UnitedHealth Group Earnings Call Insights: Conversions and 2014 Headwinds & Tailwinds

UnitedHealth Group (NYSE:UNH) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.


Ralph Giacobbe – Credit Suisse: Just wanted to go back to the conversion. Maybe you can help us size the headwind from an earnings standpoint and then are there many accounts sort of this large that are still risk based and any comment on sort of incremental appetite to shift ahead of 2014?

Stephen J. Hemsley – President and CEO: The impact as we said was really negligible but Jeff Alter can really take you through this.

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Jeff Alter – CEO, UnitedHealthcare Employer & Individual: Yeah, I think it’s important to keep in mind that this was a very unique case, $1.1 million fully insured case is, I think it’s probably the largest fully insured case in the industry. It was fully insured for decades, we’ve been partners with this municipality for a very long time, really because of regulatory constraints and the conversion shouldn’t be seen as anything just playing out a decade long process of putting this case into a self-funded condition where most cases these size have always been. As you can imagine, a case this size, there really isn’t any earnings headwind. It was a long – almost 40 year relationship with these clients, so the earnings are stable. It’s really just a plain funding conversion.

Ralph Giacobbe – Credit Suisse: Then what about on the smaller side?

Gail K. Boudreaux – EVP, UnitedHealth Group; CEO, UnitedHealthcare: This is Gail Boudreaux. Just to follow Jeff Alter’s comments to the second part of your question. Overall, actually our conversions to self-funded have been relatively consistent. There’s been a long standing movement from fully insured to self-funded, but we have not seen any acceleration in that to your earlier question. It’s been pretty stable.

2014 Headwinds & Tailwinds

Sarah James – Wedbush Securities: Can you speak broadly about 2014 headwinds and tail winds? I’m interested here in the growth in some of the unique business that United has such as Optum and Amil, but also in the core U.S. risk businesses, particularly given the incremental information that you have received since the last time we spoke on changes to the risk quoting calibration and counting (we have been seeing) for Medicare and provider contracting for exchanges with better clarity now on the unit cost basis you will be using?

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Stephen J. Hemsley – President and CEO: Sure. So I think we’ll parse these between, a little between Optum and UnitedHealthcare. I will start out with Optum and I think our focus in UnitedHealthcare really will be around, we will be kind of restating comments we made from our formal commentary about exchanges and Medicare. I think really Medicare is the principal headwind on ’14. The rest of it I think we were trying to make it clear that our businesses are very strong and our growth is very strong including Medicare. But Larry, do you want to start with Optum?

Larry C. Renfro – EVP UnitedHealth Group and CEO Optum: Sure. It’s Larry Renfro. I think you are probably aware of the three year business plan that we put together last year, we call it One Optum and we are – as we finished 2012 we were in a situation of pretty good momentum that has carried forward in the first quarter. I think also what we’re experiencing with what’s going on with rate cuts, there is obviously increased pressure in the market and as a result Optum is actually having a lot of opportunities that’s presenting itself to us. So what I am going to do, I am going to ask three people. I am going to start with Bill Miller and go to Stan Dennis and then to Kathy Hopkins to talk about their individual businesses within Optum, so you will get a better flavor for everything.

Bill Miller – CEO, OptumInsight: I would say on behalf of OptumInsight Larry’s is right that a lot of the growth certainly is expected based on all the work that we did in 2012, so we are establishing some sustainable new levels of performance. But alongside of that and particularly in Q1, these pressures that Larry spoke about have showed up in inside in two pretty simple ways. One in our payer market and provider market, its anything that our businesses do around operational performance, quality and efficiency, anything where our clients are feeling those pressures, those are opportunities that often flow to Optum. That’s true, in our payer market, around same size payment integrity and in our provider market it often shows up in some of our efficiency businesses and revenue cycle businesses. The other thing I would stress that have been key areas of the growth as this environment within higher compliance requirements, particularly in our payer business, our provider business. We’re seeing the uptake of all of our compliance businesses, pretty dramatically over 2012 but also growing into 2013 and we expect that trend to continue as the heightened awareness about compliances are here to stay. So, that’s where I would categorize our big growth areas. There are others, but those are too critical ones and I think they are brought on by some of the environment that both Steve and Larry have discussed, but Stan?

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Stan Dennis – EVP, Physician Solutions: This is Stan Dennis and I’m going to comment on the physician businesses that are principally organized within collaborative care and specialty networks. I’m going to then hand it out to Kathy Hopkins and she’s going to talk about our consumer (facing) businesses. So we had a strong start to the year for this Group. The Q1 performance is grounded in the solid plan that Larry referred to, created momentum coming into the quarter, across all of our business units and we remain committed to its execution. The results are driven principally by a healthy balance between growth and cost management disciplines. I can’t point to one business that drove the results for the Group as all the business units across the Group are performing at the upper end of the range. Collaborative care asset has a broad and growing footprint with solid performance. In a measured way, we are integrating these practices, which is part of our simplification plan. In doing so, in a way that it adds value to improving care and affordability in the communities that we serve. We have several lines of business in our specialty networks division, all with strong performance and the performance of our military reserve readiness business is solid as well. So we had a strong start to the quarter, we have our head down. We’re going to continue to focus on executing on this plan pivoting to growth and as we do so, we believe these businesses will continue to scale nicely and perform well.

Kathryn Hopkins – EVP, Consumer Solutions: Thank you, Stan. Good morning, this is Kathy Hopkins, and as Stan mentioned, I will speak to Optum’s consumer facing businesses. We’re seeing strong demand for our care management, financial and distribution services, and as Larry mentioned, we’re performing solidly against our three year plan. We’re enjoying the benefits of our cost management program that we put in place in the last year and expect these benefits to carry forward. We’re also enjoying the benefits of scale and simplification of many of our business lines. We remain focused on execution and continuing to further develop our products and services that help consumers as they choose their benefit, navigate the healthcare system and make good decisions about their health. These programs are being well received in the marketplace and as Stan said, I don’t think I can point any one aspect of our business that contributes to be the driver, but we’re really performing well across all aspects of our business.

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Dirk McMahon – Chief Executive Officer, OptumRx: As from a PBM perspective we had a nice growth year over the last 12 months. We have grown a little over 1 million members. When I say our value proposition remained strong we talk about it before (indiscernible), really it’s all about optimizing health outcomes and minimizing cost and we do that by using our clinical engines to bring together all of pharmacy, the lab, the medical data, the behavioral data have appropriate interventions again to minimize costs and optimize health outcomes and that value proposition continues to resonate with the market place.

Stephen J. Hemsley – President and CEO: So pretty positive across the board. Then maybe Gail you want to talk about UnitedHealthcare and maybe (indiscernible) and comment on it.

Gail K. Boudreaux – EVP, UnitedHealth Group; CEO, UnitedHealthcare: Two questions I think you had embedded there. I will focus on exchanges and Medicare. First on the exchanges side, I think as Steve said in his opening comments, we don’t see if changes on the commercial side having a significant positive or negative impact in 2014. We do think that there is, still long-term growth opportunities in the exchanges so we are still positive over the long term. Overall our position on exchanges hasn’t changed as we gave you a broad range at the last call. As we think about the contracting side, again I think I shared this last time that we see the contracting based on a market-by-market assessment and the economics needed to participate effectively in that market and in the exchange. So those rates are going to vary from commercial to something less. We have had a pretty long history of having value based networks and have been successful at that. I would tell you at this stage our contracting for the exchange markets is going very well. So we feel positive about that. Turning to Medicare, that is the most impactful headwind that we faced heading into 2014, again I think in Steve’s comments. So we think about 4% plus rate impact plus the impacts of sequestration against the backdrop of a 3% trend in Medicare. That’s had a cumulative impact that is more significant than we would have expected. So that is we are in the process right now of doing our bids. We’re doing a market-by-market assessment of what those implies by each of our markets. Again it’s part of the cumulative under funding but we do feel, we have a very strong Medicare business and as part of that assessment we will be using our clinical assets and looking at optimizing our network to provide the broadest space support and consistent benefits for seniors, because that’s been a part of what we’ve been looking to do. So that would I think define the headwind in terms of Medicare for ’14.

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Sarah James – Wedbush Securities: The rest of business lines are all strong?

Gail K. Boudreaux – EVP, UnitedHealth Group; CEO, UnitedHealthcare: Yeah, the other good point on that. The other businesses I think as you saw in our growth this year, really positive about how our products and services are tracking, we’re really pleased to have brought TRICARE on this year and feel very positively about the growth trajectory that we see, not only this year but over the last several years.

Sarah James – Wedbush Securities: On Amil?

David S. Wichmann – EVP, CFO and President, Operations: On Amil, thank you for your recognition of it. It’s a very strongly positioned enterprise in Brazil. The brand, the value proposition from its own delivery components, it’s strong surface reputation and the value that they provide to the various communities inside Brazil is I believe unmatched. Coupled with that are the market dynamics which are such that they support meaningful growth in that market, similar to what we’re starting to see shape up here in 2013. So a combination of those two things should provide good avenue for both revenue and earnings growth in 2014 and beyond. As we step into 2014 and then into the future, we also see the potential to access meaningful new markets in Brazil that are not or are underserved by Amil today. In addition, we see a to great opportunity to address services offering as you might expect there are very little capabilities to the extent that we see with Optum and we see great opportunity for that enterprise in the future.

A Closer Look: UnitedHealth Group Earnings Cheat Sheet>>