United Health Group [PDF Document] Earnings ReleaseDocument Transcript
Fourth Quarter and Full Year 2008 Results
Teleconference Prepared Remarks
January 22, 2009
7:45 a.m. CST
Good morning, I will be your conference facilitator today. At this time I would like
to welcome everyone to the UnitedHealth Group Fourth Quarter and Full Year
2008 Earnings Conference Call. All lines have been placed on mute to prevent
any background noise. After the speaker’s remarks, there will be a question and
answer period. If you would like to ask a question during this time, simply press,
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As a reminder, this conference is being recorded.
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Here is some important introductory information. This call will reference non-
GAAP amounts. A reconciliation of non-GAAP to GAAP amounts is available on
the “Financial Reports & SEC Filings” section of the Company’s Investors page
at www.unitedhealthgroup.com. This call contains “forward-looking” statements
under U.S. federal securities laws. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from historical
experience or present expectations. A description of some of the risks and
uncertainties can be found in the reports that we filed with the Securities and
Exchange Commission from time to time, including the cautionary statements
included in our current and periodic filings.
Information presented on this call is contained in the Earnings Release we issued
this morning and in our Form 8-K dated January 22, 2009 which may be
accessed from the Investors page of the Company’s website at
www.unitedhealthgroup.com. I would now like to turn the conference over to the
president and chief executive officer of UnitedHealth Group, Stephen Hemsley.
Good morning and thank you for joining us.
Today, we are pleased to report UnitedHealth Group’s fourth quarter and full year
For the full year 2008 revenues increased $5.8 billion or 8 percent to $81.2 billion
and our fourth quarter revenues increased 9% to $20.5 billion.
In the fourth quarter we added nearly 100,000 people in our benefits businesses.
Our adjusted fourth quarter operating margin of 7.9% was in line with our
expectation, with some out-performance on the consolidated medical care ratio
of 80.8%, offset by a slightly elevated operating cost ratio of 15.4% as adjusted.
Earnings were $0.78 per share for the quarter and $2.95 per share for the full
year, both adjusted for special items.
I should mention up front that these earnings numbers do include $50 million or
almost $0.03 per share in venture capital investment write-downs in the fourth
quarter, which was not in our outlook.
The adjusted results exclude an accrued $350 million or $0.18 per share in
operating costs to resolve class action litigation related to out-of-network medical
services from early 1994 to date, as we announced just last week.
We believe it is clearly in the best interests of our company to resolve all these
matters and move forward.
Adjusted cash flows from operations were $4.8 billion for the year, including a
strong $1.6 billion for the fourth quarter.
And I am pleased to report that full year adjusted cash flows were a healthy 1.3
times adjusted net income, and in line with the range we provided last July.
Stepping back – against the economic turbulence of the last year, these are
encouraging results for our business overall.
In 2008 we have seen advances in many important initiatives, including our
efforts to improve fundamental execution and instill a strong service culture.
And we have progressed in building deeper and richer market relationships with
the people we serve and the physicians we work with in the health care
On the benefits side of our enterprise, UnitedHealthcare’s business continues to
strengthen internally against a challenging economic backdrop and is in line with
our previously stated expectations.
Ovations had a successful sales and marketing season during its fourth quarter
And our AmeriChoice Medicaid business continues to grow in the markets we
serve and is successfully expanding into new programs and geographies.
As you might expect, some of our services businesses are feeling some effect
from the broader economic pressures.
However, the pressing interests in health care affordability, quality and
information technology should also open up new opportunities for these
As we look to the year ahead, we continue to project earnings per share between
$2.90 and $3.15 for full year 2009, and cash flows from operations are expected
to be approximately $5 billion.
The ranges in our outlook remain wide, but the economic uncertainties of 2009
remain as well.
Our financial position is strong. We have been careful stewards of our
resources, and our operating cost and capital control efforts that started early in
2008 will continue in their intensity.
And as we discussed at our Investor Conference in December, we are fully
engaged participants in the health reform movement. We bring deep experience,
broad industry expertise and diverse capabilities to this discussion.
We have been meeting with a variety of stakeholders and emphasizing the need
to reform all aspects of health and health care if we are to achieve affordable
quality health care for all.
We would like to begin the business review by giving you more detail for the
quarter and full year for our benefits businesses, which include UnitedHealthcare,
Ovations and AmeriChoice.
Earnings from operations for these businesses were $1.3 billion for the fourth
quarter and $5.1 billion for the full year 2008, all fully in line with our
As expected, UnitedHealthcare risk-based enrollment decreased by 135,000
people in the fourth quarter, while our fee-based business again performed in a
solid fashion, growing 10,000 people in a period where there are more limited
growth opportunities and increasing attrition levels.
We continue to expect UnitedHealthcare 2009 enrollment to decrease by
1 million to 1.5 million people in total, depending upon the severity of the
recession, with decreases in both risk and fee-based benefit categories.
First quarter fee-based enrollment is expected to decrease in the area of 500,000
people. While we are still gathering final January results, this should hold,
supported by very strong growth from our expanded relationship with the State of
We continue to expect the first quarter 2009 organic decline in risk-based
membership to be slightly better than 2008 but in the same general range, even
as we work intently to strengthen our underwriting disciplines in the small group
market and fully price to our expected medical cost trends.
We are operating with stronger market relationships and greater agility at the
The economy remains a challenge and we have limited visibility today into
January group terminations and employee participation levels. That said, we do
have local markets where we are seeing growth for the first time in two years or
And we are excited by the interest employers are showing for our innovation
around health personalization and the concept of building “Communities of
Turning to medical costs, we are in a solid position.
Cost trends remain in line with our expectations.
Our emphasis on regional leadership and rebuilding local relationships is helping
us to work more effectively with physicians, hospitals and health care providers
to keep costs under control for our customers.
The UnitedHealthcare medical care ratio was 83.9 percent in the fourth quarter,
slightly better than our most recent projections, and 20 basis points better than
the fourth quarter of 2007.
As we move forward in 2009, we can confidently tell you that UnitedHealthcare’s
performance is strengthening on many dimensions.
We will continue to dedicate resources and strong leadership to local markets,
build better provider relationships market-by-market, and leverage the
momentum in service improvements and fundamental execution established
This better balance of local engagement and focus in each market, combined
with our national scale, clinically integrated networks and technology capabilities,
we hope will continue to lead to profitable growth over the long term.
Moving to our Public and Senior Markets Group, which includes Ovations and
AmeriChoice, we added 220,000 people with medical benefits in the fourth
This was sharply above our expectations due to strong Medicaid growth and
consistent performance in senior products.
We had total organic growth of 650,000 people in 2008, a growth rate of
Our Ovations senior health benefits businesses are in the midst of a very
successful selling season.
Ovations Medicare Advantage is on course to exceed the upper end of the range
of 100,000 to 135,000 net new seniors for full year 2009. We estimate we have
gained more than 120,000 new members for January 1, net of terminations.
And importantly, the mix of this growth by product type is clearly better than last
year and in line with our 2009 plan.
We are seeing steady interest in HMO/PPO products and a lift in Private Fee for
Service versions driven by both significant corporate group sales and individual
retail participation. These results also include a net reduction of 7,000 people for
January 1 in chronic care special needs plans.
Medicare supplement sales also continue to perform well.
And finally, we are tracking to exceed our growth plan of 100,000 to 125,000
seniors in the standalone Part D drug benefit market this year.
Very strong early performance in Ovations is driven by improvements in sales,
marketing and distribution, product positioning and local market engagement.
We are seeing improved balance and sizeable gains year-over-year from all
principal distribution channels, including external brokers, affiliated
representatives, telesales and internal sales professionals.
While there may be some upside to our Medicare Advantage growth forecast, we
will wait to receive additional data, including confirmation of our estimates of
terminations, and to watch performance in the remaining open enrollment period
before updating our outlook.
The consolidation and integration of Ovations in-market care management with
UnitedHealthcare’s local care management resources and programs is beginning
to translate into stronger medical cost management for these businesses. We
expect this to be an important element in Ovations performance improvements in
2009 and 2010.
We have been very pleased with the strong advances AmeriChoice made
throughout 2008, including their outstanding performance in the fourth quarter.
Total Medicaid membership grew by 175,000 people this quarter, bringing total
expansion for 2008, to more than 800,000 people. We continue to expect growth
of 325,000 to 400,000 people in 2009, which is a mid-teens membership growth
This includes the last significant piece of the one quarter million new people that
we are in the process of adding as part of the expansion of services in
Tennessee. Unemployment pressures could potentially increase these
AmeriChoice numbers as the year progresses.
There has been a lot of market speculation about SCHIP expansion. This is now
moving very quickly, and I believe no company is better positioned to serve an
expanded SCHIP mandate. In AmeriChoice, we have a significant, dedicated
and capable business that leverages the best of the entire UnitedHealth Group
enterprise, and we offer on-the-ground services in 22 states and serve more
Medicaid program participants today than any market competitor.
So, summarizing across the benefits businesses, we have a meaningfully
improved start in 2009, supported by solid and diversified organic growth and a
higher quality business mix.
Now, let’s turn to our services businesses, which include OptumHealth, Ingenix
and Prescription Solutions.
They all serve the health care marketplace broadly and are a consistent source
of innovation and thought leadership inside and outside UnitedHealth Group.
Their capabilities are a large part of our overall diversification and make us a
more adaptable organization for a changing health care marketplace.
For the full year, on a combined basis, these businesses generated $19.4 billion
in aggregate revenues and $1.3 billion in total earnings from operations, with
fourth quarter revenues of $4.9 billion and total earnings from operations of
This quarter we saw the continued impact of UnitedHealthcare’s unfavorable risk-
based membership trends in OptumHealth. We also saw reduced demand at
Ingenix for CRO, consulting services, and coding and reference materials.
Operating margins for the year declined for both OptumHealth and Ingenix.
On the other hand, Prescription Solutions’ margins strengthened, increasing
90 basis points year-over-year to 2.9%, driving 35% year-over-year growth in
operating earnings in 2008, as Prescription Solutions continues to realize the
benefits of larger scale and improved generic and mail-order fulfillment
The economic climate is presenting our services businesses with both
opportunities and challenges. Pressures on both government sponsors and
employer groups are creating new opportunities for Ingenix Consulting and
Prescription Solutions to apply their technology and their innovative approaches
to help control costs and manage care more effectively.
We are seeing increased interest at OptumHealth in free-standing care
management and wellness/prevention services, as market interest in more
intensive cost management and affordability once more returns.
While OptumHealth clearly continues to be impacted by membership losses at its
largest customer, UnitedHealthcare, this impact will reverse as our benefits
businesses strengthen. Furthermore, OptumHealth is meaningfully expanding its
external revenues in its behavioral health, care solutions and specialty benefits
A clear example of this is within the public sector marketplace. Two years ago
we identified public sector services as an opportunity for growth and
diversification. OptumHealth had distinctive capabilities to offer and we had local
market relationships throughout our enterprise, but our market share was
unimpressive. With a renewed focus, we have now sold new business
representing more than 2 million people over the past year.
We are implementing behavioral health benefits for the last piece of the more
than ½ million participants we serve in TennCare. We were awarded the Empire
behavioral health benefits in New York State, serving 1.1 million people. We
recently received a mandate to finalize terms with the State of New Mexico to
provide behavioral health benefits to another 400,000 people effective July 1,
2009. And just last week we were awarded a contract to provide services to
50,000 people in Pierce County, Washington.
These market successes improve OptumHealth’s balance and business diversity
while adding operating earnings at margins that are fair and appropriate for
public sector business.
Ingenix is a significant supplier to the health care industry and is being impacted
by economic and industry trends. Spending on discretionary products and
services is under pressure across the health care industry, and challenges facing
the pharmaceutical industry are affecting spending on new product development
and creating challenges for the CRO industry. At the same time, there is
increasing demand in the government sector, in international markets, and in the
electronic medical records business.
In total, Ingenix has experienced some weakness in demand, which has been
partially mitigated by its broad product and market diversification. Many of its
offerings are attractive in this environment because they provide strong and rapid
financial pay-backs for clients. As I am sure you are aware, the federal stimulus
package will have a strong health IT element and Ingenix should participate in
that significant market expansion.
Prescription Solutions continues to see growth in the demand for mail-order
pharmacy fulfillment and its operations continue to mature. We are making
significant progress in our work to in-source specialty pharma services for all of
UnitedHealth Group. In 2008, organic membership growth outside the
UnitedHealth businesses exceeded 400,000 people and in 2009 we expect
Prescription Solutions will further develop its position in the industry as a full line,
large scale national pharmacy benefits manager.
Bringing these trends and developments across the various businesses together,
our outlook for 2009 remains in line with our most recent projections. We
anticipate revenues of $85 to $86 billion this year. We see evidence of
strengthening sales momentum, but we need further information on retention and
business mix before we can make any changes to this forecast.
We remain comfortable with our commercial medical cost trend outlook for 2009
at 8 percent plus or minus 50 basis points. We continue to forecast the
consolidated medical care ratio in the range of 82.7 percent plus or minus
50 basis points. The year-over-year increase in this consolidated care ratio is
due to anticipated changes in product and business mix favoring government
Adjusted operating costs at 15.4% of revenues, increased slightly from the third
quarter. This included $80 million or 40 basis points of seasonal expenses,
including marketing and new business installation costs, as well as some
miscellaneous expense items, such as an increase in general legal costs.
Since the first quarter of 2008 we have reduced our operating costs by an annual
run rate of roughly $470 million. We have re-invested about $60 million of that
run-rate reduction to strengthen our presence and responsiveness in local
We clearly have opportunities for further reductions, in areas such as better
sharing of our administrative services across businesses. Operating cost
management is critical to health care affordability and will continue to be a focus
for us in 2009.
While we no longer provide quarterly EPS guidance, we expect the first quarter
of 2009 to reflect the seasonal declines for businesses such as Part D and
Ingenix, as well as the effects of lower projected investment income on a year-
over-year basis. One would logically expect a year-over-year increase in the first
quarter medical care ratio, driven by business mix, and it appears a number of
the more conservative first quarter earnings estimates on the Street are giving
effect to these factors.
Our balance sheet and investment portfolio remain strengths for our enterprise.
We reported a full year net realized capital loss of only $6 million on a
$21.6 billion cash and investment portfolio, which is a virtually unique
accomplishment in 2008.
Our full year, net realized loss of $6 million includes a fourth quarter realized
$14 million net capital loss on our operating investments and a prudent
$50 million write-down on our approximately $200 million corporate venture
Importantly, our net unrealized loss position on investments improved by
$235 million in the quarter to a net unrealized loss of only $47 million at
December 31. To put that number in context, that means we had a net
unrealized loss of about two-tenths of one percent on our portfolio at year end.
Our unrestricted cash position improved by $765 million from September 30
to a balance of $865 million at year end, even as we reduced our outstanding
commercial paper to $101 million from $586 million.
Looking over the past six months, we have decreased our leverage ratio by
230 basis points, from 40.4% at June 30 to 38.1% at year end. This more
conservative leverage occurred even as we disbursed $900 million in the third
quarter to fund the shareholder litigation settlement. In total, these results
demonstrate UnitedHealth Group’s strong and consistent operating cash
We expect to have the capacity to repay the $900 million in term debt due this
quarter without accessing the credit markets if need be. Our strong liquidity,
capital position, cash flow and investment portfolio will support our businesses
during these challenging times and give us financial flexibility and strength.
Summary of Operating Trends
To sum up our operating trends, UnitedHealth Group is continuing to improve
fundamental execution, service responsiveness and in-market relationship
dynamics for our customers, members and the health care community at large.
Our improvements are gaining traction in the marketplace.
We continue to focus on translating our evolving culture of service into trusting
relationships that will help differentiate us and enrich our market position. We
are determined to accelerate these improvement trends in 2009.
We continue to steward our resources wisely. We are controlling costs
and reducing non-essential spending, with a slower capital spending pace than
last year overall.
We have always been a leader in innovation and we intend to pick up the pace,
with a concentration on bringing simpler consumer and provider innovations
profitably to market – innovations that are cost-effective, that enhance the
“personalization of health care,” and that are practical.
That means innovations that change health care for the better, cost less to
develop and can be introduced with less overall disruption.
Let me give you some quick examples.
We have pioneered a diabetes health plan for the commercial market. The plan
is tailored to the unique needs of diabetics and, importantly, pre-diabetics,
and links them to the best resources and best science, so they can control their
condition and live healthier lives, while reducing employer costs. The diabetes
health plan is just one example of our new family of personalized, condition-
specific benefit offerings for the self funded market.
We are also helping employers with our proprietary Consumer Activation Index.
This index measures consumer decision-making across key decision points and
helps employers specifically target opportunities to improve health, wellness, and
cost in their employee base.
For example, we can identify an issue with preventative screening rates for
females in a specific age cohort employed specifically at an employer’s branch
location in, say, Fresno, California, and give that employer the tools to improve
health for that group, or a group that we would call a “health community.” This is
a very granular, personalized approach, leveraging deep data and clinical
And, one final example.
Our emergency room decision support service reaches out to frequent
emergency room users and connects them to other resources such as primary
care, urgent care or nurseline resources. Participants in these programs used
nurseline 3 times more frequently, and over 40% now routinely choose a less
intensive, less expensive setting for their care.
Each of these examples is cost effective, personalized, practical and easily
We also continue to attract and position exceptional new talent across our
enterprise. These leaders are helping us build greater depth in our management
teams, as well as bringing fresh perspectives along with new energy and new
ideas to our businesses.
I can quickly think of more than a dozen high profile people added in just the past
six months or so, but let me address today’s developments:
This morning we are announcing that Larry Renfro, a very senior executive from
Fidelity Investments, will join UnitedHealth Group as an executive vice president.
He will serve as chief executive of the Ovations business. Larry is a very senior
and accomplished executive with diverse experience. He is clearly well
grounded in individual product sales and distribution. His experience involves
senior health and financial services businesses and markets, and large scale,
highly regulated operations.
This is another important move in developing the broad and deep executive
leadership needed to advance UnitedHealth Group to its full potential.
Larry inherits an Ovations business with maturing distribution and operations and
improving overall performance consistency, as well as some nice growth
momentum as it enters 2009.
Simon Stevens will assume new duties, leading our overall health care reform
undertakings across our enterprise. Simon will dedicate himself to the
engagement, development and coordination of our health care reform efforts. He
will also assume the overall operational leadership of our international business
interests, with a goal of making this one of our next significant platforms for
growth and diversification. Simon’s background as Tony Blair’s health policy
director in the United Kingdom, as CEO of America’s largest seniors health care
business and as an operating executive in the hospital sector make him ideally
suited to these challenging tasks.
We greatly appreciate Simon’s successful leadership of Ovations and that he will
now broaden his role and help guide our constructive participation in health
reform, while also leading our international growth.
Let me add, our chief legal officer, Tom Strickland – who has served
UnitedHealth Group with distinction – has recently accepted a senior position in
the Obama Administration in the Department of the Interior. All of us appreciate
Tom’s thoughtful leadership on matters of governance and his energies in
resolving a number of challenging UnitedHealth Group matters. Tom helped us
build stronger relationships with regulators and elected officials, and he
substantially strengthened our legal team. We wish Tom the best in his new
Finally, we are continuing to add new and diversified leadership to our board of
directors, including the additions in 2008 of Bob Darretta, Michele Hooper and
Glenn Renwick. We recently announced that Dr. Ken Shine will join the board.
Dr. Shine, who currently serves as Executive Vice Chancellor for Health Affairs
for the University of Texas System, brings to UnitedHealth Group 30 years
experience as a leader in health care, including 10 years as President of the
Institute of Medicine for the National Academy of Sciences.
And you can expect the addition of another independent director in 2009.
In closing, I’d like to remind you of a few key points regarding our enterprise and
the reasons we are optimistic about our continuing success, even while we
continue to be cautious concerning the challenges our economy is currently
We have spent significant efforts in 2008 refocusing back to fundamental
execution – and we are starting to see the signs of improving visibility, reputation
We have a strong and diverse business model that reflects and responds to the
national health care landscape.
We are actively engaged in the dynamics of health care reform. We believe
UnitedHealth Group can serve a broad-based reform agenda, while actually
growing our businesses as we further diversify to meet the evolving needs of that
Our financial stewardship has positioned us exceptionally well.
Change is inevitable. Some changes will be disruptive for us and for our
But leading companies take advantage of disruptive change and challenging
markets – and that is our intent.
There remains a huge opportunity to continue to advance care for people and
create value for society through innovation, technology and service.
When we execute on this agenda, our shareholders will prosper.
At this time I would like to open up for questions for our senior team.
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