UnitedHealth Group Fourth Quarter and Year End 2014 Results Teleconference Prepared Remarks January 21, Moderator:

Transcription

1 UnitedHealth Group Fourth Quarter and Year End 2014 Results Teleconference Prepared Remarks January 21, 2015 Moderator: Good morning, I will be your conference facilitator today. Welcome to the UnitedHealth Group Fourth Quarter and Full Year 2014 Earnings Conference Call. A question and answer session will follow UnitedHealth Group s prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These 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 file with the Securities and Exchange Commission, 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 21, 2015, which may be accessed from the Investors page of the Company s website. I would now like to turn the conference over to the chief executive officer of UnitedHealth Group, Stephen Hemsley. Stephen Hemsley: Good morning. Thank you for joining us today. We enter 2015 with momentum from a strong 2014 finish, and with more growth opportunities and fewer impediments than we have encountered over the last few years. We expect the strength of our performance capacities to become more visible in 2015 and even more so in 2016 and beyond, as we begin to perform more consistently to the full potential of this enterprise. In 2014, both top and bottom line results exceeded the upper range of our original forecasts for the year revenues grew 6.5 percent to exceed $130 billion, and earnings grew to $5.70 per share, despite material and well-documented burdens from 1

2 the ACA. UnitedHealth Group s performance in 2014 was highlighted by diversified growth, strong operating and medical cost management, and continuing advances in service, innovation and enabling technology, positioning UnitedHealth Group to better serve more people, and better respond to the demands of our evolving health care system in the coming years. Cash flows from operations in 2014 exceeded $8 billion or 1.4 times net earnings, with fourth quarter cash flows more than $2.4 billion, a strong 1.6 times net earnings, reflecting the core strength and quality of our business and earnings. In 2014 we raised our dividend by 34 percent, to an annual rate of $1.50 per share. We repurchased $4 billion in UnitedHealth Group shares and return on equity once again exceeded 17 percent. UnitedHealthcare As we take a more detailed look at 2014 results... UnitedHealthcare s revenues grew 5.3 percent to $120 billion. This past year we experienced outstanding growth in Medicaid and better-than-expected performance across our Medicare portfolio, balanced-off by challenges in the commercial and international markets as we entered the year. Beginning with Medicaid: Organic growth of more than 2 million people over the last five years including an exceptional 1 million new members in 2014 reflects a decade of strategic and operational decisions that have prepared us well to serve this everexpanding population and the states that entrust us to administer these programs. The Medicaid market was the first created by and aligned to society s desire to expand care for the uninsured. We have tuned our medical management and consumer engagement techniques to address the needs and experiences of these consumers, leveraging the in-market personal care approach we use today with dedicated on-theground resources embedded within the communities we serve. 2

3 Our footprint in the Medicaid market continues to grow, now reaching states where nearly 60 percent of the Medicaid community reside. We combine a strong benefit value with deep, trusting relationships serving the states and the people who rely on these programs and benefits. Today our Community & State business is well-balanced, serving people in more than 100 separate state programs from children and young families to dually eligible citizens with the most complex medical conditions. We continue to steadily grow, serving Medicaid with about 60 percent of our 2014 growth from market expansion, and approximately 40 percent from traditional sources, with year-over-year market share gains in existing programs and participation in new program launches. We expect to continue this pattern of broad-based growth in 2015, with revenues expected to grow 15 to 17 percent this year. In the senior and retiree market, strong execution drove meaningful growth for UnitedHealthcare Medicare & Retirement, which added 295,000 seniors in Medicare Supplement products and 215,000 people in stand-alone Part D. In Medicare Advantage, seniors continue to value and choose the modern benefits and support services they receive from managed care. And as you know, sustained government funding shortfalls for Medicare Advantage have hurt seniors, cutting back their benefits and causing disruptions, as products and markets were withdrawn across the industry in 2014, including more than 150,000 seniors impacted by our 2014 market and product exits. Despite this pressure, we grew to serve a net 15,000 more seniors in 2014, a small, but hard won achievement. We will be back to much stronger growth in 2015 as Medicare Advantage is expected to grow by 200,000 to 300,000 individuals, with Medicare Supplement continuing its longstanding growth pattern adding another 250,000 to 300,000 people. As we will continue to serve seniors with our leading market position in Part D, we see an overall Medicare revenue growth rate of 6 to 8 percent in

4 As expected, commercial and international markets were more challenging for us over the past year, but we believe this is beginning to turn as well. In Brazil, we grew revenues by just under 9 percent in 2014, with revenue lift provided by pricing changes and efforts to expand our geographic presence. Price increases clearly pressured membership levels, but are consistent with realigning our products for a sustainable marketplace going forward and we expect stronger market conditions in At the same time, Amil s care delivery system of more than 30 strategically positioned acute care hospital facilities and over 50 clinical practices continues to grow and perform strongly. We are advancing more modern analytics, services and technologies across Amil s unique integrated benefits and care delivery platform to better analyze and manage costs, strengthen fundamental pricing and improve operational cost structures. Amil has exceptional brand equity. People recognize the quality of Amil s hospitals and care facilities and the consistent value its medical and dental benefits offer. Overall, we expect revenues at UnitedHealthcare s Global businesses to grow 5 to 8 percent in UnitedHealthcare commercial revenues retreated 4 percent in In 2015 they will increase and the year is off to a strong start. Consistent with the strategy we shared with you over a year ago, we participated modestly in the individual exchange market in 2014, with the expectation of more significant participation as the market matured. This year we are offering products in 23 state exchanges that are home to 54 percent of the U.S. exchange market population. This includes eight of the 10 largest exchange market states, and 15 states where we also offer complementary Medicaid plans. We have enrolled more than 400,000 individuals through individual public exchanges, with four weeks of marketing still to go. We are ahead of schedule, reflecting the brand value and trust in the UnitedHealthcare name. 4

5 Growth in UnitedHealthcare s small group and middle market group health benefits businesses is also better than we had anticipated in a competitive but generally rational market landscape. The self-funded employer business is positioned for stronger growth and sales performance in 2015 as well, as we continue to consistently deliver the combination of excellent service and innovation, low medical cost trends and flexible, customized approaches valued by the sophisticated, large multi-market customer. Looking at the broader picture, UnitedHealthcare has consistently grown by offering differentiated value, service and execution to its markets. We have grown organically by more than 8 million people in the past five years. We should grow to serve over a million more people in 2015, continuing UnitedHealthcare s track record as the fastest growing health benefits company in the nation. We are confident UnitedHealthcare is positioned for continued growth, including revenue growth of 6 to 7 percent in UnitedHealthcare delivered strong operating and medical cost performance during the last year. UnitedHealth Group s consolidated medical care ratio continues to be the best overall metric describing medical cost performance across UnitedHealthcare s diverse benefits businesses. That consolidated care ratio of 80.9 percent improved 60 basis points in 2014 and we expect it to remain stable, in a range of 80.8 percent, plus or minus 50 basis points, in Medical cost trends in the commercial business were in the 5 and a half percent zone for the year, with great consistency in execution on medical cost performance across the UnitedHealthcare businesses. Hospital usage per capita was lower overall again in 2014 and was lower across each of the UnitedHealthcare benefit businesses. Optum Moving to health care services: Optum had a remarkable year in 2014 and is positioned to continue to perform strongly in Revenues grew by 25 percent, operating 5

6 margins expanded to 6.9 percent and earnings grew by 32 percent once again above the upper end of our expectations for the year. Optum surpassed all of its initial 15 by 15 targets return on invested capital, margins and earnings all well ahead of schedule. In 2015, earnings are on pace to triple since we embarked on the One Optum growth initiative a few short years ago. The fourth quarter was exceptionally strong with earnings growth of 53 percent. It was also something of a milestone surpassing $1 billion in operating earnings in a single quarter for the first time. Throughout 2014, Optum increased the quality and depth of its strategic relationships and collaboration with clients and partners. It combined good solutions with good execution for the complex problems faced by large, sophisticated customers. This included Optum s assistance in the continued advancement of Healthcare.gov and several state exchanges during the year. The One Optum commitments to greater alignment, consistent performance and cross-business simplification continue to develop well and resonate with the people and customers Optum serves. A quick profile by each Optum business looks like this: OptumHealth s businesses are gaining momentum in the wake of investments made over the last several years. We expect strong growth and earnings performance in the year ahead. OptumHealth revenues increased by 11.9 percent and operating earnings grew by 15 percent in 2014, all while growing the numbers of practices operated and patients and payers served in the care delivery businesses. Today Optum serves over 2 million consumers through owned and affiliated physician practices. 6

7 On the consumer side, Optum is aggressively deploying better approaches and new technologies for consumer engagement, health and wellness, and personalized consumer service and support. At OptumInsight, 2014 revenues grew 10.9 percent, operating earnings grew by 21 percent and the external contract backlog rose nearly 20 percent. OptumInsight s $8.6 billion backlog provides a clear indication of future revenue performance in services. A prime example here is the unique Optum One analytics platform which brings together clinical, claims, demographic and care management data to provide both backward- and forward-looking views of patient populations. With a rich and distinctive clinical encounter data set of over 55 million lives and expanding rapidly we expect to increasingly drive positive impact for care providers and the consumers they serve. OptumRx grew revenues by nearly $8 billion or 33.2 percent and operating earnings grew by 67 percent in 2014, as benefits were realized from the transition of the UnitedHealthcare commercial pharmacy business. OptumRx won external business awards to serve well more than 1 million people in 2014 and is tracking to a similar level of growth in The secular trend toward more complex and expensive specialty medications plays directly to Optum s strengths in synchronizing and integrating medical and pharmacy benefits, providing uniquely personalized service. Optum is advancing this approach with UnitedHealthcare commercial customers in 2015 and expects to see further market interest in its capabilities for Looking forward to 2015, our expectations remain consistent with those we shared with you at our Investor Conference in early December. We are off to a strong start, with Optum pursuing large, strategic relationships and UnitedHealthcare s domestic medical membership some 250,000 people ahead of our Investor Conference outlook as we close 2014 and with continued strength into early 2015, as we discussed earlier in our remarks. 7

8 For UnitedHealth Group, we are projecting high single digit percentage revenue growth in 2015, with earnings growth potentially reaching the double digits at the upper end of our earnings range. Following established patterns, we expect first quarter earnings to decrease sequentially from this quarter, but perhaps not to the levels reflected in current analysts estimates. From there, we expect the second quarter to rise sequentially and quarters three and four to have smoother progressions than in We expect performance to further improve in 2015 in a number of key areas. Let s spend a minute on these areas of focus: We expect to grow at a very solid pace, capitalizing on market opportunities in commercial benefits, Medicare and Medicaid, as well as the continuing momentum of Optum. Amil s performance will strengthen in 2015, led by balanced pricing to address medical cost trends and the use of new approaches, analytics and technologies to improve the total performance of both benefits and care delivery businesses. We are committed in 2015 to growing, strengthening and deepening customer and consumer relationships at the enterprise level across UnitedHealthcare and Optum. In this way, the breadth of services and capabilities can be dedicated to meet the needs of the largest and most sophisticated customers in health care, from the federal government to the U.S. military, to individual states, national employers, leading hospital systems, life sciences companies and to increase our focus on national health systems in other countries. This year, we expect to significantly increase the number and quality of these important relationships that we are privileged to serve. 8

9 Excellence and consistency in operational execution will remain an important focal point, every day, all year long, enterprisewide. Already in late December and January, we quietly on-boarded over 5 million people to our newly developed Rally consumer engagement digital health platform and almost 6 million to Advocate4Me, our consumer support and service technology, and nearly 400,000 physicians are now served through our cloud-based Link service platform with a goal to reach 600,000 by year end. We expect to further advance these and other next generation consumer-centric health care tools in coming months. Together with updates to our rapidly growing portfolio of mobile applications and cloud-based services, these technologies will serve to enhance and modernize our overall consumer and care provider experience in A key focal point within this area is our commitment to achieving 4-Star or better performance for at least 80 percent of our Medicare Advantage customers by 2018, and 2015 is the year this work gets finished for We expect to perform well on medical costs for our customers. We deliver to our customers and members a valuable package of cost-effective network options and simple, useful information about quality and treatment choices, supported by consumer outreach and effective medical management. In 2015 we foresee our volume of care delivered through value-based contracts exceeding $43 billion, as we help deliver improved cost and quality transparency. In 2015 we will hold to strong financial disciplines. We expect to return capital to shareholders through a rising dividend and consistent share repurchase, while we maintain a disciplined M&A outlook to further strengthen our capabilities and scale to benefit customers and consumers. Our brand equity and recognition will mature in 2015, with Optum and UnitedHealthcare each refreshing their efforts to reach consumers and thought leaders across the health system. 9

10 We spoke at the December Investor Conference about a fresh vocabulary for our enterprise words like o consumer and care provider value; o precision and consistency in our work; o simplicity; o driving the last mile in the integration of data, services and transaction processes; o rapid adoption for innovation benefits, serving consumers and care providers; o flexibility, adaptability and a more urgent pace of change. These themes will become much more than words in Every year brings challenges, and 2015 will be no exception. How we meet those challenges will define the character of our enterprise and its leadership team. We expect to continue to grow and build by focusing on serving our customers and serving you, our shareholders, all year long, driving continued momentum in 2016, 2017 and beyond. Thank you. 10