UnitedHealth Group Incorporated

Good morning and welcome to the United Health Group fourth quarter and full year 2018 earnings conference call. A question and answer session will follow United Health 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 difference 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. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial Reports and SEC Filing section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning in NR Forum 8K dated January 15, 2019, which may be accessed from the investor's page of the company's website. I will now turn the conference over to Chief Executive Officer of UnitedHealth Group, Mr. David Wickman. Please go ahead.

Good morning, everyone, and thank you for joining us today. At our investor conference just a few weeks ago, we provided an extensive and positive review of our business and expectations for 2019 and beyond. Our outlook today remains consistent with that view. We are strongly confident in the fundamentals of our business as we enter 2019. in our ability to invest, innovate, and grow, and in the breadth of opportunities across healthcare available to a company with the unique capabilities we have built over time to deliver ever more value to society and consistent results for our shareholders. The results we reported this morning bear that out. Full-year revenues exceeded $226 billion, growing 12% or $25 billion over 2017. Fourth quarter and full year 2018 adjusted earnings per share were stronger than our investor conference outlook, with full year adjusted earnings per share growing 28% to $12.88 per share. Revenues, operating earnings, and cash flows were in line with or ahead of the expectations for 2018 we discussed with you at that time. Optum's earnings were ahead and UnitedHealthcare's earnings were in line, and virtually all businesses closed out the year with strong momentum. Overall medical costs remain well controlled, and our positive forecast for 2019 remains consistent across all lines of business. We continue to address performance pressures in a handful of Medicaid markets in the fourth quarter as we executed actions on both structural costs and rate recovery to ensure 2019 will see a return to stronger margin levels for this business. Our nation is early in an exciting healthcare innovation wave, one we expect to help lead, which will drive growth at UnitedHealth Group for years to come. Our approach to this wave has several characteristics. flowing critical health information to all health care participants by linking physical interactions to digital channels supported by embedded proprietary clinical ontology and sophisticated data analytics designed to align and optimize performance. Engaging people in their health care, both individually and at scale, a difficult but essential step in improving people's health and finances. A step supported by our consumer digital platform, Rally, now with 22 million registered users on a multi-payer platform, and offering an expanded suite of services for UnitedHealthcare's Medicaid members as of January 1. Applying high-touch human interactions, again, singly at high volumes, to improve the consumer experience and drive better medical care outcomes. This is supported by our rapidly growing team of clinicians, like the physicians of Polyclinic in Seattle, who joined us at the end of 2018. Evolving pharmacy care services by advancing market-leading transparency, improved adherence and clinical effectiveness, combined with distinguished consumer value, ranging from point-of-care discounts that offer more affordable prescriptions and whole-person medical pharmacy management to a simpler transaction experience through market-leading digital support tools and services. and introducing innovative, lower-cost, consumer-centric health benefit designs and services, such as BIND, Colorado Doctors Plan, Motion, and Nexus ACO. This health care system will increasingly operate in a multi-payer and value-based context, with aligned incentives for care providers and consumers to make better health care decisions, leveraging deeply personalized information and clinical science. This modern approach produces measurable value and looks and feels refreshingly different than traditional healthcare today. So I hope you can see why we are energized by the opportunities ahead of us. With that, let me turn it to Optum's CEO, Andrew Witte, to discuss Optum's results and its unique market position and momentum heading into 2019. Andrew? Thank you, Dave.

Our focus is to accelerate the access to and integration of the individual strengths of Optum to deliver better healthcare and more affordability across the whole of the health system. In leveraging our data analytics capability to improve care pathways with local care delivery and pharmacy care services, we have unique potential to improve patient well-being and health while bringing healthcare costs under better control. Our ability to use data to better understand the next best action or better option for treatment allows us to significantly affect both the outcome as well as the cost per member for our clients and patients. Within OptumRx, the increasing impact of PreCheckMyScript and the growth of our infusion services illustrate how our expanding breadth of services are gaining significant market acceptance, growing share, and diversifying our earnings streams. Our momentum in pharmacy care services was excellent in 2018 with retained business rates in excess of 98% and several major new business awards from health plans and employer plan sponsors. We expect this to continue given the early positive signs in this year's selling season for 2020 business. In care delivery, our clinical leaders are applying clinical decision support based on evidence-based guidelines that promote better health and ensure the right care at the right time in the right setting. Today, 99% of OptumCare patients in our advanced form of Medicare value arrangements are in four-star plans or better, and OptumCare's average net promoter score is nearly 80, evidence of outstanding clinical outcomes and patient experiences. We achieved significantly lower total medical costs by keeping people healthier and avoiding unnecessary hospital use, which translates to up to 30% lower costs for our Medicare Advantage patients relative to original Medicare. Our increased number of our groups have been recognized for achieving lower costs for commercial customers as well. For example, our Reliant medical group was recognized as having the lowest total cost of care by the state of Massachusetts. We complement our medical groups with high-value ambulatory care services like our SCA surgery centers, MedExpress neighborhood care clinics, free over infusion capabilities, and Optum house calls. all of which support improving the quality, cost, and experience of healthcare. As we move forward, we will continue to build out our comprehensive portfolio of care delivery services in key markets, including through our pending combination with the DaVita Medical Group. By 2030, there will be over 80 million people in the U.S. with three or more chronic conditions, up from 30 million in 2015. More fully leveraging data analytics across all of Optum through digital and physical engagement with patients and physicians will be key to reducing costs and improving the value and experience for people in this increasingly resource-intensive market segment. We are building platforms that are convenient for the provider, ensuring the very best and most contemporary information is available to support each patient management decision. Initiatives including the rollout of the individual health record, adoption of emerging genomic knowledge, and full understanding of the implications of the data Optum manages will be key building blocks over the next year or two. Turning to Optum's financial results, full year 2018 revenue surpassed $100 billion for the first time. Revenue growth of over $10 billion for the year accelerated to 11% from 9% in 2017. And likewise, our operating margins once again strengthened across the Optum portfolio, with our overall operating earnings growing more than $1.5 billion, or 23%, to $8.2 billion, reflecting the leverage of Optum's scaled businesses and putting us in a strong baseline earnings position entering 2019. Looking ahead. The 150,000 people at Optum are incredibly enthusiastic about 2019 and our opportunities for longer-term growth and performance. We will continuously modernize our ways of working, seek solutions to improve value delivery to our clients and the patients we serve, and explore ways of aligning with others who strive in an accountable way to deliver quality care at lower cost. We are seeing the fruits of two decades' worth of strategic investments with strong business wins and pipelines and the many platform expansion opportunities we have in the United States alone, not to mention the global potential. As we continue to grow, invest, and diversify, we are just beginning to realize the potential that exists when we deploy Optum's cross-platform capabilities more fully on behalf of our customers and all of those we serve. Now, I'll turn the call over to Steve Nelson, UnitedHealthcare CEO.

Thank you, Andrew. UnitedHealthcare is growing through the relentless pursuit of better health outcomes, lower total cost of care, and a better consumer experience for clients and consumers as measured through NPS. We achieved this triple aim through the breadth and innovative nature of our capabilities, as Dave described at the outset. And by translating those capabilities into innovative products, services, and enabling technologies which advance our mission as an enterprise. In 2018, together with our care provider partners and through digital and physical interactions with consumers, we helped close over 70 million gaps in care. And that was 75% more than the 40 million gaps we closed in 2017. Contracts with value-based care features reached $74 billion in run rate spending, with about one-quarter of that in risk arrangements. Consumers who took healthy actions earned a remarkable $1.5 billion in incentives through their benefit plans. We provided 1.5 million in-home health assessments through the Optum House Calls program, and our community health workers referred people to social services nearly 600,000 times, linking them to needed services with a total value of one-quarter of a billion dollars. Collectively, the value of these and other distinctive services helps us to grow. In 2018, UnitedHealthcare grew to serve 2.4 million more people, with revenues advancing by more than $20 billion to $183.5 billion. UnitedHealthcare earnings from operations were $9.1 billion, consistent with the outlook we provided in November. Overall, medical cost trends remain well managed, predictable, and consistent with expectations. We continue to manage operating costs diligently through a combination of business simplification, automation, and operating efficiency. As we noted at our investor conference, the performance of our community and state business in 2018 was mixed. We saw strength in serving individuals with the highest health needs, such as the duly eligible, while performance in the traditional TANF Medicaid business was pressured, particularly in a handful of states. Our performance improved in the back half of 2018 with more work to be done, continued advocacy for sound rates while reducing core medical and operating costs. The community and state team is fully focused and will deliver improved performance in 2019. We completed a strong Medicare Advantage enrollment season last month and are on track to achieve 2019 growth within the 400,000 to 450,000 range of expectations. We are thoughtfully advancing in areas like digital therapeutics, real-time health information, and artificial intelligence to drive an even more distinctive consumer experience, all at lower costs. We're early in a wave of fresh product innovation for the commercial market, with new on-demand health benefits for large employers and new patient-centric care resources organized around high-quality local health systems. such as the program we launched on the Front Range in Colorado. We expect strength in the association health plan market and have an unprecedented focus on developing and cross-selling specialty benefits. To summarize, our expectations for UnitedHealthcare's performance in 2019 are unchanged with what we outlined for you at the end of November. As we look at 2019, 2020, and beyond, we're strengthening our capabilities for customers across UnitedHealthcare and UnitedHealth Group. We have a multi-billion dollar, multi-year effort well underway to address medical and operating costs on a structural basis and improve value for customers. We're deploying new technologies to provide information to doctors at the point of care and are leaning into consumer-centric services like the individual health record and Rally, and the innovative benefit designs and value-based incentives they can power. And we believe UnitedHealthcare, supported by Optum, is uniquely positioned to serve high-growth, higher-acuity markets like Medicare, duals, and patients with complex and chronic conditions. Now I'll turn the call over to John Rex, UnitedHealth Group's Chief Financial Officer.

Thank you, Steve. This morning, we reported full-year revenues of $226.2 billion, with double-digit percentage growth in the fourth quarter revenues for all reporting business segments. For full-year 2018, Optum revenues from customers unaffiliated with UnitedHealthcare grew nearly 13%, a faster pace than affiliated revenues. This reflects the market's response as we position Optum and UnitedHealth Group to serve more people independent of payer affiliation. even as we offer greater customer and consumer value through UnitedHealthcare. Balance and diversification can also be seen in our operating earnings performance, where Optum contributed 47% of full-year 2018 earnings from operations of $17.3 billion, including 60% of the earnings in the fourth quarter. To put that mix in perspective, only five years ago, Optum contributed about a quarter of full-year consolidated operating earnings. Fourth quarter adjusted net earnings per share of $3.28 brought full-year earnings to $12.88 per share, 28% growth over 2017. Full-year cash flows were $15.7 billion, or 1.3 times net income, growing 16% over 2017. Fourth quarter and full-year cash flows reflect the $2.6 billion payment to the U.S. Treasury on October 1 for our customer's portion of the federal health insurance tax. Our full-year medical care ratio of 81.6% is consistent with the outlook we provided last January of 81.5% plus or minus 50 basis points and reflects well-managed cost trends despite some margin pressures in parts of our Medicaid business, as Steve just discussed. Medical reserves developed favorably in the quarter by $280 million. We continue to expect a 2019 medical care ratio of 82.5% plus or minus 50 basis points, which reflects the impact of the health insurance tax deferral this year. The 2018 operating cost ratio of 15.1% was driven by effective cost management and strong growth in lower operating cost businesses. partially offset by ongoing investments to develop and deploy modern technologies and capabilities that advance the value we deliver to people. Turning to our balance sheet, our full-year return on equity was strong at 24.4%, and our debt-to-total capital ratio was 40% at year-end, after placing $3 billion of debt in December. We repurchased $4.5 billion of stock last year and we raised our dividend by 20% back in June to an annual rate of $3.60 per share. Looking forward, we entered this year with strength, flexibility, and momentum, and we continue to expect strong growth in adjusted net earnings to a range of $14.40 to $14.70 per share. One last observation on the quarterly earnings progression for 2019. The current first half-second half street consensus view appears to reflect our seasonal earnings pattern, which over time we have described as roughly 48% weighted to the first half. Inside of that, our sense is that we expect to perform modestly stronger than the current first quarter consensus estimates would suggest.

Dave? Thank you, John. 2018 was a strong year with advances in our businesses, improvements in service and net promoter scores, and compelling financial performance. But there is much yet to be done to fully realize our potential to reimagine healthcare for the benefit of society in the U.S. and globally. Inside this morning's business review, we touched on a number of initiatives, all forward-leaning, all indicative of a restless, ambitious character of this team, and our efforts to advance performance in healthcare for those we serve. With plans firmly in place, we are looking to perform strongly in 2019 and lay the foundation for continued growth in 2020 and the decade ahead. We have significant opportunities to diversify and strengthen the offerings we bring to people and to drive engagement, trust, and loyalty across our broad customer base. And we will continue to advance personalized interactions with the people we serve and lean into clinical quality in healthcare delivery and our leadership in digital technology. Let me close now and open up the call to your questions. One question per person, please.

And at this time, if you have a question or comment, please press star and one on your touchtone phone. You may remove yourself from the queue by pressing the pound key. Again, we ask you to limit yourself to one question. If you ask multiple questions, we will only be answering the first question so we can respond to everyone in the queue this morning. Thank you. We'll take our first question from Justin Lake with Wolf Research. Please go ahead.

Thanks. Good morning. Appreciate all the color on the medical call side. I wanted to go back to the investor day and Ask you about the HIF. It was the first time in probably five years that you didn't spike out the HIF at all as a moving part, either positive or negative. I wanted to ask you whether this is indicative of just the size scale diversification of the company kind of now being able trend without worrying about whether the HIP is coming or going or flat year over year as we look out to 20 and beyond.

Thank you. Thank you, Justin. As you know, the 13% to 16% growth rate is an average long-term growth rate, and we are, in fact, committed to it. And I do think there's merit of the scale and size of the company that caused us maybe to spend a little bit less time on those reconciliations than maybe what you would have seen in the past. John Rex, would you like to comment?

Yeah, thanks, Justin, John. Yeah, I have to start by saying, you know, I'd be remiss to diminish $2.6 billion of our customers' funds just having been paid for the health insurance tax. That's still a very significant number for any company, I would say, and a burden for our customers. But you are correct in thinking that the non-insurance insurance component of our enterprise continues to grow at a reasonable pace. And as that pacing increases and the mix continues to shift, as a percentage of our earnings mix, in terms of the volatility that they have coming in and out in any particular, starts to diminish as a percentage of the earnings mix. But again, remiss to say that it's still a very significant burden for Americans.

Yeah, and on that score, you know, the Health Insurance Act is expected to come back in 2020, and I think I'll recognize this, but it will increase the cost of healthcare by $20 billion for 142 million Americans. That causes the average senior couple to see their premiums raised by $500 per year and for families with small business coverage by about the same amount, around $480 or so per year. Our view is that outcome is unacceptable because health care already costs too much. So we're going to continue to advocate for a repeal or deferral of this unnecessary tax. We can't comment or speculate on the outcome, but we would take this opportunity to also applaud the bipartisan actions that have occurred across Congress, both the Senate and the House, in this past year or so. And hopefully we'll get this taken off the backs of consumers here pretty soon. Next question, please.

Our next question comes from Matt DeBorsch with BMO Capital Markets. Please go ahead.

Yes, I was hoping that you could talk about the factors that drove the medical care ratio to be a little bit higher than what we and I think the street analysts had modeled. I mean, is that, you know, purely the result of of Medicaid, and I noticed in the press release that you had talked about that trend moderating, but in terms of impact on MCR, it seemed particularly notable this quarter.

Well, thank you, Matthew. The MCR impact in the quarter is almost exclusively due to Medicaid performance We touched on this in the investor conference. I recognize it was in response to a question, but throughout the balance, throughout 2018, we had seen a pullback in our performance in our Medicaid business, in particular the TANF portion of it, and in particular in a handful of states. Those issues were, as we described in the script, it's really around both the funding in a handful of states, some of which you probably recognize were corrected throughout the year, and then also with respect to some of the costs, both medical as well as operating costs in those handful of states. The rest of our Medicaid business, both the dually eligible and the LTSS populations are performing quite nicely. And, of course, as you could tell, our opt-in businesses are performing well, as well as the remainder part of our UnitedHealthcare businesses, both the employer and the Medicare markets. We did make considerable progress through 2018. I'll tell you, the last half of our Medicaid performance is substantially better than the first half, but it just isn't quite up to par yet as we look in the Q4 period. We have seen, again, nice progress throughout the balance of the year, and we expect 2019 to show considerable additional improvement as we move that business back to its target margin range of 3% to 5%.

Thank you. We'll take our next question from Charles Rhee with Kellen. Please go ahead.

Yeah. You know, I don't recall that you guys discussed it earlier, but, you know, I think there were reports earlier that you guys had won a large VA contract. And, you know, maybe if you can kind of give us some details around that. I mean, the headline numbers look very big, but I can't imagine that you'd be necessarily booking all that. Can you give us maybe some color around how we should be thinking about that? I believe it's in the OPM Health, would be in OPM Health. Maybe give us some sense on how to think about that and, you know, when that would ramp up and, you know, any call around that would be helpful. Thank you.

What you're referring to is the VA Community Care Network contract, which was awarded at the end of last year. Andrew Hayek.

Thanks, Charles and Dave. So, yes, we were pleased with the award of the VA Community Care Network program to opt and serve in the regions in which we did, which were three regions. It's an honor to serve our veterans, and I would really go out of my way to recognize the dedicated and talented OptumServe team that is ready to deliver on this contract. With the award, Optum can now serve the VA's capability to provide timely and quality healthcare to more than 6 million veterans in 36 states, two U.S. territories, and the District of Columbia. And these contracts administer regional networks of high-performing licensed healthcare providers who will work together with the VA to provide medical, dental, and pharmacy services to veterans who are unable to receive care at their local VA medical center. So we look forward to completing the government review process, which of course is underway, the normal review process, and ultimately getting to work serving our military veterans. And this is A really important step, as you indicated, it's an important step forward for OptumServe, which really has the potential to bring the full depth and breadth of Optum capabilities to both current and former members of the armed services and the government.

I think it's also another, I'd be remiss to not underscore the fact that it's, you know, just another example of when there's tension in healthcare, particularly with government, that they seek a public-private partnership. So in this case, the VA sought a partnership with the private sector so that they could provide better care to the veterans, and we are honored and pleased to be able to win these awards and to serve them. Next question.

Is that included in the guidance?

Yes, it is. The contract begins in implementation in 2019, so it actually is a bit of a drag to earnings. and it is a seven-year contract, so it will provide its returns on that investment through that seven-year timeframe.

Great. Thank you.

Thank you.

Our next question comes from Sarah James with Piper Jaffray. Please go ahead.

Thank you. At Investor Day, one of the things that you talked about was the potential to double commercial specialty revenue. Can you give us an update on how that's tracking so far in 2019 and provide some more details on the drivers?

Sure. Dan Schumacher, please. Thanks. Good morning, Sarah. I appreciate the question. Yes, we do and are very focused on deepening our penetration of our specialty block. within our broader medical because we think when we bring together vision, dental, hearing, and other assets, you take more of a holistic approach to the person and drive better overall health outcomes. We made some nice progress. in the 1-1 selling cycle to drive deeper penetration, but I would tell you that we're in the early innings in the context of doubling it. Dental and vision in particular are going to be the foundational parts of that, but we expect nicer contributions from hearing as we move forward as well. Thank you.

Next question, please.

And we'll go next to Zach Zoptak with Morgan Stanley. Please go ahead.

Good morning. Thanks for the question. I appreciate the early selling season comments for the PBM for 2020. Just wanted to get a little more color if there were particular pockets of strength that you were seeing in the 2020 selling season, especially as I think you had mentioned last year you won about three health plan clients on your 2Q call. Thank you.

As I think you've noticed, OptumRx has considerable momentum on the top line, and it's getting really strong market response. John? Thanks, Zach.

It's John Prensky of OptumRx. I'd say overall our differentiated value story is really resonating in the market. We've had good uptake this past selling season. We were very successful in selling over a dozen new large relationships that had a mixture of both states, health plans, unions, and a couple large employers. We've also had good retention. Again, we've had retention of 98% for the third year in a row, which we were very pleased about. I think that links back to our strong scores around net promoter score for our clients as well as our consumers. In terms of 2020, we've already sold a couple large deals and added a couple large relationships for 1-1-20. We have a very healthy pipeline as we go into the new selling season. As you know, for the 2020 selling season, this time of year is focused more on the health hands. And so we are focused on that. And then the large employers, as well as the state bids for 2020 are just in the middle of their process. So we're optimistic. And also we're really pleased that our story around value and stability is really resonating in markets.

Thank you. Next question, please.

And we'll go next to Kevin Fishbeck with Bank of America. Merrill Lynch, please go ahead.

Kevin, you may be on mute.

Sorry, can you hear me now?

Yeah, we can.

Okay, great. So I just want to go back to the MLR question, I guess specifically on the Medicaid side. I wanted to understand two things. One is, is your commentary about the MLR and Medicaid today the – Is it the same as it was back in November, or are you highlighting that things have gotten incrementally better or worse from there? And then two, just mathematically, Medicaid, it feels strange that that could be being talked to variance to MLR in the quarter, just given its relative size. So I don't know if there's anything else that you would highlight on medical costs.

And you're talking about variance to street expectations?

Yeah, exactly.

Okay. Well, maybe what I'll do is I'll comment on Medicaid and then maybe just ask John Rex to comment on the MLR in case to make sure that we're fulsome in our response to you on that. We're in exactly the same position or pretty close to the same position we were with Medicaid when we discussed this with you in November. In fact, what compelled me to bring it up was The commentary, I believe the question that was asked, I believe you asked it actually, was really around where we may not be performing to our fullest potential. And I gave you a few examples, this one being on how our business is performing. And it is isolated to TANF. It is pretty much isolated to five markets. It's pretty compelling what these five markets were as it relates to 2018. The only thing I'd suggest is that over the last 45 days to 60 days, our teams have continued to make very nice progress and are remediating these issues on plan as we look to 2019 for improved results. And we do, in fact, see nice progress with respect to those. And it is a leading contributor to the MLR program. view.

But John, do you have anything further to add? Sure. Kevin, this is John. Good morning. So maybe just start as you kind of teed up the question to be fully responsible. So I characterized the results highly consistent with what we laid out at the end of November. So UnitedHealthcare's full year operating earnings of $9.1 billion were just slightly ahead of the point estimate that we provided at that time. And I put the kind of 81.6 percent full years consistent with the approximate 81.5 that we cited at that time also. So I would say it is consistent with the outlook that we had as we were – as we got to visit with you at the end of November. So in that line. So beyond CNS, as we discussed, the benefits businesses are performing well, at least in line with our expectations. Medical costs well contained overall. And I would suggest the $280 million in favorable development in the 4Q also is a reasonable indicator of that.

All right. Thanks.

Great. Thanks, Kevin. Next question, please.

And we'll go next to Steve Cannell with Goldman Sachs. Please go ahead.

Thanks a lot, guys. I appreciate all the color on the MCR. Sorry to beat this one, but maybe if I could just use my question to follow up here and maybe could you comment specifically on sort of the puts and takes on the commercial side and then Medicare, both sort of really on the trend and specifically maybe I would love to know if commercial medical cost trends sort of track within the 2018 full-year guidance range. in the fourth quarter, and then if Medicare MCR is sort of right in line with your expectations as well, or if there's anything worth calling out there, that'd be great. Dan Schumacher?

Sure, commercial. Good morning, Steve. With regard to the commercial cost trend, a year ago we had guided to a range which we narrowed at the investor conference in November to 5.5% to 6%, and I would tell you that on the year we landed squarely within that. So very pleased with where our cost came in from a commercial perspective, as well as then how that translated through to in line with our earnings expectations. And I would just point out that, you know, within our commercial block, we obviously have a seasonal bias towards the fourth quarter. And, you know, that's a shift that's really driven by the type of products. that the market's buying, as well as the pace at which deductibles are increasing year in and year out. And so that also contributes to how you look at the performance and its progression over the course of the year.

And that's something new. And Medicare had a very strong quarter in the fourth quarter and came in line with expectations of not a little bit ahead.

Great. Thank you.

And we'll go next to Honor Gupta with the Lee Rank Partners. Please go ahead. Thank you.

Hey, thanks. Good morning. So my question was about the vertical consolidation with the deals closing. Cigna is moving their book to Express. As you're looking forward into the new competitive landscape, and you talked in iDay about OptumRx with $250 to $300 in savings, OptumCare on days per thousand, how are you preparing for share gains while maintaining loss ratios and margins going forward in a possibly bundled landscape? commercial and PBM environment?

We're just running our business, Donna, and running it very well. As John pointed out, he's seeing strong performance and growth, and I think if you track back the last two years and then leaning into 2019 and now leaning into 2020, we continue to see a nice response to OptumRx offerings in part because It goes well beyond traditional PBM and operates as a pharmacy care services business. The collaboration between it and UnitedHealthcare is long and well established, so it's not new, meaning that the two of them work very collaboratively together on a wide range of opportunities. Of course, that pharmacy care services business is available on a multi-payer basis as well. But we have... A strong competitive offering. We work with and deeply respect the new and emerging competition. And, you know, we're not going to underestimate it, but we also remain highly confident in our own capacities to compete and continue to grow and manage our business.

Thank you. And we'll go next to Scott Fidel with Stevens. Please go ahead.

Hi, thanks. Just interested as the market continues to debate the overall trajectory of the economy exiting 2018 and into 2019, you've got a lot of sort of viewpoints on that in terms of how the overall economy is progressing in both the UnitedHealthcare and in the opt-in businesses. So just interested maybe in some of the more economically sensitive areas, you know, what you're seeing in terms of trends in the fourth quarter, particularly later in the fourth quarter relative to the third quarter.

That's a good question, Scott. And I've been thinking a little bit about this both on the, you know, we're seeing a lot of economic sentiment, if you will, but also political sentiment in health care. And I was evaluating that over the course of the last, at least my timeframe here, which has been nearing about 21 years or so. Just by way of background, we've grown our revenue base in this business from $12 billion at that time to $226 billion, which we just reported today. What I find, particularly in healthcare as well as economic cycles, is that sentiment tends to drive private sector expansion, and we've seen that through Medicare Advantage, We see that with the introduction of Part D, managed Medicaid, duals, Medicaid expansion, exchanges, the ACA broadly, and then also what we discussed this morning with respect to the VA and how they have sought public-private partnership to respond to the needs of veterans. The one thing that's true through these political shifts and economic shifts is that health care products are always in demand. It's an economic expansion or recession, or whether there's a liberal or conservative administration, UnitedHealthCube positioning tends to be unique and very well regarded. We manage a portfolio of diverse healthcare businesses, and they serve large and diverse end markets. And we tend to grow regardless of economic cycle or administration. We have a unique portfolio of competencies in data, technology, as well as clinical insights and actually our ability to manage clinical interactions just continues to advance across this business, which is reinforcing that capability in our business. And our aligned services have never been positioned to produce greater value for society, for clients, consumers, You can hear us talking a lot more around societal return and the triple lame, and then also, you know, becoming more of a consumer-oriented company, which is really what MPS signifies. So just maybe to wrap up, this is a very scaled and proven model. It has a deep management team with strong continuity. It's largely 95% domestic, so we really don't have tariff, Brexit, or other global concerns, and it has a long runway for growth. It has five well-defined high-performing growth pillars that are going to meet an $11 trillion global market in 2025. So we like the opportunity that is presented, and we believe that whether it's political sentiment or economic sentiment, this UnitedHealth Group will continue to provide distinctive results and returns both for society as well as our shareholders.

Okay, thanks.

Next question, please.

And we'll go next to A.J. Rice with Credit Suisse. Please go ahead.

Hi, everybody. I was just going to ask, I know at the Investor Day you guys talked quite a bit about the initiative around specialty pharmacy and the acquisitions as well as putting infusion in MedExpress. and in some community centers. Can you just sort of update us on where you're at today and rolling all of that out and sort of a timeframe over where you might look in the next year or so, and what does that mean for you financially?

Andrew, Eddie? AJ, thanks very much for the question. Make a couple of comments, and I'm going to ask John Prince to give you a little bit more detail. I've been thrilled with the progression of the businesses that you've described. I think within the pharmacy care services business that John runs as well as within OptumHealth that Andrew runs, we're seeing these high-quality ambulatory care facilities of the type you described really being embraced strongly in the marketplace. We continue to expect to roll out and extend those networks over the next several years. I would just make a further point, though. I think it's really important to think about Optum really as a portfolio of provider networks. So if you think about it, it's not just about these ambulatory care services like SCA, like the infusion centers, like MedExpress, but it's those things complemented by such a strong medical provider network in key markets across the U.S., And what you're going to see over the next few years is us aiming to bring to life the value of that network, that really comprehensive presence that we're now beginning to establish in a series of important markets. We think that that can really deliver substantial convenience, quality, lower cost, better service for the patients we serve, as well as the planned sponsors that we serve. With that intro, let me just hand over a bit more specificity to John.

Great. Thanks, Andrew, and thanks, AJ, for the questions. John, friends, In terms of those businesses around specialty infusion, we really like that space. We have a very differentiated offering in the market focused on decreasing the total cost of care and also improving the consumer health. We've got focused programs clinically that handle a patient through their whole course of treatment. We've done a great job of transforming the consumer experience as well as the provider experience as a close partnership between the consumer and the provider as you manage the course of treatment. We've continued to grow extensively in the external market, taking business both directly with plant sponsors, but also competing in the open market. So more than a quarter of our business comes from this open market, people selecting our services as their preferred offerings because of our MPS and our clinical outcomes. We added, we're now over 50 sites in terms of those businesses within the United States. We have a significant expansion. We're looking at more of a dozen that are in this coming year and a dozen in the future. All in from our portfolio of pharmacy care services, we have over 500 sites if you add in Genoa and other components. So strong performance and strong opportunity. Thank you, AJ. Next question. I'm sorry. Thank you, AJ.

Next question, please.

And we'll go next to Frank Morgan with RBC Capital Markets. Please go ahead.

Good morning. I think you actually commented about this a little bit at the investor day, but with regard to the loss of the Cigna book of business, I think you commented that it would be a revenue hit but really not a profit hit. And just any additional color on why that is, and does that also assume any type of operational deleveraging with that lost revenue? Thanks.

Tom Rex? Frank, good morning. It's John Rex here. So yeah, you're absolutely correct. I did comment at the investor conference in terms of the potential for that business to transition over the next couple of years. And indeed, that clearly is the expectation here. As I commented, that would have impact on revenue and script count as that transitions, and that really depends on the timing, and that timing isn't completely certain yet in terms of the pacing of that, and we're going to work with our customer in terms of meeting their needs. on that piece. I did also comment it wouldn't have any impact on our earnings outlook for 2019, and that continues to be the case, that it doesn't have any impact on our earnings outlook. So that to be determined in terms of how it impacts revenue and script count as we work with our customer signal on this.

Thank you, Frank. Next question, please.

And we'll go next to Josh Raskin with Nefron Research. Please go ahead.

Hi, thanks. Good morning here with Eric as well. And question on Optum. Rewind about two and a half years ago, you guys had a couple of really big wins, summer of 16 with CalPERS and Texas employees, GE, et cetera. And I know a lot of that all kicked off on 1117 and multi-year deals on all of those. But you probably got close to two years of data on it at this point. And so I'm curious what That data is showing in terms of the impact of synchronization. You know, there were some financial targets within those contracts, so kind of how you're tracking on those and, you know, when do you think you kind of come to market with a little bit more of a definitive study on, you know, here's what the world looked like in these accounts prior to the synchronization and here's what the impact is looking like under the OptumRx contract.

John Prince. Thanks, Josh. It's John Prince with OptumRx. I'd say I'm not going to get into details on specific customers. I'd say overall we're continuing to execute very well for our customers. That story around synchronization in which we sold to those customers a couple years ago is part of our broader story to the market today. So today when we talk about going to the market, we talk about how we're negotiating lower cost of care for drugs. We're focused on lowering the total cost of care. improving the health outcomes, as well as transforming the consumer experience. That is our core value story. When we talked about the $20 to $25 of value that we deliver for our highest-performing clients, that is part of our overall book of business in terms of how we serve our customers. So we actually have a lot of good data. That is then leveraging to our story in the market today. So we actually are coming with strong confidence about our ability to execute. And we're in the market now with – things around drug trend and how we can actually reduce drug trend. We're actually out there with total cost of care guarantees in the market, and that's because we've done the definitive study. We've been in the market for five years with this think story, and we're executing well, and we're on the next generation of it. So we're confident in how we're performing.

Thank you for the question, Josh. Next question, please.

We'll go next to Ralph Jacoby with Citi. Please go ahead.

Thanks. Good morning. You know, we're counting MLR higher by about 90 basis points in the fourth quarter year over year, normalizing for the HIF. If that's all Medicaid, it is a pretty massive uptick for a company your size. And we just haven't seen this magnitude of pressure from others in the space. So I guess I'm just trying to get a sense. if it's unique to specific markets you're in that others are in, if it's unique to you in terms of adverse risk within those populations, just trying to sort of get a sense of reconciling that, and maybe if you can help just with where your pre-tax margins are within Medicaid at this point and what kind of improvement you do expect in 2019. Thanks.

Thanks, Ralph. We're not seeing the same that you are on the MLR calc, so why don't we just circle back with you separately on that. As it relates to the Medicaid business, it is profitable. It's not at our target margin range of 3% to 5%. I'd like to see us get into the bottom end of that range in 2019. We'll definitely be within that range solidly in the 2020 time period. And we can say with confidence that that's the case based upon the great advocacy actions that we've taken so far, as well as a number of the clinical engagements and operating cost initiatives that we've put in place. I also want to let you know this business functions very effectively. It has mid-'60s NPS scores for the traditional Medicaid population. When you get into the duals, it's into the 70s. It's oftentimes number one in terms of quality scoring in its local markets. It's referenceable by all the states. So I don't want to overplay Medicaid here. We have a short-term issue that will take us a little bit of time to work our way out of. Again, we've been working on this most of 2018. It became more acute in the first half, really in the second quarter. But we've been working hard on it since. And you've probably seen some of those rate actions flow through. You can probably see that in some of the statutory filings, some of the improvements in some of these states. And I think you'd probably be able to recognize where they are and how isolated it is in our capacities then as a company to be able to turn that around. So we have a lot of confidence in where we're at. It's led by Heather Cianfranco. She's a fantastic leader. And we will, her team will continue to make good progress on this through 2019. Thank you, Ralph. Next question, please.

And we'll go next to Gary Taylor with JP Morgan. Please go ahead.

Hi, good morning. I guess MLR will be the theme of the day. I apologize. Maybe could you give us a little help just thinking about seasonality in your MLR and if that's changed? So when we look at third quarter to fourth quarter. In 2016, MLR was pretty flat. In 2017, it was up 50 bps in this quarter, up 110, but more like 170 if you exclude the prior year development. So it does seem like there's been a trend where you've seen more of an increase in the 4Q even as the years come in line. So would you attribute most of that to just some of the seasonality in the commercial business, you know, that you've talked to with higher copays and deductibles over the years? Or is there something else in the line of business mix that might be contributing to higher MLRs in the 4Q? Dan?

Thanks, Gary. Dan Schumacher. So maybe provide a little bit of context around the commercial seasonality. As you look sort of first quarter to fourth quarter, The change in that medical care ratio generally is somewhere in that 6%, 7%, 8% zone as you move from the first to the fourth quarter. I tell you, as you look 17 versus 18, there's probably been somewhere around a one-point shift in that as you look at greater concentrations in offerings that drive consumption towards the fourth quarter. as well as the increases in the average deductible. If you look inside of our average deductible increases over the last two years or so has been in the 8%, 9% zone. So those are the contributing factors that push the consumption and the realization of that towards the fourth quarter, and I think that's what you're seeing inside of it.

Thank you, Gary. Next question, please.

We'll go next to Lance Wilkes with Sanford Bernstein. Please go ahead.

Yeah, I wanted to ask a question on the cross-sales and the specialized benefits focus you guys have. And just related to that, you spoke about dental vision and kind of additional coverage as being an area of focus. I wanted to understand how much of a focus was cross-sales of PBM, stop loss, and other care management solutions as well.

Okay. Dan, do you want to take that? Sure. Thank you, Lance. Our ambition is to serve the needs of our clients, and we know that when we have the opportunity to really combine the full capabilities of our enterprise, taking our knowledge and know-how with respect to the medical offering underpinned by high-performing care delivery assets, both OptumCare as well as third-party, bring in our advocacy and navigation competencies from OptumHealth, our know-how and intelligence from OptumInsight, and then have a chance to take on the ancillary offerings that really contribute to the overall health and well-being of a person, that we have our best results and outcomes. So we are no doubt very focused on trying to combine both our medical and our pharmacy, take on stop loss, add in care management, advocacy, navigation, in support of people along with the ancillary coverages. And we're making some nice progress in that regard. And we've got a lot of upside, frankly, as you look at our penetration rates, particularly up market in pharmacy. We've got a lot of room to be able to serve our clients in a more fulsome way. Thank you, Lance.

Next question, please.

Going next is Steve Willoughby with Cleveland Research. Please go ahead.

Hi, good morning. Thanks for taking my question. Moving off the MLR for a bit, my question just revolves around some of the new commercial initiatives you've talked about, such as Vine, Colorado Doctors, and Nexus ACO. I was wondering if you could give us any perspective on the potential membership gains from these programs, either in 2019 or 2020. Great.

Dan? Sure. Thank you, Steve. Maybe just to step back a little bit, from our perspective, we are I'm glad you caught it. We're excited about our efforts to deliver greater value for people. And I think as Dave mentioned, we really think that we're on the forefront of a wave of innovation, and you named some of those. We see some modest contributions from those efforts in 2019 and increasing efforts in 2020 and beyond. Nexus has been around a little longer and more evolved. We had about 75,000 folks in 2018. As we turn into the year, we will increase that nicely, and by the end of the year, we expect to more than double that. As it relates to Colorado Doctors Plan and BIND as an example, I would say they're on the early end of it. So, again, you know, smaller contributions to our enrollment tables in 2019 and growing contributions in 2020. But, again, like the suite of offerings that were mentioned, bringing to market as well as the interest from a client perspective.

Great. Thank you, Steve. Next question, please.

Going next to Steve Valliquette with Barclays. Please go ahead.

Great. Thanks. Thanks for taking the question. So, you know, from the January 2019 Medicare Advantage membership data that just came out overnight, I know some investors look at the sequential trends versus December. Others will look at the year-over-year growth trends. I know it's early, but we're calculating that at least first of January of 2018, that United grew its total Medicare Advantage membership almost 10%, and individual MA membership was up almost 11%. So I guess the key is that one could hypothetically suggest that this is trending slightly above the midpoint of the growth you kind of suggested for 2019 back in November, which is obviously positive. So I guess I'm just curious to take your temperature and just see if you think there could be a bias to the upside for your MA membership growth in 2019. Thanks.

Brian Thompson addressed that. Sure, Steve. Hi, Brian Thompson. Thanks for the question. 2019 is off to the start that we had expected, a real strong start from our vantage point. I'd say what AEP suggests is a performance certainly in line with our four-year range. Our share of our growth does suggest some share gain again, which would be the fifth year for us consecutively, which we're certainly very pleased with. I think as we've talked about in the past, 2019 environment really provided an opportunistic opportunity to really grow meaningfully. I think we took advantage of improving our benefits, but I would also suggest that we were very cautious and very disciplined in that regard and established our benefit positioning and our capabilities for 2019 with an eye for long-term stability, certainly cognizant of the potential return of the health insurance tax. in 2019. So really pleased with our positioning. And again, I think it aligns really nicely with what we had expected. So really a strong start to 2019.

Okay, that's great. Thanks. Okay, thank you, Steve. Next question, please.

We're going next to Michael Neuschel with Evercore ISI. Please go ahead.

Thanks. John, can you just break down the favorable reserve development entry year versus anything prior year? I think prior year was lower negative in past quarters. So is that pattern consistent and this quarter's development is all underlying 2018 performance?

Sure, Michael. John Rex here. Yeah, so we had $280 million of total favorable development for Q. That breaks down 170 million current year, 110 million prior year. You know, it's called the favorable development. It's really indicative of the cost containment efforts across our businesses and across the enterprise. You know, I don't know how material I'd put it in the context of $145 billion in medical spend overall. And it continues to be our objective to manage that well to improve accuracy. We have increasing level of electronic data exchange, early detection of hotspots, and really more ability to intervene. So we should have increasing accuracy. with that and it relates to kind of our cost containment efforts. Some of those they roll across in different forms, some of them very near term, some of them take a little bit longer to achieve. So sometimes you see a little different mix in terms of prior year and current year. Thank you Michael.

Next question please.

And we'll go next to David Winley with Jeff Rees. Please go ahead.

Hi, thanks for squeezing in a question on John Rex's EPS cadence. Commentary, I understood you to say the 48% as has been in the past, but more in the first quarter. So I just wanted to clarify that you are comfortable or you are guiding us to the 48% in the first half, but more than in the first quarter. Is that how we are to interpret your comments? Thanks.

Dave, thanks for the question. Here's how we view it. So from year to year, individual quarters can often be impacted by simple factors. I call those out as, you know, such as the pacing of when weekends and holidays fall. As we all know, the yearly calendar is fairly stable. So it's just typically a matter of differences in quarters. And as you would realize, those variations are most impactful to the UHC benefits businesses. So in 2019, the first quarter had slightly fewer workdays than the first quarter 2018. In addition, given the timing of share-based compensation awards and how that impacts our tax rate, we generally also expect the first quarter to have the lowest effective tax rate of the year. So perhaps without getting overly prescriptive, and you're right about the kind of 48% mix in terms of how we see the first half playing out, and that is still consistent, but without getting overly prescriptive and without knowing all your models, you know, I'd suggest something roughly in the range of a 1% shift of your full-year earnings outlook would be more appropriately recognized in the first quarter.

Very good. Thank you.

All right. Thank you, David. Are there any other questions?

It appears we have no further questions. I'll return the floor to you, Mr. Wickman, for final comments.

Okay. Well, thank you. Appreciate all the questions today. To sum up, the company delivered strong performance in the fourth quarter and full year 2018, contributing genuine value to the people we're privileged to serve and to society at large. I'd like to take this opportunity to thank the 300,000 people of UnitedHealth Group, Optum, and UnitedHealthcare for their good work. We are confident in the fundamentals of our businesses and expect to deliver solid operating and earnings performance in 2019. The opportunities ahead in 2020 and beyond are exciting. There is a remarkable potential for us to serve more people in more ways every day, growing our businesses in the U.S. and worldwide and continuing to provide consistent, reliable results for you, our shareholders. Thank you.

And this will conclude today's program. Thanks for your participation. You may now disconnect.