UnitedHealth Group Incorporated

Good morning and welcome to the United Health Group second quarter 2025 earnings conference call. A question and answer session will follow the United Health Group's prepared remarks. As a reminder, this call is being recorded. Here are 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. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amount is available in the Financial and Earnings Reports section of the company's Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our form 8K, dated July 29, 2025, which may be accessed from our investor relations page of the company's website. I will now turn the conference over to the Chairman and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Thank you. Good morning, and thank you for joining. Today, our prepared remarks will be a little longer than usual, so we will be allowing more time for your questions. As we begin, I want to recognize and thank our employees who have been so dedicated to serving our patients, consumers, and customers during a prolonged, challenging period for our business. And I'd like to thank our leadership team, many of whom are new in their roles, for their willingness to join me in looking hard at our businesses, getting a grounded assessment of our action plans, re-baselining our outlook, and moving a pace to advance the performance of each of our businesses. This morning, I know you are eager to get into the underlying details of our revised financial outlook, which we will do. But at this moment, I believe it's also important to convey the tone we're setting at this enterprise. More than anything, it is a tone of change and reform, born out of recommitment to our mission to help people live healthier lives and help make the health system work better for everyone. It's a mission that requires a commitment to a culture of values, of service, responsibility, integrity, and humility. We pair that mission-driven ambition of reform with a keen sense of the opportunity and the expectation to perform better than we ever have. As we continue to assess the state of our businesses, it is very apparent that some require a fundamental reorientation, others require building and nurturing, and others must be reconsidered and redirected to original purpose. We also recognize the need and the opportunity to revisit and address critical processes and fundamental business practices, both internal and market-facing. We are acutely aware we have an enormous responsibility for providing care for millions of people and for protecting the government and private programs we partner in. As such, we have embarked on a real cultural shift in our relationship with regulators and all external stakeholders. We intend to be proactively engaged, constructive, and responsive to the concerns of all stakeholders and in our engagement with them. We have the chance to reposition our enterprise as a far more modern, reliable, consumer and provider-friendly enterprise using new technology and approaches, and we're going to pursue that course. Pursuit of these opportunities aligns to and enables our reform and change mandate and allows us to better achieve our mission and to steadily perform better in doing so. We are on this course against a challenging environment, which includes a generational pullback in Medicare funding set in motion in 2023 and playing out through 2026. Unprecedented medical cost trends measured in both intensity of services used as well as unit prices and more aggressive care provider coding and billing technologies. The prospects for further contraction of the Medicaid and exchange markets, the growing need to invest in the opportunities new technologies offer, and the expectation of all healthcare entities to offer a better experience for consumers, customers, care providers, and employees. And finally, the continuing public controversy over longstanding practices and complexities across the entire healthcare sector, particularly managed care, which bears the critical roles for coverage, for care management, and for pricing, for the intensity of the cost and services used in the benefit products and programs for the entire healthcare market. As a leading provider of health services, we must help advance a better health system. We are committed to engaging in these pursuits with a sense of purpose and better partnership with all stakeholders, transparency in our business and reporting practices, and continued integrity in all we do. Beyond the environmental factors that are affecting the entire sector, and more specifically to us, we've made pricing and operational mistakes as well as others. They are getting the needed attention. Our critical processes, including risk status, care management, pharmaceutical services, and others, are being reviewed by independent experts, and they will be reviewed every year and reported on, as these processes can be reviewed at any time by outside stakeholders. While we believe in our oversight and the integrity of these processes, wherever they are determined to be at variance with prescribed practice, they will be promptly remediated and will continue on this path. All the foregoing is fully addressable. We can steadily restore our performance to levels consistent with our mission and stakeholder expectations, all as we strengthen an institutional culture aligned to that mission and accountable for performance. Over the last 60 days or more, we have made extensive management and operational changes aligned to this agenda of reform and performance. Other such changes to leadership, to our businesses, our culture, our approaches and practices, and to our board, governance, and succession oversight, as appropriate, will continue to be made as we proceed through this period. With those thoughts in mind, Tim Noll and Patrick Conway, heads of UnitedHealthcare and Optum, respectively, will walk through some of the specifics in their businesses. John Rex will discuss financial performance and the elements affecting our outlook, and I'll come back with some closing thoughts, and then we'll have ample time for questions and answers. Thank you, Steve.

I'll start by emphasizing that we are approaching our business with greater humility, greater transparency, and a renewed determination to meet your expectations and our standards. The primary driver of the UnitedHealthcare earnings shortfall for 2025 is that our pricing assumptions were well short of actual medical costs. Our current view for 2025 reflects $6.5 billion more in medical costs than we anticipated in our initial outlook. A little over half, or $3.6 billion, of this is in our broad-based Medicare portfolio. About one third or 2.3 billion is in the commercial business. But evenly between ACA plans and our employer business. The remaining trend pressure is related to Medicaid, most notably due to elevated behavioral trend. In addition to trend driven issues, updated 2025 outlook removes about 1 billion from previously planned portfolio actions that we are no longer pursuing. It also reflects about 850 million of other items, including unfavorable prior period items primarily from 2024 and recognition of several one time settlements. We know these are serious challenges. We are humbled by them and will carry that sense of humility more deeply into our culture. But we also believe we can resolve our current issues and recapture our earnings growth potential. Let me now provide an update on where each business stands, starting with Medicare. When we prepared our 2025 Medicare Advantage offerings back in the first half of 2024, we significantly underestimated the accelerating medical trend and did not modify benefits or plan offerings sufficiently to offset the pressures we are now experiencing. This was compounded by the magnitude of plan exits across the sector and the extent to which we now see care providers placing further service intensity into the health system. The increasingly flexible orientation to which our Medicare networks and plan designs have evolved over recent years left us less able to address these trends in-year. On trends specifically, the increase in care activity across individual and group Medicare Advantage we saw earlier this year has now affected complex populations and our Medicare Supplement business as well. Across Medicare Advantage, physician and outpatient care together represent 70% of the pressure year-to-date. However, inpatient utilization has accelerated through Q2 and we expect will comprise a relatively larger portion of the pressure over the full year. We continue to see utilization increases in ER and observation stays and consistently see more services being offered and bundled as part of each ER visit and clinical encounter. In short, most encounters are intensifying in services and costing more. The higher trend is broad based geographically and across our membership, including our large retained membership base. To put this into context, We had initially assumed Medicare Advantage medical cost trend of just over 5% when configuring our 2025 bids, in line with our normalized trend experience in 2024. We now expect full year 2025 trend to be approximately 7.5%. Medicare Supplement, which typically is representative of overall care activity levels and cost trends in Medicare fee-for-service broadly, is up similarly in 2025 compared to historical levels. We expect that trend to be over 11% this year versus 8 to 9% in recent years. Further confirming the broad based nature of the care activity and the coding and billing patterns we are seeing. On commercial, we are seeing higher than expected medical cost increases, particularly in outpatient care, and although to a lesser extent in patient care. Orthopedic spending and pharmacy infusions are notable factors here. In the ACA business, the revenue impact resulting from a difference between the morbidity that we priced for and what we experienced is the primary cause of our underperformance. One example of the elevated commercial trend is Group Fully Insured. Their trend is approaching 11%, which is approximately 100 basis points higher than our initial expectations. Moving to Medicaid, similar elevated trends are apparent and further affected by increasing and unanticipated acceleration of cost in behavioral health, where trend is running at 20%, as well as in pharmacy and home health. We anticipate the existing rate and acuity mismatch will extend well into next year. Beyond these segment-specific factors, there are other broad drivers of higher medical costs. there has been a marked increase in health care costs due in part to increases in service intensity per encounter. For example, in Medicare Advantage, higher frequency of physician rounding, testing, and related services of specialists and in ER settings are contributing to elevated outpatient spend. In addition to strongly responsive pricing for 2026, which I will speak to in a moment, we are intensifying our remediation actions. We have stepped up our audit, clinical policy, and payment integrity tools to protect customers and patients from unnecessary costs. These efforts ensure care is delivered in appropriate settings and grounded in safety and quality, while also identifying waste and abuse in outlier coding and billing practices. We are shifting to narrower networks and focusing on more disciplined, managed products, particularly in Medicare Advantage. and we have scaled our AI efforts across health plan operations, which improves the patient and provider service experiences while driving cost savings. Lastly, in Medicaid, we continue to actively engage with state partners using both past experience and data-driven insights to show the need for immediate and more regular rate updates. Taken together, this work is helping restore our operational muscle and reclaiming executional rigor. helped by modern tools and driven by a relentless focus on improvement. Turning now to 2026. Our pricing strategy is intensely focused on margin recovery and moving back towards our earnings growth targets. In Medicare, we have historically targeted an operating margin range of 3 to 5%. Now, with the changes from the Inflation Reduction Act on the Part D program, which resulted in higher revenue, but do not impact earnings, the equivalent target margin range is in the 2 to 4% range. We are working intensively to remediate Medicare through pricing, product design, and benefit changes that will enable us to be within the lower half of the targeted margin ranges in 2026 and advancing further in 2027. Our Medicare Advantage pricing strategy for 2026 assumes a trend approaching 10% compared to our current 7.5% trend expectation. This accounts for trend acceleration and incorporates factors such as changes in fee schedules and the continuation of higher yields from provider coding and billing practices. Considering the continued cost trends and funding pressures and the need to support margin recovery, we have made significant adjustments to benefits. Additionally, and unfortunately, given these pressures, We have made the difficult decision to exit plans that currently serve over 600,000 members, primarily in less managed products such as PPO offerings. We have taken similar approaches for Medicare Supplement, Group MA, and standalone Part D pricing for next year. We will be watching the market closely as the 2026 Medicare offerings become public so we can better assess our market positioning and respond quickly. For commercial, because renewals occur over the course of the year, we are able to price for changes more dynamically. Our pricing will anticipate higher trend continuing into 2026 and 2027. We expect increased membership decline as well as shifts into both level funded and self funded product categories because of higher medical cost trends. In the individual exchange business, while we are prepared to continue to participate in the majority of the 30 markets we currently serve, we will approach them far more conservatively for 2026. We may need to make the difficult decision to exit select markets if we are unable to achieve the rates necessary for higher market-wide morbidity. Additionally, due to the projected expiration of premium subsidies across the ACA market, Our membership should decline significantly and we are mindful of the potential for adverse selection dynamics as we write reprice these offerings for next year. In Medicaid, there remains a lag between funding levels and member health risk, and we expect this to continue into 2026. Resulting in additional margin compression in the business, including a loss within the non dual segment of Medicaid in 2026. Membership losses from early adoption of recent legislation is also factored into our initial views for 2026. Wherever states support responsible funding for Medicaid, we remain committed to serving people through that program and view this as integral to our mission. The American health system's longstanding cost problem is accelerating. We are embracing our responsibility to continue to drive better health outcomes while trying to keep health care affordable for all Americans. The operational and pricing strategies I have described reflect our understanding of the challenges we face as a company and a society and our dedication to responsibly navigating the current financial pressures so that we can set a stable course for the future. I'll now turn it over to Patrick Conway, CEO of Optum.