UnitedHealth Group Inc UNH
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Second Quarter 2013 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.

This call will also reference non-GAAP amounts. A reconciliation of non-GAAP to GAAP amounts is available on the Financial Reports & SEC Filings section of the Company's Investors page at www.unitedhealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K, dated July 18, 2013, which may be accessed from the Investors page of the Company's website.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Stephen J. Hemsley - President and CEO: Good morning, and thank you for joining us this morning to review our first half 2013 and the longer-term future we continue to build at UnitedHealth Group.

The performance of the quarter and the first half of this year reflect many of the themes we are focusing on with intensity across UnitedHealth Group; growing by serving more people with higher and more consistent quality, with compassion and a better, more modern and personal consumer experience; making health care more affordable by enabling the health care consumer, the care provider and the system itself to become a more effective system of health and wellness; advancing the performance and value of this enterprise for shareholders through operating and capital disciplines in both growth and strategic diversification, as well as dividend and share recapture.

We see several of these elements in our first half performance in a number of ways, such as the consistent, broad-based growth across each of our market facing business groups, medical cost trends that have remained in check and will help to keep health benefits affordable, the increasing pace in product innovation and adoption as nearly 6 million consumers now embrace our incentive product designs and our rapidly growing portfolio of consumer tools, the rapid acceleration of deeper and more integrated performance-based payment relationships with care providers that will reach above $25 billion by this year end, and the increase in our dividend to more than $1 billion annually even as we sustain $3 billion in share buy-back.

We have a great deal more to do. We are far from performing to our potential. Although we are seeing steady advancements on many fronts, we are redoubling our commitment to consistent execution in the core fundamentals of our businesses. We are determined to accelerate the pace of innovation, and the adoption of simpler and more modern approaches and technologies and ever better approaches to consistently delivering higher quality care and access, and to make health care more understandable and affordable for both the individual consumer and for our society.

Our performance in the first half of 2013 was characterized by this growing business momentum, continued service expansion and diversification across the enterprise.

In the second quarter, UnitedHealth Group earned $1.40 per share, up 10% year-over-year, with revenues over $30.4 billion, up 11.5% year-over-year. As expected, the consolidated operating margin decreased slightly year-over-year, by 30 basis points, as the consolidated medical care ratio increased 20 basis points to 81.5%, reflecting our continued strong growth and diversification into government benefit programs, and accelerating growth from our services, international and fee-based businesses produced a 90 basis point rise in the consolidated operating cost ratio to 15.9%.

The level of services growth has become so meaningful that it continues to outstrip steady efficiency gains from our multi-year initiatives enhancing quality, simplicity and system-wide productivity, as well as our concentrated focus on cost management across UnitedHealthcare, Optum and UnitedHealth Group. While this ratio has increased, it remains largely a reflection of the ongoing growth and diversification across UnitedHealth Group.

Cash flows from operations were $1.5 billion in the quarter and $2.5 billion through six months. We decreased our debt to total capital ratio by 160 basis points during the quarter, to 34.6% at June 30, and ended the quarter with $1.2 billion in available cash.

Last month, our Board increased our dividend by 32% to an annual rate of $1.12 per share and renewed our share repurchase program with a fresh authorization for the repurchase of 110 million shares. These decisions reflect confidence in the strength and consistency of our underlying earnings and cash generation capacities into the future.

In the current quarter, UnitedHealth Group continued its pattern of steady, consistent growth and market share gains and we see more growth to come in the next few years in areas such as commercial and consumer benefits through public and private exchanges, Medicare Advantage, state Medicaid expansions, Medicaid long-term care, dual eligible MMEs, military and veteran benefits and services, the emerging Brazilian market and the continuing maturation of Optum’s broad range of services for consumers, care providers, payers and other participants in the health system as a whole.

Let’s review second quarter business results, starting with UnitedHealthcare, where the story remains one of remarkable growth and continued market share gains. Over the past twelve months, UnitedHealthcare has been the fastest growing health benefits company, increasing the number of people served by more than 9 million. This includes more than 2.9 million people in TRICARE and another 4.7 million people from Amil in Brazil both new markets for us.

Overall growth has been driven by offering distinct and innovative consumer benefits and services shaped to respond to local market needs and affordable price points for consumers. UnitedHealthcare has designed a comprehensive system of capabilities that aligns modern, incentive-based benefit designs with easy and convenient consumer empowerment tools that engage effective clinical care and wellness programs, which in turn channel naturally into incentivized, performance-based care delivery access.

This aligned system leverages better informed and incented consumer and care provider behaviors to produce sustainable cost and performance advantages and deeper, more integrated relationships with consumers, care providers and plan sponsors across all market segments.

Effective incentive alignments with consumer benefits through the care provider rewards is a critical component to sustainably improving broader accountability and effective payer-to-care provider integration.

We are the market leaders in consumer value plans, with nearly 6 million high deductible or consumer incentive plans in force. We are leaders in consumer transparency tools, with innovative mobile applications that enable effective use of information specific to each consumer. We are further along in value-based care provider, contracting than any other company and our pace is accelerating, with more than $50 billion in accountable care performance contracts expected by 2017, if not sooner. These programs offer varying levels of integration with care providers, depending on their ability to affect health outcomes and assume financial risk. Year-by-year, these programs are helping transform how health care is delivered, paid for and rewarded.

This quarter, UnitedHealthcare's organic growth was led by the initiation of services for TRICARE in the West Region for 2.9 million members of the military and their families. This is the first time this contract has moved to a new service provider in more than 15 years and we encountered challenges as we engaged in this complex and massive transition. We have learned from these initial challenges, and regret any disruption this may have caused the men and women we are privileged to serve. We are deeply grateful for the collaborative working relationship with the Department of Defense, the TRICARE Management Activity, the TRICARE Regional Office, West, the surgeons general of the respective services and the Military Treatment Facilities and their fine leaders.

Having quickly advanced from these initial challenges, we remain committed to consistent, excellent service, and the value of innovation going forward for these programs.

UnitedHealthcare's Employer & Individual business added a net 235,000 people year-to-date and is performing strongly across the board. Growth continues to be strong across the government benefit markets as well.

Through the first half of the year, UnitedHealthcare remains the largest and, once again, fastest growing Medicare Advantage participant, and Part D and Medicare Supplement both continued to perform strongly. Medicare Advantage products have grown to serve 355,000 more people through the first six months, and our full array of Medicare product offerings has grown to serve over 1 million more seniors this year.

Medicaid growth stands at 110,000 people through the first six months, despite a divestiture impacting 60,000 people earlier this year. Care for chronic, complex populations remains a distinctive capability for this business and a major forward growth driver, with recent awards to serve long-term care and dual eligible beneficiaries in Arizona, Florida, New Mexico, New York, Ohio and Washington State.

For the second quarter, UnitedHealthcare generated operating earnings of $1.9 billion, with solid contributions from all businesses. The commercial medical care ratio improved 10 basis points year-over-year. We are performing slightly better on outpatient costs, despite the continued migration of clinical services from inpatient settings. We continue to experience lower hospital inpatient usage as we expected, and inpatient costs are in line with our projections. Overall, 2013 full year commercial cost trends are tracking in line with our initial projections of 5% to 6%, with unit prices remaining the core driver of increases.

UnitedHealthcare's results include Amil – which is now 90% owned. With Amil, our international business has grown to serve 260,000 more consumers in the first half of the year, remains solidly ahead of its growth and financial plans for the year and is well-positioned to continued growth and market share gains driven by its distinctive market offerings and clinical engagement model.

We continue to be gratified by the growing response to Optum's market-leading offerings and capabilities. Each of Optum's businesses posted double-digit top line gains. Overall Optum revenue rose 21% over last year.

Operating margin expanded 170 basis points to 6.1% despite the increasing mix of pharmacy services revenues. As of today, we are more than halfway through our pharmacy migration. Since January 1, OptumRx serves a total of about 8 million new consumers, including these migrations and new business.

For the first six months of the year, total Optum operating earnings rose 80% to just over $1 billion. Optum's strong first half 2013 performance is proving that the broader health system and its constituencies create a natural end market for services, a market we have sized at more than $500 billion annually.

Historically, this market has been fragmented and served primarily by smaller, single point solutions. We see the opportunity to bring together the services and capabilities we offer and provide broader, more integrated solutions to larger, more diverse clients, while continuing to deliver even more effective standalone products and services to our traditional customer base.

We are focusing our investments on roughly 10 product families and freeing up resources through this more disciplined focus and the related productivity gains to fund further development and innovation on behalf of the clients and consumers we serve. These actions are driving stronger and more consistent margin performance across all Optum's businesses.

The collective performance of our diverse UnitedHealthcare and Optum businesses ultimately comes through in UnitedHealth Group's strong overall results. As we indicated earlier in our commentary, UnitedHealth Group consolidated revenues grew 11.5% and net earnings grew 10% to $1.40 per share in the second quarter. We expect full year 2013 net earnings in the tighter range of $5.35 to $5.50 per share. Our second half earnings performance will benefit from the timing of Part D earnings contributions and Optum’s continued performance gains.

Our balance sheet is strong and our cash flows from operations are expected in the range of $7.2 billion to $7.6 billion this year. We have already targeted returning up to $4 billion of that to shareholders and our recent dividend increase now puts us on an annual dividend payment pace of more than $1 billion.

Looking forward, our outlook remains consistent, strongly positive in the long-term with familiar near-term challenges coming in 2014 and 2015 as we indicated last quarter.

We expect pressure on the pace of revenue growth next year, given both rate and membership pressures in Medicare Advantage. We see further business and product integration advances, further medical affordability gains, an intense focus on driving lower operating costs to improve and sustain our competitive position serving key health benefit markets, and continuing strong cash flows.

The next phases of the Affordable Care Act should bring growth and expansion in the Medicaid business, as well as to Optum, and some meaningful financial challenges as well.

For instance, on the Medicare side, the challenges intensify meaningfully and include non-deductible taxes combined with the continued significant underfunding of Medicare Advantage. We remain committed to Medicare Advantage as the most valuable and fastest-growing Medicare benefit offering available to American seniors.

By 2016, Medicare Advantage will in effect be reimbursed at parity with original fee-for-service Medicare. And at the same time, it will continue to deliver better benefits at lower cost because of effective medical cost management, and far better consumer-focused services and technologies – none of which are present in the current Medicare fee-for-service system.

2016 should represent a final baseline pivot for Medicare growth for years to come and America's demographic trends are compelling, well more than 3 million people will enter Medicare each year and UnitedHealth Group is uniquely positioned to emerge as the market leader. These long term growth trends informed our approach to our 2014 Medicare bids, which will remain under review by CMS through the summer.

Our decisions for 2014 focused on balancing program sustainability, margin protection and cash flow generation of our MA business, measured on a long-term, multi-year basis. We are aggressively and consistently addressing the operating and marketing costs of our Medicare programs without compromising the exceptional support and services we offer to the seniors we are serving through these important benefits.

The depth of the underfunding of these benefits to seniors is causing us to exit certain market areas, reduce the number of plan offerings and reduce benefits in the majority of the local markets we serve, commensurate with our view of the competitive position and long term sustainability of our services for each individual market. We are shaping our networks to ensure we are delivering health care with local care provider partners who deliver high quality care and provide a sustainably low medical cost structure and who increasingly share in the results of collaborative efforts to bring greater quality and consistency of care to seniors, including the most elderly and those with chronic conditions.

These steps can be expected to moderate member growth in 2014 in contrast to our strong growth experience over the last few years. We will engage our members further by increasing our use of in-home health reviews and in-home services.

Even with these actions, we expect pressure on 2014 Medicare Advantage margins. The severe underfunding of the MA program for 2014, combined with the ACA tax impacts and continued sequestration effects are too significant a burden to ask seniors to bear alone and still expect this important franchise to remain attractive to them.

Beyond Medicare Advantage and some remaining unknowns focused around ACA implementation in the individual and small group markets, we expect the general narrative of UnitedHealth Group’s performance for 2014 to be largely the same as 2013.

Our commercial benefits, international, Medicaid and military businesses should all continue to perform well. Optum will continue to grow strongly and contribute comparatively more of our overall performance as virtually every Optum business and product line is growing and performing well and is expected to continue on that path.

We will continue to be good stewards of shareholder capital, continuing to balance investments across our businesses and returning more capital to shareholders in both dividends and share repurchase.

From 1999 through the end of 2013, we will have returned more than $40 billion to shareholders through dividends and share repurchase even as we have grown and enriched the capabilities, the market positions, the value and the forward potential of this enterprise.

We remain optimistic about our capacity to serve society and to create value for the people and customers we serve, as well as for the health system at large.

We look forward to an expanded discussion of our strategy, growth and performance at our Investor Conference, which this year will be on December 3 in New York. As usual, this morning we have a full complimented leaders here, and would ask the operator to open the call to our questions, holding one per speaker, please. Thank you.

Transcript Call Date 07/18/2013

Operator: Matthew Borsch, Goldman Sachs.

Matthew Borsch - Goldman Sachs: I wanted to just ask a little bit more about Medicare Advantage. You made a comment, if I heard it correctly, about final baseline EBIT in 2016 as a base for growth once we're fully at parity. Did I hear that correctly? Are you implying that EBIT in Medicare Advantage is down from -- on a downward slope in '14 and '15 and then normalizing in '16 and growing from there?

Stephen J. Hemsley - President and CEO: I am glad you asked the question because I don't think that if it went out that way, that's not what our intent was. Basically, continued funding pressures -- some of the mechanical, the impact of the ACA and so forth will continue basically to get the funding mechanisms for Medicare Advantage to be at parity with fee-for-service. Once that funding is leveled at that basis, the programs are thought to then be neutral to each other from that perspective. Therefore, one could expect, given the strong performance of the Medicare Advantage program that the growth could even accelerate from that point because you've got this significant demographic trend, you have a very attractive program and the Medicare Advantage program will still have meaningful advantages in terms of benefits, medical management capacities, consumer engagement and relationship capacities as fee-for-service system simply doesn't have right now. So that's why I think our outlook on Medicare Advantage in the long-term is so positive, because in essence we have to navigate through these next couple of years where some of the mechanical funding actions will take place, but even in those periods and those have been in my view in effect Medicare Advantage is continued as a broad national program to prosper and grow. So I don't know how it will play out in 2014 and 2015 as these elements play in on the funding to get funding at essence to neutrality, but from 2016 forward that neutrality should then baseline this program and it will be Medicare Advantage with its I think compelling advantages compared to the fee-for-service system and we think the prospects for growth after that are quite compelling. That's really what we try to get across.

Matthew Borsch - Goldman Sachs: That makes sense. You also characterized in terms of next year that the impact would be to moderate member growth for 2014, do you implied by that, and did you expect growth base just to add a slower rate?

Stephen J. Hemsley - President and CEO: Well, we really didn't comment at that direction what we were intending to say is actions that we are taking to make sure that program is competitive and viable and it is many markets as we can possibly continue to advance it. So along those lines we outlined a series of steps that we're taking to maybe Jack Larsen wants to comment on that, but again we are focused on operating that program to its maximum potential and serving as many of American seniors citizens we can through that program and making sure that it continues to perform in terms of growth, margin protection, cash flow attributes, et cetera, and to maximize the performance of the program recognizing the funding pressures that's on, and recognizing that there might be limitations to how much seniors can actually bear on the underfunding actions that are being taken with respect to the program. Jack?

Jack Larsen - CEO, UnitedHealthcare Medicare & Retirement: I would just add maybe a bit of an explanation point on some of the changes that we're contemplating for our business next year and I think Steve went through them well. We are looking at benefits. We're going to be adjusting our – planning some market withdrawals, I think at the more modest and perhaps 5% or so, with most of those members having an opportunity to enroll in another UnitedHealthcare plan. We will be narrowing our networks consistent with achieving better cost, better outcomes, and better management of our (Stars), Matt, we haven't really seen how our competitors are taking to all this, too. So I would say, at this distance, I think the only thing we can really say is that our performance at the membership growth line is likely to be more moderate compared to the last couple of two or three years where we have grown very well.

Operator: Justin Lake, JPMorgan.

Justin Lake - JPMorgan: First, just wanted to check and see if there is any updated view you can share with us on 2014 EPS growth overall.

Stephen J. Hemsley - President and CEO: Well, Justin we thought that question might come up. We don't really comment on next year's guidance in the current mid-year quarter. With that said, earnings growth is clearly our focus for 2014 and we are intense about that. But we have to recognize that there is a great deal in front of us to achieve that. As we just mentioned, certainly strengthening Medicare Advantage, given the significant 2014 funding shortfall and the steps we need to take to make sure that program continues to be vital is on the front of the list of that. There is also ongoing work in the commercial markets with pressures on our only individual business that continued market migration to lower price point insurance products and fee-based conversions and those are all occurring kind of in the backdrop of a normal competitive dynamics intentions. We remain respectful of medical cost trends despite the success in keeping trends in check and particularly, given the measured economic recovery. We need to make continued investments in Optum, in the emerging categories of private exchanges, Medicare risk and revenue cycle, house calls, ever larger and longer-term care provider relationships, Optum cloud products and in general, we are committed to continuing to fund ongoing innovation and adoption. Then last we want to think about headwinds, investment income we'll see probably short-term pressure as current portfolios actually turnover and transition from kind of capital gain realization mode into higher-yielding portfolios for the long-term. So with that series of headwinds in front of us, experiences taught us to be somewhat cautious and to be sure we consider and respond to these headwinds before we offer a sense of 2014, so we are not prepared to do that, but I would say we are intensely focused on solid earnings growth for 2014, but we have to work our way through that as we stand really in the mid-year of '13.

Justin Lake - JPMorgan: My actual question was more just a follow-up on Medicare Advantage. Just to make sure I am clear on what you've laid out here is, you felt like 2014 and '15 are looking like – obviously, you're going to be under pressure, but by the end of 2015 going into '16, do you expect that '16 growth to reaccelerate and you feel like you'll still, after all this pressure, given what you're doing from a cost perspective and managing, you're going to have – and you feel like the benefits that you still have left out there for seniors after these costs will still be enticing and you expect growth to be in line with what you've seen over the last couple of years and potentially even accelerate? Was that a right -- was that the correct takeaway?

Stephen J. Hemsley - President and CEO: I think you generally have it correct. I think you may have a more precise notion of it than we would having to operate the program. So, I can't tell you that on January 1, 2016, that there will be some kind of light will go on, etcetera, but you have exactly the direction of our thinking on this program correctly. That as we navigate through the next couple of years and the pressures that, I think, are well acknowledged on the program, we intend to operate it in such a way that we are maintaining the vitality of that program, protecting its margins, maintaining the vitality of its benefits and its distinctions to consumers, to seniors that need these programs and that we think that, as you reach that point of neutrality, which is about 2016, that the growth dynamics of that should accelerate, yes.

Justin Lake - JPMorgan: So do you see the program will be bigger than it is today or not or smaller than it is given what's facing you, when you get to 2016? That's it for me.

Stephen J. Hemsley - President and CEO: That's the third installment of your single question. Obviously, Justin from that discussion, we expect in the long-term that the needs of American seniors and what the values we can bring to the Medicare program suggest that is a very strong long-term growth platform.

Operator: Chris Rigg, Susquehanna.

Chris Rigg - Susquehanna: I just want to follow-up on Medicare Advantage again to make sure, I understand what you’re talking about in terms of reimbursement and the pressures in '14 and '15, but when we think about the business near-term, particularly fourth quarter this year and how you market to seniors, will you take your foot off the accelerator somewhat in terms of marketing? Or do you think you have to accelerate the spending this year to maintain what you have and potentially grow? Just if you could give us any context on how the spending might change year-to-year, that would be helpful.

Stephen J. Hemsley - President and CEO: I might offer – pick at my level that how we’re going to approach and deploy resources the market from a marketing point of view at this point in time is really a little, I would say, a level of competitive intimacy that I'd rather not share. I would say that our commentary was more along the lines of the fact that we are going to be shaping networks to be more focused – to really focus on the high-performance assets as it relates to seniors that the benefit reductions that are fairly broad-based, no developments that I think will play into a more conservative growth prospects for '14. I think that getting into what our marketing plan is might be a little bit more than we would like to get into this morning.

Operator: A.J. Rice, UBS Securities.

A.J. Rice - UBS Securities LLC: Maybe I’ll switch gears a little bit. There has been some developments, obviously, around the ACA since we last had you guys on the conference call, the employer mandate delays, some documentation delays and then we’ve also got an information on the exchanges in some states. I know you said you’d be opportunistic, particularly around the exchanges. Can you comment about, a, does any of those developments that have occurred in last few months change your perspective on those opportunities that are available to you, maybe looking out next year and beyond for the ACA?

Stephen J. Hemsley - President and CEO: I think I have Gail and Jeff Alter kind of comment on that. I would just say, again, like to calibrate that the perspective we’re bringing to it, long-term (will) positive with respect to those channels as they form and as they become areas where we think we can participate and add value. The near-term dynamics are more challenging for us and maybe that's specific to our particular profile of business. So near-term we have tended to be more cautious with respect to those and I think, generally, the elements that have been occurring reinforce those tendencies.

Gail K. Boudreaux - EVP, UnitedHealth Group; CEO, UnitedHealthcare: Good running. Its Gail Boudreaux. I think Steve hit on the core principles. We’ve been, I think, modest in our participation and the exchanges. But I think the bigger story, quite frankly, is there is significant change going on across the overall commercial market. So as we think about our business, we're focused those both inside and outside of the exchange around affordable benefit offerings for our consumers. So what we're talking about in terms of our network and our intentional integration of product, clinical and network strategies is really core to both what we're doing inside and out of the exchange. We're participating about a dozen exchanges, as you can see from what's been publicly disclosed. Quite frankly, at this stage of the game, we've kept a very disciplined process around that, we think that there is a huge opportunity over the long-term and we're going to participate to learn in those exchanges. In terms of what's happened on the overall reform implementation at this stage, we're preparing our business and as I said much of what we're doing, we're doing for both inside and outside of the exchange because we think affordability and consumer engagement are probably the most critical pieces.

Operator: Kevin Fischbeck, Bank of America.

Kevin Fischbeck - Bank of America: I just wanted to understand a little better this year's guidance, you know you guys reported a quarter which beat at least consensus numbers by $0.15, but it looks like you're only raising guidance by $0.05 at the midpoint. So I wanted to understand a little bit how you thought about guidance if there is anything that you thought of in the back half for the year that might be a headwind that maybe you weren't anticipating before that maybe the market wasn't anticipating?

Stephen J. Hemsley - President and CEO: I don't think so and I might have – Dave commented on to that, but in essence we tend to operate within a range and we feel comfortable in that range. I think excessive precision here is time has taught us to be careful about that and in essence be prudent with respect to the guidance that's offered, I would say that performance of the business has been strong through the first half, and while the orientation of the business was more challenging to the second half, we are pretty much on course and had – saw no reason to do anything other than tighten again the range of guidance.

David S. Wichmann - EVP, CFO and President, UnitedHealth Group Operations: It’s David. You kind of parsed through this, the range of $5.35 to $5.50 per share, suggest that the second half of the year will not only be stronger than the first half of this year, but also stronger than comparative half year in 2012. As you commented on in the first quarter, that's largely due to the change in the seasonal pattern of Part D revenue and profit recognition. While Steve had it right, there is very modest pressure – additional pressure on the back half of the year. I think we have already pointed some of these out, but just keep in mind, obviously the last half of the year has two quarters of the sequestration impact versus the first half of the year, we're only having one as an example. Then, of course, as you also see, we have a uptick in run rate of our growth patterns in the business as well. So that requires some investment not only in terms of selling but also in terms of implementation. Then Steve did mention the near-term impact on the higher interest rates than the impact that they have had on our ability to recognize the extensive capital gains that we have in the past. Then the last thing I'll just point out is our tax rate will return to 36.75% level for Q3 and 4, which will comparatively impact earnings in the last half of the year.

Kevin Fischbeck - Bank of America: But I guess, except for maybe higher interest rates, none of those sounds necessarily new, like new headwinds per se?

Stephen J. Hemsley - President and CEO: I just think we are just trying to establish a prudent balance, I think, consistent with what our posture has been for the last several years and the businesses continue to perform well and Optum, in particular, is having a very, very strong year. But we didn't really see a need to change the guidance other than to tighten the range given the fact we only have a half year left.

Operator: Joshua Raskin, Barclays.

Joshua Raskin - Barclays: Just taking a look at the SG&A changes, I came a little bit higher than we were looking at it. I think you were up 20 basis points, the ratio was up 20 bps in the first quarter and now up 90 in the second, and I see the TRICARE piece of it. But I am just a bit curious, what’s driving that? Was there sort of – was there any discretionary spending? Any acceleration of planned spending that you thought would be coming? Maybe within that, if you could just give us a baseline to start with the TRICARE revenue contribution that would be helpful.

Stephen J. Hemsley - President and CEO: Sure. Dave, you want to respond to that.

David S. Wichmann - EVP, CFO and President, UnitedHealth Group Operations: Sure. Hi, Josh. The operating cost ratio was up 90 basis points year-over-year. It was very much in line with our expectations for this quarter. We mentioned in the script that there is several things contributing to that ratio, predominantly related to the business mix exchanges. As you know, we have one large funding conversion from risk to fee in the first quarter that obviously will continue to impact us throughout the year. We’ve also added Amil which has a higher SG&A ratio and obviously we didn't have Amil in the second quarter of last year. TRICARE, of course, fee-based contract as well as continuing cost of implementation through the second quarter, again not in place last year and of course, Optum is growing very quickly, and of course, most of that business is service oriented and fee-based as well. The only thing I'd point out beyond that, which is all in the script, really is the – there is continued cost of implementation for PPACA, ICD-10, the TRICARE implementation and the PBM migration. Those are all items that are inside our numbers for the second quarter and those for the most part associated with improved growth prospects for the business going forward. So, we're pleased to make those investments. Last thing I'll just say is that, as indicated in the script, is that, obviously, all these things have offset what this management team has done over the past several years, but in particular in the last year around cost containment efforts and done a very nice job advancing the productivity of the business and really muting the impact of this mix shift on this operating cost ratio.

Joshua Raskin - Barclays: I was looking, Dave, more just 1Q increase versus 2Q increase. It looks like there was just sort of a pick-up to second quarter. I understand a lot of the implementation costs and the funding conversion of Amil and the implementation, but I know a lot of that was impacting first quarter as well. I was just curious what caused the 70 basis point increase and sort of the year-over-year in 2Q and trying to figure out if TRICARE was big enough to do that, and my guess is as fee-based business probably wasn't big enough to cause that change.

David S. Wichmann - EVP, CFO and President, UnitedHealth Group Operations: I don't think, if there is anything from our perspective that's out of line in there. I think it is the continued progression in mix. I think Optum continues to be a larger overall factor. I'm not sure everybody can actually calculate the impact of that, but I think that is probably the largest contributing factor that the business -- that's all operating expenses and growing at a very solid rate. I think it is as we have analyzed that it is overwhelmingly mixed even the items in terms of regulatory and so forth are basically in these numbers year-over-year and in them sequentially. So there is nothing in that that we see at a line or outside our expectations or plans for the year other than probably an even higher level of performance on the part of our services business, which includes not just Optum but also the significant growth in continued fee based businesses across UnitedHealthcare that's where all their commercial growth has been.

John S. Penshorn - Senior Vice President, UnitedHealth Group: Josh it's John Penshorn. Last November we said 15.9% plus or minus 30 basis points that range we affirm and that accommodates the accelerated growth in fee-based services Steve referred to.

Operator: Peter Costa, Wells Fargo.

Peter Costa - Wells Fargo: Can you go over for us how OptumRx growth is helping the firm exactly. We can see it on OptumRx, but some of the improvement leads over to the commercial side of the business. What portion is on the commercial side of the business and what portion is in OptumRx itself and then can you talk about the growth path of OptumRx in 2014 and 2015?

Stephen J. Hemsley - President and CEO: Sure, I'll have Dirk respond to that. I mean it is perfectly in line with the OptumRx's agenda on synchronization and the impact it has extending in the total medical cost. So Dirk you want to…

Dirk McMahon - Chief Executive Officer, OptumRx: Let's start up by talking about the business. I think if you look our RFP line is up a bit year-over-year and if you look at what we see -- we don't see a lot of the business changing hands across the PBM space, but what we do see we're actually getting a little more than our fair share and our retention has been pretty good. So if you look at what we try to do, we try to again manage total health outcomes, as well as improving the cost of care. When we do that, it's largely with our synchronization approach, we bring all the data together and optimize the overall expense. So we think that in addition to our specialty offering in the marketplace is resonating very well.

Stephen J. Hemsley - President and CEO: So that bleeds through performance for UnitedHealthcare and its businesses and obviously for our government programs. So it does we think make us distinctive with respect to medical cost trends, with respect to that section of medical cost drug, as well as growing a vital and more diversified PBM business that we think the potential once this migration is fully digested, we can focus our full attentions to the external marketplace, I think the growth prospects for that can be quite impressive.

Peter Costa - Wells Fargo: Can you quantify for us in any way how much of the improving MLR in the commercial side comes from bringing the Optum business in-house?

Stephen J. Hemsley - President and CEO: I think that we would be – it would be too much back of the envelope kind of response. So we'll take that offline and we'll kind of bring that kind of thing perhaps back in the next – in our next quarter we’ll comment specifically on the impact of that. I just don't want to shoot from the hip on something like that. So I think it's a very good question. I think we'll take it that way, if that's okay with you.

Operator: Sarah James, Wedbush.

Sarah James - Wedbush: There is obviously a robust conversation going on with parties in (D.C.) around the sufficiency of 2014 Medicare rate and how that may influence 2015 budgets and rates. Can you give us a read on what you see as the current perception in (D.C.) of the adequacy of 2014 rate? Initially it seems like they view 2014 as more positive than you view it. So I wanted to see if the perception in (D.C.) has changed throughout your discussions with them, and if you could give us a read on the level of their receptivity compared to previous years, so the information you're presenting on where rate should be going forward?

Stephen J. Hemsley - President and CEO: That would be a challenging kind of conversation to have in a forum like this. I would say this in a very constructive way that access to the administration CMS, administration HHS and so forth has always been open and fair and constructive dialog and conversation. They obviously pursue a variety of protocols in establishing the rate process. It is the complicated process; it's multifaceted. So it's not really possible to have a single conversation about elements such as that. I think our positions with respect to the funding patterns on Medicare Advantage are well-articulated and supported. There is an open dialog about that and that dialog is occurring in essence all year along. So I do think it's an environment where the parties are working together, I think there is a recognition of the role that Medicare Advantage plays in the marketplace and I would describe the conversations as you know very professional and productive. I think we would have to leave it at that. It is not what I would characterize as some kind of contentious environment at all. These are extraordinary professional people in the administration that are trying to administer these programs in accordance with the protocols that been established and to the best of their capacities. We are having ongoing business dialog with them on this subject. So I think that's all we can really comment. That happens in states as well as in Medicaid. It's just the nature of the market.

Operator: Ralph Giacobbe, Credit Suisse.

Ralph Giacobbe - Credit Suisse: First, just wanted to make sure I heard correct that you're planning on exiting 5% of MA markets next year. If possible, if that's correct, can you give us a sense of what percentage of MA enrollment that represents today? Then second, separately, just wondering has the delay in employer mandate changed or would you expect it to change discussion at all with employers? I guess it'll be helpful just to get a sense of how your discussions are going with employers, is there more pushback, is there confusion, is their concern, et cetera. Just trying to get a broad sense of the appetite to make changes due to ACA near-term.

Stephen J. Hemsley - President and CEO: Sure. Let's take Medicare first.

Jack Larsen - CEO, UnitedHealthcare Medicare & Retirement: Jack Larsen. So the 5% is – those relate to our membership and I really wouldn’t call them market exits as much as planned withdrawals. So about 150,000 or so of our members would be impacted by member withdrawals, but in turn, about 80% plus of those members will have access to another UnitedHealthcare MA product.

Gail K. Boudreaux - EVP, UnitedHealth Group; CEO, UnitedHealthcare: This is Gail Boudreaux. There are number of question I think embedded around employer mandate. Let me address that one first and if I get to your issue. In terms of the – first the delay of the employer mandate, we don’t really think that’s going to have a significant impact. Employers who currently offer insurance are going to continue to do that and that’s been the course of our discussion. In terms of how our discussions are going with employers, there is a lot of change coming to that marketplace and the intense focus is around affordability. As I said earlier not just on the exchanges, but across all of our customers. They are looking at value-based plan designs getting consumers much more engaged, how they integrate clinical programs. Let’s say the real focus is around affordability of coverage and improving consumer engagement and making sure they have real value for the dollars they spend.

Operator: Sheryl Skolnick, CRT Capital Group.

Sheryl Skolnick - CRT Capital Group: The MA discussion is remarkably more bullish than I thought it would be maybe is why your stock is trading up so nicely, because that would suggest that 2014 may not be as challenged a year as one might have thought. So, I guess the first question is, is that first part of question is, is that the correct interpretation that now that you’ve gone through all that, reaffirms, your commitment to the program long-term post 2016, which I think the point of that discussion. That you are able to find ways to mitigate the impact on both the beneficiary and the company of what is dramatic underfunding of MA? And then the second question I have relates to capital deployment. Given that discussion about MA, can you either give us a sense of where you see the most attractive segments of your market or new opportunities, be they international or existing opportunities like Optum, like commercial etcetera, where you think are the highest – best use of the capital that you're not already returning to shareholders.

Stephen J. Hemsley - President and CEO: Sure. First of all, very good observation, which I'd like to make sure we bring in line. I think our view in terms of Medicare Advantage is really not different than we had indicated last quarter. We believe that program is severely underfunded for 2014. The comments that we're making, if you parse them are, that we are exiting certain markets, we're exiting certain plans, we're narrowing our networks across virtually all the markets, we are taking benefits down across all the markets. So those are not good things for American seniors who engage on these benefits. Those elements will clearly put pressure on both top line for 2014 on Medicare Advantage, an important program for us, and on the margins of that program; so to level set on that basis, that's I think what we said clearly. We will work through those things. We are absolutely intense on this program because we think it has a meaningful long-term value to American seniors and to basically the viability of the Medicare program, in total, going forward because it brings in market dynamics around managing medical costs, around engaging consumers around holding care providers accountable, elements such as that. That's a long – that plays to our competencies. It should be a strong, long-term market, so long as the program is funded appropriately. If it not funded appropriately, then those market dynamics will change. So I don't think anything has changed about that. We have just worked one more quarter through the tactics of how we will have to navigate through 2014. To level set that we are – what we see pressure in '14 and '15 on Medicare advantage as a product, we’re working through those. The program in our view has not been funded strongly in the past and '14 was very significant. It's a 750 basis points delta and (where we) see the cost of that program to be. In terms of allocating capital, we have a diversified model and that strategy of diversification is a conscious one with the notion of allocating capital opportunistically across spectrum of that diversified model. We see compelling opportunities and have in the Optum business. There are opportunities that will emerge, we think, in the benefits businesses and we think that they will emerge over time as more pressure is brought into the overall health benefits marketplace and we look for opportunities where we can deploy our three competencies around local care market engagement, around information and around enabling technology in international settings. We found Brazil to be a compelling opportunity for that. Particularly, on our Optum services side, there is probably more market opportunities for us on the international side and we’ll continue to look for benefits, but that is going to be probably more optimistic because we don't see as many of those other than in Optum. I think Optum has a significant opportunity on the international side. We parsed our investments based upon cost of capital return thresholds, along those lines and recognize our responsibilities in terms of returning capital pursuant to dividends and share repurchase. So that's kind of the perspective and that really hasn't changed at all.

Sheryl Skolnick - CRT Capital Group: So if I could just follow-up then, if I'm going to interpret your 2014 comments, I think what I would say is beyond the challenges provided by MA, you see your capital deployment and all the other expertise that you bring to the table as providing the kind of balance perhaps to 2014 offsetting some of the negatives in MA would be the continued pace that you see in the rest of the businesses, and that the challenge in predicting 2014 for us is to balance the negative of the MA against the positives of the other business. The Street is interpreting, I think, your comments is meaning flat 2014 and I'm trying to – from my perspective, I think, you said you know balance one against the other, but you didn't commit to flat. Is that correct?

Stephen J. Hemsley - President and CEO: Yeah, we have committed to no position on 2014. I think beyond that what you're laying out is broadly the way I wouldn't – broadly correct and that is we are positive about the other aspects of our business and our capabilities and we are applying them intensively to the pressure that has been put on the Medicare Advantage program and are still working through that. So we haven't declared on 2014. We are focused on growing earnings in 2014 and growing this business that is our focus and our intensity every year. We have a lot to offer in terms of our diversified business model and when we feel we have worked through this to the point where we can responsibly offer some direction to the marketplace, we will do that. But I think generally you have the framework (of it) correct.

Operator: Ana Gupte, Sanford Bernstein.

Ana Gupte - Sanford Bernstein: So a lot of questions on 2014. I'm just trying to get a little more clarity on commercial and Medicare in 2013 as that's the baseline for all the headwinds that you will experience in '14. So on the Medicare side, in the first quarter you had a quite a bit of deterioration in your ex-commercial medical loss ratio. You brought up sequestration and hence Part D and some seasonal patterns of first quarter pressure and so on. It seems to have eased up a lot in 2Q. I'm just trying to understand if it's because of Part D or you've actually done something to improve your base Medicare Advantage business and the potential margin deterioration that you'd been experiencing, I think, in 1Q or is it (prior) period reserves or e-mail or something else?

Stephen J. Hemsley - President and CEO: I think we'll have (Dan) comment on it. Clearly Part D is a factor in it, but I think it's not the only one. So, Dan?

Dan: Sure, Ana, this is Dan. You had a lot in there to. (Decreased) point absolutely the biggest difference if you look sequentially first quarter second both on a consolidated basis and in government programs and Medicare, obviously, is the Part D timing. In the first quarter, as you looked year-over-year, it actually increased the loss ratio and as you look at the second quarter, it actually decreased the loss ratio on a year-on-year basis. So that's the biggest swing item. But I’d also tell you instead of Medicare that we also have – we have more favorable development in the first quarter and on a year-over-year basis and that's a little more concentrated in our Medicare business. From the first to the second quarter in Medicare, we are seeing a little bit better performance on our new growth in Medicare. So those are some of the things that are influencing it with Part D being the most pronounced.

Ana Gupte - Sanford Bernstein: So year-over-year, you are on base Medicare business and if you can split out Medicare Advantage and Part D, do you expect deterioration from 2012 or not for the full year '13?

John S. Penshorn - Senior Vice President, UnitedHealth Group: On the full year, we expect our Medicare Advantage loss ratio to go up. Obviously, we are having a significant reimbursement challenges as well as sequestration and then working against that is our focus on clinical management and so forth. But, yes, in aggregate we expect our Medicare Advantage lost ratio to increase on the full year. As you look at Part D, our performance is stronger there. On the full year, our earnings will be up and they are up in large part due to the significant volume growth that we had in Part D. Obviously, the quarter-to-quarter progression is different, but in aggregate on the year Part D earnings are going to be up.

Ana Gupte - Sanford Bernstein: Then just a follow-up on the commercial side, you had a little bit of margin expansion in 1Q. You'd cited loss of big fully insured very high MLR accounts at the time. You were seeing a little bit of margin expansion in the second quarter. Your days and claims payable have gone up by a day. All of you are on the hook for this tax for next year or so. Should we expect that either your reserves will strengthen or that your commercial underwriting spread gets better through 3 and 4Q as you build up for that tax burden?

John S. Penshorn - Senior Vice President, UnitedHealth Group: On the commercial side, yes, we had a decline in our loss ratio again this quarter. On a year-over-year basis, we are down 10 basis points. A big portion of that is obviously the large case funding conversion that we had at the beginning of the year. That’s being offset by the competitive market environment. We guided at Investor Day to more than one percentage point increase in our full year commercial loss ratio. We've adjusted for that large funding conversion and we still expect at the midpoint about a 60 basis point increase in our commercial loss ratio on the full year. So, full year commercial loss ratio guidance still in that 81.2% plus or minus 50 basis points.

Ana Gupte - Sanford Bernstein: So, you are getting pricing…?

Stephen J. Hemsley - President and CEO: The question is really a base line, the commercial base line for the current year is very solid, very strong and it will then run into the challenges as you point that everyone it will run into the marketplace in '14 and '15. I think we have to move on. We will able to take two more questions please.

Operator: Carl McDonald, Citigroup

Carl McDonald - Citigroup: Can you roughly quantify the margin compression that you are expecting to see in Medicare Advantage next year, roughly, are we talking 50 to 100 basis points or something bigger than that?

Stephen J. Hemsley - President and CEO: First of all, we don't really get into margin at that level in the first place and I think if I could do that at this point in time, we would have more to say about 2014. So that's what we're working through right now and we have to work through them on a real basis through the specific market. So, I really can't offer guidance at that level of precision, mid-year of the current year.

Carl McDonald - Citigroup: May be to ask in a different ways, is the headwind that you are talking about is 750 basis points, you talked about sort of the seniors ability to handle adjustments to that. What would your view is being a reasonable amount that a senior could handle in terms benefit design changes in a given year?

Stephen J. Hemsley - President and CEO: I have no basis to really speculate around that. Let me go back to – there are still a couple of things. If you think about it, that spread that you're focusing on, we're attacking by, in part, taking benefits down in a way that maintains the value and viability of the program. It runs a spectrum across markets; so it's not like a universal thing. This is done at a relatively precise level market-by-market. Network shaping is also that -- we have historically sponsored a very broad, very open access kind of market for our Medicare Advantage. We'll be forced to narrow that. We are focused potentially on operating costs across the board. Those are the elements that we're really playing in. Obviously, as I said, we're operating in a way to maintain the long-term viability of the program, but my second point in there was protecting margins. The sustainability of the program has to be that it is one that returns capital. We are protecting the margins of that program. That is a market by market proposition relative to our set of assets in the marketplace, as well as the way the program is being administered by a sponsor in those markets. It's a complicated proposition, but I can assure you we are focused on closing as much of that gap as possible. Seniors are clearly going to participate in it, pursue the benefit reductions, narrower access, so none of these things, the underfunding of the program is not a good thing for American seniors who benefit from these programs, but we are trying to navigate that in the best way possible to preserve this program by (utility) long term because we think it has compelling long-term growth aspects and value to the administration in terms of what it can do for Medicare.

Operator: Christine Arnold, Cowen and Company.

Christine Arnold - Cowen and Company: Optum seems to be running generally ahead of our expectations. Is there any change to the long-term Optum objectives that you outlined at Investor Day? You talked about international being a substantial opportunity. Where else do you see good opportunities in Optum?

Larry C. Renfro - EVP UnitedHealth Group and CEO Optum: It's Larry Renfro. I think you know that we put together, what I’d call, a multiyear business plan back about 18 months ago. We call at One Optum. When we did that, we wanted to make Optum a more important solutions organization and we wanted to really position ourselves for the future and, at the same time, we made some financial commitments to you guys on the ROIC being 15% by 2015, 6% operating margin by 2015, as well as doubling our operating profits of 2011. So those goals that we set at that point in time were kind of marching down the road. We’re hitting those pretty well and meeting expectations, and sometimes are actually doing better. The initiatives around them are pretty much around simplification, reengineering, business integration, really to help business alignment, and we talked a little bit about the PBM. In 2013, we have now started to pivot towards growth. Part of the growth initiatives (in order) to get to part of your question is that we’re trying to really have deeper what I’d call larger as well as significant relationships with our customers. That's actually working fairly well for us right now as well. The other part of growth as we've been talking about this today, comes from what I'll call new opportunities that surround us around – talk about Medicare rates and the pressure that's going on in the industry. So what all that does for us has caused us to really look for the future and we have to put certain development dollars as well as innovation dollars in to make all this work. I would say that international would fall into that same category in terms of innovation and development. As we work toward doing a lot of these programs that we are doing today in the United States, we'll be putting them into Brazil. So we're confident that we have planned investments. We're balancing those investments with the growth as well as cost management, but at this point in time, we would pretty much stand by the overall multiyear plan in terms of our guidance to meet or exceed the high end of the range.

Stephen J. Hemsley - President and CEO: Thank you, all. Once again, thank you for your interest in UnitedHealth Group today. We've had a very solid quarter and the strong year-to-date, both for UnitedHealthcare and Optum, and both continued to grow. Our performance trends are positive. I think it reflects in part the value of our diversified business approach and we remain intensely focused on the remainder of 2013 and on 2014, and the long-term success of the enterprise. So thank you for joining us.