Unitedhealth Group, Inc., Q3 2009 Earnings Call, Oct-20-2009 - NYSE:UNH

NYSE:UNH

During the UnitedHealth Group Third Quarter 2009 Earnings Conference Call, Tom Paul, one of the executives, made the following statements:

1. Regarding Part D Products and Performance Pricing Changes:
   • "In terms of our relationship to our Part D products, in regard to the performance pricing changes, ultimately from a Part D perspective, we see minimal change in our 2010 bid. We submitted our bids which were approved under a range of standard margin that we've used in the past and we continue to expect it we'll fall within that same margin in 2010."

These remarks were made in response to a question about how the Part D earnings are allocated between Prescription Solutions' innovations and how much of the earnings there is driven by the performance-based pricing that the company mentioned it would not renew for the next year. Tom Paul explained that from a Part D perspective, the company sees minimal change in its 2010 bid and expects to operate within the same margin as in the past.

During the UnitedHealth Group Third Quarter 2009 Earnings Conference Call, Stephen J. Hemsley, the President and Chief Executive Officer at the time, provided several insights and updates. Here’s a detailed summary of his statements:

Opening Remarks

• Financial Performance: Hemsley highlighted solid and consistent third quarter results, with cash flows of $2.7 billion and earnings of $0.89 per share. These results were driven by growth and performance from the Services businesses and effective ongoing medical and operating cost control.
• Employee Contribution: He praised the efforts of the company’s 75,000 employees in delivering value and service to customers and the healthcare community.
• 2009 Outlook: Based on performance to date, the company confirmed 2009 earnings of approximately $3.15 per share or revenues of about $87 billion. However, the outlook could be negatively impacted if the prevalence of H1N1 remains high throughout the fourth quarter.

Services Businesses Growth

• Revenue Increase: The services side of the company increased revenues by $723 million in the quarter, a 15% gain year-over-year.
• Business Performance: Ingenix was up 26%, Prescription Solutions grew 16%, and OptumHealth expanded by 9%. The growth was driven by demand for services from various sectors including the public sector, pharma, and unaffiliated payers.
• Service Offerings: The company provides a range of services such as consumer disease prevention and wellness programs, healthcare financial services, managed behavioral healthcare, specialty pharmaceutical care, and healthcare consulting and data analysis.

Health Benefits Growth

• Revenue Growth: Third quarter revenues in health benefits grew 7% or $1.4 billion year-over-year.
• Membership Growth: The company grew organically by 900,000 people in public and senior benefit programs through the first nine months of the year, including 275,000 people in Medicare Advantage and 460,000 people in risk-based, state-mediated programs.
• Commercial Benefits Pressure: There was pressure on the Commercial Benefit businesses due to broader economic and employment challenges. Participation in commercial benefits decreased by 275,000 people, with employment attrition driving more than 80% of this decrease.

Margins and Costs

• Net Margin: The company earned a net margin of about 4% of revenues through the first nine months of the year.
• Operating Margin: The third quarter operating margin was stable year-over-year, reflecting success in advancing affordability in operating and medical costs.
• Medical Cost Ratio: The consolidated third quarter medical care ratio of 82% increased 30 basis points over the previous year, reflecting additional H1N1 flu costs and the initial medical costs of serving new Medicaid members.
• Operating Cost Ratio: The operating cost ratio of 14.5% improved by a half percentage point year-over-year, reflecting faster growth in revenues and operating costs.
• Margin Performance by Business Group:
  • Services Businesses: Year-over-year growth and operating earnings came from these businesses, improving by $109 million in total.
  • Prescription Solutions: Best performer, driven by growth and improved scale, business maturity, and growing specialty pharmacy program.
  • Ingenix and OptumHealth: Extended their steady margin performances.

Healthcare Reform

• Commitment: Hemsley expressed commitment to helping modernize the healthcare system so it better serves all Americans at a lower cost.
• Concerns: He mentioned concerns with some proposals in Congress that could lead to higher costs and negatively affect the health benefits of the 160 million Americans with health insurance.
• Engagement: Hemsley noted active engagement with leaders in Congress and the administration, advocating for coverage for all Americans and addressing the underlying cost drivers.
• Impact on Business: He stated that the company will assess the positions of its businesses and participation in existing markets in response to legislated changes.

Outlook for 2010

• Economic Recovery: Hemsley expressed concerns about the slow and uneven economic recovery, predicting that the commercial enrollment loss in the fourth quarter would be somewhat better than the third quarter, with employer-based attrition being the most significant factor.
• Commercial Membership Decline: Projected to slow meaningfully in 2010 compared to 2009.
• Public and Senior Markets: Expected to increase the number of people served next year, led by Medicaid and Medicare Advantage, though growth would likely be slower in 2010 than in 2009.
• Medicaid Reimbursement Environment: Remained cautious about the state Medicaid reimbursement environment.
• 2010 Guidance: Preliminary estimates were for revenues to grow in a range centered around $89 billion, for operating earnings to decline year-over-year, and for 2010 earnings per share to be in the range of $2.90 to $2.10 per share.
• Cash Flows: Expected to be solid in relation to net earnings.
• Share Repurchase: Would be an element contributing to earnings per share, influenced by market factors including the status of healthcare reform.

Summary

• Diversification and Internal Discipline: Third quarter results demonstrated diversification and internal performance discipline.

• Services Businesses Growth: Delivered all of the year-over-year earnings growth in the quarter.

• Operating Costs and Medical Cost Ratios: Well-controlled and solid.

• Healthcare Reform Efforts: Concerned about some directions health reform is taking while redoubling efforts to help achieve meaningful, sustainable changes that address fundamental issues of affordability and access.

• Challenges for 2010: Understandably cautious about the challenging environment for 2010 but committed to pursuing goals at the highest level possible.