UnitedHealth Group Incorporated (UNH) Earnings Call Transcript & Summary

Great. Well, welcome, everybody. I see people still trickling in. So let me just introduce myself and welcome you to the Bernstein Strategic Decision Conference, our 40th annual. I'm Lance Wilkes, healthcare service analyst for Bernstein. Really excited to have UnitedHealthcare, our UnitedHealth Group here, and we've got really the entire leadership team here. So this is wonderful to kind of kick it off in this way. Again, for this event and throughout the 3 days, we're going to ask all the most important questions, but we also definitely have a strategic bent to this. So we're going to really focus also on sort of the long-term drivers of growth, which obviously has been phenomenal for United historically. Our view is United's secret sauce is sort of strategic vision, strategic capital management, how you've gotten into really important businesses. So to kick off, maybe, Andrew, if you could introduce yourself and the team, and then I'll kind of tee it up with a broad strategic question. We'll certainly get into some of the current questions on utilization pricing and things like that as well.

Yes. Lance, thanks so much, and thank you for the opportunity to come and talk to you all this morning. I'm joined here by Heather, who runs -- Optum President and CEO of our Optum organization; you've got Brian Thompson, who is the CEO of UnitedHealthcare; and then I'm sure many of you know John Rex, who's our CFO and President of UnitedHealth Group, so really, the leaders of the organization in large part. What I thought I might do, just to kick off with Lance, as you say, is just kind of remind you a little bit around the overall frame of UHG and what we're focused on and driving toward over the next 3, 5, 10 years, and maybe just ask Heather to reflect a little bit on her early days as CEO of Optum, an interesting kind of fresh set of eyes in terms of some of the opportunity that's coming from there. Then we'll kind of, as you say, go into more of the Q&A piece. So just to reiterate from a UHG perspective, as I think many of you will be familiar, we have a long-term goal of delivering earnings per share -- adjusted earnings per share at a rate of between 13% and 16%. Historically, we've done very well at that. Of course, it doesn't happen every single year in years where there are different events going on. But as a pattern, that's something we continue to be very much guided by in terms of the ambition of the organization. Obviously, as -- we've continued to grow, that requires us to do many things, making sure that our core businesses continue to operate and improve and drive operational efficiency in how we drive the business day-to-day, making sure we're finding continued business innovation opportunities from different pieces and parts of the organization and, of course, through growth, whether that's through organic growth of our membership and patients or whether it's through inorganic growth through deployment of the balance sheet. And John will talk a little more about that piece in particular. But as we look forward over the next few years, we continue to believe that our model can continue to support that kind of long-term ambition for the company. Really focused in 5 big areas for us right now, in terms of how we think about where we can continue to develop really meaningful aspects of growth. One, value-based care. Very -- we believe that is a fundamentally better way in the long run of evolving the environment to make sure that individuals, families, members, patients get better quality care. Decisions are more closely aligned between the provider and the patient, making sure the physician has a greater voice in all of that. Greater focus on the outcome rather than the input, so be much more orientated around how do we prevent disease, how do we bring disease under control rather than simply focused on fee-for-service. And we think within all of that, not only do we deliver better quality care, better outcome care, but we also believe it's better value for money, for the payers and the system. And as a byproduct, what we often see is less burnout for physicians and the like. So we see a lot of goodness around value-based care. It's a very -- although it's a topic that's been talked about probably 30 years as a theme, I would say, really only within UnitedHealth Group and Optum, you see in value-based care now a scale and a presence which allows it to operate truly as a business model and really is able to kind of deploy it at scale, which allows us to test different aspects of this and really start to understand what works and doesn't work over multiple years of evolution of a way of working. And Heather, I think, will talk much more about that as we get into the conversation during the day. But it's a really important aspect of what's an organizing principle, how we think about what we do in the marketplace. Of course, Optum is a lead within that. The period we're in right now is a very interesting one because we've seen some shifts and movements in terms of funding regimes coming from the government, in terms of how they choose to fund, particularly, the MA program. You've seen that have varying degrees of consequence on different participants in the marketplace, particularly those which were newer, smaller, more emerging, less multi-dimension in the way they manage their value-based environment, have more challenges than maybe some of the ones which are more established and have got more aspects to what they do. But that's a huge area for us. You should continue to expect us to invest heavily in that. Going forward, we believe that is, by far and away, the best way to deliver quality of care at affordable value. We still think it's in the early innings as a business model. We think it's an early innings for us. We continue to be extremely optimistic about its long-term potential for the group, and you see that play through, of course, in OptumHealth. Second big area is, of course, the benefits business. The benefits business that Brian here runs, and he's really -- has been a great veteran of building up the UHC benefits business, both in the commercial arena as well as in the government books of business, very substantial growth we've seen this year through membership, particularly in the commercial marketplace. And I think the bottom line comes from a relentless energy to innovate around the ways in which we offer different programs to whoever the payer is, whether they're employers, small or large, whether that's the government, whether that's the state. It's a highly responsive to the kind of innovation that UnitedHealthcare has been able to bring. You see that reflected in the continued stable performance of the business from an economic point of view, underpinned by really good strong membership growth and, again, an ability to be able to adjust to the different dynamics, whether we've been dealing with things like COVID over the last several years, changes in reimbursement regimes I touched on just a second ago. I think that business has demonstrated a tremendous ability to be resilient through all of those and be able to course correct and make sure that, over a period of years, we're able to deliver very strong and stable performance from that business. And of course, UHC creates a very important customer base for Optum. And as you know, Optum is a multi-payer organization. One of its most important partners, not the only one by any means, is UHC. I can tell you UHC is probably about the most demanding customer that Optum has. It creates a great kind of discipline inside the organization, to make sure that all of what we're trying to build in the business is really best-in-class for the marketplace. It has to be best-in-class for UHC to want to use it. And if UHC uses it, then oftentimes, you'll see other payers in the marketplace are super interested in that. So there are really, really positive and strong dynamic, which operates there between those 2 companies. Third area that we continue to invest heavily in is, of course, pharmacy. Pharmacy is the most frequent touchpoint in healthcare, highest transaction volume that goes on. And of course, we see continued innovation, thanks to the pharmaceutical industry flowing through that sector. Highly complex, highly regulated space, regulatory complexity is, I think, something which takes real skill to navigate in this environment. It's not a trivial environment to try and navigate through. But you'll see from Optum Rx, in particular, both through the PBM, which -- very proud of that organization. It's become, I think, a real champion and leader for choice and transparency. And while there are a lot of people who are critical of the PBMs, they are the only mechanism in the system which really acts to negotiate on drug pricing on behalf of the vast majority of participants in the marketplace. Ultimately, rightly, the pharmaceutical companies temporarily are monopoly holders. That's the whole definition of a patent. But during that period of the temporary monopoly position, there needs to be some level of accountability to price negotiation. That's where the PBM aggregates volume to allow that price negotiation to take place in a robust and thoughtful way. And the degree of value we deliver back to our clients, whether that's delivered through rebate dollars, which is a choice some clients take, or through net price reduction, which is a choice other clients take, that's how we deliver value back into the system. We give choice to the client in how they get paid. We give complete transparency in terms of how we add value to that system for them. And again, I think that really explains why we've seen such strong growth of our PBM over the last several years, continue to see super robust pipeline, and we feel like we're in a very good spot from a PBM perspective. Second part of our pharmacy platform are our various direct pharmacy businesses, whether that's behavioral health businesses, whether that's our home infusion platforms, clinic platform -- clinic infusion platform, specialty, rare disease, those sorts of areas. And you see those have grown up very actively over the last several years. It's been an area where we've continued to invest inorganically to lay foundations for new businesses. So you'll see continued growth on that. So that's the third of the 3 big pillars of focus for us. The fourth is around technology.and data, and that really houses within OptumInsight, although not solely within OptumInsight. But we see increasing opportunities, particularly actually accelerated, I think, by things like AI, which allows us to start to access understanding of data patterns in a different way to perhaps the past, accelerates our ability to understand what's in the information and what we might be able to use from that information. And it's beginning to give us more optimism to figure out ways in which we can fundamentally modernize and streamline a lot of the traditional ways of working across healthcare. And you'd have to be -- you'd have to have never worked in healthcare to have a view which says healthcare is simple. It clearly isn't simple. It's complex, and it is complex for a few reasons. Regulatory is one. Historic systems is another. Those systems tend to run on very old environment. They are very traditional in the way they operate, and they are ripe for modernization. And so we see that as an area of field. One -- maybe just one example to put a punctuation mark on that is really things like instantaneous adjudication. So instead of having a claim roll around the system for weeks or even months, can we get to a position where a provider can get their claim instantaneously approved and paid? That's the kind of thing that we're working towards, building towards. We think that's going to be an important potential innovation in the marketplace. But -- just one example of the kind of thing we're talking about. And then last, but not least, is financial services. Optum, for a long time, has been building up its financial service capabilities. This piece intersects a little bit with what I was just talking about in terms of our technology platform, so think again about how payment flows operate through the healthcare system. It's a relatively old fashioned environment, still enormous numbers of checks are still cut inside of healthcare. There's a lot of opportunity for that to be innovated and improved. And again, you continue to see us invest in that space. We believe -- although that's one of our smallest platforms today, we do believe that is one which has great growth potential in front of it. So that's really the overarching kind of 5 pillars of the business. I'd say -- 2 things I would really call out. One, I emphasized at the beginning, value-based care as a business model, kind of North Star that we drive toward. And then the second is really consumerizing the business. So again, one of the slightly strange things about healthcare, I think, is that, of course, it's all about the patient. It's all about the member. But actually, a lot of the history of healthcare has been really B2B dynamics, people doing things on behalf of an ultimate member or on behalf of an ultimate consumer, not necessarily the case that, that ultimate member or the ultimate consumer was part of the decision-making. We think that changes. We think, over time, more and more consumers and members will want to be, will take a greater role in some or all of the decision-making associated with, certainly, how their care is financed and, possibly, all the way through to what kind of care they choose to access in the end. That's something that takes this industry much more to a more consumer-intimate place, and that's an area we've been building up very heavily in terms of skills, capabilities inside the organization. Early days, I mean, I'd say on that. We have a long way to go to be at the level that we aspire to be in terms of leading consumer organization in healthcare, but definitely a direction of travel we're committed to and one that we've made some very substantial progress on. And if you look at simple areas -- and Brian may talk a little bit about this, simple areas around the ease of engaging with UnitedHealthcare as commercial insurance now and the kind of services you can get online, the ability to be able to interact with us in a way, which, just a couple of years ago, was really frankly not possible. So that's the overarching piece. So maybe ask Heather just to give you a kind of initial first 3 months in of running Optum and your kind of fresh eyes on that, which may also be helpful for folks.

Yes, sure. And maybe what I would add to that is, for us, it's probably worth a moment -- and I think maybe I would add even some foundations some of the questions, I think, you're going to even lead into, Lance, and I think there's a lot of questions and interest in even value-based care. So I might take a minute and hit that. But I think it's also important, I think, people really, at least, have an understanding of UnitedHealthcare generally, and we may spend some time on that. UnitedHealthcare, maybe more understood part of UnitedHealth Group, although an incredibly dynamic changing business with a very strong leadership under Brian's leadership. We've seen that evolve from B2B, serving multiple stakeholders with an incredibly strong leadership team, leaning into the consumer and evolving in a dynamic environment. Optum, if you think about that as sort of that sister company, is a services business. And if we do our job right at Optum, the way I think about it is we're aspiring to be the best in healthcare delivery, so the best primary care, specialty care and delivery service for individuals across the country, where we provide higher quality care, where incentives are aligned and we're reducing unnecessary medical expense. In addition to that, we should help consumers navigate this healthcare system with the best in consumer experience and enabling other healthcare -- other members of the healthcare systems, stakeholders with those very tools and very -- and products that we're investing in ourselves that are the foundation of our own value-based care. We should be offering those to the healthcare system so that, ideally, other companies can take risk, and we're the backbone of that risk. So Optum should help other companies take risk, and that's who we serve at OptumHealth, over 100-plus payers to do just that, particularly in a very dynamic and changing environment where funding can change. We're, hopefully, that stable partner that can help them take risk. So if I might offer 2 observations. The first one is when Andrew talks about value-based care, one of the pillars of our key priorities, I go even further to say OptumHealth has been participating in value-based care, and it's been a journey. It's been over a decade, I'd say about 15 years of learnings and we have lots of different models of value-based care. And there's lots of different models in value-based care, many of which have been started through government demonstrations across the country. And I think we've got great examples of aligned incentives and how they can improve outcomes, they can reduce unnecessary costs and they can improve quality. What OptumHealth is really focused on is full risk and the largest sort of participant in full risk. So moving into -- at the end of this year, we strive to have about 5 million members, about 5 million patients in fully accountable. So that means upside and downside risk to taking the full risk for those members. And that means a different level of accountability, so accountability for deeper clinical care. And in addition to just total cost, that means the ability to drive better clinical outcomes, higher quality, a better consumer experience and a better experience for our clinicians, all of those that we have a direct relationship with. And that's what we strive to provide. And when you think about that, I think -- why do we do that? Again, we do that so that those partners have a stable partner, so that they have -- those payers have a stable partner, somebody that they can say, "I think Optum can be our partner to take risk and provide care for our members." Why do we think we can do that and continue to do that and continue to grow? Because over those years, it's not just the learnings, it's the elements of our care model. It's the incentives, the incentive alignment with our primary care practices. But it's all of those other elements that are important for primary care and specialty care. It's strong referrals to the right site of service, including surgery and specialty. It's the wraparound services, like the population health and the behavioral health services that many of our patients need. And it's the home-based care that we've invested in, whether it's home health services through many of the investments we've made. It's transitional and longitudinal care or it's just the really important preventive services and annual home checks that we've done for years, that make sure our seniors have what they need at home and engage quickly with the PCP, have medication adherence, ensure that medication adherence and compliance is key, and then helps identify any chronic disease that needs to be managed. So those, we think, are the key to sustainable value-based care and opportunities to drive clinical improvement. And then my second observation would just be all those elements and tools, and Andrew hit on this, if we do that right, it doesn't just help OptumHealth and Optum succeed, but we should also be able to offer that back to the system. And that's actually the premise under OptumInsight, which is system enablement. So we offer that to hospital systems. We offer that through products called provider risk enablement, which helps other providers and hospital systems with those very tools. And so giving back to the health system some of those things that we've learned, whether it's products and services, whether it's risk and quality or whether it's some actuarial support.

Thanks, Heather. And I think maybe, Brian, if I might, I mean, I'm sure on a lot of people's minds, particularly people who are kind of deep in the space, they're thinking about 2025, right? And obviously, we all know that bids go in next week. We're not going to talk about detail of that. I guess if somebody was crazy enough to rewrite a bit over the weekend, they could still do that. But I'm sure Lance and everybody else, it'd be a good place for you to start in terms of just as you're thinking about '25, would be good to get your perspective.

Yes. I think it starts with just a long-term lens. Anytime you've heard us, UnitedHealthcare, in particular, talk about the Medicare Advantage space, it's been over a long horizon. And I think last year, in particular, with the new rules around the reimbursement structure with a phase-in over 3 year, candidly, that played well to our strategy. We've always looked at this as something that needs to be planned for over multiple years, how do we establish stability and the benefits our seniors have come to rely upon while, at the same time, over time, creating a thoughtful innovation pipeline of new capabilities and services, et cetera. So planning over multiple years is nothing new to United. And I think the minute we heard about the new rule set, I started thinking about 2027. What does our benefit design and business model need to look like to accommodate these changes in the risk adjustment environments? And I'm pleased with how we've navigated through year 1. I would say our enrollment is a little lighter perhaps than I'm used to seeing over the years, but I think it's also a reflection of being pretty responsible in that new reimbursement world and a good setup for what we're now accommodating as we go into year 2 of a 3-year march. So thinking about 2027, thinking about growth as an outcome of a responsible product position and we're encouraged. We're encouraged with what we've done over the last decade plus. And I remain encouraged about the responsible product we'll put in the marketplace for next year. I think we've demonstrated that there is a flight to quality at times of ebbs and flows in this marketplace. I think we're in one of those right now as this marketplace hardens a bit. I harken back to 2015 post ACA, UnitedHealthcare thrived in that environment. And I think pacing through both the introduction of the IRA as well as year 2 of a 3-year march on the new reimbursement model, it reminds me much like 2015. So encouraged by the process, always impressed by the teams. It's a complex process to get these bids in order every year. I think this year, a few more elements perhaps than normal in terms of year 2 as well as the IRA, but encouraged. And we're 1 week away, and we'll push the button and hopefully be very pleased, the market will be very pleased with what we bring here in October.

That's great, Brian. And maybe the last and then I promise to let you have the buyback. John, M&A. I mean, the big piece of our growth comes from inorganic investment, and you run all of that. And I think it'd be good for folks just to hear what your contemporary view of that.

Yes. Thank you. So as you all know, one of our key pillars in the company for decades and decades has been really trying to bring together the capabilities, accomplish all this that Andrew, Heather and Brian just talked about in the system. I think this conference is particularly interesting because it's across multiple sectors of the economy. And I think you'd still be challenged to find a sector, one, that's as large, two, that's as fragmented as healthcare, particularly services, and still is incredibly fragmented in terms of the way we phase out $5 trillion sector that's extremely fragmented. And it's just -- I go across technology, financial services, other areas, everything that you'll be seeing over the course of these 3 days, it's hard to find one that's still that fragmented. So the mission of this company has been exactly what we just discussed here is how we then amplify, bringing together the capabilities, are going to serve consumers in the way that we think they should be served, because the system really isn't organized that way. Still looks extremely greenfield to us when we look at it, in terms of the organization of the sector. So what we're trying to do is apply capital to help bring more coherence to the consumer experience, deliver better outcomes for the patients we serve. It's part of what we do. Over time, it's generated, as I said, 3 to 5 points of our earnings growth for the company. It doesn't look much different today than it looked 15 years ago in terms of those prospects, in terms of -- again, still extremely fragmented sector, the capabilities that we can bring together to help create that experience. The things that had made me look -- feel different to me, they're very diverse in terms of the opportunities that we see out there, very diverse. Some of that, I think, is our capability as a company to address those and to actually bring them into the company and to actually help them be effective in the health system. We're more capable in terms of that aspect. There are a lot more places that we can be effective in making those work for people and how we bring them together. So that's part of it. Part of it is just where the market sits today, coming off the last few years where there was a period of a few years of capital allocation being done at just, I'll call it, distinctive valuation levels that I had seen in a long time and where those sit right now, so probably among the most interesting that we have seen as a company as we look out in terms of our opportunity and where we see that potential and, again, coming -- looking at a extremely fragmented market. I've had the honor of being part of the company probably 12 years at this point. And I'm not sure what inning I thought it was when I came into the company, but feels very much like top of the third in terms of potential and ability and how the company -- the opportunities this company has to improve the healthcare system. So that remains live, very much alive, very, very well and among the most robust and interesting for the people who are serving that I've seen in my time here.

[indiscernible] Well, thanks for hitting many of the questions I was going to ask. This has worked out really well. Let me just fill in the gaps, and as I mentioned, I was kind of pitching you guys yesterday as the best idea, the combination of the setup that we -- that I perceive in the sector right now, coupled with the long-term opportunities that you guys present. So let me hit on a couple of those to better inform some of the investor perspectives. First thing would be 2024. People are still trying to get their arms around what's 2024 going to look like. And so any commentary on utilization in the first quarter now that you're a couple of months past the first quarter? How is utilization looking as far as confidence levels and what you presented in the first quarter as trends? Are there any changes as far as maybe one segment outperforming and other expectations as opposed to another segment maybe falling a little behind? So....

So I mean, I think still very early days. So we haven't closed May yet, of course. So we're still early in the year. I think first and foremost, not seeing anything that -- so I'm going to actually kind of rotate out of '24 just for a second to '25. We feel very good about where we are in terms of where we're bidding for '25. So just super important, I think, to -- this is a couple of dynamics here because obviously, as you just heard, we're right on the shoulder of those bids going in. So I think we feel good about that. As you look at '24, I mean -- and I think a little bit of this not surprising. We're paying pretty careful attention to see what, if anything, might have happened while we temporarily suspended UM back in March, April on the back of the change attack. And that takes a little while to see how that plays through, so just keeping an eye on that. Bit early -- too early to give you an answer on it, honestly, but I would call that out as a watch area for us in terms of making sure that we keep a track of that. Now again, it doesn't worry me about '25 because whatever it is or isn't, it's going to be fenced, right? So I'm not super worried about that. And then maybe one other area I'd call out is, as you know, we've come through this very sort of prolonged redetermination cycle in Medicaid, making sure that all of those -- the utilization and the rates and everything else stay in perfect synchrony through a multi-quarter cycle. There's probably going to be some disturbance around that. Again, we're watching that. And I'd probably call those 2 areas out as kind of areas to be focused on for us. But most importantly, nothing from any of that, that reads into our confidence around the bid. I think we feel solid around what we're putting in the bid. And we've done a lot of work on getting ready for this bid. But Brian, you might want to add or detract from that.

No, I think you said it really well. If there's one difference this year, obviously, when we left the first quarter, there was some claim incompleteness in the system overall because of the change disruption, and we did our best to make some accommodations for that. We've only closed 1 month since then. And really, that month was about working down that backlog and getting back to volumes at normal levels and getting those claims from paid to adjudicated, et cetera. So perhaps a little more delayed in terms of our visibility because of that. But pacing as we had thought we would through that. So I think now almost to the next month -- May and June will be telling for us and instructive. But we're thoughtful about the implications of that and how we bid, et cetera. And then thinking about what we did in utilization management and where we pause that is certainly an insight that is unique to UnitedHealth Group, and we're pleased that we did that. I think we've got the right tools and analytics to understand the implications of that. But we've got to make sure that we separate that from what I consider core baseline performance as well. So proceeding, May and June will be telling for us, but not a lot of new visibility, I would say, since we spoke last. And as we said, only really 1 month is closed since then.

Yes. Great. Let me turn to follow up on '25 MA pricing. We've got a question from the audience and one of our questions. So the 2 questions here, one backward-looking, the question from the audience was basically, well, how did you do a better job than everybody else in pricing for '24? So maybe this is a process question as far as how you look at things on a relative basis. What your process is? And then on a '25 basis, again, kind of looking at the external environment, you've got a lot of people who are talking -- you have other major competitors talking about exiting counties, cutting benefits. Just interested in what that does from your perspective in the bid and if there are any important things from risk selection or other opportunities that presents.

Sure. I'll start with '24, and I can't really comment on our competitors, but I can just tell you what we did. And '24 was about really 2027. How do we make sure that we navigate the next 3 years with as much stability as we can for those we support and serve? And that required a lot of different elements. It required us to really urgently advance our own productivity agenda. It required folks like Heather and I and our teams to get together and think about ways in which new value can be created in value-based care to offset the impacts of a different reimbursement model. And it also made us think about benefits that needed to be trimmed in year 1 as we prepared for year 2 and year 3. And we did so, we believe, in a responsible way. It may have compromised some of our growth relative to some of our competition, but at the same time, I think, was the right first step as we have 2 more steps to navigate. So I think it was about how do we drive stability over the long term, not try to win in the short term was our strategy for 2024. And honestly, I don't think you'll see much change to that type of strategy as we pace here into years 2 and 3. I'm encouraged by the traction we're getting, some of these ambitions around value creation, around productivity. I like seeing at new innovative areas like how a step function changes in our back office around AI, ML technology changes that have really advanced what we can do from a productivity standpoint and the call aviation we're seeing. As folks engage digitally, we're seeing a falloff on the call center engagement, which is an expensive part of our cost structure. So by -- so we're encouraged by the ambitions that we really set up long ago, but I would say, accelerated a year ago. So '25 is a lot more of the same. We have said before that this reimbursement model will require benefit cuts over the course of the 3-year phase-in. So while you're hearing from others a message of exits and cuts, that doesn't surprise me because, again, the reimbursement model is changing meaningfully in addition to the introduction of an IRA model. So obviously, it's not a time where I'm going to talk about what we're doing in 2025. We'll be filing that in a week. But it's pretty consistent with the message we've said since the beginning, which is there is a different reimbursement signal being sent by CMS by which all of us are doing as much responsible planning to offset the pressures of that to the seniors we support and serve. But nonetheless, there will be pressures to benefits, and there have been. And we've demonstrated that with our actions in '24.

Great. Let's shift over to OptumHealth and value-based care. And again, we perceive that to be the most misvalued aspect of the sector right now or it seems like...

And by mis, you mean under.

Undervalued. Yes, exactly. Our presumption would be that in this environment, low rates, high trend, that value-based care will be the most important thing to be focused on. And obviously, you guys have the most significant value-based care asset that's out there. Can you talk a little bit about maybe interest and adoption in other segments beyond MA? And then maybe as part of that, if you're seeing accelerated interest from other payers in the MA space. But overall, what's your pipeline look like for risk beyond the UHC source of membership?