UnitedHealth Group Incorporated (UNH) Earnings Call Transcript & Summary

Yes. Yes. As Wayne said, we're on a multiyear journey to really get after what the cost structure of this organization looks like and modernize it, technology-enabled, AI-enabled kind of future infrastructure of Optum. And so we're working through things like call and claim where we can automate and eliminate back office and positions that don't create the best experience for our consumers. We're looking at automating approvals, clinical documentation, leveraging technology in the places where there's just a lot of time and energy, manual energy that's being used. And so we're digging in there. We're using it in many of our OptumHealth workflows in our clinics, ambient listening, getting -- freeing up time for recording and documentation for our physicians so that they have the opportunity to spend more time with patients doing the things that they enjoy. So working through many different angles in our OptumInsight space, some of our legacy programs there on payment integrity, risk and quality, RCM, looking into ways that we can more tech-enable those businesses to automate and find those efficiencies. And then really partnering across the organization in many of our corporate functions. So finance and accounting, marketing, communications, HR, finding different ways for many of those functions for us to use technology to largely automate a lot of the work that gets done today. And some of the momentum we have early on in some of our legal and HR and marketing functions and then kind of a fast follow-up. Wayne and I, in partnership with some of our other folks are pushing to get finance to kind of a fully automated function by the end of next year. So we're working across the organization in many instances to try and find those opportunities where we can take cost out, make it more efficient, make it a better experience and let us operate kind of how we believe we should in the future.

Okay. Great. And then a couple of commercial questions, and then maybe we'll switch over to Optum after that. Obviously, IDR was one of the issues that came up with the second quarter. And I think you provided some framing that it's added like 100 basis points of cost. And I think that's off of a base of maybe 50 basis points in 2025. So I think on one hand, like obviously, this is a clear problem for the system that needs to get addressed at some point, but it doesn't seem obvious that it's truly incremental to what the cost trend was if it's 50 basis points in the base and 50 basis points incremental this year. So maybe just as you could step back a little bit and help us understand maybe a better framing for that and how to think about why IDR is holding up commercial margin improvement this year?

Yes. So 2 things to anchor on. First and foremost, we held serve on our margins year-over-year, but our goal was to actually expand our margins coming into this year, into '26, and that did not happen. And again, the IDR was roughly 1 point on it. But it's also fair to say that the broader risk pools are changing, at least versus our expectations and our assumptions. And that was part of it. And as we continue to see more individuals move to self-insured, as we continue to see the residual impact of all the legislative changes, whether it be what OB3 did or individuals coming off the Medicaid ranks and moving into the exchanges, it's having a very difficult to predict effect on the broader commercial market. Again, that being said, we held serve on margins this year, but our expectations for growth did not come to light. We are performing better than expected, though, on the public exchanges. But as a reminder, we are refunding and rebating back this year as a commitment we made to Congress that we understand the affordability issues that are impacting the markets. And so we said for this year, we would refund those. Had you included those, I think we would be more balanced around the impact on commercial. But by pulling that out, you look at it as more of that like true small group, large group market that we're seeing that pressure, but not as much on the public exchange side.

Okay. Yes. And then maybe just kind of take us through how you're going to deal with this and the pace of recovery that might now be expected in the current environment. And I guess, specifically, I guess, how you're thinking about just the core cost trend, the IDR pressure incrementally and potential for continued maybe degradation of the risk pool.

Yes. So the one benefit with commercial is you have chances to reprice the book throughout the year. And so we've already started many of those initiatives in Q2, Q3 and as we move into Q4. And then you'll still have a relatively decent renewal cycle in January. But that process of pricing for where we think trend is going to be kind of where the puck is going to be, has already started. The one thing I would emphasize though, is IDR we're pricing for what we're seeing out there, but that's going to require a change from Congress around what's happening. And so separate from that is we are putting a lot of sunlight on the IDR process. It's the greatest disinfectant is sunlight. And the idea is let's shine a lot more light on this. This is not a rampant industry item where every provider is doing this, right? This is a handful of individual companies, roughly 5 that make up 60% of all the IDR, right? It is a mechanism that they figured out an opportunity to take advantage of a legislative loophole that was not created for the purposes that's being utilized. And so we're sharing that data with Congress, and we want Congress to understand what these companies are doing and why we think there should be a legislative solution. So -- but in the interim, until that happens, we have to price for it. And that unfortunately puts more pressure on affordability for the consumer.

And you mentioned that, obviously, you're not recording the exchange profitability this year, but it's running better than expected. Maybe characterize what you've seen so far in the exchanges relative to the initial expectations that you had. And then maybe speak for a minute just about how you're approaching next year in terms of your pricing strategy and maybe expectation around like what the book size could potentially look like?

Yes. I would say the membership was much more durable than I think we would have anticipated with the initial increases that were put forward on the public exchanges. And so from that perspective, we found not only a greater degree of stickiness within our membership base, but the underlying medical trends were very much aligned with our pricing, meaning that we were able to expand profit margins. Remember, though, this is a low single-digit margin business, right? So we're not talking about 1 moving to 5. You're talking about moving 1 point, 1.5 points. But I do think this is a particular business that over time is going to have to trend to that level of profitability, right? This is a government-supported program as you think about Medicaid being a 2% margin business over time, you think about Medicare being 2% to 4% margin business. Similarly, I think you think of public exchanges this way. And so I would say both the stickiness, durability, but also the underlying trends seem to perform well, especially with all the unknowns that were happening with those that were being disenrolled.

Okay. Great. Maybe this is a good time then to kind of switch over to the Optum discussion. I guess, first, just kind of address this off the top. There's a news article last night discussing sale of some assets like value-based care assets in Florida to private equity. I think this is something the company has alluded to previously. Could you just help us think about strategic rationale and what makes this the right decision and what it means or doesn't mean for the rest of the portfolio?

Yes, I'll let Krista comment. I'll start by just indicating that it's really old news. We've had this partnership since 2011. And it's an opportunity for us to really accelerate investments in different markets, but maybe talk a little bit about what we're doing there.

Yes. I would just point to 2 things. First, like Wayne mentioned, in addition to having a partner for a long time, we've also talked quite a bit about some of the restructuring in the fourth quarter that we intended to do this year, and that was one of those transactions. And second, on the strategic side, we're not exiting Florida. In fact, this is actually an opportunity to make the right investments and be well positioned for growth with a partner where we still have ownership and we still have incentive to ensure that we can kind of position that market for growth in the future. And so I think strategically that this is planned. We -- obviously, we're making a number of those same strategic investments in a handful of other markets. And so Florida was an opportunity where we had a partner, and it was a great way to ensure we're making the right investment.

Great. And then obviously, the OptumHealth outperformance in the first half has been pretty notable. I guess how much of this would you characterize as coming just kind of directly transferable through improved MA underwriting and outperformance there versus other actions that you've taken? And I guess, how do we think about the second half in terms of opportunities for outperformance and maybe also opportunities for reinvestment, too?

Yes. First, I would just say, really pleased with the execution and the outcomes that we're seeing in the first half of the year. And second, really just the pacing of the work of the turnaround. Really pleased with the progress. The vast majority of our outperformance is truly driven by clinical management and operating execution. We talk a lot about clinical excellence and operating excellence inside this business. I've given some examples of things that -- programs that we've launched that we can directly tie back to the outperformance. And so again, that's why we feel confident saying the vast majority of the actions that we've taken to improve, whether that's transitions of care, clinical management, care coordination, support for our patients. We're seeing it in inpatient. We're seeing it in lower readmissions. We're seeing it in lower SNF admissions, length of stay. All of our clinical metrics are really performing better than we expected. So it's kind of a first bucket driving it. Second, on the operating side, 2 things, really, operating cost management has been a really big theme for OptumHealth this year. I would say, driving significantly more cost savings in the business than we've done in the past. That's going to be a theme that continues in the second half of the year and also into next year and years beyond. But then truly just operating performance, things like physician productivity, scheduling, how we're creating more access in the system. We've talked about expanding patient-facing hours by over 12% or 200,000 hours in the first half of the year. Those operating initiatives are driving better performance in the business. And again, we will continue. All of those efforts are going to be a significant contributor to second half of the year, but also going to contribute to margin expansion inside '27 and again, inside 2028 for this business. So again, pleased with the performance pacing ahead of schedule, and we're going to continue to focus on those elements because those also will help us drive investment in the business in the second half of the year.

Okay. And then as we think about the key levers that we need to believe in terms of you to drive up margins to targeted levels, it sounds like, hopefully, by 2028, still the right way to think about it. I guess what are the key levers there? Another question would be where does some of the recontracting efforts with external payers stand? And any kind of broad thoughts about when this part of the business might be able to return to more of the top line growth we've seen historically?

Yes. So first, I'll just start out with some of the payer work. We spent the first half of the year, like I mentioned, working with all of our payers to make sure we're positioned, managing the loss contracts that we've talked about. I would say, really pleased with the progress there, where the vast majority of all of our addressable contracts for '27 have been addressed and/or mitigated. So feeling really good about now we're heading into the planning cycle, right, getting ready for open enrollment and kind of getting ready for 2027. You asked about some of the levers. So we still had some work to do around some of our benefit construct, around some of our rates, around even just some of the contract dynamics, what we're taking risk for, what we're not. And so I would say that's been addressed in some of that contracting, but that is going to be a contributing lever to 2027 as you think about maybe some additional PPO reductions as an example that will help improve performance for 2027. Another lever for 2027 in addition to what I mentioned around clinical and operating excellence is just how we take our performance standards that we drive inside our employed practices out to our network. OptumHealth was really on a kind of a growth trajectory in the past few years. And I wouldn't -- I would say there was an opportunity around just network performance management. What are the tools we're bringing to our network, how are we performance managing, how we're making sure quality, we're managing costs, but we're managing affordability inside our network. And those are things that are going to expand inside '27 to drive continued performance improvement. So again, as I think about '27 and '28, it's that core performance. There's new strategic initiatives that we'll be launching to ensure that we're driving affordability in the system, that we're improving quality, that we're in a position to expand margin by points inside '27. And then that momentum continues inside '28. Top line growth is probably not going to be the focus next year. Really, we're talking about earnings growth kind of pacing appropriately towards our 6% to 8% margin target. But 2027 is also positioning us really well for growth inside '28.

Okay. Great. And then last year, as part of the kind of the broader update on the subcomponents of OptumHealth, the company noted that the fee-for-service primary care and multi-specialty practices were losing, I think, hundreds of millions of dollars. I guess, first, has there been much change in kind of the operations and performance there? And what is assumed in those businesses as part of the financial targets going forward?

Yes. Yes. So fee-for-service was an opportunity for us. I think maybe we were very focused on appropriately performing in value-based care. And I would say maybe took some of the focus away from fee-for-service. But like I've mentioned before, fee-for-service is actually a core contributor to our value-based care agenda, our integrated value-based care system. All of our fee-for-service businesses are a lower total cost of care setting. They still focus on quality. You still get the benefit of a value-based care model even when the payment model is fee-for-service. But we did have to do some things to really make sure that we are driving fee-for-service performance improvement, whether that's physician compensation, some of the scheduling enhancements I talked about, making sure we're improving access for our patients, whether it's some of our net collections and RCM improvement, coding accuracy, things like that. I would say we're making really good progress on that this year, cost management being another lever as well, but still more work to do as I think about our fee-for-service turnaround, kind of pacing along the same lines as the value-based care turnaround, maybe getting there a little bit faster in fee-for-service just because it's a little bit easier to pull some of those levers around basic blocking and tackling, but still more work and more opportunity as I think about heading into next year. In terms of just expectation setting, I would say all of our fee-for-service businesses are performing in line with our expectations. And in fact, maybe, I would say, slightly favorable in some cases where we're seeing really good year-over-year growth, really good mix and acuity inside those practices.

Okay. Great. And then maybe to ask on OptumInsight, maybe one for Ben. I guess as you think about reformatting, I guess, maybe some of the products to be truly relevant in the AI era that we're in, I guess what are the key milestones there? And I guess as you think about the financial profile of this business over time, like it seems like ability to impact cost structure might be among the highest of any of the businesses with inside the company. I guess how do you think about how maybe the margin profile of this business could evolve over the next several years?

Yes. Yes. So maybe on the second part of your question first. Today, we're at an 18% -- kind of an 18% to 22% margin range in OptumInsight. The business is performing in line with our expectations this year, and we expect that we'll finish the year closer to the top end of that range in 2026. Importantly, inside of '26, it continues to be an investment and innovation year for OptumInsight. And so we are -- as we're modernizing some of these solutions that OptumInsight has had a long-standing place in the market with for majority of providers, majority of payers. At the same time, we're innovating on what the future of those products look like. So to your question on what are those key milestones, we are in the process of building, developing and selling a lot of these new products. And so kind of the runway to get to those sales at times can be long because there's just so much change in the marketplace right now and so many different products and opportunities, and so we're working to get those kind of core tenets to these new models and these new products that we sell. And we have a handful of those, and we're seeing good progress in the marketplace. But in many of those instances, the sales cycle does take a little more time. But I think as you see us land some of these, then they rapidly get deployed in the marketplace. And so I think those are the milestones you'll see as you may have a product like Optum Real or Crimson or Optum AI, where you've heard of it, but there's not -- those are the things that are gaining momentum right now. And I think you're going to start to hear a lot more about those as we pace into 2027 and in the future years. And at the same time, we're innovating, and I'm sure there will be products that we're in the process of developing right now. The good news is we have a very good partner in UnitedHealthcare that we are working closely with on a lot of these products. And in most cases, they are using them, deploying them before we even bring them to market. So we have an opportunity to test quickly and kind of learn and fail if we need to, to get those to market.

Okay. Great. Maybe just the last question then on capital deployment. And as the company is increasingly able to deploy capital again over the next couple of years, I guess what should we think about as the key priorities and maybe how to contrast that against the capital deployment profile of the company that we've all kind of seen over the past 15, 20 years?

Yes. I think you'll see a similar approach to our historical deployment of capital. I think you should anticipate -- our first goal was to get our debt to cap much closer to the 40% range. If you go back to last year, at this time, we were closer to 45%. We should be tapping on 40% by Q4 of this year. So we've been aggressively paying down our debt and growing our earnings, which has helped with the debt to cap. That being said, that now allows us the flexibility to get back into the market in a much more aggressive way. When we started this year, we had anticipated deploying about $2.5 billion of capital for buybacks. We've now said we'll do at least $5 billion this year. And that's relevant because we're doing that while achieving our debt-to-cap goals. We did recently raise our dividend. So as you think about the next 5 years, in my mind, we're going to have a balanced return of capital approach again. We would expect to continue to raise our dividend. We would expect to deploy buyback at a much more aggressive pace. And we would expect to be reengaged in the acquisition space as we have historically been, albeit a lot more focused on what we think are the big growth drivers over time. We think value-based care is a massive opportunity for us, and we think these OptumInsight innovations are a massive one. And that's where our capital will be pursued.

Okay. Well, fantastic. I think that's all we have time for. So thank you so much for being here.

Great. Thanks.

Thank you.