UnitedHealth Group Incorporated (NYSE:UNH) Q2 2023 Earnings Call Transcript

UnitedHealth Group Incorporated (NYSE:UNH) Q2 2023 Earnings Call Transcript July 14, 2023

UnitedHealth Group Incorporated misses on earnings expectations. Reported EPS is $5.57 EPS, expectations were $6.01.

Operator: Good morning and welcome to the UnitedHealth Group Second Quarter 2023 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 the non-GAAP to GAAP amounts is available on the financial and earning reports section of the company’s Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated July 14, 2023, which may be accessed from the Investor Relations page of the company’s website. I will now turn the conference over to the Chief Executive Officer of UnitedHealth Group, Andrew Witty.

Andrew Witty: Thank you, and good morning. And thank you all for joining us. As we discussed a number of weeks ago during the quarter, we saw a somewhat higher than usual range of movement in certain areas of care activity. As you’d expect, this inevitably impacted some elements of our business, but we overcame these dynamics with strength in other areas. Our second quarter performance reflects the capabilities, agility, and dedication of our people as they responded to the changes. As a team, we’re confident in our ability to robustly grow in this fluid healthcare environment. Indeed, as I hope you saw in our release today, revenue growth in the quarter was strong and well balanced across our enterprise increasing by more than $12 billion to nearly $93 billion.

Let me provide a few highlights of our growth. First, the number of patients served by OptumHealth under fully accountable value-based care arrangements grew by more than 900,000 over this time last year. Among the new patients we welcomed, a significant number have complex needs. These people have serious health challenges, limited economic resources and often living communities where it can be difficult to access high quality care. Our ability to support their needs is distinctive and a direct result of the investments we have made to provide coordinated and comprehensive medical, pharmacy, and behavioral care, foundational capabilities that will help the patients we serve live healthier lives and drive growth far into the future. OptumRx and OptumInsight revenue grew double-digits on expanded capabilities and products that are generating new sales and opportunities.

UnitedHealthcare’s growth was strong and diversified as well. Today, we’re serving nearly 1.6 million more people in our commercial and public sector program offerings than we did last year. This durable growth driven by our colleagues relentless focus on quality and execution enabled us to achieve second quarter adjusted earnings per share of $6.14 and to strengthen our full-year outlook to between $24.70 to $25 per share. We know there is great interest in understanding the recent care activity I just mentioned. So I’ll give you an overview of how we’re seeing care plans progress and how we’re responding. I do want to underscore the most critical point first: making high quality care more affordable and accessible is at the core of our mission.

Having more people obtaining the care they need is a positive trend for individuals and our health system and society. As we discussed several weeks ago, during the second quarter, we observed increased care patents, notably in outpatient surgeries for seniors and especially with certain orthopedic procedures, which may have been postponed. John will provide some additional detail on this later. As we look to 2024, we have developed compelling Medicare Advantage offerings. Our teams were, of course, thoughtful, both in our response to the CMS rate notice and in incorporating these care activity trends into our June benefit filings. Even in this challenging funding environment, we continue to prioritize the stability and affordability our members have come to rely on from UnitedHealthcare.

We’re confident that next year we will once again grow at a pace exceeding that of the broader market. While of a much lesser impact than senior outpatient care, we also are seeing increased care activity in behavioral. Over the past few years, behavioral care patterns have been accelerating as people increasingly feel comfortable seeking services. Just since last year, the percentage of people who are accessing behavioral care has increased by double-digits. From our perspective it’s an encouraging sign that more people are seeking help. Yet the ongoing shortage of qualified care providers has caused significant access challenges. To address the issue, OptumHealth has expanded its network by 10s of 1,000s of care professionals this year.

And we are developing our benefit offerings, assuming demand for behavioral care services will continue to rise. OptumHealth’s value-based care models are continuing to deliver a specially strong and measurable results for people. Today serving more than 4 million patients and dozens of payers. OptumHealth and the patients and payers it serves share a common desire to seek improved health outcomes and experiences, while ultimately lowering the cost of care. And we’re pleased to see more evidence supporting the efficacy of value-based care. Last month, researchers at Yale Medicine working in collaboration with Optum published a peer reviewed study about in-home visits, an important element in our value-based care approach. The study found patients who received our in-home preventative wellness assessments, compared with those who hadn’t made fewer emergency department visits and spent fewer nights in hospitals across four common conditions: depression, hypertension, coronary artery disease, and Type 2 diabetes.

They also experienced reduced wait times for follow-up primary Care. Yale Medicine’s research follows another peer reviewed study published in JAMA in December, which found Medicare Advantage patients in Optum’s fully accountable care model showed significantly better health outcomes, compared to people in Medicare fee for service. OptumHealth patients fared better on each of eight key metrics: including hospital readmissions and emergency department visits. We see these results as compelling validation of the value-based care approach and signal more strongly its promise and potential, as we expand these care models to many millions more patients in the years ahead. I’ll now turn it over to UnitedHealth Group, President and Chief Operating Officer, Dirk McMahon, to elaborate on how we’re focusing on affordability, transparency, and simplicity for the people we serve.

Dirk?

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Dirk McMahon: Thanks Andrew. Making high quality care, more affordable and more accessible is what we do. So it is really great to see people getting the care they need, especially as our teams are working to build more capacity and our benefit networks and care delivery resources to accommodate consumers’ evolving needs. Affordability is vital. For far too many people, cost remains the most significant barrier to high quality care. We are leaning in hard on behalf of consumers, employers, and health plans to lower out of pocket costs and drive greater affordability throughout the system. As you heard from Andrew, recently we’ve seen an uptick in outpatient surgeries. Finding the most appropriate site of service is crucial, because the cost of those procedures can differ dramatically depending upon where they are performed.

Overall, evidence shows that comparable procedures performed in ambulatory surgery centers cost about half as much as traditional settings with comparable outcomes. For consumers, that translates into many 100 of dollars in out of pocket cost savings for just a single procedure. And the patient satisfaction levels at our centers are among the highest in healthcare with NPS approaching 90. Also high on our affordability agenda is continuing to lower the cost of prescription drugs. Our customers including employers, unions, health plans and governments count on us to help them access the most effective medicines at the lowest possible cost. In fact, pharmacy benefit managers like ours are the only link in the drug supply chain whose main purpose is to improve affordability for everyone.

We go further by recommending benefit designs and providing tools to help consumers navigate their options and find the best value for their prescription. A recently launched feature called Price Edge, which provides the lowest cost option for a patient’s medication. Already has delivered millions of dollars in customer out of pocket savings. Especially drug cost continue to be a focus of every customer OptumRx works with. Our differentiated approach to specialty is designed to serve the unique needs of patients, payers, providers, and pharma partners and has allowed us to greatly expand our access to limited distribution drugs. We work to tailor our programs with individualized single point of contact care for rare disease and clinical excellence programs for conditions such as MS, autoimmune diseases, and cancer.

Clients working with OptumRx, who implement all our specialty medication management programs can save up to 20% on the specialty drug cost. Most related to specialty biosimilars are another area where we are helping drive affordability and consumer choice. Earlier this year, we began offering Amjevita, a biosimilar to Humira at parity ensuring patients and their doctors have more options to choose from when deciding on a course of care. Recently OptumRx and UnitedHealthcare announced the addition of two new Humira biosimilars, Cyltezo and Hyrimoz to our standard prescription drug list also at parry. This increased competition for the innovator drug will result in double-digit savings for our customers. You might also recall that a year ago, we announced our initiative to offer lifesaving drugs at no cost to our customers.

This benefit is available to everyone in UnitedHealthcare’s Group fully insured commercial plans and has been adopted by more than 500 of our self-funded customers, increasing adherence, and saving people millions of dollars. Finally, another important customer innovation that is making the health system simpler is Optum Financial’s integrated card, which enables seamless access to benefits, programs, and rewards for more than 13 million consumers, who have been issued the card since we broadly rolled it out at the start of the year. Adoption and satisfaction levels have been very strong, make it much simpler for seniors to navigate the system and understand their benefits and creating a more satisfying consumer experience. These and many other results are validating our strategic approach to healthcare.

I know from my many meetings with customers that these affordability, transparency, and simplicity initiatives are resonating. They are a key reason for our continued growth in a highly competitive environment and for our confidence in maintaining our momentum as we look ahead. With that, let me hand it over to Chief Financial Officer, John Rex.

John Rex: Thank you, Dirk. Adaptability and delivering greater value for the people we serve continue as foundational elements for our enterprise. These last few months are a good example, identifying evolving market trends; moving quickly to help people get the care they need; incorporating our broad and multifaceted insights into planning and importantly delivering on our commitments to you, our shareholders. These traits underpin our confidence not only in achieving our goals for ‘23, but also as we look toward ‘24 and beyond. Before reviewing our business results, let me elaborate on the care patterns Andrew described earlier. To illustrate in the second quarter, outpatient care activity among seniors was a few 100 basis points above our expectations.

As we’ve highlighted, specific orthopedic and cardiac procedures had increased its far above that level of variation. And as we developed and filed our 2024 Medicare Advantage offerings, we assume that these levels of heightened care activity will persist throughout next year. Overall care activity among our Medicaid and commercial populations is consistent with our expectations. As always, we continue to intensely analyze trends that may indicate more severe disease progression, which could point to rising acuity. For example, in areas such as cancer or cardiovascular disease, we see no such evidence, while continuing to monitor closely. With that, let’s turn to out second quarter results. Revenue of $92.9 billion, grew by nearly $12.6 billion or 16% over the prior year with double-digit growth at both Optum and UnitedHealthcare.

OptumHealth revenues grew by 36% to $23.9 billion, driven by an increase in the number of patients served, a growing mix of patients with more complex needs and the expanding scope of care services we can offer. Operating margins reflect the higher care activity patterns we have discussed with seniors comprising a significant majority of value-based patients served. OptumRx revenues grew by 15%, surpassing $28 billion, driven by continued new customer wins and strong double-digit growth across our specialty, infusion, and community pharmacies. Script growth of nearly 7% reflects continued demand for our affordable solutions that give customers choice and simplify the pharmacy experience, such as biosimilar access and digital pharmacy tools.

Part way into the ‘24 selling season, this momentum continues with strong client additions. OptumInsight revenues grew 42% to nearly $4.7 billion. The revenue backlog reached over $31 billion, an increase of $8 billion over last year, in part due to the addition of Change Healthcare. The integration and investment activities discussed on previous calls have gone well and are setting the stage for the next phase of growth for OptumInsight. Turning to UnitedHealthcare. Our commercial business added nearly 500,000 people in the first-half and continues its growth with the ‘24 selling season indications tracking favorably. Within our public sector programs, we continue to expect growth of over 900,000 Medicare Advantage members this year. And our Medicaid performance remains strong, as we continue to support states as they initiate redeterminations.

Comprehensive outreach efforts to help individuals retain coverage are underway though it is still early as most states began this work only recently. Our capital capacities are strong. Adjusted cash flows from operations were at $10.4 billion or nearly 2 times net income in the second quarter and $15.6 billion or nearly 1.4 times net income in the first-half. In the first six 6 months of this year, we returned $8.3 billion to shareholders through dividends and share repurchases and in June, our Board of Directors increased the dividend by 14%. As Andrew mentioned, based upon our growth outlook and the trends discussed, today we were able to strengthen and narrow our full-year ‘23 adjusted earnings outlook to a range of $24.70 to $25 per share.

Within this, we expect a relatively balanced pacing in the second-half. Now I’ll turn it back to Andrew.

Andrew Witty: John, thank you. Overall, for UnitedHealth Group, looking to the second-half of the year and into 2024 and beyond. We’re confident that we’re capturing the current landscape in our planning decisions, which in turn gives us confidence in our ability to sustain the growth momentum shown in our first-half and continue to demonstrate the adaptability, performance, and mission-driven purpose of this enterprise, especially in evolving environments. With that, operator, let’s open it up for questions. One per caller, please.

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Q&A Session

Operator: The floor is now opened for questions. [Operator Instructions] We’ll take our first question from A.J. Rice with Credit Suisse.

A.J. Rice: Thanks. Hi, everybody. Maybe I appreciate the comments about what you’re seeing in the care demand. Maybe on the OptumHealth side, if you guys, obviously top line continues to be very strong there. There’s a little bit of margin degradation from first quarter to second quarter? How much of that relates to what you’re describing around senior utilization? I know you’ve got a capitated component and you’ve got a free for service component. But I think last quarter you also said that the growth in membership would be something that would pressure margin short-term, but obviously be a long-term positive? And then there’s a lot of other things in OptumHealth. Are they helping or hurting margin? Give us a little bit of flavor for what’s happening underneath the aggregate number.

Andrew Witty: A.J., thanks so much for the question. So first off, let me start off, I’m super pleased with the performance of OptumHealth overall. And when you look at the growth of that business and particularly the expansion of the number of patients who we’re now looking after in value based arrangements now about 4 million folks, but not just from UAC, but of course, from many other payors as well, really strong validation of the model that we’ve been building and you can continue to see us extend that. In terms of the margin compression during the Q really I’d say there are a couple of dynamics to that. One, is trend and you’d very much echo in the senior trend comments you’ve heard us make earlier in the quarter and I think is well understood.

A second element of that which specifically affects OptumHealth is the behavioral growth. And I mentioned that in my prepared comments A.J., around continued strong growth in behavioral. That certainly has played its part within Q2 for OptumHealth. And then the third area is a kind of, a good news story, but with short-term implication. So that’s really the growth of the membership that’s coming this year. As you know, we’ve grown very strongly this year, actually a little ahead of our expectations. We’ve also brought in a very significant number of complex patients as we invest in helping those folks manage their care better, that puts a little pressure on the margin in the short run. But that’s really laying super strong foundation stones, not just 4 million as we move through the year, but into ‘24, ‘25, ‘26.

So those three elements, the senior trend piece, the behavioral piece, and then the effect of the strong growth is really what explains what goes on. We’re going to continue to lean into that growth very assertively. A.J, thanks so much.

A.J. Rice: Alright.

Operator: We’ll go next to Lisa Gill with JPMorgan.

Lisa Gill: Hi. Thanks very much. Good morning. I just want to understand when I think about the guide to the upper end for the full-year MLR. How much of that is driven by this MA outpatient trend versus behavioral? And when I think about behavioral utilization, is that being driven by a particular population, or is it more broad-based? And, you know, how do I just think about behavioral as a percentage of your cost?

Andrew Witty: So Lisa, thanks so very much for that. Let me ask John to just context for you a little bit the balance between the senior and behavioral. And then maybe ask Dr. Decker to just give you a little bit of commentary around the type of consultation that we’re dealing with in terms of the growth.