Stephen J. Hemsley - Chief Executive Officer & Director Larry C. Renfro - Chief Executive Officer-Optum & Vice Chairman David Scott Wichmann - President & Chief Financial Officer Daniel J. Schumacher - Chief Operating Officer and Chief Financial Officer, UnitedHealthcare, UnitedHealth Group, Inc.

Bill Miller - Chief Executive Officer, OptumInsight Steven Nelson - Chief Executive Officer John Franklin Rex - Chief Financial Officer & Executive Vice President, Optum, Inc. Jack Larsen - Executive Vice President, OptumCare, UnitedHealth Group, Inc. Jeff Alter - Chief Executive Officer-UnitedHealthcare Employer.

Peter Heinz Costa - Wells Fargo Securities LLC Matthew Borsch - Goldman Sachs & Co. David Howard Windley - Jefferies LLC Sarah James - Wedbush Securities, Inc. Scott Fidel - Credit Suisse Securities (USA) LLC (Broker) Christine Arnold - Cowen & Co. LLC Brian Michael Wright - Sterne Agee CRT A.J.

Rice - UBS Securities LLC Thomas Carroll - Stifel, Nicolaus & Co., Inc. Michael J. Baker - Raymond James & Associates, Inc. Joshua Raskin - Barclays Capital, Inc. Sheryl R. Skolnick - Mizuho Securities USA, Inc. Ana A. Gupte - Leerink Partners LLC.

Good morning. I'll be your conference operator today. Welcome to the UnitedHealth Group first quarter 2016 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 and 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 April 19, 2016, which may be accessed from the Investors page of the company's website. I would now like to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Mr. Stephen Hemsley. Please go ahead..

Thank you and good morning. Thank you for joining us today to review our results for first quarter 2016. UnitedHealth Group businesses have steadily strengthened over the last several years and this trend continued in the first quarter of 2016.

Our momentum is evident in the highest levels of customer and consumer retention in our history combined with new customer acquisitions driving strong revenue gains across the enterprise; growth in the size, scope and diversity of products and services within our client base as well as a number of new customer opportunities we are pursuing; steadily improving metrics for brand and reputation and steadily rising net promoter scores across our businesses.

Customers buy value and expect results and we are sharpening our performance focus, driving the highest quality customer experiences, helping us become the go-to choice, a must-have partner for everyone looking to improve performance and sustainability in health benefits and health services.

When we combine higher quality from consistent excellent execution with practical innovations at scale, our opportunities to grow and serve continue to expand.

Our intensified commitments to quality performance and to growth on the strength of that quality positions UnitedHealth Group to look forward toward what we believe may become our best decade of performance and growth yet.

Turning to the results, we are reporting today our first quarter revenues grew 9% prior to acquisitions and over 24% overall to $44.5 billion with broad strength across the enterprise. In health benefits, medical costs were well managed and controlled as is evident in the consolidated care ratio of 81.7%.

Prior-year reserves developed favorably by $360 million in the quarter; the medical days claims payable increased four days year over year to 51 days. Cash flows of $2.3 billion or 1.4 times net income continued at a strong and reliable pace.

First quarter's operating cost ratio decreased 110 basis points year over year to 15.2% due to a combination of business mix, technology-driven operational efficiencies and the cumulative overall effects of revenue growth. These efficiency gains were partially offset by continued investments in our businesses.

Our tax rate reflected early adoption of the new accounting standard for stock-based compensation, adding roughly $0.06 per share in the quarter. You should expect it will add considerably less in coming quarters due to the natural pattern of equity-based compensation activity for our company.

First quarter adjusted earnings of $1.81 per share grew 17% year over year and our full-year revenue and per-share earnings outlook is strengthening, as Dave Wichmann will describe shortly. Since we know exchanges are in the minds of many of you, let me take a quick minute for an update.

As you know, we have been evaluating public exchanges on a state-by-state basis. We have maintained our regular public dialog with you since November about the individual exchange market and how our own experience and performance have been unfavorable in these markets.

The smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis. Next year we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017.

We continue to remain an advocate for more stable and sustainable approaches to serving this market and those who rely on it for care. With that, I will now ask Larry Renfro to review Optum's exceptional performance and then Dave to cover UnitedHealthcare and provide UnitedHealth Group comments.

Larry?.

Thanks, Steve. Optum is off to a strong start again this year, consistent with the ambitious plans we shared with you at our Investor Conference last December. Optum will again grow revenue at more than 20% and earnings from operations at above 30% this year.

We continue to estimate Optum will contribute 42% or more of enterprise-wide operating earnings this year, even considering our ongoing investments to support the future growth of this young business.

Optum's performance reflects the large-scale opportunities we are pursuing and the tremendous efforts our 100,000 employees make to deliver differentiated services and capabilities to those seeking to solve complex challenges across the healthcare system.

Our first quarter revenues of $19.7 billion grew 54% year over year or 11% prior to acquisitions. OptumRx revenues grew 72% to $14.3 billion, while OptumHealth and OptumInsight together grew revenues to $5.7 billion, which is growth of 21% over the first quarter of 2015.

Our first quarter operating margin of 5.6% includes the continuing increase of pharmacy care revenues as you have seen in the past two quarters. Overall, Optum produced $1.1 billion in earnings from operations. As you may know, we identified five drivers for Optum's growth over the next five years.

They are pharmacy care services, care delivery, technology, government services, and international. Last quarter we spent some time on a more detailed review of care delivery. Today we will focus on pharmacy care services then follow up briefly with data analytics. Pharmacy care services is a high priority area for us.

This focus goes back from 5 years to the original decision to undertake the largest and arguably most complex business in-sourcing ever attempted. It required significant investments, precise execution and flawless delivery. As you know now, it has been a real success.

Last year we took another step, our combination with Catamaran led by Mark Thierer who now heads our entire OptumRx platform and serves as a senior member of our overall Optum leadership team. This combination was a significant advance of scale and today the business is running at over 1 billion scripts annually up from 350 million in 2012.

Eight months in, the greatly expanded OptumRx is advancing a meaningful differentiated solution for clients in the marketplace with distinctive capabilities around patient centered data analytics, new capabilities in specialty pharma such as home infusion and workplace related resources.

Since we came together our retention rates have persisted in the high 90%s and we are building our largest ever pipeline of opportunities. We were pleased this quarter to announce an innovative partnership with Walgreens to which we are creating a 90 day at retail pharmacy offering.

This is all about meeting consumers where and when they want whether that means home delivery or walking into the local Walgreens store. Together, will provide choice and cost savings to our clients as we work and benefit together in a meaningful more collaborative way.

We are enthusiastic about the potential of the extension of our relationship with Walgreens, the largest retail pharmacy in the U.S. Overall, this year we expect OptumRx to generate more than $58 billion in revenues and manage nearly $80 billion in pharmacy spend for our customers including $30 billion in specialty drug spending.

Pharmaceutical spending comprises 12% to 15% of the overall cost of health benefits and has been the traditional focus of the pharmacy benefits industry. We find that focus much too limiting when it comes to improving health and healthcare overall. The impact OptumRx has on healthcare and its cost has the potential to be profoundly broader and deeper.

Here you have the most frequent consumer touch point in all of healthcare, one that provides great visibility into the full healthcare continuum.

An individual's engagement with OptumRx becomes more impactful when we break out of the one-dimensional procurement and formulary arbitrage model of today and open up providing consumers integrated medical and pharmaceutical services.

In the process, we help reduce unnecessary overall systems utilization including ER visits, hospital admissions and readmissions and provide more effective and timely interventions to improve adherence and health outcomes. That's the value proposition of the future we are focused on.

Employers using our integrated and technology enabled approach can save in excess of $120 per member per year across their combined medical benefit.

In summary, our objective for the impact of this business goes far beyond traditional pharmaceutical management to where the potential to influence both the consumer and the health system for the better is much greater. That is why pharmacy care services are core to our growth and value story over the next decade.

Optum also is delivering differentiated value from our work inside the health systems. Our second core to our growth are unrivaled existing capabilities in healthcare data science and analytics. Companies new to the space are excited about the potential that someday these forces will vault healthcare into a new age.

For Optum's customers, that someday is today. We are meeting their critical needs right now. We are the leader in using advanced technology and predictive analytics to connect stakeholders across the care continuum with the insights to better manage the health of populations and the resources they depend on.

Our continuously updated, integrated and curated clinical and claims data asset comprises more than 80 million lives of robust clinical data and 170 million lives of claims data. We can see from both sides.

Beyond the 250 million clinical and administrative lives, our diverse and comprehensive data set includes 8 billion lab results, 4 billion determinations and 3 billion medical procedures. We can provide a real-time clinical and financial picture that is fully integrated and spans years of longitudinal detail.

Our health data resources continued to grow securely and responsibly every day. Today, our analytics products are helping thousands of care providers. And ultimately, the millions of consumers they serve translate data into action and action into better medical outcomes.

Today, not someday, we help our customers step up from reacting to challenges to designing and implementing actions that reliably lead to better health delivered at lower cost.

Today, we are delivering the wealth of information, analysis, and positive benefits of big data with results that include double-digit improvements in critical performance factors like utilization and chronic disease control, which in turn empower care providers to adopt and succeed in new models of care and related new revenue streams.

Today, we lead the way in implementing predictive analytics in healthcare because healthcare is all that we do. Healthcare technology and data analytics have been our specialized focus for years.

So while others learn to crunch large amounts of static data, Optum is fully integrated into the live flow of healthcare transactions, enabling us to provide up-to-date useful information that makes the healthcare system more intelligent and enables it to act that way. Now, let me turn it over to Dave..

Thank you, Larry. As we open 2016, UnitedHealthcare's momentum continues. Strong new customer growth and historically high retention levels reflect the competitive value UnitedHealthcare offers in the marketplace.

Quarter by quarter and year by year, we continue to gain new customers and retain valuable established customers who choose the combination of our more engaging consumer experience, distinctive service, product innovation, and integrated clinical and network value.

People using our modern consumer-based benefit designs are supported by actionable information available at their fingertips, enabled and delivered by advanced analytic capabilities, as Larry just described, increasingly channeled through consumer and care provider-friendly mobile technologies.

Employers continue to be drawn to well-managed competitive cost trends, physician and consumer engagement, and value-based arrangements for care delivery.

We partner with our largest customers to benchmark performance and design customized plans that help them advance year by year along the continuum of ever-improving benefit performance and heightened consumer engagement. And we are serving individual patients and overall populations with more complex medical conditions.

Our coordination of services and ability to close gaps in care significantly increase the value we bring to consumers and customers. Simply put, the greater the level of patient needs, the more we can help. As a result, we continue to deliver exceptional organic growth.

Our U.S.-based benefits businesses grew organically to serve 1.3 million more people with medical benefits in the first quarter, and that brought organic growth to 2 million people in the past year. Looking at commercial markets, we are up about 700,000 people in the quarter and 1 million people since March 2015.

First quarter 2016 delivered diversified growth across self-funded national accounts, public sector, small groups, middle-market businesses, and individuals. Turning to exchanges, as we expected when we spoke with you in January, we grew roughly 300,000 lives through the first quarter and served 795,000 people on public exchanges as of March 31.

We expect that level to decline to around 650,000 by December. Through this first quarter, we have seen no change in our estimates of cost from the 2015 exchange period.

This quarter, with the majority of our 2016 exchange members new to us, we have been appropriately cautious in our reserve estimates, reflecting an additional $125 million in full-year 2016 exchange losses. These were fully absorbed in this quarter and fully considered for the year in our guidance range.

And as Steve mentioned, we do not anticipate financial exposure to exchanges in 2017. In Medicare, the value of our Medicare Advantage offerings continue to resonate, differentiated by the stability of our benefits, networks, membership, and distribution systems.

We offer seniors clear value and a consistent modern consumer experience, all of which drive new growth as well as strong consumer retention. This strength is reflected in our first quarter membership growth of about 300,000 seniors.

Medicare is a consumer business, with seniors receiving a variety of outreach approaches focused on better and more consistent care, such as receiving home visits, and benefiting from our personalized, compassionate, and education-focused consumer service. In 2015, we helped close 9 million gaps in care for seniors we serve.

And we expect nearly 65% of our members to be in a four-star plan by 2017, with further improvement in that percentage in 2018 to 80% or more. We believe our Medicare prescription drug benefit business will be much better positioned for 2017.

We've pulled back in a number of markets this year to reposition products and added membership and the new product potential via a modest acquisition in the first quarter. Our Part D membership decreased 70,000 people in the first quarter and should decline by another 200,000 or so by year-end.

This suggests we will serve 4.7 million to 4.8 million people by year-end 2016, considerably better than what we projected last December. And we expect to return to growth in Medicare Part D in 2017. Switching to Medicaid, managed care serves as the most effective proven tool to ensure budget sustainability for state Medicaid programs.

This financial predictability along with the ability of managed care to expedite systems transformation, comprehensively integrating care while addressing social determinants, has resulted in an unprecedented level of procurement activity.

Of special note is the significant increase in the volume of opportunities for populations with more complex needs, such as people served by long-term services and support programs.

The recent award of Nebraska's integrated health, behavioral, and pharmaceutical model reinforces these expected trends in procurement to include more populations with more complex needs and to look to integrated solution to address state's needs.

Our expectation for continued expansion of opportunities to serve all Medicaid populations was reinforced by our recent award in two California counties and across our community and state business the addition of 145,000 people in the first quarter. Let me now touch on the outlook for UnitedHealth Group as a whole.

Building on the strength of our first quarter, we expect full year revenues of approximately $182 billion, up from our prior outlook of $180 billion to $181 billion led by strength in OptumRx and UnitedHealthcare Employer & Individual.

Strong first quarter results combined with a slightly lower tax rate for the balance of the year and the impact of recently completed acquisitions allows us to increase our outlook for adjusted net earnings by $0.15 to a range of $7.75 to $7.95 per share. We continue to foresee cash flows approaching $10 billion.

As you know, we expect Optum to grow full year operating earnings by more than 30% in 2016. We continue to expect seasonality to be a factor in our overall earnings results.

Similar to years past Optum expects to generate in the area of 60% of its operating earnings in the second half of the year while the current consensus view appears to be modestly more first-half biased.

Taken together, this suggests that updates for full year UnitedHealth Group earnings per share estimates after recognition of our first quarter performance would most appropriately be focused on the second half of this year. Turning to capital, we closed the quarter with a strong balance sheet.

We expect share repurchase activity to be more pronounced in the first half of this year with the second half focused on debt reduction toward targeted levels and we will see our dividend levels – we will address our dividend levels at our June board meeting as we do each year.

Steve?.

Thank you, Dave. Today we are in a strong position at a unique moment in time. We have the opportunity to considerably elevate our performance around quality and customer satisfaction, delivering greater value and driving unparalleled organic growth across our entire franchise. While remaining as always disciplined on pricing and cost management.

We are focused on delivering higher quality at every touch point with every customer and consumer, doing this well elevates customer trust and loyalty, loyalty that becomes the foundation for an extended period of growth benefiting consumers, society and shareholders.

We're intensely focused on this agenda and expect it will produce strong clean results in 2016 and a positive view of opportunities in 2017 and the decade to come. So thank you for your interest today. And operator, could we please open for questions, again one per analyst please this morning. Thank you..

And we can take our first question from Peter Costa with Wells Fargo. Please go ahead..

Good morning. Thanks for the question, nice quarter.

Can you explain to me a little more about what's going on with the individual exchange business? You've given us a lot of information, but it sounded like you said $125 million added to reserves, so that would be like $0.08 of earnings pressure this quarter, and I think you talked about only $0.15 of earnings pressure for the whole year previously.

So I'm trying to understand whether that was all earnings pressure this quarter or was that coming out of the PDR? What's the PDR value today on the balance sheet, maybe would help.

And finally, how does the withdrawals at the various state levels impact what you're doing with Harken Health?.

So let me go with the – so I'll have Dan respond to the first part of this, I'll just indicate that Harken is a small and interesting innovation that we are considering and we will stay with it, again it's in a very modest pilot position.

So it really doesn't affect our review of this in terms of the way we're thinking about our positioning on exchanges on a state-by-state basis. We will be down to, again, a handful of states that we will be actively participating in the exchange.

Dan, why don't you just give them the overall baseline in terms of the exchange P&L outlook?.

Sure. Good morning, Peter..

Good morning..

So let me – why don't I recap what we shared with you in our prior conversations and then talk specifically about what we're updating today. So in January we described an expected combined loss for both the 2015 and 2016 policy years of $1 billion.

Inside that, the 2015 policy year loss was $475 million, and that number, as Dave mentioned, remains unchanged. Obviously, the balance related to the 2016 policy year, so at that point was estimated at $525 million. Today we are updating our full year outlook for the 2016 policy year to a loss of $650 million.

So that $125 million increase was fully recognized in our first quarter financials and not surprisingly our PDR, as you asked, did increase over the course of the first quarter.

As we look at it, our enrollment is very much in keeping with our expectation at that 795,000 lives on the exchange specifically, and I'll tell you that well over half of that enrollment is new to us this year.

So as we look at it, the early indications on the health status of the members appears to be a little bit worse, so we are being appropriately cautious in updating our full year outlook and recognizing that additional $125 million in the first quarter financial results.

In the month of June, importantly, we will have a first indication of how our risk scores actually compare to the industry and we will look forward to updating you further at that time with regard to our individual ACA business. Thank you..

That's really helpful.

And then how much is the PDR value exactly now?.

It's bigger..

What we're trying to convey is that we added $125 million to the quarter and added for the full year. So the PDR has increased. We weren't going to get into the exact amount of the PDR in this morning's. Maybe we can take that off line through the course of the day..

Okay..

Next question, please..

And we'll take the next question from Matthew Borsch with Goldman Sachs..

Yes. I was hoping you could help us understand the prior year reserve development figure, how that breaks out? It's obviously a lot larger than what you had a year ago.

How do we think about that benefiting or not benefiting the first quarter earnings? And if you can just give us any detail on where that came from?.

Sure.

Dave, you want to handle that?.

Sure. Thank you, Matt, for the question. The prior year reserve development in the first quarter of 2016 advanced explicitly by about $220 million or so, and that on a comparative quarter basis. That influenced our MLR favorably in the quarter as well as our EPS as well.

The development, although I won't get into the specifics of how that's broken out by line of business, it was pretty broad reaching across all of our lines of business, and really is reflective of what we experienced in the fourth quarter as well, which is the delayed realization of affordability efforts and end market initiatives that we pursued in UnitedHealthcare in the back half of 2015.

So we're very pleased with how our trends are developing consistent with the forecast that we provided you before and obviously this is a favorable development in the quarter..

And last year's first quarter was actually unusually low.

Dan, do you have anything else to respond?.

No, the only thing I'd highlight is just add a little bit more color on some of the things that are contributing.

As we look at trying to drive greater value for customers and consumers that we serve, some of the areas not surprisingly we've talked to you about at length in the past, our focus on inpatient management is ever present, 2015 marked our seventh consecutive year of absolute reductions in both admissions and bed days on a per capita basis and that's true across all of our lines of business.

But we also extend that work into other areas with particular focus around outpatient because it's one of the bigger drivers of cost and making sure that we're driving care to the most appropriate setting and likewise looking at out-of-network spend. So there's some context, Matt, on some of the things that we're looking at.

And as you look at the contribution to the quarter, I would tell you the change in the development, the majority of that, was P&L impacting to your question..

And I think if you look over....

Okay, thank you..

If you look over the last four years you'd say this quarter was more normal and that last year would be more of a low outlier. Next question, please..

The next question comes from Dave Windley with Jefferies. Please go ahead..

Hi, good morning. Thanks for taking my question. Larry, you're very good at boiling things down to bullet point lists.

I wondered if, in this data analytics conversation, you could talk about the audiences that are consuming your technology in data analytics and I'm interested in the breadth there, and perhaps where you see the most significant untapped opportunity for monetizing the data and analytics?.

Do you want me to take it?.

Yes..

Dave, it's Larry Renfro. I'm going to ask Bill Miller to comment on this and he'll take you through into some of the specifics of areas that we are talking to and people we are talking to.

But in general, across the – nationally, obviously, we are working with everybody on the provider side as well as we are also working with our own programs internally at UHC. So we've got a good start in terms of how we're using the data, the analytics. it's a key, key component in terms of how we're headed for the future.

Bill?.

Yeah, I'd say just to follow-up – and I appreciate the question, Dave. If you look at our history, we've got decades of experience really using analytics as a foundational tool to build a lot of businesses.

And when you ask about constituencies that we serve, it ranges, as Larry mentioned, from providers, payers where we're particularly strong, but also government, pharma who we've been servicing for a long time, and now more recently, consumers and employers.

Just to give you a flavor for some ways that they're consuming these analytics, I mean, from a payer and provider standpoint, people have been using our analytics to close gaps in care on a monthly basis. We fire off 131 billion rule-based decisions every month to help close gaps using our tool like Optum One, which you've heard a lot about.

It's really crunching and assessing both clinical and claims data to predict where we're going to see people that need interventions, and those interventions are additive to the tool and how we've extended it in terms of being able to action it where we can actually go out and prove where we've shown how our interventions intercede in people having strokes, people having heart attacks, and what that saves not obviously is good for the patient, but obviously good for the system.

Our revenue cycle analytics actively are taking out friction between payers and providers, speeding up payment, driving more accuracy and improving the financial conditions of both payers and providers.

So I could go on and provide a lot examples, but they range from strong financial performance that our analytics drive to clinical performance which really drive better outcomes and lower costs..

kind of those that really affect clinical encounters and outcomes so they're kind of more in the Optum Care domain, where you can really drive performance; and then those that are broader system-wide, which might be more in the Optum360 domain.

And then the other thing I'd say is that we're in the early stages because the process of those who are interested in these analytics are really just getting going and being able to use them at their full value in terms of the real-time speed they operate at, et cetera, because they're used to things that are much slower, agreed?.

Agreed, and I think that's where we've seen a lot of the uptake, Dave. As reform has hit, it's the need for speed, the need for action, the need for having tools that actually allow you to take, affect, and move the needle with respect to cost, quality, and outcomes is critical in how they integrate with other systems..

Whether they're at a consumer level or whether they're at a system-wide level..

Right..

And so that's why I think we're in the early stages but have such a well-established base in this, so I would think that there will be continued evolution and growth to come from this..

Very good, thank you..

Next question, please..

We'll go next to Sarah James with Wedbush Securities..

Thank you for the question.

Can you speak to some of the one-time pressures on MLR? So how much was the leap year impact? With the PDR, would there be any pressure on MLR from exchanges that may fall off next year? And how did the four cost buckets end up versus your expectations?.

Sure.

Dan, do you want to touch on that?.

Good morning, Sarah..

Good morning..

So as you look at the consolidated care ratio, so we reported 81.7% in the quarter this year, and that compared to last year, it's about 30 basis points increase year over year.

As you look inside that, the biggest factor driving the increase was the additional calendar day, and second would be then the exchange impact, and that being partially offset by the change in reported development on a year-over-year basis. I think the last part of your question was on cost categories.

Is that what you said, Sarah?.

Yes, the four cost buckets, inpatient, outpatient, Rx, physician, how do they trend versus expectations?.

Good. So as we looked at our medical costs in the quarter, they were – we had expected coming into the year a moderate increase in the trend, the underlying utilization trend, and I'll tell you in the first quarter we were able to manage to that outcome and so very consistent with it.

On a category basis, I would tell you that I wouldn't spike out any change relative to the guidance that we provided at the investor conference back in December. And we continue to expect on the full year a commercial cost trend in the range of 6% plus or minus 50 basis points..

And you're seeing pressure in the usual places, outpatient, specialty?.

Yes..

Testing?.

Yes..

So nothing really changed..

No, very consistent with what we described in December..

Thank you..

Next question, please..

We'll go next to Scott Fidel with Credit Suisse..

Thanks. I'm wondering if you could give us some indicators on how the risk mix is looking on the new Medicare Advantage lives. It looks like United has added around – accounted for around 65% of the growth in the MA market.

So I'm just interested in terms of as you track that, if you can give us some details on how risk scores are looking on the new MA lives. And then in terms of the mix of those members that are coming from competitor share gains as compared to attracting them from fee-for-service? Thanks..

Steve Nelson?.

Sure, thanks. Good morning, Scott. We're really pleased with the growth that we saw in both the open enrollment period, but also in our outlook for SEP, the special election period.

And this growth is a result of the hard work we've been talking to you about over the past two or three years around – and putting ourselves in a position to offer stable benefits.

But the work around improving our stars, engaging our network differently and aligning incentives, really good engagement with our distribution system, and then innovations in our member experience have all led to not only strong sales, but it's important to note, strong retention as well.

So the vast majority of our membership is retained membership, membership that we have great experience with. But in terms of the mix across – and the different categories that I would think about in describing our mix is around geography, which is very broad-based.

The growth came pretty evenly across our geography, so that was very much in line with our expectations. Our new to Medicare population, we're seeing actually that population choose Medicare Advantage more often, the percentages growing there, and we see that sequentially.

That's our experience, but that again is very much in line with our expectation. And then the new-to-us category, which folks that have just enrolled in other plans and enrolled in one of our plans again is very much in line with our expectations.

So we're seeing a really strong performance in this business over the first quarter, and we expect to build on that. And our outlook for growth in 2017 is really strong in both – I should mention in both the individual and the group retiree segment as well, as we're seeing a really strong pipeline there..

So really what I'd say is in three dimensions, well dispersed geographically, well mixed between new to Medicare and new to us, and then a good mix between individual and group, so stable group..

Got it. So it sounds like broad-based pretty much across all the channels is the bottom line..

And I think the point you made about how well dispersed we are geographically is key, so good question. Next, please..

Your next question is from Christine Arnold with Cowen. Please go ahead..

Good morning, thank you. You mentioned that international is one of your five major pillars.

Could you speak to where you expect to see the growth, where you're seeing the opportunities in international? And how is Brazil doing?.

Sure. They actually, I think, are two different categories, so I'll ask Larry to touch on international because I think when we talked about it in the context of growth it was more on the Optum side. And then Dave can touch on Brazil..

So, Christine, it's Larry. I think we sized back at the investor conference in December, we sized that market as being about a $500 billion business. This is a marathon, it's not a sprint. We are getting established. We have actually been in the UK for about 10 years. But what we're really engaging in today is much broader.

It's down the lines of integrated care. We're working with the trust, and in the UK the trust would be the hospitals. We're working with what's called NHS Improvement. They're the organization that really monitors the trust. We're working with NHS. We're working with the Prime Minister's office, the Department of Health.

So we have a variety of programs that we have underway, and we believe that we're pretty well-positioned at this point to bring a lot of the products and services that we actually have in the States.

I didn't want to interrupt the conversation a few minutes ago about the data and the analytics, but that also is a very, very good area for us to introduce, and we're working to do just that as we speak today.

Dave?.

Hi, Christine. It's Dave Wichmann. So just specifically a few comments on Amil and the activities we've undertaken. The business remains profitable as it was last year. Similar to last year, it's continued to become more and more competitive in the market and I'd say the market segments that are the most attractive in Brazil.

And the performance improvement across the business has been substantial. We have put in very strong pricing and cost containment disciplines. We've improved our service substantially down there, I'd say, to more of a kind of a UnitedHealthcare-style service approach, but in Brazil.

Our Net Promoter Scores in the market continue to advance, and we have a more extensive and better performing healthcare delivery company broadly, so I'd characterize that all as a stronger foundation. Obviously, we're still impacted by the devaluation of the real.

That affects both our revenues and then you can see it there probably best, where in local currency, we have a 16% increase in our revenues, but when you translate into the U.S. dollars, it's a 15% decrease.

And I think it's obvious that the economy is not particularly strong there, companies are struggling, middle class is flat to declining slightly, and obviously the political situation is unsettled. It certainly doesn't help things a whole lot. So we are pretty measured in terms of our view about Brazil right at this point in time.

We are competitive, like I said, in certain segments and we are focused on our growth in those segments, and we are growing. We do have a fair amount of in-group attrition right now as employment levels decline on a – at an employer-by-employer basis, but we are seeing growth underneath all of that, which is very encouraging.

I think most important, really, as it relates to Amil is that we've – not only are we a strong insurance company, but we've created a strong healthcare delivery company throughout the course of the time that we've owned Amil and we see that as very positive positioning in that market and a meaningful source of our overall performance advance expectations here in 2016..

So profitable despite the economic stress, not particularly helpful political environment, but continuing to actually fare well and growing as a – in terms of its dimension as a delivery system, which I think is distinctive in that market. Next question, please..

And we'll go next to Brian Wright with Sterne Agee CRT..

Thanks for the question, good morning. The last time I think you all updated the market sizing opportunity for Optum was back in 2011 at over $500 billion.

Do you have any updated thoughts on what the size of the opportunity is now?.

Sure. It's Larry. Brian, we have sized the – and I'm going to turn this over to John Rex. I'm probably going to answer the question and then he won't have anything to say, but the domestic side today, we would size at about $680 billion, and the international side at $500 billion. So you're looking at $1.180 trillion that would be the market size.

I don't know, John, do you have anything?.

No, that's accurate. That's where would be in terms of the current view of domestic, up from the initial $0.5 trillion. And you think about that growth across, you know, at that point, we talked about eight markets. I would say that there's been growth across all those markets.

I'd highlight areas really probably in such as care delivery and kind of technology is among those areas that have been growing among the faster since we last provided that. But kind of a proportionate movement in terms of the area that we spiked out a few years ago..

So next question, please..

Thank you..

We'll go next to A.J. Rice with UBS..

Hello, everybody. Maybe I'll just ask about the acquisition pipeline and the opportunities. It looks like you spent about $1.7 billion in the quarter. I know there was – I've read about the Symphonix deal. I wonder if you could comment on some of the other opportunities that you've seen and taken advantage of..

So maybe we'll talk a little bit about the M&A activity we have done. We typically don't comment on where we're going in these areas for a whole host of obvious reasons, so our comments in M&A are more retrospective than they'll be prospective..

A.J., thanks for the question. It's Dave Wichmann. So our acquisition pipeline and our acquisition activities are really focused in a couple of areas in particular.

Obviously, we just got done talking about the size of the services market globally, and so we continue to invest capital to access or broaden our capabilities across Optum and then to also establish a foundational market position, so it can grow from there.

We also see interest in the – still in the international markets, although our activities there have dampened just a bit given the – how those global markets are performing overall. And of course we still have interest kind of broadly across our business.

We haven't done much in the health plan space in quite some time because of all the work that we've done over the course of the last two decades to establish strong market presence as well as strong presence in each Medicare, commercial and Medicaid. But certainly we would continue to consider those things in the future.

As it relates to the first quarter, I think folks know that we funded the Helios acquisition at that time, which is a workplace health PBM, in the first quarter. We also, as we have indicated in the past, have a strong interest in continuing to develop our OptumCare business. And so there's a small acquisition inside there as well..

Okay. Thanks..

No real change. The same basic agenda, looking at capabilities, looking to build out the platforms. Probably on the international side there might be more opportunity in services and benefits at the time, so good question. Next, please..

And we'll go next to Tom Carroll with Stifel..

Hey. Good morning. So question on the tax rate and the intangibles comments you had in your prepared remarks and the press release today.

What should we think about as the tax rate going forward from here for the rest of the year? And what do you think is the sustainability of the benefits into 2017?.

Tom, it's Dave Wichmann again. So thanks for your question. The tax rate change is really because there was a new accounting pronouncement that came out in March, which we think has a $0.10 impact on the full year of which we recognized $0.06 in the first quarter.

The pronouncement wasn't required to be adopted until 1/1/2017, but as is often the case, if we're prepared to adopt, we go ahead and adopt early as allowed by the pronouncement.

The sustainability of that is this is going to be a little bit of a challenge, I think, broadly for companies because what it does is subjects your tax rate or your tax position to more of a period type cost or some more volatility overall in the expected effective tax rate, and in part because it has to do with the combination of the performance of your stock and then also the timing of option exercises as well as stock-based plans, either vesting and/or becoming available to employees at given points in time.

So there will be a little more volatility in the rate. We expect the full year rate to be in the neighborhood of about 41% or so for the full year 2016.

And we'd expect on that at least this impact, if you will, of the new accounting pronouncement to be pretty consistent year-after-year, depending upon, again, how the stock price performs as well as the vesting activity underlying our equity-based plans..

But it is a year-by-year proposition and so long as you have equity-based compensation and a belief that your stock is going to continue to perform, there will be tax benefits that come through and then they'll just come through quarter-by-quarter.

Right?.

These used to go through equity in the past, so they're now just going through the P&L. And one other question you might have, just to make it clear, why is it $0.06 in the first and $0.04 in the balance of the year, and it is just the timing of the way in which we issue equity in our business, which is generally in the first quarter..

Great, thank you..

Next question, please..

We'll go next to Michael Baker with Raymond James..

Yeah. Thanks a lot.

Larry, I just wondered if you could you update us on your retail care, neighborhood care model in terms of giving us a sense of what number of locations you're up to, and if the target is still kind of 25 to 30 clinics a year?.

Sure. I'm going to ask Jack Larsen to join in this conversation. But that target, as you said, of 30, I'd say we might try to be a little more aggressive about that.

If we kind of back up and we kind of look at our business and I think you're pretty much aware of this is our overall business plan, we're trying to be in 75 markets and we're balancing how we do that through acquisitions, through startups and so forth.

So we are progressing on target, and our expectations are that we will continue to grow and that's one of the areas, as Dave mentioned, that we will be looking to have acquisitions in, more along the care delivery side, but from I think you're speaking more about the urgent care and what we're doing there.

So let me turn it over to Jack and let him answer this question..

Thanks, Larry, and good morning, Michael. Yeah. I would just amplify what Larry said, we do have aspirations for rather smart growth with our standalone neighborhood care centers. I think from a consumer and retail point of view we're seeing great receptivity for the units, the kind of services we offer.

And look, one of the more important determinants of overall healthcare cost is where a consumer enters the healthcare system, and we think what it is that our neighborhood care centers offer with respect to the portfolio of services and retail orientation of it, really hits the mark in a number of ways..

And then just one quick question.

At some point should we expect the rebranding effort to come under the Optum banner, or is that not necessary given the local dynamics that are out there?.

We're always studying that, but what I would tell you, and I think you know this pretty well that this is all about local care delivery and being in local communities. So the brand is pretty strong in the different areas where we work.

We do brand it as Powered by Optum and so forth, but those things are six of one, half a dozen of the other, so we're going to have to watch that for a period of time before we make any decision about full branding..

Thanks for the update..

And we'll go next to Josh Raskin with Barclays..

Thanks for fitting me in here, guys. I want to talk about the commercial business. The membership numbers came in a little bit stronger than we were looking in the first quarter, so curious where some of those gains are coming.

And then I'm really more interested in the 2017 national account selling season and what you're seeing there, how customers are reacting to the potential mergers for some of the two or four of the bigger companies out there? And maybe, are you just seeing more accounts put out RFPs, or do you think retention levels for the industry will be similar and maybe this is a 2018 event?.

Let's do the first one first with Dan, and then maybe Jeff can comment on the national business scene..

Sure. Thanks, Josh. I appreciate the question. Certainly in the quarter we had very strong growth in our commercial business. It was well balanced across both funding status as well as geography, and then within that by line of business. As we talked at the investor conference, you can look at the fully insured result as an example.

The results inside there are actually muted a little bit by a large customer in a third-party exchange that went through a funding conversion.

So if you actually adjust it for that, you'd see inside there really are strong growth in our small and middle market, and we continue to see customers responding to the value proposition that we're offering in the market. And we also see from a pricing standpoint our competition moving more in line with us.

So as they orient more around a future outlook of cost that resembles something closer to reality, what we see is that we're becoming more competitive, and that market frankly favors is..

Jeff?.

Sure. Good morning, Josh. It's Jeff Alter. The national account selling season is probably just cost of the cycle. It's down from the last few years. There aren't a lot of large clients out to bid. I think part of that is the industry does a lot of proactive renewals, the same as we do, to keep some of the large clients from going out to a full bid.

It's early. The market is sizing up now, we're in a season of the finalist meetings. Probably by June we'll get a better sense of where we're positioned and how that market is shaping up. But it is a selling season marked with a lot of smaller cases as opposed to some of the past seasons that had some fairly large clients out to bid..

So no real impact from any of the pending mergers, is that fair?.

Fair now. I'll probably update you a little bit better once we get through the finalist season and some of the post-finalist discussions..

Okay, thank you..

That may be more a dynamic to the next year..

Thanks..

It's probably more a dynamic next year. So maybe we only have time for maybe two more questions. So next, please..

We'll go next to Sheryl Skolnick with Mizuho Securities USA..

Hello, gentlemen, thank you very much. And as always, it's a pleasure to look at your earnings release. So I'm going to step back from some of the important details we've been discussing and focus on the question of how UnitedHealth Group, Optum, and UnitedHealthcare are integrating, which is always one of my focus areas.

But in particular, my concern is that the cost out of pocket is very significant for the consumer. If you go on the exchanges and you try to price an individual policy, it can cost you $38,000 without subsidies.

Similarly, if you're insured by an employer, your out-of-pocket costs rise every year, yet Optum is clearly influencing through tying its analytics and services to the actual provision of care and changing that process. Optum is clearly influencing United; it's clearly influencing the market.

When or how can United take a leadership role to revolutionize or take that next step to revolutionize the benefit and cost structure so that we consumers can actually see it in our pockets and United can gain share and then really dominate the market?.

That is quite a question, and I admire the direction of it. But maybe I could only respond to it in the broadest context..

That would be great, thank you..

If I were to take some of the national account clients that we're privileged to serve and who have been more progressive adopters of the entire breadth of capabilities that we can bring to them and then working with them cooperatively and then working with them in terms of how they are engaging their consumers, if you will, you actually see distinctive performance patterns.

And you see them distinctive in terms of, I'd say, two dimensions, better use of the healthcare resource system, resources in total, and a year-by-year improvement in the consistency of that pattern of usage, and improvement in their overall health status as they embrace with and get comfortable with programs that are more consumer-friendly and easier and, as you suggest, fueled with data analytics that are now really positioned that they can actually act on them and the whole spectrum of what we have been talking about that some of the things that we are doing and capabilities we're putting in the marketplace on a real-time basis.

The marketplace is adjusting in terms of how do I exactly use these. They know directionally how they want to use them.

I don't know if they are nuts and bolts to quite that point, but these more progressive clients have had distinctively better cost positions and distinctively better patterns of consumer decisions, resource utilization, and health status, wellness.

If we can translate that from those venues to the more progressive – to make them more progressive in other sectors of the marketplace, and I think about the large government sectors because they have the same attributes as large health employer sponsors. They are sponsoring large populations. They have more influence on how these programs go.

Then you begin to get into the water with respect to consumer behavior and you get into the water with respect to care provider behavior. And those kinds of developments I think can really establish these patterned measures, can really drive change. And clients are seeing it, states are seeing it, governments are seeing it.

Some of Larry's commentary with respect to international is showing some of these patterns to international governments that have arguably a different healthcare system.

And their response to these things and then the whole idea that the technology is now capable of doing this at such scale and such speed and doing it down to a mobile expression, whoever uses that mobile expression, whether it's a care provider or a consumer, those things are playing out.

So we are in the early stages, the best way to see it is in the large national accounts. And then, believe it or not, you can see it in some of the things like Medicaid, where you can see large state sponsors that once they really get these programs in a mature state, are driving distinctive results relative to the populations they're serving.

The next stage is really getting this directly to the consumer. And I think there, platforms like Rally really represent the first generation of a way to actually jump over and really get in the consumers' head using these applications and things like that. And I think this is just the beginning. So that would be my reaction to it.

I don't know if we can react in a more granular way. So I thank you for that question and next question, please..

And we'll go next to Ana Gupte with Leerink Partners. Please go ahead..

Yes, thanks. I appreciate you fitting me in.

On the Medicare rate, could you give us your thoughts for 2017? Any reactions to the 0.85% post the fixing of the error, the risk coding changes, and the impact on your partial and full dual mix of business, the employer group waiver plan? And then on the HIF, the tax holiday, do you see that flowing through to seniors and accelerating industry growth? And how does that all impact your book of business for 2017? Is it about a top line or margin expansion?.

I don't think we're going to get into – we typically don't get into the nuts and bolts of the Medicare rate. We would again kind of express disappointment that the funding patterns that Medicare has been using for Medicare Advantage seems to under-fund a program that is so well embraced by seniors and so effective at serving them.

So we continue to advocate for more consistent and more market-oriented funding for that. So, Steve, I'll – beyond that comment, offer your response to that and then the – her second question..

Sure. Good morning, Ana. It's Steve Nelson. I'll just make a couple comments to add to Steve's there, beyond the rates, a little color around insurer's fee and the changes to the group benefits. With respect to insurer's fee, to step back a little bit, our goal is to provide predictable and stable benefits to seniors.

It's something that we were able to do this year and that's I think going to be important over the long run.

So as you know, we're in the midst of benefit planning right now and that is going to be one factor that we consider amongst several other factors in our pursuit of this goal to offer stable benefits in what, as Steve accurately described it, remains an under-funded environment in 2017.

So it will be something that we'll consider and be able to talk more about after we get through our planning season. In terms of the group, change to the group benefit, while we're disappointed in that change, it remains – I would just say the value to the retirees and employers who are trying to find solutions for the retiree population.

Medicare Advantage remains a very strong value proposition, and we're seeing that actually play out in our pipeline development and as we look towards 2017 as one of the strongest in years.

So there's a lot of work for us to do in terms of continuing to advocate for seniors on behalf of this very popular and effective program, and we're going to continue to do that. Thanks for the question..

So that's the end of our questions. So just in closing, I offer that we have a unique opportunity to serve more people in more meaningful ways in distinguished UnitedHealth Group, Optum and UnitedHealthcare through the quality of our work.

And as we elevate our focus on quality service to consumers and customers, we expect broad-based growth to follow. So we thank you, and that concludes our call this morning. Thank you very much for attending..

And this does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day..