Stephen J. Hemsley - Chief Executive Officer & Director Larry C. Renfro - Chief Executive Officer-Optum & Vice Chairman, UnitedHealth Group, Inc. David Scott Wichmann - President Steven Nelson - Chief Executive Officer, UnitedHealthcare Medicare & Retirement Daniel J.

Schumacher - Chief Operating Officer and Chief Financial Officer, UnitedHealthcare, UnitedHealth Group, Inc. Tami L. Reller - Chief Financial Officer, Optum, UnitedHealth Group, Inc. John Franklin Rex - Chief Financial Officer Mark A. Thierer - Chief Executive Officer, OptumRx, UnitedHealth Group, Inc. Austin T.

Pittman - Chief Executive Officer, UnitedHealthcare Community & State, UnitedHealth Group, Inc. Jeffrey Berkowitz - Executive Vice President, Optum, UnitedHealth Group, Inc. Michael Weissel - Executive Vice President, Optum Consumer Solutions, UnitedHealth Group, Inc Bill Miller - Chief Executive Officer, OptumInsight, UnitedHealth Group, Inc.

Jack Larsen - Executive Vice President, OptumCare, UnitedHealth Group, Inc..

Matthew Borsch - Goldman Sachs & Co. Justin Lake - Wolfe Research LLC Sarah James - Wedbush Securities, Inc. Scott Fidel - Credit Suisse Securities (USA) LLC (Broker) A. J. Rice - UBS Securities LLC Peter Heinz Costa - Wells Fargo Securities LLC Andy Schenker - Morgan Stanley & Co. LLC Chris Rigg - Susquehanna Financial Group LLLP Michael J.

Baker - Raymond James & Associates, Inc. Sheryl R. Skolnick - Mizuho Securities USA, Inc. Frank Morgan - RBC Capital Markets LLC Christine Arnold - Cowen & Co. LLC Ana A. Gupte - Leerink Partners LLC Joshua Raskin - Barclays Capital, Inc..

Good morning. I'll be your conference operator today. Welcome to UnitedHealth Group's Second 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 are 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 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 July 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. Good morning, and thank you for joining us today to review our company's second quarter performance. For our full year 2016, both UnitedHealthcare and Optum continue to grow at a vibrant pace. The outlook for net earnings, cash flows and return on capital remain strong and consistent with our recent commentary.

The steady advancement of innovative, market-responsive products, services and experiences has led to balanced organic gains across virtually all of our businesses. We believe our businesses remain well-positioned for continued broad-based growth for the balance of 2016, for 2017 and in the years to come.

As we reflect on this quarter's performance, we once again see exceptional growth, improved customer retention, and important new business awards and opportunities, leading to continued advances in both revenue backlog and sales pipelines.

For second quarter 2016, UnitedHealth Group revenues grew 28.2% year-over-year to $46.5 billion, with all domestic lines posting double-digit growth, as we grew to serve 132 million unique individuals. Adjusted earnings per share of $1.96 per share grew 13.3% year-over-year.

Medical cost trends remain steady and consistent with the outlook we shared as we began the year, and operating costs remain well-controlled. Last quarter, we updated you on our intent in 2017 to participate in only a handful of ACA-compliant individual markets, what we referred to as the exchange market.

That effort is on track, and we do not expect any meaningful financial exposure on 2017 business from the three or fewer exchange markets where we currently plan to remain. Our second quarter includes an incremental $200 million in full year 2016 exchange market losses fully absorbed in these results.

Along with what we absorbed last quarter, first half 2016 results reflect an incremental $325 million in full year losses beyond the expectation established as we entered the year.

Looking at the company overall, we intend to carry strong 2016 business momentum into 2017 that will include investing in and improving our competitiveness for the years beyond 2017. We will balance these investments with our commitment to provide returns to shareholders through growth in earnings per share and dividends.

We will lay out a strongly positive and detailed view of 2017 later this year and address questions at that time. We'll now turn the call to Larry Renfro to discuss Optum's strong second quarter performance, then Dave Wichmann will cover UnitedHealthcare and the UnitedHealth Group overall.

Larry?.

consumers, health plans, life science companies, governments, employers and health care providers. Now, let me turn it over to Dave..

Thank you, Larry. Broad, diversified growth and strong forward momentum also continued at UnitedHealthcare again this quarter. UnitedHealthcare is passionate about modernizing and enriching the consumer experience and continues to advance new approaches to simplify that experience for the people we serve.

Second quarter Medicare & Retirement revenues grew nearly 14% to $14.3 billion. Strong retention and growth in Medicare Advantage and Medicare Supplement yielded net growth of nearly 0.5 million people year-to-date. Growth in Medicare is being driven by dependable products that offer clear value and serve people in simple and caring ways.

For instance, while seniors are on the phone with us for other reasons, we will encourage and schedule hundreds of thousands of doctors' appointments for them this year. Home visits by our house call nurses will be up 20% year-over-year to over 1.2 million in 2016.

Activities such as these, along with consistent approaches around benefits, products, network engagement and tailored service meaningfully improve care quality, the consumer experience and customer retention.

From these and other activities, we expect to serve a significantly higher percentage of our Medicare Advantage members through four-star plans in 2017. This was a big lift by our people and care delivery partners. And I am grateful to all of them for what they have achieved on behalf of those we serve.

Strong organic growth continues in Medicaid as well, with revenues up 14.7% to $8.3 billion as UnitedHealthcare community and state served 225,000 more people in the second quarter. This past quarter's growth includes new members in Iowa and expanded services in New York.

And we were awarded additional markets in Pennsylvania for next year, as part of that state's program expansion. Importantly, Medicaid revenue growth also reflects a stronger mix as states continue to ask us to help them serve more people with more complex healthcare needs.

We now serve nearly 5.7 million people through state-sponsored health care programs, and we expect that growth to continue as we advance innovations to help states better serve their most complex and higher-cost citizens, meeting their needs with more integrated social services built around their health.

Our Employer & Individual business revenues also grew 14% to $13.5 billion in the second quarter. UnitedHealthcare grew to serve nearly 400,000 more people in commercial benefits through the first six months of the year outside of the exchange market products.

This is strongly favorable to the initial growth forecasts for both self-funded and full-risk offerings.

Turning to medical costs, we reported a care ratio of 82% this quarter, which is 30 basis points year-over-year – a 30 basis point year-over-year increase, primarily due to adverse exchange market performance and the relative levels of claim reserve development in the quarter, offset by strong underlying core performance by the rest of our UnitedHealthcare businesses.

Year-to-date, favorable prior-year reserve development was $300 million as compared to $130 million in the first half of 2015. In the second quarter of 2016, reserves developed unfavorably by $100 million.

Of this, $60 million relates to items that predate 2016 and do not impact 2016 core medical trends, such as 2013 and 2014 Medicaid and Medicare true-ups and settlements. The current year portion of development relates to exchange market products. Beyond this component, the current year development in the second quarter was favorable.

Commercial medical trend remains consistent with the original outlook of 6% plus or minus 50 basis points. Hospital inpatient admissions per person are lower year-over-year across all UnitedHealthcare businesses.

Like most years, there are pockets of higher cost trends, including specialty pharmacy and the increasing use of ER and outpatient services this year. Overall, health care cost trends remain in line and controlled. Bringing these items together, in the second quarter, UnitedHealthcare grew revenues by $4.5 billion or 13.6% on a year-over-year basis.

The business grew by 320,000 domestic consumers in the quarter and has added more than 1.6 million consumers year-to-date. UnitedHealthcare generated nearly $2 billion in operating earnings in the quarter despite the pressures from exchange market products and the second-quarter prior-year reserve development we just described.

Stepping back, UnitedHealthcare has delivered steady, distinguished organic growth consistently for more than half a decade, and here's how we're doing it. We help people achieve better health by using our data and analytics to simplify decision-making and to help them access the care they need.

We work with physicians and hospitals, sharing information to help them make fact-based decisions about the care they provide. And we focus every day on improving the quality of our execution in every interaction and process for the people we engage with and serve, as well as those who provide their care.

UnitedHealthcare, still with only a modest national share in a growing health care benefits market, expects to drive further growth by delivering on these commitments better and better every day, every quarter and every year.

Moving to UnitedHealth Group as a whole, cash flows from operations in the second quarter was $1.7 billion or about 1 times net income compared to 0.7 times net income in the year-ago period. Year to date, cash flow from operations of $4 billion was 1.2 times net income, also ahead of last year's pace.

The company repurchased 7.8 million shares for $1 billion in the first half of 2016. Our Board of Directors increased the dividend in June by 25% to an annual rate of $2.50 per share. We will return nearly $2.4 billion to shareholders in dividends payments in the next 12 months.

The debt-to-total-capital ratio declined to 48%, and we expect it will continue to decline in the second half of this year, as we work back to a target in the 40% range. Reflecting on performance for the first six months of 2016, overall growth and results have been favorable across the businesses.

However, our exchange market growth is also above our original estimates, as are the corresponding losses. Prudently balancing this overall performance, we are narrowing our 2016 adjusted earnings per share outlook to a range of $7.80 to $7.95 from the former $7.75 to $7.95 per share.

We believe this to be an appropriate posture, given the performance backdrop of the exchange business, even as the core businesses have performed strongly.

As we consider the balance of 2016, we expect the combination of cost to set up new businesses for – new business for 2017 and ongoing investments in growth areas such as MedExpress, OptumCare and International, along with strong seasonal fourth quarter earnings performance from Optum, will produce approximately equal adjusted earnings per share results in each of the last two quarters of this year.

Steve?.

Thank you, Dave. As we have discussed in recent conversations, we believe we are in the early stages of a unique era for UnitedHealth Group, looking ahead toward what may be the best and most important decade of performance for this enterprise. We serve growing markets that are seeking better performance in health care, both in the U.S. and globally.

We continue to strengthen and align enterprise capabilities to meet these needs. And we are intensely focused on the quality and consistency of the experience we deliver to our consumers, customers, benefit sponsors and care providers.

On this latter point, we have the opportunity to evolve and differentiate our enterprise in the coming years by focusing intensely on redefining the quality and value of the health care experience for those we serve, and importantly, objectively measuring the impact of these efforts and recalibrating and enhancing our performance as we advance.

With this focus, paired with evolving capabilities and the strong market positions of our growing diversified portfolio of businesses, we expect to drive differentiated growth for years to come. These efforts will help people live healthier lives and make health systems work better for everyone.

As a company, we're committed to making the most of this period of opportunity. We thank you for your interest today. And, operator, let's open up for some questions. One question per person, please. Thank you..

Again, we ask you limit to one question per person, so we can get to as many participants as possible. We'll take the first question from Matthew Borsch with Goldman Sachs. Please go ahead..

Yes.

Could you just give us, sorry, maybe some visibility on how you're handling the Medicare Advantage bids for 2017? I know the information is not public yet, but if you can just talk to directionally how much of the ACA fee suspension you've loaded into benefits versus reserving for other internal initiatives or earnings?.

Sure. I think our orientation is to really make sure that we are serving the interests of seniors.

Steve, do you want to touch on that?.

Sure. Good morning, Matt. Steve Nelson..

Good morning..

Yes. So, as you pointed out, it is a bit early to provide any detail, but I can give you some high-level perspective and direction. We clearly want to build on the momentum that we're experiencing right now in 2016. So, our objective is to continue to offer stability in our benefits, including premiums.

There will be some enhancements where we think that's appropriate. It's obviously a market-by-market conversation, but overall, stability in both benefits and premiums. And this is driven in large part by the great improvement that we've been experiencing in our Star performance, particularly for 2017.

And then we're going to continue on the innovations around the member experience for clinical programs. And we think this well positions us for growth in both the individual and the group Medicare Advantage products, and particularly, in the group side, experiencing really strong sales and retention for 2017..

Yeah. Just – sorry, go ahead..

With respect to the insurance fee and as a moratorium there, I think it's important to think about that in the context of the overall funding equation. As you know, this program has been underfunded, 14% rate cut since 2010 and continues to be underfunded relative to medical costs.

So, our goal, as Steve mentioned, is to provide stability and valuable benefits to the seniors. And it's a very effective program that continues to drive costs down and improve outcomes, and satisfaction is really high.

So our perspective and our approach has been, after we take this into the overall funding equation, we're going to share a portion of it, obviously, with the provider partners and employer groups in the group MA space, and then passing on a meaningful amount to our members in the form of stable benefits, and again, enhancing where we can.

So, I think, that provides a perspective. And again, we're just – we're really feeling great about the position of this business and the opportunities as we head into 2017 and beyond..

Yeah. And it's a great question, but it's just a little early in terms of going too far into it, so....

Okay. Can I just one follow-up? Okay, never mind. I know you got a lot of people. Go ahead..

So, we can cover these off-line, Matt, through the course of the day..

Right, yeah..

All right. Thanks. Next question, please..

Go next to Justin Lake with Wolfe Research. Please go ahead..

Thanks. Good morning. My question is on the exchanges. Two things here. One, I know you're broadly exiting, but wanted to get more detail on what happened here in terms of a postmortem.

Maybe Dan can walk us through how the initial $400 million of losses was set when you originally realized the problem for 2016, and what the company has seen to – that has driven the loss to be about double that over the last six months or so? And then just lastly, you're running more than $500 million of losses, give or take, in this segment for 2016 in terms of what you've reported for this year.

Can we simply add that number back to the 2016 reported earnings to get the true run rate to jump off for 2017 for Steve's strong earnings number for next year, or are there some other adjustments we need to think about? Thanks..

Sure.

So, Dan, do you want to take him through the math?.

Sure. Good morning, Justin..

Good morning..

The question was comprehensive. So, just to re-baseline on the individual ACA. Our expectation coming into the year was that on a policy-year basis, we would lose somewhere in the area of $525 million. We had done a premium deficiency reserve at the end of the year of $245 million to partially offset that.

So, the net of those two was about a $280 million impact to 2016 earnings performance. And then in the first quarter, we strengthened that or increased the loss expectation by $125 million, and then likewise, added an additional $200 million in the second quarter fully recognized in the quarter in terms of the expectation of the full year.

So, when you put that all together, it's a shade over $600 million of P&L impact to 2016. As you look at what's driving the increase inside that, so for the quarter, the $200 million that we've added, it's a combination of two things. It's really more volume and higher consumption. And I'd break it down, about a third of that is higher volume.

So, we've got higher sales as well as more moderate attrition than we had expected. And then two-thirds is really around the consumption. And, obviously, we had unfavorable development on our exchanges relating to the first quarter in the second quarter. That came with higher second quarter costs, and we've also let that inform our full year outlook.

So, two-thirds of that $200 million really relates to the underlying consumption. And what's changing underneath that, to your question, the reality is the severity of chronic conditions inside the population actually increased on a year-over-year basis. If you look at the prevalence of chronic disease, things like HIV and Hepatitis C, diabetes, COPD.

Those are examples of things that the prevalence was high to begin with in 2015, and that has increased into 2016. So, that's what's informing our view. As you think about 2017, I would tell you, of that $605 million on the math I went through previously, a good meaningful portion of that will contribute to our 2017 performance.

Some of the things offsetting that are certainly some semi-variable and fixed costs associated with this business that don't go away as we shrink our footprint in 2017..

Thanks, Dan. That's, I think, a great response. So next question, please..

And we'll go next to Sarah James with Wedbush Securities. Please go ahead..

Thank you. I wanted to circle back to comments around the negative prior-year development. You mentioned that it was driven in part by Medicare and Medicaid settlements related to 2013 and 2014. What is that, exactly? And it seems like an unusually long lag time for a true-up, so if you could just talk us through that..

Sure.

Dan, do you want to touch on that?.

Sure. Good morning, Sarah. Well, first and foremost, I'd tell you that there are certainly a lot of inherent estimates in our business, and as a result, there's lots of pluses and minuses in any given quarter, so when you look at the portfolio of things that resolve in a given quarter, there are always some things that change period to period.

As it relates to second quarter, as Dave mentioned, we experienced $100 million of unfavorable reserve development, and that was split 60% on the prior year, and 40% on the current year. As you look at that prior-year element, there isn't anything individually large. There's a collection of things.

And I'd tell you, that was a blend of some old provider settlements as well as, as Dave mentioned, some government true-ups, some of them dating back three years, particularly around Part D as you resolve the intersection between claims and corridors and reinsurance, and programs inside that.

So, those are the things that contributed to that prior-year element. Importantly, though, those are all things that frankly don't have any bearing on our current year medical trend and medical outlook. And as it relates to the current year component, that obviously – with more than all of that was related to the individual ACA book of business.

Absent that, we actually had favorable development related to the current year in the quarter. But important when you put it all together, from a medical cost perspective as well as a trend perspective, outside of the individual ACA, we continue to track in line with our expectations across the platform..

And some of it has to relate to how long it takes for the benefit sponsors and the administrations to actually get the final data, so you can actually get resolution..

Absolutely..

Thank you. Next question, please..

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

Thanks. First, just quick question is just on the exchange update.

Where did you end up in terms of exchange lives in 2Q, and what does your updated loss forecast assume in terms of attrition for the rest of the year? And then just a second follow-up question, just on OptumRx, looks like you're actually annualizing now to over $60 billion of revenue annualized in the first half.

So, how are you thinking about the full year revenue guidance? I think, most recently it was at $58 billion, but it seems like you're – or at least annualizing well ahead of that so far in the first half of the year. Thanks..

So that's an interesting two-part combination.

So, Dan, do you want to take the first part?.

Sure, Scott. On the exchange enrollment, we ended the quarter with 820,000 lives in the exchange, so that's up about 25,000 from what we expected – or from what we ended the first quarter at.

As we look to where we expect to perform over the balance of the year, we expect that to moderate through attrition and land somewhere in the zone of about 750,000 lives, as we close the year out. And then, obviously, with the – 2017, we would expect a very meaningful reduction in that..

And OptumRx?.

Scott, it's Larry Renfro. I'm going to start, and then I'm going to ask Tami Reller. Tami is the new CFO at Optum, and she's going to make a couple of comments here. So, I'm just going to talk a little bit about the Rx business for a second. We've been in business with Catamaran for about a year right now.

And when we did that – we had a lot of reasons we did the business, and a couple of them, I thought, might be important to call out in regard to your question. And one was around the complementary strengths that we had. And that was the retail and the mail focus, and those business coming together as well as payers and employers coming together.

But probably the most complementary was the technology, and we've been able to get that put that in place. The value proposition, and that's what I think you're starting to see now, the expanded services, the scale, as well as synchronization is starting to take hold, and it's resonating in the industry.

So, we believe we're building a sound business, and you know how that works. So, we've had a good first half. We have hit all the metrics and are set up pretty well for the second half. And so, I'll let Tami comment on that..

That's great. Good. And I would just reiterate that integration is going well, new business is going well, renewals, all going very well, so we appreciate the question on the business.

The one thing I would just note, too, is that we had a number of items that we noted in the December investor conference on elements that would affect both revenue and – as well as scripts, and that has to do with Part D enrollment, as well as one of our large clients moving to an administrative-only relationship and then also the well-known co-op closures.

So, some of those elements do have an impact as we go forward throughout the year, but again, remain confident in the OptumRx business overall for the year..

Okay. Thanks..

Thank you. Next question, please..

Go next to A. J. Rice with UBS. Please go ahead..

Hello, everybody. I think I'll just ask broadly about capital deployment from here. Obviously, you're coming up on the anniversary of the Catamaran deal, where you step back from the share buyback activity, been running about $500 million a quarter, which is less than previous.

At what point do you think you might step that back up? And then also, just on general acquisitions and opportunities for transactions there, can you give us any thoughts on the availability of deals, and your thoughts about where you're focused?.

Well, I think we'll address the capital allocation, but I would not get your hopes up that we're going to give you too much guidance about where we're focused, things like that, I think, as you might suspect.

So, John, do you want to cover capital?.

Sure. Good morning, A. J. It's John Rex here. So, just thinking about – ways to answer your question here. So, yeah, we've repurchased about 1 billion shares – about $1 billion worth of stock year to date. That's against the guidance we had for $1 billion to $1.5 billion.

So, you should expect that the repurchasing activity will moderate meaningfully in the second half of the year. And Dave had a bit commented in his portion of the script, we're also committed to continuing to bring down our debt-to-total-capital ratio back ultimately to our approximately 40% target range.

So, we're just slightly below 48% here, as we exited the Q2. And so we'd expect to continue to focus on meeting those commitments and bringing down that debt-to-capital ratio. So, that's how you kind of think about it in terms of progression and capital..

Okay..

And as it relates to M&A, I mean, we have a clear business model. We continue to be focused on building that out. We talked in the past about allocating capital to cultivate capabilities that we think are important for the future. And we tend to be careful with respect to how we consider our timing and values.

So, I don't think any of those things that had been long-standing attributes really changed. And so, we'll – we continue to be attentive to the marketplace, but beyond that, I don't think we can give you much. Next question, please..

We go next to Peter Costa with Wells Fargo. Please go ahead..

It's going to be kind of a broad question, but I'm curious about what you're seeing going on with drug price trend going on now.

If we look at your bids, you've won some business with OptumRx, some very sizable accounts, including one where your pricing shows up in publicly filed information, where you can see that your view on trend is a little bit below where some of the competitors are by 0.5% or 1.5%.

So, can you tell us what you think is going on with drug price trend and with the various regulation that's coming out or that might come out on drug pricing? And where do you see all that evolving going forward over the next year or two?.

So, we'll comment from a PBM point of view, and then maybe broadly in terms of the pressure on elevating drug prices broadly, particularly, in the specialty categories.

Mark?.

Yeah, thank you. Good morning, Peter. Well, drug prices are the first item, obviously, on our clients' list. And, I think, if you look at how we're attacking this, this last quarter has been a real differentiator for us. As Larry said, the combination here for us was all about scale. And it is intended to take to the supply chain.

So, as a much bigger business, we're talking about drug pricing every day to the biotech companies and to the pharmaceutical companies bringing product to the market. And the way we contract with them is to protect our clients as best we can from some of these price increases.

Obviously, price can be addressed by regulatory issues, but also just by better management of the drug benefits. So, we use our tools like formulary, like specialty steerage, like preferred and exclusionary networks, to drive price down. And in large part, this is what's defining us right now.

We've reached a scale where we've obviously taken the drug spend that we manage for our clients to the supply chain and a differentiated model to drive down and contain to the best of our ability drug prices.

And so rather than talk on a political stage about how to get after drug pricing, we're using the tools that we've deployed here and integrating them with better medical management in the broader Optum chassis.

So, we do think we have a differentiated model, a better way to get after drug price and drug cost management, combining both the technology platform that Larry talked about and, really, the leading clinical management platform in the broader Optum. So, that's what we're doing..

Next question, please?.

Next question is from Andy Schenker with Morgan Stanley. Please go ahead..

Thanks. Good morning. So, maybe if you could discuss a little bit more how you see the Medicaid pipeline opportunity, involving both near term and longer term, maybe even including the Pennsylvania and LTSS RFP.

Dave in his prepared remarks said he expect to grow, so what's giving you confidence about your ability to continue to win RFPs going forward? And then just real quick, how are Iowa costs running versus the losses assumed in the PVR? Thanks..

Austin?.

Thanks for the question. First of all, as far as the pipeline, I think we've mentioned a couple of times earlier in the year, we see very robust pipeline. We expect to respond to about 20 RFPs this year that'll be implemented over the next three years.

Many of those, and I think this is a really important piece, continue to include, and Dave mentioned this in his comments, more and more populations with complex needs. That gives us an awful lot of confidence, because when you look at the combined capabilities of UnitedHealthcare and Optum, that really is in our wheelhouse.

That's really where we can provide tremendous amount of value to the consumer as well as our state partners. So, we see that continuing. The Pennsylvania LTSS opportunity is just one example of that. We'll see Virginia as another example of that, Oklahoma another example, so you're going to see a continued increase in these very costly populations.

Keep in mind when you back up and look at the macro story here, you've got $500 billion of spend in the Medicaid space. You got about 70% of the membership in managed care today, but only about 41% of the dollars. So, when you talk about confidence in the pipeline and opportunity to grow, that's really where that opportunity sits.

Couple with that still some greenfield states. There are 15 states that don't have managed care today, some very large, like North Carolina, where we've been successful in working with the state to get legislation passed, and that market will continue to develop.

So, again, I think, it squares up very nicely with our capabilities and marks the road for a very good growth opportunity going forward. In regard to Iowa, first and foremost, we're very pleased with the implementation. It's been going very well. We stay very focused on job one, which is taking care of the folks we've been entrusted to do so.

And we did build a very good relationship with the state. As you know, it's – we're one quarter in, so it's very early, so too early to really comment on what we're seeing. Early indications would be that it's in line with our expectations, but, again, very early..

Thank you.

Next?.

And we'll go next to Chris Rigg with Susquehanna. Please go ahead. Your line's open..

Good morning. Just was hoping to get some more clarification on Dave's comments about the drivers of medical cost trend.

I guess, just generally, when you made your comments about specialty pharma, ER and outpatient and then inpatient, is that inclusive of the ACA exchange membership? And then more importantly, is it fair to say that the specialty pharma, emergency room, outpatient are trending higher than you initially expected, and that's being offset by inpatient? Or just any comment would be helpful.

Thanks a lot..

Dan?.

Good morning, Chris. Dan Schumacher. So, first and foremost, just as a reminder, coming into the year, our expectation was for a moderate increase in underlying utilization trend. That's what informed our pricing, our entire benefit planning as well as the guidance we've provided.

And that's what we were able to manage to in the second quarter, very consistent with our conversation in the first quarter and very much in line with our expectation. It's kind of looking at how trends progress through the year. Typically, we talk in annual terms.

But as we look to the quarters, we certainly don't view Q2 use as having accelerated beyond the Q1 rate. If anything, I'd probably tell you that Q2 is perhaps a little bit lower.

To your questions about the categories themselves, the bigger drivers of our trend are certainly in pharmacy and outpatient, as Dave mentioned, and then working against that is more moderate levels of trend, as we drive down per capita use on an inpatient basis. The pharmacy piece, I will tell you that's largely driven by Hepatitis C.

So, we changed our coverage criteria effective 1/1 of 2016 in our commercial business, so we expanded coverage. And that's what's really driving that 8% to 9% pharmacy trend on a commercial basis that we talked about back at the investor conference. And then if you look to the outpatient side, inside there, we see elevated levels of emergency room.

Surgical procedures are contributing, also facility-based – facility-dispensed prescriptions, so that's kind of oriented more around the oncology space. So, those are some of the bigger contributors, and not surprisingly, that is absolutely where our medical management efforts are focused to work down those costs.

All of those categories, I will tell you, are within the ranges that we expressed at the investor conference, probably a little bit higher on the outpatient side, in line in the pharmacy space, a little bit better on the inpatient side, but net-net, we still expect, on a commercial basis, our full year medical trend to be in the range of 6% plus or minus 50 basis points..

Great. Thanks a lot..

You bet..

Next question, please?.

And we'll go next to Michael Baker with Raymond James. Please go ahead..

Yes.

So, Larry, I was wondering if you could update us on what you're seeing in terms of Optum opportunities on the international front?.

Well, that's a good question. I'll start with probably the area that we're spending a lot of time in, and that's the U.K., and what's going on with the U.K. I'm going to ask Jeff Berkowitz, who runs that area, to follow up my comments. But – and we've talked about this in the past. We've been – we've been in the U.K.

for about 10 years or so, but the past year we have put a lot of time and effort into the development of our products there. I would say that regardless of the political situation, the challenges, the opportunities, everything that we have been trying to address, nothing has changed.

And we feel that the past year, we've been able to establish ourselves in a capacity that people now understand the Optum products. They understand our direction and what we're trying to achieve. So, we remain bullish with some caution around what's going to go on, on the political side.

Jeff?.

So, Larry, just as you said, we've spent the past years in the U.K. establishing a very strong foundation. We have a strong foundation with the National Health system, a strong foundation with the National Health system improvement, and a very strong foundation of work on the ground with the Department of Health.

And even with Brexit, Optum's foundation stands – continues to stand strong. And while we don't yet know all the ways Brexit will play out, as Larry just said, in the coming months and years, we do believe that the health service right now will continue to drive its existing plans related to our own efforts there.

And we will continue to work closely with England's Department of Health and the NHS to help them achieve those important missions..

So, Michael, it's Larry again. I would comment on Brazil that we are working with Amil in bringing our technologies, our services to that part of the world. And that's going pretty well. And there are other development countries that are too early for us to talk about.

But as we talked about back at the Investor Day, we believe this is about a $500 billion market, so we're going to stay and be part of it..

Thanks for the update..

Next question, please?.

Next we'll go to Sheryl Skolnick with Mizuho Securities. Please go ahead..

Good morning, and thank you. And first, I would be remiss if I didn't say congratulations to John, and David, and Tami on their new roles, well-deserved and lovely to see.

And with that, can we focus on something that's important, but I'm not sure we actually got a whole lot of detail around this? OptumRx has clearly done a very good job of winning competitive business and not based solely on price, or not even importantly on price, but rather on what appears to be an innovative and intriguing combination of services and capabilities as well as scale.

But implementation is going to be important, so – and I gathered from your commentary around guidance that you plan to spend to implement, which is great.

But can you give us some more details about what you plan to do to ensure that these new lives as well as the existing lives, as seamless an experience becoming OptumRx beneficiaries as did the 11 million commercial lives, which you clearly were able to bring on without even a whisper of an issue? That would be very helpful.

And with some estimate of what it will impact presumably in third and fourth quarter. Thank you..

Sure. So I think that's an excellent area of interest. So....

I'll start..

Yup..

So, Sheryl, it's Larry. I'm going to ask Mark to comment after I finish. So, I know, you know that we have certain priorities that we work toward in Optum, and one of them is to establish, what I'll call, these deeper, more comprehensive relationships. I think we had a goal to have about 8 to 10 of them by the end of 2016.

I think, we're pushing 17 right now. And these last wins were part of that. So, as part of going after that effort a few years ago, we have been strengthening leadership ever since that started.

So, we feel very, very confident in the leadership that we have, and that we have developed as well as with the combination of Catamaran and OptumRx, we're pretty solid when it comes to that. When you step over into implementation and execution, that happens to also be one of our key priorities that we pride ourself on.

So, this is not really out of the ordinary, what we do. So, we looked at both of those things from an execution standpoint as well as from a people standpoint, and so the third question you asked is about the monetary side of this, and it's built in. So, there should not be any impact at all to guidance.

We expect to get these type of relationships, and we have built it in the plan. So, there shouldn't be anything extraordinary that would happen from a financial standpoint.

Mark?.

Yes, Sheryl. Good morning, and, Larry, thank you. So, I think, I'd like to just take a moment and talk about what broadly large-scale buyers want and need. And we are feeling very good about the fact that our message is resonating, and we posted some substantial wins here recently, and it's not by accident.

Large buyers have a set of complicated needs but, first and foremost, they need a flexible and proven technology partner and engine to drive their PBM benefit. They obviously need market-clearing economics and prices – price matters.

But our model of providing superior service and really focusing on quality and then marrying our data analytics and our synchronization capability, these are really the reasons that our message is resonating.

And then finally, if someone's going to make a bet on a big transition, you have to have a track record of executing on large-scale conversions or transitions. And this combined business has that. As you know, there was a very large-scale transition several years ago in OptumRx.

And in our prior business at Catamaran, we had bought and integrated eight companies. And so, the notion of a heavy lift and making large-scale implementations happen is something that we know how to do. So, we're feeling really good about the balance of the year and the work plan in place to implement these flawlessly.

If you look back on our 1/1/16, where we also had a good number of new client wins, we got great channel checks on our implementation work, because that's the heart and soul of this business. You have to do well. It all starts with a successful implementation, and we do know what to do. So, thanks for the question..

Thank you. We only have a few more minutes, so a couple more questions. So, the next one, please..

And we'll go next to Frank Morgan with RBC Capital. Please go ahead..

Good morning. One of the areas of growth you called out in OptumHealth, one of those drivers was expansion of behavioral services into new Medicaid markets. You called that on the press release. I'm curious.

Could you elaborate on that a little bit more on that particular growth opportunity, how sustainable is it, and how much did it contribute to this 15% growth in that segment? Thanks..

Sure.

Mike?.

Sure. So, this is Mike Weissel. Thanks for the question. I think, when we look at behavioral health and we look at the Medicaid market, in particular, we see a number of opportunities. I think, we see them both in combination with UnitedHealthcare, as Austin mentioned earlier, in the areas of the long-term social services or IDD population.

Those populations continue to kind of be driven into managed care in some way with the behavioral piece. So, we see plenty of opportunity there. There are also other states, which are looking to do that on a direct basis.

And so, we compete on a regular basis and have a robust pipeline today, specifically, in the direct market with some of these states as they look to build it. So, we see that as a continuing growth opportunity for us..

And the continued integration of behavioral health in the mainstream clinical?.

I just would comment. This is Austin Pittman. So, Mike mentioned this, but the work we continue to do to really integrate our behavioral health with our physical health really creating a new model that we're calling whole-person health is really an exciting new direction for us.

It certainly will bode well for UnitedHealthcare and Optum's growth on that piece of business, as well as that external business. In fact, you could probably think of it with a lot of the same attributes that were just discussed around OptumRx, integrating and synchronizing network with our full clinical model. Same thing applies here.

It's a really exciting next step for us..

And it's not limited to Medicaid..

No..

It's broad-based.

Next question, please?.

We'll go next to Christine Arnold with Cowen. Please go ahead..

Hi, there. You spoke to the backlog growth which looks really nice in OptumInsight.

Could you speak to where you see major opportunities and kind of the composition maybe of the opportunities that you're seeing there?.

Yeah, maybe just in broad strokes, though.

Larry?.

So I'll start and – I'll start. And it's Larry, Christine. So I'll get going here, and I'm going to ask Bill Miller to come in on this as well. So, when – we look at all of our indicators, and all are in line with what we are expecting. In three of the – what I call the top metrics that we engage with to see how the growth is going.

One would be our qualified sales pipeline, and I brought that up a few minutes ago in the script. And I'll just tell you that from an overall year-over-year standpoint, our qualified sales pipeline, which is a very diverse pipeline, is double the size of what it was this time last year.

Obviously, number two is that backlog that we were talking about, where we're up the 15%. That $11.3 billion, obviously, that's another key indicator. And I think the third one is even a stronger one, and that's our – what I'll call, our closed sales. And how we look at the total contract value on that. And we're up 80% at the end of the second quarter.

And that 80% is going against the entire year of 2015. So, I'm doing an 80% above on contracted – total contracted revenue for Optum, 80% above what was done an entire year of 2015. So, obviously, the sales pipeline, the closed sales and the backlog, that's going give us a jumpstart into 2017. So, we're feeling very good about where we stand right now.

But I might just ask Bill to comment on some of the things that he's actually got going on inside some of these different metrics I'm talking about..

Yeah. Hi, Christine. Yeah, as Larry said, there's a lot of confidence if you interrogate that backlog and that prevailing confidence comes from – if you even look at Q1 and Q2, they were marked by some of the largest software deals we've done. Those are piled into the backlog. We see more of that coming down the pipe in the future.

Number two, if you just look at the velocity, the sheer numbers, the size of it, as Larry noted. It is at breakneck pace. And then third, if you kind of look at the nature and the demographics of that, just our activity in the pipeline, in general, we are the recipients of more RFPs than we've ever been.

We are engaging in strategic conversations with more constituencies at a faster pace than we ever had, and that includes health providers, health plans, governments, employers and certainly, pharma. And then also, I would think the interesting part about it is the comprehensive nature of the – many of the opportunities in that pipeline.

They're very big, they're long in their duration, and they are really aligned with what we've always expressed in terms of these deeper and more comprehensive relationships. And there is a fair amount of it that's marked by analytics, too. That's a growth market for us.

If you look at the demographics in there, and you look at kind of the way we set up in the analytics market, it's clear that we're going to see growth there. The pipeline reflects that. And I think we have distinguished ourselves very well on the analytics front, on the revenue managed front, payment integrity.

So, it's a very diverse sort of boundary-less pipeline that I think bodes well for the rest of the year and certainly into 2017..

But to your point, that's a long lead time and could be uncertain – unclear in times of time frames, right?.

Yes..

Just challenging to manage that. So, great question. Next question, please? So we'll take two more, and then we'll cut it off. And John and Brent and others will be around for the balance of the day..

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

Yes. Thanks. Good morning. So, I wanted to get some more color on your comments on the capital deployment towards OptumCare. You've mentioned that is a focus area and MedExpress.

In context of these trends that we continue to see on outpatient mix shifting and ER, and then most recently with the administration making all these changes, not the least of which is macro, I was wondering if you have an increased appetite at this time to buy primary care docs? And are you seeing more willingness for them to affiliate with you relative to the hospital? And then the second part of that was what about ambulatory surgery centers, given that seems to be a big trend in terms of elective surgeries and procedures?.

Okay. Well, we'll go another 10 minutes responding to that question..

Ana, it's Dave Wichmann. Maybe just to extend on the capital deployment front, and then if Larry or Jack want to comment as well, please feel free to do so. I think John Rex in his new role as CFO did a great job responding to our overall capital priorities, but I think it has been consistent over time.

We have allocated about 50% of our capital to growth and about 50% of our capital to returning to shareholders. And you can see that is strongly biased towards the dividend right now, as we seek to also pay down our debt and get our leverage ratio down to 40%.

The 50% on M&A we really didn't touch on a whole lot, and our priorities remain pretty consistent as they have been. As you can see, we've been investing significantly into Optum. And you can see the returns of that, which have been extensive.

I think, the team has done a fantastic job of driving nice returns on the invested capital basis that we put in place there.

Two of those areas were the MedExpress platform, which is the urgent care platform, which supports the notion of us providing better quality, more consumer-responsive and higher-value care, and in this case happens to be in the ambulatory setting. We said that, that was a foundational investment in MedExpress.

And I think, as you knew at the time, we would continue to invest into opening new locations in that business over time. And as you can imagine, with de novo startups, they tend to create a little bit of a drag on earnings, particularly, as you're just getting going in the early stages of that.

Your instincts are right, and they kind of tie into the trend conversation that Dan discussed as well, which is we're seeing a higher utilization of ER. And, of course, the care setting and the urgent care, we believe, is much more effective and will help to obviate costs not only for UnitedHealthcare but across all the payers that Optum serves.

Another area of priority for us is to continue to invest in the OptumCare business. Larry laid out quite nicely, I believe, the 75 markets that we want to pursue, which constitute about 80% of all health care. And one of the areas in which we're pursuing that is through the development of physician practices and services in those markets.

And we have an initial foundation of that, I believe about $10 billion of revenue or so on a combined basis. We serve over 7 million patients, and we have a nice going business, I believe, in some stages of some 25-plus markets so far.

And our activities there continue, and we'll continue to deploy capital in that area and continue to pursue the development of our business in that primary care setting.

Larry, do you want to add?.

Yeah, just a couple things. Today, we have about 175 MedExpress urgent care centers. And we have been doing about 30 start-ups a year. I think, we'll ramp that up 2017 to about 75. And then we probably have another additional 75 urgent care centers that were all part of the primary care businesses that we have, and we have acquired.

So, as Dave said, this is one of our top growth pillars in terms of what we're trying to do for the future, and we're going to be focused on that. The other side of this is OptumCare, and I'll let Jack talk about that..

Thanks, Larry. Good morning, Ana. In the OptumCare Care Delivery business, we're certainly in the early innings of building this.

To your question on receptivity, yes, we are seeing increased receptivity of some of the higher-quality physician groups, primarily organized around primary care to look not only to join us but really to do something different in terms of the way they care for their patients, really looking for the assistance coming out of care delivery, out of Bill Miller's business with OptumInsight, around population health tools and really re-equipping them to up their game to be more attractive to large-plan sponsors and large employers looking to contract with physicians in an altogether different way.

So, we have been hard at work at that. And we continue to see good receptivity, and we're going to be at it for certainly the balance of 2016 and 2017. And I think, in one of your questions, you have preferred to MACRA, clearly game-changing when it comes to the world of physicians and providers.

We're certainly evaluating the regulatory release, but we think it is really a stamp of approval of where we're taking physicians and getting them right in the thick of more comprehensive population health management..

I think we can play at that level and can do it right from the start..

Thanks. Very helpful color..

Last question, please?.

And we'll take that question from Josh Raskin with Barclays. Please go ahead..

Hi. Thanks for sneaking me in, guys. Steve, you mentioned some commentary around 2017 and an outlook coming a little bit later. So, I appreciate we're not going to get into the specifics here.

But as you think about the comments you've made and then $2 billion of Optum revenues that we know about, Medicare Advantage, including the fee and group wins that you're seeing, the elimination of the exchanges which, that alone $0.37, $0.38 this year. That's like 5% of earnings.

Are there any offsets, anything we should think about that's unusual in 2017 in terms of a headwind that would preclude you from getting into your long term 13% to 16% growth?.

So, the only ones you missed on the upside were the Stars, the increasing Stars performance and just the overall momentum of growth coming in.

And then I think, the offset I would offer is, I think, you have to remain respectful of two things, and that is that our business has increasingly a large factor of federal and state programs, and those programs have funding dynamics to them. So, I think, those things always have to be taken into consideration and respected.

And lastly, as we've talked through the course of the morning, kind of a never-ending respect for medical cost trends and particularly those we outlined this morning, making sure that we are addressing those effectively. And, I think, those two things are environmental but have to always be called out as elements for consideration.

And as we indicated early, we are getting a lot of new business opportunities and successes, and making sure that we stand those up in a very effective and successful way and are meticulous with respect to that execution. Those are the things that I would say balance off in terms of making sure that we are living up to our responsibilities.

So, that's the kind of outlook I would bring to it..

Okay..

So, we thank you. Just kind of in closing, UnitedHealth Group delivered, I think, a very strong second quarter. UnitedHealthcare and Optum's products and services continue to grow and resonate with consumers and customers.

I think, our enterprise is well-positioned to address the changing healthcare needs of the people and markets we serve, and in doing so, we continue to have the momentum of broad-based growth that we're going to take through 2016 and 2017, and hopefully, the decade ahead. So, this concludes our call, and we thank you for your interest today.

Thank you..

And this will conclude today's program. Thanks for your participation. You may now disconnect, and have a great day..