UnitedHealth Group and Elevance Health Report Strong Q2 2024 Earnings Amid Healthcare Industry Growth

UnitedHealth Group (UNH) Q2 2024 Earnings Call Transcript | The Motley Fool

Good morning, and welcome to the UnitedHealth Group second-quarter 2024 earnings conference call. [Operator instructions] As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amount is available on the Financial & Earnings Reports section of the company's Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated July 16th, 2024, which may be accessed from the Investor Relations page of the company's website. I will now turn the conference over to the chief executive officer of UnitedHealth Group, Andrew Witty. Andrew Philip Witty -- Chief Executive Officer Thank you, Jennifer. Good morning, and thank you for joining us. The second-quarter results we reported today reflect diversified and durable growth and a commitment to ensuring high-quality care is available to every person we're privileged to serve. In the first half of the year, revenues grew by nearly $14 billion with strong contributions from across the enterprise, led by double-digit growth in Optum. UnitedHealth Group entered the second half of the year with continuing and broad-based growth momentum. As a result, we are affirming our full-year adjusted earnings outlook, even as we absorbed $0.60 to $0.70 per share in business disruption impacts related to the cyberattack. These results come from the sustained focus of the 400,000 people of UnitedHealth Group on adding value for patients, consumers, and customers through the fundamental execution of our key priorities. We're also well-positioned for growth in 2025. In the selling season to date, the most sophisticated thoughtful buyers of health benefits and services in the U.S., such as large employers, union, state, seniors, all continue to choose the offerings of UnitedHealth Group when they're looking for managed care, pharmacy services or a Medicare Advantage plan that provides the best value. This consistent growth reflects customers' recognition of the need for a company like ours. As you know, UnitedHealth Group strives to help reduce the fragmentation and lack of coordination that drives up costs and erodes care outcomes in the $5 trillion U.S. healthcare marketplace. We aim to better coordinate and align incentives among caregivers, payers, and pharmacy, enabling us to focus on the whole patient throughout their health journey. We believe this increases value for customers and consumers, improves people's experience and health, reduces redundancies and waste, and ultimately leads to a more sustainable health system. For example, the proven health and economic value to consumers and taxpayers of Medicare Advantage. A recent study by Milliman found that the cost to taxpayers of Medicare Advantage is 4% less than traditional fee-for-service Medicare. At the same time, Medicare Advantage provides seniors well over $2,000 per year in additional value through lower out-of-pocket cost and important services like dental, vision, and hearing, none of which fee-for-service Medicare covers. That means a lot to the majority of the people Medicare Advantage serves who have limited economic resources and otherwise would lack access to such services. The home visits we offer seniors further illustrate the value of MA. Last year, our medical professionals made more than 2.5 million home visits. As a direct result, our clinicians identified 300,000 seniors with emerging health needs that may otherwise have gone undiagnosed. They connected more than 500,000 seniors to essential resources to help them with unaddressed needs such as food and security, medication affordability, transportation, and financial support. They also identified and helped close more than three million gaps in care that made a real difference in people's lives. Within 90 days of one of our home visits, 75% of patients received follow-up in a clinical setting. Additionally, Medicare Advantage patients with chronic conditions who receive these home visits end up with better managed and more stable health outcomes, as evidenced by spending measurably less time than fee-for-service patients in emergency room and other hospital settings. The bottom line, our home visit programs help patients live healthier lives and save taxpayers' money. It is only Medicare Advantage that makes programs and results like this possible. Similarly, Optum Rx clients continue to appreciate the efforts we make to ensure delivery of the lowest-cost drugs in the face of drug company's sole ability to set prices. They also recognize the importance of the comprehensive pharmacy services we provide to people that's driving our momentum this year and bodes well for 2025. We also continue to bring practical innovation to people through new products and services and by using new and emerging technologies to improve our own operating efficiency. For example, Surest continues to differentiate itself in the marketplace, which is why more and more customers are offering it to their employees and why the offering continues to grow substantially. Additionally, investments in modernization of legacy technology and new emerging technologies are enabling our consumer-centric advancement of healthcare. For example, our growing AI portfolio made up of hundreds of practical use cases will generate billions of dollars of efficiencies over the next several years. These investments enable us to improve consumer experience, enhance provider find and price care capabilities to meet people's needs and improve clinical back-office execution. We expect technology innovation to become an increasingly core driver of our growth over the next two to five years. And now I'll turn it over to our president and chief financial officer, John Rex. John F. Rex -- President and Chief Financial Officer Thank you, Andrew. I'll start this morning by providing context on some of the unique items in the quarter, then I'll follow with perspectives on care activity and general business updates. The overarching theme I hope you leave with today is that UnitedHealth Group continues to deliver broadly diversified growth with expanding opportunities, works that positions us for continued strong performance in '25 and beyond. Now to update on Change Healthcare. Our focus has centered on the patients, care providers, and customers who rely on us to keep the health system running. Payment and claims as well as for most care providers are back to normal, but we know that is not the case for some. So we continue to work with those who are not there yet. UnitedHealth Group has provided more than $9 billion in loans and advanced payments to help providers mitigate the impact of the attack, all at no cost to them. Cyber impacts in the quarter totaled $0.92 per share, and we now estimate the full-year impact will be $1.90 to $2.05 per share. So let me break that down a couple of steps further for you. Of the total in the quarter, $0.64 per share were direct costs incurred in restoring the clearinghouse platform and other response efforts. These included higher medical expenses directly stemming from the temporary pause of some care management activities. For the full year, we now estimate these direct costs at $1.30 to $1.35 per share. The $0.40 to $0.45 per share increase in this estimate is primarily related to care provider financial support and costs for producing and mailing the consumer notifications that will begin later this month. As a reminder, these direct costs are included in net earnings, but are excluded from adjusted earnings per share. The other component affecting our results relates to disruption of the ongoing Change Healthcare business. This largely encompasses the loss of revenues combined with the cost of keeping these capabilities fully ready to serve. Notably, these effects are not excluded from adjusted earnings. In the second quarter, this impact was $0.28 per share. For the full year, we now estimate the business disruption impacts at $0.60 to $0.70 per share, compared to the $0.30 to $0.40 we estimated last quarter. Most of the service functionality is now restored, and revenues are rebuilding even as the pacing of this process varies. These important services are now more modern, secure, and capable and continuing to advance rapidly. Our ambition continues to be to return to baseline performance in '25 and to grow strongly from there. Turning to international. Following the sale last quarter of our much larger Brazil operations, we classified the remaining South American businesses as held for sale. This is a natural step following the Brazil sale. We highly value the relationships we have built with our dedicated colleagues over the last several years and wish them continued success. In a diverse enterprise with a strong growth record and capabilities such as ours, such portfolio evolutions enable us to keep our focus on the many compelling growth opportunities before us. The second quarter includes a total of $1.3 billion in South American impacts, the majority of which is noncash and largely due to foreign currency translation losses accumulated over the years. About $220 million of this stems from a regulatory action in Chile, affecting all health plans. You'll see that as a component in the supplemental financial tables we provided this morning. The action relates to industry premium increases dating back to 2020, but as configured will be reflected in consumer premium credits to be issued in future years. As a result, the entire $220 million was recorded as a reduction to premium revenue in the second quarter, increasing our reported medical care ratio by about 25 basis points. Turning to the second-quarter medical care ratio. It was also impacted by about 40 basis points or $290 million due to the suspension of some care management activities after the cyberattack. That makes for a total of about 65 basis points of nonrepeating impacts, including South America. Beyond these effects, the medical care ratio in the quarter was also modestly affected by three other factors, one being member mix within Medicare Advantage and dual special needs plans, which this year has been shaped by the unusual competitive benefit configurations in the marketplace. A second being the timing mismatch between the current health status of remaining Medicaid members and the state rate updates, a timing mismatch we expect to realign in the months ahead. And third, the lingering upshift in provider coding intensity, which we believe was spurred by the temporary suspension of our care review activities and carry pass. This impact is not reflected in our cyberattack direct response costs, and we have been addressing it. Nonetheless, we continue to expect our full-year medical care ratio, excluding 30 basis points of cyber and South American effects, to be within the range we offered in November, albeit at the upper end. For our 2025 Medicare Advantage planning process, we assume care patterns and mix at the levels we are seeing today, in addition to fully incorporating the second of the three-year phased funding cuts. And we have been fully attuned to how the Inflation Reduction Act will affect Medicare Part D offerings in '25. Also as noted, we expect the Medicaid timing mismatch to subside as rates are updated throughout the remainder of this year and into next, appropriately reflecting current member health status. Turning to the performance of our businesses. At UnitedHealthcare, revenues of $74 billion grew by $3.6 billion. UHC domestic commercial membership grew 2.3 million in the first half of this year as employers and consumers responded to our distinctive offerings. And while the '25 selling season is ongoing, we are encouraged by the continued momentum we see. Our recently filed Medicare Advantage bid for '25 again took a balanced approach to provide as much stability for seniors as possible, while factoring in the realities of the funding cuts and current care patterns. You can expect us to continue to prioritize balanced and durable performance over transitory market share gains. In Medicaid, we expect membership levels to stabilize as we head into the second half of the year, and our teams are executing well with both renewals and expansions. OptumHealth's revenues grew by 13% to $27 billion, and the operating margin expanded over last year. We are on track to approach 5 million patients in value-based care by the end of this year and are progressing strongly on our earlier and deeper engagement with patients, with a purposeful focus on our newer regions to more rapidly improve health outcomes and experiences. Optum Rx's revenues grew 13% to over $32 billion, driven by strong customer response to the differentiated value, consumer experience and clinical expertise we offer. At OptumInsight, for the services beyond Change Healthcare, we see strong performance in line with our expectations. The revenue backlog increased to nearly $33 billion, growth of over $1 billion from a year ago, driven by business process and information technology services for health systems. A few additional items of note. As we highlighted in April, we established an additional $800 million in medical reserves in the first quarter to reflect the potential for the cyberattack to have affected claims receipt timing. With claims now flowing at more normalized levels, we continue to prudently analyze these trends. Similar to last quarter, the second-quarter results do not reflect any favorable earnings impacting medical reserve development. Days and claims payable at 45.2, compared to 47.1 in the first quarter. The change was due primarily to the return to more normal claims submission patterns from providers and, to a lesser extent, some impact from reclassifying the remaining South American operations to held for sale. Cash flows from operations in the quarter were at $6.7 billion or 1.5 times net income, even with the accelerated funding for care providers. In June, our board of directors increased the dividend by 12%, marking the 15th consecutive year of double-digit dividend increases to shareholders. During the quarter, as I mentioned earlier, we prioritized devoting resources to support care providers in the wake of the cyberattack over some activities such as share repurchase. It was the right thing to do, devoting all our efforts to provide stability for the health system. Still, with our ongoing strong capital capacities and with support needs abating, we expect to achieve the full-year repurchase objective we shared with you last November. In summary, it is the confidence we have in the performance of our diversified businesses that allows us to affirm full-year adjusted EPS in the range of $27.50 to $28, the objective we established last year, even as we have absorbed the unanticipated $0.60 to $0.70 in business disruption impacts. Within this, we expect a balanced pacing in the second half. Now I'll turn back to Andrew. Andrew Philip Witty -- Chief Executive Officer John, thank you. As I said in November at our investor conference, we operate in an environment where change is constant. What you've come to see is that when changes happen, foreseen or unforeseen, we just deal with it. UnitedHealth Group is a nimble and adaptable enterprise, well suited to meet the challenges that come our way and the opportunities we pursue with the many and diverse capabilities available to us. In this first half, as we've done before, we navigated a complex external environment, while managing through a significant business disruption. We continue to deliver on our growth objectives and are committed to delivering on our 13% to 16% long-term growth target. We'll now answer any questions you might have. Operator, please? Operator Thank you. [Operator instructions] We'll go first to A.J. Rice with UBS. A.J. Rice -- UBS -- Analyst Hi. Thanks for the question. Just to make sure, expanding on John's comments, if we're thinking about the -- your thinking on MLR overall for the rest of the year, it sounds like beyond Change, beyond Latin America, there's two items you're calling out. One is Medicaid timing mismatch, which sounds like you think it's short term and then this upcoding, coding intensity comment. And I assume that's mainly in the insurance business, but maybe it's in Optum as well. Can you just give us a sense of how much those are impacting your thinking? And how much is second quarter versus the impact in the back half on those? Andrew Philip Witty -- Chief Executive Officer Yeah, A.J., thanks for the question. Let me ask John to get right to it. John F. Rex -- President and Chief Financial Officer Good morning A.J.. Yeah, there's really kind of three items that we're talking to in addition to those two here also. The member mix component here when you bring it all together, those additional items that we're looking at in terms of -- versus where we were and how we're thinking about it. I would say they're kind of roughly equivalent zone in terms of their impact here. And then how they flow throughout the year -- the rest of year, really, you'll see some of those elements. So as it relates to Medicaid impacts, pricing goes on over a period of, say, kind of 12 months or so. So there's pricing that occurs over the rest of this year into next year. So those elements in terms of catching up -- that mismatch catching up with the acuity that we have in the remaining population occurs over a period. Certainly, we are addressing the elements we talked about in terms of what we're seeing in the coding up shift, and we're well underway in addressing those elements, but we'll continue to address them throughout the course of the year. The member mix is kind of the member mix we have now at this point. That really pertains to just the elements that I've mentioned in my prepared comments about some of the benefit design impacts and how that impacted both our growth and also the type of membership that we were left with as we saw our full configuration. That really lasts with us throughout the year. So -- but that was an element we also incorporated into our view for 2025 as we approached our bid for '25. Thank you. Andrew Philip Witty -- Chief Executive Officer Well said, John. And maybe just to reiterate one thing John said and then maybe add a further point, A.J. Super important just to hear what you said in terms of that member mix. Obviously, we deal with it during this year, but we obviously had the opportunity to incorporate into our '25 planning and bid. So feel very good about that. And then secondly, maybe just to reflect, step back just a little bit on as we think of MLR. Really, the biggest incoming dynamic on MLR at the beginning of this year was the funding reduction in MA, the V28 significant reduction in funding. And you can see that we are fundamentally navigating that, I think, extremely well. And yes, there are a couple of areas of pressure at the margin. I think, as you just heard from John, they're primarily boxed off in terms of they're going to work their way through the pricing cycle with Medicaid or, in the case of concerns around coding activity, we're very focused on that, confident we're -- we'll be able to -- we are addressing that. So those things feel transitory. Most importantly, we feel good about the way our response to the V28 funding cut is playing out for us in the overall business. And really as we started the year, that was the much bigger thing to make sure we got right, and I'm feeling like we're well on our way through the first year of this 3-year cycle. And we've talked to you repeatedly about how critical it is to make sure we navigate that over the long run, and we feel good about that. So thanks, A.J. Next question? Thanks very much and good morning. I want to focus for a minute on SG&A, which came in much better than expected. Can you maybe talk about the key components of where you're seeing cost savings, the durability? And Andrew, you touched a little bit about AI efficiencies there. Are you starting to see that in this quarter? And how much opportunity is there from an SG&A perspective when we think about AI? Andrew Philip Witty -- Chief Executive Officer Lisa, thanks so much for the question. I'm going to ask John to comment a little bit. Let me make a couple of kind of upfront comments and then maybe a couple of examples more specifically to help you a little bit on this. So to get to your last point, we are running now hundreds of AI use case deployments. I'd say the first wave of those are essentially allowing us to do things much more quickly, much more reliably, much more efficiently than humans can do them, so an ability to navigate complexity to find the answers within complex datasets. And super important, and I'll give you a couple of examples of how that begins to help us as we go on. I think we are now -- you will also start to see, as we roll through the end of this year and next year, those same kind of tools begin to be deployed in fundamental reimagination of business process. So one is essentially allowing an existing process to run more efficiently. The second is can we actually take steps out of a process and really start to change things. I'd call out payment integrity as a front runner in that particular regard. And you'll start to see a lot of movement there over the next year or so, Lisa. And it's going to be, I think, OptumInsight, '25, '26, '27 in terms of deployment of technology to change many of the processes that we've been used to for decades is coming, and that's going to be a very exciting phase. If you look in the short run, I'll give you a couple of examples, and this plays a little bit around technology. I certainly wouldn't say these are all generative AI examples, but they're certainly digitization examples. They are certainly technology-enabled examples. So for example, we brought on this year Optum Rx a record number of clients. You've seen the growth. You can imagine the number of folks who've been signed up into Rx platforms. We actually spent 9% less this year in the onboarding of that record volume than we did the prior year, 9%, entirely due to digitization, technology efficiency deployed through the organization. Let me take you to another part of the organization, OptumHealth. We've more or less increased our number of risk -- fully risk delegated lives within OptumHealth by about 40% over the last two years. That's -- by the way, that's in excess of 1 million -- almost 1.5 million more lives over that period with zero increase in personnel headcount in the risk-based businesses. So zero increase in headcount in a business which has increased its served members by close to 40%. So those are just a couple of examples. You're seeing that show up in those two examples, Optum. That's why you're starting to see that leverage flow through the Optum business line and is something we obviously expect to continue to sustain over many, many quarters and years. And John, I'd love you to go a little deeper. John F. Rex -- President and Chief Financial Officer Lisa, as you can -- I guess I'd start by -- it's early in that journey in terms of potential and opportunity for what we can do. And yes, it was a very strong quarter in terms of cost management. But let me just step back a moment here. As you can imagine, given how some of these businesses were built and the fragmentation of the system, there are duplicative functions and uneven consumer experiences throughout that we're addressing. And as our businesses begin to scale, our ability to produce efficiencies accelerates while, at same time, we can improve those customer experiences and expand the best practice across the broader base. These comments, the comments that Andrew was offering in his answer to your question, it's just really a natural outgrowth as these businesses begin to move beyond what we have viewed the earliest phases to a more adolescent phase. That's what we're seeing very strong this quarter. Over the longer term, we can expect advancement. I wouldn't expect it to remain at this level consistently as we look ahead over the next few quarters, though. It was a super strong quarter. But we are going to look to invest in many of these items that Andrew just articulated here, getting to a more modern streamlined experiences as these businesses evolve further. So I wouldn't expect it to persist right at this level as we make those investments, and we're anxious and ambitious to make those investments. Andrew Philip Witty -- Chief Executive Officer Great. So, Lisa, thanks for raising it. You can tell it's a big focus for us. We laid out when V28 first was announced, that one of the three ways in we would -- that we would respond to this is we would double down on our own cost management efficiency and productivity. You're absolutely seeing that, and that coincides with an extraordinarily and exciting moment around technological innovation, whether that's generative AI, digitization, all wrapped together in our march toward a greater consumer focus within the organization. All of that really hangs together is very much the core focus of how we think about things going forward. Thanks, Lisa. Next question? Operator We'll go next to Josh Raskin with Nephron Research. Josh Raskin -- Analyst Hi. Thanks. Good morning. Looking at your bids that you submitted for MA for 2025, I'd be curious if you could tell us if you were bidding to improve MA margins in 2025 or if you're still within that target range in light of the G&A savings. And then more importantly, maybe just some early thoughts on what sort of growth assumptions you have included in those bids, both your assumption for the market as well as any potential market share gains. Andrew Philip Witty -- Chief Executive Officer Hey, Josh. Thanks so much. I'm going to ask Tim Noel to address the first part of your question. On the second part, you're not going to be surprised, but I'm going to defer from making any predictions about next year. It's still a little early. We'd like to see where everybody else plays out in this cycle. I think we all saw in the 2024 cycle, ultimately, the way growth plays out in the marketplace depends on how everybody bids, not just on how you bid. And it only takes one bid to be kind of out of expectation to completely distort your view of how things could play out. So just going to defer a little bit on that one. But on the first point, Tim, I'd love you to make a few comments. Tim Noel -- Chief Executive Officer, Medicare and Retirement Yeah. Thanks, Josh, for the question. So as we think about margins in the MA business and as it relates to our bid, I think we've talked about the consistent approach to how we plan margins. And we maintain -- continue to maintain that. And we're operating comfortably within that margin range as we have in the past and as we're planning in 2025. And then when I think about our pricing approach for 2025, as Andrew mentioned, too early to get into a lot of specifics as CMS is reviewing those bids right now. But we're in a posture on how we've priced those products as we'll be comfortable with whatever growth is the outcome of the products that we bring to marketplace in 2025. Andrew Philip Witty -- Chief Executive Officer Right. Thanks so much, Tim and Josh. Appreciate the question. Next question, please. Yeah. Hi. Thanks. Can you speak in a little greater detail about your expectation that the Medicaid pressure starts to subside in the second half of the year? I guess, specifically, can you maybe speak to what you actually know about rates today, either draft or finalized versus perhaps speaking to a general reliance on actuarially sound rates playing out over a reasonable period of time? Just trying to understand a little bit of visibility that you have a bit better. Hey, Stephen. Thanks for the question. I'm going to ask Krista Nelson, who leads our Medicaid business to respond to that. Krista? Krista Nelson -- Chief Executive Officer, UnitedHealthcare Community and State Yeah. Thanks so much for the question. So as it relates to visibility, we've got visibility into the majority of our rates for '24. And while there's just a slight gap in the second quarter, we really like how our 7/1 rates are shaping up and continue to work with state partners to influence key assumptions before those rates become final in the future. And while we might see a little bit of dislocation the rest of the year, states have really committed to accurately reflecting the change in acuity from redeterminations into current and future adjustments and really expect this to even out as we pace through the remainder of '24 and early '25. Thanks for the question. Andrew Philip Witty -- Chief Executive Officer Krista, thanks so much. So listen, Stephen, I think you heard there why we're confident that this is really a kind of time fenced issue. And in the grand scheme of things, I would characterize this as at the margin. It's a part of what you've seen in this small deviation in Q2, but we don't really see it as a sustainably structural issue, and you heard exactly why just there. So thanks, Krista. And Stephen, thanks for your question. Next question, please. Thanks. Good morning. Just a quick clarification and then a question about second half MLR. So first, a clarification. On the MLR, it sounded like, John, you're guiding to a core MLR of the -- at the high end of the range or 84.5%. And then I would add 30 basis points of the one-timers for the full year that you've seen in the first half. That would leave GAAP MLR at 84.8%. Is this correct? And to be clear, is there any expectation for further one-timers in the second half of the year? Or should the third and fourth quarter kind of be clean? And then my question is just around core MLR in the first quarter, ex the one-timers was 84.2%. It sounds like it will be 84.8% in the second half. Maybe you could help us think about 3Q versus 4Q just to make sure our expectations are set correctly given of how much focus there is here. Thanks. John F. Rex -- President and Chief Financial Officer Good morning, Justin, I'd say, first, yes, your -- the way you described our assumptions around core full-year MLR are consistent with our expectations. So how you describe that is quite consistent. As it relates to just looking at toward the 3Q and such, I'd expect that to be in the neighborhood of 84%, very likely a few tens of basis points higher than that, though, so it kind of a little bit above that in that zone. As it relates to kind of other elements that we've pulled out here, no, they shouldn't be material. Those cyber effects should continue to abate. As we mentioned, we're not adjusting for the elements we talked about the provider and coding intensity, so that kind of pulls through a little bit. But there shouldn't be any material other impacts that we're thinking about. Thank you. Hi. Thanks. Good morning. Actually, I was hoping we could maybe do a similar exercise as Justin just asked about what MLR for OptumHealth margins. And maybe first, if you can talk about how the OH margins came in at 2Q relative to your expectations and then how you're thinking about OH margins progressing in 3Q and 4Q, and then how comfortable you are with getting into that -- the full year target range that you had provided. And John, I thought it might be helpful to -- as we think about the sort of pacing in the back half of the year, in particular, how you're thinking about an exit rate for OptumHealth margins as we're exiting 2024 would be helpful. Thanks. Andrew Philip Witty -- Chief Executive Officer Scott, thanks so much for your question. I'm going to ask Dr. Amar Desai, who leads OptumHealth to give you a few comments there. Let me just preface that by saying, look, we feel good -- very good about the continued progression and, in particular, the way in which OptumHealth is -- has adjusted to deal with the new funding environment. I'm also very, very encouraged by the degree of external payer engagement with our OptumHealth platform as they deal with the environment themselves and look to OptumHealth as a part of that solution. And I think the performance of the business you see is it continues to improve over last year. You continue to see decent progression. And let me ask Amar to give you a little bit of a sense of how he sees the second half of the year playing out. Amar Desai -- Chief Executive Officer, Optum Health Scott, thanks for the question. So as Andrew said, we're in the middle of the first year of a large rate reduction over the next three years, effectively being a price cut. And as we think about the initiatives, we're pleased with the early success, mitigating the impact of that changing rate environment. In '23, we developed a three-year plan to manage through V28. Medical cost management and affordability initiatives was at the center of it. Proactive clinical engagement that impacts member experience and total cost of care is obviously core to that, including better prevention and chronic disease management. And then disciplined operating cost management, more efficient ways to work, improvements in productivity, driving consistency in our workflows and systems, which Andrew and John alluded to. We're executing very well on this plan, seeing solid progress across each of these areas. As an example, at this time last year, we had engaged 62% of all members. Year to date, we've engaged three-fourths of all members and above that for our highest-risk membership. We're also focused on coordination of care, particularly at transition points in care, where we've increased post-discharge visits for patients who have been hospitalized that has, in fact, reduced readmission rates by 10% in our most mature markets. So as we pace through the balance of the year, we expect to continue to build on this momentum across engagement, affordability, and operating cost management and are confident in the 7.7% to 8% target for the year. Andrew Philip Witty -- Chief Executive Officer Amar, thanks so much. And Scott, thanks again for the question. Next question, please. Operator We'll go next to Kevin Fischbeck with Bank of America. Kevin Fischbeck -- Analyst Great. Thanks. Just wanted to clarify, I guess, something and ask the same question. It wasn't clear to me what you were saying about no favorable reserve development. Does that mean the $800 million that you mentioned previously is still somehow in the numbers? Or is that kind of worked through at the end of Q2? And then I guess, just trying to understand better where the outperformance is because, obviously, you guys have assumed $0.60 to $0.70 of Change costs in your guidance, but reaffirm the numbers. And it doesn't sound like Medicare is the answer, doesn't sound like Medicaid is the answer. Change isn't the answer. So where has the outperformance coming that allowed you to maintain guidance? John F. Rex -- President and Chief Financial Officer Kevin, this is John. So yes, that's exactly what we said, there was nothing material there going on in development. No favorable P&L impacting development in the quarter, very similar to last quarter in terms of just no impact being there. And in terms of just a comment -- or questions regarding outperformance, well, maybe some -- across a number of the businesses in terms of where we're seeing. We're seeing very strong growth certainly in our commercial health benefits business. We're seeing strong growth. We're seeing margin progression in OptumHealth. So we're seeing advancement. The -- really, the strong approach that the team at M&R took and tell how they looked at '24 in terms of overcoming the headwinds of V28 and the very disciplined approach they took to how they stepped out into the marketplace with the products that they took. Even with some of the elements that we talked about that were overcoming there, but certainly, all those creating a good impact from us. Clearly, just across the company, the strong operating efficiencies that the company is driving strong and sustained. And they said, look, we will continue to make investments, but really a significant progress on that and still feel very early stage. So as Andrew commented in terms of the potential we have as we look over the next five years and this impact, and we're just getting some of these businesses to a maturity level where we think we can really harness that. Thank you. Andrew Philip Witty -- Chief Executive Officer Yeah. Thanks, John. And let me just also reiterate that point. Part of what you're seeing here, Kevin, is obviously the big change this year was the V28 funding cut price reduction, which obviously focuses primarily on our Medicare Advantage business that Tim runs and the OptumHealth business that Amar runs, both of whom are responding super well. But let's be clear. While those pricing cuts are focused on two businesses, team UHG is responding, right? The entire corporation is engaged in how it manages itself better, reduces cost across the company, leverages technology, accelerates our consumer agenda, all designed to play our part across the board in how we offset the pressure that's been inflicted on those two important businesses. Why we're confident we can navigate this? I think you're seeing that in the performance of the business, and we're going to continue. That's why I said what I said earlier today. We're going to continue to focus on every aspect of our business to make sure that our -- the model we've laid out and we believe is the right one to delivering best value care for patients is the one that prospers, and we're super confident in that. Next question. Hi. Good morning. The OptumInsight backlog was down about $200 million sequentially. Can you give us color on the drivers of that and the nature of conversations you're having with providers following the cyberattack? Do you expect further declines in the backlog this year? Thanks. Andrew Philip Witty -- Chief Executive Officer Andrew, thanks so much for that. Let me ask Roger Connor to address that. It's pretty straightforward. But let me ask Roger to answer that and maybe give you a little bit more flavor on what he's seeing. Roger Connor -- Chief Executive Officer, OptumInsight Yes. Andrew, thanks very much for the question. Just in terms of backlog, obviously, an important measure, and there has been some impact from the Change events within that. What it doesn't include, obviously, is what we're doing in terms of bringing in new clients and what we're doing in our whole innovation space. But fundamentally, we are very confident in terms of the performance going into next year with the cyber event certainly from an impact on the overall health system is not absolutely minimal. When you look at our overall focus, it's not on driving that business recovery, and that's all about bringing volume back into the system. And we're seeing that actually really ramping up and seeing momentum acceleration. We're not only trying to bring volume back into our current customers. We're also working to bring new clients in, and that's exciting because this event has really transformed the marketplace. They're looking for, again, access to innovation, access to security in the system, and that's what we've brought back. We've brought back a very secure system, and that is resonating. We're seeing that momentum. You add that to the underlying strength of the OptumInsight business. Again, Change is only 15% of our overall business performance this year and was planned. That's why we're confident in terms of getting back to our baseline performance in 2025. Andrew Philip Witty -- Chief Executive Officer Right. Thanks so much, Roger. Thanks, Andrew. Next question. Hi. Good morning. Thanks for the question. I wanted to go back to the provider coding activity that you called out and ask maybe what you saw kind of change in the quarter and what actions you're taking to address this change. And is this pressure something that you accounted for in bids for next year? And then if I could just ask a very quick clarification on the Change impact on EPS. You talked about the return to baseline performance in 2025. Does that mean you would expect to recover the $0.60 to $0.70 of it is in earnings this year? Andrew Philip Witty -- Chief Executive Officer OK. Thanks so much for the question, Nathan. Brian, if you'd like to go first. Brian Robert Thompson -- Chief Executive Officer, UnitedHealthcare Sure, I'll answer that first part on the upshift that we saw in provider level of care coding patterns. We actually believe that was largely induced by our level of care waivers that we did during the cyber disruption. The reason we believe that is we really saw higher level of mix to inpatient versus observation after we went back to turning on our utilization management protocols pretty distinct on April 15 and thereafter. So that's why we see that. Certainly aware of that activity as we plan for 2025 in our bid. So really no concerns with respect to that. Feel like it's an anomaly tied to what we saw during our waiver. And we have reinforced our utilization management protocols and believe that these impacts will dampen as we pace through the remainder of the year. John F. Rex -- President and Chief Financial Officer Yeah. And regarding Change, yes, as you -- as we mentioned in our comments and Roger mentioned, our ambition is to get back to baseline expectations performance for that business in 2025. So these baseline expectations being what we would have expected prior to any of this happening. And clearly, this quarter, we increased the impact of the business disruption here. So as we bring those back, there's -- the pacing of those revenues coming back taking sometimes a little bit more time to bring in, but that is our ambition actually as we look ahead. Andrew Philip Witty -- Chief Executive Officer Thanks, John, Brian. Again, just on this business interruption piece, I think in all honesty, we were a little optimistic in hindsight at the pace at which we thought people would come back in terms of putting their flow through the system once it was reconnected. I think as we've looked to the last several weeks, that momentum and pace in particular, as we look at new clients come in and as well as returning clients feel good about where we are now. So I think probably a little over optimistic three months ago. I think now, I feel like we have this now, and we're in a good position. And the rest of the year, we've got a clear path how this plays out. And I think the platform that we've rebuilt is going to serve people extremely well. Next question. Great. Thanks. So on the earlier topic of potential offsets, I wanted to ask on Optum Rx and with the recent level of industry attention kind of on the PBM business as well as kind of specialty pharmacy, how should we think about how those drivers are playing out relative to your expectations, whether it's biosimilars or GLP-1 in terms of that therapeutic category? How should we think about those near-term drivers across Optum Rx? Thanks. Andrew Philip Witty -- Chief Executive Officer Erin, thanks so much for the question. Let me ask Heather who runs Optum for us to make a couple of comments on that. If you don't mind, Heather? Heather Cianfrocco -- President, Optum Sure. Just basically, I think you can see in the quarter just strong performance. Maybe a couple of things I would just highlight for that. We've talked for a few years about the investments we've been making in Optum Rx on both the PBM side, but also on the pharmacy side. PBM side, I think you've seen the growth there in client and just in volume sort of same -- with respect to volume within our existing clients as well. We take that as a sign of strong retention of existing clients and continuing to perform with them. I think the thing I'd highlight on the PBM side is, I've said this before, the modular effect of the PBM business. We serve at the privilege of our clients. So what they need, we serve. And that is we administer their benefit, and we offer the programs, the services to drive affordability of medications for them in the best interest of their members. And we've brought a lot of products and services in the last year, two or three new products this market that are leading, differentiating in the marketplace that we are seeing our health plans and our employers take advantage of this year that are really market differentiating. And we're seeing that drive not just growth with health plans, but growth in products and services. So I think you're seeing that show up. The other thing you're seeing is the cost efficiency show up in the business, one of the -- Andrew brought up an example, and you're seeing some of the timing of supply chain efficiency. On the services side of the business, you mentioned specialty. I'd call out the diversification of the pharmacies in general. Remember, we've got the integrated behavioral health business, which continues to grow and expand. It's a very differentiated business and that it's co-located. And it's specifically directed at those behavioral health members to ensure access and affordability and a holistic care to individuals with mental health conditions. And then our frontier and our infusion services that really drive those specialty medications in home, we're seeing continued need for that from our PBM clients, but also non-PBM clients. And so that's where we're really seeing that diversified growth. So you're just seeing that show up in continued, consistent performance in that business through the quarter. Andrew Philip Witty -- Chief Executive Officer Heather, thank you. Erin, thanks so much for the question. We have time for one final question, please. Great. Thanks. For OptumHealth, could you talk a little bit about what pricing has been like there? And in Investor Day, it seemed like you may have seen some improved pricing as far as global cap rates. And likewise, given higher global cap rates out of the MA business, I was wondering if '25, we should be expecting continued improvement in that or whether there needs to be a retrenchment or retracing of that to kind of make up for what was given. And also, are you starting to exclude things from global cap as you look at 2025? Andrew Philip Witty -- Chief Executive Officer Lance, thanks for the question. And love the cheeky attempt at the end call to predict -- give you some numbers for '25. We're going to defer from that, but well done on the last ditch effort. I'm going to ask Amar to give you a little bit more of a kind of general sense of how we're seeing that. Hey. Thanks for the question, Lance. Look, we continue to have very strong relationships across our over 100 plan partners. And in fact, a pretty dynamic rate and benefit environment, we've seen increased outreach from payers looking for an enduring partner that's very adept at operating within fully capitated value-based arrangements. In particular, the discussions have been productive around benefit design, funding, market level planning, and we're confident in the position as we go into 2025. We're down the path in adding plan partners as well as adding geographies for 2025. Foundational within that to those relationships and as we think about those arrangements is quality, quality of care of our providers that are anchored in the community, our strong ability to drive clinical outcomes, improvements and achievement in star measures, and, of course, strong documentation and diagnosis. We also are seeing that the strength of our network that's aligned in geographies is an important focus area for plan partners and, of course, continued focus on clinical engagement, which I mentioned previously. So when you take that together, great momentum across those areas gives us confidence as we drive value for our plan partners and as we pace through the next two years of the risk model changes and grow. Andrew Philip Witty -- Chief Executive Officer Amar, thank you very much. And as I think you can probably sense from those couple of answers that Amar has given you over the course of the call. Amar leads a very, very special team of people running a very, very special business in terms of what it's able to do on behalf of patients and the way it's able provide great work experience for the healthcare professionals and colleagues who work in that business. I'm very pleased with how the continuation of that business progresses. We're coming toward the end of the call. I'd like to thank you all for your questions this morning. As you've heard, our focus on fundamental execution, our restless spirit, and our ability to adapt to changing environments gives us great confidence as we look ahead and as a testament to the hard work and discipline of the people of UnitedHealth Group who work every day to serve patients, consumers and care providers, customers efficiently and effectively. We appreciate your time this morning.

Elevance Health, Inc. (ELV) Q2 2024 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are encouraged to present a single question. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Steve Tanal Good morning, and welcome to Elevance Health's second quarter 2024 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Pete Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits business; and Felicia Norwood, President of our Government Health Benefits business. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. Thank you, Steve, and good morning, everyone. We appreciate you joining today's earnings call. This morning, we reported second quarter results, including adjusted diluted earnings per share of $10.12, reflecting 12% growth year-on-year. These results reflect thoughtful execution in a dynamic operating environment as well as the unique strengths of our enterprise, including the power of our diverse set of businesses. We have reaffirmed our full year adjusted diluted earnings per share guidance of at least $37.20, which represents 12% growth year-over-year. We have prudently maintained our full year outlook, given industry-wide dynamics we are navigating in our Medicaid business and the investments we are making to support business transformation and deepen capabilities within CarelonRx. Our Health Benefits segment demonstrated balance and resilience in the quarter. In Commercial, we continue to make progress on our margin recovery initiative and are delivering solid membership growth, notably in our individual ACA business which has grown substantially year-over-year. We've also extended our momentum in national accounts where the business is tracking to historically high retention levels and new customer acquisition remains strong. Year-to-date, we've consolidated business with additional existing employer group clients who previously only worked with us on a slice of their business, a testament to the unique value we deliver to the market. In Medicaid, we are pleased with our recent new business wins and re-procurement success, positioning us for future growth. We launched the Indiana Pathways for Aging program just weeks ago and are proud to be the largest payer in this important program in our home state, serving nearly 40% of all eligible Hoosiers. Indiana Pathways plays directly to our strengths, serving populations with chronic and complex needs. We were also privileged to be awarded the KanCare Kansas Medicaid RFP this quarter, working in partnership alongside two Blue partners as Healthy Blue. Turning to Medicaid redeterminations. While nearly all of our members have had their eligibility redetermined since the process resumed last year, our work is not done. With approximately 70% of coverage losses attributable to administrative challenges, we continue our proactive outreach to members to maximize access to care and minimize barriers to whole health. We expect disenrolled members to re-enroll throughout the year, albeit on a longer lag than expected when redeterminations resumed last year, We are seeing the percentage of returners steadily increase, especially in our Blue states where we offer both Commercial and Medicaid health plans. As a result of redeterminations, our Medicaid membership mix has shifted, resulting in increased acuity and we are working actively with our state partners to ensure rates remain actuarily sound. In Medicare, we were pleased with the recent ruling regarding our challenge of the initial 2024 Star ratings. As a result, our enterprise weighted-average rating has increased to 4.0 Star and we now expect approximately 56% of our members will be in plans rated at least 4.0 Star or in contracts too new to be rated that will be reimbursed similarly in payment year 2025. This outcome will help offset funding cuts to the Medicare Advantage program for the second consecutive year, which we believe will result in increased premiums and/or reduced benefits for seniors and people with disabilities who rely on Medicare Advantage for their health and wellbeing. For our part, we maintained our disciplined approach to 2025 bids. We will be offering highly valued and competitive benefits as we seek to balance growth and margins and remain focused on building an attractive and sustainable Medicare Advantage business for the long term. In our Health Services businesses, we are making progress on our key strategic priority to scale our enterprise flywheel for growth. Carelon Services delivered robust growth in operating revenue and earnings in the quarter as we gained traction with external clients both through new business wins and the expansion of risk-based services to existing customers. For example, we recently secured a significant win with an existing Blue Cross Blue Shield partner and deployed new behavioral and medical benefit management services to state and third-party payer clients. These awards are a testament to the value we deliver and an affirmation of our strategy of proving value internally before driving growth externally. Turning to CarelonRx. We are integrating recent acquisitions and scaling key value drivers as we invest to control the levers that matter to deliver greater value and enhance consumer experiences for our members. Our margin performance in the second quarter reflects elevated investment, specifically around infrastructure and service levels as we remain committed to providing best-in-class home delivery and SpecialtyRx services. We see significant opportunity to grow and scale these assets and remain excited about the growth potential of CarelonRx. We are making progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities and optimize our Health Benefits business and have robust long-term growth potential embedded in each of these imperatives. We are delivering strong and accelerating growth in Carelon Services with a long runway ahead. Meanwhile, our guidance for 2024 embeds significant investment in growth, notably in CarelonRx and government health plan operating margins below their long-term average with meaningful upside to our targets. Our focused execution reflects our confidence in Carelon as our flywheel for enterprise growth and the embedded earnings power of our businesses, which together will enable us to deliver strong growth in adjusted diluted earnings per share over the long-term. In closing, I want to thank our community partners who share our purpose and dedication as well as our associates who work hard every day to make Elevance Health a lifetime trusted health partner for the members we are privileged to serve. Their collective passion is reflecting a recent external recognition, including as one of America's Greatest Workplaces in 2024 by Newsweek where Elevance Health earned five out of five stars as well as our inclusion among the Best Companies to Work For for 2024 by US News and World Report. With that, I'd like to turn the call over to our CFO, Mark Kaye, to discuss our financial results and outlook in greater detail. Mark? Mark Kaye Thank you, Gail, and good morning to everyone on the line. As Gail shared, we reported second quarter results, including GAAP diluted earnings per share of $9.85 and adjusted diluted earnings per share of $10.12, representing growth of 12% year-over-year. We ended the second quarter with 45.8 million members, principally reflecting attrition in our Medicaid membership. Our commercial fee-based business grew by 354,000 lives year-over-year, reflecting the distinct value we provide to self-insured employers and the strength of the Blue Cross Blue Shield brand. Additionally, the thoughtful positioning of our individual ACA products has proven effective in ensuring robust and profitable growth. Total operating revenue for the quarter was $43.2 billion, approximately flat year-over-year. As we approach the tail-end of Medicaid redeterminations, we anticipate growing operating revenue in the second half of the year, driven by growth in premiums and CarelonRx product revenue related to higher external membership and the acquisition of Paragon Healthcare. Carelon Services' momentum accelerated in the quarter. Operating revenue grew by over 26% and operating earnings increased by more than 30% due to growth in risk-based services provided to internal and external clients, prudent pricing and strong execution. The consolidated benefit expense ratio was 86.3% for the second quarter, an improvement of 10 basis points year-over-year. This improvement was driven by several factors including premium rate adjustments in recognition of medical cost trends, disciplined medical management and a shift in our mix of business towards commercial. This was partially offset by our Medicaid business where acuity has increased due to attrition of healthier members. Elevance Health's adjusted operating expense ratio was 11.5% in the second quarter, an increase of 50 basis points relative to the second quarter of 2023. We absorbed elevated investment costs notably in CarelonRx and this along with other strategic initiatives will position our company for long-term sustainable growth. We anticipate significant improvement in our operating expense ratio in the second half of this year. Adjusted operating gain for the enterprise grew approximately 6% year-over-year, led by Carelon Services. We have maintained a prudent posture with respect to reserves. Days and claims payable at the end of the second quarter stood at 45.3 days, above our long-term target range in the low 40s. As a reminder, days in claims payable in the first quarter included approximately 1.7 days related to the industry-wide delays in claims receipts. With respect to our outlook, we are closely monitoring acuity and cost trends, notably in Medicaid, and are working collaboratively with states to ensure rates remain actuarily sound. We are, however, expecting second half utilization to increase in Medicaid and as a result, anticipate our full year benefit expense ratio will end the year in the upper half of our initial guidance range. Nonetheless, we expect to achieve our full year adjusted diluted earnings per share guidance of at least $37.20. Before I close, I'd like to briefly talk through our enterprise growth algorithm which we have included in the supplemental earnings presentation provided this morning. Our commitment to growing adjusted diluted earnings per share by at least 12% annually on average incorporates upper single-digit growth in operating revenue, underpinned by membership growth, geographic expansion and momentum in Carelon as we scale our enterprise flywheel. Our commitment to disciplined underwriting and operating expense management across all lines of business will drive the improvement inherent in our enterprise operating margin target of 6.5% to 7% by 2027. Taken together, we are targeting growing operating earnings in the upper single-digit to low double-digit percent range annually on average over time. Finally, we expect capital deployment to consistently deliver one-third of our targeted adjusted diluted earnings per share growth rate. Overall, our results in the first half of the year are consistent with our initial guidance, and we will maintain a steadfast focus on execution and operating efficiency over the balance of the year. And with that, operator, please open the call to questions. [Operator Instructions] For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice Hi, everybody. Maybe just to kick it off here. I know you've laid out your long-term growth objectives and all. I wonder if at this early date, you're prepared to comment a little more on any plans you have to accelerate growth in '25. I know the topline has had redeterminations and other things this year. What's your thought about ability to get back to that growth trajectory that you're seeking long-term in '25? Gail Boudreaux Great. Thanks, A.J., and thanks very much for the question this morning. I think let me start with what Mark outlined as our enterprise growth algorithm because I think that really frames for everyone how we are thinking about our business. And also as you think about 2024 and our results, the balance and resilience of our complementary businesses that has allowed us to grow in multiple ways in many type of different macroeconomic environments. While it is early for '25, I'd like to at least frame sort of how we're thinking about 2025. We do expect to accelerate revenue growth across all of our businesses. Specifically in our health business, we see a lot of really strong momentum in commercial and that's been ongoing. Part of that's through the targeted expansion of our individual ACA footprint and in some cases, adding new geographies that help support what's happening in the Medicaid redeterminations. In Medicare Advantage, as we said in our opening comments, we feel that we've positioned ourselves for sustainable growth in margins and look at that as a very good long-term business. And then in Medicaid, we're nearing the end of the redetermination cycle and we do anticipate a return to growth. And you've heard about some of our early wins this year which we are very pleased with. We also do believe that some of those that were redetermined based on administrative reasons will be coming back, albeit it's taken a little bit longer than we originally thought. And then I'd like to kind of close these comments about our excitement around Carelon and the growth that we're seeing and how we progressed. You saw some of that come through in the second quarter. In Carelon Services, we are seeing some very strong external growth in the quarter and we see expanded opportunities as we continue to build our capabilities, particularly in the risk market. And what we're seeing here is our ability to prove it on our own businesses first and then take it to the market commercially has been a really strong selling point for us and we're very excited about that. And then finally, CarelonRx is our ability to scale, especially on the specialty side, including the integration of some of our recent capabilities such as Paragon Healthcare, BioPlus Specialty Pharmacy. And we're looking forward to adding the Kroger Specialty Pharmacy business as well as we continue to diversify. So overall, as we think about acceleration of revenue growth in '25, we do expect it across all of our business and are extremely positive about what we're seeing inside of our business. So, thank you for the question. And next question, please. Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead. Nathan Rich Thanks for the questions. I wanted to ask on Medicaid. I think about a quarter of your book is due to set rates in the back half of the year. Could you maybe just talk about what your guidance assumes for these rate updates? And maybe anything you've seen kind of so far as you think about the updates for July or October to the extent you have visibility? And I guess, Mark, on your comment on Medicaid utilization, have you seen the level of care on a same member basis increase or is the issue really just the timing dynamic between where state rates are and the level of acuity that you're seeing in your population? Gail Boudreaux Well, thanks for the questions, Nathan. A lot in there. So let me ask Felicia Norwood, who leads Government first and then have Mark respond to the second part of your question. Felicia? Felicia Norwood So, good morning, Nathan. You are absolutely right. The way our rate timing works, we have about half of our states where we have rates in the first half of the year and the other half in the back half of the year with a -- our core group certainly in fourth quarter. At this point, we have visibility into nearly all of our Medicaid Premium for 2024 and the rate conversations with our states are very constructive. With that said, not all of our rates are final. We are in constant conversations with our states and providing them with information, updated information that we see in terms of the experience almost weekly to make sure that they are seeing what we are seeing from an overall change perspective as we wind down redeterminations which certainly has been one of the largest transformative things that have happened in Medicaid for some period of time. I will say that the conversations are ongoing. We fully expect our rates to remain actuarily sound, but we acknowledge the potential for a short-term disconnect between the timing of our rates and the emerging acuity in our populations and that's certainly been reflected in our updates for the year. I will say that we continue to make sure that states and their actuaries have the most recent data that we have and we will continue to have that engagement as we go through the fourth quarter rate process with a few very large states that remain in negotiations with us. And with that, I will turn it over to Mark to talk about the rest of the issues around utilization. Mark Kaye Thanks very much, Felicia, and good morning. Medicaid utilization in the quarter, as you heard from Felicia, reflected higher acuity as expected. We are also seeing signs of increased utilization across the broader Medicaid population, including in outpatient home health, radiology, durable medical equipment, as well as some elective procedures. I just wanted to add here, just as we noted in our prepared remarks, the full year outlook does allow for both this shift in acuity and increased utilization in the second half of the year, including the rate timing mismatch that Felicia spoke to. Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes Yeah. Could you talk a little bit about CarelonRx, and in particular, interested in the contracting approach and scope for the CVS contract that underlies parts of that as you're insourcing things? And then just if you could give a quick update on the status of the integration rollout to the Anthem members and other members of BioPlus and Paragon and the status of Kroger? Thanks. Gail Boudreaux Great. Well, thanks, Lance. I'm going to ask Pete Haytaian, who leads Carelon to address your question. Pete Haytaian Yeah. Thanks. Thanks a lot for the question, Lance. We feel very good about the overall strategy as it relates to pharmacy. I'll start with how we're performing on the core and growth in the core. Our strategy is resonating in the marketplace. There continues to be a lot of interest in what we're doing as it relates to the strategic levers that matter and how we're insourcing and diversifying our business. And I think our value story is really resonating -- the integrated value story and that's really playing through with highly competitive pricing. And again, we continue to perform very well on the core PBM down-market and middle-market. So we feel very good about that. As it relates to our diversification and your question on our assets, things are going very well. As we talked about with regard to specialty, we spent the last year building out our infrastructure to be able to handle the capacity -- to have the capacity to handle the Elevance scripts and we feel very good about that. We began to migrate scripts at the beginning of this year as it relates to specialty and we continue to move forward in that regard. And importantly, we are preparing right now and continue to make investments around the Kroger close and assuming those scripts as well. Right now, we're projecting that to close Q3, Q4 of this year and again, a lot of preparation and investment to make sure that we do that really well. And then finally, as it relates to Paragon, again, just to reiterate the opportunity there because we feel very, very good about that. We're talking about $16 billion of infusion spend as it relates to Elevance Health with about 50% of that being in the hospital setting. So again, a great opportunity for us to have care be provided in a more appropriate setting, be it in an ambulatory site or in the home and we feel very good about our positioning and the density that we have in our markets as it relates to that. And importantly, as part of that strategy, we are targeting at a zip code level, the stand-up of ambulatory sites to be able to provide that care. We're launching one imminently and then we are preparing and building out strategies to launch others into 2025. So, overall, we feel very good about our strategy of insourcing the strategic levers that matter and the growth opportunity that exists. Gail Boudreaux Thanks, Pete, and thanks again, Lance, for the question. And just I think this is a great example of our flywheel for growth and our ability to scale these assets which we're very excited about. And again, thinking about this as the opportunity to drive a differentiated cost of care for our health plans within Elevance Health, but also better experience for members and support our partners across the ecosystem. So again, a really important part of our flywheel. Next question, please. Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck Okay, great. Thanks. I guess in your prepared remarks, you mentioned that the results here were somewhat burdened by, I guess, three things. One, your investments in Carelon for growth and then you had below average margins in Medicaid and below average margins in Medicare Advantage. Can you help size those things? How should we think about where those margins are today relative to kind of where they should be from a target perspective? Thanks. Mark Kaye Thanks very much for the question. We're not going to comment on in detail where single lines business operating margin may land, given our combined Health Benefits reporting segment. But however, to your question, let me give you a little bit of color. We do expect the Medicaid margins to compress year-over-year. There are key factors driving this, including or beyond the industry-wide dynamics that we're navigating. And those include what we spoke to a moment ago around the timing mismatch of rates relative to acuity and the higher acuity itself associated with the Medicaid membership mix. Importantly, as you heard us talk to you just a moment ago, we are holding very constructive conversations with the states to ensure those rates remain actuarily sound. In Medicare, we do continue to expect margins are going to improve in 2024 compared to 2023. They will still remain below our long-term target margin range. And then finally, we are very pleased with the progress of our 2024 commercial repricing initiatives and our disciplined pricing practices. And we've spoken about this before, but it's worth emphasizing 2023 really marked that first -- or the end of that first full year of our efforts to recover margins and you're seeing some of that benefit together with the action that we're taking in 2024 come through our numbers. Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin Hi, thanks. Good morning. What are your expectations for market-level growth in MA for 2025? And I know it's early, but maybe any headwinds, tailwinds and how we should expect Elevance to grow market-share relative to the overall market in MA for 2025? So, good morning, Josh, and thank you. It's an incredibly dynamic time in Medicare Advantage. And now more than ever, we think it's important to be very thoughtful and rational as we plan for 2025. Despite this environment, Medicare Advantage enrollment is at an all-time high and over 50% of individuals are still choosing MA. And that means there's still a clear value for what MA offers and we're committed in the long-term to having and operating a profitable and sustainable MA business. It's a little early to talk about 2025 in terms of growth expectations. Our bids were recently submitted to CMS and frankly, we are still getting feedback on that. In addition to that, the industry-wide submissions aren't known yet. We feel encouraged by commentary from peers that everybody is going to kind of price rationally and have benefit rationalization as we head into 2025, but we still have to wait and see what emerges once we have greater information from our competitors. So at this point, there's a lot of unknowns. I will tell you we maintained a very disciplined approach, offering competitive benefits while we are balancing growth and margins. I think we were very thoughtful in the plan designs that we put out there to make sure that we were focusing on profitable growth and the sustainability of this program for the long term. We are very focused on our DSNP business, which is where we believe that we have a strong advantage when we think about our Medicaid and Medicare positioning. And we also did prioritization around our products in terms of our local market dynamics. So it's still early to determine what growth is going to look like for 2025. We feel very good about how we position our business on the heels of our strategy in 2024 to make sure that we have a sustainable long-term business in Medicare Advantage. Thank you. Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead. Lisa Gill Thanks very much and good morning. I really want to stick with Medicare Advantage for a minute. Can you talk about what you saw specifically in the quarter around trend? And then, Felicia, maybe you can comment on what you included around trend assumption in your MA bids as we think about 2025? Thanks very much for the additional questions here on Medicaid. First, we are seeing a larger than typical pull-forward effect and that's really driven by the increased numbers of Medicaid members who are losing coverage. You can think about this as beneficiaries who are facing an imminent loss of coverage, in the month or so preceding that coverage loss, picking up additional benefits. Second, member mischaracterization among the core expansion in specialized population has caused some localized revenue pressure as some members expect to regain coverage after previously being determined as ineligible. And third, on this topic of Medicaid, elevated outpatient trends in elective procedures. Steve just flagged me, he said to talk about Medicare. So I apologize for that. On Medicare, the answer is very short. Trends developed in line with expectations. Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake Thanks. Appreciate the question. First, can you size the Medicaid trend increase that you're seeing here? And then second, I just wanted to follow up on Kevin's question on government margins. Understand you don't want to give us specific absolute margin levels, but I was wondering if you could share your expectation of the trajectory of margins in Medicare Advantage and Medicaid for 2025 versus 2024? Thanks. Mark Kaye Thanks very much for the question. Segment margins in the quarter improved by 20 basis points year-over-year. And I'd argue that the first half results here are consistent with our initial guidance range. And we expect full year margins to end within our initial outlook, up 25 basis points to 50 basis points, primarily driven by the ongoing recovery of our Commercial business. From a seasonality perspective, there are two key comments I wanted to draw out here. For modeling purposes, second quarter revenue growth is going to mark the low point for the year and we expect third and fourth quarter operating revenue and premium revenue growth rates to improve. And then secondly, just on the MLR that ties directly to your question, we now expect the third quarter MLR to be near the high end of our full year guidance range. And I note this specifically, Justin, as the current third quarter consensus estimate does not appear to capture the calendar day shift associated with the Leap year and that's going to have approximately a 70 basis point impact on the third quarter MLR. Next, we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead. Erin Wright Hey, thanks for taking my question. Can you talk a little bit about the investments you're making around CarelonRx and how you're thinking about the timeline in terms of scaling specialty? And are there ample opportunities out there for you like Kroger and Paragon out there? Thanks. Gail Boudreaux Well, thanks. Thanks, Erin, and welcome to our call. I think this is the first time you've been on our call. So it's great to hear from you. I'll ask Pete to comment. Pete Haytaian Yeah, no, thank you. We feel very good about our specialty strategy, and I appreciate the question. I'll try not to repeat what I said before and give you a little bit more context. But as I noted, as it related to our specialty strategy, we acquired BioPlus last year in 2023. And again, we spent a lot of time last year in building out the infrastructure and the capacity to be able to assume Elevance scripts. And our focus as it relates to the near term is being able to migrate Elevance scripts, which will occur through this year and into 2025. As you noted, we're going to be opportunistic and we have been as it relates to things like Kroger, that provides additional scale for us. To give you a little bit of color on Kroger, it's about 500,000 incremental scripts. They also give us access to additional LDDs as well as having a presence in places like Puerto Rico, which could help us as well. And so we'll continue to be opportunistic as it relates to our specialty strategy and really on our focus to deliver whole health. We are anticipating, as I noted earlier, that Kroger would close Q3, Q4 of this year, and we're preparing for that and continuing to make investments around that. And then I'd say as we move forward more broadly and Gail touched upon this as it relates to our specialty strategy, there's a real focus on patient differentiation in Whole Health. We have a wonderful opportunity as we move forward to really drive Whole Health and capture all the value of Carelon, including things like integrating behavioral health and other services. And so that's going to be our goals and focus moving forward. We feel very bullish about it. We feel very bullish about our growth. We feel very bullish about delivering on the Carelon strategy and Whole Health as we move forward. Next, we'll go to the line of Michael Ha from Baird. Please go ahead. Michael Ha Thank you. Just wanted to ask about your long-term growth targets. In your deck, you now had a slight decline in health benefits long term growth CAGR. And apologies if I missed this in your comments, but could you provide some color on what's driving that? Is that MA, Medicaid, presumably not Commercial? And then I also think you reaffirmed long term targets on Carelon. But over the past year since your Investor Day, CD&R partnership, BioPlus, acquisition of Paragon, pending Kroger, the business seemingly has taken very positive steps forward in its evolution. So would it be fair to say your prior targets at Investor Day, most of those assumptions within your guide or long-term targets did not contemplate all these new developments. And specifically, Carelon Services revenue per consumer serve the 50% growth target by '27 now appears like there's much, much higher runway. So just overall taking a step back, even though you're reaffirming your targets. Is it true that now today, there's significantly greater potential embedded earnings power within Carelon versus last year that could be unlocked in future years? Thank you. Mark Kaye This quarter, we are pleased to introduce our growth algorithm which underpins our adjusted diluted earnings per share target of average annual growth of at least 12% over time. You asked a little bit about the revision, and we have revised our enterprise revenue growth target from the high single to low double-digits to high single-digits percent range and that's primarily to reflect Medicaid-related attrition that has occurred to date and the impact of the prudent actions that we're taking in our 2024 and 2025 Medicare Advantage bids in response to the risk model revisions. Accordingly, our health benefits segment revenue CAGR should now be in the -- will now be in the mid-to-upper single-digit percent range. But the key point here is our path is much the same. And that really means that we're expecting high-single-digit to low double-digit percent growth in operating earnings. And the key point here to the second half of your question, with approximately one-third contribution from capital deployment and that capital deployment can come through in the form of inorganic activity to support our Carelon businesses. Thank you. Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok Hi, good morning. Wanted to follow-up on some of the Medicaid comments. It sounds like you're optimistic that rates get better in the back half, but also acknowledge a temporary disconnect that persists and expect higher Medicaid utilization in the back half. So if we translate that into MLR expectations, does guidance assume that Medicaid MLR peaks in 2Q and gets better from here with potentially better rates or do you expect it to peak at some point in the back half of the year? Thanks. Mark Kaye Great question. And the opening comments there are completely consistent with the way that we're thinking about it. You should really think about this as we now expect our full year benefit expense ratio to be in the upper half of that initial guidance range, i.e., 87% to 87.5%, principally because of the Medicaid dynamics that we're navigating. We're not looking to provide specific quarter-by-quarter guidance. Next, we'll go to the line of Ryan Langston from Cowen. Please go ahead. Ryan Langston Hi, good morning. Just a quick one for me. Prior year development was a bit more favorable than we expected. Can you maybe give us a sense on if that's just mostly from the fourth quarter, and if so, any kind of particular pockets of utilization you'd call out is maybe coming in better than expected? Thanks. Mark Kaye Thanks very much for the question. Let me put the prior development in the context of the medical claims payment change this quarter. I think that's more instructive to understand the dynamics here. And you saw medical claims payable in the quarter go down by approximately $1.3 billion versus the first quarter. And there are really several factors that drove this and then ultimately drove PYD development. And they include the reserve runoff due to Medicaid membership decline, the catch-up in claims paid associated with elevated reserves for industry-wide claim receipt delays in the first quarter, and then the improved operational environment that's reflected through our shorter cycle times. And the key point here is that MCP, which is why it's more instructive, remains at historically high levels, both in aggregate and on a fully insured PMPM basis. And that indicates the continuity of our historical prudent reserving practices and our strong balance sheet. Gail Boudreaux Thank you, Mark. And, Ryan, welcome to our call for the first time. It's great to have you. Next question, please. Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead. Stephen Baxter Hi. Thanks. I just wanted to come back to the Medicaid utilization comments, I think you were making in response to an earlier question. I'd love to expand a little bit on that. Could you comment perhaps on how much of the pressure is geographically isolated in some of your markets versus maybe more broad-based? I think you're speaking to also some utilization of care from people that were expecting to lose coverage. Would you be expecting that dynamic to slow a little bit as redeterminations end, or is that potentially offset by rejoiner dynamics or factors like that? Thank you. Mark Kaye Thanks for the question and appreciate the opportunity to provide additional clarification here. Certainly, we expect the larger than typical pull-forward effect that we've seen in the second quarter to abate as the year goes on, principally because we're through the tail end of redeterminations at this point. We are obviously working with the states to ensure that the timing and rate mismatch is appropriately adjusted. On the member miscategorization, this is really ensuring that those members who are initially categorized, for example as TANF are put in the more appropriate and -- cohort for purposes of rates to think about ABD, for example. And then what we are really seeing elevate as the year goes on is the outpatient trains and elective procedures, and that's something that we fully accounted for in our MLR guide for the full year. Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead. Scott Fidel Hi, thanks. Good morning. I was hoping you could drill a bit more into the $4.3 billion of timing items that impacted operating cash flow. And then just wanted to see whether you expect all those to reverse in the back half of the year and whether you're comfortable reaffirming your full year CFFO target of at least $8.1 billion and if not, where you expect operating cash flow to land for the year. Thanks. Mark Kaye Appreciate the question this morning. Year to date, operating cash flow is $2.4 billion and to your point, that is a decrease of approximately $6 billion year-over-year. The key point here is that this includes $4.3 billion of timing-related items and approximately $1.3 billion of net cash outflows that are primarily associated with the runoff of our Medicaid reserves and the improvement in the operational environment, which is reflected by a short -- shorter cycle times. The timing-related item reflects a $3.6 billion impact from an additional month of premiums that we received from CMS in the year ago period, and so not a concern from our perspective. On a full year basis, we do expect operating cash flow outlook to be slightly north of $7 billion, and that really reflects the year-to-date reductions in working capital and specifically, as I mentioned a moment ago, that decrease in MCP driven by Medicaid membership attrition. Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James Thank you. So in the prepared remarks, you guys mentioned a significant win with a Blue Cross Blue Shield partner. I was wondering if you can help us size your pipeline there and give us any clarity on how penetrated you are into that market. So how many of your Blues brethren do you currently have contracts with and what's the opportunity look like to expand this? Yes, Sarah, thanks a lot for the question. Appreciate it. And yeah, we're really pleased with how services growth is going. We mentioned 26% growth in the quarter and a clear path of achieving our long term objectives. So we feel very good about that. As it relates to your question, again, our focus is, as Gail said earlier, building capabilities internally and importing them externally, and we're seeing that play through. And your reference to Blues, I would say that we are currently engaged with most of the Blues, and our strategy with regard to that is really landing and expanding, to be quite frank. And this is a great example of that where we had an existing relationship with a client, we continue to grow those services with that particular Blue. They see the value in that. We were able to convert some of those capabilities to risk. And I'll remind you that, that is a very big part of our strategy, assumption of risk, both on a category of service basis as well as a full risk basis. And so, you'll see that continue to move forward. As it relates to the pipeline, this year, we're doing very well. '24 growth year-over-year is very, very strong. So you'll see really nice improvement from that perspective. And as you would expect, we're already selling into 2025. A real focus in 2025 on our behavioral health capabilities, our post-acute capabilities and then some of our Carelon Health businesses. So I appreciate the question, Sarah. Gail Boudreaux Yeah. Thanks, Pete. Thanks for the question, Sarah. As you heard from Pete, it's an -- we have exciting opportunities to deepen our penetration because we do work with most of the Blues -- other Blues today and also other payers, quite frankly, and state partners has been a great opportunity for Carelon more broadly and you're seeing that come through. So thanks for the question. We're excited about the opportunity there. Next question, please. Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill Hey, good morning, guys. And I appreciate you taking the question. I guess, Mark, I was just going to ask if you could bridge a little bit when we think about the 2027 OP margin targets in the MCO segments. Kind of like how you think about the sources of the margin expansion there. And I'd be interested in particular if you would talk about what your expectations are around the exchange subsidies and the growth of the exchange business. Mark Kaye Thank you very much for the question, George, and certainly happy to talk through the algorithm at a little bit of a high level. So you can think about this as being driven by upper single-digit growth in revenue, enterprise operating margin expansion to 6.5% to 7%, and then the balanced approach to capital deployment, inclusive of share repurchases and strategic M&A. On the revenue side, revenue growth is going to be driven by increased membership in the health benefits business, geographic expansion efforts, and then prudent pricing to cover cost trend. And then similarly in Carelon, key drivers are going to include the expansion of risk-based revenue in Carelon Services and the continued growth in CarelonRx membership. On the margin side, expansion is going to reflect the disciplined operating expense management and the transformation of some of our business processes, leveraging new technologies, including AI. And that coupled together with -- or at least the way I think about it, effective medical management and underwriting disciplines really going to enable us to achieve the enterprise operating margin target. And then finally, consistent with our 2023 Investor Day guidance, we do expect to achieve approximately a third of our adjusted diluted EPS growth rate through capital deployments. Gail Boudreaux Thank you, Mark. And to your second part of the question around our exchange business, as you have heard us talk about, we have been, I think, very disciplined in our approach to expanding that business. We have had very strong results individually, up 30% -- 35% year-over-year with the ACA growing almost 40%. So as you think about that, our goal is to serve our members throughout their coverage transitions. We see a significant opportunity to continue that expansion, including geographic expansion, particularly for members that were historically in Medicaid and now need other coverage. So, again, a really nice opportunity. But you'll see that same sort of disciplined approach that we've shown throughout in the ACA. Next question, please. Next, we'll go to the line of Whit Mayo from Leerink Partners. Please go ahead. Whit Mayo All right. Hey, thanks. Just quickly, on midyear renewals, just remind us how much of the commercial risk book renews in the second half of this year and just how you're thinking about retention, membership, ability to take the required price action that you need. And just as a clarification, is it fair that Commercial is performing better than expectations on margin with government, worse, at least in the first half? I just wanted to make sure I properly got this. Thanks. Gail Boudreaux All right. Thank you. I'm going to have Morgan Kendrick, who leads our Commercial Business, address your questions. Morgan Kendrick Yeah. Thanks for the question. As we think about it, that cohort of business that we renew in July is about 25% of the risk-based large group business. And to camp onto that, it performed as expected. In fact, we're seeing persistency up a bit. We talked about attrition in the large group risk business with our January cohort on the first quarter call, That's abated and we're seeing persistency improve, and we're seeing the margins coming through. So we feel really good about how we're positioned for continued growth and expansion in that business moving forward. Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead. Dave Windley Thanks for taking my question. I believe you have a cost savings plan targeting around $750 million. That's maybe a relatively nearer term initiative. I'm wondering if you could describe your progress against that. And then also, should we think about the benefits of those savings dropping through? Or are you mostly reinvesting those savings in some of your growth initiatives? Thank you. Mark Kaye Dave, good morning. Thanks very much for the question. In terms of the 2023 business optimization activity, we are on track to realize the gross run rate expense efficiency improvement of approximately $750 million that we committed to do. And that's going to benefit both our operating performance this year and it's going to help to establish the strong foundation for growth in 2025 and beyond. If I step back just for a moment, and we covered this a bit in our prepared remarks, we do anticipate significant improvement in our operating expense ratio in the second half of the year as we continue to take additional steps to enhance operational efficiency, and we'll begin to see and realize those incremental run rate improvements over time. Gail Boudreaux Thank you, Mark. And Dave, I might maybe just spend a moment because I think it's a great opportunity to share a little bit about how we're going about this. We, first of all, have been very disciplined about our expense management. More importantly, we believe the opportunity around Generative AI for our business is expansive and it's going to materially impact all parts of our organization. We've been focusing on a couple of things, and I know I've spoken about this before, enhancing experiences while driving costs down, but also fueling future expansion. And I would say over the last few months we've really accelerated those internal efforts. And again, this has been a journey. So it's not new, but we are going to start seeing the absolute impact of the AI technology and digitization around our significant operational areas. And just a couple of things maybe to make this real as we transform. And there's kind of three areas around the engagement model that we think about members, providers and our own associates who are critical to this journey with us. On the member side, we look at each interactions of our members and we're using AI to make those much more unique and personalized and integrating it across our member touchpoints. Oftentimes there's disconnects in those touch points and that's a huge opportunity for us to take really personalized digital service and enrich that experience. And what does that do? I mean, the real impact you see it is improved access to care, better times processing, less error rates, reduction of our calls, use of chat. So those are some very tangible ways that we're deploying that and have been over the last year. And you're going to start seeing that come through based on what Mark just shared. The provider side is an area that I'm particularly excited about because we're looking at reimagining and streamlining all of our admin tax -- tasks rather on an end-to-end basis with the provider lifecycle. And that's a lot. But as you think about the impacts there, we touch not just providers but also members and some very specific things like automating the onboarding process of how they come into our plans, refining roster management specifically around data and how that drives downstream to claims, also enhancing contract administration. And we think those interactions are going to improve our member experiences, but also improve our relationship and our ability to work in value-based care with our care providers and more seamlessly. And then I'll end with associates because we know that they need to be part of this journey. It's also a cultural journey on AI that's going to drive, I think, greater efficiency. And we rolled out our spark, which is our internal ChatGPT tool to over 50,000 of our associates so that they can harness the capability, use it and improve their own productivity. And we're seeing really nice results from that. So again, I wanted to just share that because I think our expense, focus and efficiency is driven a lot by the impact we're going to see from that. And while we have a lot of opportunities, we're trying to look at the end-to-end impact of where we can take friction out of the system and fundamentally improve what we're doing. So hopefully that gives you a sense of how we're going about achieving the goals that we set, and we see huge opportunities going forward and embedded into our growth algorithm for the future. Next question, please. Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead. Ann Hynes Hi, good morning. I just want to focus on Specialty. I know that Elevance is -- with your acquisitions, you're insourcing more specialty, not only on the dispensary side but also the distribution side. So I'm just curious about your strategy longer term. Do you think there's more opportunity for specialty on the distribution side? And if you think there is, is there any therapeutic area you're focused on? Thanks. Pete Haytaian Thanks for the question, Ann. We think there's a tremendous opportunity as it relates to specialties. I said, earlier, our priority in the near term is the Elevance scripts, and absorbing the Elevance scripts effectively. And then also, as we talked about what we're doing with Kroger. We continue to see opportunities to cover more LDDs. And then in addition to that, as it relates to Whole Health, we are very focused on the patient experience. We are very focused on centers of excellence and how we can care for the members in a differentiated way by wrapping around additional assets. Longer term, again, we will be opportunistic, but right now, we have a lot in front of us and we want to execute against that effectively as it relates to specialty. Gail Boudreaux Yes. Thanks, Pete. And Ann, I just want to highlight one point that Pete said, it's really an integration strategy. Specialty has a long runway for us, but the integration to our Carelon Services and what we do to deliver better value for our health plan members is really critical to our strategy. And I think that is unique, our ability to take both the Specialty pharmacy, but all the Specialty services around these disease categories we think is differentiating. So, thank you. Last question we're going to take now, please. For our final question, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix Hi. Thank you very much. I just wanted a quick follow-up on Felicia's comments on MA bids for next year. I realize it's too early to talk about growth, but I think earlier in the year, you had talked about long term MA growth focused toward Carelon markets. And I just wanted to see if you could provide any color on how your bids contemplate your geographic footprint evolving and also your density towards Carelon markets in 2025. Thanks. Felicia Norwood So, Ben, thank you for the question. We've always been very strategic around where we want to see our MA growth as we go forward. If you recall this past year, we made very deliberate decisions around markets that we wanted to exit because we wanted to make sure that we positioned ourselves to long term growth and performance. When we think about our strategy today, it's certainly in those areas where we have Medicare and Medicaid business, because the DSNP business is incredibly important for us. And if you think about where things are going long term, having alignment around Medicare and Medicaid is critical for us. But ultimately, it's absolutely about being able to deliver for the Carelon flywheel as well. The members that we are focused on, particularly in D-SNP and other SNP products, are very complex populations. And as we think about Whole Health, we've been working very collaboratively with Pete and the team to make sure that we are able to deliver Whole Health for those that we are very privileged to serve. So the footprint really is focused on density, certainly in our Blue markets, but being able to be focused on our Medicaid markets as well, in places where we see opportunities to grow strategically with Carelon in the future. And that's the pathway and framework that we've established when we think about the long term growth for our Medicare Advantage business which we continue to be incredibly excited about as we think about being a lifetime trusted partner for those we serve. So thank you for the question. Gail Boudreaux So, thank you for your questions, everyone, and thank you for all of you for joining us today, for your interest and your support. We look forward to sharing more about our progress that we're making on our enterprise strategy with you in the coming quarters and are confident that the balance and resilience of our diverse set of businesses positions us well. Thank you for your interest in Elevance Health, and have a great rest of your week. Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through August 17th, 2024. You may access the replay system at any time by dialing 800-391-9851. International participants can dial 203-369-3268. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.

UnitedHealth Group Incorporated (UNH) Q2 2024 Earnings Call Transcript

A.J. Rice - UBS Lisa Gill - JPMorgan Josh Raskin - Nephron Research Stephen Baxter - Wells Fargo Justin Lake - Wolfe Research Scott Fidel - Stephens Kevin Fischbeck - Bank of America Andrew Mok - Barclays Nathan Rich - Goldman Sachs Erin Wright - Morgan Stanley Lance Wilkes - Bernstein Good morning, and welcome to the UnitedHealth Group's Second Quarter 2024 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 US 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 amount is available on the financial and earnings reports section of the company's investor relations page at www.unitedhealthgroupcom. Information presented on this call is contained in the earnings release we issued this morning and in our form 8-K dated July 16, 2024, which may be accessed from the investor relations page of the company's website. I will now turn the conference over to the Chief Executive Officer of UnitedHealth Group, Andrew Witty. Andrew Witty Thank you, Jennifer. Good morning, and thank you for joining us. The second quarter results we reported today reflect diversified and durable growth and a commitment to ensuring high quality care is available to every person we're privileged to serve. In the first half of the year, revenues grew by nearly $14 billion, with strong contributions from across the enterprise, led by double-digit growth at Optum. UnitedHealth Group entered the second half of the year with continuing and broad-based growth momentum. As a result, we are affirming our full year adjusted earnings outlook even as we absorb $0.60 to $0.70 per share in business disruption impacts related to the cyberattack. These results come from the sustained focus of the 400,000 people of UnitedHealth Group on adding value for patients, consumers and customers through the fundamental execution of our key priorities. We're also well positioned for growth in 2025. In the selling season to date, the most sophisticated thoughtful buyers of health benefits and services in the US, such as large employers, unions, states, seniors, all continue to choose the offerings of UnitedHealth Group, when they're looking for managed care, pharmacy services or a Medicare Advantage plan that provides the best value. This consistent growth reflects customers' recognition of the need for a company like ours. As you know, UnitedHealth Group strives to help reduce the fragmentation and lack of coordination that drives up costs and erodes care outcomes in the $5 trillion US healthcare marketplace. We aim to better coordinate and align incentives among caregivers, payers, and pharmacy, enabling us to focus on the whole patient throughout their health journey. We believe this increases value for customers and consumers, improves people's experience and health, reduces redundancies and waste, and ultimately leads to a more sustainable health system. For example, the proven health and economic value to consumers and taxpayers of Medicare Advantage. A recent study by Milliman found that the cost of taxpayers of Medicare Advantage is 4% less than traditional fee-for-service Medicare. At the same time, Medicare Advantage provides seniors well over $2,000 per year in additional value through lower out-of-pocket cost and important services like dental, vision and hearing, none of which fee-for-service Medicare covers. That means a lot to the majority of the people Medicare Advantage serves, who have limited economic resources and otherwise would lack access to such services. The home visits we offer seniors further illustrate the value of MA. Last year, our medical professionals made more than 2.5 million home visits. As a direct result, our clinicians identified 300,000 seniors with emergent health needs that may otherwise have gone undiagnosed. They connected more than 500,000 seniors to essential resources to help them with unaddressed needs such as food insecurity, medication affordability, transportation, and financial support. They also identified and helped close more than 3 million gaps in care that made a real difference in people's lives. Within 90 days of one of our home visits, 75% of patients received follow-up in a clinical setting. Additionally, Medicare Advantage patients with chronic conditions who receive these home visits end up with better managed and more stable health outcomes, as evidenced by spending measurably less time than fee-for-service patients in emergency room and other hospital settings. The bottom line, our home visit programs help patients live healthier lives and save taxpayers money. It is only Medicare Advantage that makes programs and results like this possible. Similarly, Optum Rx clients continue to appreciate the efforts we make to ensure delivery of the lowest cost drugs in the face of drug companies' sole ability to set prices. They also recognize the importance of the comprehensive pharmacy services we provide to people that's driving our momentum this year and bodes well for 2025. We also continue to bring practical innovation to people through new products and services, and by using new and emerging technologies to improve our own operating efficiency. For example, Surest continues to differentiate itself in the marketplace, which is why more and more customers are offering it to their employees, and why the offering continues to grow substantially. Additionally, investments in modernization of legacy technology and new emerging technologies are enabling our consumer-centric advancement of healthcare. For example, our growing AI portfolio made up of hundreds of practical use cases will generate billions of dollars of efficiencies over the next several years. These investments enable us to improve consumer experience, enhance provider find and price care capabilities to meet people's needs and improve clinical back-office execution. We expect technology innovation to become an increasingly core driver of our growth over the next two to five years. And now, I'll turn it over to our President and Chief Financial Officer, John Rex. John Rex Thank you, Andrew. I'll start this morning by providing context on some of the unique items in the quarter. Then, I'll follow with perspectives on care activity and general business updates. The overarching theme I hope you leave with today is that UnitedHealth Group continues to deliver broadly diversified growth with expanding opportunities, work that positions us for continued strong performance in '25 and beyond. Now to update on Change Healthcare. Our focus has centered on the patients, care providers and customers who rely on us to keep the health system running. Payment and claims [slows] (ph) for most care providers are back to normal, but we know that is not the case for some, so we continue to work with those who are not there yet. UnitedHealth Group has provided more than $9 billion in loans and advance payments to help providers mitigate the impact of the attack, all at no cost to them. Cyber impacts in the quarter totaled $0.92 per share, and we now estimate the full year impact will be $1.90 to $2.05 per share. But let me break that down a couple of steps further for you. Of the total in the quarter, $0.64 per share were direct costs incurred in restoring the clearinghouse platform and other response efforts. These included higher medical expenses directly stemming from the temporary pause of some care management activities. For the full year, we now estimate these direct costs at $1.30 to $1.35 per share. The $0.40 to $0.45 per share increase in this estimate is primarily related to care provider financial support and costs for producing and mailing the consumer notifications that will begin later this month. As a reminder, these direct costs are included in net earnings but are excluded from adjusted earnings per share. The other component affecting our results relates to disruption of the ongoing Change Healthcare business. This largely encompasses the loss of revenues combined with the costs of keeping these capabilities fully ready to serve. Notably, these effects are not excluded from adjusted earnings. In the second quarter, this impact was $0.28 per share. For the full year, we now estimate the business disruption impacts at $0.60 to $0.70 per share compared to the $0.30 to $0.40 we estimated last quarter. Most of the service functionality is now restored and revenues are rebuilding even as the pacing of this process varies. These important services are now more modern, secure and capable, and continuing to advance rapidly. Our ambition continues to be to return to baseline performance in '25 and to grow strongly from there. Turning to international. Following the sale last quarter of our much larger Brazil operations, we classified the remaining South American businesses as held for sale. This is a natural step following the Brazil sale. We highly value the relationships we have built with our dedicated colleagues over the last several years and wish them continued success. In a diverse enterprise with a strong growth record and capabilities such as ours, such portfolio evolutions enable us to keep our focus on the many compelling growth opportunities before us. The second quarter includes a total of $1.3 billion in South American impacts, the majority of which is non-cash and largely due to foreign currency translation losses accumulated over the years. About $220 million of this stems from a regulatory action in Chile, affecting all health plans. You'll see that as a component in the supplemental financial tables we provided this morning. The action relates to industry premium increases dating back to 2020, but as configured, will be reflected in consumer premium credits to be issued in future years. As a result, the entire $220 million was recorded as a reduction to premium revenue in the second quarter, increasing our reported medical care ratio by about 25 basis points. Turning to the second quarter medical care ratio, it was also impacted by about 40 basis points, or $290 million due to the suspension of some care management activities after the cyberattack. That makes for a total of about 65 basis points of non-repeating impacts, including South America. Beyond these effects, the care ratio in the quarter was also modestly affected by three other factors. One being member mix within Medicare Advantage and dual special needs plans, which this year has been shaped by the unusual competitive benefit configurations in the marketplace. A second being the timing mismatch between the current health status of remaining Medicaid members and the state rate updates, a timing mismatch we expect to realign in the months ahead. And third, the lingering upshift in provider coding intensity, which we believe was spurred by the temporary suspension of our care review activities and carried past. This impact is not reflected in our cyberattack direct response costs, and we have been addressing it. Nonetheless, we continue to expect our full year medical care ratio, excluding 30 basis points of cyber and South American effects to be within the range we offered in November, albeit at the upper end. For our 2025 Medicare Advantage planning process, we assumed care patterns and mix at the levels we are seeing today, in addition to fully incorporating the second of the three-year phased funding cuts, and we have been fully attuned to how the Inflation Reduction Act will affect Medicare Part D offerings in '25. Also, as noted, we expect the Medicaid timing mismatch to subside as rates are updated throughout the remainder of this year and into next, appropriately reflecting current member health status. Turning to the performance of our businesses. At UnitedHealthcare, revenues of $74 billion grew by $3.6 billion. UHC domestic commercial membership grew 2.3 million in the first half of this year as employers and consumers responded to our distinctive offerings. And while the '25 selling season is ongoing, we are encouraged by the continued momentum we see. Our recently filed Medicare Advantage bid for '25, again took a balanced approach to provide as much stability for seniors as possible, while factoring in the realities of the funding cuts and current care patterns. You can expect us to continue to prioritize balanced and durable performance over transitory market share gains. In Medicaid, we expect membership levels to stabilize as we head into the second half of the year and our teams are executing well with both renewals and expansions. Optum Health revenues grew by 13% to $27 billion, and the operating margin expanded over last year. We are on track to approach 5 million patients in value-based care by the end of this year and are progressing strongly on our earlier and deeper engagement with patients, with a purposeful focus on our newer regions to more rapidly improve health outcomes and experiences. Optum Rx revenues grew 13% to over $32 billion, driven by strong customer response to the differentiated value, consumer experience and clinical expertise we offer. At Optum Insight, for the services beyond Change Healthcare, we see strong performance in line with our expectations. The revenue backlog increased to nearly $33 billion, growth of over $1 billion from a year ago, driven by business process and information technology services for health systems. A few additional items of note. As we highlighted in April, we established an additional $800 million in medical reserves in the first quarter to reflect the potential for the cyberattack to have affected claims receipt timing. With claims now flowing at more normalized levels, we continue to prudently analyze these trends. Similar to last quarter, the second quarter results do not reflect any favorable earnings impacting medical reserve development. Days [and] (ph) claims payable at 45.2 compared to 47.1 in the first quarter. The change was due primarily to the return to more normal claims submission patterns from providers and to a lesser extent, some impact from reclassifying the remaining South American operations to held for sale. Cash flows from operations in the quarter were $6.7 billion, or 1.5 times net income, even with the accelerated funding for care providers. In June, our Board of Directors increased the dividend by 12%, marking the 15th consecutive year of double-digit dividend increases to shareholders. During the quarter, as I mentioned earlier, we prioritized devoting resources to support care providers in the wake of the cyberattack over some activities such as share repurchase. It was the right thing to do, devoting all our efforts to provide stability for the health system. Still, with our ongoing strong capital capacities and with support needs abating, we expect to achieve the full year repurchase objective we shared with you last November. In summary, it is the confidence we have in the performance of our diversified businesses that allows us to affirm full year adjusted EPS in the range of $27.50 to $28.00, the objective we established last year. Even as we have absorbed the unanticipated $0.60 to $0.70 in business disruption impacts. Within this, we expect a balanced pacing in the second half. John, thank you. As I said in November at our investor conference, we operate in an environment where change is constant. What you've come to see is that when changes happen, foreseen or unforeseen, we just deal with it. UnitedHealth Group is a nimble and adaptable enterprise, well suited to meet the challenges that come our way and the opportunities we pursue with the many and diverse capabilities available to us. In this first half, as we've done before, we navigated a complex external environment while managing through a significant business disruption. We continue to deliver on our growth objectives and are committed to delivering on our 13% to 16% long-term growth target. We'll now answer any questions you might have. Operator, please. [Operator Instructions] We'll go first to A.J. Rice with UBS. A.J. Rice Hi, thanks for the question. Just to make sure, expanding on John's comments, if we're thinking about the -- your thinking on MLR overall for the rest of the year, it sounds like beyond Change, beyond Latin America, there's two items you're calling out. One is Medicaid timing mismatch, which sounds like you think it's short term and then this upcoding, coding intensity comment. And I assume that's mainly in the insurance business, but maybe it's in Optum as well. Can you just give us a sense of how much those are impacting your thinking? And how much is second quarter versus the impact in the back half on those? Andrew Witty Yeah, A.J., thanks for the question. Let me ask John to get right to it. John Rex Good morning, A.J. Yeah, and really kind of three items that we're talking to in addition to those two here, also the member mix component here when you bring it all together, those additional items that we're looking at in terms of -- versus where we were and how we're thinking about it. I would say they're in kind of roughly equivalent -- in roughly equivalent zone in terms of their impact here. And then how they flow throughout the year -- the rest of year, really, you'll see some of those elements. So, as it relates to Medicaid impacts, pricing goes on over a period of, say, kind of 12 months or so. So there's pricing that occurs over the rest of this year into next year. So those elements in terms of catching up -- that mismatch catching up with the acuity that we have in the remaining population occurs over a period. Certainly, we are addressing the elements we talked about in terms of what we're seeing in the coding up shift, and we're well underway in addressing those elements, but we'll continue to address them throughout the course of the year. The member mix is kind of the member mix we have now at this point. And that really pertains to just the elements that I mentioned in my prepared comments about some of the benefit design impacts and how that impacted both our growth and also the type of membership that we were left with as we saw our full configuration. That really lasts with us throughout the year. So -- but that was an element we also incorporated into our view for 2025 as we approached our bids for '25. Thank you. Andrew Witty Well said, John. And maybe just to reiterate one thing John said and then maybe add a further point, A.J. Super important just to hear what you said in terms of that member mix, obviously, we deal with it during this year, but we obviously had the opportunity to incorporate into our '25 planning and bids. So, feel very good about that. And then the secondly, maybe just to reflect, step back just a little bit on as we think of MLR. Really, the biggest incoming dynamic on MLR at the beginning of this year was the funding reduction in MA, the V-28 significant reduction in funding. And you can see that we are fundamentally navigating that, I think, extremely well. And yes, there are a couple of areas of pressure at the margin. I think as you just heard from John, they're primarily boxed off in terms of they're going to work their way through the pricing cycle with Medicaid or in the case of concerns around coding activity, we're very focused on that, confident we'll be able to -- we are addressing that. So those things feel transitory. Most importantly, we feel good about the way our response to the V-28 funding cut is playing out for us in the overall business. And really that -- as we started the year, that was the much bigger thing to make sure we got right, and I'm feeling like we're well on our way through the first year of this three-year cycle, and we've talked to you repeatedly about how critical it is to make sure we navigate that over the long run, and we feel good about that. So, thanks, A.J. Next question? Thanks very much and good morning. I want to focus for a minute on SG&A, which came in much better than expected. Can you maybe talk about the key components of where you're seeing cost savings, the durability? And, Andrew, you touched a little bit about AI efficiencies there. Are you starting to see that in this quarter? And how much opportunity is there from an SG&A perspective when we think about AI? Andrew Witty Lisa, thanks so much for the question. I'm going to ask John to comment a little bit. Let me make a couple of kind of upfront comments and then maybe a couple of examples more specifically to help you a little bit on this. So, to get your last point, we are running now hundreds of AI use case deployments. I'd say the first wave of those are essentially allowing us to do things much more quickly, much more reliably, much more efficiently than humans can do them. So an ability to navigate complexity to find answers within complex datasets. And super important, and I'll give you a couple of examples of how that begins to help us as we go on. I think we are now -- you will also start to see as we roll through the end of this year and next year, those same kind of tools begin to be deployed in fundamental reimagination of business process. So one is essentially allowing an existing process to run more efficiently. The second is, can we actually take steps out of a process and really start to change things. I'd call out payment integrity as a front-runner in that particular regard. And you'll start to see a lot of movement there over the next year or so, Lisa. And it's going to be, I think, OptumInsight '25, '26, '27 in terms of deployment of technology to change many of the processes that we've been used to for decades is coming, and that's going to be a very exciting phase. If you look in the short run, I'll give you a couple of examples. And this plays a little bit around technology. I certainly wouldn't say these are all Generative AI examples, but they're certainly digitization examples. They are certainly technology-enabled examples. So for example, we brought on this year at OptumRx a record number of clients. You've seen the growth. You can imagine the number of folks who've been signed up into Rx platforms. We actually spent 9% less this year in the onboarding of that record volume than we did the prior year, 9%, that's entirely due to digitization, technology efficiency deployed through the organization. Let me take you into another part of the organization, OptumHealth. We've more or less increased our number of risk -- fully risk delegated lives within OptumHealth by about 40% over the last two years. That's -- by the way, that's in excess of 1 million -- almost 1.5 million more lives over that period with zero increase in personnel headcount in the risk-based businesses. So, zero increase in headcount in a business which has increased its served members by close to 40%. So those are just a couple of examples. You're seeing that show up in those two examples, Optum. That's why you're starting to see that leverage flow through the Optum business line and it's something we obviously expect to continue to sustain over many, many quarters and years. And, John, I'd love you to go a little deeper. John Rex Yeah. Good morning, Lisa. As you can -- I guess I'd start by -- it is early in that journey in terms of the potential and opportunity for what we can do. And yes, it was a very strong quarter in terms of cost management. But let me just step back a moment here. As you can imagine, given how some of these businesses were built and the fragmentation of the system, there are duplicative functions and uneven consumer experiences throughout that we're addressing. And as our businesses begin to scale, our ability to produce efficiency accelerates while, at same time, we can improve those customer experiences and expand the best practice across the broader base. The comments that Andrew was offering in his answer to your question, it's just really a natural outgrowth as these businesses begin to move beyond what we have viewed the earliest phases to a more adolescent phase. That's what we're seeing. Very strong this quarter. Over the longer term, we can expect advancement. I wouldn't expect it to remain at this level consistently as we look ahead over the next few quarters, though. It was a super strong quarter. But we are going to look to invest in many of these items that Andrew just articulated here, getting to a more modern streamlined experiences as these businesses evolve further. So I wouldn't expect it to persist right at this level as we make those investments, and we're anxious and ambitious to make those investments. Andrew Witty Great. So, Lisa, thanks for raising it. You can tell it's a big focus for us. We laid out when V-28 first was announced, that one of the three ways that we would respond to this is we would double down on our own cost management efficiency and productivity, you're absolutely seeing that. And that coincides with an extraordinarily and exciting moment around technological innovation, whether that's Generative AI, digitization, all wrapped together in our march toward a greater consumer focus within the organization. All of that really hangs together is very much the core focus of how we think about things going forward. Thanks, Lisa. Next question. We'll go next to Josh Raskin with Nephron Research. Josh Raskin Hi, thanks. Good morning. Looking at your bids that you submitted for MA for 2025, I'd be curious if you could tell us if you were bidding to improve MA margins in 2025, or if you're still within that target range in light of the G&A savings? And then more importantly, maybe just some early thoughts on what sort of growth assumptions you have included in those bids, both your assumption for the market as well as any potential market share gains? Andrew Witty Hey, Josh, thanks so much. I'm going to ask Tim Noel to address the first part of your question. On the second part, you're not going to be surprised. I'm going to defer from making any predictions about next year. It's still a little early. We'd like to see where everybody else plays out in this cycle. I think we [also are] (ph) in the 2024 cycle. Ultimately, the way growth plays out in the marketplace depends on how everybody bids, not just on how you bid. And it only takes one bid to be kind of out of expectation to completely distort your view of how things could play out. So, just going to defer a little bit on that one, but on the first point, Tim, I'd love you to make a few comments. Tim Noel Thanks, Josh, for the question. So, as we think about margins in the MA business and as it relates to our bid, I think we've talked about the consistent approach to how we plan margins. And we maintain -- continue to maintain that and we're operating comfortably within that margin range as we have in the past and as we're planning in 2025. And then when I think about our pricing approach for 2025, as Andrew mentioned, too early to get into a lot of specifics as CMS is reviewing those bids right now. But we're in a posture and how we've priced those products as we'll be comfortable with whatever growth is the outcome of the products that we bring to marketplace in 2025. Andrew Witty Great. Thanks so much, Tim. And, Josh, appreciate the question. Next question, please. Yes. Hi. Thanks. Can you speak in a little greater detail about your expectation that the Medicaid pressure starts to subside in the second half of the year? I guess specifically, can you maybe speak to what you actually know about rates today, either draft or finalized, versus perhaps speaking to a general reliance on actuarially sound rates playing out over a reasonable period of time? Just trying to understand the level of visibility that you have a bit better. Thank you. Andrew Witty Okay. Hey, Stephen, thanks for the question. I'm going to ask Krista Nelson, who leads our Medicaid business to respond to that. Kristen? Krista Nelson Yeah, thanks so much for the question. So as it relates to visibility, we've got visibility into the majority of our rates for '24. And while there's just a slight gap in the second quarter, we really like how our 7/1 rates are shaping up and continue to work with state partners to influence key assumptions before those rates become final in the future. And while we might see a little bit of dislocation the rest of the year, states have really committed to accurately reflecting the change in acuity from redeterminations into current and future adjustments and really expect this to even out as we pace through the remainder of '24 and early '25. Thanks for the question. Andrew Witty Krista, thanks so much. So I mean, listen, Stephen, I think you heard there why we're confident that this is really a kind of time-fenced issue and in the grand scheme of things, I would characterize this as a margin. It's a part of what you've seen in this small deviation in Q2, but we don't really see it as a sustainably structural issue and you heard exactly why just there. So, thanks, Krista. And, Stephen, thanks for your question. Next question, please. Thanks, good morning. Just a quick clarification and then a question about second half MLR. So first, the clarification. On the MLR, it sounded like, John, you're guiding to a core MLR at the high end of the range or 84.5%, and then I would add 30 basis points of the one-timers for the full year that you've seen in the first half, that would leave GAAP MLR at 84.8%. Is this correct and to be clear, is there any expectation for further one-timers in the second half of the year? Or should the third and fourth quarter kind of be clean? And then my question is just around, core MLR in the first quarter, ex the one-timers was 84.2%. Sounds like it'll be 84.8% in the second half. Maybe you could help us think about 3Q versus 4Q just to make sure our expectations are set correctly, given how much focus there is here. Thanks. John Rex Good morning, Justin. I'd say first, yes, the way you described our assumptions around core full year MLR are consistent with our expectations. So how you describe that is quite consistent. As it relates to just looking at towards the 3Q and such, I'd expect that to be in the neighborhood of 84%, very likely a few tens of basis points higher than that. So, it's kind of a little bit above that in that zone. As it relates to kind of other elements that we've pulled out here, no, they shouldn't be material. Those cyber effects should continue to abate. As we mentioned, we're not adjusting for the elements we talked about the provider and coding intensity, so that kind of pulls through a little bit. But there shouldn't be any material other impacts that we're thinking about. Thank you. Hi, thanks. Good morning. Actually, I was hoping we could maybe do a similar exercise as Justin just asked about with MLR for OptumHealth margins. And maybe first, if you can talk about how the OH margins came in at 2Q relative to your expectations. And then how you're thinking about OH margins progressing in 3Q and 4Q? And then how comfortable you are with getting into that -- the full year target range that you had provided. And, John, I thought it might be helpful to -- as we think about the sort of pacing in the back half of the year, in particular, how you're thinking about an exit rate for OptumHealth margins as we're exiting 2024 would be helpful? Thanks. Andrew Witty Scott, thanks so much for your question. I'm going to ask Dr. Amar Desai, who leads OptumHealth to give you a few comments there. I mean, let me just preface that by saying, look, we feel good -- very good about the continued progression and in particular, the way in which OptumHealth is -- has adjusted to deal with the new funding environment. I'm also very, very encouraged by the degree of external payer engagement with our OptumHealth platform as they deal with the environment themselves and look at Optum as a part of that solution. And I think the performance of the business you see is, it continues to improve over last year. You continue to see decent progression. And let me ask Amar to give you a little bit of a sense of how he sees the second half of the year playing out. Amar Desai Hi, Scott. Thanks for the question. So as Andrew said, we're in the middle of the first year of a large rate reduction over the next three years, effectively being a price cut. And as we think about the initiatives, we're pleased with the early success, mitigating the impact of that changing rate environment. In '23, we developed a three-year plan to manage through V-28. Medical cost management and affordability initiatives was at the center of it. Proactive clinical engagement that impacts member experience and total cost of care is obviously core to that, including better prevention and chronic disease management and then disciplined operating cost management, more efficient ways to work, improvements in productivity, driving consistency in our workflows and systems, which Andrew and John alluded to. We're executing very well on this plan, seeing solid progress across each of these areas. As an example, at this time last year, we had engaged 62% of all members. Year-to-date, we've engaged three-fourth of all members and above that for our highest risk membership. We're also focused on coordination of care, particularly at transition points in care, where we've increased post-discharge visits for patients who have been hospitalized that has, in fact, reduced readmission rates by 10% in our most mature markets. So, as we pace through the balance of the year, we expect to continue to build on this momentum across engagement, affordability and operating cost management and are confident in the 7.7% to 8% target for the year. Andrew Witty Great. Amar, thanks so much. And, Scott, thanks again for the question. Next question please. We'll go next to Kevin Fischbeck with Bank of America. Kevin Fischbeck Great, thanks. Just wanted to clarify, I guess, something and ask another question. It wasn't clear to me what you were saying about no favorable reserve development. Does that mean the $800 million that you mentioned previously is still somehow in the numbers? Or is that kind of worked its way through at the end of Q2? And then I guess just trying to understand better where the outperformance is because obviously, you guys have assumed $0.60 to $0.70 of Change costs in your guidance but reaffirm the numbers and it doesn't sound like Medicare is the answer, doesn't sound like Medicaid is the answer, Change isn't the answer. So where has the outperformance come in that's allowed you to maintain guidance? Thanks. John Rex Yeah. Good morning, Kevin. This is John. So yeah, exactly what we said there was nothing material there going on in development. No favorable P&L impacting development in the quarter, very similar to last quarter in terms of there was just no impact being there. And in terms of just a comment -- or questions regarding outperformance, well, maybe some across a number of the businesses in terms of where we're seeing, we're seeing very strong growth, certainly in our commercial health benefits business, we're seeing strong growth. We're seeing margin progression in OptumHealth. So we're seeing advancement. The -- really, the strong approach that the team at M&R took and tell how they looked at '24 in terms of overcoming the headwinds at V-28 and the very disciplined approach they took to how they stepped out into the marketplace with the products that they took. Even with some of the elements that we talked about that we're overcoming there, but certainly, all those creating a good impact from us. Clearly, just across the company, the strong operating efficiencies that the company is driving, strong and sustained. And as I said, look, we will continue to make investments, but really a significant progress on that and still very early stage. So as Andrew commented in terms of the potential we have as we look over the next three years and this impact, and we're just getting some of these businesses to a maturity level where we think we can really harness that. Thank you. Andrew Witty Yeah. Thanks, John. And let me just also reiterate that point. I mean part of what you're seeing here, Kevin, is obviously, the big change this year was the V-28 funding cut price reduction, which obviously focuses primarily on our Medicare Advantage business that Tim runs and the OptumHealth business that Amar runs, both of whom are responding super well. But let's be clear, while those pricing cuts are focused on two businesses, team UHG is responding, right? The entire corporation is engaged in how it manages itself better, reduces cost across the company, leverages technology, accelerates our consumer agenda, all designed to play our part across the board in how we offset the pressure that's been inflicted on those two important businesses. Why we're confident we can navigate this? I think you're seeing that in the performance of the business, and we're going to continue -- it's why I said what I said earlier today. We're going to continue to focus on every aspect of our business to make sure that the model we've laid out and we believe is the right one for delivering best value care for patients is the one that prospers and we're super confident in that. Next question? Hi, good morning. The OptumInsight backlog was down about $200 million sequentially. Can you give us color on the drivers of that and the nature of conversations you're having with providers following the cyberattack? Do you expect further declines in the backlog this year? Thanks. Andrew Witty Andrew, thanks so much for that. Let me ask Roger Connor to address that. It's pretty straightforward. But let me ask Roger to answer that and maybe give you a little bit more flavor on what he's seeing. Roger Connor Yeah, Andrew, thanks very much for the question. Just in terms of backlog, obviously, an important measure and there has been some impact from the Change events within that. What it doesn't include, obviously, is what we're doing in terms of bringing in new clients and what we're doing in our whole innovation space. But fundamentally, we are very confident in terms of the performance going into next year with the cyber event certainly from an impact on the overall health system is not absolutely minimal. When you look at our overall focus, it's now on driving that business recovery. And that's all about bringing volume back into the system. And we're seeing that actually really ramping up and seeing momentum acceleration. We're not only trying to bring volume back into our current customers. We're also going to bring new clients in, and that's exciting because this event has really transformed the marketplace. They're looking for, again, access to innovation, access to security in the system and that's what we've brought back. We've brought back a very secure system, and that is resonating or seeing that momentum. You add that to the underlying strength of the OptumInsight business. Again, Change is only 15% of our overall business performance this year, was planned. That's why we're confident in terms of getting back to our baseline performance in 2025. Andrew Witty Great. Thanks so much, Roger. Thanks, Andrew. Next question. Hi, good morning. Thanks for the question. I wanted to go back to the provider coding activity that you called out and asked maybe what you saw kind of change in the quarter and what actions you're taking to address this change? And is this pressure something that accounted for in bids for next year? And then if I could just ask a very quick clarification on the Change impact on EPS. You talked about the return to baseline performance in 2025. Does that mean you would expect to recover the $0.60 to $0.70 [that is in] (ph) earnings this year? Thank you. Andrew Witty Okay. Thanks so much for the question, Nathan. Brian, if you'd like to go first? Brian Thompson Sure. I'll answer that first part on the upshift that we saw in provider level of care coding patterns. We actually believe that was largely induced by our level of care waivers that we did during the cyber disruption. The reason we believe that is we really saw a higher level of mix to inpatient versus observation after we went back to turning on our utilization management protocols. Pretty distinct on April 15th and thereafter. So that's why we see that. Certainly aware of that activity as we plan for 2025 in our bid. So, really no concerns with respect to that. I feel like it's an anomaly tied to what we saw during our waiver. And we have reinforced our utilization management protocols and believe that these impacts will dampen as we pace through the remainder of the year. John Rex Yeah. And regarding Change, yes, as we mentioned in our comments and Roger mentioned, our ambition is to get back to baseline expectations performance for that business in 2025. So those baseline expectations being what we would have expected prior to any of this happening. And clearly this quarter, we have increased the impact of the business disruption here. So as we bring those back, there's the pacing of those revenues coming back, taking sometimes a little bit more time to bring in, but that is our ambition, actually, as we look ahead. Andrew Witty Thanks, John, Brian. I mean, again, just on this business interruption piece, I mean, I think in all honesty, we were a little optimistic in hindsight at the pace at which we thought people would come back in terms of putting their flow through the system once it was reconnected. I think as we've looked at the last several weeks, that momentum and pace, and particularly as we look at new clients come in and as well as returning clients feel good about where we are now. So I think probably a little overoptimistic three months ago. I think now, I feel like we have this now and we're in good position and the rest of the year we've got a clear path how this plays out. And I think the platform that we've rebuilt is going to serve people extremely well. Next question. Great, thanks. So on the earlier topic of potential offsets, I wanted to ask on Optum Rx and with the recent level of industry attention kind of on the PBM business as well as kind of specialty pharmacy, how should we think about how those drivers are playing out relative to your expectations, whether it's biosimilars or GLP-1s in terms of that therapeutic category, how should we think about those near-term drivers across Optum Rx? Thanks. Andrew Witty Erin, thanks so much for the question. Let me ask Heather, who runs Optum for us, to make a couple of comments on that, if you don't mind, Heather. Heather Cianfrocco Sure. Just basically, I think you can see in the quarter, just strong performance, maybe a couple of things I would just highlight for that. We've talked for a few years about the investments we've been making in Optum Rx on both the PBM side, but also on the pharmacy side. PBM side, you've seen the growth there in client and just in volume, sort of same with respect to volume within our existing clients as well. We take that as a sign of strong retention of existing clients and continuing to perform with them. I think the thing I'd highlight on the PBM side is, I've said this before, the modular effect of the PBM business. We serve at the privilege of our clients, so what they need, we serve, And that is we administer their benefit. And we offer the programs, the services to drive affordability of medications for them in the best interest of their members. And we've brought a lot of products and services in the last year. Two or three new products this market that are leading differentiating in the marketplace that we are seeing our health plans and our employers take advantage of this year that are really market differentiating and we are seeing that drive not just growth with health plans, but growth in products and services. So I think you're seeing that show up. The other thing you're seeing is the cost efficiency show up in the business. One of the -- Andrew brought up an example. And you're seeing some of the timing of supply chain efficiency. On the services side of the business, you mentioned specialty, I call out the diversification of the pharmacies in general. Remember, we've got the integrated behavioral health business which continues to grow and expand. It's a very differentiated business in that it's co-located and it's specifically directed at those behavioral health members to ensure access and affordability and holistic care to individuals with mental health conditions. And then our frontier and our infusion services that really drive those specialty medications in-home, we're seeing continued need for that from our PBM clients, but also non-PBM clients. And so that's where we're really seeing that diversified growth. So you're just seeing that show up in continued, consistent performance in that business through the quarter. Andrew Witty Heather, thank you. Erin, thanks so much for the question. We have time for one final question, please. Great, thanks. For OptumHealth, could you talk a little bit about what pricing has been like there? And, in Investor Day, it seemed like you may have seen some improved pricing as far as global cap rates, and likewise given higher global cap rates out of the MA business. Was wondering if '25, we should be expecting continued improvement in that, or whether there needs to be a retrenchment or retracing of that kind of makeup for what was given? And also, are you starting to exclude things from global cap as you look at 2025? Thanks. Andrew Witty Hey, Lance. Thanks for the question. And love the cheeky attempt at the end of the call to get us to predict, give you some numbers for '25. We're going to defer from that, but well done on the last-ditch effort. I'm going to ask Amar to give you a little bit more of a kind of general sense of how we're seeing that. And please go ahead, Amar. Amar Desai Thanks for the question, Lance. Look, we continue to have very strong relationships across our over 100 plan partners. And in fact, in a pretty dynamic rate and benefit environment, we've seen increased outreach from payers looking for an enduring partner that's very adept at operating within fully capitated value-based arrangements. In particular, the discussions have been productive around benefit design, funding, market level planning and we're confident in the position as we go into 2025. We're down the path in adding plan partners as well as adding geographies for 2025. Foundational within that to those relationships and as we think about those arrangements is quality, quality of care of our providers that are anchored in the community, our strong ability to drive clinical outcomes, improvements and achievement in star measures, and of course strong documentation and diagnosis. We also are seeing that the strength of our network that's aligned in geographies is an important focus area for plan partners, and of course continued focus on clinical engagement which I mentioned previously. So when you take that together, great momentum across those areas gives us confidence as we drive value for our plan partners and as we pace through the next two years of the risk model changes and grow. Andrew Witty Amar, thank you very much. And as I think you could probably sense from those couple of answers that Amar has given you over the course of the call, Amar leads a very, very special team of people running a very, very special business in terms of what it's able to do on behalf of patients and the way it's able to provide great work experience for the healthcare professionals and colleagues who work in that business. I'm very pleased with how the continuation of that business progresses. We're coming toward the end of the call. I'd like to thank you all for your questions this morning. As you've heard, our focus on fundamental execution, our restless spirit, and our ability to adapt to changing environments gives us great confidence as we look ahead and as a testament to the hard work and discipline of the people of UnitedHealth Group who work every day to serve patients, consumers, and care providers, customers efficiently and effectively. We appreciate your time this morning. Thank you. This does conclude today's conference. We thank you for your participation.

Earnings call: UnitedHealth Group highlights strong growth in Q2 2024 By Investing.com

UnitedHealth Group (NYSE:UNH) has demonstrated robust growth in the second quarter of 2024, with revenues increasing significantly in the first half of the year. The company's health services arm, Optum, was a significant contributor to this growth, showing double-digit expansion. UnitedHealth Group has maintained its full-year adjusted earnings outlook despite experiencing a cyberattack that caused business disruptions. The company's diverse offerings, including managed care and Medicare Advantage plans, continue to attract customers, and its investment in technology, such as AI, is expected to further drive growth. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights UnitedHealth Group's second-quarter performance reflects the company's resilience and adaptability in a changing healthcare landscape. With a strong focus on technology, customer satisfaction, and efficient cost management, UnitedHealth Group is poised to continue its growth trajectory in the healthcare industry. InvestingPro Insights UnitedHealth Group (UNH) has not only shown resilience and adaptability but also continues to demonstrate strong financial performance, as reflected in key metrics from InvestingPro. With a significant market capitalization of $474.34 billion, UNH stands out as a heavyweight in the healthcare sector. The company's P/E ratio, which stands at 24.42 for the last twelve months as of Q1 2024, suggests that investors have high expectations for future earnings growth, despite it being above the industry average, indicating a premium valuation. InvestingPro Tips highlight that UnitedHealth has a history of returning value to shareholders, with a notable dividend growth of 27.27% in the last twelve months as of Q1 2024, and has consistently raised its dividend for 32 consecutive years. This track record of dividend growth is a testament to the company's financial health and commitment to shareholder returns. Moreover, UNH's share repurchase program is another sign of management's confidence in the company's prospects, as they have been aggressively buying back shares. Investors should note that UnitedHealth Group is trading near its 52-week high, at 98.95% of this level, reflecting strong investor confidence. This could be a double-edged sword, as it may offer limited upside potential in the near term, but it also underlines the company's robust performance and investor sentiment. For those interested in deeper analytics and additional insights, there are more InvestingPro Tips available for UnitedHealth Group, which can be accessed at https://www.investing.com/pro/UNH. And remember, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription to stay ahead with comprehensive market data and analysis. Full transcript - United Health Group (UNH) Q2 2024: Operator: Good morning, and welcome to the UnitedHealth Group's Second Quarter 2024 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 US 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 amount is available on the financial and earnings reports section of the company's investor relations page at www.unitedhealthgroupcom. Information presented on this call is contained in the earnings release we issued this morning and in our form 8-K dated July 16, 2024, which may be accessed from the investor relations page of the company's website. I will now turn the conference over to the Chief Executive Officer of UnitedHealth Group, Andrew Witty. Andrew Witty: Thank you, Jennifer. Good morning, and thank you for joining us. The second quarter results we reported today reflect diversified and durable growth and a commitment to ensuring high quality care is available to every person we're privileged to serve. In the first half of the year, revenues grew by nearly $14 billion, with strong contributions from across the enterprise, led by double-digit growth at Optum. UnitedHealth Group entered the second half of the year with continuing and broad-based growth momentum. As a result, we are affirming our full year adjusted earnings outlook even as we absorb $0.60 to $0.70 per share in business disruption impacts related to the cyberattack. These results come from the sustained focus of the 400,000 people of UnitedHealth Group on adding value for patients, consumers and customers through the fundamental execution of our key priorities. We're also well positioned for growth in 2025. In the selling season to date, the most sophisticated thoughtful buyers of health benefits and services in the US, such as large employers, unions, states, seniors, all continue to choose the offerings of UnitedHealth Group, when they're looking for managed care, pharmacy services or a Medicare Advantage plan that provides the best value. This consistent growth reflects customers' recognition of the need for a company like ours. As you know, UnitedHealth Group strives to help reduce the fragmentation and lack of coordination that drives up costs and erodes care outcomes in the $5 trillion US healthcare marketplace. We aim to better coordinate and align incentives among caregivers, payers, and pharmacy, enabling us to focus on the whole patient throughout their health journey. We believe this increases value for customers and consumers, improves people's experience and health, reduces redundancies and waste, and ultimately leads to a more sustainable health system. For example, the proven health and economic value to consumers and taxpayers of Medicare Advantage. A recent study by Milliman found that the cost of taxpayers of Medicare Advantage is 4% less than traditional fee-for-service Medicare. At the same time, Medicare Advantage provides seniors well over $2,000 per year in additional value through lower out-of-pocket cost and important services like dental, vision and hearing, none of which fee-for-service Medicare covers. That means a lot to the majority of the people Medicare Advantage serves, who have limited economic resources and otherwise would lack access to such services. The home visits we offer seniors further illustrate the value of MA. Last year, our medical professionals made more than 2.5 million home visits. As a direct result, our clinicians identified 300,000 seniors with emergent health needs that may otherwise have gone undiagnosed. They connected more than 500,000 seniors to essential resources to help them with unaddressed needs such as food insecurity, medication affordability, transportation, and financial support. They also identified and helped close more than 3 million gaps in care that made a real difference in people's lives. Within 90 days of one of our home visits, 75% of patients received follow-up in a clinical setting. Additionally, Medicare Advantage patients with chronic conditions who receive these home visits end up with better managed and more stable health outcomes, as evidenced by spending measurably less time than fee-for-service patients in emergency room and other hospital settings. The bottom line, our home visit programs help patients live healthier lives and save taxpayers money. It is only Medicare Advantage that makes programs and results like this possible. Similarly, Optum Rx clients continue to appreciate the efforts we make to ensure delivery of the lowest cost drugs in the face of drug companies' sole ability to set prices. They also recognize the importance of the comprehensive pharmacy services we provide to people that's driving our momentum this year and bodes well for 2025. We also continue to bring practical innovation to people through new products and services, and by using new and emerging technologies to improve our own operating efficiency. For example, Surest continues to differentiate itself in the marketplace, which is why more and more customers are offering it to their employees, and why the offering continues to grow substantially. Additionally, investments in modernization of legacy technology and new emerging technologies are enabling our consumer-centric advancement of healthcare. For example, our growing AI portfolio made up of hundreds of practical use cases will generate billions of dollars of efficiencies over the next several years. These investments enable us to improve consumer experience, enhance provider find and price care capabilities to meet people's needs and improve clinical back-office execution. We expect technology innovation to become an increasingly core driver of our growth over the next two to five years. And now, I'll turn it over to our President and Chief Financial Officer, John Rex. John Rex: Thank you, Andrew. I'll start this morning by providing context on some of the unique items in the quarter. Then, I'll follow with perspectives on care activity and general business updates. The overarching theme I hope you leave with today is that UnitedHealth Group continues to deliver broadly diversified growth with expanding opportunities, work that positions us for continued strong performance in '25 and beyond. Now to update on Change Healthcare (NASDAQ:CHNG). Our focus has centered on the patients, care providers and customers who rely on us to keep the health system running. Payment and claims [slows] (ph) for most care providers are back to normal, but we know that is not the case for some, so we continue to work with those who are not there yet. UnitedHealth Group has provided more than $9 billion in loans and advance payments to help providers mitigate the impact of the attack, all at no cost to them. Cyber impacts in the quarter totaled $0.92 per share, and we now estimate the full year impact will be $1.90 to $2.05 per share. But let me break that down a couple of steps further for you. Of the total in the quarter, $0.64 per share were direct costs incurred in restoring the clearinghouse platform and other response efforts. These included higher medical expenses directly stemming from the temporary pause of some care management activities. For the full year, we now estimate these direct costs at $1.30 to $1.35 per share. The $0.40 to $0.45 per share increase in this estimate is primarily related to care provider financial support and costs for producing and mailing the consumer notifications that will begin later this month. As a reminder, these direct costs are included in net earnings but are excluded from adjusted earnings per share. The other component affecting our results relates to disruption of the ongoing Change Healthcare business. This largely encompasses the loss of revenues combined with the costs of keeping these capabilities fully ready to serve. Notably, these effects are not excluded from adjusted earnings. In the second quarter, this impact was $0.28 per share. For the full year, we now estimate the business disruption impacts at $0.60 to $0.70 per share compared to the $0.30 to $0.40 we estimated last quarter. Most of the service functionality is now restored and revenues are rebuilding even as the pacing of this process varies. These important services are now more modern, secure and capable, and continuing to advance rapidly. Our ambition continues to be to return to baseline performance in '25 and to grow strongly from there. Turning to international. Following the sale last quarter of our much larger Brazil operations, we classified the remaining South American businesses as held for sale. This is a natural step following the Brazil sale. We highly value the relationships we have built with our dedicated colleagues over the last several years and wish them continued success. In a diverse enterprise with a strong growth record and capabilities such as ours, such portfolio evolutions enable us to keep our focus on the many compelling growth opportunities before us. The second quarter includes a total of $1.3 billion in South American impacts, the majority of which is non-cash and largely due to foreign currency translation losses accumulated over the years. About $220 million of this stems from a regulatory action in Chile, affecting all health plans. You'll see that as a component in the supplemental financial tables we provided this morning. The action relates to industry premium increases dating back to 2020, but as configured, will be reflected in consumer premium credits to be issued in future years. As a result, the entire $220 million was recorded as a reduction to premium revenue in the second quarter, increasing our reported medical care ratio by about 25 basis points. Turning to the second quarter medical care ratio, it was also impacted by about 40 basis points, or $290 million due to the suspension of some care management activities after the cyberattack. That makes for a total of about 65 basis points of non-repeating impacts, including South America. Beyond these effects, the care ratio in the quarter was also modestly affected by three other factors. One being member mix within Medicare Advantage and dual special needs plans, which this year has been shaped by the unusual competitive benefit configurations in the marketplace. A second being the timing mismatch between the current health status of remaining Medicaid members and the state rate updates, a timing mismatch we expect to realign in the months ahead. And third, the lingering upshift in provider coding intensity, which we believe was spurred by the temporary suspension of our care review activities and carried past. This impact is not reflected in our cyberattack direct response costs, and we have been addressing it. Nonetheless, we continue to expect our full year medical care ratio, excluding 30 basis points of cyber and South American effects to be within the range we offered in November, albeit at the upper end. For our 2025 Medicare Advantage planning process, we assumed care patterns and mix at the levels we are seeing today, in addition to fully incorporating the second of the three-year phased funding cuts, and we have been fully attuned to how the Inflation Reduction Act will affect Medicare Part D offerings in '25. Also, as noted, we expect the Medicaid timing mismatch to subside as rates are updated throughout the remainder of this year and into next, appropriately reflecting current member health status. Turning to the performance of our businesses. At UnitedHealthcare, revenues of $74 billion grew by $3.6 billion. UHC domestic commercial membership grew 2.3 million in the first half of this year as employers and consumers responded to our distinctive offerings. And while the '25 selling season is ongoing, we are encouraged by the continued momentum we see. Our recently filed Medicare Advantage bid for '25, again took a balanced approach to provide as much stability for seniors as possible, while factoring in the realities of the funding cuts and current care patterns. You can expect us to continue to prioritize balanced and durable performance over transitory market share gains. In Medicaid, we expect membership levels to stabilize as we head into the second half of the year and our teams are executing well with both renewals and expansions. Optum Health revenues grew by 13% to $27 billion, and the operating margin expanded over last year. We are on track to approach 5 million patients in value-based care by the end of this year and are progressing strongly on our earlier and deeper engagement with patients, with a purposeful focus on our newer regions to more rapidly improve health outcomes and experiences. Optum Rx revenues grew 13% to over $32 billion, driven by strong customer response to the differentiated value, consumer experience and clinical expertise we offer. At Optum Insight, for the services beyond Change Healthcare, we see strong performance in line with our expectations. The revenue backlog increased to nearly $33 billion, growth of over $1 billion from a year ago, driven by business process and information technology services for health systems. A few additional items of note. As we highlighted in April, we established an additional $800 million in medical reserves in the first quarter to reflect the potential for the cyberattack to have affected claims receipt timing. With claims now flowing at more normalized levels, we continue to prudently analyze these trends. Similar to last quarter, the second quarter results do not reflect any favorable earnings impacting medical reserve development. Days [and] (ph) claims payable at 45.2 compared to 47.1 in the first quarter. The change was due primarily to the return to more normal claims submission patterns from providers and to a lesser extent, some impact from reclassifying the remaining South American operations to held for sale. Cash flows from operations in the quarter were $6.7 billion, or 1.5 times net income, even with the accelerated funding for care providers. In June, our Board of Directors increased the dividend by 12%, marking the 15th consecutive year of double-digit dividend increases to shareholders. During the quarter, as I mentioned earlier, we prioritized devoting resources to support care providers in the wake of the cyberattack over some activities such as share repurchase. It was the right thing to do, devoting all our efforts to provide stability for the health system. Still, with our ongoing strong capital capacities and with support needs abating, we expect to achieve the full year repurchase objective we shared with you last November. In summary, it is the confidence we have in the performance of our diversified businesses that allows us to affirm full year adjusted EPS in the range of $27.50 to $28.00, the objective we established last year. Even as we have absorbed the unanticipated $0.60 to $0.70 in business disruption impacts. Within this, we expect a balanced pacing in the second half. Now, I'll turn it back to Andrew. Andrew Witty: John, thank you. As I said in November at our investor conference, we operate in an environment where change is constant. What you've come to see is that when changes happen, foreseen or unforeseen, we just deal with it. UnitedHealth Group is a nimble and adaptable enterprise, well suited to meet the challenges that come our way and the opportunities we pursue with the many and diverse capabilities available to us. In this first half, as we've done before, we navigated a complex external environment while managing through a significant business disruption. We continue to deliver on our growth objectives and are committed to delivering on our 13% to 16% long-term growth target. We'll now answer any questions you might have. Operator, please. Operator: [Operator Instructions] We'll go first to A.J. Rice with UBS. A.J. Rice: Hi, thanks for the question. Just to make sure, expanding on John's comments, if we're thinking about the -- your thinking on MLR overall for the rest of the year, it sounds like beyond Change, beyond Latin America, there's two items you're calling out. One is Medicaid timing mismatch, which sounds like you think it's short term and then this upcoding, coding intensity comment. And I assume that's mainly in the insurance business, but maybe it's in Optum as well. Can you just give us a sense of how much those are impacting your thinking? And how much is second quarter versus the impact in the back half on those? Andrew Witty: Yeah, A.J., thanks for the question. Let me ask John to get right to it. John Rex: Good morning, A.J. Yeah, and really kind of three items that we're talking to in addition to those two here, also the member mix component here when you bring it all together, those additional items that we're looking at in terms of -- versus where we were and how we're thinking about it. I would say they're in kind of roughly equivalent -- in roughly equivalent zone in terms of their impact here. And then how they flow throughout the year -- the rest of year, really, you'll see some of those elements. So, as it relates to Medicaid impacts, pricing goes on over a period of, say, kind of 12 months or so. So there's pricing that occurs over the rest of this year into next year. So those elements in terms of catching up -- that mismatch catching up with the acuity that we have in the remaining population occurs over a period. Certainly, we are addressing the elements we talked about in terms of what we're seeing in the coding up shift, and we're well underway in addressing those elements, but we'll continue to address them throughout the course of the year. The member mix is kind of the member mix we have now at this point. And that really pertains to just the elements that I mentioned in my prepared comments about some of the benefit design impacts and how that impacted both our growth and also the type of membership that we were left with as we saw our full configuration. That really lasts with us throughout the year. So -- but that was an element we also incorporated into our view for 2025 as we approached our bids for '25. Thank you. Andrew Witty: Well said, John. And maybe just to reiterate one thing John said and then maybe add a further point, A.J. Super important just to hear what you said in terms of that member mix, obviously, we deal with it during this year, but we obviously had the opportunity to incorporate into our '25 planning and bids. So, feel very good about that. And then the secondly, maybe just to reflect, step back just a little bit on as we think of MLR. Really, the biggest incoming dynamic on MLR at the beginning of this year was the funding reduction in MA, the V-28 significant reduction in funding. And you can see that we are fundamentally navigating that, I think, extremely well. And yes, there are a couple of areas of pressure at the margin. I think as you just heard from John, they're primarily boxed off in terms of they're going to work their way through the pricing cycle with Medicaid or in the case of concerns around coding activity, we're very focused on that, confident we'll be able to -- we are addressing that. So those things feel transitory. Most importantly, we feel good about the way our response to the V-28 funding cut is playing out for us in the overall business. And really that -- as we started the year, that was the much bigger thing to make sure we got right, and I'm feeling like we're well on our way through the first year of this three-year cycle, and we've talked to you repeatedly about how critical it is to make sure we navigate that over the long run, and we feel good about that. So, thanks, A.J. Next question? Operator: Yes. We'll go next to Lisa Gill with JPMorgan (NYSE:JPM). Lisa Gill: Thanks very much and good morning. I want to focus for a minute on SG&A, which came in much better than expected. Can you maybe talk about the key components of where you're seeing cost savings, the durability? And, Andrew, you touched a little bit about AI efficiencies there. Are you starting to see that in this quarter? And how much opportunity is there from an SG&A perspective when we think about AI? Andrew Witty: Lisa, thanks so much for the question. I'm going to ask John to comment a little bit. Let me make a couple of kind of upfront comments and then maybe a couple of examples more specifically to help you a little bit on this. So, to get your last point, we are running now hundreds of AI use case deployments. I'd say the first wave of those are essentially allowing us to do things much more quickly, much more reliably, much more efficiently than humans can do them. So an ability to navigate complexity to find answers within complex datasets. And super important, and I'll give you a couple of examples of how that begins to help us as we go on. I think we are now -- you will also start to see as we roll through the end of this year and next year, those same kind of tools begin to be deployed in fundamental reimagination of business process. So one is essentially allowing an existing process to run more efficiently. The second is, can we actually take steps out of a process and really start to change things. I'd call out payment integrity as a front-runner in that particular regard. And you'll start to see a lot of movement there over the next year or so, Lisa. And it's going to be, I think, OptumInsight '25, '26, '27 in terms of deployment of technology to change many of the processes that we've been used to for decades is coming, and that's going to be a very exciting phase. If you look in the short run, I'll give you a couple of examples. And this plays a little bit around technology. I certainly wouldn't say these are all Generative AI examples, but they're certainly digitization examples. They are certainly technology-enabled examples. So for example, we brought on this year at OptumRx a record number of clients. You've seen the growth. You can imagine the number of folks who've been signed up into Rx platforms. We actually spent 9% less this year in the onboarding of that record volume than we did the prior year, 9%, that's entirely due to digitization, technology efficiency deployed through the organization. Let me take you into another part of the organization, OptumHealth. We've more or less increased our number of risk -- fully risk delegated lives within OptumHealth by about 40% over the last two years. That's -- by the way, that's in excess of 1 million -- almost 1.5 million more lives over that period with zero increase in personnel headcount in the risk-based businesses. So, zero increase in headcount in a business which has increased its served members by close to 40%. So those are just a couple of examples. You're seeing that show up in those two examples, Optum. That's why you're starting to see that leverage flow through the Optum business line and it's something we obviously expect to continue to sustain over many, many quarters and years. And, John, I'd love you to go a little deeper. John Rex: Yeah. Good morning, Lisa. As you can -- I guess I'd start by -- it is early in that journey in terms of the potential and opportunity for what we can do. And yes, it was a very strong quarter in terms of cost management. But let me just step back a moment here. As you can imagine, given how some of these businesses were built and the fragmentation of the system, there are duplicative functions and uneven consumer experiences throughout that we're addressing. And as our businesses begin to scale, our ability to produce efficiency accelerates while, at same time, we can improve those customer experiences and expand the best practice across the broader base. The comments that Andrew was offering in his answer to your question, it's just really a natural outgrowth as these businesses begin to move beyond what we have viewed the earliest phases to a more adolescent phase. That's what we're seeing. Very strong this quarter. Over the longer term, we can expect advancement. I wouldn't expect it to remain at this level consistently as we look ahead over the next few quarters, though. It was a super strong quarter. But we are going to look to invest in many of these items that Andrew just articulated here, getting to a more modern streamlined experiences as these businesses evolve further. So I wouldn't expect it to persist right at this level as we make those investments, and we're anxious and ambitious to make those investments. Andrew Witty: Great. So, Lisa, thanks for raising it. You can tell it's a big focus for us. We laid out when V-28 first was announced, that one of the three ways that we would respond to this is we would double down on our own cost management efficiency and productivity, you're absolutely seeing that. And that coincides with an extraordinarily and exciting moment around technological innovation, whether that's Generative AI, digitization, all wrapped together in our march toward a greater consumer focus within the organization. All of that really hangs together is very much the core focus of how we think about things going forward. Thanks, Lisa. Next question. Operator: We'll go next to Josh Raskin with Nephron Research. Josh Raskin: Hi, thanks. Good morning. Looking at your bids that you submitted for MA for 2025, I'd be curious if you could tell us if you were bidding to improve MA margins in 2025, or if you're still within that target range in light of the G&A savings? And then more importantly, maybe just some early thoughts on what sort of growth assumptions you have included in those bids, both your assumption for the market as well as any potential market share gains? Andrew Witty: Hey, Josh, thanks so much. I'm going to ask Tim Noel to address the first part of your question. On the second part, you're not going to be surprised. I'm going to defer from making any predictions about next year. It's still a little early. We'd like to see where everybody else plays out in this cycle. I think we [also are] (ph) in the 2024 cycle. Ultimately, the way growth plays out in the marketplace depends on how everybody bids, not just on how you bid. And it only takes one bid to be kind of out of expectation to completely distort your view of how things could play out. So, just going to defer a little bit on that one, but on the first point, Tim, I'd love you to make a few comments. Tim Noel: Thanks, Josh, for the question. So, as we think about margins in the MA business and as it relates to our bid, I think we've talked about the consistent approach to how we plan margins. And we maintain -- continue to maintain that and we're operating comfortably within that margin range as we have in the past and as we're planning in 2025. And then when I think about our pricing approach for 2025, as Andrew mentioned, too early to get into a lot of specifics as CMS is reviewing those bids right now. But we're in a posture and how we've priced those products as we'll be comfortable with whatever growth is the outcome of the products that we bring to marketplace in 2025. Andrew Witty: Great. Thanks so much, Tim. And, Josh, appreciate the question. Next question, please. Operator: We'll go next to Stephen Baxter (NYSE:BAX) with Wells Fargo (NYSE:WFC). Stephen Baxter: Yes. Hi. Thanks. Can you speak in a little greater detail about your expectation that the Medicaid pressure starts to subside in the second half of the year? I guess specifically, can you maybe speak to what you actually know about rates today, either draft or finalized, versus perhaps speaking to a general reliance on actuarially sound rates playing out over a reasonable period of time? Just trying to understand the level of visibility that you have a bit better. Thank you. Andrew Witty: Okay. Hey, Stephen, thanks for the question. I'm going to ask Krista Nelson, who leads our Medicaid business to respond to that. Kristen? Krista Nelson: Yeah, thanks so much for the question. So as it relates to visibility, we've got visibility into the majority of our rates for '24. And while there's just a slight gap in the second quarter, we really like how our 7/1 rates are shaping up and continue to work with state partners to influence key assumptions before those rates become final in the future. And while we might see a little bit of dislocation the rest of the year, states have really committed to accurately reflecting the change in acuity from redeterminations into current and future adjustments and really expect this to even out as we pace through the remainder of '24 and early '25. Thanks for the question. Andrew Witty: Krista, thanks so much. So I mean, listen, Stephen, I think you heard there why we're confident that this is really a kind of time-fenced issue and in the grand scheme of things, I would characterize this as a margin. It's a part of what you've seen in this small deviation in Q2, but we don't really see it as a sustainably structural issue and you heard exactly why just there. So, thanks, Krista. And, Stephen, thanks for your question. Next question, please. Operator: We'll go next to Justin Lake with Wolfe Research. Justin Lake: Thanks, good morning. Just a quick clarification and then a question about second half MLR. So first, the clarification. On the MLR, it sounded like, John, you're guiding to a core MLR at the high end of the range or 84.5%, and then I would add 30 basis points of the one-timers for the full year that you've seen in the first half, that would leave GAAP MLR at 84.8%. Is this correct and to be clear, is there any expectation for further one-timers in the second half of the year? Or should the third and fourth quarter kind of be clean? And then my question is just around, core MLR in the first quarter, ex the one-timers was 84.2%. Sounds like it'll be 84.8% in the second half. Maybe you could help us think about 3Q versus 4Q just to make sure our expectations are set correctly, given how much focus there is here. Thanks. John Rex: Good morning, Justin. I'd say first, yes, the way you described our assumptions around core full year MLR are consistent with our expectations. So how you describe that is quite consistent. As it relates to just looking at towards the 3Q and such, I'd expect that to be in the neighborhood of 84%, very likely a few tens of basis points higher than that. So, it's kind of a little bit above that in that zone. As it relates to kind of other elements that we've pulled out here, no, they shouldn't be material. Those cyber effects should continue to abate. As we mentioned, we're not adjusting for the elements we talked about the provider and coding intensity, so that kind of pulls through a little bit. But there shouldn't be any material other impacts that we're thinking about. Thank you. Scott Fidel: Hi, thanks. Good morning. Actually, I was hoping we could maybe do a similar exercise as Justin just asked about with MLR for OptumHealth margins. And maybe first, if you can talk about how the OH margins came in at 2Q relative to your expectations. And then how you're thinking about OH margins progressing in 3Q and 4Q? And then how comfortable you are with getting into that -- the full year target range that you had provided. And, John, I thought it might be helpful to -- as we think about the sort of pacing in the back half of the year, in particular, how you're thinking about an exit rate for OptumHealth margins as we're exiting 2024 would be helpful? Thanks. Andrew Witty: Scott, thanks so much for your question. I'm going to ask Dr. Amar Desai, who leads OptumHealth to give you a few comments there. I mean, let me just preface that by saying, look, we feel good -- very good about the continued progression and in particular, the way in which OptumHealth is -- has adjusted to deal with the new funding environment. I'm also very, very encouraged by the degree of external payer engagement with our OptumHealth platform as they deal with the environment themselves and look at Optum as a part of that solution. And I think the performance of the business you see is, it continues to improve over last year. You continue to see decent progression. And let me ask Amar to give you a little bit of a sense of how he sees the second half of the year playing out. Amar Desai: Hi, Scott. Thanks for the question. So as Andrew said, we're in the middle of the first year of a large rate reduction over the next three years, effectively being a price cut. And as we think about the initiatives, we're pleased with the early success, mitigating the impact of that changing rate environment. In '23, we developed a three-year plan to manage through V-28. Medical cost management and affordability initiatives was at the center of it. Proactive clinical engagement that impacts member experience and total cost of care is obviously core to that, including better prevention and chronic disease management and then disciplined operating cost management, more efficient ways to work, improvements in productivity, driving consistency in our workflows and systems, which Andrew and John alluded to. We're executing very well on this plan, seeing solid progress across each of these areas. As an example, at this time last year, we had engaged 62% of all members. Year-to-date, we've engaged three-fourth of all members and above that for our highest risk membership. We're also focused on coordination of care, particularly at transition points in care, where we've increased post-discharge visits for patients who have been hospitalized that has, in fact, reduced readmission rates by 10% in our most mature markets. So, as we pace through the balance of the year, we expect to continue to build on this momentum across engagement, affordability and operating cost management and are confident in the 7.7% to 8% target for the year. Andrew Witty: Great. Amar, thanks so much. And, Scott, thanks again for the question. Next question please. Operator: We'll go next to Kevin Fischbeck with Bank of America (NYSE:BAC). Kevin Fischbeck: Great, thanks. Just wanted to clarify, I guess, something and ask another question. It wasn't clear to me what you were saying about no favorable reserve development. Does that mean the $800 million that you mentioned previously is still somehow in the numbers? Or is that kind of worked its way through at the end of Q2? And then I guess just trying to understand better where the outperformance is because obviously, you guys have assumed $0.60 to $0.70 of Change costs in your guidance but reaffirm the numbers and it doesn't sound like Medicare is the answer, doesn't sound like Medicaid is the answer, Change isn't the answer. So where has the outperformance come in that's allowed you to maintain guidance? Thanks. John Rex: Yeah. Good morning, Kevin. This is John. So yeah, exactly what we said there was nothing material there going on in development. No favorable P&L impacting development in the quarter, very similar to last quarter in terms of there was just no impact being there. And in terms of just a comment -- or questions regarding outperformance, well, maybe some across a number of the businesses in terms of where we're seeing, we're seeing very strong growth, certainly in our commercial health benefits business, we're seeing strong growth. We're seeing margin progression in OptumHealth. So we're seeing advancement. The -- really, the strong approach that the team at M&R took and tell how they looked at '24 in terms of overcoming the headwinds at V-28 and the very disciplined approach they took to how they stepped out into the marketplace with the products that they took. Even with some of the elements that we talked about that we're overcoming there, but certainly, all those creating a good impact from us. Clearly, just across the company, the strong operating efficiencies that the company is driving, strong and sustained. And as I said, look, we will continue to make investments, but really a significant progress on that and still very early stage. So as Andrew commented in terms of the potential we have as we look over the next three years and this impact, and we're just getting some of these businesses to a maturity level where we think we can really harness that. Thank you. Andrew Witty: Yeah. Thanks, John. And let me just also reiterate that point. I mean part of what you're seeing here, Kevin, is obviously, the big change this year was the V-28 funding cut price reduction, which obviously focuses primarily on our Medicare Advantage business that Tim runs and the OptumHealth business that Amar runs, both of whom are responding super well. But let's be clear, while those pricing cuts are focused on two businesses, team UHG is responding, right? The entire corporation is engaged in how it manages itself better, reduces cost across the company, leverages technology, accelerates our consumer agenda, all designed to play our part across the board in how we offset the pressure that's been inflicted on those two important businesses. Why we're confident we can navigate this? I think you're seeing that in the performance of the business, and we're going to continue -- it's why I said what I said earlier today. We're going to continue to focus on every aspect of our business to make sure that the model we've laid out and we believe is the right one for delivering best value care for patients is the one that prospers and we're super confident in that. Next question? Operator: We'll go next to Andrew Mok with Barclays (LON:BARC). Andrew Mok: Hi, good morning. The OptumInsight backlog was down about $200 million sequentially. Can you give us color on the drivers of that and the nature of conversations you're having with providers following the cyberattack? Do you expect further declines in the backlog this year? Thanks. Andrew Witty: Andrew, thanks so much for that. Let me ask Roger Connor to address that. It's pretty straightforward. But let me ask Roger to answer that and maybe give you a little bit more flavor on what he's seeing. Roger Connor: Yeah, Andrew, thanks very much for the question. Just in terms of backlog, obviously, an important measure and there has been some impact from the Change events within that. What it doesn't include, obviously, is what we're doing in terms of bringing in new clients and what we're doing in our whole innovation space. But fundamentally, we are very confident in terms of the performance going into next year with the cyber event certainly from an impact on the overall health system is not absolutely minimal. When you look at our overall focus, it's now on driving that business recovery. And that's all about bringing volume back into the system. And we're seeing that actually really ramping up and seeing momentum acceleration. We're not only trying to bring volume back into our current customers. We're also going to bring new clients in, and that's exciting because this event has really transformed the marketplace. They're looking for, again, access to innovation, access to security in the system and that's what we've brought back. We've brought back a very secure system, and that is resonating or seeing that momentum. You add that to the underlying strength of the OptumInsight business. Again, Change is only 15% of our overall business performance this year, was planned. That's why we're confident in terms of getting back to our baseline performance in 2025. Nathan Rich: Hi, good morning. Thanks for the question. I wanted to go back to the provider coding activity that you called out and asked maybe what you saw kind of change in the quarter and what actions you're taking to address this change? And is this pressure something that accounted for in bids for next year? And then if I could just ask a very quick clarification on the Change impact on EPS. You talked about the return to baseline performance in 2025. Does that mean you would expect to recover the $0.60 to $0.70 [that is in] (ph) earnings this year? Thank you. Andrew Witty: Okay. Thanks so much for the question, Nathan. Brian, if you'd like to go first? Brian Thompson: Sure. I'll answer that first part on the upshift that we saw in provider level of care coding patterns. We actually believe that was largely induced by our level of care waivers that we did during the cyber disruption. The reason we believe that is we really saw a higher level of mix to inpatient versus observation after we went back to turning on our utilization management protocols. Pretty distinct on April 15th and thereafter. So that's why we see that. Certainly aware of that activity as we plan for 2025 in our bid. So, really no concerns with respect to that. I feel like it's an anomaly tied to what we saw during our waiver. And we have reinforced our utilization management protocols and believe that these impacts will dampen as we pace through the remainder of the year. John Rex: Yeah. And regarding Change, yes, as we mentioned in our comments and Roger mentioned, our ambition is to get back to baseline expectations performance for that business in 2025. So those baseline expectations being what we would have expected prior to any of this happening. And clearly this quarter, we have increased the impact of the business disruption here. So as we bring those back, there's the pacing of those revenues coming back, taking sometimes a little bit more time to bring in, but that is our ambition, actually, as we look ahead. Andrew Witty: Thanks, John, Brian. I mean, again, just on this business interruption piece, I mean, I think in all honesty, we were a little optimistic in hindsight at the pace at which we thought people would come back in terms of putting their flow through the system once it was reconnected. I think as we've looked at the last several weeks, that momentum and pace, and particularly as we look at new clients come in and as well as returning clients feel good about where we are now. So I think probably a little overoptimistic three months ago. I think now, I feel like we have this now and we're in good position and the rest of the year we've got a clear path how this plays out. And I think the platform that we've rebuilt is going to serve people extremely well. Next question. Operator: We'll go next to Erin Wright with Morgan Stanley (NYSE:MS). Erin Wright: Great, thanks. So on the earlier topic of potential offsets, I wanted to ask on Optum Rx and with the recent level of industry attention kind of on the PBM business as well as kind of specialty pharmacy, how should we think about how those drivers are playing out relative to your expectations, whether it's biosimilars or GLP-1s in terms of that therapeutic category, how should we think about those near-term drivers across Optum Rx? Thanks. Andrew Witty: Erin, thanks so much for the question. Let me ask Heather, who runs Optum for us, to make a couple of comments on that, if you don't mind, Heather. Heather Cianfrocco: Sure. Just basically, I think you can see in the quarter, just strong performance, maybe a couple of things I would just highlight for that. We've talked for a few years about the investments we've been making in Optum Rx on both the PBM side, but also on the pharmacy side. PBM side, you've seen the growth there in client and just in volume, sort of same with respect to volume within our existing clients as well. We take that as a sign of strong retention of existing clients and continuing to perform with them. I think the thing I'd highlight on the PBM side is, I've said this before, the modular effect of the PBM business. We serve at the privilege of our clients, so what they need, we serve, And that is we administer their benefit. And we offer the programs, the services to drive affordability of medications for them in the best interest of their members. And we've brought a lot of products and services in the last year. Two or three new products this market that are leading differentiating in the marketplace that we are seeing our health plans and our employers take advantage of this year that are really market differentiating and we are seeing that drive not just growth with health plans, but growth in products and services. So I think you're seeing that show up. The other thing you're seeing is the cost efficiency show up in the business. One of the -- Andrew brought up an example. And you're seeing some of the timing of supply chain efficiency. On the services side of the business, you mentioned specialty, I call out the diversification of the pharmacies in general. Remember, we've got the integrated behavioral health business which continues to grow and expand. It's a very differentiated business in that it's co-located and it's specifically directed at those behavioral health members to ensure access and affordability and holistic care to individuals with mental health conditions. And then our frontier and our infusion services that really drive those specialty medications in-home, we're seeing continued need for that from our PBM clients, but also non-PBM clients. And so that's where we're really seeing that diversified growth. So you're just seeing that show up in continued, consistent performance in that business through the quarter. Andrew Witty: Heather, thank you. Erin, thanks so much for the question. We have time for one final question, please. Operator: We'll go next to Lance Wilkes with Bernstein. Lance Wilkes: Great, thanks. For OptumHealth, could you talk a little bit about what pricing has been like there? And, in Investor Day, it seemed like you may have seen some improved pricing as far as global cap rates, and likewise given higher global cap rates out of the MA business. Was wondering if '25, we should be expecting continued improvement in that, or whether there needs to be a retrenchment or retracing of that kind of makeup for what was given? And also, are you starting to exclude things from global cap as you look at 2025? Thanks. Andrew Witty: Hey, Lance. Thanks for the question. And love the cheeky attempt at the end of the call to get us to predict, give you some numbers for '25. We're going to defer from that, but well done on the last-ditch effort. I'm going to ask Amar to give you a little bit more of a kind of general sense of how we're seeing that. And please go ahead, Amar. Amar Desai: Thanks for the question, Lance. Look, we continue to have very strong relationships across our over 100 plan partners. And in fact, in a pretty dynamic rate and benefit environment, we've seen increased outreach from payers looking for an enduring partner that's very adept at operating within fully capitated value-based arrangements. In particular, the discussions have been productive around benefit design, funding, market level planning and we're confident in the position as we go into 2025. We're down the path in adding plan partners as well as adding geographies for 2025. Foundational within that to those relationships and as we think about those arrangements is quality, quality of care of our providers that are anchored in the community, our strong ability to drive clinical outcomes, improvements and achievement in star measures, and of course strong documentation and diagnosis. We also are seeing that the strength of our network that's aligned in geographies is an important focus area for plan partners, and of course continued focus on clinical engagement which I mentioned previously. So when you take that together, great momentum across those areas gives us confidence as we drive value for our plan partners and as we pace through the next two years of the risk model changes and grow. Andrew Witty: Amar, thank you very much. And as I think you could probably sense from those couple of answers that Amar has given you over the course of the call, Amar leads a very, very special team of people running a very, very special business in terms of what it's able to do on behalf of patients and the way it's able to provide great work experience for the healthcare professionals and colleagues who work in that business. I'm very pleased with how the continuation of that business progresses. We're coming toward the end of the call. I'd like to thank you all for your questions this morning. As you've heard, our focus on fundamental execution, our restless spirit, and our ability to adapt to changing environments gives us great confidence as we look ahead and as a testament to the hard work and discipline of the people of UnitedHealth Group who work every day to serve patients, consumers, and care providers, customers efficiently and effectively. We appreciate your time this morning. Thank you. Operator: This does conclude today's conference. We thank you for your participation.

Elevance Health (ELV) Q2 2024 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health second-quarter earnings conference call. [Operator instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Steve Tanal -- Chief Investor Relations Officer, Corporate Financial Planning and Analysis Good morning, and welcome to Elevance Health's second-quarter 2024 earnings call. This is Steve Tanal, vice president of investor relations. And with us this morning on the earnings call, Gail Boudreaux, president and CEO; Mark Kaye, our CFO; Pete Haytaian, president of Carelon; Morgan Kendrick, president of our commercial health benefits business; and Felicia Norwood, president of our government health benefits business. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thank you, Steve, and good morning, everyone. We appreciate you joining today's earnings call. This morning, we reported second-quarter results, including adjusted diluted earnings per share of $10.12, reflecting 12% growth year over year. These results reflect thoughtful execution in a dynamic operating environment as well as the unique strengths of our enterprise, including the power of our diverse set of businesses. We have reaffirmed our full-year adjusted diluted earnings per share guidance of at least $37.20, which represents 12% growth year over year. We have prudently maintained our full-year outlook given industrywide dynamics we are navigating in our Medicaid business and the investments we are making to support business transformation and deepening capabilities within CarelonRx. Our health benefits segment demonstrated balance and resilience in the quarter. In Commercial, we continue to make progress on our margin recovery initiative and are delivering solid membership growth, notably in our individual ACA business, which has grown substantially year over year. We've also extended our momentum in National accounts, where the business is tracking to historically high retention levels and new customer acquisition remains strong. To date, we've consolidated business with additional existing employer group clients who previously only worked with us on a slice of their business, a testament to the unique value we deliver to the market. In Medicaid, we are pleased with our recent new business wins and reprocurement success, positioning us for future growth. We launched the Indiana Pathways for Aging Program just weeks ago and are proud to be the largest payer in this important program in our home state, serving nearly 40% of all eligible Hoosiers. Indiana Pathways plays directly to our strengths, serving populations with chronic and complex needs. We were also privileged to be awarded the KanCare Kansas Medicaid RFP this quarter, working in partnership alongside two Blue partners as HealthyBlue. Turning to Medicaid redeterminations. While nearly all of our members have had their eligibility redetermined since the products resumed last year, our work is not done. With approximately 70% of coverage losses attributable to administrative challenges, we continue our proactive outreach to members to maximize access to care and minimize barriers to whole health. We expect disenrolled members to enroll throughout the year albeit on a longer lag than expected when redeterminations resumed last year. We are seeing the percentage of returners steadily increase, especially in our Blue states where we offer both commercial and Medicaid health plans. As a result of redeterminations, our Medicaid membership mix has shifted, resulting in increased acuity and we are working actively with our state partners to ensure rates remain actuarially sound. In Medicare, we were pleased with the recent ruling regarding our challenge of the initial 2020 Star ratings. As a result, our enterprise weighted average rating has increased to four star, and we now expect approximately 56% of members will be in plans rated at least four star or in contracts -- to be rated that will be reimbursed similarly in payment year 2025. This outcome will help offset funding cuts to the Medicare Advantage program for the second consecutive year, which we believe will result in increased premiums and/or reduced benefits for seniors and people with disabilities who rely on Medicare Advantage for their health and well-being. For our part, we maintained our disciplined approach to 2025 bids. We will be offering highly valued and competitive benefits as we seek to balance growth and margins and remain focused on building an attractive and sustainable Medicare Advantage business for the long term. In our Health Services businesses, we are making progress on our key strategic priorities to scale our enterprise flywheel for growth. Carelon Services delivered robust growth in operating revenue and earnings in the quarter as we gained traction with external clients, both through new business wins and the expansion of risk-based services to existing customers. For example, we recently secured a significant win with an existing Blue Cross Blue Shield partner and deployed new behavioral and medical benefit management services to state and third-party payer clients. These awards are a testament to the value we deliver and an affirmation of our strategy of proving value internally before driving growth externally. Turning to CarelonRx. We are integrating recent acquisitions and scaling key value drivers as we invest to control the levers that matter to deliver greater value and enhance consumer experiences to our members. Our margin performance in the second quarter reflects elevated investment, specifically around infrastructure and service levels as we remain committed to providing best-in-class home delivery and specialty Rx services. We see significant opportunity to grow and scale these assets and we remain excited about the growth potential of CarelonRx. We are making progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities and optimize our health benefits business, and have robust long-term growth potential embedded in each of these imperatives. We are delivering strong and accelerating growth in Carelon Services with a long runway ahead. Meanwhile, our guidance for 2024 embeds significant investment in growth, notably in CarelonRx and government health plan operating margins below the long-term average with meaningful upside to our targets. Our focused execution reflects our confidence in Carelon as our flywheel for enterprise growth and the embedded earnings power of our businesses, which together will enable us to deliver strong growth in adjusted diluted earnings per share over the long term. In closing, I want to thank community partners who share our purpose and dedication as well as our associates who work hard every day to make Elevance Health a lifetime trusted health partner to the members we are privileged to serve. Their collective passion is reflecting a recent external recognition, including as one of America's greatest workplaces in 2024 by Newsweek where Elevance Health earned five out of five stars as well as our inclusion among the best companies to work for, for 2024 by U.S. News and World Report. With that, I'd like to turn the call over to our CFO, Mark Kaye, to discuss our financial results and outlook in greater detail. Mark? Mark Kaye -- Executive Vice President, Chief Financial Officer Thank you, Gail, and good morning to everyone on the line. As Gail shared, we reported second-quarter results, including GAAP diluted earnings per share of $9.85 and adjusted diluted earnings per share of $10.12, representing growth of 12% year over year. We ended the second quarter with 45.8 million members, principally reflecting attrition in our Medicaid membership. Our commercial fee-based business grew by 354,000 lives year over year, reflecting the distinct value we provide to self-insured employers and the strength of the Blue Cross Blue Shield brand. Additionally, the thoughtful positioning of our individual ACA products has proven effective in ensuring robust and profitable growth. Total operating revenue for the quarter was $43.2 billion, approximately flat year over year. As we approach the tail end of Medicaid redeterminations, we anticipate growing operating revenue -- second half of the year, driven by growth in premiums and CarelonRx product revenue related to higher external membership and the acquisition of Paragon Healthcare. Carelon Services momentum accelerated in the quarter. Operating revenue grew by over 26% and operating earnings increased by more than 30% due to growth in risk-based services provided to internal and external clients, prudent pricing and strong execution. The consolidated benefit expense ratio was 86.3% for the second quarter, an improvement of 10 basis points year over year. This improvement was driven by several factors, including premium rate adjustments and recognition of medical cost trends, disciplined vehicle management and a shift in our mix of business toward Commercial. This was partially offset by our Medicaid business where acuity has increased due to attrition of healthier members. Elevance Health adjusted operating expense ratio was 11.5% in the second quarter, an increase of 50 basis points relative to the second quarter of 2023. We absorbed elevated investment costs, notably in CarelonRx. And this, along with other strategic initiatives, will position our company for long-term sustainable growth. We anticipate significant improvement in our operating expense ratio in the second half of this year. Adjusted operating gain for the enterprise grew approximately 6% year over year, led by Carelon Services. We have maintained a prudent posture with respect to reserves. Days in claims payable at the end of the second quarter stood at 45.3 days, above our long-term target range in the low 40s. As a reminder, days in claims payable in the first quarter included approximately 1.7 days related to the industrywide delays in claims receipts. With respect to our outlook, we are closely monitoring acuity and cost trends notably in Medicaid, and are working collaboratively with states to ensure rates remain actuarially sound. We are, however, expecting second-half utilization to increase in Medicaid. And as a result, anticipate our full-year benefit expense ratio in the year in the upper half of our initial guidance range. Nonetheless, we expect to achieve our full-year adjusted diluted earnings per share guidance of at least $37.20. Before I close, I'd like to briefly talk through our enterprise growth algorithm, which we included in the supplemental earnings presentation provided this morning. Our commitment to growing adjusted diluted earnings per share by at least 12% annually, on average, incorporates upper single-digit growth in operating revenue, underpinned by membership growth, geographic expansion, and momentum in Carelon as we scale enterprise flywheel. Our commitment to disciplined underwriting and operating expense management across all lines of business will drive the improvement inherent in our enterprise operating margin target of 6.5% to 7% by 2027. Taken together, we are targeting growing operating earnings in the upper single-digit to low double-digit percent range annually on average over time. Finally, we expect capital deployment to consistently deliver one-third of our targeted adjusted diluted earnings-per-share growth rate. Overall, our results in the first half of the year are consistent with our initial guidance, and we will maintain a steadfast focus on execution and operating efficiency over the balance of the year. And with that, operator, please open the call to questions. [Operator instructions] For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice -- UBS -- Analyst Hi, everybody. Maybe just to kick it off here. I know you've laid out your long-term growth objectives and all. I wonder if it's this early date, you're prepared to comment a little more on any plans you have to accelerate growth in '25? I know the top line has had redeterminations and other things this year. What's your thought about ability to get back to that growth trajectory -- second term in '25? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Great. Thanks, A.J., and thanks very much for the question this morning. I think let me start with what Mark outlined as our enterprise growth algorithm because I think that really frames for everyone how we are thinking about our business and also, as you think about 2024 and our results, the balance and resilience of our complementary businesses that has allowed us to grow in multiple ways in many types of different macroeconomic environments. While it is early for '25, I'd like to at least frame sort of how we're thinking about 2025. We do expect to accelerate revenue growth across all of our businesses, specifically in our health business, we see a lot of really strong momentum in commercial, and that's been ongoing. Part of that's through the targeted expansion of our individual ACA footprint, and in some cases, adding new geographies that help support what's happening in the Medicaid redeterminations. The Medicare Advantage, as we said in our opening comments, we feel that we've positioned ourselves through sustainable growth and margins and look at that as a very good long-term business. And in Medicaid, we're nearing the end of the redetermination cycle and we do anticipate a return to growth. And you've heard about some of our early wins this year, which we are very pleased with. We also do believe that some of those were redetermined based on administrative reasons, will be coming back, albeit it's taken a little bit longer than we originally thought. And then I'd like to kind of close these comments about our excitement around Carelon and the growth that we're seeing and how we progressed. You saw some of that come through in the second quarter. In Carelon Services, we are seeing some very strong external growth in the quarter, and we see expanded opportunities as we continue to build our capabilities, particularly in the risk market. And what we're seeing here is our ability to prove it on our own businesses first and then take it to the market commercially has been a really strong selling point for us, and we're very excited about that. And then finally, CarelonRx is our ability to scale especially on the specialty side, including the integration of some of our recent capabilities such as Paragon Healthcare, BioPlus specialty pharmacy. We're looking forward to adding the Kroger specialty pharmacy business as well as we continue to diversify. So overall, as we think about acceleration of revenue growth in '25, we do expect it across all of our business and are extremely positive about what we're seeing inside of our business. So thank you for the question. And next question, please. Operator Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead. Nate Rich -- Goldman Sachs -- Analyst Thanks for the questions. I wanted to ask on Medicaid. I think about a quarter of your book is due to set rates in the back half of the year. Could you maybe just talk about what your guidance assumes for these rate updates? And maybe anything you've seen kind of so far as you think about the updates for July or October to the extent you have visibility? And I guess, Mark, on your comment on Medicaid utilization, have you seen the level of care on a same member basis increase? Or is the issue really just the timing dynamic between where state rates are and the level of acuity that you're seeing in your population? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Well, thanks for the question, Nathan. A lot in there. So let me ask Felicia Norwood who leads government first and then have Mark respond to the second part of your question. Felicia? Felicia Norwood -- Executive Vice President, President, Government Health Benefits So good morning, Nathan. You are absolutely right about the way our rate timing works. We have about half of our states where we have rates in the first half of the year and the other half in the back half of the year with our core group certainly in fourth quarter. At this point, we have visibility into nearly all of our Medicaid premium for 2024. And the rate conversations with our states are very constructive. With that said, not all rates are final. We are in constant conversations with our states and providing them with information -- updated information that we see in terms of the experience almost weekly, make sure that they are seeing what we are seeing from an overall change perspective as we wind down redeterminations, which certainly has been one of the largest transformative things that have happened in Medicaid for some period of time. I will say that the conversations are ongoing. We fully expect our rates to remain actuarially sound, but we acknowledge the potential for a short-term disconnect between the timing of our rates and the emerging acuity in our populations and that's certainly been reflected in our updates for the year. I will say that we continue to make sure that states and their actuaries have the most recent data that we have. And we will continue to have that engagement as we go through the fourth quarter rate process with a few very large states that remain in negotiations with us. And with that, I will turn it over to Mark to talk about the rest of the issues around utilization. Mark Kaye -- Executive Vice President, Chief Financial Officer Thanks very much, Felicia. Medicaid utilization in the quarter, as you heard from Felicia, reflected higher acuity as expected. We are also seeing signs of increased utilization across the broader Medicaid population, including in outpatient radiology, durable medical equipment as well as some elective procedures. I just wanted to add here, just as we noted in our prepared remarks, the full-year outlook does allow for both this shift in acuity and increased utilization in the second half of the year including the rate timing mismatch that Felicia spoke to. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes -- Analyst Yeah. Could you talk a little bit about CarelonRx, and in particular, interested in the contracting approach and scope for the CVS contract that underlies parts of that as you're in-sourcing things? And then just if you could give a quick update on the status of the integration rollout, the -- members and other members of BioPlus and Paragon and the status of Kroger. Thanks. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Great. Well, thanks, Lance. I'm going to ask Pete Haytaian, who leads Carelon to address your questions. Peter Haytaian -- Executive Vice President, President, Carelon and CarelonRx Yeah. Thanks, a lot for the question, Lance. We feel very good about the overall strategy as it relates to pharmacy. I'll start with how we're performing on the core and growth in the core. Our strategy is resonating in the marketplace. There continues to be a lot of interest in what we're doing as it relates to the strategic levers that matter and how we're in-sourcing and diversifying our business. And I think our value story is really resonating -- integrated value story, and that's really playing through with highly competitive pricing. And again, we continue to perform very well on the core PBM down market and middle market. So we feel very good about that. As it relates to our diversification and your question on our assets, things are going very well. As we talked about with regard to specialty, we spent the last year building out our infrastructure to be able to handle the capacity -- to have the capacity to handle the Elevance scripts. And we feel very good about that. We began to migrate scripts at the beginning of this year as it relates to specialty, and we continue to move forward in that regard. And importantly, we are preparing right now and continue to make investments around the Kroger flows and assuming those scripts as well. Right now, we're projecting that to close Q3, Q4 of this year. And again, a lot of preparation and investment to make sure that we do that really well. And then finally, as it relates to Paragon, again, just to reiterate the opportunity there because we feel very, very good about that. We're talking about $16 billion of infusion spend as it relates to Elevance Health with about 50% of that being in the hospital setting. So again, a great opportunity for us to have care to be provided in a more appropriate setting, be it in an ambulatory side or in the home, and we feel very good about our positioning and the identity that we have in our markets as it relates to that. And importantly, as part of that strategy, we are targeting, at a ZIP code level, the standup of ambulatory sites to be able to provide back care. We're launching one imminently, and then we are preparing and building out strategies to launch others into 2025. So overall, we feel very good about our strategy of in-sourcing the strategic levers that matter and the growth opportunity that exists. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thanks, Pete, and thanks again, Lance, for the question. And just I think this is a great example of our flywheel for growth and our ability to scale these assets, which we're very excited about. And again, thinking about this is the opportunity to drive a differentiated cost of care for our health plans within Elevance Health, but also better experience for members and support our partners across the ecosystem. So again, a really important part of our flywheel. Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck -- Analyst OK. I guess in your prepared remarks, you mentioned that the results here were somewhat burdened by, I guess, three things. One, investments in Carelon for growth and then you had below-average margins in Medicaid and -- margins and Medicare Advantage. Can you help size those things? How should we think about where those margins are today relative to kind of where they should be from a target perspective? Thanks. Mark Kaye -- Executive Vice President, Chief Financial Officer Thanks very much for the questions. We're not going to comment on in detail. We are a single line business operating margin may land given our combined health benefits reporting segment. But however, to your question, let me give you a little bit of color. Would you expect the Medicaid margins to compress year over year. There are key factors driving this, including or beyond the industrywide dynamics that we're navigating. And those include what we spoke to a moment ago around the timing mismatch rates relative to acuity and the higher acuity itself associated with the Medicaid membership mix. Importantly, as you heard us talk to you just a moment ago, we are holding very constructive conversations with the states to ensure those rates remain actuarially sound. In Medicare, we do continue to expect margins are going to improve in 2024 compared to 2023. They will still remain below our long-term target margin range. And then finally, we are very pleased with the progress of our 2024 commercial repricing initiatives and our disciplined pricing practices. And we've spoken about this before, but it's worth emphasizing 2023 really marked that first -- or the end of that first full year of our efforts to recover margins and you're seeing some of that benefit together with the actions that we're taking in 2024 come through our numbers. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin -- Analyst Hi. Thanks. Good morning. What are your expectations for market-level growth in MA for 2025? And I know it's early, but maybe any headwinds, tailwinds, and how we should expect Elevance to grow market share relative to the overall market in MA for 2025? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director I'll ask Felicia to comment on that, Josh. Thank you. Felicia Norwood -- Executive Vice President, President, Government Health Benefits So good morning, Josh, and thank you. It's an incredibly dynamic time in Medicare Advantage. And now more than ever, we think it's important to be very thoughtful and rational as we plan for 2025. Despite this environment, Medicare Advantage enrollment is in an all-time high. And over 50% of individuals are still choosing MA. And that means there's still a clear value for what MA offers, and we're committed in the long term to having and operating a profitable and sustainable MA business. It's a little early to talk about 2025 in terms of growth expectations. Our bids were recently submitted to CMS, and frankly, we are still getting feedback on that. In addition to that, the industrywide submissions aren't known yet. We feel encouraged by commentary from peers that everybody is going to kind of rationally and have benefit rationalization as we head into 2025. But we still have to wait and see what emerges once we have greater information from our competitors. So at this point, there's a lot of unknowns. I will tell you, we maintained a very disciplined approach, offering competitive benefits while we are balancing growth and margins. I think we were very thoughtful in the plan designs that we put out there to make sure that we were focusing on profitable growth and the sustainability of this program for the long term. We are very focused on our D-SNP business, which is where we believe that we have a strong advantage when we think about our Medicaid and Medicare positioning. And we also did prioritization around our products in terms of our local market dynamics. So it's still early to determine what growth is going to look like for 2025. We feel very good about how we position our business on the heels of our strategy in 2024 to make sure that we have a sustainable long-term business in Medicare Advantage. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Lisa Gill from J.P. Morgan. Please go ahead. Lisa Gill -- Analyst Hi. Thanks very much and good morning. I want to just stick with Medicare Advantage for a minute. Can you talk about what you saw specifically in the quarter around trend? And then Felicia, maybe you can comment on what you included around trend assumption in your MA bids as we think about 2025? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thanks very much for the additional questions here on Medicaid. First, we are seeing a larger than typical pull-forward effect, and that's really driven by the increased numbers of Medicaid members who are losing coverage. You can think about this as beneficiaries who are facing imminent loss of coverage in the month or so preceding that coverage loss picking up additional benefits. Second, member mischaracterization among the core expansion and specialized population has caused some localized revenue pressure as some members expect to regain coverage after previously being determined as ineligible. And third on this topic of Medicaid, elevated outpatient -- and elective procedures. Steve just flagged me said to talk about Medicare, so I apologize for that. On Medicare, the answer's very short, trends developed in line with expectations. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake -- Analyst Thanks. Appreciate the question. First, can you size the Medicaid trend increase that you're seeing here? And then second, I just want to follow up on Kevin's question on government margins. I understand you don't want to give us specific absolute margin levels but was wondering if you could share your expectation of the trajectory of margins in Medicare Advantage and Medicaid for 2025 versus 2024? Thanks. Mark Kaye -- Executive Vice President, Chief Financial Officer Thanks very much for the question. Segment margins in the quarter improved by 20 basis points year over year. And I'd argue that the first half results here are consistent with our initial guidance range. And we expect full-year margins to end within our initial outlook, up 25 to 50 basis points, primarily driven by the ongoing recovery of our commercial business. From a seasonality perspective, there are two key comments I wanted to draw out here. For modern purposes, second-quarter revenue growth is going to mark the low point for the year and we expect third and fourth-quarter operating revenue and premium revenue growth rates to improve. And then secondly, just on the MLR because it ties directly to your question, we now expect the third quarter MLR to be near the high end of our full-year guidance range. And I noted specifically, Justin, as the current third quarter consensus estimate does not appear to capture the calendar day shift associated with the leap year, and that's going to have approximately a 70 basis point impact on the third quarter MLR. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead. Erin Wright -- Analyst Great. Thanks for taking my question. Can you talk a little bit about the investments you're making around CarelonRx and how you're thinking about the time line in terms of scaling specialty? And are there ample opportunities out there for you like Kroger and Paragon out there? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Well, thanks, Erin, and welcome to our call. I think this is the first time you've been on our call, so it's great to hear from you. I'll ask Pete to comment. Peter Haytaian -- Executive Vice President, President, Carelon and CarelonRx Yeah. No, thank you. We feel very good about our specialty strategy, and I appreciate the question. I'll try not to repeat what I said before and give you a little bit more context. But as I noted, as it related to our specialty strategy, we acquired BioPlus last year in 2023. And again, we spent a lot of time last year in building out the infrastructure and the capacity to be able to assume Elevance scripts. And our focus as it relates to the near term is being able to migrate Elevance scripts, which will occur through this year and into 2025. As you noted, we're going to be opportunistic, and we have been as it relates to things like Kroger that provides additional scale for us. To give you a little bit of color on Kroger, it's about 500,000 incremental scripts. They also give us access to additional LDDs as well as having a presence in places like Puerto Rico, which could help us as well. And so we'll continue to be opportunistic as it relates to our specialty strategy and really on our focus to deliver whole health. We are anticipating, as I noted earlier, that Kroger would close Q3, Q4 of this year, and we're preparing for that and continuing to make investments around that. And then I'd say as we move forward more broadly, and Gail touched upon this as it relates to our specialty strategy, there's a real focus on patient differentiation in whole health. We have a wonderful opportunity as we move forward to really drive whole health and capture all the value of Carelon, including things like integrating behavioral health and other services. And so that's going to be our goals and focus moving forward. We feel very bullish about it. We feel very bullish about our growth. We feel very bullish about delivering on the Carelon strategy and whole health as we move forward. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line Michael Hall from Baird. Please go ahead. Mike Hall -- Robert W. Baird and Company -- Analyst Thank you. Just wanted to ask about your long-term growth target. In your deck, you now had a slight decline in health benefits long-term growth CAGR. And apologies if I missed this in your comments, but could you provide what -- some color on what's driving that? Is that MA, Medicaid, presumably not Commercial? And then I also think you reaffirm long-term targets on Carelon. But over the past year since your Investor Day, CD&R partnership, BioPlus, acquisition of Paragon, pending Kroger. The business seemingly has taken a very positive step forward in its evolution. So would it be fair to say your prior target at Investor Day, most of those assumptions within your guide or long-term targets do not contemplate all these new developments? And specifically, Carelon Services revenue per consumer served, the 50% growth target by '27 now appears like there's much, much higher runway. So just overall, taking a step back, even though you're reaffirming your target. Is it true that now, today, there's significant greater potential embedded earnings power within Carelon versus that outlay that can the unlock for future years? Thank you. Mark Kaye -- Executive Vice President, Chief Financial Officer This quarter, we are pleased to introduce our growth algorithm, which underpins our adjusted diluted earnings per share target of average annual growth of at least 12% over time. You asked a little bit about the revision. And we have revised our enterprise revenue growth target from the high single to low double digits to high single-digit percent range, and that's primarily to reflect Medicaid-related attrition that has occurred to date and the impact of the prudent action that we're taking in our 2024 and 2025 Medicare Advantage bids in response to the risk model revisions. Accordingly, our health benefits segment revenue CAGR should now be in the -- will now be in the mid- to upper single-digit percent range. But the key point here is our path is much the same. And that really means that we're expecting high single-digit to low double-digit percent growth in operating earnings. And the key point here to the second half of your question, with approximately one-third contribution from capital deployment and that capital deployment can come through in the form of inorganic activity to support our Carelon businesses. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi. Good morning. I wanted to follow up on some of the Medicaid comments. It sounds like you're optimistic that rates get better in the back half, but also acknowledge a temporary disconnect that persists and expect higher Medicaid utilization in the back half. So if we translate that into MLR expectations, does guidance assume that Medicaid MLR peaks in 2Q and gets better from here with potentially better rates? Or do you expect it to peak at some point in the back half of the year? Thanks. Mark Kaye -- Executive Vice President, Chief Financial Officer Great question. And your comments there are completely consistent with the way that we're thinking about it. You should really think about this as we now expect our full-year benefit expense ratio to be in the upper half of that initial guidance range, i.e., 87% to 87.5%, principally because of the Medicaid dynamics that we're navigating. We're not looking to provide specific quarter-by-quarter guidance. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Ryan Langston from Cowen. Please go ahead. Ryan Langston -- TD Cowen -- Analyst Hi. Good morning. Just a quick one for me. Prior year development was a bit more favorable than we expected. Can you maybe give us a sense on if that's just mostly from the fourth quarter? And if so, any kind of particular pockets of utilization you'd call out maybe coming in better than expected? Thanks. Mark Kaye -- Executive Vice President, Chief Financial Officer Thanks very much for the question. Let me put the prior-year development in the context of the medical claims payment change this quarter. I think that's more instructive to understand the dynamics here. And you saw medical claims payable in the quarter go down by approximately $1.3 billion versus the first quarter. And there are really several factors that drove this and then ultimately drove PYD development, and they include the reserve runoff due to Medicaid membership decline, the catch-up in claims paid associated with elevated reserves for industrywide claim receipt delays in the first quarter and then the improved operational environment that's reflected through our shorter cycle times. And the key point here MCP, which is why it's more instructive, remained at historically high levels, both in aggregate and on a fully insured PMPM basis and that indicates the continuity of our historical prudent reserving practices and our strong balance sheet. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thank you, Mark. And Ryan, welcome to our call for the first time. It's great to have you. Next question, please. Operator Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Hi. Thanks. I just wanted to come back to the Medicaid utilization comments. I think you were giving response to an earlier question. I'd love to expand a little bit on that. Could you comment has on how much of the pressure is geographically isolated in some of your markets versus maybe more broad-based? You're speaking to also some utilization of carrier from people that were expecting to lose coverage. Would you be expecting that dynamic to slow a little bit as redeterminations end? Or is that potentially offset by rejoinder dynamics or factors like that? Mark Kaye -- Executive Vice President, Chief Financial Officer Thanks for the question and I appreciate the opportunity to provide additional clarification here. Certainly, we expect larger than typical pull-forward effect that we've seen in the second quarter to abate as the year goes on, principally because we're through the tail end of redeterminations at this point. We are obviously working with the states to ensure that the timing and rate mismatch is appropriately adjusted. On the member miscategorization, this is really ensuring that those members who are initially categorize, for example, as tenant are putting the more appropriate and cohort for purposes of rates, so think about ABD, for example. And then what we are really seeing elevate as the year goes on is the outpatient trains and elective procedures. And that's something that we fully accounted for in our MLR guide for the full year. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead. Scott Fidel -- Analyst Hi. Thanks. Good morning. I was hoping you could drill a bit more into the $4.3 billion timing items that impacted operating cash flow, and then just wanted to see whether you expect all those to reverse in the back half of the year and whether you're comfortable reaffirming your full year CFFO target of at least $8.1 billion. And if not, where you expect operating cash flow to land for the year? Thanks. Mark Kaye -- Executive Vice President, Chief Financial Officer I appreciate the question this morning. Year-to-date operating cash flow is $2.4 billion. And to your point, that is a decrease of approximately $6 billion year over year. The key point here is that this includes $4.3 billion of timing-related items, and approximately $1.3 billion of net cash outflows that are primarily associated with the runoff of our Medicaid reserves and the improvement in the operational environment, which is reflected by shorter cycle times. The timing-related item reflects a $3.6 billion impact from an additional month of premiums that we received from CMS in the year-ago period and so not a concern from our perspective. On a full-year basis, we do expect operating cash flow outlook to be slightly north of $7 billion, and that really reflects the year-to-date reductions in working capital. And specifically, as I mentioned a moment ago, that decrease in MCP driven by -- membership attrition. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. So in the prepared remarks, you guys mentioned a significant win with a Blue Cross Blue Shield partner. I was wondering if you could help us size your pipeline there and give us any clarity on how penetrated you are into that market. So how many of your Blue spend do you currently have contracts with? And what's that look like to expand this? Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Great. Thanks, Sarah. Pete? Peter Haytaian -- Executive Vice President, President, Carelon and CarelonRx Yes, Sarah. Thanks a lot for the question. I appreciate it. And yes, we're really pleased with how services growth is going. We mentioned 26% growth in the quarter and a clear path of achieving our long-term objective. So we feel very good about that. As it relates to your question, again, our focus is, as Gail said earlier, building capabilities internally and importing them externally. And we're seeing that play through. And your reference to Blues. I would say that we are currently engaged with most of the Blues. And our strategy with regard to that is really landing and expanding to be quite frank. And this is a great example of that, where we had an existing relationship with the client. We continue to grow those services with that particular Blue. They see the value in that. We were able to convert some of those capabilities to risk. And I'll remind you that, that is a very big part of our strategy, assumption of risk, both on a category of service basis as well as a full risk basis. And so you'll see that continue to move forward. As it relates to the pipeline, this year, we're doing very well. '24 growth year over year is very, very strong. So you'll see really nice improvement from that perspective. And as you would expect, we're already selling into 2025. A real focus in 2025 are on our behavioral health capabilities, our post-acute capabilities, and then some of our Carillon Health businesses. So I appreciate the question, Sarah. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Yeah. Thanks, Pete, and thanks for the question, Sarah. As you heard from Pete, we have exciting opportunities to deepen our penetration because we do work with most of the other Blues today and also other payers, quite frankly, and state partners has been a great opportunity for Carelon more broadly and you're seeing that come through. So thanks for the question. We're excited about the opportunity there. Next question, please. Operator Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill -- Analyst Hey. Good morning, guys, and I appreciate you taking the question. I guess, Mark, I was just going to ask if you could bridge a little bit when we think about the 2027 OP margin targets in the MCO segments. Kind of like how you think about the sources of the margin expansion there? And I'd be interested, in particular, if you would talk about what your expectations are around the exchange subsidies and the growth of the exchange business. Mark Kaye -- Executive Vice President, Chief Financial Officer Thank you very much for the question, George, and certainly happy to talk through the algorithm at a little bit of a high level. So you can think about this as being driven by upper single-digit growth in revenue, enterprise operating margin expansion to 6.5% to 7% and then the balanced approach to capital deployment, inclusive of share repurchases and strategic M&A. On the revenue side, revenue growth is going to be driven by increased membership in the health benefits business, geographic expansion efforts and then prudent pricing to cover cost trend. And then similarly, in Carelon, key drivers are going to include the expansion of risk-based revenue in Carelon Services and the continued growth in CarelonRx membership. On the margin side, expansion is going to reflect the disciplined operating expense management and the transformation of some of our business processes, leveraging new technologies, including AI. And that's coupled together with -- or at least the way I think about effective medical management and underwriting discipline where they're going to enable us to achieve the enterprise operating margin target. And then finally, consistent with our 2023 Investor Day guidance, we do expect to achieve approximately one-third of our adjusted diluted EPS -- rate through capital deployment. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thank you, Mark. And to your second part of the question around our exchange business, as you have heard us talk about, we have been I think, very disciplined in our approach to expanding that business. We have had very strong results individually, up 30% -- 35% year over year with the ACA growing almost 40%. So as you think about that, our goal is to serve our members throughout their coverage transitions, we see a significant opportunity to continue that expansion, including geographic expansion, particularly for our members that were historically in Medicaid and now need other coverage. So again, a really nice opportunity, but you'll see that same sort of disciplined approach that we've shown throughout in the ACA. Next question, please. Operator Next, we'll go to the line of Whit Mayo from Leerink Partners. Please go ahead. Whit Mayo -- Analyst Hey. Thanks. Just quickly on midyear renewals. Just remind us how much of the commercial risk book renews in the second half of this year and just how you're thinking about retention membership, ability to take the required price action that you need? And just as a clarification, is it fair that commercial is performing better than expectations on margin with government worse, at least in the first half? I just wanted to make sure I properly got this. Thanks. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director All right. Thank you. I'm going to have Morgan Kendrick, who leads our commercial business, address your questions. Morgan Kendrick -- Executive Vice President, President, Commercial and Specialty Health Benefits Yeah. Thanks for the question. As we think about it, that cohort of business that we renew in July is about 25% of the risk-based large group business. And to camp on to that, it performed as expected. In fact, we're seeing persistency up a bit. We talked about attrition in the large group business with our January -- on the first quarter call, that's abated, and we're seeing persistency improve, and we're seeing the margins coming through. So we feel really good about how we're positioned for continued growth and expansion in that business moving forward. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead. David Windley -- Analyst Thanks for taking my question. I believe you have a cost savings plan targeting around $750 million, that's maybe a relatively nearer-term initiative. I'm wondering if you could describe your progress since that. And then also, should we think about the benefits of those savings dropping through? Or are you mostly reinvesting in some of your growth initiatives? Thank you. Mark Kaye -- Executive Vice President, Chief Financial Officer Dave, thanks very much for the question. In terms of the 2023 business optimization activity, we are on track to realize the gross run rate expense efficiency improvement of approximately $750 million that we committed to do. And that's going to benefit both our operating performance this year, and it's going to help to establish the strong foundation for growth in 2025 and beyond. If I step back just for a moment, and we covered this a bit in our prepared remarks, we do anticipate significant improvement in our operating expense ratio in the second half of the year as we continue to take additional steps to enhance operational efficiency and we'll begin to see and realize those incremental run rate improvements over time. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Thank you, Mark. And Dave, I might maybe just spend a moment because I think it's a great opportunity to share a little bit about how we're going about this. We, first of all, have been very disciplined about our expense management. More importantly, we believe the opportunity around generative AI for our business is expansive. And it's going to materially impact all parts of our organization. We've been focusing on a couple of things, and I know I've spoken about this before, enhancing experiences while driving cost down, but also fueling future expansion. And I would say, over the last few months, we've really accelerated those internal efforts. And again, this has been a journey, so it's not new, but we're going to start seeing the absolute impact of the AI technology and digitization around our significant operational areas. And just a couple of things maybe to make this real as we transform. And there's kind of three areas around the engagement model that we think about: Members, providers and our own associates who are critical to this journey with us. On the member side, we look at each interactions of our members, and we're using AI to make those much more unique and personalized and integrating it across our member touch points. Do you know oftentimes, there's disconnects in those touch points, and that's a huge opportunity for us to take really personalized digital service and enrich that experience. And what does that do? I mean the real impact you see it is improved access to care, better claims processing, less error rates, reduction of our calls, use of chat. So those are some very tangible ways that we're deploying that and have been over the last year and you're going to start seeing that come through based on what Mark just shared. The provider side is an area that I'm particularly excited about because we're looking at reimagining and streamlining all of our admin tests rather on an end-to-end basis with the provider life cycle. And that's a lot. But as you think about the impacts there, we'd touch not just providers, but also members and some very specific things like automating the onboarding process of how they come into our plans, refining roster management, specifically around data and how that drives downstream to claims. Also, enhancing contract administration. And we think those interactions are going to improve our member experiences, but also improve our relationship and our ability to work in value-based care with our care providers and more seamlessly. And then I'll end with associates because we know that they need to be part of this journey. It's also a cultural journey on AI that's going to drive, I think, greater efficiency. And we rolled out our Spark, which is our internal ChatGPT tool to over 50,000 of our associates so that they can harness the capability, use it and improve their own productivity. And we're seeing really nice results from that. So again, I wanted to just share that because our expense focus and efficiency is driven a lot by the impact we're going to see from that. And while we have a lot of opportunities, we're trying to look at the end-to-end impact of where we can take friction out of the system and fundamentally improve what we're doing. So hopefully, that gives you a sense of how we're going about achieving the goals that we set, and we see huge opportunities going forward embedded into our growth algorithm for the future. Next question please. Operator Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead. Ann Hynes -- Analyst Hi. Good morning. I just want to focus on specialty. I know that Elevance is -- with your acquisitions, you're in-sourcing more specialty, not only on the expense side, but also the distribution side. So I'm just curious about your strategy longer term. Do you think there's more opportunity for specialty on the distribution side? And do you think there is, is there any therapeutic area you are focused on? Peter Haytaian -- Executive Vice President, President, Carelon and CarelonRx Thanks for the question. And I think there's a tremendous opportunity as it relates to specialty. As I said earlier, our priority in the near term is of the Elevance scripts and absorbing the Elevance scripts effectively. And then also, as we talked about, what we're doing with Kroger. We continue to see opportunities to cover more LDDs. And then in addition to that, as it relates to whole health, we are very focused on the patient experience. We are very focused on centers of excellence and how we can care for the members in a differentiated way by wrapping around additional assets. Longer term, again, we will be opportunistic. But right now, we have a lot in front of us, and we want to execute against that effectively as it relates to specialty. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Yes. Thanks, Pete. And Ann, I just want to highlight one point that Pete said, it's really an integration strategy. Specialty has a long runway for us. But the integration to our Carelon Services and what we do to deliver better value for our health plan members is really critical to our strategy. And I think that is unique. Our ability to take both the specialty pharmacy, but all the specialty series around these disease categories, we think is differentiating. So thank you, last question, we're going to take now, please. Operator Final question will go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix -- RBC Capital Markets -- Analyst Hi. Thank you very much. I just wanted a quick follow-up on Felicia's comments on MA bids for next year. I realize it's too early to talk about growth but I think earlier in the year, you had talked about long term and the growth focus toward Carelon markets. And I just wanted to see if you could provide any color on how you're -- contemplate your geographic footprint evolving and also your density toward Carelon markets in 2025? Felicia Norwood -- Executive Vice President, President, Government Health Benefits So, Ben, thank you for the question. We've always been very strategic around where we want to see our MA growth as we go forward. As you recall, this past year, we've made very deliberate decisions around markets that we wanted to exit because we want to make sure that we positioned ourselves to long-term growth and performance. When we think about our strategy today, it's certainly in those areas where we have Medicare and Medicaid business because the D-SNP business is incredibly important for us. And if you think about where things are going long term, having alignment around Medicare and Medicaid is critical for us. But ultimately, it's absolutely about being able to deliver for the Carelon's flywheel as well. The members that we are focused on, particularly in D-SNP and other STEP products are very complex populations. And as we think about whole health, we've been working very collaboratively with Pete and the team to make sure that we are able to deliver a whole health for those that we are very privileged to serve. So the footprint really is focused on density certainly in our Blue markets, but being able to be focused on our Medicaid markets as well in places where we see opportunities to grow strategically with Carelon in the future and that's the pathway and framework that we've established when we think about the long-term growth of our Medicare Advantage business, which we continue to be incredibly excited about as we think about being a lifetime trusted partner for those we serve. So thank you for the question. Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director So thank you for your questions, everyone, and thank you for all of you for joining us today for your interest and your support. We look forward to sharing more about our progress that we're making on our enterprise strategy with you in the coming quarters and are confident that the balance and resilience of our diverse set of businesses positions us well. Thank you for your interest in Elevance Health and have a great rest of your week. Operator Ladies and gentlemen, a recording of this conference will be available for replay after 11 a.m. -- through August 17th, 2024. You may access the replay system at any time by dialing 800 3919851. International participants can dial (203) 369-3268. Steve Tanal -- Chief Investor Relations Officer, Corporate Financial Planning and Analysis Gail Koziara Boudreaux -- President, Chief Executive Officer, and Director Felicia Norwood -- Executive Vice President, President, Government Health Benefits Lance Wilkes -- Analyst Peter Haytaian -- Executive Vice President, President, Carelon and CarelonRx