UnitedHealth Group Incorporated (UNH)

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UnitedHealth Group Inc. (UNH)

Q3 2009 Earnings Call

October 20, 2009 8:45 am ET

Executives

Stephen J. Hemsley - President, Chief Executive Officer, Director

Jackie Kosecoff - CEO, Prescription Solutions

Tom Paul - COO

Gail Boudreaux - EVP, UnitedHealth Group and President, UnitedHealthcare

Larry Renfro - EVP, UnitedHealth Group and CEO, Ovations

Mike Mikan - Chief Financial Officer

Simon Stevens - Executive Vice President

Dawn Owens - Chief Executive Officer, OptumHealth

Analysts

Gregory Nersessian - Credit Suisse

Charles Boorady - Citi

Joshua Raskin - Barclays Capital

John Rex - JPMorgan

Christine Arnold - Cowen and Company

Kevin Fischbeck - Bank of America

Matthew Borsch - Goldman Sachs

Justin Lake - UBS

Tom Carroll - Stifel Nicolaus

Lee Cooperman - Omega Advisors

Scott Fidel - Deutsche Bank

Ana Gupte - Sanford C. Bernstein & Co

Doug Simpson - Morgan Stanley

Michael Baker - Raymond James

Peter Costa - FTN Equity Capital Markets

Matthew Perry - Wells Fargo

Presentation

Operator

Good morning. I would like to welcome everyone to the UnitedHealth Group third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (Operator's Instructions) As a reminder, this conference is being recorded.

This call and its contents are the property of UnitedHealth Group. Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited. Here is some important introductory information. This call will reference non-GAAP amounts. A reconciliation of non GAAP to GAAP amounts if available on the financial reports and SEC filings section of the company's investor pages at www.unitedhealthgroup.com.

This call contains forward looking statements under US federal security laws. Such statements are subject to risk 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 on the reports that we've filed with the Securities and Exchange Commission from time to time, including the cautionary statements included in our current and periodic filing.

Information presented on this call is contained in the earnings release we issued this morning and our Form 8-K dated October 20, 2009, which may be accessed from the company's investor pages at www.unitedhealthgroup.com.

I would now like to turn the conference over to President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Stephen Hemsley

Good morning. This morning we reported solid and consisted third quarter results led by cash flows of $2.7 billion and earnings of $0.89 per share, driven by a strong combination of growth and performance from our services businesses and increasingly effective ongoing medical and operating cost control.

These results reflect the efforts of our 75,000 people in consistently delivering value and service to our customers and the healthcare community across a broad spectrum of need.

Based on our performance to date, we are confirming 2009 earnings of approximately $3.15 per share and revenues of about $87 billion. While this includes an elevated level of H1N1 related medical costs in the fourth quarter, our outlook could be negatively impacted if the prevalence of H1N1 is sustained at a high enough level throughout the entire quarter.

Today we'll discuss these results and our 2010 outlook against the backdrop of a challenging economy and proposed healthcare reform legislation.

To begin with growth, the services side of our company increased revenues by $723 million in the quarter, a strong 15% gain year over year. Ingenix was up 26%, Prescription Solutions grew 16%, and OptumHealth expanded by 9%. These businesses had solid and consistent growth driven by demand for services from physicians and care providers from across the public sector, from pharma, and from unaffiliated payers.

We provide a diverse range of innovative services that help optimize the healthcare system, improving healthcare quality and consistency, transparency and accountability, and affordability and access. Examples of these services include large scale consumer disease prevention and wellness programs, healthcare financial services, managed behavioral healthcare in a benefit parody environment, specialty pharmaceutical care, and healthcare consulting, information systems, and data analysis.

In health benefits our third quarter revenues grew 7% or 1.4 billion year over year. We grew organically by 900,000 people in public and senior benefit program through the first nine months of this year which includes 275,000 people in Medicare Advantage and growth of 460,000 in risk-based state Medicaid program. These results underscore the importance of our balanced and diversified approach to the healthcare benefits market.

Third quarter pressure on our commercial benefit businesses reflect our nation's broader economic and employment challenges. Participation in our commercial benefits decreased by 275,000 people this past quarter with employment attrition driving more than 80% of this decrease. Absent employment attrition, the number of people served in fee-based products actually grew in the product and over the past six months, and the decrease in people served to risk-based products was also significantly smaller than reported.

Inside our fully insured loss numbers we continue to improve our customer retention and to expand the uptake of new products and programs.

Turning from growth to margins, we earned a net margin of about 4% of revenues through the first nine months of the year after accounting for $1.5 billion in income taxes. With a net margin of 4% our businesses drive their financial results by averaging modest earnings per customer while serving very large numbers of people with an ever increasing array of modern and innovative benefits and services.

Our third quarter operating margin was stable year over year. The steady performance reflects success in advancing affordability in the two key areas of operating costs and medical costs. On the medical cost side, our medical trends continue to track to our expectations, reflecting longstanding clinical care management skills and ever improving technology applications for both forecasting cost and at managing care.

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