Executives: Stephen Hemsley - CEO Larry Renfro - CEO and Vice Chairman, UnitedHealth Group and CEO, Optum Dave Wichmann - President Austin Pittman - CEO, UnitedHealthcare Community & State Division Dan Schumacher - CFO, UnitedHealthcare Steve Nelson - CEO, UnitedHealthcare, Medicare & Retirement Division Bill Miller - CEO, OptumInsight John Rex - EVP and CFO, UnitedHealth Group Tami Reller - EVP and CFO, Optum Amir Rubin - EVP, Optum Mark Thierer - CEO,

OptumRx
Analysts: Matthew Borsch - Goldman Sachs David Windley - Jefferies Jane Farr - Piper Jaffray Steve Baxter - Wolfe Research Peter Costa - Wells Fargo Securities Scott Fidel - Credit Suisse Ralph Jacoby - Citi Josh Raskin - Barclays Michael Baker - Raymond James A.J. Rice - UBS Kevin Fischbeck - Bank of America/Merrill Lynch Lance Wilkes - Sanford Bernstein Sheryl Skolnick - Mizuho

Securities
Operator: Good morning, I will be your conference operator today. Welcome to the UnitedHealth Group's Fourth Quarter and Full Year 2016 Earnings Conference Call. [Operator Instructions]. Here are 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 filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts.

A reconciliation of the non-GAAP to GAAP amounts is available on the financial reports and SEC filings section of the company's Investor 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 January 17, 2017 which may be accessed from the investors’ page of the Company's website. I would now like to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Stephen Hemsley: Good morning and thank you for joining us. We plan to keep our prepared remarks brief today.

Just a month and a half ago, we held our annual investor conference and fourth quarter results are very much in line with or slightly stronger than we discussed at the conference. So our focus is now well in to 2017. We ended the year with modestly stronger than expected growth across our businesses, and as the story has been throughout the year, customer retention and expanding relationships played a central role at our member and revenue growth for both UnitedHealthcare and Optum. To briefly recap 2016, revenue of a 184.8 billion grew nearly $28 billion or 18%, as earnings from operations advanced over 20% to $13.3 billion. Revenues advanced 24% to $7.3 billion and adjusted net earnings per share grew 25% to $8.05 per share for the year.

Fourth quarter 2016 results included $47.5 billion in revenues, more than $3.5 billion in earnings from operations. Net earnings of $1.9 billion and adjusted earnings per share of $2.11. All of these results were at or modestly ahead of the expectations set at our investor conference in late November. Operating cash flows for the year were $9.8 billion, 1.34 times net earnings, within our range of expectation despite timing changes in several state payments. We look forward to the opportunities of 2017, as we continue to drive our agenda of quality based net promoter or NPS performance and growth.

Building on the momentum of strong NPS gains in 2016, and that being we began 2017 with one of the stronger operational starts to a new year we’ve ever had. We remain fully committed to meeting or exceeding the 2017 outlook we previewed with you at our investor conference, and Dave Wichmann and Larry Renfro will discuss, we have solid growth momentum going in to 2017, so we will turn to their commentary beginning with Larry.

Larry Renfro: Thank you Steve. Customers of both UnitedHealthcare and Optum have been responding to our focus MPS, quality and value efforts. These are the building blocks of valuable, deep, long term relationships.

Customer retention was a factor in UnitedHealth Group’s 2016 growth and that continues as we answer 2017. The healthcare customers we serve turn to us to solve large complex problems. UnitedHealthcare for example, is increasingly helping states managed care for their complex, highly vulnerable and most costly populations. We also continue assist employers with effective, innovative programs to support the needs of their retirees and employees challenged by chronic health issues. For Optum, 2016 was a distinguishing year for developing and deepening relationships across healthcare, as we deliver more value to the market place.

In the first quarter, we announced a strategic relationship with Walgreens, offering more choice and greater savings to both consumers and their sponsors. We also entered in to a technology partnership with Availity, a leading health IT provider to meaningfully improve connectivity and processing for payer, care providers and consumers. In the second quarter, several audit organizations engaged Optum to deliver pharmacy care services in 2017, in response to our progressive clinical models for whole-person care. Quest Diagnostics joined us in the third quarter in collaboration that will span several of Optum’s businesses starting with Optum 360. We were honored to receive several important multi-year contracts from the Department of Veterans Affairs and we partnered with Allscripts across OptumInsight and Optum Health.

In the fourth quarter, we were pleased to announce a new relationship with CVS Health that will strengthen their retail and our pharmacy care service offerings to the benefit of consumers. Moving in to this year, last week we announced we will join the Surgical Care Affiliates or SCA. This combination will expand the breadth of care delivery capabilities at Optum, as we continue to evolve a comprehensive ambulatory care platform including primary, urgent, surgical and homecare, all designed to deliver higher value and quality healthcare to consumers and payers. Surgeons operating in SCA centers perform nearly 1 million surgeries annually in over 200 locations across 33 states with consistently high quality consumer satisfaction and improved value. In SCA, we will grow and build upon a leader we know well in a high growth market.

A market where we have already gained meaningful market presence, experience and insight through awesome care. The momentum inside our businesses comes from the growth and depth of these relationships and the breadth of sustainable value we can offer. In 2016, Optum revenues grew 24% to $83.6 billion, as earnings from operations grew 32% to more than $5.6 billion slightly ahead of our most recent outlook. Fourth quarter 2016, was the first anniversary of the Catamaran acquisition and we were pleased with the operating earnings growth of 18% in the quarter for Optum overall, lead by 27% growth at OptumRx. Margins reached 8.1% in the fourth quarter and were 6.7% for the full year, up 40 basis points over 2015.

Looking to 2017, OptumInsight’s year-end backlog grew 21% to $12.6 billion. As we stand back from Optum and look at our progress, we are advancing the quality and consistency of our services to customers, simplifying our business, strengthening our leadership team and boasting our resources and investments in the most important growth trends in healthcare. While there is more to be done in the United States and globally, the opportunities continue to grow even faster and larger. We are optimistic about our outlook for 2017, with revenues exceeding $90 billion and earnings from operations in the range of $6.2 billion to $6.4 billion. In 2017, at Optum and across UnitedHealth Group, we are committed to grow by developing stronger relationships, delivering consistent value to strengthen NPS and helping make health systems work better for more people.

Now let me turn it over to Dave.

Dave Wichmann: Thank you Larry. UnitedHealthcare also enters 2017 with strong momentum. Fourth quarter and full year 2016 revenues were well balanced growing by double-digit percentages in every product category. Medical cost remained well managed with commercial medical cost trend ending the year in line with expectations at approximately 6%.

2016 was one of the strongest organic growth years in our history, with more than 2 million members joining. UnitedHealthcare continues to build well diversified growth momentum as customers and consumer retention rates continue to improve broadly, with notable strength in small and mid-sized commercial groups and in Medicare. In the full risk commercial risk business, we grew by 205,000 people in the quarter and 375,000 people for the year providing a positive starting point as we enter 2017. This growth was broad based, appropriately priced and balanced across geographic regions, products and customer types. In the self-funded segment, the market has been stable with strengthening employment rates helping us grow within existing customers.

In 2016, UnitedHealthcare grew to serve an additional 335,000 commercial fee based consumers, including 20,000 more in the fourth quarter. As expected, individual business declined in the fourth quarter, premium deficiency reserves taken earlier this year were sufficient, and we maintained an appropriate and prudent residual reserve for claims not yet received. Consistent with our commitments too early in 2016, we did not ACA compliant individual business carries any financial exposure forward in 2017. Turning to Medicare, in 2016 we grew our medical membership organically by 625,000 people, about two-thirds through Medicare advantage. 2016 was among our best Medicare growth years, but we expect 2017 to be even stronger.

Our positive Medicare advantage performance in 2016 was driven by the combination premium and benefit stability, rising stars performance and improved service and clinical performance all leading to record retention rates. These same factors are driving 2017 growth. We expect to serve nearly one million more senior will medical benefits this year including more than three quarters of a million seniors in Medicare advantage balanced and diversified by regions, channel and products. Moving to Medicaid, adding 100,000 people in the quarter brought our full year growth to 585,000, once again broad-based and organic from new programs in both new and existing space. In 2017, we will introduce services in the states of Virginia and Missouri and plan to enter Colorado via the pending partnership with Rocky Mountain Health plan, further expanding the number of state partners we serve.

As we recap the year, UnitedHealthcare revenues of $148.6 billion grew 13% year-over-year, virtually all organic as it has been over the past several years. Every business grew revenues by double digit percentage in the fourth quarter and for the full year 2016. Earnings from operations exceeded $7.6 billion and grew at 13% or over $900 million. Turning to UnitedHealth Group as a whole, our fourth quarter revenues of $47.5 billion grew 9% over last year. The fourth quarter consolidated medical care ratio decreased 190 basis points to 80.8% slightly outperforming our recent investor conference outlook.

The full year care ratio of 81.2% improved 50 basis points year-over-year with core businesses overcoming both the pressures in the individual market in the first half of 2016, and the higher levels of reserve development in 2015. The full year operating cost ratio improved 30 basis points to 15.2% in line with our investor conference forecast. As we step in to 2017, there are a number positive indications that reflect our continuing momentum. Our focus on quality and NPS’s intensifying and bearing results. Consumers continue to engage more deeply in their health earning $255 million in healthy behavioral incentives in 2016.

We began the year crisply in customer installation and service on record levels of new and diversified growth across Optum and UnitedHealthcare. Optum enters the year with record backlog, people served and adjusted scripts. And with Optum bank crossing the $7 billion mark in consumer health assets under management, Optum in pursuing a strong vision as a health service organization unlike any in existence today. We will continue to develop our business to fit that vision in 2017. Our merger with SCA will significantly expand our capabilities for consumers, payers and hospital partners that often care, while establishing presence in new markets.

UnitedHealthcare enter the year with strong retention rates and new business growth across all three lines of business, and we are seeing improving performance and earnings contribution from our hospital company and health plan in Brazil. We should touch briefly on Penn Treaty an industry topic we first discussed in 2010 that finally seems to be resolving. Penn Treaty is a financially distressed long term care insurance company with no affiliation to us. While we have never sold long term care policies, under state laws health insurers will be assessed a share of the guarantee funds needed to protect Penn Treaties policy holders. We expect to accrue an approximately $315 million operating charge for our portion of the assessment.

This charge will be funded over several years and the cash will be largely recovered through premium tax credits overtime. While this outcome is well known, current accounting practice only allows this charge to be recognized when a final court order of liquidation is entered. When that ultimately occurs we will incorporate the impact in GAAP earnings, while excluding it from adjusted earnings per share. To wrap, we remain committed to our outlook for 2017 revenues of $197 billion to $199 billion adjusted net earnings of $9.30 to $9.60 per share and cash flows from operations of $11.5 billion to $12 billion. Only 17 days in to the year, we think this posture strikes an appropriate balance of optimism and prudence.

Steve?

Stephen Hemsley: Thank you Dave. You may notice a separate press release this morning announcing that Tim Flynn has joined the Board of UnitedHealth Group. Tim is an exceptionally creative and solutions oriented executive, a former global managing partner of KPMG. Tim has deep financial and global operating expertise, he is also deeply versed in corporate governance, and we are thrilled to welcome Tim to our Board of Directors. We’ll close with a few words on the overall domestic healthcare landscape.

To be clear, we have no better sense than anyone else concerning the timing or any ultimate actions with respect to the Affordable Care Act. So any questions and responses on that subject need to have that clear context. And as you would anticipate, we will not speculate on hypothetical or provocative questions in this area this morning. Our posture has remained consistent for some time now. We remain positive and constructive with respect to what ultimately evolves in the next phase of healthcare change.

We see the opportunity for robust, state based healthcare markets offering flexible commercial benefits, flexible Medicaid available to eligible as well as pain beneficiaries, well-structured and managed high risk pools, exchanges where space choose to sustain them and much more. We believe all of these taken together can represent affective, local, state based coverage systems which can well accommodate those currently in the ACA individual exchanges, as well as serve as channels for further expanding coverage if that remains the focus. We see this approach as being simpler, offering more flexibility, more choice and more affordability to both consumers and state and federal sponsors. And as we have for many years, we remain staunch advocates for affordable coverage infrastructure that supports a modern healthcare system including a strong and diversified future oriented healthcare work force and improvements to government sponsored benefits that incorporate better use of technology, information and care resources for Americans. UnitedHealth Group, Optum and UnitedHealthcare remain full committed to our mission, to help people live healthier lives and help make the health system work better for everyone.

Today we see more opportunities to serve and grow in the next 10 years than the past 10. We will remain and adaptable, innovative and restless enterprise. We see many ways we can work, our work can continue to improve, if we stay focused on that mission, and we are committed to pursue that goal in 2017 and a decade ahead. We thank you for your interest today and now we’ll take questions. Again one at a time please, and we’ll try to respond as many as we can today.

Operator: [Operator Instructions] our first question is coming from Matthew Borsch with Goldman Sachs. Please go ahead.

Matthew Borsch: I just was hoping that you could address the question to the Pennsylvania Medicaid contracts, and how the latest developed in the re-bid might or might not have affected your guidance relative to what you had already baked in for those contracts.

Stephen Hemsley: Sure. I’ll have Austin do that, but those will that affect our guidance at all after ’17.

Austin?

Austin Pittman: Sure. First let me say that our commitment has been and still is to focus on the service of the people in Pennsylvania. That’s what we get up and do every single day, so we’re staying very focused there. As per the Medicaid program or health choices, as you know, we currently serve about 220,000 Pennsylvanians. The procurement process as has been noted has been particularly troubling to us both the lack of transparency and the material shifts and the outcome itself.

If you recall, we went from retaining our existing footprint and expanding state-wide in the initial ward to being eliminated from the program through this latest protest and rebid process. So we have formerly protest as others have. We’re pursuing all of our available options to get transparency. As we get acquainted with the details, we’ll take further action from there. In the meantime, as I said at the start we’ll stay focused on serving the people of Pennsylvania.

Matthew Borsch: Just on the guidance, I thought that Medicaid enrollment ads for this year included maybe a material number for Pennsylvania, was that wrong about that?

Stephen Hemsley: No I just think that this process will take some time. I think the protest will extend and I think we also have other opportunities throughout the course of the year. So I don’t think that single state like that will affect our outlook.

Operator: Our next question comes from David Windley with Jefferies. Please go ahead.

David Windley: Acknowledging that your intent in OptumCare is to be multi-payer, I wondered if you could comment on how much of UnitedHealthcare’s medical cost is flowing through OptumCare, what your goals for that might be and then how Surgical Care affiliates falls in to that or leverage that opportunity thanks?

Stephen Hemsley: Sure. I think we’ll have a Larry kind of comment on that. I guess I would focus on the fact that we serve multiple payers through our OptumCare platform have for some time that portfolio continues to expand SCA fits right in to it.

Larry Renfro: Sure. Dave, I’m going to go back a little bit and talk about how we kind of got where we are at with OptumCare, where we are in terms of SCA at this point in time.

So if you go back in time five years ago, we had this one Optum plan that we put together and as part of that structure we had a 75 market strategy. Now all this relates to UHC and how we have positioned Optum from the start. So with a 75 market strategy we’ve kind of looked at the market place at a $500 billion market place that now has grown to $1 trillion. And as part of that, we have looked at what the growth pillars are going to be in the future and OptumCare is the piece of that, and that’s where SCA will fit. And as SCA is a great organization that we are bringing in that’s going to add scope and scale, it’s going to be very complementary to what we’re doing.

So we feel pretty strong about SCA. We feel pretty strong about OptumCare being a big piece of our strategy going forward in the future to get to the breadth of the market that we’re trying to penetrate. I might ask Dan Schumacher to comment a bit about the UHC side. Dan?

Dan Schumacher: Sure. Thank you Larry.

As we look at surgeries broadly, obviously the deal to winning a majority of those still take place in hospital setting both inpatient and outpatient and so the reality is that there is a huge opportunity for greater penetration for surgery to take place in an ambulatory setting. And when you look at the kind of quality that can be demonstrated through and ambulatory setting as well as the patient satisfaction that frankly runs north of 90 when you look at the net promoter scores and you see a cost profit that runs about half of what you’d expect in an hospital setting, there’s tremendous opportunity. And within UnitedHealthcare for some time we’ve been focused on sight of service for several years and we’ve made some headway, but the reality is, we think there’s an opportunity to really accelerate and we think the partnership with SCA provides a great potential.

Stephen Hemsley: And if I’m not speaking enough Dave Wichmann will correct me on this. A little less than half or roughly half of the flow that goes, the activity flow that goes through OptumCare is UnitedHealthcare and only 12% of SCA is UnitedHealthcare, is that true?

Dave Wichmann: That’s right Steve.

Operator: Our next question comes from Jane Farr with Piper Jaffray. Please go ahead.

Jane Farr: United saw a strong Medicare growth in January. The penetration for the overall market went up more than I've ever seen in January versus December jobs. So, can you talk to your view of underlying long-term growth for Medicare Advantage, either for United specifically or the industry, and your view on where MA penetration could go now that we have the younger population aging in? If you have any numbers around how much of your (inaudible) growth was from fee for service that would be helpful as well?

Stephen Hemsley: Sure.

I think Steve Nelson can handle this.

Steve Nelson: Sure. This is Steve Nelson. We will talk a little about our growth not speculating on the broader industry, but we did see higher this year as you noted and so the program continues to be really popular and very effective. Just commenting on our growth, I’d reiterate what Dave said in his prepared comment.

The growth that we see coming out of AEP is very strong and in line with the guidance that we’ve provided in our November investor conference. And one sort of an important point there is, about 85% of our full year guidance actually comes to us on January, so the bulk of that membership is already with us. We have some pretty good insight in to the mix as well, and as you can - as we’ve talked about before about half of that was from our group business so we’ve a lot of insight in to that membership and in fact a lot of times we have claims experience there. And then we also had broad growth all of our geographies, markets and products. So really the product stability, the product portfolio, the offers choice is really resonating in the market.

There are several drivers that I would attribute to at least our growth as we are experiencing this strong growth for 2017. Again the product portfolio that we’ve worked hard over the past several years to put this in place. Also really strong engagement and with our distribution partnership across all of our channels really brand in the market for UnitedHealthcare and then also the investments and the improvements we’ve made in as Dave noted in our stars quality and also in our member experience. So I think this really positions us well to receive this growth and to continue to grow not only in 2017, but beyond. In terms of the conversions, it’s a little early to get in to specific details about the conversions from fee for service, but again there was some market share growth and Medicare wedge overall, and I think it’s a testament to the effectiveness of the program where you see higher outcomes, lower costs and very high satisfaction.

Stephen Hemsley: Thanks Steve. And despite the fact that MA has been underfunded over the last several years, it continues to take share with or take 1.3% or 1.5% market share shit is the indication. That’s been pretty steady despite the fact that it’s been underfunded. It is clearly the most popular form of Medicare; it serves the lower income groups. It has great retention value, and we would think that that will continue so that the share of Medicare Advantage will ultimately continue to grow and take its place in terms of the government programs.

Next question please.

Operator: We’ll take our next question from Justine Lake with Wolfe Research. Please go ahead.

Steve Baxter: This is Steve Baxter on for Justin. A question for you about the OptumInsight backlog.

Appreciating that the backlog here is at a record level, but we noticed that it was flat sequentially for the first time since 2013 heading into the ACA implementation. I was hoping you could speak to what you're hearing from clients, and in particular, are you seeing any uncertainty with hospital buying patterns just given the uncertainty of where we might be going with (inaudible) and replace?

Stephen Hemsley: Sure. Larry you want to take it or Bill Miller.

Larry Renfro: I will start and then I will hand it to Bill. I think that if you look at fourth quarter you’ll see that we had a pretty strong fourth quarter specially OptumInsight and Bill will speak to that in a second.

So all of our financials were in line with our expectations. One thing to keep in mind, when it comes to technology services and how we look at Optum360 across the board is that we are very diversified. When we really serve is 300 health plans, 4500 hospitals, over a couple of hundred government agencies and so forth. So we have a lot of opportunity and its diversified opportunity. So Bill just comment on the quarter.

Bill Miller: We’re real happy with our performance in Q4 and a part of that confidence in going forward and with respect to the pipeline and the backlog is, there’s several metrics that we look at and while hospital is one sector that we work with, you understand that we have a really wide constituencies of payer provider life sciences companies and government and across the board we’re seeing enormous growth in our pipeline. Our sales and some of the size of the sale in each of those geographies have clients has grown dramatically year-over-year. And if I look at and search for slow-downs, we don’t see it because if you look at the solutions that we provide, they are mission-critical, they are implementing marked technology, they have proven ROI. So we’re not seeing the slow-down that perhaps is being felt in other places because of our diversity, the mission critical nature of our solutions that we bring to market. And so we are seeing wide adoption.

And with respect to the backlog, while they may have been a little flat in this quarter-over-quarter, if you look at the year-over-year growth it’s a tremendous story. If you look at any given quarter, we’re going to burn through some backlog, there’s projects that get completed and so that doesn’t concern us. I think we look at the year-over-year metric and feel really positive and heading in to ’17, if you look at how much time we spent in the market, the way we’ve developed our products and the interviews that we do with clients and the expansion of all of our key clients, it sets us up for another really successful year, despite of the fact that there is some uncertainty about ACA and others. That uncertainty always creates opportunities for Optum because clients are looking for ways to thrive and survive in these uncertain times and Optum becomes a really relative and significant client and partner to talk to in those context.

Stephen Hemsley: Yeah, I couldn’t agree with that more.

Next question please?

Operator: We’ll take our next question from Peter Costa with Wells Fargo Securities. Please go ahead.

Peter Costa: Can you give us some more specifics on a couple of (inaudible) in the quarter, in particular the unfavorable development in the fourth quarter and the higher interest and other income in the quarter?

Stephen Hemsley: Sure, we’ll split those out, maybe Dan the development and John Rex, the investment income.

Dan Schumacher: Sure. Good morning Peter.

Dan Schumacher. Let me offer a couple of comments about medical overall and more specifically to your question around development. Now as you look at our consolidated medical care ratio for the quarter, it was a little bit than what we had discussed at the end of November and then inside that I’d tell you that our medical cost continued to be well controlled. And the other thing, as you look at development sort of quarter in and quarter out, I think it’s really important to remember that it’s on a base of medical spend on an annual basis of more than a $115 billion. So when you look at the outcomes this quarter in particular, it isn’t particularly meaningful.

Looking specifically at this quarter, I’d tell you that if you look across it both from a geography perspective look across categories I don’t think that there is anything that is worth highlighting. I would tell you that it probably orients a little bit more towards our government businesses, and underneath that we’ve talked overtime about some of the efforts we’ve had around incentives related to quality and the underlying use that comes with that and we’ve seen some of that this quarter and that’s showing up in those outcomes. But importantly and overall I’d tell you that our medical base line is for our all of our businesses, we are tracking in line with our expectations as we close the year and that means that we are starting 2017 where we had planned.

John Rex: Peter, this is John Rex on investment income. Really two major elements driving most of that put in the category just larger balances outstanding due to the growth we’re seeing at UHC and Optum Bank.

So those are large interest earning balances across those books. In addition higher realized capital gains for our investment portfolio. So, we did some pro-active portfolio of re-alignment ahead of the fed interest rate actions to capture some of that value and compare to our reinvested higher rates going forward as those occurred and so we wanted to be proactive as we are anticipating those events. Let’s say, if I take both those elements rather balanced in terms of the higher investment income that you’re seeing in the quarter.

Stephen Hemsley: Next question please.

Operator: We’ll take our next question from Scott Fidel with Credit Suisse. Please go ahead.

Scott Fidel: Steve wanted to ask a thematic question here, just as we enter into the whole discussion around corporate tax reform, and just thinking about the minimum medical loss ratios in that context. Clearly it hasn't seemed like the (inaudible) LMRs have proven to be that big of a deal the last couple of years, but just now as we think about corporate tax reform and then leveraging the benefits of that, do you think it might make sense for the industry to perhaps get more proactive on rethinking the minimum LMRs and maybe lobbying to have some relief there, or basically the question is do you think that minimum LMRs could end up offsetting a lot of the benefits to shareholders from corporate tax reform or not?

Stephen Hemsley: So again Scott we’re not really engage in commentary around policy or what could or couldn’t happen. The only comment I’d make about MLRs and why they were probably not as controversial is because for the most part our offerings were pretty close to those MLR levels anyway.

So they’re pretty much across the board. So that’s why I think that they were managed and digest across the industry. And beyond that, we’re just not going to comment on what tax policy could be or what might come forward in terms of changes in the ACA. Our commentary with the market place has really been more broadly about what could be simpler, more sustainable, local market based coverage approaches. So that’s kind of where our level of commentary has been.

Operator: We’ll take our next question from Ralph Jacoby with Citi. Please go ahead.

Ralph Jacoby: Just want to go back to the SCAI deal; obviously it looks like a platform deal in what's a fragmented market. So one, just wanted to make sure I understand the strategy, is it to sort of accelerate the M&A pace or is it a little bit more of a test model, if you will for now? And then how will you navigate, and maybe have you had conversations with all of the various partnerships and JVs, some of which are obviously with other payers as well as hospital systems that could create some friction?

Stephen Hemsley: Sure. Larry will comment on this, but we think this step is an important development step.

So we think this is a market leading platform we can build on, so we do think it’s important that it fits nicely in to the whole narrative of more comprehensive, local market base, ambulatory care platform. So that’s the high level thinking behind it. Larry you want to pick it up?

Larry Renfro: Sure, and I’m going to ask Tami to talk about the footprint so that you get a feel for the footprint and how everything is going to work together inside Optum in regard to SCA and why it’s a primary focus for us. And then I’m going to ask Amir Rubin really to talk about what’s been going on in the diligence side of this and what the business looks like. I will caution you that we are in an approval process.

So during this approval process there’re certain things obviously that we can’t do, but I think I can lay out the strategy and these folks will be able to pack it up. I probably didn’t do a good job a few minutes ago of explaining it, but this goes back five years. This is a strategy that we put in place to really go after what I would call the OptumCare business as one of our primary pillar for growth. We started with primary care and I think you know that we’ve been growing primary care over the last few years. We’re probably around 21,000 physicians at this point.

The second part of OptumCare was our urgent care with Med Express and other centers that we have set up with urgent care. So we’re up to 250 centers there. So obviously the surgery center kind of starts to play out and add capabilities for us as we go forward. So this is all about growth, and this is about us maintaining our physician with the ambulatory side to really make this move forward, not only here but also globally. Because as we look and I’m going to stray here but just for a second, but I would tell you that the work that we are doing in Brazil, the work that we’re doing in London, what we’re expecting to do across Europe and so forth.

This is all a process that would fit nicely in all of those markets. So let me turn it over to Tami to kind of go through the footprint.

Tami Reller: Thanks Larry, and maybe just a couple of OptumCare broader perspectives and numbers to give this context before Amir talks specifically about SCA. If you look at OptumCare today, it already represents more than 50% of OptumHealth revenues. And obviously this is an important growth platform, so we expect more in the future.

Also if you look at OptumCare, today we have a footprint in 28 primary care markets that expect to expand in to four to six new markets per years. And so as we look at the opportunity between OptumCare broadly and SCA which today has 200 locations in 33 states which we noted earlier, there is an opportunity there to really look at that much more holistically and make some good growth come from that. Larry also noted the more 21,000 physicians today and we would expect to continue to grow that as a nice clip in to the future as well OptumCare probably 2,000 per year as we move forward. So a tremendous amount of growth ahead across the OptumCare platform.

Amir Rubin: This is Amir Rubin, just to add to Larry and Tami’s comments.

We did a detailed due diligence process and we were very, very impressed with the exceptional SCA leadership and the model that SCA has developed across the country. As you heard from Steve’s opening remarks, SCA has over 200 centers in 33 states and these are terrific centers with outstanding quality accredited and certified by the highest accreditation bodies NPS scores, Net Promoter Scores of 90 on average, really high net promoter scores delivering outstanding surgical procedures that have the cost of inpatient settings in partnership with surgeons, in partnership with health systems, many of whom are our clients and serving communities very effectively. As you heard from Tami, we’re excited too. There’s a nice overlap, probably about 50% overlap with the SCA market and the OptumCare market, and moreover SCA and its surgeons and the health systems that it partners with, are now looking to move even more complex cases in to the ambulatory arena such as joint replacements, hips and knees and really on the front end of delivering high quality, high service and value based care, serving all care, UnitedHealthcare, as you’ve heard from Dan Schumacher and across OptumCare we serve over 85 cares that we are very excited to continue serving the broad payer market partnering with our health system clients and aligning with physician for the community.

Larry Renfro: This is Larry again.

Let me just make one comment. So if you looked at our 75 market strategy that we’ve been executing against today, we are in 28 markets. With this acquisition, we will pick up about 17 more markets. So about 50% of SCA markets overlap with 17 new markets. So this is going to accelerate our growth obviously, and this is a very, very key point in the growth of OptumCare.

Operator: We’ll take our next question from Josh Raskin with Barclays. Please go ahead.

Josh Raskin: Wanted to follow up, I understand Steve you don't want to speculate on potential regulatory changes etcetera, so without getting into any details on what you're expecting. One, have you spoken with the incoming President-elect or his team, and then are there any changes that you’ve made strategically already? So forgetting about what can happen in the world, but is there anything you're doing in the markets today that would relate to some things that you think could potentially happen?

Stephen Hemsley: Josh, I would have preferred to answer the last one compared to this one. We’ve maintained an presence broadly in the healthcare sector, again policy sector, and have been consistent for some time, and I think you’ve seen our materials with respect to really advancing a simpler state-based healthcare system around investments going forward in to the healthcare sector around affordability and good sustainable ways to advance affordability.

Systematically very much involved and we have been offering specific ideas with respect to that. It aligns with the businesses that we’ve had in the philosophy and the mission of our enterprise about helping people live healthier lives and about making the system work better for everyone, everyone being all the participants in the healthcare market place. It has been more at a, what I would call, a high level and then invoked more specifically when called upon. We think that’s a sustainable way, we have been on this for some time, prior to the outcome of any elections etcetera. So we would have been indifferent in terms of who would have proceeded that these would be the kinds of themes that we think will drive a better and higher performing healthcare systems that could serve more Americans.

And we continued to be on that track and I think the setup of that business as we’ve said many times, the participation across the expanse of the benefit market and the continued diversification in the important markets with Optum, serving areas that where we think we can bring our competencies around, expertise around information and insights about how healthcare could be organized and resources used more affectively and the virtuous application of technology to drive a more modern healthcare system. Those are things that are really native to our businesses at this point in time, very adaptable, so adaptability is a very important thing for us. We can move these things around to approach the market place in different ways, and we think we have been developing the kind of assets and capabilities to serve a healthcare system and combinate a variety of approaches. So that has kind of philosophy and that has been our narrative with the policy community and expert community and will continue to stay in a positive constructive posture in that way because I think it’s - this as we’ve said many times will continue to evolve both as a market place and in terms of national policy. So I don’t know what I could tell you more than that, that’s kind of the philosophy we bring to it and it’s the same philosophy that we speak in Washington and in state capitals, and I think it has and I think it will continue to serve us well and I think be positive to the healthcare market place.

Operator: We’ll take our next question from Michael Baker with Raymond James. Please go ahead.

Michael Baker: I was wondering if you could comment or give an early read on the PBM selling season in terms of potential for activity versus what we saw for the last selling season.

Stephen Hemsley: Mark you want to comment?

Mark Thierer: It’s busy, it’s busy. This last year we really felt good about the big wins that we posted.

It was the largest selling season obviously in our history. But at this point in the selling season we’re queuing up for lots of new employers and health plans are coming to market as well. So I would say right now our pipeline is larger than it’s ever been. And I will just take a moment and tell you, in this business you have to start your new business well, because the market checks and - it’s a small business and we’ve just had our best one won I think in the history of the business our readiness and our preparation for some very large scale clients was I think superior and we are gauging this by how our clients are reacting and the NPS scores that we’re seeing. So this successful won one on last year’s selling season sets us up very well for the 2017 selling season.

As I said the pipeline is robust. We are pushing our new value prop and we do think that the synchronization message is totally resonating and clients are migrating towards it. So we are feeling pretty good about our opportunity in 2017.

Operator: We’ll take our next question from AJ Rice with UBS. Please go ahead.

A.J. Rice: I might just ask a two-part question on the international business. I think the comments were made in the prepared remarks that you're pleased with the progress you've made down there and I noticed that fourth quarter you had good enrollment in Brazil. You have to go back to fourth quarter of last year for a positive sequential enrollment as well, I don't know if there's something seasonality that drives that or some other dynamic that's going on. But can you just give us an update on where things stand there, and where you are at relative to contribution margins.

And the other aspect on international I was just going to ask you about is I think you guys have commented that there are some contracts that Optum is looking at, particularly in the UK, potentially. Can you give us any update on the timing of when we might see those?

Dave Wichmann: A.J. it’s Dave. I think I’ll take the first part of that and then ask Larry to comment on the Optum contracts in particular. A.J.

I wish I could say that was organic growth down in Brazil, but it was actually a small acquisition that we completed of both a health insurance company and a healthcare company. So it’s an integrated delivery system that serves the ABC region near Sao Paolo. It’s named Santa Elaina and it is a very strong, well performing local delivery system there that really serves the lower end of the middle class broadly. So it added about 250,000 lives or so to our quarter. Maybe I’m not really sure how to respond to the contribution margin comment, but I will say that we do see an improved outlook for Amil and now what is called Americas (inaudible) which is our large national healthcare delivery system predominantly hospital based in Brazil.

Of course the political and economic instability certainly aren’t helping the business today, but we have seen nice progress and we have an improved outlook for 2017 for the business. You probably have noticed that we made a couple of augmentations to our leadership team down there. We just brought on Claudio Lottenberg, who was the former President of the Albert Einstein Health System. He is a fantastic leader, very well regarded across Brazil and we think he’ll be a terrific addition to our business. We also named a Louis DeLuca to run our Americas health system.

He came to us from Samaritano which was the large hospital that we acquired in San Paolo. And then we’ve also added a number of other physicians in the business. I think strengthening leadership and importantly as we come across a five year anniversary looking to make sure that we have a very strong leadership team in place as we transition a generation. Our new team is performing very well, they are focused on more modernized health system and building a strong healthcare infrastructure, and we continue to remain bullish and optimistic about not only the prospects for Amil and Americas (inaudible) but also Brazil broadly. Larry you’re going to touch on Optum?

Larry Renfro: Sure.

A.J. its Larry. I think on the last earnings call, we talked a little about that. We have been building a foundation in London in the UK area, and we had spent past year really getting our self positioned in what I would call the new models care. We would know it here as the ACLs.

As they are starting to take their trust and trust over there are their hospitals, and they are starting to put them together in certain segments of the country, and they’re looking for services that we provide whether that be hospital type services or what we are doing with OptumCare. That’s why there is a very large overlap here when you start talking about OptumCare and what we might be able to do in the UK area. We are in bid and discussions with about five different areas, I won’t go in to them from a competitive standpoint, and we believe in the first 6 to 9 months of this year, we shall start to see some outcome. So there’s no question that it got delayed with Brexit and they’ve had some change in terms of leadership and we’ve had to establish ourselves with new leadership which just takes time. It’s not an issue of them wanting to, they understand our model, a lot of the ministers have been here and they have visited our locations to see the integrated care and how we operate and so forth.

SCA should be a positive in terms of how we might look at that eventually, not right away in the UK. So I guess one part of the question is, we’ve got the circled areas that we’re talking about that we are in bids on right now, 6 to 9 months we should start to see some outcomes there and we feel pretty solid about that. The other path we’re going down is on what I’ll call national programs and the big national programs is what I would call a national database where we could bring our data and analytics in to play. Again we are in the process with that and I would think that timing might be a little slower, it might six months, 3 to 6 months and the decision is ours. So we’re feeling pretty good about it.

We’ve got a good team, we’re moving some senior leaders over to the UK and again I think that come summer time we should start to see some results there.

Stephen Hemsley: We’ll do two or three more questions. So the next please.

Operator: We’ll take our next question from Kevin Fischbeck with Bank of America/Merrill Lynch. Please go ahead.

Kevin Fischbeck: You said in the commentary that the exchange performance was better year-over-year. Was that simply just a lack of a PDR from the prior year or you’re actually seeing stabilization. I think you last quarter you said that the Q3 results and the exchanges were stabilizing, wanted to see the color down to Q4.

Stephen Hemsley: I think it’s broadly stable.

Dan Schumacher: Kevin, its Dan Schumacher.

I think the point we’re making there is, last year we recorded the Premium Deficiency Reserve to provide for losses in 2016, and so when you look at it on a year-over-year basis, you had to drag in ’15 and then we resolved the PDR and the exchanges in the fourth quarter this year. So that’s the improvement we are talking about year-over-year.

Kevin Fischbeck: So versus Q3 it was stable?

Dan Schumacher: Versus Q3?

Kevin Fischbeck: Expectations versus Q3?

Dan Schumacher: Yeah, generally in line with expectations.

Stephen Hemsley: Our view on exchanges haven’t changed. Next please.

Operator: We’ll take our next question from Lance Wilkes from Sanford Bernstein. Please go ahead.

Lance Wilkes: Yeah, I had a question on PBM margins, and just wanted to know a couple of points on those. One, as you saw improvement for the quarter, how much of that is mergers synergies and how much - as you look into 2017 of your merger synergy plan are you through? And then related to that would be what sort of trends are you seeing from both manufacturers and rebates on the cost side and what are the trends like on the client side as you look at your margins?

Stephen Hemsley: So that is about a four-part question Mark, so do you want to --?

Mark Thierer: So let me just talk about margins in this business. We’ve talked for some time now that we’re comfortable with operating margins in the 3-5 points, and so you asked about synergies.

We met and actually exceeded our $0.30 commitment in the 2016 planned year. We’ve not provided a specific outlook on synergies for ’17, but I’ll tell you that we’ve got running room in the plan and work to do still to extract synergies from the combination. So that has exceeded our expectations and been very solid and I would like to just tip the hat to the operating team who’s made this work happen, it’s been exceptional. You asked about rebates and the picture going forward. This is the thing that we’re paid to do.

We’re paid to go to the supply chain on behalf of our clients and extract savings for the benefit of the consumer and obviously for the plants sponsor. So we think that we’ve created a business model here where we have best-in-class contracting capabilities that we take not just to the pharmaceutical industry, but we take it to the retail chains, we take it to the biotech manufacturers and we take it to the generic manufacturers as well as the wholesalers. So this entire supply chain, this is our job to extract savings for the benefit of the member and for the benefit of the plan sponsor, and the outlook for that in this coming year is really very solid. Hopefully that answers your question.

Stephen Hemsley: Next question please.

This will be our last.

Operator: We’ll take our last question from Sheryl Skolnick with Mizuho Securities. Please go ahead.

Sheryl Skolnick: Thank you so much, and I will try not to make it too difficult for you this time. So you've obviously had very significant success across UHC as well as across Optum, and I'm going to ask a similar question to what I asked in a different way.

We've also noticed some interesting trends on utilization, despite some spiking from the ACA in hospital based utilization, particularly in patient care. And I'm wondering if you can help me to understand what steps you are taking and what you can attribute your management of cost trend, presumably related to appropriate controls on appropriate sites of care, and what the outlook might be given that you're now bringing OptumCare into a higher level of scale and capabilities with surgical care for your ability to further improve your cost trends through improved coordination and appropriateness of sight and timing and place of care?

Mark Thierer: Well you’ve kind of defined the space in the question, so you clearly have grasped the idea. The ambulatory platform that we are forming is in fact a very important and viable proposition in and of itself, it represents the more organized, more informed deployment of resources in terms of ambulatory care and very much focused on the appropriateness of setting. It also plays to themes that are clearly moving in the market place where these services are moving in to these better venues and in fact technology is a very powerful element behind it both in process and so forth. So it creates a better resource platform to serve consumers and that has implications for all that we serve.

It is a multi-payer platform in UnitedHealthcare, it is an enterprise that is very effective and advancing on those and it provides them an advantage in terms of how they deploy it and integrate in to their offerings. So kind of that is a start, do you want to pick it up?

Dan Schumacher: Good morning Sheryl, Dan Schumacher. The only thing I would add, if you kind of look at it over the last eight years right, we’ve been able to drive down on a per capita basis inpatient, and inside that we’ve focused a lot in those early years around the conversion of inpatient to outpatient. And I think this is sort of the continued evolution as we focus more on the side of service to how do we get that outpatient in to the ambulatory setting. So we’ve continuing to introduce more steps in controlled measures on the front end, but more importantly trying to put in incentives at the surgeon level that really can help drive to the most appropriate settings.

So the combination of (inaudible) structure with the consumer providing a strong motivator and then likewise on the delivery side trying to put incentives in place for the surgeons to be able to drive towards a more appropriate use. So we really look at this partnership as an opportunity to really strengthen our value orientation, both in our product designs as well as in our relationships with the professionals that are providing these surgeries.

Stephen Hemsley: And the OptumCare platform is free standing value up all by itself, so we basically have kind of a two-dimensional agenda going here and I think that’s - whether that’s core of your question and you’ve grasped what we are doing in OptumCare very well. So again thank you for joining us today. I think the takeaways from this call are pretty straight forward that UnitedHealth Group, Optum and UnitedHealthcare represent a strong, diverse, well performing enterprise driven by mission and culture with strong leadership team, dedicated employees.

We remain very committed to taking our performance to even higher levels of quality, value, growth, shareholder return and service to emerging needs of enormous global healthcare market place. So we continue to evolve and adapt to serve that market, helping people live healthier lives and making the system work better for everyone. Thank you for joining us we’ll see you next question. Thanks.

Operator: This does conclude today’s call.

You may disconnect at any time and have a wonderful day.