Apr 21, 2009
Operator
Good morning my name is Curie, and I will be your conference facilitator today. At this time I would like to welcome everyone to the UnitedHealth Group First Quarter 2009 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 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 is available on the financial reports in the SEC filing section of the company’s investors page at www.unitedhealthgroup.com.
This call contains forward-looking statements under US Federal Securities Laws. Such 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 from time to time, including the cautionary statements included in our current and periodic filings. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 21, 2009, which may be accessed from the investors' page of the company's website at www.unitedhealthgroup.com.
I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley. Please go ahead.
Stephen Hemsley
Good morning and thank you for joining us. Our first quarter results reflect the steadily strengthen execution we committed to in the spring of 2008.
There are three areas of performance we want to highlight for you. First, we continue to strengthen our discipline around product placement and pricing at the local market level.
We are seeing benefits from the renewed focus on in-market relationships and local market insights and leadership, which are coming into better balance with our national capabilities and sales. Second, we continue to steadily advance a stronger culture of service and responsiveness throughout our businesses.
This effort began roughly two years ago and people are noticing the difference across the board from brokers and consultants to customers and consumers, and increasingly care providers. As we have built stronger local relationships and improved service, the positive aspects of our reputation for innovation are again being recognized.
Our focus on fundamental execution in this area is driving results. And finally even before the current economic crisis, we will reduce in-operating cost and working to more consistently and fundamentally to manage our medical costs.
That work is continuing. And today, we are clearly benefiting.
Turning to our results, first quarter revenues of $22 billion, increased 8% year-over-year. Revenues reflect strong growth in our Medicare Advantage, Medicaid, Part D prescription drug and Medicare supplemental offering along with growth in sales prescription drugs to our PDM.
Enrollment and client retention in our commercial benefit businesses were modestly favorable to our expectations offset a higher than expected attrition driven by the economic downturn. Our consolidated first quarter operating margin of 7.6% absorbed 50 basis points of reduced investment income year-over-year.
Positives included favorable developments in our estimates of last year's medical costs and our risk businesses and improved operating cost management. Overall medical costs are performing consistent with our expectation.
We continue to expect our 2009 commercial medical cost trends to be in a range of eight percentage points plus or minus 50 basis points and we are pricing accordingly. We continue to effectively manage the conservative balance sheet with the strong liquidity position.
At March 31 our investment portfolio has come on to a net unrealized capital gain of $54 million. Bringing these factors together we earned $0.81 per share in the first quarter compared with $0.78 per share one year ago, despite absorbing $0.06 per share reductions in net investment income.
Our businesses generated cash flow from operations of $1.1 billion in the quarter an exceptional performance from a first quarter when cash flows are not seasonally strong. Looking ahead, our strong growth in public and senior benefits program will likely drive full year revenue past $86 billion perhaps $1.5 billion or more above the upper end of our revenue outlook.
However, it is premature to adjust our overall earnings outlook at this early stage of the year and we continue to be appropriately circumspect about the economic environment and the impact it may have on our businesses. We are seeing pressures from increasing employment attrition at customers of UnitedHealthcare and OptumHealth.
And reduced sales activities at Ingenix and these may largely offset to strengthen our public and senior businesses. As such we are maintaining our earnings outlook in the broad range of $2.90 to $3.15 per share.
With the understanding that the broad range is appropriate and that we do not provide quarterly earnings guidance. We do have a view that second quarter earnings will be markedly lower than the first quarter just as they were last year.
That includes higher medical care ratios even in second quarter driven by seasonally higher expenses under high deductible plan designed at UnitedHealthcare. In the later half of the year this is expected to be partially offset by favorable seasonality and Part D earnings.
Prescription Solutions also expects a sequential decline in second quarter earnings following the traditionally strong mail order retail business in the first quarter. A year-over-year reduction in investment income represents further pressure for coming quarters particularly in the second quarter.
We continue to expect a nominal level of second quarter cash flow with roughly $4 billion of our targeted $5 billion or so in cash flows from operations that come in the second half of the year given the timing of income tax payments and variations in working capital balances. Before reviewing performance at the business group level it makes sense to offer broader contact and where we are in our view of the market overall as we look over the balance of 2009 and towards 2010.
Internally we see [sub centered], positive momentum forced in to our enterprise much stronger than last year or the year before. We see this in consistently stronger service and response levels, better market receptivity to and acceptance of our newer products and services, improved in more consistent pricing discipline, stronger customer retention levels and growing broker and agent networks.
In our services businesses, our consulting capabilities are expanding nicely. The government customer sector where we were relatively weak two years ago is now emerging as one of our strongest and fastest growing sector.
Our selling skills, processes and disciplines are advancing across the Board. Our innovation and the attitude and energy of our people are sources of real strength.
The obvious offset to this momentum is the exceptionally weak economy that is driving high levels of unemployment. This is also driving a pull back in those business sectors we provide with consulting and other information and knowledge related services.
We think that we will begin to flow in the second half of 2009 and into 2010 but it is impacting current sales revenue pipeline. The Healthcare stimulus package should be positive for Medicaid in the near-term and for our Healthcare IT services in the intermediate-term.
Through all of this measurable value we are bringing to the markets a more consistent and concrete ways has never been higher. Well as we discuss the business group performances with you, we will offer some specific examples of the value propositions we hope to play into a sustained movement to modernize the healthcare system in this nation.
Let’s begin with the business reviews. With our benefit businesses starting with United Healthcare.
The first quarter results were stronger than we had originally anticipated. We saw a slightly better top-line performance from both e-based and risk-based businesses driven by stronger than expected enrolment from the e-based clients and approve the account retention for the risk-businesses.
These were partially offset by economy related attrition that was higher than we had estimated. Looking forward we expect stronger customer retention to continue to help offset rising unemployment.
At the year-end, average unemployment lands in the 10% range as compared to our previous upper end outlook of 9%, we would still forecast our total decline in consumer served at about $1.5 million for the year. The slightly stronger first quarter start moves those incremental membership losses later into the year, so our total revenue outlook for UnitedHealthcare continues to be about $41 billion in revenue.
Our UnitedHealthcare medical care ratio of 81.5% reflects slowly strengthening yield as well as favorable development in our estimate 2008 medical cost. We continue to estimate this ratio at 84%, plus or minus 50 basis points in 2009, maintaining its seasonal increases toward the meaningfully higher fourth quarter level.
All in, we are pleased with the steady progress UnitedHealthcare continues to make and the value it brings to healthcare. We aligned our benefits, our physician networks, our hospital contracts and our support services along lines of clinical specialization.
Our premium networks integrate evidence-based care management programs across more than 20 medical specialties and report on care quality and efficiency to the consumer. These networks now span more than 135 local markets reaching nearly 20 million of our members.
Through our Premium Designation program, we can identify as many as 100,000 positions, who consistently produce superior overall clinical care outcome. And up to 20% lower cost levels overall through their adherence to evidence-based care and consistently excellent clinical practice processes.
Today, well above 3 million people use some form of our modern consumer-focused benefit products, a fastest growing products particularly in this economy. These more modern product design increasingly intent patients to pursue premium network care for better outcomes at lower cost.
This way adding our consumer activation index to systematically engage consumers in better care decision making, research suggest that 50% or more of the healthcare decisions people make are not optimal for them. We are incanting the supporting active patient engagement using this index and supporting better evidence-based decision making to the highly integrated, personalized and multi-channel easing platform developed by active help.
Our programs offer potent results for customers. For example, our self-funded national account core client base has had an all-in compound annual healthcare cost fed at 5% over the last four years.
With the last two years averaging 4% as these program become more established. This is a dramatically differentiated cost performance trend from broad market trend in the market today, and at this sustainable value.
Moving to first quarter of our public and senior benefit businesses, AmeriChoice had an excellent quarter with strong organic growth and premiums well match the cost as expected. AmeriChoice revenues and growth remains strong with full year revenues expected to approach $8 million.
AmeriChoice's organic growth outlook, the risk-based business, a 425,000 to 500,000 people this year is unchanged. We recently terminated an unprofitable fee-based Medicaid contracts serving about 75,000 (inaudible) in Texas or we lose that fee-based membership in the second quarter.
AmeriChoice also converted about 100,000 fee-based members in Tennessee to risk-based status in the first quarter as we expected in our original outlook. AmeriChoice is a distinctive platform for driving value for the state Medicaid marketplace where they routinely outperform fee-for-service Medicaid program.
AmeriChoice's Middle-Tennessee marketplace, which is taken over from a fee-for-service program provides a recent example. Expected mothers are having healthier babies and incurring lower cost with a 13% decrease in the neonatal intensive care days per thousand.
Use of hospital emergency rooms decreased by 12% by moving care to effective primary care centers and reducing unnecessary risks. This is why state continues to look to private sector solution and why AmeriChoice now serves 21 state governments and the District of Columbia.
We bring more modern and integrated clinical program, sophisticated technology, actionable information to improve program effectiveness and ultimately better care and cost outcome. AmeriChoice has abundant opportunities under health care reform beginning with the reauthorization and expansion of the children's health insurance program, where it is estimated at 3.3 million people are to be added to base eligible population of 4.8 million.
We anticipate that more people ultimately be enrolled in Medicaid as a result of this expansion and longer-term AmeriChoice is exceptionally well-positioned for national coverage efforts or through state-based programs. Ovations had a very strong start to the year with higher than projected growth across its offering.
In Medicare Advantage, our efforts to strengthen local market product positioning and distribution were more successful than expected. New sales are up year-over-year as is customer retention.
We grew across all channels and in all products except in special needs plan where we appropriately reduced prior-year benefit level. Growth was driven by corporate responsive programs and retail sales.
It took place across all geographies. These results were achieved by stronger fundamental execution rather than any single factor.
And we believe these efforts to produce a well-balanced mix across our products. The balance of this year is clearly on course to grow all of its businesses except Special Needs Plans.
Medicare Advantage business will likely exceed 200,000 new seniors and it’s roughly double the conservative end of our growth outlook from Investor Day. Our D growth is also above our estimate.
This strength should lead the higher overall revenues for Ovations likely approaching $32 billion or mid-teens percentage revenue growth. UnitedHeath Group's value distinctions are among the most fundamental basic for Medicare beneficiaries served by Ovation.
Our Medicare Advantage managed care benefits are designed as modern integrated offering, in contrast to the Medicare Part A and Part B indemnity benefits. Our benefits are richer and consumer engagement is evident.
The performance differences are evident as well. These privatized programs have taken one quarter of the overall Medicare market, much of it in just past few years.
Our performance shows 25% lower readmission rates in unmanaged Medicare in our local best market roughly one-third lower over our hospital inpatient bad days. Our Medicare Advantage medical costs trends are better than unmanaged fee-for-service Medicare even with richer benefit content.
2010 Medicare cost trend estimate in CMS and it's related rate adjustments were largely consistent with it's February guidance we are preparing to file 2010 benefits using the rate CMS just provided and are prepared to adjust as CMS receives final guidance from Congress. Now we will turn to our services businesses for which we project combined revenues of approximately $21 billion this year at the upper end of our prior outlook.
We provide a broad and diverse set of capabilities in services across the total Healthcare system through these businesses. Ingenix did a good job of withstanding economic pressures affecting its customers particularly pharmaceutical companies and hospitals.
Attentive operating cost management as well as stronger sales performance in the payer government market segment largely offset the economic pressure on growth and we remain focused on agile responses to changing market conditions. Ingenix is delivering consumer focus tools such as a match making service choosing our physicians and most recently Quicken Health developed with partnership with both Ingenix and Intuit.
Quicken Health is being introduced in to the marketplace and would be adopted by UnitedHealthcare to help consumers organize their health and health benefit information and manage their healthcare related finance. Under that theme of using information to power the system we expect Ingenix will see significant opportunities for growth through products and services already established and in the market in areas such as electronics medical records, compared effectiveness research, health information exchanges and connectivity, information security and physician performance and payment accuracy solutions.
At OptumHealth we are seeing high growth in the public sector and a solid external business pipeline which are being offset by losses of higher margin commercial business. The development of the strong and growing public sector businesses has helped to moderate earnings decreases from UnitedHealthcare commercial market and position OptumHealth for a more diverse future.
OptumHealth adds its own distinctive value to the systems, Optum operates more than 1000 web portals of half of employers helping put information at their employees finger tips regardless of who their benefit carrier may be. OptumHealth maintains confidential personnel health records on behalf of more than 20 million people accessible through our membership cards or through direct Internet access.
OptumHealth financial services used its payment systems electronically transmit more than $7 billion in claims payments and related payment information directly to physicians and other providers in the first quarter alone at 29% year-over-year increase. This is an obviously faster and cheaper method of payments than the costly inefficient paper, checks and the mail which dominates the industry today.
It is perhaps the simplest and most basic example of the extended modernization needed in healthcare. It also reduces costs and increases gross for healthcare providers.
Opportunities for OptumHealth include integrated disease management at [hay brow] and medical care programs and expanded opportunities for wellness and prevention programs. OptumHealth was the developer of these things like one referenced earlier in today’s discussion and that factor enables us to drive personalized, quality and affordability in the benefits businesses.
And finally Prescription Solutions had a very strong first quarter with increases in revenues total prescriptions filled and prescriptions filled through our mail facilities. Top-line growth was led by the increased Part D performance from Ovation by strong mail order sale.
The operating margin of 4% was a record for this business which is now on track for full-year earnings growth in excess of 30% on revenues approaching $14 billion. Prescription Solutions add value by helping people optimize their drug benefit that customer use generic medications exceeded the national average by 400 basis points in 2008 and we will exceed that in our managed Medicare business.
In the longer term we accept the congressional focus on affordable drugs and ultimately and expansion of generics in the biologic area to create significant opportunities for this business. We see our country’s focus on total costs to value only increasing the strategic importance of integrated pharmacy management in the future.
Before closing, we will touch on healthcare reform or modernization as we think of it broadly. We support the true modernization in the entire healthcare system.
We believe the Americans want a systems that is more accessible to all, more affordable, more effective and efficient, simpler and more responsive. They don't want just more coverage; they want a better and more cost-sustainable modern system.
This is what we have been working for, for more than 20 years and offers is an example to consider the program for sophisticated customer like General Electrical uses in its health benefit plan today. Our Premium designation networks, wellness program consumer activation, health coaching applications to consumer technologies and smart benefit design are all part of their approach and it produces a distinctive quality of care and cost outcome for their employees year-after-year.
Back in 1965 GE's program looked much like the indemnity or fee-for-service today. GE's progressing thinking and leadership, combined with private market innovation and entrepreneurship have advanced its benefit offering followed by multiple generations.
That approach to innovation and modernization needs to be expanded across all market from commercial to Medicare to Medicaid and beyond. When we consider both reform and modernization, we see expanding market opportunity.
Some of our businesses may need to adapt to different requirements as they have done frequently in the past as we have said before. This company was built on and for healthcare reform and modernization and we expect that to continue.
In conclusion, we believe our first quarter performance shows we are expanding positive momentum in the businesses despite considerable pressures in the economic environment. We have seen the positive results for fundamental execution, service, local focus and attractable innovations.
This is in its early stages. We will steadily advance our performance quarter-quarter-quarter to better serve customers, consumers and care providers.
Modernization and healthcare, which we believe should go beyond the current expectations with government reform plays to our strength as a company and its key to our social mission. The truth is the change is inevitable.
Some changes may require rapid adaptations, but leading companies take advantage of, both change and challenging market. There remains a huge opportunity to continue to advance our healthcare system to better serve people and create value for society through innovation, technology and service.
And that is what we intend to continue doing. As we continue executing on this agenda, our customers and stakeholders will benefit and our shareholders will prosper.
At this time I would like to open up for questions for our senior team, thank you.
Operator
(Operator Instructions). We ask that you limit your question to one per person.
We will pause for a moment, compile the Q&A rooster. Your first question comes from the line of Charles Boorady of Citi.
Charles Boorady
Thanks, good morning. My first question on the 200 million in prior period reserve developments, which was comparable at last year.
Can you bifurcate commercial versus Medicare on that?
Stephen Hemsley
Mike?
Mike Mikan
Hey, Charles, this is Mike. I don't want to get into exact numbers.
What I can tell you is, we saw much greater development in mix in the commercial side versus last year, where we saw a greater mix in the government side. So year-over-year, we are seeing a greater mix on commercial.
Charles Boorady
In terms of the uncertainty around health reform, which I think you addressed well. I am just wondering how that's impacting your capital deployment decisions and specifically do you think it's prudent to see, how federal law may change before repurchasing your own stock or making a further acquisitions?
Mike Mikan
Charles, I think that as we said through our prepared comments and that's kind of we have behaved through our business, we think there is a significant need in the government marketplace and significantly opportunity. We expected there will be changes overtime, but broad market demands of that whole sector are compelling and growing meaningfully.
We have put capital there in the past, we would expect that we would continue to and we will obviously be alert to the timing of what we might anticipate government action to be, but it really doesn't change. There is nothing here that has really changed the outlook on the business.
Charles Boorady
So it's just not the word, would you say then should we infer from that that you believe valuations including your own stock valuations is reflecting something significantly worse than what we should expect of the outcome of federal reform to be?
Stephen Hemsley
Well, I made that comment on our own stock valuation, do I believe this is an enterprise that has the capacity that we have and the cash generating capacities that we possess has the greater value potential, we clearly do. In terms of the government's role in its programs in healthcare sector.
I think largely as I said before we think that will play out to be opportunistic and we are approaching our business that way and we are looking at our capital management in that passion as well.
Charles Boorady
That’s great. Thank you.
Operator
Your next question comes from the line of Tom Carroll of Stifel Nicolaus.
Tom Carroll
Hi, good morning. Just wanted to drill down a little more on your commentary about, what does markedly lower mean for second quarter?
And maybe in answering that, could you review for us the drivers for that again. And then secondly, if I look at first quarter to second quarter of last year it showed about a sequential decline of about 14% I guess applying that to this year would put you at about $0.70, I mean is that ballpark, am I thinking about that correctly?
Stephen Hemsley
Well I will offer just a little bit of how I missed and then I might ask Mike Mikan to comment if you need little bit more clarification, but we first of all we moved to give in annual guidance and we did that by intent and we intended to broaden our guidance and we will maintain that posture as well. I would say that as we look at consensus numbers we might have a few observation; one that consensus is perhaps not fully considering the seasonal pattern of last year.
So it really look the last year seasonal pattern I think offer some guidance. We would think those pattern would cause a second quarter to pull in a little slightly from where consensus is right now in response to higher medical costs and commercial benefits, as deductibles whereof as well as prescription solution seasonality.
And I would also offer the maybe certain fourth quarters could be pulled in a bit more from consensus is right now in consideration of progressively higher medical care utilization that I think in total it really over lay the seasonal pattern of the prior year, that will give you some sense of the quarter outlook. Would you offer anything to that Mike?
Mike Mikan
As I would say I would think from without a consensus now slight pulling in from the second quarter and then perhaps just a bit more in the third and fourth mostly in response to the pattern to carry utilizations to the course of the year with our product.
Tom Carroll
Thank you.
Operator
Your next question comes from the line of Matthew Borsch of Goldman Sachs.
Matthew Borsch
Yes. Thank you.
Could you elaborate, the press release you comment on higher medical care ratios for the public and senior market business. Is that something that came as any surprise, can you give us any sort of range of magnitude and what you are referring to there, thanks.
Stephen Hemsley
I actually don’t think it came as any surprise and we would anticipate that those sectors would have relatively higher care ratios. Mike, do you want to comment?
Mike Mikan
Matt, I think we talked about this at the Investor Conference and we also discussed it at our fourth quarter call that we were going to have a mix shift in 2009 a greater weight in the government business as well as the fact that we did gain enrollment group private people service business which carries the higher loss ratio in addition, we did make our benefits more competitive than the MA space. So, all in all we did expect a mix shift additional volume in the government business as well as higher care ratios in that business which was driving our aggregate or consolidated medical care ratio up by say call it 50 basis points or so year-over-year
Stephen Hemsley
In-line with what we had expected.
Matthew Borsch
Okay. And on the Medicaid side, aside from understanding that you’ve got more of that business coming in are you organically seeing the Medicaid MCR somewhat higher and why?
Stephen Hemsley
Medicaid is holding firm. I think we are doing a good job of managing the opportunities in the new business in that market, but Rick Jelinek, you want to add to that?
Rick Jelinek
Yes Matt, as we look at our business, we have got a deliberate strategy to match our revenue and to-date those are progressing well. We have also had some favorability on our SG&A side where we have had strong focus on taking advantage of our scale and size.
So those operations are coming in as planned and while we are seeing the outlook for the revenue side and yield to be slightly lower than we originally thought in the year, we are also seeing our medical expenses and our operating costs slightly down so the matching of revenue and medical and operating costs are as planned.
Matthew Borsch
Okay, thank you.
Operator
Your next question comes from the line of Christine Arnold of Cowen and Company.
Christine Arnold
Good morning. Couple of quick questions here.
On Medicare Advantage you saw a lot of growth here and I think we have seen in the industry, although I missed a lot of it last year, but I think we have seen some disappointment. Can you give us some metrics that can help us understand what you look at in order to get a sense that Medicare Advantage won’t be and I am quite surprised later in the year?
And then you said that you are going to look at Medicare guidance from Congress. Do you expect Congress to change the 4% reduction that CMS has announced?
Thanks.
Stephen Hemsley
Yes, two very different questions. Larry Renfro, do you want to take that first.
Larry Renfro
Yes. I think what's going on with the growth and now we are going to sustain, we had a very good start to the year with our selling.
I think one thing that we get very well was position the really the product from a design standpoint. We also know our customer much better than we did a year ago.
And I think that our distribution systems we were really adopting the new guidelines with suitability for our prospectus and all those things worked very well. As far as some of the experience for the rest of the year may I just comment on one area Christine on what I will call the Part D side.
Based on the claims that we have experienced so far in the first quarter everything seems to be in line with our expectations. We are paying very close attention to utilization and unit cost experience and again they are in line with our expectations.
The other factor would be the risk for and the risk for are lining up with our assumptions and with our existing memberships. So that kind of puts it all in perspective in terms of growth side of the first quarter and the experience that we have today on claims and what we expect for the rest of the year.
Stephen Hemsley
Jack Larsen is a CFO of the Pubic and Senior Sector Group. Do you want to add anything Jack?
Jack Larsen
I would. Christine, hi, Jack Larsen.
The one thing I would add is that while we have looked as Larry said the inbound HCC scores and whatever medical claims information we have on some of those new members. We are going to watch those inbound as well as through the balance of year and certainly have a much more refined point of view sometime in the second quarter.
Christine Arnold
Okay and then what were those rates you said that you are going to wait for Congress to give instructions; do you expect a change in the 4% cut?
Larry Renfro
This is Larry again what we are doing today is, we are looking at the obviously what we received from CMS and at this point of time, we are working on our bid and putting them together has been presented to us by CMS, if there is a change in those bids, then we will react to that we don’t expect that to harm us.
Christine Arnold
It could have helped.
Larry Renfro
I think, that is basically a situation if you really follow the patterns in the past Christine, we will file our benefits using the rate guidance that CMS provides, that is not a passive process once our benefits are filed there is significant back and forth that occurs and generally speaking, that resolved itself roughly around Labor Day. As it stands right now we will follow the guidance with CMS and if the reduction in the physician rates are overturned we will expect that there will be revisions from CMS and accordingly response from us that pattern that has been established in the past.
And we will continue to approach it that way and we will be very alert in the regular contact with the administration with respect to that dynamic although we expect that to occur all through this summer.
Christine Arnold
Okay, thank you.
Larry Renfro
Yep.
Operator
Your next question comes from the line of Greg Nersessian of Credit Suisse.
Gregory Nersessian
Hi good morning, two questions. The first is on the commercial risk business, particularly the high deductible health plan products.
Wondering if you noticed any change in utilization patterns in the first quarter. I know it's early but with the deductibles resetting in the first quarter.
If perhaps you noticed members putting off discretionary services or may be utilizing more in network doctors, generic drugs any changes I guess in the behavioral patterns of your membership that you could speak?
Stephen Hemsley
Gail Boudreaux who heads our commercial business.
Gail Boudreaux
Good morning, this Gail Boudreaux. In terms of the high deductible products from utilization perspective we have seen a fairly consistent utilization relative to the expectation we have had.
We have over almost 3 million members and our high deductible programs, we have got a fair amount of experience and we have not seen anything outside of real changes in the behavioral patterns at this point. But again as you said it's not fairly easy, it's early to make those kind of predictions fiscal year.
Gregory Nersessian
Okay great and then my second question was just actually, what was the free cash at the parent at the end of the quarter and also the share count guidance, has that changed for the year?
Stephen Hemsley
Free cash at the end of the quarter was right around $700 million and we are not changing the guidance. We are sticking with the range in terms of share guidance for the year.
Gregory Nersessian
Okay great. Thanks.
Operator
Your next question comes from the line of Joshua Raskin of Barclays Capital.
Joshua Raskin
Hi thanks, good morning. Just wanted to talk about medical cost trends in the fourth quarter when you guys reported in January it sounded like the medical cost kind have come in favorable to your previous expectations below that 8% and now we are seeing obviously stronger commercial earnings, favorable development and it's sounds more like a reiterate of that 8% trends.
So I guess technically, anyways there has been some sort of acceleration in the first quarter here in have it doesn't seems like it was flu. So, I am just curious what change of the medical, what's causing that slight upward pressure?
And then, I guess I will follow that.
Stephen Hemsley
Mike, you want to start with that and then maybe Dan can speak to the commercial business directly?
Mike Mikan
Yeah. Sure, I am not going to change from what we said last quarter.
We did see favorable developments in the fourth quarter. We continue to see some favorable development in the first quarter.
That being said, we continue to see pressures on the unit costs side in the facility in patient setting. And although we can acknowledge that, there areas where we are seeing same or moderating trends, there are also areas that continue to have significant amount of pressure.
And remember, we have a very large national presence, so we are trying to give it to you in aggregate. That dwells on the details.
Dan Schumacher, the CFO of UnitedHealthcare, do you want to add to that?
Dan Schumacher
Sure, Mike. As I think about the cost trends in the commercial phase, Joshua, and one thing that's important to remember obviously in the first quarter we had favorable prior period development.
That's not something we plan for nor expect forward, and then also something that may not measuring in your calculus's as we add on more COBRA members as a result of federal stimulus, we expect some additional medical costs as we pace through the year.
Joshua Raskin
Are you seeing that CROBRA impact already, or is that just expectation?
Dan Schumacher
That's expectation at this point. We issued our letters to qualifying members last week and so over the ensuing months we will see the take up rate and corresponding implications from a medical cost standpoint.
Joshua Raskin
Got you, and then just a quick follow-up, another question was asked and I appreciate you not giving quarterly guidance. But if you look at the previous 11 years before 2008, the history would tell you that the sequential changed earnings from 1Q to 2Q is actually up.
Last year was obviously a lot different. There was lot of recognition of higher cost or lower yields I guess in the second quarter.
So I am just curious what changed in the business, revenues were only up mid-to-high single-digits last year. So what's really changed dramatically in the last two years, they completely sort of changed that seasonality of earnings.
Stephen Hemsley
Its interesting, Josh. In terms of 11 years, actually a lot of changed.
And if you really think about it, the introduction of a different benefit designs, introduction of Part D across our business, the amount of it is just complete change in our mix business over that period of time has produced different quarter-to-quarter patterns, Mike, you want to comment?
Mike Mikan
I would reiterate what, Steve said a lot has changed. The change in the book of business, principally overtime has changed the seasonal patterns of this business.
But second quarter, I think what Steve said, you are going to see multiple things. One, we do have pressure on investment income.
So you have to take that in consideration. And remember, we do have a volume impact from UnitedHealthcare as well.
So you need to look at that year-over-year and we been seeing that for the last couple of years. So Steve also mentioned Prescription Solutions seasonality, we saw favorability in the first quarter.
So we take all that in to consideration. I think directionally, the market appears to be looking at it correctly.
We think it should be adjusted slightly, but I think the market recognizes the seasonal nature of the business.
Joshua Raskin
Okay, great. Thanks.
Operator
Your next question comes from the line of Carl McDonald of Oppenheimer.
Carl McDonald
Thanks. You mentioned the slowly strengthening pricing yields.
Could you talk about what you saw in the competitive landscape in the risk business on January 1 renewals? And then any indications you have at some of the July 1 or mid-year '08 amount?
Stephen Hemsley
Well, I think Gail is the best for that. Go ahead.
Gail Boudreaux
Yeah, good morning. First of all in terms of the competitive landscape, we really haven't seen the competitive landscape changed fundamentally over the last several quarters, so from perspective it remains competitive but rational.
We have some pockets affirming and I’ve talked about those over the last several quarters in the Northeast and Southeast. As we look at our Premium yield, as we talked about again, we're pricing our new business to match our forward deal of 2009 medical costs.
And again that is a projected trend of 8%, plus or minus 50 basis points. When I think about our yields, again we believe that our actions have had an impact as we cycle to our policy renewal dates.
You might recall, we took a number of actions back in 2008, including giving less credit. Credit buy downs and premium and we do think our new business discounting as well as opening the line for the renewals.
So at this point, we believe that our yields and our trend expectations are aligned as Dan mentioned a few moments ago, and we talked a little bit about medical costs, we do are looking at have the impact of potentially COBRA. However we do believe that our full-year medical costs ratio of 84%, plus or minus 50 basis points accounts for that.
Carl McDonald
Great, thank you.
Operator
Your next question comes from the line of Scott Fidel of Deutsche Bank.
Scott Fidel
Thanks, just want to follow-up with the question on the Health reform, and I know it's early here, but gets your sense on the potential that we moved forward with a public plan option included, maybe just talk to the likelihood that would include either commercial versus Medicare rates. And then also just, with the (inaudible) that recently came out and talked to, do you think that those assumptions they made around, potential migrations over the public plan would seem a reasonable to you guys and how do you adapt to that?
Stephen Hemsley
Sure, I will perhaps start out and then Simon Stevens who really is dedicated this area was in heads up what we call it a center for healthcare for modernization commented as well. There is obviously going to be a great deal of talk around a number of concepts and so forth around public plans over the next few months the whole political process is kind of engineered to bring forth the whole spectrum of ideas which that will one genre that will be public plan.
Well there is a lot of activity around them, they are highly conceptual at the moment and it is really not possible to assess them because they are really so limited in terms of their detail. There are instances of that where you could see that there will be opportunities to participate in some broader way.
But for the most part our view is that the employer based system will remain intact and while there maybe some efforts to bring some changes to it the employer based system should prevail in that regard and that's a real public plan would be quite challenging on many levels and particularly in the provider community is impacted is based on Medicare kind of rates. Do you want to take from there Simon?
Simon Stevens
Sure, so just picking up Steve's last point, this is Simon Stevens. I think public [plan] were designed off the back of Medicare rate then there would be very significant opposition from doctors and hospitals because as [Lewin] point, that would mean 19% pay cut for doctors and a 29% reimbursement cost for hospitals.
We, however, adapt simply a thrashing providing unit prices without taking any approach to volume or appropriateness for quality is an effective way of sustaining getting more value as of the healthcare information current spending. Of course, there are lots of other possible public plan designs but some compel use of couple of price controls on providers, but in that case its not obvious what point of having a public plan as there are other effective ways of achieving those prime times as Steve said in his opening remarks.
If the aim is to reduce cost growth than we have already shown how we can help large employers than the trend and the question is how do we get these techniques deployed more widely in government (inaudible) programs too. And in addition of thought, the industry has already proposed compressive set of changes to the individual insurance market that achieved the same universal access that public plan is suppose to do.
Scott Fidel
And just a follow-up just around PBM and earnings up 43% year-over-year. Can you talk about which customer segments really drove that growth than just more strategically just in the context the new set of well point selling their PBM to express.
Stephen Hemsley
Slow down, I am not keeping up with question.
Scott Fidel
Sorry, I was just asking of the PBM and then just strategically, just in the context of well point selling their PBM, your views at this point in terms of keeping that internally and driving growth as compared to hedged realizing value, through a way spin-off to the (inaudible).
Stephen Hemsley
Well, in terms of our PBM performance, we are obviously pleased with the first quarter performance. But I think it is largely driven by a real seasonal influx in terms of prescription refills as the year renews itself in the first quarter.
Gail, do you want to comment on that or Jack.
Jackie Kosecoff
It's Jackie, hi. Let me just comment to Ted on the first quarter results.
We believe that they reflect growth in external sales additional Part D and [MATV] membership and the in-sourcing of our Unison Medicaid business. We continue to benefit from drug procurement and that we are contrasting improvement that also provide our clients with a high quality affordable drug benefits.
One tracked with our phase in-sourcing of specialty pharmacy fulfillment and the AmeriChoice businesses. At the same time we are very carefully managing our operating expenses.
The high demand we saw in the mail service facilities in January and throughout the first quarter reflects Part D and [MATV] seasonality as members returned to mail service facility. However, at the same time, we continued to see quarter-after-quarter and year-after-year growth in the both mail penetration and generic utilization.
Although prescription solutions expects to have a strong performance in the second quarter as Steve mentioned earlier, we anticipate a slight margin erosion over the first quarter. As historically scrip utilization overall and mail utilization in particular tends to decline quarterly in the Medicare book-of-business as members move into the coverage gap.
Stephen Hemsley
That was Jackie Kosecoff who is Heads of Prescription Solutions. Mike do you want to make a comment?
Mike Mikan
I would only add, I want to make sure, it's clear that we are seeing volume increases as a result of the additional business that Jackie just mentioned, but from utilization perspective we are seeing that utilization on a per member, per script basis or day supply basis flat to slightly down so within expectations of what we had going into the year. So it's really driven, the increase is really driven from volume.
Larry Renfro
And Scott, in terms of the second part of your question, I would say that our performances vary now that our kind of PBM and drug benefit strategy are performing exceptionally well and kind of playing out as we hope that goes serves much of our commercial benefit business. We retain really comprehensive control to UnitedHealthcare and MedCo continues to perform well.
At the same time Rx Solutions gives us more integrated internal capability. We are serving both commercial and public sector through Rx Solution.
It's sourcing all our specialty pharma. Its capacities are scaling and growing quite nicely.
Its systems have been updated and that really are now state-of-the-art in terms of the market. It's generic and generic penetration and mail service has continues to grow and it's becoming increasingly more meaningful contributor to our overall performance.
So as Medco contract nears a point of reconsideration, I think we will be in an ideal position to consider a spectrum of our alternative that can meet our business needs and drive long-term value for our customers and our businesses. And we do not really see a compelling reason to alter that approach at this point in time.
We do not think anywhere near fold full potential in terms of our performance in the business and on either platform.
Scott Fidel
Okay, thank you.
Operator
Your next question comes from the line of Sheryl Skolnick of CRT Capital Group.
Sheryl Skolnick
Thank you very much. In the commercial business both in the risk business obviously one of the things that would concern me, and I do not if its too early to tell yet is that, you are retaining members with higher than expected attrition that’s one thing clearly that’s going to have negative effect on the rest of the year.
But in retaining the members you have and in the customers that you were attracting is there any sense of whether the employees who are keeping the insurance and enrolling in these plans are adversely selecting not as just United. But to keep insurance and to what extend might that be reflected in your actuarial models?
And then I have a follow up.
Stephen Hemsley
Yeah I don’t think, I don’t think that’s the case that at all. Actually I think the retention dynamics in our small group business and we are actually quite positive in terms of that.
And the attrition is really spread out in terms of where that is occurring although it is hitting us harder in the small group phase, Gail do you want to comment.
Gail Boudreaux
Sure, hi, Sheryl.
Sheryl Skolnick
Hi.
Gail Boudreaux
Sheryl a couple of points around your question, first as we look at our book of business for the first quarter in particular. The actual employer retention was favorable and as you noted the attrition in the small group which is really more heavily impacted by the economies where we saw that.
But again looking at risk statistics we have not approved any noticeable change in our receivable. And we do look at that and track it fairly closely, we culminated a couple of times we are going to watch the impact hit over potentially.
But we do track age and sex factors to give us a perspective on to the relative health of our customer base and how that’s trending. If we talked about that over the last several quarters and that has stayed very stable.
On a case level at the employer level we incorporate risk for is also in the data collection process. And then of course take into consideration health status indicators and to give you a little bit of an example that utilization data pharmacy, data treatment diagnostics and ultimately the prognosis and those are all part of our underwriting process.
So when we talk about risk force that’s really what we are looking at and that’s what’s remained fairly stable.
Sheryl Skolnick
Okay that’s very helpful and this is the only somewhat related question. One other concerns that I have had as you addressed a number of things on the customer relationship side would be on the provider relationship side.
And I understand you are making some changes in personnel in the like. But especially in the hospital sector the surveys that have been done, improved from last year there is still some shall we say difficult relationship that you’ve had within the hospitals.
To what extent do you think you will be able to make progress on that to be able to go into 2010, 2011 where we might have some healthcare reform with some stronger provider relationships that can perhaps enhance your product offering relative to a public plan?
Larry Renfro
Yeah I would like to jump into this and then I’ll give it to you. I actually think as you pointed out Sheryl, we have made a conscious effort to really strengthen our performance and our relationships across the board.
We probably had the most work to do in the care provider community and we have made a number of changes there and they are perhaps the most far reaching and they are starting to have a real impact and I would say the level of disruptions that has occurred within our particularly our hospital base has really been very, very modest over the last year and a half. As we have expanded in terms of our hospital network.
That being said, there is probably more for us to do on the provider relationship side than in any other area, and I couldn't agree with you more than it will be that will serve our business very well to strengthen those relationships. I think Gail has got lot more specifics in terms of what we have done and what we are contemplated with respect to provider response.
Gail K. Boudreaux
Sheryl, we have a couple of things that I want to point out to you to build upon Steve's comment. The first is we made a significant, I think focus in investment around our Provider Advocate program, which is really putting customer advocates, provider advocates in the field, and we have been rolling that out throughout 2008 and into 2009, and we are starting to see the impact of that.
And that's specifically on the physician relationship. On hospital side, we have been investing in a lean process using Six Sigma.
They helped our hospitals, specifically improve their account receivable balances as well as our interfacing relationship with them, and I think that's starting to have really positive input. So as Steve said, as we saw a number in customer turnaround on service, and I think we have done a great job there.
We are starting to see that on the provider side, but we would agree that there is a bit of a longer tail, and we are going to begin to see the up-tick in 2009. But those investments and service have been happening through 2008 and are continuing in 2009.
Sheryl Skolnick
Great. Well, thank you very much.
Stephen Hemsley
Mike, and you want to add something.
Mike Mikan
Sure. I would add that as Gail as said overtime.
It's going to take time to improve the relationships, and we have been focused on it for a several years. Some of the challenges that we have had as you probably recognize is some of the acquisitions and integrations that we have had.
And as we moved to integrate platform, consolidate reimbursement policies, standardize contract, which I am happy to say we have made significant progress with, we believe that in addition of the stuff that Gail just mentioned, that you are going to see an up-tick in our relationships with hospitals and we are seeing it internally. It may not be out there in the surveys just yet, but we do believe going forward, you are going to see a market of a improved relationship between providers in general, both physicians and facilities with the United.
Sheryl Skolnick
You did get best of provider survey results, did get less bad than last year. But there is as you suggest, there is an awful lot of work to do with cultural reputation.
It's the hard part to fix. You had to do that with customers service, I imagine you will be able to figure out what to do for providers that's just not wonderful at the moment, is that there?
Mike Mikan
We would agree with you on that.
Sheryl Skolnick
Okay. Thank you very much.
Operator
Your next question comes from the line Lee Cooperman of Omega Advisors.
Lee Cooperman
Thank you. First of all I want some more clarification, and I know they come across big academic, where the earlier questioners asked you about the stock price, you said you wouldn't comment on evaluation.
I would like think you've made 32 million comments in the first quarter. I assume we are not buying back stock for practice that we are buying back stock, because we think it's undervalued.
No response necessary, but let us make that point.
Stephen Hemsley
Lee, I did. I said I wouldn't but then I did, because we do believe that there is meaningfully higher potential value in our shares, we given our potential and given our performance capacity.
Lee Cooperman
Got you. If I could ask the $700 million number that was mentioned by Mike, what is the financial condition of the holding company, was that the $700 million in the holding company that you are referring to, just really just two financial question, what is the financial condition of the holding company.
And assuming everything was the same, the balance of this year, your earnings guidance didn't change, your stock price didn't change. How do you think you would deploy the $5 billion cash flow in '09 between your debts reduction, stock repurchase, acquisitions I guess you can't foretell.
But some sense generally, how you intend to use that $5 billion. These are those two questions.
Mike Mikan
The corporate, as we sit here today, we have about $1 billion dollar of corporate cash that differs from what we had at the end of the quarter. It is slightly down from the previous time period when we reported fourth quarter earnings.
That is a result of the significant debt repayment that we made. Lee, as you know.
Lee Cooperman
Great.
Mike Mikan
Probably know in the first quarter $900 million. And then the first quarter, when you look at our dividends that we get from the regulated entities, the first quarter is the lowest quarter.
It's about 15% of the dividend overall. So we expect to ramp up dividends through the remainder of the year and due course as we always do throughout the year.
With respect to operating cash flow and deployment just in broad based numbers, we expect it to reduce our debt. We gave a target of 33% to 36%, say roughly $1 billion dollars of debt repayment.
We do have CapEx of roughly $800 million. And we do need to leave cash in our regulated entities as a result of the growth of payables since we started with favorable cash position of roughly $800 million dollars at the beginning of the year.
When you net it all out, it leaves you with around $3 billion. And if everything plays out the way it trends today, we would expect to be repurchasing shares for the remainder of the year at or around that amount.
Lee Cooperman
Okay, thank you very precise question. I appreciate it.
Operator
The next question comes from the line of John Rex of JPMorgan.
John Rex
Yeah. I just want to come back to Medicare business, quickly.
As you think about your 2010, let's just assume the status close year that we get roughly 5% reduction in premiums and assume if your costs turn to that business is running 3%, 4%, so you got a pretty wide gap to fill there. How should we think about that or how do you approach you think about the trade-off between margin maintenance and member retention and kind of what can you do in terms of maintaining current all in value that had been Medicare Advantage senior would see in the product.
I would presume we [need in about] 2010 and some meaningful reduction in your margin you for that business, is that right way to be thinking about it?
Stephen Hemsley
Well, I will have Larry respond to this, but I would say that if that were play out there are number of areas that we have, we obviously thought about government funding levels to these programs over the years. We have positioned ourselves in that marketplace [oriented] in ourselves to the more high value versions of these offerings in the marketplace.
We have also oriented ourselves to markets that we think are more sustainable long-term, and we are driving a lot of change in our business probably more in that business then any others in terms of really looking at what our long-term cost structure has to be and how we approach that business, so that we can basically outperform straight private view for service across the board and we are headed in that direction. We would see certainly some pressure.
We also have a lot of levers to pull with respect to how we approach benefits, markets, how we approach medical cost management, operating costs and the like. And Larry Renfro who will head that business up and Tom Paul who is Chief Operating Officer may be you want to comment.
Larry Renfro
Well, why don’t I start out. This is Larry Renfro, its early right now as we all know and we are working our way through this, but one thing that's good is we prepared the June one bid is the fact that our license has been through changing right environments for.
Obviously, we have also a great diversity of products and a lot of things that Steve just said. We believe we will be well positioned for 2010.
We really can't go in to the strategy today. I think you know that from the competitive nature of our bid.
But we are looking at all the business levers, we believe we have identified and over the next few weeks as we get closer to the bid process, we think we will have the forecast. So I will turn over to Tom.
Tom Paul
I don't think I have anything to add other than again the, as Larry said we are carefully looking at all the levers that we have from a resource perspective to bring some [bear fruits] with innovations and across new [HTT Enterprise] who focus on the operating expense, medical management and trends and the benefit and premium and geography levers that we have to look at in our 2010 bids.
John Rex
I guess just one point I think about, you are in a position looking up from (inaudible) you look like maybe little better margin position than MA than some of the competition. And so you potentially have the ability to look at this as a kind of a more a two year deal that is lets say stick to '08 as right now with down 5 you get a lot of that back in 2011.
And you are kind of willing, to use that advantage you have, to kind of take a little bigger hit in margins as you are going to the 2010 kind of knowing that some comes back in the 2011 its almost advantage you may have in the marketplace in terms of just member retention and having to do less with the benefit packages and others?
Stephen Hemsley
With that going into our strategy, I would say we always look at what we are doing over the month and year across that, but today it’s not the time to talk about our strategy.
John Rex
Okay.
John Penshorn
It's John. Your fundamental point that there is pressure in the marketplace is correct and we have to respond to that pressure, but I might also suggest to stand back and take a breath because the whole positioning of our business here is not just on a single program but on all that we bring to that marketplace.
So there are supplemental opportunities that will be, there will be more experimentation in the marketplace and to your point about pressure, there will probably more change and more growth opportunities in that marketplace. So, appropriate in terms of taking the perspective of how this will play out over a couple of years and the positioning of our business, so that we could engage in a multi-year strategy to really drive long-term market positioning and performance is exactly the right zone to be in.
And our other products and other positioning play into that quite nicely and there maybe actually be more opportunity in the marketplace than others have focused in on right now.
John Rex
Great, thanks Steve.
Stephen Hemsley
Last question.
Operator
Your final question comes from the line of Michael Baker of Raymond James
Michael Baker
Thanks. I was wondering if you could update on in terms of the potential rollout of the new database or when that might be up and running as part of the New York AG settlement.
And then if you could provide some color around scrip volumes in the PVM as well as generic utilization in the mail penetration rate that would be helpful?
Larry Renfro
Sure. We will have Andy Slavitt, who heads up Ingenix talk just briefly about the timeframe of that activity.
Andy Slavitt
Good morning. New York Attorney General's office estimated there will be about six months from the date of announcement and collection of a non-profit to from the new database.
They have not made that announcement yet, it should come, I expect that will come shortly and then you could expect six month or so from that date.
Michael Baker
All right. Thanks.
And then on the PBM give some color around where claims volumes are now as well as mail and generic rates?
Stephen Hemsley
Jackie Kosecoff who head up Prescription Solutions.
Jackie Kosecoff
Good morning. We do not give specific mail penetration rates but I will be happy to give you those numbers on our generic utilization side.
In Q1 of 2008, we ended with a generic penetration rate of about 65.6% and that compares to Q1 of '09 up 68.6%.
Michael Baker
Thank you.
Jackie Kosecoff
You are very welcome.
Stephen Hemsley
Thank you all. We will be available through the course of the day John Penshorn, Mike and others to respond to questions as you go through.
We appreciate your time this morning. Thank you.
Operator
Thank you for participating in today's UnitedHealth Group first quarter 2009 earnings conference call. This concludes today's conference.
You may now disconnect.