Oct 20, 2009
Operator
Good morning. I would like to welcome everyone to the UnitedHealth Group third quarter earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period.
(Operator's Instructions) As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group.
Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited. Here is some important introductory information.
This call will reference non-GAAP amounts. A reconciliation of non GAAP to GAAP amounts if available on the financial reports and SEC filings section of the company's investor pages at www.unitedhealthgroup.com.
This call contains forward looking statements under US federal security laws. Such statements are subject to risk and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found on the reports that we've filed with the Securities and Exchange Commission from time to time, including the cautionary statements included in our current and periodic filing. Information presented on this call is contained in the earnings release we issued this morning and our Form 8-K dated October 20, 2009, which may be accessed from the company's investor pages at www.unitedhealthgroup.com.
I would now like to turn the conference over to President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Stephen Hemsley
Good morning. This morning we reported solid and consisted third quarter results led by cash flows of $2.7 billion and earnings of $0.89 per share, driven by a strong combination of growth and performance from our services businesses and increasingly effective ongoing medical and operating cost control.
These results reflect the efforts of our 75,000 people in consistently delivering value and service to our customers and the healthcare community across a broad spectrum of need. Based on our performance to date, we are confirming 2009 earnings of approximately $3.15 per share and revenues of about $87 billion.
While this includes an elevated level of H1N1 related medical costs in the fourth quarter, our outlook could be negatively impacted if the prevalence of H1N1 is sustained at a high enough level throughout the entire quarter. Today we'll discuss these results and our 2010 outlook against the backdrop of a challenging economy and proposed healthcare reform legislation.
To begin with growth, the services side of our company increased revenues by $723 million in the quarter, a strong 15% gain year over year. Ingenix was up 26%, Prescription Solutions grew 16%, and OptumHealth expanded by 9%.
These businesses had solid and consistent growth driven by demand for services from physicians and care providers from across the public sector, from pharma, and from unaffiliated payers. We provide a diverse range of innovative services that help optimize the healthcare system, improving healthcare quality and consistency, transparency and accountability, and affordability and access.
Examples of these services include large scale consumer disease prevention and wellness programs, healthcare financial services, managed behavioral healthcare in a benefit parody environment, specialty pharmaceutical care, and healthcare consulting, information systems, and data analysis. In health benefits our third quarter revenues grew 7% or 1.4 billion year over year.
We grew organically by 900,000 people in public and senior benefit program through the first nine months of this year which includes 275,000 people in Medicare Advantage and growth of 460,000 in risk-based state Medicaid program. These results underscore the importance of our balanced and diversified approach to the healthcare benefits market.
Third quarter pressure on our commercial benefit businesses reflect our nation's broader economic and employment challenges. Participation in our commercial benefits decreased by 275,000 people this past quarter with employment attrition driving more than 80% of this decrease.
Absent employment attrition, the number of people served in fee-based products actually grew in the product and over the past six months, and the decrease in people served to risk-based products was also significantly smaller than reported. Inside our fully insured loss numbers we continue to improve our customer retention and to expand the uptake of new products and programs.
Turning from growth to margins, we earned a net margin of about 4% of revenues through the first nine months of the year after accounting for $1.5 billion in income taxes. With a net margin of 4% our businesses drive their financial results by averaging modest earnings per customer while serving very large numbers of people with an ever increasing array of modern and innovative benefits and services.
Our third quarter operating margin was stable year over year. The steady performance reflects success in advancing affordability in the two key areas of operating costs and medical costs.
On the medical cost side, our medical trends continue to track to our expectations, reflecting longstanding clinical care management skills and ever improving technology applications for both forecasting cost and at managing care. Our consolidated third quarter medical care ratio of 82% increased 30 basis points over last year's third quarter performance.
In addition to H1N1 flu cost, this increase reflects the elevated initial medical cost of providing service to new Medicaid members who had not previously been in a coordinated care plan. Third quarter results included $190 million in favorable development in our previous estimates of medical cost, suggesting that historical medical cost trends were well controlled.
This compares with $130 million in the third quarter of 2008. Our businesses continue to improve clinical resource utilization and to realize the benefits of our operating scale.
We have been focusing sharply on operating costs over the past 18 months as we've said on these calls. The operating cost ratio of 14.5% improved by a half percentage point year over year as adjusted, reflecting faster growth in revenues, the headcounts, and similar related operating costs.
We will continue our efforts to lower our operating costs to support healthcare affordability. Looking at margins by business group, all of our year over year growth and operating earnings this quarter came from our services businesses which improved by $109 million in total.
Prescription Solutions was, by far, the best performer in this quarter as it continues its path of growth and improved scale, business maturity, and growing specialty pharmacy program. Its growth has been driven by Ovations and AmeriChoice as well as unaffiliated customers.
Ingenix and OptumHealth extended their steady margin performances. Behavioral and dental benefit costs at OptumHealth were in line with our expectations for this quarter.
Both businesses have effectively aligned their operating costs and level of business growth experience this year. Our health benefit companies overall operating margin of 6.2% decreased 60 basis points year over year, principally due to shifting mix as well as some unusual H1N1 medical costs.
We estimate that we incurred about $60 million in H1N1 related medical costs in the third quarter and costs of the H1N1 virus are also a significant factor on our fourth quarter outlook. UnitedHealthcare's third quarter medical care ratio of 84.6% increased 80 basis points year over year, largely due to its share of additional H1N1 costs and the increased concentration of enrolment.
Looking ahead, UnitedHealthcare now forecasts a fourth quarter medical care ratio just above 86%. We anticipate our consolidated ratio will be in the mid-82% range compared to 80.8% in fourth quarter 2008.
Our commercial benefit pricing remains balanced, disciplined, and fair. Our fourth quarter expectations include higher than typical flu cost this fall, continued impact and seasonally higher medical expenses typically experienced in the final three months of each year.
Let's turn to healthcare reform in the continuing legislative process in Washington. Our views, priorities, and approach have remained the same throughout this year.
We are committed to helping modernize the healthcare system so that it better serves all Americans at a lower cost. That's why we continue to advocate with policymakers for coverage for all Americans and that's why we continue to believe that universal care will only be sustainable if legislation effectively tackles the underlying cause of the problem, namely that healthcare in this country costs too much.
We have been consistent, even aggressive, with policymakers that reform legislation who must address access and cost, and do it systemically if we are to achieve a high quality and economically sustainable healthcare system. We have been concerned with some proposals in congress which not only fail to adequately address the fundamental cost drives, but would in fact lead to higher costs.
This would place even greater pressure on already overburdened citizens and employers and this is not a future problem that might occur at a later date. There are proposals that would add new taxes on benefits and healthcare products and services and ones that cut Medicare payments to doctors and hospitals.
They would likely increase costs on the healthcare systems and shift that burden to the private sector and negatively affect the health benefits of the 160 million Americans who currently have health insurance primarily through the nation's employer-based system. It's worth nothing that our company alone already pays more than $1 billion per year in state fees, assessments, and premium taxes, that are built into healthcare costs.
Insurance reform proposals that fail to fairly bring everyone into the system will be stabilized insurance markets and coverage pools causing costs to rise on businesses and the citizens who already are participating responsibly. We are continuing to engage actively with leaders in Congress and the administration.
I was in Washington just last week for meetings and will be back again this week. We are brining practical solutions, innovative ideas, information and data to the debate to ensure that we modernize the nation's healthcare system and rein in rising costs to pressure coverage today.
As a commercial enterprise, we continue to invest in practical innovation that leads to better surface and better medical outcomes and lower cost through better use of our great healthcare system. Those capabilities have increasing and enduring value, and to be sure, we will assess the positions of our businesses and our participation in our (inaudible) markets and will take whatever actions are necessary to respond to legislative changes in the best interest of customers and shareholders.
Our nation continues to weather a fragile economy and we cannot lose sight of the impact on healthcare legislation on job development and global competitiveness of the American economy. However, as I said earlier, we continue to believe this is the time to modernize and of just reform healthcare on a truly systemic basis so that universal access can be sustained without significantly greater cost to taxpayers and those currently with benefits.
Now we'll offer you a perspective on the cross currents we foresee as we conclude this year and enter into 2010. Our concerns are consistent with those of our last quarterly call.
The economic recovery appears to be slow developing and uneven at best. Unemployment continues to rise and the debate over additional stimulus spending suggests the government's concern that renewed economic strength is not imminent.
This backdrop will impact demand for some of our businesses. We expect our fourth quarter, ac commercial enrolment loss, to be somewhat better than the third quarter with employer-based attrition the most significant factor.
In 2010 we project our commercial membership decline will slow meaningfully as compared to 2009. Our reputation for service and value has risen sharply and that trend will continue to accelerate.
Customer retention is strongly improved and our broker and consultant relationships continue to strengthen. In our commercial risk business we expect to continue to maintain steady pricing disciplines in response to perspective medical cost pressures.
Much of this pressure is driven by insufficient government reimbursement to care providers and further shifts in the cost of the commercial sector. Our public and senior markets businesses should increase the number of people they serve this year, again led by Medicaid and Medicare Advantage.
Growth in these two programs will likely be slower in 2010 than in 2009 as we expect fewer new people from large new state programs in Medicaid and our Medicare Advantage Benefit has been reduced in response to dramatic government driven rate cuts to that program. We remain cautious about the state Medicaid reimbursement environment and we are exposed to a meaningful portion of the 5% rate cut that CMS assigned to the Medicate Advantage Program for next year.
We have plans to offset the impact on margin beyond the benefit design changes we've made for 2010 by improving performance across all elements of our Medicare Advantage businesses. However , we will not assume a perfect matchup on those plans in our 2010 outlook.
We expect growth in revenues from each of our enterprise services businesses. Mix shift and economic circumstances including loss of membership with UnitedHealthcare will likely challenge OptumHealth margin performance.
Prescription Solutions will effectively discontinue its use of performance based pricing in 2010 and that will impact its margin percentage in earnings. We anticipate that Ingenix will continue to be our highest margin business next year.
In total we expect 2010 to be a somewhat more difficult year than 2009. We will see membership and local competitive pressures in risk business.
The loss of commercial risk business over the course of 2009 creates headwind on margin dollars for UnitedHealthcare and OptumHealth for 2010. And H1N1 flu will remain a risk.
Effective medical cost management and operating cost control will be key to preserving our margins. Our preliminary estimates are for revenues to grow somewhere in the range centered around $89 billion for operating earnings to decline year over year and for 2010 earnings per share to be in the broad range of $2.90 to $3.10 per share.
While there clearly could be downside to this range, there could be upside as well. Cash flows from operation should continue to be solid in relationship to net earnings this year and next.
Share repurchase will be an element contributing to earnings per share. The market factors, including the status of the healthcare reform, will influence the timing and level of repurchases in fourth quarter 2009 and in 2010.
As in the past, we will refine these numbers and further delineate them as we get closer to 2010. We've made no adjustments to accommodate healthcare reform, and health reform legislation if signed into law may necessitate a revision in our 2010 outlook.
So let me briefly summarize the key points from this morning. Third quarter results provide a good measure of our diversification and internal performance discipline.
Our services businesses delivered all of the year over year earnings growth in the quarter. All business groups performed well relative to our expectations, and operating costs were well controlled and our pair ratios were solid.
Our innovation, service, and the overall value we provide our customers continues to strengthen, as measured by growth for many of our businesses. We're concerned about some directions health reform is taking, but will redouble our efforts to help achieve meaningful sustainable changes that address fundamental issues of affordability and access.
We're understandably cautious about the challenging environment for 2010. We will pursue our goals in 2010 working to perform at the highest level possible.
In the longer term, the outlook remains compelling. Large and critical human and social needs are still to be addressed.
The healthcare system cries out to be made more efficient, modernized, and effective, in an integrated system. Our nation's healthcare resources need to be used optimally and appropriately for the benefit of the most people possible.
Our company has the capability, the resources, market positions, and insights, that enable us to play a meaningful role in meeting those needs. And finally, should health reform affect our long-term positioning, we will move thoughtfully on behalf of our customers, owners, and other stakeholders.
This is a first look at 2010. We plan to update you on our progress at our annual investor day which will be December 1st in New York, and with that we'll open up this call to your questions, but with one understandable caveat first.
I suspect many of you are interested in how various policy proposals might affect our business or the industry. Since so much is in flux right now and sensitivities on these issues are as high as they have ever been, we appreciate your understanding of our reluctance to speculate or respond beyond broad directional theme.
As usual, we ask you to limit yourself to one question or topic today in deference to time, and I thank you for your interested in UnitedHealth Group. And if we could begin questions?
Operator
(Operator's Instructions) Your first question comes from Gregory Nersessian with Credit Suisse.
Gregory Nersessian
Hi, good morning. My question was actually on Prescription Solutions, another very strong quarter there, exceeding our estimates again.
I was wondering two questions, one if you could just remind us how the Part D earnings are allocated between Prescription Solutions and Ovations and then second of all, how much of the earnings there is driven by the performance-based pricing that you mentioned you won't renew for next year?
Stephen Hemsley
I would offer that Prescription Solutions continues to grow in its capabilities and maturity as a business and I think a lot of this is a reflection of that continued strengthening of that business, but I'll ask Jackie Kosecoff and then perhaps Larry Renfro or Tom Paul to respond to the second half. Jackie?
Jackie Kosecoff
Good morning, Gregory. First of all, Prescription Solutions has a third party contract in terms of its service to Ovations.
So we work separately in that regard. And you are right, Prescription Solutions has had a good 2009.
We've benefited from improvements in (inaudible) and generic penetration rates, higher than anticipated Medicate membership growth, new external earned sales of nearly 600,000 lives, improved client retention, and in addition, performance based (inaudible) and network contracting that came in earlier and greater than anticipated and has greatly benefited us in our Part D business. These network contract savings have already been built into all of our clients' 2010 pricing and we're not likely to achieve the magnitude of contracting improvements in 2010 that we saw in 2009.
Tom?
Tom Paul
In terms of our relationship to our Part D products in regards to the performance pricing changes, ultimately from a Part D perspective we see minimal change in our 2010 bids. We submitted our bids which were approved under a range of standard margin that we've used in the past and we continue to expect that we'll fall within that same margin in 2010.
Gregory Nersessian
Okay. Jackie, just in terms of the Part D question, is it fair to say that more than 50% of the Part D earnings show up in prescription solutions rather than the Ovations?
Jackie Kosecoff
That's not a question that we're going to answer right now.
Gregory Nersessian
Okay. And then my second question was just on your contracting.
I'm hearing a lot of anecdotal evidence that there are a number of community hospitals that are feeling the economic pinch and looking to get pricing from managed care. I'm wondering how you're approaching your contract on I guess both a commercial and maybe the Medicaid side next year with a lot of these community hospitals that may be on the brink.
Stephen Hemsley
I'm not sure that there is a particularly different approach in terms of how we have been responding to our relationships with the delivery community. The facilities have been under pressure for the last several years will just continue under those pressures.
So I'm not sure there is a particularly distinctive approach that we're taking with respect to our relationship with the delivery community. We think it has been a constructive one and increasingly we're sensitive to those kinds of issues as we engage with them and continue to maintain and build our network.
And I would like to limit these to one question each, so with that I think we'll move to the next question.
Operator
Your next question comes from Charles Boorady with Citi.
Charles Boorady
Hi, thanks. Good morning.
So I will keep it to one question, just looking for your 2010 and longer-term target for the UHC loss ratio. At about 84.5% it is well above your peers and above historical normals and I'm wondering if you see this as a new equilibrium or if you target improving that loss ratio next year and over time?
Stephen Hemsley
Well, I think that this does ebb and flow over time. If you really take a look at this over a long enough continuum of many years these patterns do establish themselves.
I think we endeavor to improve our performance relative to our specific book of business as an ongoing kind of concept of the business. But I'll add that I think there is nothing I think that is specific to this.
I would say that mix also represents a significant element in this and that's why I reference our book of business. But beyond that I would Gail or Mike if they —
Gail Boudreaux
I think Steve hit the critical part. The impact is really mix.
We've talked about where we've held our trend in line with our expectations and we continue to monitor it so I think that that really hits the major points of where we would track our loss ratios as we think about going forward.
Stephen Hemsley
So I would just finish that by saying I think it reflects the book of our business, but I would also tell you, we are always looking to improve our performance and I don't think that will ever change. Next question?
Operator
Your next question comes from Joshua Raskin with Barclays Capital.
Joshua Raskin
Thanks. Question relates to your customer contracts on the commercial side with the large groups, small groups, and then individuals.
What sort of contract terms do you have in the case that you guys would incur some additional fees or taxes that you didn't know about when you originally signed these contracts? I.e.
can you go in the middle of a contract and reprice them, I guess, effectively?
Stephen Hemsley
Well, I don't know if I want to get into the specifics of that. I mean, we maintain relationships with customers that are, and we endeavor to have them multiyear and to be responsive to the different factors in the marketplace.
Typically there isn't an element of that nature in terms of change in our relationships, but I would also that this is a question that comes from the reform agenda, there has also never been a circumstance quite like this. So I would describe our relationship with our customers as being both contractual and non contractual in nature and kind of leave it at that if that is where you were headed.
Operator
Your next question comes from John Rex with JP Morgan.
John Rex
Thanks. Just wanted to kind of step back again on your commentary on 2010 and just kind of look at it more broadly.
So it seemed like you would be implying about a 10% drop in op earnings for 2010. I was wondering if you could just help us kind of understand kind of order and magnitude in at least your biggest businesses, commercial and Medicare kind of the contributing factors, and maybe just so we can kind of understand order of magnitude from those businesses.
Stephen Hemsley
Well, we are giving you, as we typically do at this time of year, kind of a broad directional sense of 2010. There are a lot of factors and we delineated several of them in the script including the commercial headwinds into 2010 just from the commercial membership reductions from 2009.
We expect 2010 membership performance to be measurably better, but not necessarily a positive and we have pressures from Medicare that are well established, a rate environment in the Medicaid marketplace. We have the beginning startup of our tricare business.
I mean there are a number of factors — the introduction of efforts around 5010 and ICD10. So I think there are a number of factors that lead us to kind of lead us to set on this outlook at this time and we really can't give you anything that would be more delineable than that, but I actually think that's quite a pretty robust list.
Operator
Your next question comes from Christine Arnold with Cowen & Company.
Christine Arnold
Hi there, just delving into Medicare Advantage a little bit. Could you talk about — you said it's not going to be a perfect match and there's a broad range of assumptions out there.
Can you comment on that and your long-term strategy there?
Stephen Hemsley
Sure. I will give this to Larry Renfro, but I think, our long-term strategy for one is that we think this is a very compelling marketplace.
There are perhaps more challenges to the Medicare population than perhaps any other in all of healthcare in opportunities to make it perform better both in the government fee for service version and in the private sector version. And that will take a very focused effort around optimal care management, really focusing on that population, better application of technology and modernization of the product — so we think there is really a real future in meeting the needs of that population.
In terms of the nearer term to 2010, we have a number of programs. Larry, do you want to —
Larry Renfro
Christine, I know what we're talking about is the 5% rate cut and we've already addressed what I'll call a meaningful portion of the 5% with benefit design as well as improving performance across all elements of the business. The three main focus areas that we're concentrating on now is cost management, operating cost, and growth.
And what we are trying to do is to beef all these areas up in order to get as close to the number that we're trying to fill in this gap.
Operator
Your next question comes from Kevin Fischbeck with Bank of America.
Kevin Fischbeck
Okay, thank you. I just wanted to confirm something that was in the press release.
The numbers that you disclosed about the favorable development, we're talking about the 2009 numbers. You refer to the 190 as net favorable development and then we talked about the 2008, you referred to it as total development.
I just wanted to make sure that those two numbers are in fact comparable and whether you were making a distinction there between net development and total development as far as what might be re-accrued.
Stephen Hemsley
I don't think so, but Mike, can you —
Mike Mikan
Well, we're comparing the development that was re-accrued in the third quarter of this year which is $190 million compared to what was recorded at the same time period in Q3 of 2008 which was $130 million. So the comparative is 190 versus 130, but I don't think there was any distinction between net and total.
I wouldn't draw any meaning from those words.
Operator
Your next question comes from Matthew Borsch with Goldman Sachs.
Matthew Borsch
Hi, good morning. Just curious about the share repurchase outlook — your buybacks were quite limited in the quarter and it wasn't clear from your comments if you had reflected any amount of significant share purchase in your EPS range for 2010.
You reference health reform, can you just comment on what your thinking is there?
Stephen Hemsley
Sure. And I'll let Mike handle most of this, but I do think that we are largely on track for our share program in '09 and we did offer that it will be a factor in 2010 as we see it.
It could be influenced by external factors. We always leave that open.
Mike Mikan
Hey, Matt. As you know we entered the year with expecting to purchase more than $2.5 billion of shares in 2009.
On a year to date basis we have repurchased 66.5 million shares and so that's a substantial portion. We still expect or are planning on, depending on market conditions, to repurchase more than $2 billion this year.
Some of it is just timing, Matt, on dividends. And we did have a large debt repayment in the third quarter and we're going to continue to maintain a conservative financial position during the economic climate in the environment that we're operating in today.
Operator
Your next question comes from Justin Lake with UBS.
Justin Lake
Thanks, good morning. Just a question on swine flu here.
Can you talk about the pace of change that you saw in the third quarter as far as how the $60 million number totals up, how the costs have looked in the severed segments, and then what's explicitly built in for that fourth quarter, just around number there?
Stephen Hemsley
Justin, are you referring to H1N1?
Justin Lake
Yeah.
Mike Mikan
Justin, as we disclosed in the second quarter, we had estimated that we incurred incrementally $50 million of H1N1 flu related costs. We did see, as I'm sure others have as evidenced by the CDC, influenza-like illness data that an acceleration or an elevation in the later parts of the third quarter.
And that's pretty comparable in total costs to what we saw in the second quarter. In terms of by category, we are seeing a significant elevation in the commercial book of business and in the Medicaid business.
We are not seeing the same level of acceleration or elevation in the senior business. So you can get the order of magnitude by business and we continue to believe that we’re going to see an elevation as we are seeing into the fourth quarter, and at some point in time we'll peak and subside from there in the quarter.
And I think if you look at the elevation as we entered into the third quarter, we're expecting that to continue well into the fourth quarter.
Operator
Your next question comes from Tom Carroll with Stifel Nicolaus.
Tom Carroll
Good morning. Actually just a followup on the flu question.
Certainly the prevalence data that is out there for ILI is nontrivial at this point in time. And just in addition to your response to the previous question, could you provide us maybe a per member per month number that you tend to see for ILI during the flu season?
Stephen Hemsley
Generally we are not interested in getting into that kind of a level of a metric — the next thing you know we will be quoting quarter by quarter flu PMPM metrics. I'm not interested in responding at that level of detail.
I think suffice it to say that we have a tremendous amount of resource focused on monitoring our cost on that and mitigating them as best we can, but also responding to the needs of customers. During these kinds of times, I think our programs, as it relates to influenza both on the vaccination and so forth are quite progressive and I think that we have had a pretty good handle on these costs through the course of this year.
We have provided for them in the fourth quarter. I don't know if anybody can fully predict how an effort like this is going throughout the country, but I think that we've done a pretty good job through the course of this year and I think that we will see how it plays out in the fourth quarter.
But I don't think we really should be responding on a kind of PMPM basis on a particular item as variable as this might be.
Operator
Your next question comes from Lee Cooperman with Omega Advisors.
Lee Cooperman
I'm sorry to go this place again because we've discussed this in the past, but you run a very fine company, but your capital management is just way off base. If I was a director of UnitedHealthcare, I would be paying a recurring dividend, particularly in this environment where there's an above average amount of uncertainty.
You constantly reference cautious about a challenging economy, et cetera, et cetera — what do you think your stock would sell at if your board of directors approved a 40% payout of your guidance number 315 for this year? I calculate that to be a dividend of $1.26.
The S&P 500 yields 2.2%. $1.26 dividend and a 4% yield, your stock would be trading at $31.50, up 26% from where it is.
So I think your capital management program is depressing the value of the stock and it's as simple as that. We've had this conversation before and sometimes it pays to turn a leaf and take a new policy.
I have in front of me the results of your historic buyback programs and it really hasn't really done anything for the shareholders. I believe we have spent $15.6 billion from 2005 to the end of the second quarter of 2009 and average price of $43.93.
So it's really not done anything. There is consistent insider exercise of options and sales with the exception of the CEO which I admire for his large stake, but it seemed to me if you paid a dividend of 40%, that would still leave you 60% of $5 billion with $3 billion to build the business, to buy back shares, and to do other things.
And I think for ac company that size to take a 100-0 approach, meaning no dividend and all directed to repurchase where the repurchase has been kind of flawed and miscalculated, there's a mistake. And I say this constructively because I admire you guys.
You run a very fine company, but I can't find many companies of that size that don't pay dividends. It just seems to be in your industry and in your industry they all exercise options and sells while the company says our stock is undervalued and we're buying.
So I'm sorry if I'm overbearing, but it's getting very frustrating to me that you respectfully take the questions, but I don't get a good answer why there's no cash dividend of consequence. Your shareholders are suffering from coupon shock, there is no return on short term —
Stephen Hemsley
I think I have the nugget of your question on this.
Lee Cooperman
It's not a question. It's actually a statement.
Stephen Hemsley
Oh, I am very much aware of that and if you would allow us to respond, I think we have tried to have —
Lee Cooperman
Thank you. I'm interested in your response.
Stephen Hemsley
— constructive conversation with you on this. We do appreciate and respect your point of view and believe it is not solely yours and that it is the point of view of others as well.
We think it's very important in terms of the deliberations about capital structure, particularly in the backdrop of a challenging economy, an economy that could be challenged for a considerable period of time, and an unknown around healthcare form, and I think that we have taken steps in terms of the positioning of our investment portfolio, the positioning of our overall capital structure relative to debt, the reduced level of share repurchases that were made in 2009, and I think that as this runs its course, healthcare reforms clarifies to some extent, we will then look at what the capital structure should be going forward and I think that's the way we responded to you in the last —
Lee Cooperman
No. But there's a big difference.
Stephen Hemsley
Healthcare reform is not yet really —
Lee Cooperman
You spent $1.6 billion in buying back stock. What is the difference in spending $1.6 billion in buying back stock and having the money leave the company that way as opposed to spending $1.1 billion and paying a cash dividend and let your shareholders decide what to do with the money.
You've given out the $1.6 billion.
Stephen Hemsley
You'll allow us to go through a thoughtful process relative to where our capital should be allocated going forward, given the diversity of our business, how healthcare reform could play out across the spectrum of our businesses and market opportunity. We will then set a capital direction going forward which may very well include the dividend, but I'm not committing to that at this point in time and I think that we could all, at this point in time, for the general timeframe around what healthcare reform in terms of this phase might be in terms of timing, and that's our response.
Lee Cooperman
But do you understand that the $1.6 billion in stock repurchase is a form of dividend? You are giving out the money.
It has left the company forever. You gave $1.6 billion.
$1.26 dividend would be a bit —
Stephen Hemsley
I appreciate your point. I think we've responded and as I said, we respect your point of view and the point of view of others on this and we will take this up when the reform period runs its course and we have better clarity with respect to what our capital structure need might be going forward and I appreciate your input.
Next question, please.
Operator
Your next question comes from Scott Fidel of Deutsche Bank.
Scott Fidel
Just trying to get some for the reform exposures in context, can you just walk through what the number of individual numbers that you have currently are? And then in the commercial business, what your breakdown in enrolment is relative to a small group, less than 50 lives, versus bigger groups.
And then just as a followup to that, just if you have any estimate on what percentage of your members might be exposed to this high value dollar tax that they're proposing on the Cadillac plans and how you think the market would potentially respond to that.
Stephen Hemsley
This might go into the category of areas where things are so open and fluid right now, I'm not sure that's fully appropriate to respond to that, but Simon, do you want to give a sense of where things are on those and then to the extent that there is a response in terms of membership, Gail, a response?
Simon Stevens
Yeah. So, Scott, obviously we're not going to speculate at this stage given the situation’s still very fluid and sensitive.
The Cadillac tax proposals alongside other tax proposals are just one of several competing versions of how to fund health reform and nobody knows at this stage exactly what will emerge from the congressional debate that is still to come. But on the general question of impact, obviously the Congressional Budget Office, the Joint Committee on Taxation has said that ultimately the taxes wind their way through to consumers either directly in consumer prices or in the form of reduced benefit, and that's the experience of course in states where the premium taxes exist, as Steve said in his opening comments.
Gail Boudreaux
Good morning, Scott. In terms of the numbers, the end of the third quarter we had 4.1 million members in the combination of both small businesses and our individual market.
And as you might recall, our small business includes members from 2-99 lives.
Operator
Your next question comes from Ana Gupte of Sanford C. Bernstein.
Ana Gupte
Good morning. My question is about COBRA.
You didn't say anything about COBRA and its contribution to the upward pressure on your commercial MLRs. So could you give us some specifics on what percentage of your commercial (inaudible) right now, what MLR it's running at, and then going forward into 2010, do you see at least in the back half of the year, some tailwind as the stimulus subsidized population starts to roll off?
Gail Boudreaux
Hi, Ana. Let me put a little bit of context around COBRA.
I think as we talked about on the last couple of calls, our COBRA membership has continued to grow over the nine month period. We started the year at about 1.5% and we're now over 2% of COBRA in total and we continue to track that certainly as unemployment continues.
In terms of the take-up rate of COBRA, that take-up rate's remained relatively consistent, but we do think that the stimulus has certainly had an impact on COBRA. Overall as we think about the wear off of stimulus, at this stage we don't really have a prediction on COBRA declining dramatically.
I think we'll have to see how unemployment continues to track along with attrition. In terms of the overall cost structure, we feel that we've still got it covered within our medical cost ratio of 84 plus or minus 50 basis points, so we continue to follow that.
And we've also been watching those members quite closely and trying to get them involved in our care management program because we think we can add real value to them in helping them manage their care.
Operator
Your next question comes from Doug Simpson with Morgan Stanley.
Doug Simpson
Hey, good morning, everyone. Steve, you mentioned in your prepared comments the cross subsidy arising from the differential provider payments from the commercial and the government payers and I'd just like to be curious your sense as to how well understood this is by employers?
And if you look out three to four years, how does the industry manage that dynamic with those employer customers as that subsidy potentially expands because of things like the industry tax, the $6.7 billion being proposed. I mean, do they realize where their payment rates are for providers versus the government?
Do they fully understand that differential? And then just from a customer relations standpoint, how does the industry manage the expansion of that over the next three to five years?
Stephen J. Hemsley
Well, I think the answer to that somewhat varies by the size and sophistication of the customer, but I would say on the upper end of our customer base, they do understand it and understand it increasingly well and I would suggest that the activities that have been going on over the course of the past year in terms of the national reform debate have elevated the consciousness of this and employers are quite engaged with respect to their concerns about the level of cost shifting and the cost shifting that may occur going forward. So I think the larger employers are already attuned to this.
Their sensitivities have increased, and I also believe it is moving down market as smaller companies are realizing that impact. We do see employers engaging and participating and expressing concern with respect to the overall cost elements of the, at least the proposed legislative initiatives at this point in time, and the amount of shifting that they represent in terms of coming into the private sector to support the expanded program.
And so I believe that they are getting increasingly engaged on this. How we work with them continues to be an advocate of a more modern system, a more reform system where there is good transparency with respect to cost and accountability and to really get behind the kinds of things in reform and modernization that we have been advocating in terms of focusing on cost, changing the way care is paid for, moving away from volume and more towards value, and employers are embracing that.
And more and more are amenable in participating in programs where these new, more modern approaches, are engaged. So in some respects the sensitivity or visibility on this has actually increased the amount of innovation and change.
I don't know how else to answer you beyond that, and I also think it's going to be sustaining. I think that employers are dedicated to maintaining benefits and to do it in a progressive way, and I think the reform activities have kind of brought a new energy into that.
It is a challenge, but I also think we've got a lot of solutions for it.
Operator
Your next question comes from Michael Baker of Raymond James.
Michael Baker
Thanks. I was wondering if you could give us some additional color on the 2010 commercial selling season?
It sounds like it went better for you. If you could give us a sense of some of the underlying factors in addition to service improvement, whether it be Optum or where you stand relative to discounts, particularly in light of the renewed focus on trying to widen that gap?
Stephen J. Hemsley
I'll ask Gail and maybe Dawn Owens to respond a little bit to these, but again we are, at this point in time, giving just broad direction so our response is going to be more thematic.
Gail Boudreaux
Yeah. Good morning.
I think as Steve mentioned, we're still in the middle of the 2010 selling season so these comments are definitely thematic. As we look at the season though, I think the key thing, particularly for our larger employers, were around strong network, strong cost division — I think they very much value clinical programs, ability to use data to drive healthier behavior.
I think we feel very good positioning around our service improvements. Our metrics are at the best they've been.
We've also present a lot of time in terms of positioning our products at the local market and that's paid off. There is a real focus on affordability and I think our leading position in consumerism has really helped as employers look to make sure that employees are engaged, thinking about healthier behaviors.
Some of the emerging trends which I think tie very well to our innovation agenda, thinks like our connected care, employers are looking at on-site clinic, for example in biometric testing. And again, this is all to drive better outcomes to help manage the cost curve.
So as we look at that across both large and small employers, you see a real focus on affordable products, and I give you two examples. We launched a product catalyst and are simply engaged in our local market and I think we're seeing some very nice traction in that.
And on the national accounts we're also seeing, in addition to unit cost focus, a real focus on driving better behavior across our clients. And Dawn maybe has some comments around Optum and the kind of things you're seeing too.
Dawn Owens
Sure, Gail. Thank you.
As we approach the selling season, we saw a couple of things that I would note. One is because of the interest around cost management, we saw an increased level of activity around the products and services that we offer.
From wellness prevention to really integrated solutions that get at transparency, consumer behavior change, and ultimate cost management, better decision making, better outcomes. And I think the capabilities that we're able to deliver, whether it's our e-Think platform or the integrated clinical behavioral model really not only help UnitedHealthcare in their selling approaches in the commercial marketplace, but also our independent selling efforts to large employers, state based programs, and even independent health plans.
Operator
Your next question comes from Peter Costa with FTN Equity Capital Markets.
Peter Costa
Hi, good morning. I just want to get a little more clarity on the 2010 guidance if you can.
You talked about giving or targeting the same margins in Medicare and having that approved in your rates. So are you expecting lower membership in Medicare there then to contribute to the lower earnings for next year?
And then on swine flu, can you give me sort of how much you expect swine flu or H1N1 to affect the numbers in 2010 on the commercial side?
Stephen J. Hemsley
Sure. I don’t' know if we can offer specifics on something as granular as swine flu in 2010, but Larry, I might ask you to respond to Medicare.
Larry Renfro
Sure. Earlier when we talked about the 5% rate cut, that was the number that we were talking about that's the gap, and I think that our position on what I'll call the growth for next year, it's early innings for us to give a firm commitment or a thought on this, but I will give you a direction and that is we believe the industry is going to grow and we believe that we'll grow slightly, but it won't be the type of growth that we had in 2009.
Operator
Your next question comes from Matthew Perry with Wells Fargo.
Matthew Perry
Hi, good morning. Some of your peer companies have talked about an issue with provider upcoming or revenue maximization from provider groups.
Wondering gif you're seeing any of that in the third quarter and whether if you are seeing it you could spike out whether it's more prevalent in Medicaid, Medicare, or the commercial business?
Stephen J. Hemsley
I might ask Mike to respond to that.
Mike Mikan
Hey, Matt. I would start with — we have seen coding intensity in our cost trends for years now.
That hasn't changed per say. We monitor it regularly.
We analyze it by major category on an inpatient outpatient and physician level. We analyze it by type of service as well as admission by geography and by line of business so we've got a good grasp of this with data over time so we understand where there are variations.
From time to time we do note variations whether in a local market or by a line of business or type of service. We aggressively manage where we note those variations, but in aggregate, we're not seeing any increase in the weight of change in coding intensity.
Operator
(Operator's Instructions) .
Stephen J. Hemsley
Well actually, if there really aren't any more questions, maybe we should just wrap this up. I want you to obviously be aware that John Penshorn, Mike Mikan, and others, will be available through the course of the day for questions.
I thank you for your participation in the call today. I can assure you that we are very focused enterprise.
We're focused on performing. We have been aware of the challenges through the course, as far back as the end of the first quarter in terms of what 2010 could be.
We have some real traction on those, but we're being realistic about the overall climate that we're in and I assure that we will put our best performance into 2010 and are hopeful that the reform efforts proceed in a constructive way that really does advance the agenda for the entire nation. So thank you very much for your participation this morning.
Operator
Thank you. This concludes the conference.
You may now disconnect.