Jul 20, 2010
Operator
Good morning, I will be your conference facilitator today. At this time I would like to welcome everyone to the UnitedHealth Group Second Quarter 2010 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be question and answer period.
(Operator Instructions). We request that you do not utilize a speakerphone or headset if you will be asking a question.
This will aid in a better quality listening environment. For purposes of getting to as many participants as possible we also ask those with questions to limit to one question per person.
As a reminder, this conference is being recorded. This call and its contents are a 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 the non-GAAP to GAAP amounts is available on the financial reports and SEC filing section of the Company's investor's page at www.unitedhealthgroup.com.
This call contains forward looking statements under U.S. federal security's 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 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 July 20th, 2010 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.
Stephen Hemsley
Good morning and thank you for joining us today. This morning we will share with you a review of our second quarter performance, a brief assessment of our 2010 performance at the halfway mark and some early themes for 2011.
In the second quarter we again delivered consistent, positive performance across our businesses. Customers and care providers are seeing and responding to the increasing benefits of our steady focus on fundamental execution, coupled with the advantages of our scale and our commitment to the steady advancement of practical innovation that translates to more affordable cost and a better healthcare experience for them.
Collectively these drive value for our customers, consumers and the healthcare system in total and they anchor our growth in financial performance. Second quarter financial results were once more highlighted by stronger than expected revenues, related to stronger overall business growth.
We earned $0.99 per share, down slightly on a sequential basis, due to the greater level of favorable reserve development in the first quarter. Second quarter cash flows from operations of 723 million brought our year-to-date cash flows to $1.9 billion.
This morning we will update our full year 2010 financial outlook. We now estimate 2010 revenue of about $93 billion, up approximately $1 billion since our April call and an increase of more than $2 billion over the December revenue forecast.
Despite the weak U.S. economic environment, we're driving to a full year organic revenue growth rate of 6%.
Once again in this quarter, four of our businesses had year-over-year revenue growth in access of 10%. We now expect full year net earnings in a range of $3.40 to $3.60 per share, led by diversified revenue growth and continued operating and medical cost discipline all supported by the advancing benefits of our scale.
Let's turn to an update of our two major business groups. We believe our health benefit businesses serving the employer, individual, Medicare and Medicaid in community program markets, all gained market share this quarter and delivered revenues of $21.6 billion, an increase of 7% year-over-year.
Operating earnings increased to more than $1.5 billion. In the public and senior sector, we added a net 165,000 consumers in the quarter, bringing us to a total addition of 800,000 people served through the first six months of 2010.
Better than expected growth in Medicaid, Medicare Advantage in Part D is driven our portfolio of strong consistent and reliable benefit offerings, in tune with the distinct needs and local market preferences for the communities we serve. Our team is steadily improving cost management in Medicare and senior products while advancing the consumer service experience and above all preserving the benefits seniors care about the most.
Our sales and distribution processes have worked more effectively this year than ever before. In Medicaid, our positioning as a committed community-based organization that cost effectively provides quality care in local communities is translating into growth.
Economic weakness continues to move people to state sponsored programs but we're also growing through new contract awards such as our recent success in Mississippi. Operating margins expanded year-over-year both in the quarter and through six months to an increasingly effective cost management and the advantage that our operating scale provides in this weight constraint state budgetary environment.
Perhaps, most significantly on the commercial benefits side this quarter, we grew by 70,000 people, led by growth of 95,000 in risk-based offering. Nearly two-thirds of our local markets grew risk-based membership and nearly half of our markets generated fee-based growth in the quarter.
These methods show the steady advancement of a strong turnaround from this time last year. There are a number of reasons for this momentum, even in the face of a challenging economy.
We are using ever improving local market focus and engagement while leveraging the advantage of our national scale to deliver more specific, market relevant and cost-effective products at affordable price points. Our consistent accurate and responsive service is now emerging as a distinctive strength.
Customer retention is strong with year-over-year improvements in every line of business and every region for our risk-based offerings. Product innovation has resulted in strong performance from newer, more affordable consumer engaged designs that deliver increased value to both employers and consumers.
We are appropriately managing medical and operating cost in a more effective consistent systematic fashion and this success further improves customer value and growth. For the full year 2010, we now see overall health benefit revenues of more than $86 billion, a 6% increase over 2009.
Rough make up of those revenues would be nearly 41 billion in commercial benefits, nearly 36 billion in Medicare and senior offering and a full 10 billion in revenues from our Medicaid business. Our health services businesses include OptumHealth Ingenix in prescription solutions all of which worked to modernize and advance healthcare as a system.
We help drive better medical outcomes while lowering costs, deliver more efficient and consistent access to healthcare resources and advance consumer education, engagement and care provider performance. Our offering support the millions of Americans who work inside the health system to make the system perform more effectively and consistently.
Our health services businesses continue the momentum we brought into 2010. Second quarter combined revenues grew 16% year-over-year to $6.2 billion and combined earnings from operations of $357 million were once again better than we had expected.
Ingenix continued its strong growth spreads, second quarter revenues increased by $108 million or 26% with growth driven by the companies increasing government and care provider business opportunities along with some small acquisitions. Revenue backlog increased by a $117 million year-over-year to 2.3 billion, the portion of our backlog that we expected to deliver within the next year grew 15% year-over-year to more than 1.6 billion [ph].
Ingenix results include roughly $20 million year-to-date incurred in startup and development expenses for offerings to new products in markets both domestic and overseas. OptumHealth grew its revenue 7% year-over-year led by public sector contract awards and third party market growth which has been the pattern for the past couple of years.
OptumHealth operates critical components of our health services business platform on both consumer and care provider dimensions. Through OptumHealth we connect patients and physicians using evidence based information, technology and personalized outreach that help drive better health outcomes.
OptumHealth is increasingly engaged with physician and other care providers in more integrated care delivery. For example, our Colorado Connected Care Telehealth Network links to Denver based Centura Health network physicians with four rural health centers to deliver specialty care to medically underserved community and we are expanding our information and care delivery capabilities to other settings such as through various medical group partnerships, our own expanding clinical operations in the South West and our Evercare Geriatric Nurse Practitioners.
OptumHealth’s effective applications to those widely varied settings illustrates our growing capabilities to adapt to the diversity of care delivery settings in the U.S. Ultimately, this deeper integration into direct care setting driven by information and system based processes will enable us to improve the cost and quality of care delivery regardless of care venue or ownership structure.
OptumHealth in our broad health services platform are critical to this effort. Like Ingenix, OptumHealth has invested more than $20 million so far this year in start up and development expenses in support of expansion capabilities and products serving the new healthcare markets we see emerging post-reform.
Prescription Solutions continue to grow at top-line with 19% year-over-year revenue increase in the quarter with normal PBM margin levels. Some of you recently toured our direct mail facility in Kansas City and saw the modern operating technologies and high performance platform that serves our PBM customers.
Prescription Solutions continues to make right investments to position the company for innovation, improved clinical and benefit integration and continued growth. We are affirming 2010 growth expectations for our health services businesses after increasing them just 90 days ago, and expect our combined health services revenues to grow 13% around $24.5 billion in 2010.
Looking at UnitedHealth Group's consolidated results, second quarter revenues of $23.3 billion increased 7% year-over-year driven by stronger organic growth across virtually all of our businesses. Our UnitedHealthcare clinical management and care management efforts continue to show positive results.
Medical cost performance is favorable to our expectations. The second quarter result is building steadily on the progress from our first quarter of this quarter and the second half of 2009.
External factors also influence this outcome year-to-date including the more moderate flu season this spring and lighter overall system used in the northeast in the first quarter due to winter storms. The second quarter consolidated medical care ratio of 81.5% reflected these internal and external factors and was also impacted by $270 million in favorable reserve development, as compared to $30 million in last year's second quarter.
We expect to see greater healthcare consumption in the second half of 2010 after a moderate initial six months this year, and as we experience the typical seasonal increase in cost under high deductible policies, which continue to grow, and represent a larger share of our commercial risk business. We also anticipate slight uptick in medical costs in the fourth quarter due to healthcare reform related benefit mandate, and are including the ramp up of those costs in our 2010 outlook and forward pricing model.
We project this year's UnitedHealthcare commercial medical care ratio to be in the range of 83% plus or minus 50 basis points. Our consolidated second quarter operating cost ratio of 44.4% was well within our expectations and reflects the strength of our service, quality, operational integration and cost management discipline.
As noted earlier, our updated UnitedHealth Group 2010 outlook puts consolidated revenues at about $93 billion. We see our consolidated medical care ratio at 82% plus or minus 50 basis points and operating cost in the range of 14.6% plus or minus 30 basis points.
We expect to see increased operating cost in the second half of the year due to the shortened and intensified Medicare Advantage selling fees. We expect operating earnings of 6.6 billion to $7 billion for the year with operating cash flows approaching $5.
We expect net earnings per share will increase year-over-year to a range $3.40 to $3.60 per share. We expect to fund about $140 million in dividends for the quarter and the repurchase up to $2.5 billion in stock this year.
As always share repurchase can be affected by a number of factors including the level of business expansion activities that occurs. We continue to look for opportunities to expand our health service and businesses.
Currently, health services contribute about 20% of our operating earning. We think that it is underweight relative to our opportunities in that factor.
Pursuing our natural areas of interest and confidence and health services could move it up toward a 30 to 40% range of operating earnings over the longer term. On health benefits side, we're likely to be more opportunistic in assessing mergers.
Health net of the northeast is a great example of an opportunistic transaction with a positive outcome for all parties involved. Looking forward towards 2011, there are some clear head wins which are virtually all external.
They include an uneven and jobless economic recovery, continued low interest rates which effect the earnings contribution from our cash and investments and in certain view of the state Medicaid rate environment given the pressures on state budgets, a comparatively more modest net decrease in federal Medicare rates than in 2010, increased medical and operating cost pressures related to the affordable CARE Act, the Mental Health Parity Act and expenses to prepare for compliance with the federally mandated ICD-10 [coding] HIPAA 5010 standards. We also won't have visibility on the potential impact for minimum Care ratio regulations for our commercial business until the Department of Health and Human Services announces its guidance.
The list of positives heading into 2011 reflects an organization executing for its customers with rapidly advancing consistency and value. Our revenue growth rate is accelerating and we believe we are gaining market share as we aggressively and broadly address fundamental affordability.
We are managing medical costs ever more effectively and consistently and we have outlined areas for further improvement in coming years. We are moving quickly on our plan to remove $1 billion in operating costs over roughly four to five years and are working on a patch to exceed that amount.
Across the board, our health benefit businesses have improved our local market focus and value and cost positions. This has advanced customer satisfaction, retention and growth, which provides scale advantages to our services, operations and cost structure.
The health services businesses should benefit from both the affordable CARE Act and stimulus funding as it eventually is deployed. Our balance sheet is strong and we continue to have good financial flexibility and we continue to nurture a broad pipeline of innovation at many levels inside the businesses as well as a natural market adjutancy beyond the edges of our businesses.
Sustaining and strengthening our culture of innovation, innovation that is practical and benefits customers, Care providers in the healthcare system overall is critical to our future. We have asked one of our most entrepreneurial operating executives, Rick Jelinek to lead our new emerging businesses group and Rick will be joined by other talented executives with strong entrepreneurial backgrounds as well.
This group will focus on translating internal innovation for applications beyond our businesses current week as well as helping to drive external innovation through our venture capital relationships and investments. Jack Larsen will assume Rick's role as CEO of the Medicaid business while Tom Paul is becoming CEO of the Medicare business.
Both of these individuals will continue under the overall direction of Larry Renfro and Tony Welters. These and other changes will come forward as the year progresses and we continue to adapt to the changes we anticipate in the new American Healthcare market.
In conclusion, we serve the full spectrum of the market and we offer the advantages of scale in an innovative and service oriented culture. You can literally see us adapting as an organization to the new demands of healthcare policy, the new American healthcare markets that are being traded and the new opportunities they will bring.
That includes strategic and movement of leadership, changes in capital investment priorities, a progressive maturing of our dual platform strategy of health benefits and health services and continued prudent balance sheet management. Our long standing mission remains unchanged, to help people live healthier lives by making healthcare work better for everyone.
We are interested in your questions this morning, which I will hold one per analyst so we can speak with as many of you as possible in the limited time we have. We will also have an opportunity to discuss our businesses and our 2011 outlook rater in greater detail at our investor day, which will be at New York on Tuesday, November 3rd -- November 30th, excuse me.
So let me repeat that; on Tuesday, November 30th. We don't want you showing up there on the 3rd.
I will now turn this call back to the moderator to take control of the questions and answers. Thank you.
Operator
(Operator Instructions). Your first question comes from the line of Christine Arnold with Cowen.
Christine Arnold
Good morning. My question relates to reform.
You indicated that reform in Mental Health Parity will likely increase the trend. How do you think about that and can you give us some examples of what you're doing to mitigate that and to make it more predictable?
Stephen Hemsley
Yeah. Christine, as you can appreciate, that answer varies greatly across the different settings and the end use.
So there is kind of no pin point answer to that, but I think Gail Boudreaux is probably best positioned to respond to that.
Gail Boudreaux
Good morning, hi Christine. It's Gail Boudreaux.
In terms of your second part of the question which is how are we mitigating some of the trend, I think the focus -- our focus has been on affordability and overall how we manage that affordability with our employers. So we continue to be very disciplined around cost management, managing unit costs and working with our employers around different solutions, around product offerings.
Lean products have been particularly important this quarter, where we saw very nice growth in those areas. Our simply engaged products grew by 78% as one example of that.
We're also seeing interest in value based network type products and I think those have begun to gain traction again in many of our markets across the country. So if I would summarize it, I think it's a couple of things, that our product placement in local market and it's our ability to help our employers manage their medical costs both through our care management program, some of our disease management programs and the last thing is the engagement of the employees themselves if they're interested, how do we get those employees engaged to biometric screening and other things?
So it's pretty much a combination of all those things, as employers look to manage their total cost structure.
Christine Arnold
Okay, thank you.
Stephen Hemsley
Thank you, next question.
Operator
Your next question comes from the line of Joshua Raskin with Barclays Capital.
Joshua Raskin
Hi, thanks and good morning. Also reform related, I guess, could you talk a little bit about maybe the spending.
I think you mentioned in some of the segments, some investments that you're making. But I wonder if you could break out what your investment spending is regarding reform this year and then if you could help us understand what the impact is on the 2011 selling season, are you seeing different patterns emerge from employers and benefit managers?
Stephen Hemsley
I think we'll parse this up a little bit. I might ask Mike to offer a view about our total level of spending.
I think have been keeping that in check and we are kind of deployed across our businesses with respect to healthcare reform. And then I think as terms of examples, I might ask Andy Slavitt and Dawn Owens to give some of the examples of its kind of efforts we're making in terms of investments.
Mike Mikan
Hey Josh, this is its Mike. Steve laid out in opening comments investments that we are making broadly speaking within Ingenix and OptumHealth, I'm not sure I'd would like to quantify all of those is you know health reform and our business growth prospects are pervasive across all our businesses.
We make investments every year and it's all with the idea of growing our businesses, so, we laid out some examples for you, but I wouldn't want to quantify them as obviously it's a very diverse business. That said, if you just look at our operating cost, we're well within and even better than our original expectations.
Remember at the Investor Day, we laid out an operating cost target of 14.8% plus or minus 30 basis points. We reduce that as we teamed into the year managing our cost better than we had set our plan to.
We continue to drive productivity improvement. So, all of these investments are embedded in that and are offset with the productivity gains that we're making, we're going to continue to drive that into the future.
Joshua Raskin
Okay and then the 2010 selling season?
Mike Mikan
Just one second, Andy and Don, you want to offer a couple of examples?
Andy Slavitt
Sure. Josh, hi Andy Slavitt of Ingenix.
So, Ingenix's second quarter continue to see strong growth, at 26%, Steve, I think remarked that we've had year-to-date about $20 million in investment so far through the year in the areas you might expect. I'll pick two, EMRs and meaningful use and program integrity and fraud prevention are two strong growth areas.
So, we continue to see a high growth horizon, and also we're planning to continue to invest heavily in the opportunities to get us there. Don?
Dawn Owens
Yeah, and then from the OptumHealth perspective, we're looking at how the opportunity exist to get closer to the actual care delivery system, if you look at what everybody is looking for its integration of cared, patient-centered care and so forth. So how we take our tools and our capabilities and build them into the healthcare system to optimize both the access of care as well as the delivery of care.
And the Centura Health System example that was sited earlier in the opening remarks of the call, is a wonderful example of where we see the transit, translation of what we've been doing in the commercial marketplace with employers that can really help and apply in the direct health delivery stage as well and so, that is really where our activities in efforts of focus within OptumHealth.
Stephen Hemsley
Josh, give me 2011 again, what is your question?
Joshua Raskin
It's just with the impact in reform on the 2011 selling season, are you seeing different patterns behavior from your employer groups and your benefit managements?
Stephen Hemsley
I think I had offered two versions to that, Gail, may be on the commercial side, but then I think we should be talking about the government side because of the change in the selling season on that, Gail?
Gail Boudreaux
Good morning, Josh, in terms of the 2011 season, behavior pretty consistent with what we're seeing. Employers are focused on managing their total cost and as I said a few moments ago it's really all about affordability.
We're in the midst of the 2011 season right now for national account though, from that perspective, again, we're seeing three things. Total cost management focused on getting in price engage and getting more value out of the programs that they have, so they are very interested in the care management with this management program and so that behavior has been very, very consistent.
And we're obviously working with all of our employers to make sure that we implement the provisions that go into effect in September, as part of the renewal process.
Tom Paul
Josh this is Tom Paul and regards to the Medicare program I think as you are aware the open enrollment period beginning January 1, going to the March 31 for this next selling season is eliminated. So, that is requiring us to move much of our sales into the annual election period which begins on November 15 and concludes on December 31.
But it is requiring us to really to move much of our preparation and on boarding of sales agents and marketing materials etcetera at an earlier stage but we are well positioned to accomplish that. The second thing that I would bring up that is important for this selling season is the special election period that will incur as a result of the change over and the Private-Fee-for-Services marketplace throughout the industry and as a result beginning in on October 1 there is a special election period for individuals and plans that those plans won't exist after '11.
Stephen Hemsley
So, I would like to win on but I would say in total that I think we are well prepared and we expect to pretty responsive marketplace. Next question please.
Operator
Your next question comes from the line of Matthew Borsch with Goldman Sachs.
Matthew Borsch
Yes I was wondering if you can talk about how your pricing on the commercial risk products has evolved during the year. Clearly the trend that you were experiencing in the second half of last year was at least it seems was significantly higher more pressure than what you see if you actually brought down your pricing and I am asking it partially does it looks like the yield is lower or is that a more of a function of product mix and where you see that going in the back half?
Stephen Hemsley
I think Gail is probably best to respond to that.
Gail Boudreaux
Good morning. In terms of, there is a couple of points to your question, one is as with the yield question first, that is a results of the change in mix and if you think about yield it's a combination of geography line of business, customer segment etcetera.
Our medical cost as you can see from our results have been very consistent over the last several quarters but we continue to price the same way we have which is to that forward view of our medical cost.
Matthew Borsch
Okay, so you wouldn't characterize it necessarily the way that I have with sort of step down function from second half '09 to first half of this year.
Gail Boudreaux
It's really a mix issue and as you know we have put a lot of new products into the market as well, some of those have a benefit design and again we are pricing to what we believe is our view of the cost in those products. So, it really is a part of mix both geography and product as well as market customer side.
Matthew Borsch
And were you seeing a meaningful change in the employer appetite on the risk side for the linear benefit products?
Gail Boudreaux
We saw a quite bit of growth this quarter. We are really pleased with the growth we saw as you saw from our results of 95,000 of fully insured growth.
A lot of that growth did come from linear products where employers particularly in the small end of the market are very focused on managing their overall cost. We also saw a nice uptick in our employer retention numbers which again I think is an example of our ability to offer them a suite of products where they can offer multiple choices to the employees but yes that has been a very positive improvement in our positioning in the market place.
Matthew Borsch
Okay. Thank you.
Stephen Hemsley
Thank you and next question please.
Operator
Your next question comes from the line of John Rex with JPMorgan.
John Rex
Thanks I was wondering if you can just give us a little more precision on what you are seeing in the utilization trends in the first half, it appeared to be fairly light slack utilization trends, kind of what areas were surprising to you? And then as you look at the second half, obviously you are looking for a significant uptick there and so maybe like aside from the seasonal impact two-tier utilization commercial books what elements you think will drive utilization higher in the 2H?
Stephen Hemsley
I think maybe Mike --
Mike Mikan
I will start from let's say a broad perspective John. We last year at the end of the year; we had anticipated the flu season, H1N1, we expected a normal flu season within Q1 of this year.
We have as you've seen through our prior period development, we've seen that true up favorably, that continued into the first quarter as we had a lighter flu season. We did have the storm impact in the northeast that Steve had mentioned, and then frankly we've just seen lighter utilization across all cost categories.
We are now expecting our trend to come in favorable to what we had originally estimated at 8% plus or minus 50 basis points. We would revise that to be more in line with 7.5% plus or minus 50 basis points today, and again that's really utilization across the board.
I'm not sure I would isolate anyone individual item, there are many. I would know though that unit cost pressure continues to be the principle driver of trend, but that being said, we are seeing favorable utilization.
And with respect to the latter, the second half of the year, we always see as you know an uptick especially in our commercial line of business as a result of the deductible wear-offs, so there’s seasonality, and we should also mention that lighter flu season that we saw in the first half. Obviously, we don't expect that to replicate in the second half.
So, we’ll see an uptick in our medical loss ratio as we always do in our commercial business in the second half of the year.
John Rex
And are bed days running negative at this point, commercial bed days?
Mike Mikan
I would say we continue to improve our bed day performance year-over-year. I would say they are flat to slightly down, and even driving that.
A lot of that is directly related to the clinical programs that we've implemented over the years, and we continue to see improvement.
John Rex
Thank you.
Stephen Hemsley
Thank you, John and we will go to the next.
Operator
Your next question comes from the line of Justin Lake with UBS.
Justin Lake
Thanks. Good morning.
There are signals in the market that you’ve begun communicating with brokers on commission levels for 2011. I'm just wondering if you could share with us what you're thinking in regards to the timing and magnitude of the changes and maybe if you could give us any specifics on the individual versus the (inaudible) market?
Stephen Hemsley
I think that's clearly. Gail?
Gail Boudreaux
Good morning, Justin. On the individual markets, we did send a letter to our brokers because we don't know the ultimate disposition of the medical cost ratio, and we are concerned about the impact that could have on individual market.
We sent a letter in May indicating that there could be changes in January when we knew, when we know more about what happened. Brokers are an important part of our distribution channels in that marketplace, and the reaction of our brokers has been they are happy that we are being upfront with them.
But at this stage we haven't been specific as we just don't know what the true impact will be. In terms of the reception that we got from the brokers, we had a very good quarter in our individual business.
We grew, we got strong sales still and our distribution channel have been I think very positive for us, so that’s something that we continue to work on, and that's really -- we've seen the activity in that market, and many of our competitors have followed our lead in that regard.
Justin Lake
And Gail, do you have any kind of insight into when you think the HHS division there or at least the NAIC might be communicating the HHS’ recommendations on those MLR reports?
Gail Boudreaux
We don't know and we really can't offer an opinion on this at this stage. We're just trying to obviously stay flexible and stay communicating with our customers and our brokers about that but we don't know.
Justin Lake
Thank you very much.
Stephen Hemsley
Thank you and maybe next question please.
Operator
Your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.
Kevin Fischbeck
Okay, thanks. I was wondering if maybe if you could comment on the NAIC process so far?
Do you have any concerns regarding the resolutions that are passed so far, if there are any outstanding issues that you're looking forward to giving input on?
Gail Boudreaux
With respect to the NAIC process, we've been very involved in the process over the last few months in giving inputs to both the NAIC and Health and Human Services and appreciate that opportunity. You have been encouraged by what I guess I would characterize as broad day support and recognition from employers in particular as well as individuals in states about the need for cost containment and the value of the clinical program and the recognition quite frankly that the Care management, disease management programs have real value in the system, that they do three things, one they improve quality up here and help us reduce unnecessary costs and ultimately improve people's health.
From that prospective I think that's been encouraging and employers who are selecting and picking these programs have started to engage in the discussion and provide support about the importance of those programs. In terms of the overall definition, when we look at how it's defined, what the Health and Human Services does once they have that decision, again we really don't know and we'll be waiting for their input and to the final resolution of that.
Kevin Fischbeck
So are there any kind of house setting issues that you feel are some of the more important ones that we should be following?
Stephen Hemsley
Actually we don't. We are engaged in the process but it is their process.
The determination will be made and we expect it will be partially made. So I think that's all we really can offer on that subject.
We are all waiting to get a sense of what direction is given.
Kevin Fischbeck
Okay, thanks.
Stephen Hemsley
Thank you. Next question please.
Operator
Your next question comes from the line of Tom Carroll with Stifel.
Tom Carroll
Hey, good morning. How are you analyzing increased medical costs related to family coverage for children up to age 26 towards the end of the year and how much of your higher cost expectation in the second half of the year is related to that?
Stephen Hemsley
Maybe I -- I'm not sure we can answer that in a degree of precision because that is a pretty specific narrow question we have -- that kind of varies significantly about what were already in the benefits, what the books, how the books were already positioned on that. I don't know Gail if you have an observation on that but I'm not sure that we can really give you a precise answer to that question.
Gail Boudreaux
The only thing I would add to Steve's comments is that we're taking a look at this in the large group on a customer-by-customer base. It's obviously been different from where they are today versus what the provision impacts then has a range of answers and on the small end of the market we're looking at it by product-by-product.
So rather than give a specific answer, I think an awaited answer to that off flows, I think that would be misleading.
Stephen Hemsley
Tom I just want to make sure we're clear. All of those items are reflected in the revised trend that I just gave and also in the UnitedHealthcare loss ratio for the year at 83% plus or minus 50 basis points.
So we reflected those additional cost of the second of half in those forecast.
Tom Carroll
Okay, so in terms of magnitude this doesn't seem to be a, I guess what I would call a material unknown for you right now, is that fair?
Stephen Hemsley
I agree with that. That is not a material unknown we've incorporated that into our thinking going forward, or we've incorporated it into our benefits, pricing going forward and into our outlook.
So that is absolutely true.
Tom Carroll
Excellent; thank you.
Stephen Hemsley
Thank you.
Operator
Your next question comes from the line of Scott Fidel with Deutsche Bank.
Scott Fidel
Thanks, I wonder if you could provide an update on the implementation on the mental health parity regs yet. Just relative to the final reg which I know that there was some concern in the industry just around some of the rules included, and if you think that there is going to be any changes to how that business is ministered, or how plans approach managing behavioral cost because of the final parity rules?
Gail Boudreaux
Hi, the new rules went into effect in July of this year. They go into effect on the effective date or renewal date of the group, and so while we have some clients could have gone effective in July, the majority of our business goes into effect in January.
The areas of impact are both quantitative IED parts of the benefit plan design around cost sharing for consumers as well as non-quantitative to medical management network components, and we are very much on track with respect to our compliance with new directory with our customers, our health plans, and so worth making the appropriate adjustment to their plans into out practices to make sure that we are compliant, so that's concluded in our pricing, it concluded in our operating approach, and suddenly it causes employers and health plans to take a step back, look at mental health management in light of the broader health reform, and make some changes and adjustment, but I think we've been very much on the forefront both of communication, consultation and solutions with our clients to help make sure that they can maintain to focus the cost management and stewardship and support to patients in this very important area of service provision and coverage. So, we've been very busy to prepare for the implementation in the effective date, but at the end of the day it's just adjusting our model to make sure that they are confirming a new client.
Scott Fidel - Deutsche Bank And do you have an estimate of what the aggregate impact on behavioral cost trends are from the parity legislation?
Dawn Owens
It's not just towards the answer that you heard for Gail, it really depends on client-by-client, where they are coming from. We had a number of clients because of state parity regulations that were already very fully in line with many of the parity provisions that were impacted at a federal level, and so it can be extremely modest raw material depending upon where out client is along that spectrum.
Scott Fidel - Deutsche Bank Okay, thanks.
Stephen Hemsley
Thank you, next question please?
Operator
Your next question comes from the line of Ana Gupte with Sanford Bernstein. Ana Gupte - Sanford Bernstein Good morning, my questions are about two reform provisions on the small group markets.
So the first one is on Grandfather Clauses, I was wondering if you're seeing lower switching than you were seeing in five years in lower product design changes, so in essence maybe their retention is related to this, and potentially could change the role of brokers in that market? And the second question was on tax credits for small group low wage employees, did you see that to be a meaningful driver of membership growth membership growth going forward?
Stephen Hemsley
Gail?
Gail Boudreaux
In terms of the two questions, let me start with the Grandfathering question on the impact of small groups. The rules on grandfathering interim rules has just come out so as it relates to switching at this point, I don't think that we really know at this point the impact that that will have on small group.
On of the biggest concerns and I'll go back to this is affordability for small group customers and when you think about how the rules are written today, they can't shop or move their coverage, they can't change the precautionary provision and they're eliminating the math of taking change on deductibles. Given that the biggest driver organic affordability, I don't believe that, that is driving other retention.
I think it's really the offering in the markets run affordable product if we do see employers buying those leaner product designs, so I think that addresses the first question. And in terms of the second question on tax credit, we are supporting our clients with ways to calculate those credits, we think that there's an opportunity to help them in this marketplace, so we're working with small employers across the Board for them to take advantage of that where it's appropriate and we put in place, calculators and other support towards them.
So I think it's too early to tell what the uptick will be, but certainly we think it's an opportunity. Ana Gupte - Sanford Bernstein And are you seeing any switching from limited benefits plan to affordable plans you're putting out there with alliance you just announced on restaurants and potential well other groups as well?
Gail Boudreaux
The alliance with the restaurants I think the great International Restaurants Association is a great example of offering food at affordable price points and we just launched that. I think it's too early to tell.
We're very encouraged by the opportunity to reach a sect of employees that have historically been lower waged and have not had coverage, many of them, and we think that, that offering will be positive. We haven't seen a lot of switching in our normal market outside of when the benefit plans; we are seeing a lot of purchasing however it may plan.
So, the market is very fluid and again it's all based on total cost and affordability, particularly for this small employer. Ana Gupte - Sanford Bernstein Thank you.
Stephen Hemsley
Thanks. There is any prevailing trend that is usually the focus on the new plan, so that I think if anything in the marketplace, that would be the takeaway.
Next question, please?
Operator
Your next question comes from the line of Stuart Hosansky with Vanguard.
Stuart Hosansky
Good morning. Thank you for taking my question.
My question is your current debt total gap is around 30%. You've stated in the past that you have a target of around 40%; can you let us know what you are -- whether you've changed your targets and what your plans are in the near-term?
Stephen Hemsley
I would be happy to actually I've Mike answered the majority of this, but we have not changed or our plans or our appetite with respect to that. Our capital approaches and so forth remain as a -- have been and we think we have a very, very significant capacities within our organization.
Mike?
Mike Mikan
Stuart, I want to clarify. We have not -- said that our target is 40% debt to total cap.
We've said that we believe this business can support around the 40% debt to total cap level. Our capital position reflects our strategic plan, it reflects the strong diversity and growth prospects and we're going to manage it the way Steve has been discussing over the last several years, and we feel very comfortable where we are today, and feel comfortable as I said operating in that range that I mentioned.
Stuart Hosansky - Vanguard So we really, truly think we have capacities and can operate within a broader range than we have today and our positions on this are unchanged. Next question.
Operator
Your next question comes from the line of Peter Costa with Wells Fargo Securities.
Peter Costa
Hi, thanks for taking the question. Couple of things, first quickly the commercial versus the Medicare PPD can you quantify how much was where and second sort of a broader question in terms of the coming changes to the individual market with guaranteed issue coming and the premium support payments coming from the exchanges and then looking at the pressures on rates right now from the government as well as the MLR minimums in particularly the pressure there in the individual business.
Can you describe how you see that individual market evolving over the next couple of years, as we get to that, is that all going to change in 2014 or is it going to involve ahead of time I know some of what Rick has been doing with the exchanges might be part of your plans going into that. So, I would kind of like to understand more about how you see that evolving.
Stephen Hemsley
I think as it relates to reserves I will have Mike offer that and then we will get to the second part of your question.
Mike Mikan
As we said in the past we don't breakout development by line of business. What I can say is as we have seen in the last several quarters favorable reserve grew up across all the benefits businesses.
Stephen Hemsley
And Peter on the second part I mean that is, we have been focused in spanning across broadly the healthcare benefits markets for several years now. So, we have been looking across all the markets and see them in a more fluid state trying to basically take our cost positions, our service model, our information and focus them on how we could best serve those individual markets recognizing there is going to be movement across them and we think the exchanges represent potential in other opportunity to segment a market place and pursue them with our offerings and Gale maybe you want to add to that?
Gail Boudreaux
Peter in terms of the individual market and how that plays out in exchanges I think it's too early to predict. There is going to be a lot of variables that affect the commercial marketplace not at least of which is the economy over the next several years and quite frankly there is still a lot to be defined yet how the exchanges are going to operate.
One example we are already working in private exchanges, the great example is the National Restaurant Association and the individual market today sell through internet exchanges is pretty extensively. So, we have lot of experience, we are going to continue to work with other states if they bring up exchanges and we have seen that already in several states.
So, I think our approach we are going to try different product offerings, different ways to reach consumers, we are going to learn from that. We feel like we have some really good results over this quarter that based on trying different products again putting them in the marketplace, testing them, that we will learn really what consumers are interested as part of that and be prepared for 2014 when the exchanges come into play.
So, our approach is really learn as much as we can, test a number of things, really use our innovation agenda, and we have a very strong individual product portfolio today with some very nice traction and offerings that afford consumers a good price point. So, as I think about exchanges in the commercial market and individual, our goal is to be prepared as the rules are defined and as we test things in the market.
Stephen Hemsley
Maybe Rick you could give a few thoughts.
Rick Jelinek
Peter, Gail covered that very well from a individual standpoint I guess. I might add that in addition to the precursor elements that we participate in, in terms of online shopping tools in the individual and small group market we also interface with other intermediary type programs today, 1-800 Medicare.
There are various examples in Medicaid as it relates to enrollment brokers, and how we interface at the state level, and so balancing our experience with the regulated entities on the federal and state side would be more open market on the individual side is where we are bringing together our competencies to prepare for the future. But it's still new and there is a lot of information terms in rates that have to be written; even in the absence of those detailed regulations, we have groups inside our organization today that are beginning to flush out the participation requirements of the cases that we know about, and the ultimate positioning across the enterprise.
Peter Costa
Thanks so much.
Stephen Hemsley
Thank you. Next question.
Operator
Your next question comes from the line of Michael Baker with Raymond James.
Michael Baker
Thanks a lot. My question relates to the AmeriChoice business.
Back in the investor day, you gave a expectation regarding your rate outlook kind of low single-digit in light of state budget challenges and [FMAC] being in a balance so to speak, I was wondering if you are in a position to at least update that or timing on what you see now?
Stephen Hemsley
Jack Larsen?
Jack Larsen
Sure. Hi Michael.
So we did have a point of view at the Investor Day Conference, so low single-digit rates. As you all know state rate constraints have been something that are not new to us AmeriChoice.
We are in the same position we were then, we still expect those kinds of rates. Much of our rate increase for the balance of this year would be settled up here in the next 30 to 60 days, as states finish their own internal budget discussions, and we're working with them and making sure we stay close to that whole decision process.
Michael Baker
Thanks.
Stephen Hemsley
Next question, please?
Operator
Your next question comes from the line of Charles Boorady with Credit Suisse.
Charles Boorady
I wonder if you could expand on the scope of the new business group that Rick Jelinek will be heading up just in terms of the total financial commitment, and over what period you expect that to be deployed, just how significant could it be? And would these monies be expense as part of our internal development of new business or incubations, or do you see it being invested in, to show it up as an investment on your balance sheet if it's in the form of making minority investments in other companies or investment in venture capital funds that focus on health businesses you think are interested?
Stephen Hemsley
Well, maybe I'll start and then I'll ask Rick to comment as well, but really this stems from an increasing emergence of innovation really across all of our businesses as well as the -- I think a number of the opportunities that healthcare reform is really putting pressure on. I think those things and some of the questions that were asked earlier in the course of the morning were around enduring themes about new approaches to affordability, new patterns or opportunities in terms of getting access and distribution of product into the marketplace.
A whole spectrum of issues that you can only imagine from healthcare reform as well as our efforts to really expand and broaden innovation really across our businesses.
Rick Jelinek
In some instances, I think our capacity to take these kinds of thoughts and translate them into spawning new businesses that we needed to put more resource more focused, more dedication to that, and this is really an effort to do that that this isn't going to be a reporting business group. From a formal point of view, this is really a focus on getting some strong entrepreneurial resources focused on these opportunities and we expect that most of it will be largely expense in nature and kind of pulling these efforts together across our enterprise where we're already spending money.
Some of them could be investments. I hope you know that we already make a number of investments and invest in the venture community and invest in a number of other areas.
We have to plans to change in that agenda but maybe I'll get closer to it and have Rick and his team engage with it more directly. This is really making sure that we pool resources together to make sure that we optimize our opportunity as we continue to expand our innovation agenda and as healthcare reform opportunities emerge on the marketplace.
Mike Mikan
I guess I would just add Charles that over the last decade we built a very adaptable organization that can respond quickly to emerging opportunities in the changing market, an example that might highlight in the past then our response and I guess ultimate leadership position in areas such as Medicare Part D or consumer directed health plans, health banking, health technology and the like and like most of you we believe the pace of the market will quicken over the next decade and so this focus intent is to take advantage of that so that we can identify these opportunities early and act swiftly. And given that we are just creating a group, what the plan is, is to instill the business objectives of this into our 2011 capital and business planning process and so we'll accommodate that into our next year's plan.
So we're exited about the opportunities and think this will create some additional business and growth for the company.
Charles Boorady
It sounds brilliant and United does have a long track record in competing six special businesses and I'm trying to put parameters around, are we talking about 50 million a year, 100 million a year, or just kind of ball park on the capital you'll be -- additional capital you'll be putting into this effort above and beyond what you've already been doing on a run rate basis.
Stephen Hemsley
Well maybe a couple of points I'd like to make sure that we come back and reinforce. One is we are deployed throughout our businesses in innovation and responded to the marketplace.
I think you heard some of that from Ingenix and from Optum today. That's not going to change.
This is really coming on top of it. The amount of capital we're deploying there, I'm not going to really respond to that.
We'll talk about that I think a little bit more when we do our investor day review but I think most importantly is the intensity around pulling resources together that already exist across our enterprise and making sure we are basically taking two bits at the apple, that we're deploying through our businesses and then we're coming on top and looking at entrepreneurial opportunities over and above it. I don't think its something that is going to be required that much in terms of capital et cetera.
Charles Boorady
Great thanks.
Stephen Hemsley
Next question please.
Operator
Your next question comes from the line of Doug Simpson with Morgan Stanley.
Doug Simpson
Hi, good morning. Steve, obviously there is a lot of market focus on the coming MLR floors and pricing in general.
Maybe if you could just talk a little bit broadly about your expectations looking into 2011 and beyond and your relative level of confidence and the outlook for commercial, the commercial risk business specifically and if you could tie that in just to how are you thinking about capital deployment in the share buyback program versus the dividend, versus the dividend you raised last quarter. Just relative to this uncertainty how are you thinking of making that investment in share buybacks?
Stephen Hemsley
My answer is kind of twp parts to that, obviously we don't know where regulations are going to set with respect to the care ratios and the impact in the commercial market place and then as we said earlier in our prepared comments, there are certainly a number of external factors as they were last year, as we headed into 2010 that we are concerned. I would offer that almost those factors are continued.
We progressed well through 2010, we're positive about 2011. We see our businesses getting stronger and momentum building and I'm just really taking about core capability.
We are seeing the market respond positively in that regard, so we have a positive outlook on our business and on 2011, relative to the markets perception of us and their response. All of those are encouraging and its quiet broad based in both out benefits and our services businesses.
We just don't know about where the care ratios will sort out and we will respond in a constructive and hopefully creative way as they do. So, I can't really offer more on that, it hasn't really changed our perspective in terms of the overall direction of the business.
We are committed and think positively about the benefits we face, when we think about reform, it will just put pressure on enduring things about affordability around modernizing the system about being more responsive in terms of what the needs of individuals are and we think we can respond with our capabilities, with better information, technology and care sight. We do think we are underweighted on services and that we have opportunities to deploy those same free confidences in a very impactful way across healthcare services and so we are -- in our head allocating more of our expansion capital in those directions.
The end of the day, it doesn't really change -- it hasn't changed our capital outlook. We are investing in our core businesses, we are maintaining, we think a prudent capital structure and I think Mike responded to that earlier, we are committed to a dividend, we thought and contemplated that for more than a year.
We expect that our dividend to -- we think we came out in a market relevant position and expect to maintain that and look at all the metric with respect to how our dividend is positioned and consider it each quarter and each year with our Board. I would say more broadly is the more allocation and focus on the healthcare services sector.
Doug Simpson
Okay and then Mike, if I could just ask as you were discussing leverage, should we be thinking about the leverage comfort range or however you want to say it. Maybe being a little bit lower right now and -- would leverage all else being equal maybe, drift back up, call it late 2011-2012.
Mike Mikan
Well I got it I think you got to take into consideration all the opportunities that are in front of us and the timing of those. I am not sure that I would change what we've said; we're operating at 30% on a debt to total capital.
We are committed to the share repurchase program that we put out for 2010, the dividend that you've just referred to and we've got ample flexibility with a strong balance sheet to invest in the business both through organic and the expansions and I think as I stated earlier in terms of what the business can support, we feel very comfortable that the business can support and we've said this for years and we've grown and diversified since then that the business can support 40% debt to total caps. So, I think you got to look at it is as fluid and we're going to remain flexible and very prudent in our capital investments.
Stephen Hemsley
And really unchanged from when you stand back and look at this, our capital positioning and the half of these that we have really provide a really great opportunity for us to continue to expand and grow the business, on both sides of the benefits and services, maintain a prudent capital structure, maintain dividend and maintain a share buyback. The capacities of the organization are quite remarkable on those levels.
Doug Simpson
Okay, thank you.
Operator
Your next question comes from the line of Carl Mcdonald with Citigroup.
Carl Mcdonald
Thanks, historically, the strategy there was been to price to trend and start to improve margins of the overall business, do you think that's still a viable strategy today? I'm sure if you said it differently, if you are looking at the pretax margin of 7% give or take, can that still go higher in this environment assuming the similar business mix?
Stephen Hemsley
Well, I think that, I think the issue is -- I think that you can still price to trend. I think that is the appropriate long-term positioning of the organization and I think the interesting thing is the mix of the business, how you have to take a look at the totality of our healthcare services business and the diversity of it how we serve all of the market sectors as they move from one layer to the next, the tremendous leverage that exists given the fact that we have integrated our technology, in our operations that are increasingly integrating those, so I think there is tremendous capacities to deliver better value in the marketplace and to grow and to price to your underlying cost trend and continue to advance that business.
And then on the services side, I think healthcare reform has, I've said this before, put the kind of dynamics into the marketplace around affordability, around need to modernize and simplify that the allocation of capital there, represents a growth opportunity for us or an organization that has been dedicated over the years the information technology and healthcare expertise. So I think we're pretty positive with respect to what the prospects would be if we really engage in trying to advance the healthcare system which is I think the mandated health reform movement.
Next question.
Operator
And there are currently no further questions in queue. I would like to turn the call back to management.
Stephen Hemsley
Well, we thank you this morning, we did have, we think very solid strong second quarter results and striking elements be accounted characteristics in the acceleration of organic growth and I would say the increasing quarter-by-quarter effectiveness of our overall programs with respect to managing very appropriately medical costs and our operating cost. And while people are justifiably focused on health reform, this is really only one element of the market dynamics.
The market broadly present challenges and great opportunities and we are really preparing to meet them and to the respond and we thank you for your attention this morning.
Operator
And thank you ladies and gentlemen this will conclude today's conference call. You may now disconnect.