Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Here's some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual result to differ materially from historical experience or present expectations. A description of some of the risk and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, 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 January 16, 2014, which may be accessed from the investors page of the company's website. [Operator Instructions] I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley. Please go ahead.

Good morning and thank you for joining us today. Given that we provided a comprehensive review at our investor conference just over a month ago and that our 2013 fourth quarter and full year results were generally in line or ahead of that discussion, we'll keep our formal comments brief this morning and spend more time on to your questions and topics of interest. We see 5 takeaways from this morning's discussion. 2013 was a very strong year, as we meaningfully advance the enterprise's capabilities, our growth and growth potential, diversification profile and market momentum. There are certainly near-term 2014 pressures, particularly from ACA implementation and Medicare funding actions that will divert more than $1.50 per share in earnings from us in 2014. But we have plans and actions in place to offset these reductions and to grow revenue to a range of $128 billion to $129 billion and produce earnings in the range of $5.40 to $5.60 per share, with cash flows from operations between $7.8 billion and $8.2 billion. In 2013, we deepened our capabilities and market relationships and successfully moved beyond significant undertakings, such as the OptumRx in-sourcing, the implementation of the large, long-term TRICARE contract and extensive ACA readiness and compliance efforts. We move into 2014 with operational readiness and performance levels stronger than ever before. As Medicare Advantage underfunding is hurting seniors' benefits and causing disruptions to beneficiaries, our focus will remain on advocating for fair and consistent government funding to this program that now serves some 30% of this country's Medicare beneficiaries. In continuing to innovate, shape and improve our Medicare Advantage products and services to sustain these benefits can bring the best resources and service experience for American seniors. We will continue to focus on delivering earnings per share growth in 2015 with our ultimate performance, dependent in part on the results of the Medicare Advantage rate-setting processes for 2015. And finally, while we will work intensively through the near-term pressures just discussed and covered comprehensively at our investor conference, we believe even more firmly that long-term, no organization has greater ability to serve and enable a more effective, modern healthcare system and respond to a national imperative to improve the performance at health care and reduce its cost from consumer benefits and well-being to care delivery and enabling technology. UnitedHealth Group's long-term growth and earnings potential in this undertaking has never been more compelling than it is today. To briefly review 2013. Full year revenues grew nearly $12 billion or 10.7% to $122.5 billion and net earnings grew 4% to $5.50 per share. Earnings were at the top end of the range we provided more than 1 year ago despite the subsequent imposition in sequestration, which cost approximately $250 million in operating earnings or $0.15 per share in 2013. Cash flows from operations is $7 billion or more than 1.2x net income. Fourth quarter cash flows were $1.1 billion and we ended the year with more than $1 billion in non-regulated cash. We raised our dividend by 30% once again in 2013. It is now at a $1.12 per share annual rate. And we purchased nearly $3.2 billion of UnitedHealth Group shares in 2013. Return in equity for the year approached 18%. UnitedHealthcare continued its extraordinary growth in 2013. We came to serve 4.5 million more people this past year entirely through organic growth, including more than 900,000 people in public and senior market benefit programs and nearly 400,000 people internationally. Stepping back, UnitedHealthcare has grown by a remarkable 14 million people over just the past 4 years. Our benefit businesses are distinctively diversified locally, regionally and by product and customer type. UnitedHealthcare earned $7.3 billion in 2013. UnitedHealthcare's operating cost were well-managed in 2013, as were medical costs, with commercial trends in the area of 5%. Hospital usage per capita was lower for the fifth consecutive year in 2013 and was lower across all our major benefit businesses. UnitedHealthcare's results were negatively impacted by funding pressures and government-sponsored benefits, 3 calendar quarters of sequestration in Medicare and reduced levels of overall reserve development. Despite these pressures, UnitedHealth Care Group fourth quarter earnings 9% year-over-year to $1.8 billion. UnitedHealthcare ended the year more aligned than ever, with key care provider partners. We have $28 billion in annual medical spending and 8 million members served under fee for value contract, including more than 2 million people under the most progressive of these performance arrangements. We are intensely focused on expanding our integrated and accountable care leadership throughout 2014 and we have set an aggressive target of having more than $65 billion in value-based contracts with care providers by 2018. Turning to Optum, our Health Services platform. Our focus on growth, simplification, integration and building larger and deeper relationships produced record revenues and operating earnings in 2013. Revenues grew 26% to $37 billion. Every reporting segment produced double-digit percentage revenue growth. As just one example of Optum's performance, our local care delivery business in OptumHealth increased both the number of payer partners and increased the number of people it served by 6% and it expanded operating margins more than 2 percentage points in 2013. Medical cost performance and patient satisfaction levels were excellent, with the overall trend held flat and our physician groups participating in health plan contracts with quality Star ratings ranging from no less than 3.5 up to 4.5 stars. During the fourth quarter, Optum, QSSI was honored to be engaged and serve CMS in their efforts to enroll million of Americans to the federal and state exchanges. Great progress was made over the past 90 days and we are pleased to be a part of that effort. And we will stay involved in the senior advisory capacity as this project moves to its next phase of development. For the year, Optum's operating earnings of $2.3 billion grew 61%, or $875 million over 2012, and are now up 84% over our 2011 baseline year. Fourth quarter 2013 operating earnings increased 43%. Optum reached its 6% operating margin target 2 years early in 2013 and now has established a new target called 8 by '16, which means an 8% operating margin by 2016. As we enter 2014 with our company in a very positive position, we will continue to closely study the development of the individual public exchanges in 2014 and will be selective in our approaches for 2015. However, we expect to realize strong growth by serving several ways: as established Medicaid programs grow through the ACA expansion; as eligible Medicaid prospects were identified to the federal and state exchange market; and as the inevitable dual eligible MME initiatives begin to form in our implement. The recent Tennessee Medicaid award for 2015, in which we earned the highest score among 7 qualified bidders, our 2015 renewal in Hawaii and the Michigan MME award, all reflect our strong capabilities and established relationships in the rapidly growing Medicaid market. We have won 30 new RFPs or contract renewals in the past 4 years and we have grown organically by more than 1 million people served through our UnitedHealthcare community and state business over that period. Continuing on 2014. Our initial Medicare growth is within our estimate, with balanced new membership growth and large employer wins during the year, offset by our exit from plans covering 150,000 people and the loss of over 90,000 seniors in 1 state account. Our Part D and Medicare Supplement offerings continue to grow well in the marketplace. We continue to expect commercial group risk membership to be stable in 2014, with our commercial individual insured membership declining over the course of the year. And the number of consumers served in fee-based arrangements declining due to the loss of that large state account, as well as some migration to private exchanges for both retirees and active employees. Our 2014 plan includes the collection of insurance fees and related taxes from state Medicaid customers. We have strong oral commitment from our customers that these were paid and we will record these revenues as written contract amendments are finalized over the course of the year. The timing of these final commitments could affect quarterly earnings progression. UnitedHealthcare's earnings in the first quarter will also see year-over-year variances related to reserve development, capital gains and the effect of sequestration, which did not take effect until April 1, 2013. Optum continues to build out its businesses around the themes of engaging consumers, aligning and optimizing care delivery, modernizing the health systems infrastructure and using data and analytics to make the health system more informed, aligned and effective. Optum expects strong top and bottom line growth in 2014, with operating earnings in the range of $3.1 billion to $3.2 billion and $45 billion to $46 billion in revenue. This performance will put earnings growth in the area of 25% and that growth rate includes, in both years, the earnings contributions from realigning our IT and global services businesses into Optum in 2014. This natural alignment will help us create and capture growth opportunities in business process outsourcing for health care and in healthcare IT assignments similar to our efforts in service to CMS. Optum's earnings are expected to be strong in the second half of 2014, due to growth investments early in the year, such as fully implementing Optum360, as well as more traditional seasonal earnings pattern. In the fourth quarter of this past year, both S&P and Moody's confirmed our corporate debt rating and upgraded their outlook. We ended the year with more than $1 billion in available cash and a ratio of debt to total capital below 35%. We continue to project cash flows from operations in a range of $7.8 billion to $8.2 billion in 2014 and expect to return well more than $4 billion to shareholders through share repurchase and dividend. Standing back from the numbers, UnitedHealth Group is in a very strong position. We have posted consistent growth for several years, as measured by people served, revenues, contract backlog, cash flows, operating earnings, dollars under value-based contract and so on. We have leading positions in our market, but our market share is much lower than leaders typically have in more mature industries. We serve large and growing markets, so we have considerable organic growth opportunities for the future. Our scale benefits the consumers, clients and customers we serve through innovation, cost advantages, efficient service and so on and this naturally engenders further growth. That model is expanding in care provider services and care delivery, with government agencies and national employers and with consumers and in Brazil, in Europe and beyond. Very large and sophisticated customers are seeking an enterprise-level partner, one with proven capabilities and the financial strength to help them navigate the changes that both consumers and government regulations are driving throughout the market, a partner like UnitedHealth Group. In closing, I would simply once more shorthand each takeaways. 2013 was a very strong year in growth, achievement and capabilities and putting some big operational tasks behind us. 2014 will feel the impact of the ACA taxes and Medicare funding pressures, but we believe we can produce revenue growth and earnings in the $5.40 to $5.60 per share range. We suggest the quarterly earnings progressions need to better accommodate the first quarter and first half factors we discussed this morning. And finally, in the longer term, we believe our prospects to grow and produce positive change across the health system for the benefit of all the system participants and our shareholders remain exceptional. So thank you for your time this morning and we now would like to address your questions, discuss areas of interest to you today. So can we ask the moderator to take over and we'll respond to questions. Again, 1 per analyst, please, out of respect for the others in line.

[Operator Instructions] We'll go first to Sarah James with Wedbush.

You touched on Medicare headwinds for '15 in the prepared remarks and I wanted to better understand if that's a headwind compared to '14, so an incremental headwind in '15?

I don't think we were really suggesting anything other than we had said at the investor conference, that, obviously, there were rate actions taken related to 2014 that we believe significantly underfunded the program. And we had indicated there that we are -- continue to be watchful about the funding posture on the Medicare Advantage program. And we will continue to be watchful of that and continue to advocate strongly for consistence, reasoned funding of these program and continued commitment to American seniors who participate in them. I think we didn't really mean anything more than that.

As I think about items to watch, there was that update in December of the 200-basis-point change in fee-for-service cost trend assumptions, so that kind of got us to a starting point of down 6% to 7%. And I think about some offsets to that. United has been very successful in medical cost savings through ACOs and risk-sharing contact with providers. So could you quantify what kind of trend vendor these efforts could create across the entire Medicare book?

I don't think we can. At kind of that distance, we think these programs are extremely effective and they're effective in terms of their cumulative effect. And we are intensely engaged on them across, basically, all of our benefit businesses, but certainly as they relate to government programs. In terms of the discussions that were held in December, we are not going to speculate, really, on what ultimate funding may come forward or change our position on that. We are going to be intensely engaged as that process goes forward. And as I've said before, we're going to continue to advocate strongly for strong and responsible funding to these programs. And I think we really can't speculate on a process that is really just not even really formally begun.

We'll go next to Christine Arnold with Cowen and Company.

Steve, you highlighted some seasonality issues, both in Optum, investing in Optum360 and then some seasonality issues there, as well as some timing issues potentially with the health insurance fee. Could you help us think about some of these timing issues within both Optum and UnitedHealthcare and how they might impact progression of earnings relative to what we've seen historically? I know you talked about first quarter, those 3 factors. But any help you could give us would be appreciated.

Yes, I think -- well, I think the general theme is to be -- I'm going to hand these off because they do really touch different parts of our business. And I'll probably ask John Rex to speak to some of the front end on Optum and then in terms of the Medicaid activities, Steve and Dan. But I think the -- we're obviously suggesting that you relook at the progressions in terms of, again, I'll say the first half versus the second half of the year, given the timing of when these Medicaid contracts will actually fall in informal terms and the patterns of the Optum business, both in its new business and its traditional seasonality. But John, you want to start up?

Yes. So when I think about Optum in 2014, so we'd expect a pattern, first half, second half pattern of roughly 40%, 60% in terms of earnings progression for the year. Now if you think about 2013, we're roughly 40%, 45% in the first half. So the impact there, you're seeing some of the impact of the investments we're making in these larger, more comprehensive relationship that we've talked about and that would be an impact that you'd see, particularly as you look across the Insight and the OptumHealth businesses.

Things like Optum360.

And Optum360, in particular. The one that we talk about most.

And then, Steve, you want to talk about Medicaid?

Christine, it's Steve Nelson. We have -- as you've heard me say before, we have a year-round process we're engaging based on rates and we call this rate advocacy and especially from the competency of our business. But the fees and tax impact has been a part of that. We consider a part of our cost. As we sit here today, the states have over -- or I'd say, overwhelming majority of our states have agreed to reimburse us for both the fee and the tax impact. Actually, those fees have technically said no to us. We are continuing to be engaged with them in a productive and, I think, thoughtful discussion. So it's more work to do, but the progress is really significant and our outlook is positive. In terms of how we recognize the revenue, Dan, do you want to comment on that?

Sure. Christine, on the revenue recognition side, as Steve mentioned, the overwhelming majority, we've got commitments. With respect to revenue recognition, we'll be relying on written commitments. We have a very good share in hand today, but still have some more to get and will make progress over the course of the first quarter and throughout the year and that will influence the timing of the revenue recognition.

Can you elaborate on what portion, maybe you're not comfortable but if you are, what portion you have written commitments on the health insurance fee to get all of it recovered? And are they filling in efficiency adjustments below the line by telling you that you're getting the health insurance fee, but then saying you're going to get all these new memberships so maybe we don't need to you as much? Or are they recognizing the pent-up demand?

You fit a couple in there. With respect to the insurance fee specifically, the majority of our states are looking to do a lump sum true-up once the fee is actually known. So we'd expect to get it in the September timeframe from a reimbursement standpoint. And in terms of how many we have in hand from a written commitment, we have less than half but more than 1/3. So we're making strong progress and we've got -- we expect in the next week and the coming weeks to be more of that, as well as for the second quarter. Your other question around pent-up demand, that was more, I think, aimed at the expansion population in the newest health members into those markets. We do have an expectation of higher views related to those new members and we have, in the vast majority of our states, a separate rate sell that does account for and reflect a higher initial use pattern. We'd expect that, obviously, to moderate over time as our clinical programs take hold.

We'll go next to Justin Lake with JP Morgan.

I just wanted to follow up on Medicare Advantage. It sounded like you said you're seeing membership on track versus your expectations. Wondering if we can get a little bit more color here in terms of what you're seeing in open enrollments, specifically maybe talking through some of the impact from changes to your physician network and on member attrition. Because of this, maybe are you seeing any selection issues happening here in terms of bigger members leading more significantly than others, et cetera?

I'll have Jack respond to this. And I'm sure he will hit this point, too. But we would remind you that we start out the year 250,000 or so down, given the market exits we took and the single contract that we lost. So Jack, do you want to pick up on that?

Sure, Justin. Jack Larsen. Maybe before I tackle the multipart question here on the 2014, let me go back and remind you about 2013 and the very strong growth year we had there, almost 1 million members, with something around 425,000 in Medicare Advantage alone. With respect to the 2014 AEP performance, let me take the growth part first. I'd say we were on our plan in all of our major product lines, Med Stop, Part D, MMA. I think for individual Medicare Advantage, we took a little bit of a different approach this year and really aimed at preserving and, in fact, growing our share in markets that we would consider to be long-term, financially stable, viable markets for us. And in these particular markets, we have really strong growth and we have retention, member retention, that was actually improved over what we had seen in prior years. And I would say in some other markets, we made a decision that we were going to seed some share to others. And in those markets, where we pay some benefit decisions, we saw retention slightly less than historical levels, as well as the rate of production and new business. And I think, as Steve referred to, you hit it right out. We started with about 150,000 people affected by market withdrawals. Now on the group side, we, I think, chatted at the investor conference about the loss of a large state-based contract of about 90,000 people, effective 1/1. And you're seeing those numbers in the recently posted CMS result. That will be offset effective February 1 through the win of a large state account in, roughly, the 90,000 member range. So all-in, I'd say, we're right where we thought we would be this AEP and feel pretty good about our plus or minus 50,000 member growth that we shared with you at the investor conference. In terms of mix, it's just way too early. I don't think we're seeing anything that surprises us. But we're doing that analysis now. We need to see a little more information on our inbound members from CMS. And I think we'll have a better point of view the next time we speak in the [indiscernible].

Jack, maybe just in terms of any comments on the impact due to enrollment of some of these physician -- from the physician network changes? And maybe talk a little about what benefit that's going to give you in terms of quality improvements and cost going into 2015? And then, just lastly, on those markets that you did decide to take a step back on, would it be fair to say -- should we think that the market should be concerned that you put -- that the members that are being put back into the market or that you're exiting are significantly different in terms of morbidity or risk versus those in the existing book and then maybe there could be some selection issues in the market broader?

Yes. So as I said earlier, we did see levels of attrition a little higher in those markets that we chose to seed some shares. Some of those markets are aware we are taking our network optimization, network restructuring kind of work. And it's also -- it's geography, but it's also products as well. So we differentiated between HMO products and PPO products. I think in terms of just what we are trying to accomplish in our network activities, there's just a ton of pressure all over the system. Steve referred to it and we talked about it at the investor conference. And I think that rate pricing pressures probably most defeat Medicare. The system's fragmented. Clearly, it has rising cost. And I think everyone agrees it's got the opportunity for demonstrably better outcomes. I think what we're -- the themes we see and really what the Affordable Care Act is telling us is law and CMS is suggesting us through regulations, is that the industry has to change and we have to change. We have to be more integrated. We need to be more aligned. We need to have a provider network that is aligned with us better, both in terms of data and financially. And we need to do all of that with far less resources. And I think these are the themes that we're responding to. This is what you are seeing us and others do in the marketplace with respect to reaching out and making affirmative changes in our network. So we're really evolving to meet the requirements of a Medicare program that's going to be successful in the future. So while it's going to be a little noisy and a little turbulent, we acknowledge that. I think we're conforming our business in the right way to be successful in the Medicare program in the future.

Gail, do you want to comment?

Sure. Justin, it's Gail Boudreaux. In addition to what Jack just said about network, I think it's important to think about that this activity across network is going on across all the benefits space. And Jack referenced some of just the incredible pressure in the system around rising costs, connectivity and, quite frankly, getting better outcome. But in addition to just the shaping of the network to meet the unique populations in Medicare, we're also very focused, as you know, on increasing our pay-for-performance across Medicare. We talked about that a little bit at our investor conference, moving that up dramatically over the next few years. Greater clinical integration. And it's all to drive better outcomes. And again, those who respond to CMS' desire to have greater primary care centric networks and better outcome, that's happening across all of the benefits businesses and it's really important about -- as we think about modernizing the health care system. So what we're trying to do there, I think, is evident in Medicare, but it's also evident in our other business. And our support is provide better data and allow these physicians to better and more effectively manage these patients.

We'll go next to A.J. Rice with UBS.

I think I just might switch gears and ask you about the Optum and the experience with QSSI. Obviously, in the last 2 months, you guys have gotten a lot of kudos for how that's worked out. Can you comment on maybe your thoughts on the business implications of the way that's played out? Has that opened up other contracting opportunities with the federal government, outside the federal government and beyond? And give us some flavor for that, if you would.

Sure. Obviously, I think as you're suggesting, that it's had a very positive reputational effect. But Larry, if you're on the line, do you want to start this and then maybe Andy Slavitt comment as well?

Sure. A.J., I think you probably know this, so let me give you a little history here. When we started the project prior to October 26 -- and I'll just use that date -- we were a contractor that built the data services hub, as well as the registration process, something called the IDN. And then we controlled all the testing. When we got brought in on October 26 to work on fixing the site, we got, obviously, to work with CMS and HHS. And they did a great job of kind of outlining everything to us so that we kind of understood where we were at. And that's why we became the general contractor. And coming to general contractor, we were operating under, what I would call an urgent timeframe for about 60 days to get things accomplished. And then we were able to get through that, learn a lot and it's now in, what I'll call a more normalized environment. And we -- we have just become, as I'm sure you read, a senior adviser. And I'll have Andy talk about that in a second. But what I would say is we obviously learned a lot in terms of working with the federal government and being a part of the whole process. I would tell you that we are also working with a lot of the state. And I think that when we were at our investor conference, we talked about we were moving over on the UHG IT side, what we do with our technology infrastructure and so forth. So we believe that's going to tie in nicely to what we did for the government to be able to offer candidly around the industry. So it's going to expand what we do. So we appreciate what we were able to accomplish and what we've learned, but we believe we're just kind of starting. Andy, you got anything else?

Yes, just had a couple of quick thoughts. First of all, this is -- some of this is repetitive of what Steve and Larry covered. Clearly, this was a job done principally by CMS with the help of a lot of contractors. We were glad to be and continue to be glad to be involved. I think in terms of implications, I'll just point the 3 things. First is we try to build our reputation on big complex problems that we can solve for clients in health care and, hopefully, more clients will have an opportunity to see Optum in action and that's a good thing. Second, as Steve mentioned in his opening remarks and Larry just hit on it, we can bring technology outsourcing to this industry in a way that we think is unique to health care. And so we think there's opportunity both in and out of the government for us to do that. And the third, there are situations very much like this around the country and state-based exchanges, where some level of business problem-solving, prioritization and leadership will be called for. And we're happy we were able to jump into those situations as well.

I'll just finish by reinforcing the fact that we were pleased to be part of that. That was a broad team effort. There were significant efforts and progress made in terms of the participation from CMS, their leadership and their staff. And all of the partners, the outside suppliers around that, everybody pulled together in an extraordinary way to do that, the only way that could have been accomplished. And so, really, the credit really should be spread broadly.

We'll go next to Chris Rigg with Susquehanna.

Just wanted to come back to Medicaid quickly. Understand the comments about the lump sum true-up and that most states or all states have, essentially, verbally agreed to maybe the true-up for the fee. But from a GAAP earnings perspective, does -- can you just help us understand whether you can, on a GAAP basis, just assume you're going to get it in the first quarter and second quarter, if you haven't actually received anything in writing? Or just generally, how the fee might impact EPS on a quarterly basis?

Chris, it's Dan Schumacher again. With respect to recognition, obviously, the expense associated with the tax will be incurred in each month across the year. On the revenue recognition, we will rely on written communication. And where we have those, we'll be booking revenue in each of the respective quarters. And where we don't, we'll be weighting what we do. Even though you mentioned lump sum, they may pay in lump sum, but you will recognize appropriate matching once you get a contract.

Correct.

But so, in theory, this could create a -- if you don't have something inked, at least early in the year, it could create a bit of a headwind in the first, second quarters of '14, is that correct?

That's why we mentioned it. It's exactly why we mentioned it.

And we'll go next to Kevin Fischbeck with Bank of America.

I want to go back to the commentary around 2015. Obviously, appreciate that it's a little bit early to be talking about it. But with all indications that the 2015 MA rate may be as bad, if not worse, than the 2014 we've seen proposed, can you just give us a sense of what within your business might be doing better in 2015 than 2014? I mean, I just try to -- struggle with the concept. I think you started off by saying you expect growth in 2015 but the impact will really be determined by the final MA rate. So I just want to see if the rate is as bad in 2015 as it is in 2014, what operational levers within MA or outside of MA can you see at this point that might help you show a growth rate better than what you're showing in 2014?

Well, again, we're not going to speculate on where the funding activity will ultimately play out. We have a very broad and diverse business. We are intensely focused on improving our performance across the board. As you can see, the performance that has been achieved in -- broadly in several areas across UnitedHealthcare. The sense of growth in Medicaid to the very strong performance that we had in the commercial business this past year and the opportunities internationally. And then the opportunities for Optum, I think, are impressive and they have established a track record of performance. And we are intensely focused on our cost and the continued improvement of our businesses. So I would think that they would be all the traditional kinds of things that one would be pursuing. And we are pursuing them, I think, with significant intensity. I just think that in January, off of the strength of a phone call conversation in December with CMS, that we should necessarily take undue direction from that and that we will see how this process proceeds. And as I've said before, I think that there is a broader sense of responsibility to American seniors than to have underfunded the program, by our measures, about 6.7% last year. And if there is speculation that there would be underfunding at that level again in this year, that would be almost a 13% pullback on Medicare Advantage over the course of 2 years. And we would think that, that would be extraordinarily disruptive. It remains to be seen.

I appreciate the commentary about the underfunding, it does seem to be a significant cutover a couple of years. But and also, it's very difficult to propose -- or to forecast what's going to come out of CMS at any point of time. But when the rate hits, we have to interpret that the day it happens. And everything that you've outlined to me sounds like things, to your point, that you've been working on for 2014 and you're seeing benefits from them in 2014. I guess the question is, if we see something similar from MA in 2015, if you'd do the same things to offset it in 2015. There is a reason for acceleration outside of the MA business -- or is there, I guess, is my question.

Well, I think that we have probably more areas to accelerate and to grow and build on than perhaps anyone else in the space. And then we would take the steps necessary with respect to benefit adjustments, market considerations, network actions, premium actions, cost and distribution cost. So there's a broad repertoire of actions that we are taking and the question really comes down to the intensity of those. And that's where we get down to disruption.

We'll go next to Ralph Giacobbe with Credit Suisse.

It's obviously still early in the year. But the issues around the roll-out persist. Over time, obviously, you would think that things would start to work themselves out. But just given the timeline of bids due just in the next kind of few months. I guess, what are your thoughts on playing in the exchange in 2015? Should we expect a similar approach and maybe more limited activity? Or have you seen enough where we should start to expect you to be a sort of a more active participant? And then maybe just how much, if at all, is the '15 MA outlook just sort of influential on that decision or not? Or is that sort of something that's kind of mutually exclusive?

Sure. So Gail and Jeff, do you want to start?

Sure. Well, Ralph, first of all, in terms of the public exchanges, I think you know that we've got a very modest footprint. And as I shared at Investor Day, our decisions around 2015, our participation will really be very much reliant on how this market matures. So at this stage, we're really not projecting our participation. We will be looking at sort of the -- how robust the enrollment is, what the risks in those markets are and the consumers participating and, quite frankly, the cost structure is on those markets. So at this stage, I don't know that we have any additional guidance to give you from what we shared at the investor conference, but that's our outlook.

Would you expect to have that, though, just in the next kind of few months? I mean, I'm sure there'll be some level of incremental.

Again, it's a maturing marketplace. It's really early. It's just rolled out. We'll be looking at a market-by-market basis. So we're not going to give guidance around our participation at this stage, but we're going to watch the markets mature. And we'll get more information and we'll be sharing that with you as it becomes known to us. In terms of your second question on Medicare and does that influence our exchange participation, I would say, no, it doesn't. We're going to look at -- we look at each of our markets very specifically and look at the dynamics in those markets. So we will take a very focused look at exchanges. And as you heard from Steve, we'll also look market-to-market in Medicaid -- Medicare just as we did this year.

Generally, our view on '15 is that we are not dependent on exchanges.

Right.

I mean, we will take this in a measured way.

We'll go next to Sheryl Skolnick with CRT Capital Group.

Now my question, though, I'm sensing some sensitivity among investors and, indeed, some of this is on my end. Perhaps I don't understand exactly what kind of pricing decisions you made for 2014 with respect to your estimates of cost trend and a recoupment of the fees through higher premiums where possible. There's a sense out there that, that trend is kind of tied to premium right now and that perhaps, if the fees are 100 to 200 basis points, there's only 80 basis points or so of wiggle room. That was one statistics suggested to me. So I'm wondering if you can comment on that and give us some comfort or some indication of what's happening there, especially with respect to a trigger here, that's the medical cost ratios have been a tad high in the fourth quarter and I'm wondering if that's anything that might be indicative of the pricing versus cost trend in '13 and then in '14, anything in the conversation as we speak.

So we'll have Jeff kind of speak to that pricing discussion. And if we have not get fully your question, then we'd clarify it on the end. So Jeff, do you want to start?

Sheryl, it's Jeff Alter. So I think the market test and their surveys are correct. Our pricing in 2014 is stronger than it was in 2013. And you mentioned it, a part of the reason that it's stronger is because of the ACA fees, taxes, as well as the essential health benefits across all markets. And then when you look at small group and individual, the move to community rating, depending on which part of that marketplace you're looking at, you could see some much stronger pricing. Your suggestion around cost trend versus pricing, just a couple of things to think of. One, we have not changed the discipline of pricing that has gotten us -- has been successful for us for a very long time. We look at our forward cost, which now include, as I mentioned, some impacts due to the ACA. But we're certainly as focused on medical trends as we had ever been in the prediction of medical trend. The medical trend for pricing was about a point higher in '14 than it was for '13 and we match our premium to that. Again, I know it's been a few years, but we'll go back to the MLR. We manage this across hundreds of intersections, so that we try to stay as close to that rebate line as possible. So depending on which market you're looking at or studying, we may have rebates that are still to be paid in that marketplace. And we're continuing a long how to adjust to that very tight band around that MLR. And in other markets, we have the ability to price a little bit stronger. So that is all in that calculus that creates our forward pricing as we move forward. And now, more than ever, impacts for the ACA are also included in there.

Good discipline, well-aligned with medical cost trends and, really, not particularly significant changes in the marketplace. We're competitive, but we think we are pricing well.

Right. And the MLR performance in the fourth quarter, were you comfortable with that?

Yes.

Sheryl, this is Dan. From a fourth quarter standpoint, as we look at that, medical costs were well controlled. If we look at the implications on both loss ratio and trend, they were very much in keeping with our expectation from Investor Day and set the stage for the right jumping off point into 2014.

We'll go next to Matthew Borsch with Goldman Sachs.

I wanted to just ask on the commercial enrollment and what you're seeing from employers as sort of 2-part question. Number one, are you seeing anything significant in terms of employee uptake of coverage now that there's this broad awareness of the individual mandates? Some employers, evidently, are seeing that in some cases, I gather, as significant. And somewhat related to that, just curious on comments on the commercial risk enrollment results for the fourth quarter. Just those were stronger than we expected. I just wonder if you could remind us if there was a special factor there.

Sure, Matt, it's Jeff Alter. I guess, on your first question, it's sort of hard to tell. I think that would probably most happen in our largest clients. And it takes a little bit past 1/1 to make sure that all those enrollment files are correct. And so we usually feel better about commenting on sort of the National Account growth or growth in existing accounts by the time we get to February, it's a little too early to talk about that. We do see interest for some employers to create a different benefit construct that could allow for growth. But we haven't seen those results come through yet in our 1/1 enrollment. Talking about our fourth quarter '13, I think there were a few things that were driving that. There was a fairly large push in our individual business to sign up as many enrollees as possible early so that we can give that advantage of an additional year without the ACA impact. And that program was an aggressive program and it was very successful. And then we had mentioned probably throughout '13 that there was interest in our small group clients for alternative plan years for them to be able to keep their benefits for that additional year even prior to the president's announcement. So that did drive some, I'll call it one-time growth in the fourth quarter of '13.

Just so I could understand, because I'm a little confused about it. I would think that those dynamics would make you feel more secure about retention at the small group and individual level but not necessarily explain growth if you're doing early renewals with your current account base. Was there an element to this that also drove some growth?

Yes. So in some markets, the value proposition that we put into the market was not matched by some competitors. And so we were able to take some share. And then you're right, it did help attrition. It also helped the sort of retention of groups that might have left anyway. So when you think of a small group attrition rate of somewhere in that 15% to 20%, those groups that were renewing in that fourth quarter, there was a higher attrition rate -- a better retention rate.

Right. And sorry, just last thing on this. Wouldn't this make you maybe feel a little bit better about the guidance on individual, not that it necessarily moves the needle much, but given what you saw towards year-end?

We're not -- at this point, we're not changing our guidance for '14. There's a lot to play out.

We'll go next to Peter Costa with Wells Fargo.

Can we talk about OptumRx for a minute and in terms of the growth you expect in 2014 and 2015, probably from outside clients. But also I want to understand how the rule changes that came out on preferred networks will impact you, whether there's integration savings -- integration expenses that you'll save, that you won't have to do next year. And then, from the early marketing window, what are you seeing in terms of how it's starting to look for 2015 and then the potential for your specialty trend to help you win business?

Okay, 3. Okay, so let's start with growth. I think we had a nice momentum coming out of 2013. Our value prop continues to resonate in the marketplace. If you look at '14 sort of excluding our last wave of the migration, we'll probably grow north of 1.5 million next year. Based on what we sold on 1/1, we'd be confident in that number. As it relates to CMS, I'd like to comment more broadly, I think. What we'd like to see from the CMS proposal, any CMS proposal, is -- and the rule-making is the ability to continue to incent the efficient mail channel and manage preferred networks consistent with historical practices. We believe both those things are really good for the beneficiary and good for the Medicare program. Last thing, specialty trend, I would say a couple of things. I think we continue to have a good advantage with our ability to manage not only the specialty benefit but then -- the specialty spend within the medical benefit but also in our formulary. I think that's a good thing that we've historically done and our trend has reflected that over time. I think that got all your question, does it not?

Just integration expenses and then you bringing in the cost from doing the big integration that you've done this year or bringing that PBM in house, is there some substantial savings that we should be expecting going forward?

Yes, we did recognize that savings. As I talked about at the Investor Day, there's -- we're not changing our guidance for next year. The avoidance of those expenses in 2014 compared to '13 definitely provided us with earnings lift in 2014.

And nothing incremental for 2015?

It's already in our numbers.

Yes, I would say that it's already in our numbers.

All right. Do you think the changes, the rule changes, if they happen as they are proposed will hurt your competitors more than they will hurt you in terms of preferred networks?

You know what, I can't really speak to what I think about that right now. We'll hold off. We're sort of in the rule-making phase as we speak right now. We got to let the full rule play out. We'll give our comments during the comment period as will our competitors. We'll be able to speak more deeply about this as the year progresses, when we get a specific visibility into what the rules are.

We'll go next to Scott Fidel with Deutsche Bank.

I just wanted to follow up just on the commercial pricing and cost trends and would be interested if you can maybe drill in just comparing small group and large group for your expectations for 2014. So with the expected 100 bp increase in cost trend, how does that compare between small group and large group? And then maybe just an update on sort of the pricing environment in small group versus large group and whether you're seeing any variance there?

Jeff?

Sure. So we're not going to get into that level of detail in a call like this. I would say the -- just to comment around small group pricing, this is a transitional year for many markets. We're moving out of medically underwritten to community ratings. So I think on a call like this, in a summary discussion, it's hard to discuss small group versus large group when you have such a transition going on in small group as we move to that community rating formula.

Yes. And Scott, this is Dan Schumacher. I would just add that, obviously, in small group, there's a lot more variability than there is in large group because small group's going through the transition to adjust to community rating. And based on your health status previously, there's more variation in the price differential at the group level in the market than there is at the large group, which is always okay. I don't think there's any really new change in the marketplace.

This is Gail. I would just add to Jeff and Dan's comments to the tone of your question, which is that the small group market has remained pretty consistent, with the exception of the change in community rating. The market competitiveness is relatively the same as we commented the last few quarters.

We'll go next to Josh Raskin with Barclays.

Question just broadly about M&A. 2013 was very quiet by United's standards. The deployment of capital for acquisitions is $300 million or so. So I'm curious, is there something in the environment do you think that the level of uncertainty around reform has created a bigger divide between buyers and sellers? Or is there something else going on there? And maybe, I know you guys have talked specifically around a pipeline, per se, for M&A. But with things you're looking at, would you consider it to be similar to what we're seeing in '13? Or do you think there's going to be more opportunity going forward?

Maybe we'll comment very broadly, but we generally don't like to comment on what our view of the potential expansion marketplace is or what our interest might be or are, because we consider that to be somewhat competitive and strategic. I'd just offer broadly that often, the biggest impediment is valuation and whether we feel comfortable with how the market is valued across a particular set of asset or asset classes. Do you have any comment, Dave?

Josh, I think I'd just also remind you that we were coming off of the -- at least for us, we were coming off of the Amil acquisition, which was quite substantive the fourth quarter of last year. And what shows up more as a financing activity as opposed to an investing activity is the tender that we did for Amil's public shares, that's about 1.5 billion as well. So it was roughly about 1.8 billion or so allocated to M&A type activity. And lastly, I'll just say, to reiterate the thing at our investor conference, we are clearly a -- an M&A company and our interests in M&A continue. Our agenda is virtually the same, which is really around building these capabilities, geographic market presence. But possibly, a slight bias more towards Optum in the international markets, which we think are fast-growing and expansive markets. But we'd also look to -- for opportunities to leverage our scale broadly in our business.

The next question will come from Andrew Schenker with Morgan Stanley.

Just thinking about Medicaid. Clearly, you don't break out Medicaid MCRs. But at a high level, how should we think about the cost for the business, maybe excluding the industry fee, reflecting kind of the growth and mix that you'll be staying including long-term care duals, the expansion of re-procurement. How big an impact mix had on MCR? And would any changes be temporary once you get these people into your care management programs, or should there be a long shift upward in the MCRs for that product?

We don't comment -- maybe Steve can make a few comments on this. But in general, we really don't get into margin discussions at that level of depth. We have historically suggested that the range of margin for those businesses in the 3% to 5%, 3% to 6% level, depending upon the performance of the business in a particular year. And that mix, ultimately, even if one offering were to be particularly strong, it tends to generally, ultimately come down into that general range of 3% to 5% for that kind of business. And we're really not changing our perspective on that. And I think that's well aligned with the marketplace. That said, Steve, do you have anything to offer?

Stephen, I think those are good comments. I would just say generally, they -- the opportunities to grow in Medicaid are robust and they include a variety of populations. For example, more complex populations, the expansion population has different utilization characteristics, at least the first, as Dan mentioned. And as we engage with them and are -- both the complex population and expansion population, engage with them our distinctive clinical models and our pride of capabilities that we have, I think, a really strong track record, we'll be able to bring a lot of value to our state partners and good outcomes to these populations. So it's part of our business. It's part of the growth opportunity. And we're actually -- really like our position and our opportunities in the space. And just to expand on Steve's earlier comments in the beginning, really strong track record in competing successfully for this business with that.

Yes, it's a very localized business, local programs. So these margins run their range from year-to-year across that -- those geographies. And given our scale, we aspire to the higher ends of those margins. But we will run the range of those margins across our markets over time. So it is a business with a great deal of variation market to market.

Our final question comes from David Windley with Jefferies.

On specialty drugs, I'm hoping to get the sense of magnitude. Do the hep C drugs have the potential to make a meaningful impact on the trend in specialty? And from a rate advocacy standpoint, are you having discussions with the states, as I understand, a lot of this may hit Medicaid, are you having discussions with the states about them potentially backstopping you in some way on the cost of drug life stability?

So Dirk, do you want to comment in general. And then I think that sounds to me more like a Medicaid question than a drug question. But maybe you want to talk about the specialty additions.

Yes, well, just hep C in general, I think -- we know that new therapies have recently been launched. The competition is valuable for our strategy at state. Like any other drugs, we compare the efficacy versus the cost of these drugs. And when we look at those, we'll decide where to place them from a tier perspective. We would, of course, steer utilization from a tier strategy standpoint to those that produce the most effective and most efficient outcome. So we're really about trying to manage the overall drug/medical spend as we sort of take our approach to pharmacy management, I think hep C is similar. And as far as where they are in the trend, I'll turn it back to Steve.

Sure. So from -- we do expect higher utilization of these drugs in 2014. We did see that in 2012 as well when we had the new introductions that came in mid 2011. But that's obviously something that's part of our forward outlook. It's contemplated in our pricing. In terms of the implications on our trend, we are talking basis point, not points, and it's fully reflected in our forward outlook. With respect to Medicaid specifically, just as the insurers' fee and other elements are components of cost, it is an element that goes into our build-up. It's an active part of our dialogue to the extent that we're covering pharmacy benefits in a state and it will be part of our beta process that Steve Nelson talked about. So thank you. I would say that, that will conclude our comments today. We remain intensely focused on the challenges and the opportunities of 2014 and 2015. And we thank you for joining us and thank you for your continued interest in our enterprise. Thank you.

This does conclude today's conference. You may now disconnect. And have a wonderful day.