UnitedHealth Group Incorporated
Q2 2007 Earnings Call Transcript

Published: 19 Jul 2007

[Operator:]

Good morning. My name is Dennis and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group Second Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited. Here is some important introductory information. This call will reference non-GAAP amounts. A reconciliation of non-GAAP amounts is contained on the investor information section of the company's website at www.unitedhealthgroup.com. This call contains forward-looking statements under US Federal Securities laws. Such statements are subject to risk and uncertainties that could cause actual results to differ materially from historical experience and present expectations. A description of some of the risk and uncertainties can be filed in reports filed with the Securities and Exchange Commission from time to time, including the report on Form 8-K filed in connection with the company's July 19, 2007 earnings release. Information presented on this call is contained in the earnings release and Form 8-K, dated July 19, 2007, which may be accessed from the investor information 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 welcome to our 2007 second quarter earnings call. This morning we will review our performance for the second quarter and first half of 2007, and update our outlook for the balance of the year. Today, we again have a number of our executives available for your questions on the call, after which John Penshorn, Brett Manderfeld, Mike Mikan and others will be available to respond any additional questions. Consolidated earnings were quite strong again this quarter. They reflected as I expect the full year and 2008 will do as well, the overall strength and adaptability embedded in our diversified business model. That business model is a strategic point of differentiation and has two dimensions. First, we focus dedicated businesses toward well-defined and high potential healthcare markets. And second, we leveraged three exclusive core competencies, healthcare facilitation, access and quality, the use of complex technology and the application of clinical healthcare information. Throughout periods of flux, this two-dimensional portfolio has consistently enabled us to adapt and succeed to economic downturns or changing market conditions, to perform well competitively and financially, and to remain focused on enhancing quality, affordability, simplicity, and access in American healthcare. Our diversified businesses help to provide the consistency and stability that enable us to deliver the strong results you saw in the second quarter. Net earnings per share increased 24% year-over-year to $0.87 per share, exceeding our previous estimate by approximately $0.06. Revenues increased 6% year-over-year, to just under $19 billion. Operating earnings increased 21% year-over-year, to more than $2 billion, and our operating margin expanded 140 basis points year-over-year, to 10.7%. The consolidated medical care ratio of 80.5%, improved 110 basis points year-over-year, below the low end of our expectation for the quarter. On a full year basis, we now expect the consolidated care ratio to be in a range of 81% plus or minus 50 basis points, an improvement from our previous guidance. Aggregate prior year reserve development in the second quarter was a net positive $100 million compared to $150 million, for the second quarter of 2006. Medical days payable excluding AARP, were 52 days, squarely within our expected range. The second quarter operating cost ratio was 13.8%, which compares favorably with the 13.9% operating cost ratio in the second quarter of 2006. We continue to make steady advances in this area. We targeted full year operating costs falling in the range of 13.5% of revenues, plus or minus 30 basis points, excluding the 409A charge, and based on our updated revenue forecast for the year. Cash flows from operations as reported for the quarter were $1.7 billion. Normalizing CMS payments to the respective periods, we achieved an equally strong $1.65 billion in cash flows. This is nearly 140% of second quarter net income. Our financial position remains exceptional, with the debt-to-total capital utilization ratio of approximately 28.5%, and available cash of $2.9 billion. In May, we closed on the $2.6 billion, five-year revolving credit facility and in June, we issued a $1.5 billion three-tranche bond offering, that was very well received by the marketplace. And both Moody's and S&P removed their negative outlooks this quarter. Return on equity in the quarter was roughly 23%. As you know, we resumed our share repurchase activity in mid March and have spent approximately $2.4 billion through June 30. We expect to spend over $2 billion more in the second half of the year. Further, we recognized some revenues earlier than planned due to the resolution of certain matters related to Medicare population eligibility and risk status. All of these relate principally to the current year operations and contributed approximately $0.02 per share, to the second quarter. These items were previously in our outlook for the second half of 2007. As we said in the last quarter's call, we recognize the need to focus sharply on the fundamentals in order to continue improving performance, and we made considerable progress in the second quarter and first half. Some examples

[Operator:]

(Operator Instructions). Your first question will come from the line of Melissa Mullikin with Piper Jaffray.

[Melissa Mullikin:]

Good morning. Can you walk through on what approvals and regulatory processes remain prior to being able to close this year's acquisition? And then I have a follow-up on, just a question on what was your basic share count for the quarter? Thanks.

[Stephen Hemsley:]

Sure. I think Tom Strickland is probably best position to respond to that.

[Tom Strickland:]

Right now we are waiting the final approval from the Department of Justice, that process is underway and we expect it to be resolved early in the fall. In addition, there are additional hearings in the State of Nevada next week and we are hopeful that the final approvals with the Nevada Insurance Commissioner will take place, again sometime within the next 30 to 60 days.

[Stephen Hemsley:]

Thanks, Tom. What were your second questions in share counts?

[Melissa Mullikin:]

Yeah. What was the basic share count in the quarter?

[Stephen Hemsley:]

Mike?

[Mike Mikan:]

1.3, 17.6 shares.

[Melissa Mullikin:]

Okay. Thanks.

[Stephen Hemsley:]

I think that was precise enough, Mike. Next question?

[Operator:]

Your next question will come from the line of Christine Arnold with Morgan Stanley.

[Christine Arnold:]

Good morning. You said that the Uniprise business had several wings and you feel like you are retaining business. Could you give us a sense for how much has been completed on that, what your incoming versus outgoing RFPs look like, and some sense of net wins versus a year ago?

[Stephen Hemsley:]

Yeah, we obviously can't respond to specific company names and things like that. In terms of providing, I think a good but broader response tranche bond.

[Mike Mikan:]

Yeah. Hi, Christina. I think we can characterize this year's inbound RFP activity as comparable in pattern to prior years; it is developing about 10 to 15% less than the pipeline for last year, which again was 10 to 15% below the pipeline of the prior year. As we continue to see a decline in the inbound RFP pipeline, we fully believe we see all that comes to open market bid in a large client sector of that which is coming to bid a less and less is actually changing vendors a defining portion is actually moving from one company to another within that context we continue to perform exceptionally well. Our closed ratios have improved and our retention has increased over the prior year. And that gives us some positive outlook towards the 2008, effective date selling season.

[Christine Arnold:]

So, when you said your retentions are parallel to where your RFPs were versus a year ago. And how many of those have been closed?

[Mike Mikan:]

You are asking what percentage of our existing book of business went out to bid this year versus a year ago.

[Christine Arnold:]

Yes. And how much of that has made a decision and you retained it?

[Mike Mikan:]

Right, the amount of our book of business that went out of bid this year was slightly higher than past year's, driven primarily by a typical three year renewal pattern that culminated this year. Virtually all of that large case business, the large pieces of that, has been resolved and retained. So the bulk of the risks, that we had inherent in that modest increase has been retained going into the '08 of season. So, we are through the consecutive.

[Christine Arnold:]

Okay. Thank you.

[Mike Mikan:]

Next question?

[Operator:]

Your next question will come from the line of Greg Nersessian with Credit Suisse.

[Greg Nersessian:]

Hi, thanks. Good Morning. I just wanted to clarify the health performance in the Ovation segment. I think, you mention the risks payable that you quantified as having $0.02 impact on earnings in the quarter. But so, if I back that out, there was still a dramatic improvement in the Medicare MLR. I'm just trying to figure out how much of that is sustainable and what are the factors that are specifically attributable?

[Stephen Hemsley:]

We try to address a little bit in the script about the terms of the traction that we're getting with respect to a number of the programs that we think Ovations brings to that space, uniquely a lot of them taken from the approaches to the market that Evercare has been very successful with, as well as the use of our network access on these programs. Simon, do you want to add to that or Lois?

[Lois Quam:]

I'd just point to all factors among the range of things that are having an impact there. The first is, as you've just said Steve, is that we're now able to leverage and broaden the United Network across the country and deploy the best of PacifiCare, and the best of United in terms of our network management, first time into the full year. I reckon that we've obviously maintained a continued disciplined approach to our marketing distribution and operating costs. Third, we took deliberately balance design to balance the benefit design, this being the second year which we've been able to apply our pricing and underwriting methodologies across the Medicare lives acquired through PacifiCare. And fourthly, and very importantly, we've seen enhanced care utilization and that has had a number of components, including being able to leverage elements of the Evercare model across our entire book. So, those factored amongst others means that we are seeing steadily improving performance.

[Stephen Hemsley:]

And we've always, as I think we've said to you in the past, kind of taken a long-term view of these programs, and not just a year-by-year view, and as a result we manage them in a way that we think that the profitability of these are sustainable, given what we bring to those programs.

[Greg Nersessian:]

I guess my question was more, if I look at you're components of your guidance, the commercial medical loss ratio, the guidance is between 81 and 82, and the overall medical loss ratio is 81, and which would imply that the Medicare medical loss ratio would be 80%. I'm trying to figure out if that is a sustainable level for that ratio; if there is something else going on there that we shouldn't sort of project going forward?

[Mike Mikan:]

There are two important differences obviously between the medical cost experience in our Ovations portfolio and commercial portfolio, although we don't talk. The first is that we can link a significant portion of that Ovations medical cost to our overall Medicare Advantage reimbursement levels, either directly by capitation or indirectly by Medicare network contract. And the second is that obviously the mix of services being used by senior members differs in important ways from the mix of services being used in the commercial population. So for example, we see a more pronounced impact on our Medicare Advantage costs as a result of recent litigation and cost increases from implantable cardiac defibrillators, sensing certain counselor therapist, and treatment of [macular] degenerations, all of which would have a higher utilization rate in the seniors' population.

[Stephen Hemsley:]

I would just broadly say that we have made the points throughout the year that in our diversified model, we are getting strong performance out of observation and it is offsetting to some extent the commercial business this year. Next question?

[Operator:]

Your next question will come from the line of Scott Fidel with Deutsche Bank.

[Scott Fidel:]

Thanks. First question is, if you could just talk about your pricing strategy in a little bit more detail and specifically, if in the back half of the year, you are looking for higher net yields and pricing than the first half, and also expectations around 2008, if you expect higher rate increases than you are seeing in 2007. Then, if I could just ask a follow up on your leverage expectations, and are you still comfortable at 25 to 30%, would you consider moving that up higher may be into 30 to 40% range?

[Stephen Hemsley:]

Sure. I will hand this question over, but instead of baseline, we take pricing actions every quarter. We are looking at pricing at all times. We are pricing to preserve our margins and to respond to the forward outlook on medical costs. So, we take these actions at all times. We have the actions at all times. We have been moving them up and we do expect to improve. And Dave, can you offer some of the background?

[David Wichmann:]

Sure. Thanks guys. Just to reiterate a couple of comments that, Steph we've made first our pricing strategy is been very, very consistent and our underwriting disciplines around that pricing strategy have been very disciplined, which focus on pricing to our forward view of medical cost trends. With your second question really related to are we looking for higher premium yields in the second half of the year and I'd suggest to you that, in the normal course of business, as we evaluate our pricing really on a quarterly basis. We determine when and when not to adjust it, and in this case we have decided to adjust it up, really for two things. One, obviously, we have a modest short fall in yields relative to 2007; and the second is really just looking to 2008, which we expected to be largely the same relatively flat cost trend, year-over-year. There are a couple of items that have come forward; really in the tech agenda and also with breast cancer screening. We do expect that you will have higher day content and some other items. I'd suggest that there is going to be a modest uptick in trends in 2008, and because of all those factors, we have raised our pricing expectations for 2007.

[Stephen Hemsley:]

And your second question, Scott.

[Scott Fidel:]

And I was just more around your debt to capital comfort level at this point. I know you talked that 25% to 30% historically. Is that still your comfort level or would you consider moving that up?

[Stephen Hemsley:]

I think we discussed that a little bit in our last call and we have ambition to move it up, but Mike you want to respond?

[Mike Mikan:]

Yes, Scott. We believe with our diversified business model, our strong cash flows at this company can sustain a higher debt-to-total cap ratio. We're working with the rating agencies as well as our Board. Right now, we're comfortable in our range and the guidance that we've given with the 30% debt-to-total cap, and we would seek to potentially, in the future, raise that maybe to a 35% range or so. But at this point, we're comfortable with 30% debt-to-total cap.

[Scott Fidel:]

Okay. Thank you.

[Mike Mikan:]

Thanks.

[Operator:]

(Operator Instructions). Your next question will come from the line of Matthew Borsch with Goldman Sachs.

[Matthew Borsch:]

Yes. Hi, thank you. Good morning. Let me just start by saying that, Steph, I think you're becoming CEO, is a very good thing for UnitedHealth Group. But I wanted to ask a question, if your thinking has changed about the industry at all with regard to cyclicality. But it seems to me that one of the problems you're dealing with right now, you're dealing with the tough end of cards, if you will, for the next two, three years. Would you agree with that assessment in terms of the buildup of competitive pressures, that you're seeing being markedly different from what we had a few years ago?

[Stephen Hemsley:]

Actually Matt, I've always believed that there have been a lot of competitive dynamics in the marketplace. And I think we've seen those competitive dynamics become more intense over the last couple of years. But I'd say we're in the middle of those kinds of dynamics. So, you and I've never actually had a conversation about personal views of the space. But I don't think they've changed from the perspective that I think, the space particularly in the commercial marketplace, has strong competitive dynamics. They are highly regional, and they are across multiple market segments. So, it is very difficult to generalize because of the meaningful segmentation. But if you're asking is there an increased intensity in competitive dynamics, I think that there has been increased intensity. But I'd say it's probably been over the last two years, and I think it continues, and I think it will continue for the next couple years, particularly given a relatively moderate medical cost structure in the marketplace. We perform when there are medical cost challenges, because we really have the capabilities to deal with those challenges, since we think uniquely better than others. So, in a period of strong medical cost advancement, we've the capabilities, and the leverage and scale to be, we think, increasingly more effective, and that would be my response.

[Matthew Borsch:]

Yeah, that makes sense. If I just one quick follow up which is if I pause together your guidance on the commercial involvement outlook correctly. It looks like you're looking for total commercial involvement risk plus fee days to be down slightly for the full year. And I'm just wondering, what you can point to that you think will be significantly better in 2008, as compared to this year, if it's internal or external?

[Stephen Hemsley:]

I'll let some others. But I'd tell you that I'm actually pretty encouraged with respect to the approaches, I think that have been taken to the commercial books of business. I think there has been a lot of fresh thinking about of the spectrum of products that are being brought there that I think there is a lot of fresh thinking with respect to specific market segmentation and I think we have a lot of opportunities to come a lot more affected in front end of our business, which is an area where I think it can be strengthen. So, I think it can be more much more effective in the front end sales, marketing, local relationships, the new products that are coming to the market place that introduced we have a three major new products advancing and others are coming forward and the orientation to making sure that book of business stays vibrant and fresh is, I think very, very positive, Ken, you want to response to that.

[Ken Burdick:]

Sure. Thanks Steve. Matt, I appreciate the question. Just to reinforce couple of other points that Steve made. We've had an improvement in small business meaning that the losses have been reduced from what we had seen over the past quarters, however, we haven't seen the complete reversal. We are excited about the new product line UnitedHealthcare edge and the modernization of our portfolio. We also, as we've mentioned in last quarter's call, the vast majority of the AMS and PacifiCare losses are now behind us that has cycle through. Second point would be that, our individual business has temporarily stalled that had been a source of for propound growth in the past and will be in the future. We are awaiting a couple of key markets for approvals namely, Rhode Island and California and we will be launching an eight new markets in addition to those to the later half of this year, which gives us a good right path heading into 2008.

[Matthew Borsch:]

Great, thank you.

[Stephen Hemsley:]

And Matt, if I can comeback and link those two if your question about view of the marketplace in total. I think that we are actually quite ahead, as you think about positioning of this book to move forward we are ahead in consumer products, we are ahead for agenda about affordability and price points on products. And I think we are ahead in terms of the nature of the products that we're bringing forward and the elements that we haven't talked about, which is how are clinical engagement of facilitation is integrated with our networks and how the premium networks and so forth are tied into those products. I think that we will see over the next couple years that the actions that have been taken over the last couple years are really going to be quite productive. Thanks.

[Operator:]

Your next question comes from the line of Josh Raskin with Lehman Brothers

[Josh Raskin:]

Hi, thanks. Good morning. Just a quick follow-up its sounds like Steve, you said in your prepared comments that the pressure on the medical loss ratios disagree on the commercial side still relates a lot to the favorable development and those comments are very consistent with what you said last quarter, but it did sound as though included in the press release you talked about competitive pressure on renewals etcetera. But I just want to reconcile that with your previous comments that said it didn't sound like you are seeing a real change in the marketplace right now. And I just want to make sure that what you are seeing in the second quarter is no different in what you saw in the first quarter or are there actually incremental change of things?

[Stephen Hemsley:]

I think I'm going to repeat what I said may be, you tell me whether it's responsive or not. We see the competitive marketplace, competition to be intense, but we have seen it that way. We had as we start the year we project what our net premium yield would be, and they have come in 50 to 70 basis points less than we have projected. We've as this said, we take a very routine pricing actions on that each quarter or more often if we have to. And we've taken those actions, and so we're continuing from that perspective. I don't really think that to change in our approaches.

[Josh Raskin:]

Okay, that's what I want. And then could you just clarify what's your comment was when you said your instincts were right about the Medicare Advantage network product?

[Stephen Hemsley:]

That we, as we really positioned as we entered 2007, and that position it takes place in 2006. As you think about the positioning of the benefit designs of the relative offerings across the Medicare space, we said that we preferred the network based versions of those offerings. But those offerings have we think greater value. They offer more potential to the recipient, and that they are more sustainable overtime because of that. And as a result we orient more to those than to the Private-Fee-for-Service, and that just been our philosophy. And we think that was a good positioning because we think that the network based products have a longer-term value. Simon, do you want to offer anymore, no?

[Simon Stevens:]

Nothing more than that.

[Josh Raskin:]

Okay. So, it sounds like more comfort with your ability to manage the cost, and maybe a slight excitement of the potential future for Private-Fee-for-Service is that what you talk about meaning sustainability

[Simon Stevens:]

I think, that's going too far. We believe that Private-Fee-for-Services continue to be part of our portfolio for 2008. We expect it continue to grow in this product. But that said Steve as just pointed out we're not overweight or dependent on the Private-Fee-for-Services. And taking our multiyear, and multi product approaches we do, we see that our broader organizational asset including the strength of UnitedHealth network can obviously be deployed with particular advantage in our network based Medicare Advantage offerings.

[Stephen Hemsley:]

Okay. If you just come back to the notion of networks, and the integration of care facilitation. What you can do for people with that we come back added in this, is it a cultural change in terms of what's the best for the senior for the consumer, the Medicare network based offerings have greater value, and greater long-term potential to serve the consumer, and that's why we value them.

[Josh Raskin:]

Okay. Thanks.

[Operator:]

Your next question will come from the line of Sheryl Skolnick with CRT Capital.

[Sheryl Skolnick:]

Good morning, everyone. Okay I've one very minor question and then a real question if I may is, answer my real question first and I think get to the minor I will get that. We're focusing on the commercial business Steve, if I want to interpret your comments in your term correctly, I think I've heard you say that you're refocusing, you're reorganizing and you're repositioning that commercial business in the sense that it sounds like you've reviewed the product portfolio and recognized that significant important new products need to be brought to market as you say modernize the portfolio. I hear you also saying more about the leadership in the consumer directed side, but I guess what I'm getting at here is really two issues. One, how big was the problem in commercial? How far behind the curve of keeping that product offering flexible up-to-date, customers service being what it needs to be, any or all of those important metrics. How far behind the curve might you be, because I'm getting the impression that you've lost the momentum and I'm getting that impression because your membership growth isn't all that robust. So, I'm trying to reconcile that with your comments that you think that you're ahead of the curve and I'm am trying to also get a sense of whether there is sort of this renewed effort to position the commercial business, so that may be we won't have to see another year of if not membership deterioration than flat membership, but declining mix of members in terms of margins and profit dollars?

[Stephen Hemsley:]

Yeah, there is a lot in that question, but in the broadest sense. First of all, I actually don't think we were behind in anyway and I don't want to create an impression like that at all. We have I think struggled with respect to being able to get a bead on commercial risk membership over the last couple of years. And I think across the industry based upon what I have observed and we do look, that has been more of an industry-wide situation and not at all unique to our enterprise. What I might say it has been unique to our enterprise over the last couple of years is that, we had been more active in acquisition and when you are and you begin to reposition those books of business and I'll deal with them separately. You will have more loss and that loss will run through your net membership reporting and we do the best we can, I'm trying to separate that related to new acquisitions, because there is a refreshment of that book. Most of the time those in our view need pricing potential and we know that going in. But I think to the core of your question is there, we behind in terms of product offerings or things of that nature. I don't think we are, actually we think that we are, unfortunately we will with the marketplace. I think the marketplace needs to move ahead and I think we're pushing inside this organization to say, let's do what we think is right and let's put kinds of products in the marketplace, that we think the marketplace is looking for. I think Vital Measures is a good example of that. I think the edge product is a good example of that. I think the [blade] product is a good example of that. I think tighter integration of our ancillary services and engagement with our consumer services is a good example of that. And I think we are pulling those things together and we are getting active in the commercial marketplace along bringing change and refreshment to that and that's why I think we are ahead. The service theme, I think we have, I believe that, a lot of that was related to PacifiCare, where I think we were more aggressive and perhaps too aggressive as we approach PacifiCare's platform, which was not as strong as our legacy. We overlaid the UnitedHealth Group model on it and we've had to retrench to bring more resources back and I think that has been done. Our legacy platform, actual service this year over last has been markedly stronger and it is only going to get stronger. It is in a lot of new hands and we are taking service extremely seriously on the consumer and the provider side of it, so that needed to be addressed anyway. Am I answering your question, Sheryl?

[Sheryl Skolnick:]

Yes, you're. And I guess my, this little quick question is typically when we hear about Medicare and Ovations and Evercare, we hear from Lois, is Lois okay?

[Mike Mikan:]

Lois, would you like to talk to Sheryl

[Lois Quam:]

Sheryl, good morning. Thank you for inquiring about my health. Yes.

[Sheryl Skolnick:]

Okay, just wanted to make sure, you are still there.

[Lois Quam:]

Yes. I'm very pleased to have such a strong team of people to work with. And as I think, I asked Simon Stevens, who he had worked with on the international business to join the organization earlier this year and as you can see he is making strong contribution.

[Sheryl Skolnick:]

Okay, excellent. Thanks very much.

[Mike Mikan:]

Thanks.

[Operator:]

Your next question will come from the line of Peter Costa with FTN Midwest Securities

[Peter Costa:]

Hi, you guys beat the numbers you sort of raise guidance, you bragged about the diversified model that you have, you're not getting value for it considering you guys have a similar evaluation to other health insurers, and your stock down today obviously because of the performance on the UnitedHealthcare business. Do you think about tying to capture some value for that diversity that you've in someway, have you thought about doing something to capture that value?

[Simon Stevens:]

Well that's a subject. We obviously are very oriented to making sure that industries are appropriately rewarded for their interest in our enterprise. We look at various approaches to achieving that and it difficult to get into a specific conversation along those lines. I think some of the questions about capital leverage start to get at some of it. And I could only respond to tell you that we're, I think a very active organization. We think, I think you can tell from our merger and acquisition activity, and I think you can tell perhaps from the way we approach capital, which I think might be a little different than others that we're active in thinking along those line. And beyond that I don't think, I can respond to specifics other than to suggest that we think that we could do better and we're focused on that. Well, that's not much of an answer, but I can't really, I don't think get into a lot of specifics on a question like that.

[Peter Costa:]

Okay.

[Operator:]

Your next question will come from the line Tom Carroll with Stifel Nicolaus.

[Tom Carroll:]

Hi, good morning. Thanks for taking my question. Quickly, just some clarification on the UnitedHealthcare medical loss ratio, you mentioned 100 basis points of the increase is really explained by the unfavorable development that you saw late at the end of '06. And then in the scripts, you talk about $10 million of favorable first quarter '07 development. So, I guess is it fair to assume that this late '06 unfavorable experience has completely gone? And then secondly, what's the probability of seasonal reoccurrence of this type of experience in your model?

[Simon Stevens:]

Mike, do you want to address that

[Mike Mikan:]

Tom if I get your question right or correct that the swinging prior year development that we forecast for the year is about 100 basis points, and that translate to about $300 million. We did not have prior year unfavorable reserve grew up from the prior year in the second quarter of this year. We did however have prior year favorable development last year in the second quarter similar to what we had in the first quarter. And so, the total impact for the year is about a 100 basis points year-over-year on the BCR and the net delta are the things that folks Steve and Dave Wichmann have talked about previously.

[Tom Carroll:]

Okay. So again may be could you talk about the second half expectations for this year and I know you've talked somewhat higher level on changes in pricing and expectations on enrollment and things like that. Again, do you think we see anything late this year?

[David Wichmann:]

Tom. It's Dave Wichmann this time. So you asked two questions that I just want to make sure we close out. One is whether the ‘06 development is done or gone and we are not seeing that continue to advance. So, we believe in fact that it is. Second, with respect to whether this is going to repeat, we have taken into account in developing our estimates of 81.5% to 82% benefit care ratio or medical loss ratio if you will, the natural ware off of the deductible like we experienced last year. So as you might recall during the fourth quarter of the year, we experienced a ware off of the deductible on our higher deductible or high deductible healthcare products and we have taken that into consideration. We feel quite confident in the 81.5 to 82% medical loss ratio.

[Mike Mikan:]

And I would just follow on Tom that. We believe that we've adjusted our reserve methodology accordingly, so we do not anticipate that the same occurrence will occur in this second half as it did this year from last year in which we reported in the first quarter that we missed, we don't think that will happen again.

[Stephen Hemsley:]

We will take one more question and then, through the balance of the day; John, Brett, Mike others will be available. So we would like to make sure that we respond and if you call us we will timely address the questions. But we can only do one now, so next.

[Operator:]

This morning's final question will come from the line of Charles Boorady with Citi.

[Charles Boorady:]

Hi, thanks. Good morning. Can you give us the seasonality of the med loss ratio generally for Part D this year for the four quarters? And if the guidance for a weaker 4Q this year reflects any change in the seasonality where we historically expect that to be and especially strong quarter for Part D? And so what you are baking into your assumptions for the 4Q?

[Stephen Hemsley:]

That question could take 15 minutes to answer I think. So, may be you should, we will give you a response now, but if it's not enough, we will handle it offline. Is that okay?

[Charles Boorady:]

Yeah. Really just the four quarters med loss ratios on a directional change from quarter to quarter and if the 4Q is not significantly improved for Part D is there some other reason why your fourth quarter guidance is lower than what we would have expected based on the first three quarters?

[John Penshorn:]

Hey Charles, this is John Penshorn. You know, we don't disclose medical care ratio for Part D on a standalone basis. I think we've stated clearly that the seniors businesses hurl across the portfolio of Ovations are all having very strong years. And the fourth quarter outlook that we have here we think is appropriate in total, which includes the comments that we just made about fully accommodating in our models the expectations around medical costs in some of the high deductible products in the later half of the year

[Mike Mikan:]

And we will see how that plays out

[Charles Boorady:]

Steve would you make any '08 or beyond comments that company historically talked about 15% plus annual long-term EPS growth, do you think that's achievable over the next one to three years?

[Stephen Hemsley:]

Actually, I would tell you as we look at the business, I think well we've been mostly about challenges and I like what's going on. I like the orientation that this leadership group is taking. I like the way that we are approaching the UnitedHealthcare business in terms of how we're looking at the commercial space. Obviously you have to like the positioning that has been taken by Ovations. I think the state business opportunities are really quite remarkable. I don't know exactly when those fall in place, and the other is that the movement in terms of the enterprise services businesses that Richard Anderson oversee they are making meaningful contributions, and they're growing at striking rate. So, I actually, I'm pretty gazed up about the business and the business issues, and I will go back to the theme that said, if you could have a sense what we are dealing with the middle of last year and the progress and where we're set to be back at this moment with the opportunities, we think are in front of us and some very difficult work that has gotten behind us. We're back into the business, and I think you're going to see that in 2008. I think you're going see it profoundly in 2009 and beyond. So, I'm not all backing off on that.

[Charles Boorady:]

Thanks.

[Stephen Hemsley:]

Thanks.

[Mike Mikan:]

Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. You may all disconnect, and thank you for participating.