Humana Inc. (HUM) Earnings Call Transcript & Summary

Great. All right. Good morning, everyone. Thanks for joining us today. I'm Steve Tanal, managed care provider analyst. And to my right is Bruce Broussard, CEO of Humana. Bruce, thanks so much for joining us again this year.

Good morning.

Look forward to chatting a little bit about the business.

So I thought maybe we'd start off a little bit high level, talk about strategy, a little bit about value-based reimbursement and the integrated model, kind of what you guys have been doing for a long time now. I think last year at this conference, we talked for a while about a thought piece you had published that, among other things, really highlighted the opportunity inherent in provider risk models. One of just 2 factors you had cited is holding the potential to greatly improve health care. And you mentioned then that 30% to 35% of Humana's MA members were in full-risk arrangements at that time. I thought I'd start by asking, how does that number compare today? How does the rapid enrollment growth you guys put up in '19 impact that figure? Maybe you should comment there to start.

Sure, sure. I think in general, we see a continued benefit and also growth in value-based payment models within providers recently, much more acceptance of it and much more desire to participate in it. This year, in total, value-based payment models represent about 67% or so of our membership. That, at the beginning of the year, was -- is really around 64%. What we did see is a dilution from 1 year to the next of about 3% at the beginning of it because of the growth that you just mentioned, that when members come into our plans, they're not attributed to a primary care doctor, and we begin to move them into primary care during the -- in the year. So you have both how many providers you have, but it's also where your members are utilized. And so we do see continued growth. But I would say, overall, it's not only about the growth of the membership. It's the quality of the relationship with the provider. We really try to strive to have our providers be in surplus, which means that they are making more than they would traditionally do in fee-for-service. And that -- actually, that is one of the metrics. We look at our operators and being able to manage and then measure the effectiveness of our programs that we offer them, including whether it's our human resources that are going into their practices to help them or the technology that we have. And we've seen an increase this year in the 2% to 3% level of also just more providers being in the surplus side of that. So I -- and we're managing membership growth and getting them into the providers for managing the contractual relationships with our providers. And at the same time, we're managing the effectiveness of the providers that we have. And we see all of those going up, but they're doing it in -- synchronized together.

And given that you and maybe some of your peers are sort of driving that shift, I thought I'd ask, of the members that are in full-risk arrangements, what percentage of those members roughly are with sort of Humana-owned providers?

Yes. We have about 12% of our members that are within Humana providers that range between our joint ventures we have that we are owner -- owned and to fully-owned clinics that we operate in. But I do want to emphasize that our clinics are also agnostic. So they see other Medicare Advantage relation -- they have other Medicare Advantage relationships. And some of them see a fee-for-service -- not a lot, but some of them see a fee-for-service Medicare side. But they're all dedicated the same.

Maybe if we turn that on its head then, actually, then so roughly what percentage of the patients of Humana [Audio Gap]

I don't think we have disclosed that.

Got it.

But I would -- there are more than less, let me say that much. There are more members than less members.

Okay. And so last year, we sort of talked about tracking provider surpluses as a measure of success on this whole theme. And on 3Q -- on the 3Q call, you all mentioned 60% of providers are generating surpluses. How does that figure compare to the prior year? Is that -- that's up about 2 or 3 points, is that right? Is that how it is?

It is this year, yes.

Yes, okay.

So obviously, you've seen an increase there. And again, I think that it's the effectiveness of the program as much as the -- as just the total providers that are in there.

And thinking about it on the same member basis, are the surpluses growing as well?

Yes.

So on the same theme, I think to my ear, it sounds like site of care is probably the key source of savings for most of the providers that are succeeding in these capitated models. We talked a little bit last year about network adequacy rules in Medicare Advantage and sort of local provider concentration as maybe points of friction in the shift to lower acuity sites. Are those barriers any more or less prohibitive now a year hence? And has anything really changed? It does seem like some progress is being made just with respect to telehealth access in 2020 in MA.

Yes, yes. I would say we continue to see more and more opportunity of building convenient access points for our members. You mentioned telehealth is one. Obviously, we have a number of partnerships we've announced during 2019. I think the home is another area where the home has traditionally been a home health nurse delivering a service for a particular physician order. I think you're going to see that expand. I think -- I mean I know for us as an organization, we see the home as an opportunity to bring care into the home that traditionally has been done at more of an institutional setting. So I just feel that we -- because of technology, because of payment, encouraging to be in a lower cost setting, and in addition, just that's creating some innovation in the marketplace, you're going to see growth in other noninstitutional [Audio Gap]

Sure. Now we were talking about that a year ago, you had pointed to dialysis as one area where potentially the competitive landscape may have impeded what could have been a greater sort of natural shift toward dialyzing at home. Is there a viable path that you see to realizing lower cost for dialysis? And [ big ] providers have to be involved?

Yes. Let me try to answer that in a series of different aspects because ESRD is complicated for both the structural reasons, concentration that's in that industry today. Then primarily reimbursed on treatment versus prevention is another area and then just the complexity of that patient population in general. We, as you well know, and it's going to come in 2021, the ESRD will be opportunity for people to come into MA as being an ESRD patient before, if you were -- you only can be in MA is that if you came in not being an ESRD and then became an ESRD.

Grandfathered.

That's exactly right. And so in 2021, there's that opportunity there. And we feel, for membership reasons, it's a great thing for membership because you're allowing now to incentivize and pay for prevention. I think today, the industry has been more paid for treatment. So -- and today, when -- if they do come in and they're in their early stages, how can we prevent it from advancing? And even if they're a diabetic today, a severe diabetic, how do we prevent them from going into ESRD? And so this whole incentive of prevention, I think, is great within the [Audio Gap] I think being in MA, also, if there the structural barriers can be dealt with, and I'll come back to that in a minute, the incentives around the most cost-effective care begin to start to also come on. What I mean by that is that people now are oriented to the delivery of the service in the most cost-effective fashion, both in dollars spent in the treatment also, but also the prevention side. So value-based payment models are an important part of that. And so when I think about relationships with DaVita and Fresenius and so on, moving to a structural area where it is more around payment around value-based is a big initiative for us. The third area that we are working with is really around CMS and then what they're doing on Part D and [Audio Gap] second. One is around network adequacy as the network adequacy rules today really doesn't incorporate home into the definition of network adequacy. So as we bring in another delivery mechanism, American network adequacy expand. And then in addition, just what's the geographic reach of network adequacy and how do we expand that to cure some of the structural issues of the concentration. And so for us, as we think about innovative delivery of home for ESRD, how do we also incorporate that, that it will also be recognized as a delivery model [Audio Gap] delivery system as a whole. And then the last thing that we look at is in the area with CMS, is the ability for them to insert more payment into the model because the more expensive ESRD patients [Audio Gap] more abundant MA program.

I want to come back to that but maybe in a different context. So why don't we stay for a moment on sort of the integrated model and then back to ESRD, if you will, as I've got more questions there. But same with sort of the value-based side of things, you've often referred to the 5 areas of health care that can have an outsized impact on costs. Those for Humana are primary care, pharmacy, home, behavioral and social determinants. Where do you see the most opportunity for ownership of provider businesses looking out sort of 1 to 3 years?

Yes. I would say the primary care where we do that more organically, we [Audio Gap] very little acquisitions within the primary care area because the -- what we are building in that particular service is senior dedicated and, in addition, value-based-oriented. And we find that building them is much easier than going out and buying them and converting them. There's only a few assets out there that have been like that. DaVita was the -- owned the largest through health care partners, which United bought. There's a few other ones out there, but are we -- not a lot of surplus out there for that. The second area is the home. I mean obviously, we have a put and call relationship with Kindred. And then we have the opportunity to bring the home and the hospice in, in 2021 or 2022, that area of -- but I'd say the expansion of that area with a new reimbursement system in the home area is going to make some of the smaller entities not as viable. And so there -- I think there will be a consolidation opportunity within the home, the highly fragmented nature of it. And then in addition, I see it being an area of growth by putting more clinical capabilities in that are more acute delivery of [ service ].

Okay. Partners in primary care. Focus on the clinics within that construct and/or then the JV with Walgreens to start. How did that first full year go? And how did traffic develop? I remember you talked about that last year. That was a key thing. Did traffic develop pretty well in those clinics in the first year?

Yes. And let me just make sure everyone has context on the Walgreens relationship and [Audio Gap] second. We are intrigued with the convenience of retail both in the location they are and in the lifestyle for our members and the day-to-day things that they need. And so if we can incorporate as health care delivery in that convenience [Audio Gap] we are intrigued by the opportunity to increase the scale of our -- of utilizing the -- our clinics. Our clinics, since they are organic and since it's dependent on AEP and members having to convert from one provider to another provider, it takes time to build them; 3 to 4 years is the time for us to scale it and get to an adequate return for our shareholders. And what we look at is, is retail an opportunity to accelerate that. Our experience over the last 18 months with Walgreens is that there is an acceleration. I would say it's meaningful but marginal. It's not going to -- it changes the curve, but it doesn't change it from 3 years to 1 year kind of thing. It flows. It's [ indiscernible], but it's in months and a year versus a longer -- a shorter period of time than that. But it's still -- we have found within the integration of -- within the pharmacy and the clinic that the team-based care model is really effective. We see good outcomes there, a little better than our stand-alone clinics. We see satisfaction at the higher rate, Star scores at the higher rate, clinical engagement at wonderful levels. So we see that it's just the team-based care model also has a great impact on that. So we see acceleration. We see the team-based side of that as being an important part of the retail side. But our independent centers are also very, very effective. And we would continue to do the independent side as well as the retail side.

Sure. I guess as we think about how those clinics develop, I thought it would be interesting to hear the approximate percentage of the patients in the stores after the first year that are Humana members.

Yes. And I would say in the -- a lot of them are Humana members. Again, we have relationships with fee-for-service, and we have relationships with other Medicare Advantage. We don't -- both because of the materiality and the competitive nature, we don't give any kind of details around that. But I would give you that Humana represents a [Audio Gap]

Sure, that's understandable. And what can you tell us about sort of the basic economics of the JV for Humana? I'm sort of thinking in rough terms, I don't know, maybe you want to steer the metrics as well. But revenue PMPM, profit margin rate, trying to understand how that might compare with the whole versus sort of your wholly owned partners in primary care clinics. Maybe the closest confidence may be.

Yes. I would say the larger enterprise impact is on the insurance side. And I would say that, that, the -- we receive the full profit of that side of the equation. And those economics are very similar to our other value-based payment models that are in this particular area whereas clinic-based, at senior-based, it's only seen by primary care. So I would say the economics from the insurance side. From the structural side and just how it works, these clinics have about the same economic contribution that they would have if they were independent or not. There are some benefits of construction, some -- from rent and so on. But the way the pieces of the pie are split up is that we pay Walgreens and -- a rent. They pay us a small management fee, and then we split the profits in the middle. I would say, for both of us as an organization, they're fairly immaterial amounts. On the whole, they can be material if it scales to the level, but I think that today, it's fairly immaterial. And the more important thing is the customer and what comes out of it and how we can scale this.

Got it. Well, I'm going to ask you how that might influence which side of the business, wholly owned versus JV, you prefer to scale more, but it sounds like you'd maybe be indifferent if the economics were larger that could [indiscernible].

Yes. I think the bigger thing for us is how do we gain more and more of our patients [indiscernible]. The economics from the insurance side is very, very compelling, but more importantly, it is that member satisfaction and the quality scores are there and the effectiveness of the care model is there. So it's as much about the economic model as it is about the outcomes that we receive and the longer-term satisfaction we have with our customers.

Got it. So maybe if we close the loop on the topic, any update on the expansion plans for the JV as well as the wholly owned side of the primary care business?

Yes. We will be expanding in 2020. We've opened a number of clinics in the Houston area that are in partners in primary care that are individually owned. And then we've also -- expanding within Kansas City, a few more with Walgreens area -- or in the Walgreens with the Walgreens stores. And then we're doing one in South Carolina to accent some of our independents. Each one of those -- and the South Carolina one is really a new door type for Walgreens that is actually they are taking it down to the floor and rebuilding it to be a pure health-oriented Walgreens that we will be [indiscernible] on the primary care. That is a test for them to see if our home- and our health-oriented store, how they work.

Interesting. When does that one open?

Sometime in the summer, I think.

Got it.

Right now, we're operating out of a trailer.

Got it. Awesome. All right. So let me switch topics and think about kind of the bridge to '20 off '19. Obviously, without getting too specific, I don't want to front-run anything you guys have with your release. But now you're coming off an incredibly strong '19 for membership growth, and it didn't even really seem to pressure MLR, which I think was surprising to some of us. I guess to what extent was that a function of taking share of existing Medicare Advantage members that may have come on board sort of coded for risk adjustment versus some other factor?

Yes. This year, it -- there was about 44% of the members who were coming from competitive plans. The year before, it was [ 40% ]. There was an increase, a slight increase, but I would say it doesn't explain the MLR or the lack of impact on the MLR. I would say one of the things that the organization has been very attentive to is how do we get our members into clinical programs quicker. I think that is, at the end of the day, the -- how we manage this effectively. And the organization, for a whole host of reasons, has become very intentional. It shows up in our Star scores and our effectiveness on our side, but I would [Audio Gap] area that we continue to invest in and feel that, that ultimately [Audio Gap] value for [indiscernible].

So over many years sort of very consistently said that new members typically will break even roughly in year 1 and then turn profitable in year [Audio Gap] at the March Analyst Day showed that trajectory. It was fairly steep [Audio Gap] so I wonder how that stronger start for '19, however incremental that may be, how does that influence your thought process around sort of the earnings tailwind associated with these new members in '20, if at all?

Obviously, we'll incorporate it into the estimates for 2020, and gives us some tailwind in the [Audio Gap] we've got a lot of headwinds. And it helps us with the earnings trajectory there. We do see still breakeven to a little positive, but I would say it's still on the margin is not going to make the year that we get the member in, going to make the year that following [Audio Gap] because it takes 2 years, 18 months, for us to be [ more ] effective.

Helpful. Okay. Now the return of the HIF in 2020, the health insurer industry fee, after suspension in '19, sort of posed some major challenges in planning. To my eye, it seems you've taken a number of actions to lessen the burden both on members and shareholders into '20. I want to chat about that a little bit, maybe focusing first on the operating expense run rate. First, the head count reduction and the staffing changes you announced pretty fairly recently, can you give us a sense for how impactful those might be in '20? And then whether those savings will be part of the run rate beyond 2020? Thinking about the sustainability, would you say you're lean and you're going to add back more -- backfill a little bit once the HIF is revealed or no?

We have -- one of the fundamental philosophies we have in the company is that we have to improve the productivity of our organization. Improving the productivity of the organization is how do you do it with sustainability. Now there's a lot of inefficiencies in health care. We create a lot of friction for our customers and how do we make it easier for them and make it cheaper for us. And that's sort of a philosophy that we embarked on a number of years ago. I think we committed that -- and when the tax reform came out, that we were going to take some dollars, reinvest those dollars into technology and use that technology to improve the productivity. That's what some of those dollars that you see we invested a few years ago. What you see that we did this year, it was about 2,000 individuals that were affected by this are really around how do we gain productivity. And productivity is around how do we use digital interfaces for our customers, make it easier for them. We reduced the interactions we need to have with them because we're doing it right the first time and with simple things as using phone call transfers and the phone calls, specifically to where are their systems that are disconnected that we connect and make it much easier for our associates for them [Audio Gap] improve the associate experience where they're not going to 2 or 3 screens, it's done on one screen, time-and-motion studies. And so you just see a lot of effort there. That's not a 1-year thing. That's a multiple-year investment that you see the organization. Comes down to this we need to gain scale and if -- I mean we need to gain efficiencies as we scale the organization. And then you see that commitment to our shareholders and to our customers as that is a must for [Audio Gap] The share, it's $1 more than last year. And next year, it might be a little less. So you're going to see some bumps as these initiatives come out, but the commitment is long term gaining productivity.

Okay. Sounds sustainable, I suppose. So I guess the midpoint of the current 2019 operating cost ratio guidance, the last one on this question, is about 50 bps higher than where you started the year. You all attributed it to higher incentive compensation related to strong year-to-date performance as well as, again, accelerated investments or rent through administrative efficiency in '20 and beyond. So neither of those items sound like they need to occur in '20, to my ear, at least not necessarily. And 50 bps on that ratio is $320 million, pretty significant. So is it fair to think about it in that way as maybe an offset to the HIF coming back? Or do you expect to sustain kind of similar levels of investment going forward?

Yes. I would say a number of those items -- I'm not going to be absolute, but most of those items are not reoccurring. I think one of the aspects you mentioned was the incentive plan. And I think that incentive plan has become a large variation with the line to the shareholder value as a result of expanding that shareholder plan to close to 30,000 people or at least by 4,000 or 5,000 people. And we did that to -- and this is one of the things we did in the tax reform, to align improved results that are aligned to our shareholders to a larger population, seeing as the -- as the shareholders are seeing better improvement or are seeing better performance in the organization, our associates are being [Audio Gap] At the same time, we also -- that incentive plan incorporates a Net Promoter Score. And so if our customer satisfaction goes up, they also get rewarded [Audio Gap] integrated together, but those 2 things is if the organization performs well, then there's some success. And if it doesn't perform well, then obviously, there's not a [Audio Gap] So next year, we reset it. We reset targets for our Net Promoter Score this year now. And in addition, we've reset a line to shareholder expectations. And so whatever the target is, is what it is. And if we overperform, that's great. But if we underperform, the shareholders [Audio Gap] That would be one that's going to have the volatility, some of the investments that we put forward, more of a timing difference to '19 or '20. And some of the investments are just a onetimer.

Okay. Now the competitive backdrop, and last question on '20, the competitive backdrop in MA seems to be intensifying into 2020. And that's based on our admittedly somewhat forward analysis so just the quantifiable aspects of plan design, whatever you could pull from Plan Finder. We thought we'd see more of a stable or degrading value proposition given the return of the HIF. Didn't seem like that's what we got. Am I missing something with that assessment? And more importantly, how concerned should we be for the profit margins in MA longer term?

Yes, yes. I think there's frequent questions with the amount of people that are -- or organizations that are going into MA. The competitive space is greater. I would say what I see is that there's a few players that are competing against each other. And I would say that would be Aetna, that would be us and United as being the primary competitors. We do see fall-away of some of the smaller players in the Blues. We -- and so there's people that are entering, and there's people that are -- organizations exiting and entering. But at the -- but we also see there is sort of a fight to the top where the bigger are getting bigger and the smaller are either staying the same or shrinking. And so you see market share being taken from the smaller players there. So the competitive nature from a numbers point of view, I just don't see that there. The competitive nature between a few plans is probably more aggressive. And then that's a very geographic positioning area and how it goes within the marketplace where it's dependent on provider relationships, depending on your brand, depending on your concentration in that market area. But we do see continued pressure there. In 2020, what we experienced is as we experienced there, where we probably were a little more conservative with the HIF than our competitor, and our competitor, especially United, I think United was much more -- came out much more aggressively this year than they have. So I would say just how we -- the tone of how we approached it was a little different. But on the other side, I would say that we are still committed to continuing to maintain a margin that provides ample return to our shareholders. And it's this constant fight between margin or membership, and we continue to believe that membership growth is important. So clinical programs and the development of clinical programs, the efficiencies of the productivity of the organization are all very important parts of the pricing model. I think the business would be easy if you just went every year and changed pricing and [indiscernible] in membership and margin and went through that. But in reality, the biggest thing that I think long-term margin pressure will be, will be is how effective are your clinical programs. Pricing is an easier way to attach the margin. But the way you are able to have that sustainability in margin is your clinical programs. And I think investing in the clinical programs and investing in the productivity of your organization is really going to allow the more -- the defense -- the best offense and the best defense for your margin.

All very helpful. I will point out, I mean, despite how you frame the competitive environment for you and United, the guidance adjusted for group inclusive of United, again, pretty similar, 5% to 10%. That's pretty healthy off of your '19 levels, so okay.

If you talk to our sales team, that didn't come easy. But I think [indiscernible] we have a lot of respect for United and what they do, and I hope they have the same for us. So each one of us make us better as we compete, but hopefully, we both get enough of the share.

Sure. Okay. So I thought we'd touch on some considerations for '21. Obviously, the major topic of discussion lately has been the repeal of the HIF. And I want to emphasize the word repeal. And maybe just the first sort of a softball question, how did that happen? It didn't even seem like a suspension was assured, and then the repeal came.

Yes. Well, I would say in general, it was -- not support, it was the mechanism to get it done is probably the biggest aspect of that. I think the Medicare Advantage, as I travel through the various different parts of the government, that has a high degree of support as a result of its reputation: the reputation that it is a consumer-oriented; the reputation that it's oriented to holistic health; the reputation that it's offering a much broader solution than what's out there today, public option and [Audio Gap] for service side. I would say just the support is there. In this political environment, anything that is logical doesn't -- it just doesn't get done. I mean you have to find these mechanisms to do it. And I think the mechanism was is that there needed to be an appropriations bill, there needed to be certain things that both sides needed, the Democrats needed and the one -- the Cadillac Tax, sorry. And I just think through the means, it came out that, hey, this does make sense for there. At the end of the day, how it got done is important, but it got done, and it is such a great benefit to our members and the ability for them to have more stability as opposed to this up and down. It takes where it was taxing the most vulnerable population that had the most cost. And so for us, as we look at it, it's helpful for the industry. It takes a risk out of the industry. But at the end of the day, the people that we serve, it's a solution for them.

And look, the pretax amount of it is massive, right, $1.2 billion of spend in 2020. Let's assume you give all that back to members. Now it's not tax-deductible either. And so over the years, it was in or it was out, you guys are always very forthcoming about, well, here's the math on the tax. Pretty easy to get, right? And so Brian defined that in 2020 as a $2.15 per share headwind at the Investor Day. Is it safe to assume that at least that much could come back in '20? Putting aside -- I know you're not guiding the core business, so you might do what you will with the $1.2 billion, but the tax impact, should that not come back?

Let me -- when we say come back, obviously, mathematically, it's going to come back here, but what we do with it is probably the more appropriate question you're trying to get to. I would say we are really not prepared to make that commitment. And the reason for that is that, first, we haven't seen the right notice. We've seen some preliminary information about that. This ESRD question that you're talking about is another area that we just need to understand more details about that. And then the competitive side and just what we like. And so we have a lot of work to do through this process to do it. We're fortunate we happen to help in those areas. But we really need to study this and understand as those details become more clear of how it is. So we're not prepared to [Audio Gap] I do want to say, just in passing, and -- is I think the math today of taking our higher end of our growth rate and then just adding this onto the growth for 2021 is probably -- I think that's too [ aggressive ].

And not what you're going to want? Or...

No, no, that's not.

But clearly, you could?

Well, we could do a lot by setting benefits, and doing that, in the short run, that might work well. But in the long run, I think it creates greater harm. So for us, I think it's too early, but we do just want to emphasize to our investors that it's not taking our growth rate and adding this to it. I think there will be a lot of movement in between as we think about the -- both the headwinds and tailwinds. And I'd caution our investors to [Audio Gap]

Fair enough. Okay. Helpful. And so if you think about the very known sort of factors for '21 that is an offset, clearly, how are we -- how should we think about it? And how are you thinking about the HIF repeal in the context of that rule change for ESRD patients that allow those members to freely enroll in MA plans? Like is that a major offset? Or...

It helps. And I think I'd just -- can I spend a few minutes just on ESRD?

Please. Yes, absolutely.

We talked about it briefly. I think ESRD is an area that we need to see further clarity on. I think as I mentioned earlier, and I just want to reemphasize it, is one is around just what is CMS going to do? We are actively engaged with them around are they going to put more funding in because of the expense of these patients? I mean lose on every ESRD patient we've [ been acquiring ]. Now it only represents below 1% of our patient population, but that's because of the way they come into the system. So funding is one area. Network adequacy is another that I mentioned, just how is the competitive dynamics there. The second part of it is, what is our relationship with the providers? And are they more risk-based or are they fee-for-service? And that is something that we are working with our providers on. And so that's there. And how does network adequately affect that? And then the third area is where are the areas of innovation we can bring to the table that allow us the ability to offer a lower cost in the home is one of those areas that would be -- that we can [indiscernible]. So there's a series of initiatives we have going on, administratively, contracting-wise and then also just execution-wise on the -- that we look at. And part of the big assumption that will be is, what is the penetration rate? What will the ESRD penetration rate be? And what's the total there? Now you can run a lot of scenarios of if it's a small penetration rate, the risk is less. I mean, if you have a significant penetration rate, then the risk is greater. And all those things in the middle that I talk about, contracting, network adequacy, funding and innovation, all affect that risk. And so you ask me, is this the headwind or tailwind? There's a lot of things we got to do, we got to take into account. And there's a little bit why we're uncomfortable giving an indication for the HIF, is we got to see how these details work out. There will be a number of them throughout 2020 that allow us to do that.

Helpful. And I guess I mean I think order of magnitude is helpful at this stage or a couple of years out. We're trying to do our jobs and do some research on this and figure out what the sensitivities are relative to the penetration. And as part of that process, we came across a white paper from a consulting firm that it was actually paid for by Humana, that said, "If every ESRD patient moved into MA, the hit to industry profits would be 1.7%." Now we actually called the consulting firm and said, "Is that a typo?" because that's not that material relative to the HIF, and they said, "It's not a typo." And because if you think about the pretax amount, the HIF alone is about 180 basis points of premiums, right? It's on a 4% pretax margin. That's 45%. And so I guess the question is, how concerned should we really be by this given the HIF repeal at this stage? Is it major? Or is it something that should be manageable?

Again, I think the HIF offers a tailwind to this. I think your math is solid. And now we're we going to pay for a report and let it be public again? But it's solid, and it gives you some comfort there. Again, I think it would be...

Their math is solid, not our math.

Okay, their math is solid.

Is that what you're saying?

Their math is good.

Their math is good, okay.

And I mean we paid for it and we listened to it. And so a lot of it is as an input of many. I would just say, my hesitation and my stuttering a little bit is just the fact that I think we need to see how all this falls out.

I understand.

But I understand exactly what you're trying to do, is what are those ranges. And the HIF gives some cushion, not for too much. I don't [Audio Gap].

That's fine. Understood, okay. And I guess now I'm going to skip a question that I add in your bag. I'm not going to get you to weigh in on whether CMS will act. But I guess I want to understand, what are you advocating for relative to ESRDs, specifically the mechanism of payment model if you're getting that far with CMS? Are you actually prescribing, "Here is how we could do this better," to remedy some of the actuarial issues?

Yes. No, we're really -- I mean I can't get into the details of what we're engaged with them on. But we're really asking to put more funding so that the benefits for all remain stable. That's what we're really -- the method of getting that funding in range. But the funding is there because again, these patients are very expensive patients. They're in a very expensive setting. The structural implications are all difficult. And we just believe that this type of patient population does [Audio Gap]

And you mentioned less than 1% of MA members, your members today are on dialysis. How do you think about the percentage of ESRD patients in the aggregate, 410,000 of them roughly in the country, 420,000 now? How do you think about what percentage of those individuals might prefer Medicare Advantage to fee-for-service? And is there any reason to believe it could be materially higher or lower than MA penetration of Medicare overall?

Yes, that's an interesting question because there's a lot of dynamics. I think first is -- to be honest with you, is what do the industry players do, and do they market and encourage people to go in MA or are they indifferent [Audio Gap] area to think about. And then in addition, the benefit to the -- for the member themselves around copays and maximum on out-of-pocket expenses today. A lot of that is covered both through charitable and then [Audio Gap] towards some of that. But I just -- there's a lot of dynamics there that the penetration would just follow standard penetration. But I [Audio Gap] other influences that could impact...

Makes a lot of sense, okay. Let's see, we've got 5 minutes left, so I'm going to be a little targeted, I suppose. Well, let's do one on here. Specialty drugs, right? It's -- I think everybody in the managed care industry is talking about this is the next major driver of cost trend looking out over the next decade. How do you guys think about the risk that, that poses through the medical cost line and like a traditional MAPD product? And what are you doing to get ahead of it?

I mean a few things. First, I think we are very oriented to the structural -- or the [Audio Gap] of specialty pharmacy from the point of view of just making sure that it -- when the drug comes to market, we're prepared. [Audio Gap] that's how we manage it. The second thing is, we are oriented to building capabilities, continued capabilities in managing the specialty pharmacy. And over the last number of years, there's been some expensive drugs that have come out, and we've done [Audio Gap] clinical capability appropriate there. And third is working with CMS and others on the use of the specialty drugs and where they are appropriate [Audio Gap] obviously a part of that. But I think those are the 3 areas that are the most important around being able to predict it, being able to manage it, but at the same time, able to ensure that it's being cost appropriate and [Audio Gap]

Got it, okay. So last night, you all put out an 8-K reaffirming most parts of the guidance, except the Part D enrollment was sort of trued up and got a little more specific. 675,000 I think was the decline that you guys identified there. So clearly, a tough year for enrollment for the stand-alone Part D business in '19, meaningful attrition in '20. You guys have been doing a lot of work there, I think over the past couple of years, to figure out what's really going on the market. And I guess I wanted to ask you, what have you learned there? And how are you repositioning longer term? And maybe as part of this question, maybe just remind us all how big that business really is in the context of earnings today, right, because I don't think it matters that much, yes?

Well, on the insurance side is more material on the Healthcare Services side on the material than on the mail order side. So I would just say that drives a good bit of our mail order business. I would -- just to step back, I think many of the audience knows that there's a limit for the number of slots you can have within a Part D plan being 3, [indiscernible] the 3. And so for you to make any kind of structural changes, you have to do it within the [Audio Gap] In addition, the other element of Part D is it is price-driven that price is a very important part of that. So if you want to -- and what happens over time is because of the aging of your membership, the price increases just actuarial. And if you're going to be profitable at all, to increase it. And so we are in a circumstance that we had a low-priced plan that turned to a higher-priced plan, went from $12 to $15 to $27. And for us to get competitive, we had to find a $15 plan, but we had to do it within the slots of those 3. So what we ended up doing is consolidating 2 plans into 1, created a slot, came out with a low-priced plan and introduced the high-priced plan. Our -- but we had to take those 2 plans, and we raised the price by 50% -- I mean 100%. It went from $27 to $50 or so. We -- in our prediction of the -- lots of our members, we predicted well the growth of the low-priced plan. And so that hit our target. And so our strategy of being -- growing the low-priced plan, we feel really comfortable with. Where the prediction we were off, how many people convert was -- exited the high-priced plan. And that's what you see. So the difference is not about the strategy longer term. We feel really confident we have a plan now that has a structural competitiveness around price. We feel that we can -- in 2021, we'll be able to grow that. We had to get through this transition. Painful for us, painful for the investors and seeing the attrition that you saw and also painful for our members because a lot of the members went through some -- a lot of education of going through this. So it was not a fun process to go through. But after all is said and done, we feel really confident about the longer-term structural positioning we are in.

Great to hear. Maybe one last quick one and then one general question we're asking. The last quick one is just simply, hopefully, we could just comment and move on, how concerned should we be by the flu?

For us, not a lot. It's more flu B. It's more pediatric-oriented. So our Medicaid and commercial business is impacted by it a little bit. But for the adult population, we don't [Audio Gap]

Very helpful. Now we're asking all of our CEOs today to share their views on one or more major changes that you expect will occur in your industry, however you want to define that, in the next decade that the investment community is not focusing on today. Any sort of...

Yes. I would just say the investment community sort of silos providers and health plans into 2 different buckets, so to speak. And I would say that over time, you're going to see more and more of that convergence. I think the convergence of taking risk and managing populations holistically because of payment models like Medicare Advantage, other things that are coming out and being able to do that and delivering the service within your organization and with partners you have, I think is an ongoing change that you'll just see long term.

Just ticked to 0. So...

That's why I stopped my sentence.

It's perfect. All right, we'll stop it there. Thank you so much for being here.

Well, thank you. Thank you for having me.

Thanks. I appreciate it. Thank you.