Humana Inc. (HUM) Earnings Call Transcript & Summary

Okay. Great. Good morning. I'm Steve Valiquette, the health care services analyst here at Barclays. Welcome to our next session which will feature Humana. Sorry for the technical glitch. We're a couple of minutes behind here. Now similar to another company earlier today, my understanding is that CEO, Bruce Broussard, is tied up in D.C. in some managed care industry meetings with Vice President, Mike Pence. But we are fortunate to have CFO, Brian Kane, with us for this fireside chat. And also Amy Smith from Investor Relations is here as well. So thanks guys for the flexibility, and welcome.

Sure. No, good to be here with you.

Okay. Great. So just to dive right in here. Obviously, coronavirus or COVID-19 is certainly top of mind for investors. Maybe you can just discuss how it's impacting the various components of Humana's overall operations, maybe split it up into the payer side versus the provider side.

Sure. Well, I think people may have seen that we put out a press release yesterday, highlighting the things that we are doing for our members to make it easier for them to get tested and to get care. We, like others, are waiving any co-pays associated with the tests for the virus. We're encouraging our members to use telehealth in waiving any co-pays on the urgent care side. We've also made available our -- the ability for members to get their scripts early -- their prescriptions early and get early refills. Typically, there are limitations in terms of refills. But just to give members peace of mind, we have waived that restriction. We also have ensured that we've stocked up on pharmaceuticals that we'll need for this, and so we have ample supply there. And then we've created a hotline for our members to be able to call specific agents who are able to answer specific questions around the virus and how our members can get care and the like. So we are responding very comprehensively, as you can imagine. On the provider side, our provider clinics, our primary care clinics, we're ensuring that our health care workers have the protections they need, the masks, et cetera, to be able to provide care for our members as they come into those settings, and similarly, liaising very closely with CDC and local health care testing sites to be able to get the testing that members need. So we are very prepared. As you can imagine, for our employees, it's similar to what others are doing with respect to canceling international travel, canceling all nonessential domestic travel, limiting significantly the number of conferences that we do, and it's a high bar for those conferences to take place in person. To the extent that employees can work from home, we are encouraging that. And we're also testing large-scale work at home to the extent we will need that if the virus really spread. So we are prepared as much as we can be and are ready to respond accordingly.

Okay. Great. So this next question, normally, you would ask a managed care company this sort of question and get no answer at all, but given the fluidity of the situation, maybe we'll take a stab at it. But I guess I'm just curious, you kind of argue it both ways, that on the one hand, you could see where there could be some increases in health care utilization across the system. Other places, maybe there's less if people are just kind of going into hibernation modes. So I'm wondering if you're able to comment right now, just over the last several weeks or month, are there any notable changes in utilization trends? Recognizing it's early, but are you seeing that utilization is either up or down in certain pockets that are worth mentioning? And just maybe we'll just try to dive into that if you're able to talk about it.

Sure. I would say, broadly, I think investors are trying to understand what the impacts might be. On the one hand, there are scenarios where, obviously, a lot of people go to the hospital. To the extent that people are on ventilators, that's a very costly admission. And so to the extent there's a lot of that and a lot of severe cases, that could be costly for the managed care industry. On the other hand, the flip side, people, to the extent they really don't want to go out and get -- go into the health care setting, to the extent they could avoid their elective procedures, what we've seen in past situations, say, hurricane, for example, or the polar vortex that we saw a number of years ago, we did see a reduction in elective use, which is a small percentage of our overall spend. But still, we did see a modestly positive impact. And so to the extent you have a situation where people are avoiding getting care and are not -- and you don't see a significant increase in hospitalizations and really high acuity of this virus, you could see a modest positive. I think also to the extent that people are not getting their care, particularly our chronic members, that's something we'll want to monitor because it's important that our members with chronic conditions get the care they need. And so those are the various things that we're monitoring. I would say it's really too early to comment on any specifics related to the virus and the utilization impact. So far, it's been modest, and we'll see where it goes. I suspect over the next few weeks, we'll have a much better sense of where we are with this.

Okay. Okay. And then just quickly around kind of short-term utilization trends. I think -- people, I think, are -- separate in their minds coronavirus from just flu season. But as we think about just average flu season cost for Medicare and what's happening this year, just in general, is it something that you're able to touch on as well?

Yes. And I know investors have asked those questions, and we historically have not provided -- I guess just for some clarity, I would say our Medicare flu costs, our average season flu costs, when you think about it comprehensively, which would include pneumonia-related effects of the flu, all the Rx spend, any kind of vaccine costs that we cover, it's in the neighborhood of about $375 million for a typical flu season, plus or minus. And again, that's a fully loaded picture. And so that's typically the number that we price to. Obviously, as we grow, that number increases over time. The Medicare population gets hit harder than others, as we know, for the flu. And we're prepared if there's another outbreak related to the virus to be able to handle that. I would say, and this is important, as people think about cost for 2020 versus ongoing cost, our expectation is that, to the extent we believe that this is -- it will become more of a regular feature of the annual flu, we would price for this for 2021 to the extent there's any meaningful impact. I would imagine the industry will as well, and so we'll be able to price for this like we do for the flu today.

Okay. That's helpful.

I hope it will be a onetime event if it occurs.

Okay. All right. And somewhat tied into that, don't know if you're able to comment on this or not, but just given your comment on the last quarterly results about 1Q 2020 earnings representing about 24% of full year earnings and recognizing that you've already factored in flu seasonality and then so far coronavirus not really changing much, I mean, should we assume there's no incremental impact as far as 1Q '20? And that guidance you gave around 24% of full year earnings, that still holds the way you see things right now?

Yes, I would say that holds, and we reaffirmed guidance last night or 2 nights ago, whatever, just to that effect. So yes.

Right, perfect. Okay. Okay. Great. All right. Shifting gears here a little bit to other parts of the business. I know it's a little bit early to discuss 2021 individual MA benefit plan design, but I guess I'm curious if there's any learnings from the competitive landscape for the 2020 enrollment cycle that may lead to any changes or adjustments or other things you might be thinking about for next year's season.

No, nothing specific. I mean, obviously, this is a competitive space. We've more than held our own in '19 and also in '20, notwithstanding the return of the HIF. Obviously, the HIF going away in 2021 will be helpful for us and disproportionately benefits us. So we feel good about the 2021 season. We're still working through 2020, obviously, but we understand that we're getting to that season. Again, we're -- we have to think about 2021. But no, we feel good about how we're positioned. We're ready to really start in earnest the pricing discussions, where we've laid a lot of preliminary groundwork. Obviously, waiting for the final rate notice. But we feel good about how we're positioned. Membership is doing well for 2020. We feel good about the guidance we gave, and we're hopeful that we continue to grow at or above the market going forward, and I think we're well positioned to do that as we've demonstrated in the last 2 years here.

Okay. Okay. And speaking of the HIF removal, people are going to keep on asking you about, hey, how much of this for 2021 may fall to the bottom line versus how much you might reinvest in the operations. I'm sure right here today, you're probably -- I don't even know exactly how you're going to handle that yet, so I'm not going to ask you to give any color on that. I guess my question would just be, do you know at what point this year that you will have some clarity on that? And when should we expect to hear about the -- how that's going to be handled for 2021, the way you see things right now?

Yes. I mean as you know, we -- typically, the process is -- on the third quarter call, we give sort of high-level EPS guidance. Sometimes on the second quarter call, or in rare instances on the first quarter call, we might give some directional guidance. My guess is we won't say anything material on the first quarter call, but we're still evaluating what we might say. I would imagine the second quarter call, we might start giving some more direction. But really, the third quarter call is where we provide much more specific guidance. We just got -- we -- some buzzing in there -- we just -- we need to make -- we -- typically just because of the competitive nature of it, we don't disclose that much detail, as you can appreciate.

Yes. Okay. As we think about some of your individual MA members by vintage year, for lack of a better phrase, just for the members that you've added for calendar 2020, is there any preliminary read on the profitability of this group and margins so far in the first several months of this calendar year? And any update just on the progress of moving these patients into Humana's medical cost management programs?

We've not seen any issues at all. I mean it's way early, obviously. We get some APT or admissions per thousand data, drug data, but it's still very early to really make any conclusions or judgments on the members, but we have not seen anything that concerns us with respect to the new members.

Okay. That's helpful. And if we think about the 2019 vintage and to the extent that you're still trying to monitor this in isolation, again, all this talk around, hey, in year 1, some of the MA members are less profitable, they become more profitable in year 2, so for the new members that you took on in calendar '19, are you seeing the typical year 2 margin lift this year for this group of members? Just curious to get any thoughts or updates around that.

Totally fair question. I'd answer it the same way, which is we're not seeing anything that would suggest we're not, but it's still too early just because we don't have real claims data yet. But I would say that our revenue and cost estimates are in line with expectations at this point.

Okay. And then also sticking with MA for a minute here. Obviously, on the group side, you got some pretty strong growth for this year, and it's been well documented about some wins or at least one pretty good-sized win from one of your competitors. Maybe just any update on the transition of that business. Any surprises? Or has it been pretty routine transition for Humana on the group MA side?

I would say relatively routine. I mean each account has its own things that they need and service levels that they expect, and we're obviously very happy to have this account. I think all things are going well at this point.

Okay. Great. I just want to give a little update on the progression of some of the Medicaid operations. I don't know if you're able to talk about anything sort of state by state, but maybe just give an update on what's going on, on the key states you're focused on for this year. And then also I think you're waiting to hear on Louisiana as well. Maybe just give an update on Medicaid.

Yes. Not -- I would say nothing new. We are waiting here on Louisiana and Kentucky to validate the procurement wins that we've had. We expect to hear hopefully relatively soon on -- very soon in Louisiana. We'll see where Kentucky goes. But we feel good about both those procurements. I think if you look at the scores, we really acquitted ourselves well. We continue to look for additional procurements. We're still waiting on Texas actually in terms of the Texas CHIP/Texas TANF business that we haven't heard yet. So we feel very good about our Medicaid business. We continue to want to grow and expand it prudently. We're going to continue to bid on procurement opportunities as they arise. And to the extent there are tactical acquisitions that we could do in particular states, we would certainly be open to those as well. So we're working through that.

Okay. Great. Okay. Before I dive into a few other parts of the business, I did have one other question I forgot to ask around coronavirus, and that's really just the concept of having any sort of reinsurance coverage for pandemics, et cetera. Just curious if that's something that -- has that been triggered any time in recent history that you can think of? And if we also had to compare coronavirus to any of the other virus type situations, whether it's SARS, MERS, Ebola, you name it, is there any of those that you would say the pulse is parallel to what's happening this year? So I'm curious to get your thoughts around both those subjects on coronavirus.

I think -- yes, I think on the second one, it's really hard to compare. We just don't know enough yet, I mean, what the incidence rate is, how prevalent it is, what the mortality rate is, because a lot of it's unreported still. So I think we got to withhold judgment on that comparing it to other viruses that we've seen. I think with respect to reinsurance, again, I think it's too early to tell. I think, honestly, it will depend on how severe it is. Quite a bet, other industries are probably higher on the pecking order than we would be, but I don't know. We haven't had those conversations. I think it will depend on how severe the challenge is. Certainly, people who are uninsured, I think, will get -- are most likely to get the coverage on this topic. And then industries that are perhaps more systemic in nature that could really impact the economy like airlines, et cetera, might get something. But it's hard to say on whether the insurance -- the health insurance industry would get you reinsurance for an extreme outbreak. I don't know the answer to that. We'd obviously be supportive of that, but it's hard to say whether that would come forward.

Okay. Great. Okay. Again, kind of bounce around here a little bit in our last couple of minutes here. You mentioned that you expect about $0.55 of incremental EPS from the group in Specialty segment in 2020 versus 2019. Is there any early read in 2020 or just general updates on the expected improvements and how that's progressing so far?

No real update. We -- I would say that the baseline that we underwrote, the '19 baseline feels good. So one of the challenges we had last year is that we had negative prior period development coming into the year. We're not seeing it this year, at least, through February claims. So that's the only real update. We still have, obviously, ways to go here. But so far, so good. And importantly, strategically, I think we're making real progress on that front as well. So I would say positive so far, but way too early to make any conclusions.

Okay. Okay. And then final question, just kind of bounce it around here a little bit. So if we think about Medicare Part D, it's been somewhat of a volatile business for you guys over the past couple of years, and it's been volatile, I guess, for a lot of companies, although there was a slight improvement in your outlook for 2020 from your prior update. But maybe just taking a step back, curious to be able to provide a little more color just on some of the key variables as to why, in your mind, the Part D markets become just so hypercompetitive. And maybe just talk about a few key points around that.

Yes, I think that the challenge with the Part D market, as we've discussed before, is that really is a commodity business. It's a price-driven business. We're trying to change the basis of competition over time to add more value to our members, but I think that's what's driving it. I think different players have different needs and different objectives. Some might be trying to drive retail traffic, others are making most of their money from the insurance side but have been able to have a low price product to attract a really healthy mix and drive profitability. So I think it really depends. But I think some players are being more conservative. I'd put us more on the conservative side, just trying to get to a position that's sustainable. That over time will allow us to continue to cross-sell this product into our Medicare Advantage book, which is an important opportunity for us that we're focused on. So we'll see where it goes. We'll continue to innovate in the space. Our goal this year was to stabilize the book. I think we're hopeful we've accomplished that. Probably, you really don't know what others do, will do next year. But we got to a low price position. The sales of that low price product are going well within expectations. And so I would say our goal is to keep it more of a stable business to give us a pool of members who we can convert to Medicare Advantage over time. The interesting thing, as you probably noticed, is that the industry actually shrunk this year in AEP, 450,000 members. We think a lot of those went to Medicare Advantage. So that's, on balance, a positive thing for us. We're hopeful we continue to see that type of progress.

Okay. Great. All right. With that, I think we're out of time. So I'd like to thank Brian and Amy for their time today, and enjoy the rest of the virtual conference.

Great. Thanks, everyone. Take care.

Okay. Thanks.