Humana Inc. (HUM) Earnings Call Transcript & Summary

Good morning. This is Kevin Fischbeck from Bank of America. I want to thank everyone for joining us, kicking off the virtual health care conference this year. It's my pleasure to introduce Humana. Humana is one of the largest Medicare Advantage companies in the country and Medicare Part D providers. The company also has a commercial and Medicaid business as well. Presenting today, we have Brian Kane, who is the CFO. Amy Smith from Investor Relations is also on the line as well.

So Brian, maybe we could just start off the conversation talking about what seems to be the -- probably going to be the theme of the conference this year, which is COVID and how it's impacted the business. Obviously, you talked about volumes dropping towards the end of March, down in April. Do you have any updates on how volumes are trending and how you're thinking about that return of volumes through the rest of the year?

Sure. Well, good morning, Kevin. It's good to be here with you virtually. From a volume perspective, not surprisingly, we still see very depressed volume. We are seeing slight rebounds but off a very low base in certain of the states that have opened. So we are seeing some activity, some surgeries getting done, an increase in primary care visits in person. But it's still very low, really, again, not really a surprise. I think over the coming weeks is where we're going to watch it closely to see how quickly the utilization rebounds. I think what we said on the earnings call, which is still the case that it's conceivable over the coming weeks, you see a bit of a surge to catch up on procedures that really needed to get done that couldn't get done, what I call critical but nonemergency procedures. So I think you'll see that. I think it's still a question as to when we get to the back half of the year, where does utilization ultimately settle out. I think it's conceivable that perhaps it settles out a little bit below the capacity that it did -- that it had before. The COVID crisis, there are scenarios where, at least for a period of time, it stays above the baseline, just again based on the catch-up. But it's something that we're monitoring closely.

Okay. That's helpful. And so it does sound like, at least in the first half of the year, the numbers are going to be maybe below -- actually, maybe before we do that, when you think about volumes potentially kind of maybe being above average for a certain period of time. I think you mentioned surgeries, you mentioned physician visits as kind of the things you're starting to see now. Are there any other things that you would say -- that you would expect to be kind of the first things to come back? Or is there anything that you would say you might think it would be the last thing to come back?

Well, I think pure elective surgeries in in-patient settings I think is going to take some time to come back. I mean whether that's around sort of hips and knees or ophthalmological treatment or even basic things that get done, basic screenings and the like, I think probably might take some time before that bounces back. But we do think you'll see, again, more, I would say, critical surgeries that have to get done will bounce back more quickly. And again, we are hearing anecdotes of that, that there are facilities that are reopening, outpatient facilities that are reopening and scheduling. In our home health business, we're also seeing -- I would say certainly, we hit the trough and we're starting to see a slow rebound in home health, albeit it's really slow and still early. So I think things that are most elective and most institutional setting will be probably the last to come back, would be our expectation.

All right. That makes sense. And then I guess, since utilization is kind of starting off the year a little bit below average, you mentioned in the call that you would look to reinvest upside back into the system to support patients and providers. I mean how exactly does that work? And does that just kind of mean that, as investors, we should kind of expect you to be in that range, around $18.50, for this year?

Well, yes, and that's what we said. We've maintained our guidance of $ 18.25 to $ 18.75, which is the guidance we came into the year with. We expect to end the year at that level. And what we said was, to the extent there was utilization outperformance, meaning that there was less utilization than we had forecasted, we would reinvest that with our various constituents, whether it's members, providers, the communities we serve, et cetera. The other day, we did announce a copay waiver on all primary care and behavioral visits, which really was done as a way to get people back into the health care system once it was safe to do that. And obviously, that's not an immaterial cost, but we thought it was the right thing to do. We're providing care kits to all of our members, which include masks and instructions and things to -- for our members to stay safe and be able to really go out and really reenter the economy and feel confident doing that. And so you'll see us continue to do that over the coming weeks and months because, again, we really want to make sure that our members are safe and our providers are in good stead. I would say, as you think about the numbers in the second quarter, we've seen some of the analyst estimates. We tried to indicate on the call that, really, the second quarter would have a disproportionate amount of the earnings. I think we said the second half would heavily weighted to the second quarter. I think the analyst estimates are still too light in that regard. And really, we're looking more towards the high end of the various estimates that are out there is probably a better proxy as to where the quarter might shake out, and then we'd see lesser earnings throughout the year as utilization picks back up and some of these programs that I mentioned really kick into effect.

Okay. That makes sense. And you mentioned that you're -- when you think about 2021, that you kind of think of $18.50 this year as the base, I guess, to think about 2021. So how are you thinking about pricing for 2021? It would seem like not having -- this year's utilization is all out of whack. So how do you feel comfortable that you're going to be able to price to next year and that you should be able to show growth off of that $18.50 number?

Yes. Well, that is correct. So we are using $18.50 as the baseline. As you said, there is less data than normal when we sort of price for the next year. We call it emerging experience. What does the baseline look like for 2020 as we trend into 2021? So there is less experience than we've had in the past. So we still have a reasonable sense of our revenue numbers, which based on the risk of the members that we got for the year. So that's not really impacted by COVID for 2020 as we go into 2021. And then on the cost side, we have basically data through mid-March on admissions per thousands and very initial claims. So we will make some assumption around emerging experience. As we mentioned on the call, the business is doing better than we initially forecasted coming into the year. So that will -- we will bake that into our pricing, and that's how we think about the $18.50. And then as you trend forward, the question then is, well, how does COVID impact your trends? So the first thing is to get the baseline right and then you trend off that baseline. We have a view in the ordinary course what trend would be. And then we have to make an assessment of where we think the COVID trend will -- or the COVID impact -- will have an impact on trend. And that's something we're debating, whether there's some arguments for that it could be elevated for a period of time. There are other arguments that people won't feel as comfortable using the health care system and, therefore, are less engaged in the institutional setting. And so it could be pressure trend for a bit. But I think it will be slight either way, and -- but that's something that we're wrestling through. And the other impact is on revenue, which is to say, hopefully, the economy opens up quickly. We are, as I mentioned, starting to see that. But to the extent that people are not comfortable using the health care system in 2020, we're not able to effectively collect the documentation codes to assess the riskiness of the members that we have because we get paid for 2021 based on 2020 risk that we're taking. I would tell you that we're very focused on this. We are gearing up, ready to make sure we can collect those codes. And so working a lot with our internal teams and our vendors about ramping up things like in-home assessments once things settle down, availing ourselves to video telehealth, which CMS has accepted for risk adjustment purposes. So we are very mindful of the 2021 impact -- of the COVID 2020 impact on the press utilization and how that might impact revenue, and so we're doing everything we can to mitigate that exposure. So I think as far as 2021 goes, I mean, I still feel good about how we're positioned. I think the other thing we've got to consider is the selling season. That's something that we're watching very closely in terms of the ability for our brokers to have over-the-kitchen table-type sales. We've already seen a big increase in telephonic sales long before COVID, and that's increased even this year. Before COVID, but then with COVID, you've seen a real impact on -- not surprisingly, on field sales in person. So we're also assessing the impact of that on potential growth. Now obviously, that impacts everyone so -- but that is something that we are assessing as well.

Is there any reason to believe that -- you guys have an in-house broker contingent that's, I think, bigger than anybody else. Is there something you can do to kind of mitigate that disruption to your broker and leads? Or is it just something that everyone's going to have to be suffering through?

Well, we're spending a lot of time and effort on really equipping our brokers to sort of flip their business to more telephonic, give them the digital capabilities they need to be comfortable doing that. It is a different kind of sale, but we are doing our best to migrate them. I would also say, we are converting a lot of our folks who normally take appointments into actually driving sales, and I'm talking about the internal teams now. And so trying to leverage all the capabilities that we have. So if you've been taking appointments to set up in-person sales, we want to convert that to more of a telephonic beyond appointment scheduling to actual getting the right people on the phone, meaning our licensed brokers to actually sell products to leverage that channel as well. And then externally, working with our broker partners to help them, again, equip themselves to be telephonic. So I do think there are things we can do. It's something that we're very focused on and moving quickly on, but there is uncertainty around that. Again, it impacts everyone. What we have seen so far is that while sales have come down, not surprisingly, in the COVID crisis, terms have also come down. And so from that perspective, that's actually a good trade financially and it doesn't impact growth as much. Obviously, it offsets the impact of sales and from an impacting of growth. But nonetheless, we are watching that dynamic, and it's something that we just got to be very focused on as we move into 2021 here.

Okay. That's interesting. So the turnover is lower, and it's better for you to keep a patient that's cheaper -- I guess, financially advantageous to keep a patient than to get a new one, say?

Right. I mean for a couple of reasons, they're already -- typically, they're more likely to be documented and so we get paid appropriately, and they're more likely engaged in our clinical programs. So typically, our longer-tenure members have better financial results than our shorter-tenure members. Members that we get new sales typically are breakevens, where we price things at, so there is that impact. That being said, we want to see the sales channel grow because ultimately, we need to bring more people into Medicare Advantage. And that's -- we think we have a compelling product. You've seen growth this year, really, from a market perspective, be very robust. And we think the product is resonating with the marketplace, and so we want to be able to sell it any way we can.

All right. Great. I guess one last question on the 2021 pricing. The MA is now going to be an option for people with dialysis for the first time versus if you're already on an MA plan and had kidney failure, you could stay on an MA plan, but you can't -- you couldn't choose one until 2021. How do you think about the implications of that? And have you gotten clarity yet on the network adequacy side of things?

So we're still working through that element. And again, we -- the rules that were put out we're very supportive of. And we think that will be, on the margin, helpful for 2021, but would be meaningfully helpful as the years go on here and as we avail ourselves of new technologies, new sites of care. We're hopeful they get finalized, and I think they're very positive and a very good step that CMS has taken. We've talked about this before. We've done a lot of work around how many people we think will come into Managed Care, Managed Medicare, and then what portion our plans will attract, and then what is the unit cost to serve those members. And I would tell you, we're very focused on all 3 of those elements. And we are, I would say, feeling a little bit better than where we were, but there's still ways to go in trying to understand the impacts of what that will be. And I think that's something we'll talk more about as we get it through the second and third quarter, we can provide more color there.

All right. Great. And you talked a little bit about COVID disrupting risk scoring. I guess what about Star ratings? It sounds like you'll be able to use the Star ratings again. But you already have next year's Stars locked in, but Star ratings again for 2022. Is that -- how do you think about that? Is that a net positive because your star ratings are already so high? Or do you kind of count on a little bit of improvement every year?

Yes. So for bonus year 2022, so right now, we're bidding, obviously, for bonus year 2021. Those are the Stars we got last September. Where you get new stars this September, which is for bonus year 2022 and so -- and that's based on 2019 service periods. What CMS said was we recognize there's a lot of charts you need to collect. There's a lot of sort of administrative work that's impossible to get done during the crisis. There's a customer service survey that would be happening right during the COVID crisis. And so again, that would be distorting. So we're not going to hold you to that. We're going to let you use the prior year Star scores. So on balance, that's a good thing for us for 2022 because, again, bonus year 2022 because we're in a good position, as you said. The question then really revolves around bonus year 2023, believe it or not, which is based on 2020 service periods for HEDIS and the like. And that is something that we're working through with CMS and get their perspective. There haven't been any discussions about that yet publicly. And that's something that we're obviously very focused on as well because a lot of the care that happens to close gaps occurs -- is occurring -- typically occurring now in 2020 for bonus year 2023. But because people aren't using the medical system, it's harder, obviously. Now to the extent we engage in those in-home assessments that I mentioned, really ramp up the ability to see our members, and we're going to have, as you can imagine, a big campaign around that in the back half of the year here as the system hopefully opens up, that will have an impact not only on revenue, but also on bonus year 2023 Stars. But that is something that we're very focused on and working with CMS on.

Okay. And then, I guess, maybe the last component about next year's pricing is the HIF going away. It's a nice tailwind, probably a bigger tailwind for you than for anybody else. Given how it impacts MA, I guess you've kind of cautioned people not to take your 11% to 15% long-term growth and just throw $2 on top of that. But why not? And I guess, how do you think about factoring in HIF into this next year?

Well, as we've always said and we, I think, demonstrate is really trying to balance top line growth with bottom line growth and the perennial growth and margin question. And that's something that we'll continue to do for 2021. And we think the idea of just putting the north of $2 into EPS is too aggressive. We don't think that is the right balance. And so we will balance growth in margin. We want a compelling product for our members as well as a compelling EPS line for our shareholders. So that's really what we're balancing.

And I guess, do you have any thoughts then about what that industry growth might look like next year? You've talked about the disruption here to the broker channel and everything else. Do you think next year is going to be a normal year for industry growth?

It's a fair question, but it's just really hard to know. I mean the way I think about, the way we think about industry growth that for 2019, when you adjust for the cost plans and a few other things, we are well into the 8% range, probably mid-8s or so on individual MA. Before COVID happened, I would have said that 2020 could exceed that, which was pretty amazing given obviously the HIF was back and just really the acceleration in growth that we're seeing. And then in 2021, with the HIF going away, you would think that, at a minimum, you could hold serve, I think COVID does really create some questions around that. It's hard to know. I mean there are scenarios where there's really no impact or scenarios, like I said on the selling season, where it could create some disruption. But hopeful that it won't, but it's just something that we don't really have a sense of yet. And again, we're doing everything we can to mitigate that impact. But without COVID, I would say we'd be in a really, really good spot. Now COVID just creates a little more uncertainty, but I still think the growth dynamics are very, very strong for the business. I mean you just think about the unit growth, add to that sort of the PMPM growth, it's a very good dynamic that we have here.

Yes. And I guess, how do you think about growth during recession? It seems like we're going to be in a recession for a little while now. How does that impact -- do you think MA should be relatively insulated but wasn't sure if that is going to be -- some people think it might be a positive to membership growth? Is there an impact on utilization? How are you thinking about it?

I think it's on the margin. I think we're definitely, on the Medicare side, less exposed to the economic cycle than certainly the commercial business or the Medicaid business because people obviously are -- generally aren't working. And so there's less impact from employment. I think to the extent that there is a downturn, the fact that Medicare Advantage covers a lot more of your costs, a lot more -- it covers a lot more of your out of pockets, I think on the margin, it's an attractive product for people. And so I think you could see that benefiting growth. You could see maybe a modest benefit of utilization in terms of not being as strong because people are more cautious about that. Again, I think it's on the margin relative to other sort of subsectors in managed care.

Yes. And then as far as the Part D business, you guys went through a pretty big repositioning in Part D. It hasn't grown for a long time. And even with the repositioning, it shrank again. I mean do you think that that's a business that you can actually get growing? And I guess, what has to happen for it to reaccelerate?

Yes. I don't see this as a big growth driver. I think it's something where depending on where -- how aggressive people are, you sort of want to hold serve, maybe you shrink a little bit, maybe you grow a little bit. It's sort of more of a steady business. And really, we look at it as 2 things. One is a nice source for our pharmacy business, but also importantly, a source of Medicare Advantage conversions. We've seen an increase of that over the last few years. We're very focused on that. And so to have sort of millions of members already served by Humana, to have the opportunity to talk to them about Medicare Advantage and convert them is something that we're excited about. And so that's why we're really focused on trying to hold serve here with the PDP business. The PDP business has become a true commodity, particularly on the low price side, meaning that it's very, very price sensitive. A lot of it's about selection. Interestingly, we are seeing -- and I think the market has seen that the PDP market has actually shrunk this year, something like 450,000 members, which is a big deal. And then obviously, that means they're going to Medicare Advantage, which is a really good thing. So the trade-off is good. So we continue to innovate and experiment and figure out ways to be attractive to members beyond price. And that's something that we are focused on. But I would say for the foreseeable future, I don't see it as a growth business, but more as an opportunity to feed our pharmacy business as we continue to focus on growing our mail order penetration, which is really important as well as using it as a source of Medicare Advantage conversion opportunity, which is a great trade if we can make that happen.

And I got a question, actually, that came in through the Veracast system here from a client. It's actually a follow-up to the vertical integration panel that we did yesterday, asking -- maybe -- I'm going to rephrase it a little bit. So you guys have spent some money buying some practices, building clinics and kind of vertically integrating that way beyond the home health. How much -- how far along the road to vertical integration are you? And is there a target for how much of your spending or how much of your membership should be or could be in kind of a vertical integration setup?

I would say it's a fair question. I would say we're early days on that. I mean on the primary care side, call it, depending how you define it, call it, 10% plus or minus of our spend is in a owned or joint-ventured asset where we have real equity where our members go. And so it's a relatively small percentage of our members. Part of the challenge is that we're growing very rapidly, so that's a good problem to have. And so it's hard to get them into these settings. If they got to pick a doctor, we want to encourage them to use our assets and the like. About 1/3 of our members are at full risk. And about, like I said, about 1/3 of those are in our proprietary settings. And so we're looking to increase that. People saw the Welsh, Carson transaction. Notwithstanding COVID, we are still moving full speed ahead and finding real estate locations and getting ready to open new clinics. And so we'll continue to push that hard, 15 to 20 per year. We were constantly looking for assets like that to invest in or buy. And so you'll continue to see us expand that. Again, one of the challenges is the denominator because of the growth. But again, I think we're in the early days there. I think on the Kindred side, we'd like to see more of our spend in Kindred, it's still a relatively small percentage. But really, right now, we're trying to calibrate the model and get that right. So far, we've seen good results there, and we like what we're seeing with Kindred. We like what the management team is doing. We work constructively with our financial partners here. So that's an area in the home that you're going to see us continue to expand, not only on the skilled nursing side where we're working with Kindred, but also more broadly, you'll see us with primary care continue to think about how do we utilize the home, particularly now with COVID, really, I think having accelerated dramatically the things that we could do in the home. And so you'll see us invest on the primary care side there and other ways to get into the home. And so that's really where we're focused, thinking about new models in the home, delivery models in the home. We're excited about that. And most of that ultimately, I think, to the origins of your question would be vertically integrated in that we would have typically some form of equity stake, although we also contract with people going into the home, too. But we're working through that. But I would say both primary care and the home are critical elements of our strategy, and they certainly involve the vertical integration concept.

Okay. Maybe that's a good segue into what maybe the last question on the call. How are you thinking about the legacy of COVID? What long-term impacts do you think there might be on how you're doing things or how you expect maybe people will be accessing the health care system?

Well, as everyone's talked about, and we certainly are a big proponent of, is the increase in telehealth. I mean we've seen both our proprietary centers as well as a number of our provider partners significantly make the shift to telehealth. And I think you'll continue to see that. People are getting more comfortable with it. There are still a number of things that have to happen in person. And so part of that will happen at a doctor's office, part of that might happen in the home, as I talked about in your last question. But we do see a meaningful increase in the use of telehealth services. Primary care will be a part of it. We do see specialists continue to be a part of the telehealth revolution here, and we're excited about it. We think it really can deliver a set of services that today are hard to get to a number of members who just don't have access in the way we all want them to. And so we're excited about that. And so I do think that will be one of the legacies of this crisis. And in fact, CMS has recognized the importance of telehealth and is now giving us credit from a documentation perspective for video telehealth visits, which is a big deal. They've never done that before. And I think they recognize just the importance of tele in the range of services that a member might get. I also think you might see an increase in risk taking and capitation. We talked about this only yesterday in your panel, but the providers who are taking risk and get a capitated payment every month, meaning some kind of percent of premium or per member per month fee which is just paid at the top of every month, gives them a source of cash flow, which obviously, in times like this are very, very powerful. Whereas if you're a true fee-for-service doctor or any kind of provider, you don't have the benefit of that cash flow. So I do think there'll be more and more discussions around that. And I think what that will enable is really a better alignment of payer and provider. We've been pushing this for years, and we continue to see an increase around value-based payments, but we do think that this crisis could really ramp that up. So I think it will be hopefully a net positive at the end of the day. I do think movements out of the institutional setting will continue, which we view as a positive for the health care system and certainly our business. And so we think those will be lasting legacies.

All right. Unfortunately, I think that's all we have time for. Thank you very much for taking the time. Appreciate it.

All right. Thanks, Kevin. Have a great day.

Okay, bye.

Take care.

Bye-bye.