Humana Inc. (HUM) Earnings Call Transcript & Summary

Hello. Good morning, everyone. I'm Dave Windley, I'm the Managing Director in Jefferies Equity Research Department. I want to thank you for attending Jefferies Virtual Healthcare Conference this year. I want to also extend our thanks to our next presenting company. It's my pleasure to introduce Brian Kane, Humana's CFO. And Humana is our next presenting company. As a reminder, we can take some questions from the audience if we have time. [Operator Instructions] Brian, thank you very much for being here. Amy is along with him.

But Brian to start off, I wanted to get a -- basically the question that I think a lot of managed care companies are dealing with, with low utilization in 2Q and figuring out how to inject liquidity into the system, how to support your provider partners, how to manage costs over the balance of the year. Humana, in some cases, has waived out-of-pocket member costs as far as the end of the year. And I just wondered if you could frame for us the relative magnitude of what you're seeing, the levels of utilization that are down in 2Q and how you have the confidence and visibility to waive some of these costs as far out into the year you have?

Yes. Well, good morning, David. It's great to be with you. We have seen, obviously, a significantly depressed utilization. I would say that April was probably even a little bit more depressed than we had initially anticipated and May has come back a little bit faster than we've anticipated. But all in, it's still meaningfully down from obviously pre-COVID levels, really depending on the service category, but across the board, it remains depressed. Trying to forecast it is not easy to do, for sure. And we obviously are doing our best to assess what it may be. We've committed to our investors that we would stay within sort of the $18.25 to $18.75 range, recognizing that, trying to anticipate what the future costs are going to be in the back half of the year is certainly not an exact science by any means, depending on how fast utilization bounces back. Depending on the state, we are seeing more systems open up in our owned assets. We are seeing people come back in and getting in-person care, which we like to see on the primary care side. That is starting to happen. But as I said, it continues to be quite low and admissions are down, ER visits are way down, surgeries with some -- a little bit of a spike in pent-up care, but also remain down. And so again, really depressed across the board. With respect to some of the programs that we're implementing to effectively rectify the imbalance, you mentioned waiving co-pays. We've -- we were, I think, probably the first along with Cigna to waive all co-pays on treatment of COVID. We also led the way in terms of waiving co-pays on any primary care visit in any setting as well as behavioral health visits in any setting, really to encourage our members to get back into the health care system. And so we've been very focused on doing that. That is a costly number, but it's the right thing to do. So we will -- we feel confident being able to do that through the end of the year and still meet the numbers that we set out. We're also very much helping our providers. We've released something like $1 billion of cash and some earnings to our providers in the form of loans and other things or dollars that they need to be able to operate and being very constructive there, accelerating claims payments and the like. We've turned off, up till very recently, financial recovery and much of our utilization management programs. In fact, you'll see an impact this quarter in our prior period development. We normally recover a lot of claims. You'll see our prior period development likely actually being a little bit negative this quarter and the second quarter on account of that, but it's the right thing to do to get -- to not recover those dollars. Some of those will get back probably later in the year or next year, but a lot of them are really -- are gone. And again, really in the service of helping our providers. So we try to do a really comprehensive program here. We've also been very constructive with our members in terms of care coordination. We've reached out to almost 1 million of them, making sure they have their medication. We've sent safety kits, including masks and other instructions for them. We've shipped many hundreds of thousands of meals, and that will go into the millions over time here to make sure that they have the food they need. We removed the edits in terms of early refills on prescriptions. And so we've done everything we can to ease the burdens on our members, our providers and also our communities. We've given tens of millions of dollars to our foundation. We just announced something, in light of the social unrest, for Louisville. And so we've been very, very focused on all these issues.

Yes, very good. It's an extensive list. Should I -- I guess what I'm -- what I struggle with is assessing relative magnitude because you do describe that some of these things that Humana is extending on the benefit side or waiving factors are pretty substantial numbers. Are -- is there a titration element to this or -- in terms of kind of coming at the $18.25 to $18.75 from the top end, kind of working your way down and titrating that over the balance of the year? Or was the motivation more the need is now, so let's get as much out there now, and we probably won't see more of these things as the year transpires.

Well, again, we've tried to be thoughtful and try to assess what the utilization reduction, how meaningful that is, being thoughtful about how it could come back, and given that, create programs that allow us to really refund effectively the excess benefit that we're getting and give that back to our various constituents. I think we've been thoughtful about it. You will continue to see announcements from us and doing various things. Obviously, the co-pay waiver is meaningful. We've also been working with our commercial customers on premiums and the like. So we've been -- and we will continue to lean forward with our various constituents, including our providers. And we think it's the right thing to do. But we're being, I think, very thoughtful about that $18.25 to $18.75. I will say -- and again, I mentioned this in the last public setting, as it relates to the second quarter, I still think The Street is not modeling it right with respect to how the utilization patterns and the spending patterns are going to unfold over the year. In fact, I think it's fair to say that at this point, we will be north of $10 for the second quarter. So I think The Street should appreciate that. And then -- but again, still focus on the $18.25 to $18.75, which means, obviously, the back half of the year will be meaningfully lower from an earnings perspective. But we've tried to be very direct on that. I'm being extremely direct now. We never give second quarter -- we never give quarterly guidance, but I just want to make that clear that we will -- our expectation, at least, is that we would be north of $10 on the second quarter. And then the third and fourth quarter will follow accordingly.

Understood. Appreciate the -- yes, the clarity there. As it relates to the specific areas that you have targeted, I'm also wondering about the concerns, of course, for individual members' health in the deferral of diagnostics, deferral of procedures, et cetera, is that -- there is the potential for health to deteriorate and those costs to be bigger downstream. How should we read into the specific initiatives that you've chosen to target as perhaps strategically selected to help to mitigate that issue?

Well, as you can imagine, it's something we are very focused on, and that's really the purpose of the outreach that we've done with our members. And as I said, we're approaching just 1 million contacts that we've made with our nurses and social workers reaching out, ensuring that they have -- our members have the medicines they need. They're getting the care that they need, encouraging them to avail themselves of telehealth, as that's available. We expect that in home visits by nurse practitioners and primary care doctors will begin to really ramp up as states open up and people are more comfortable with having people in their homes. We'll see more of that. We do expect to see people come back into the medical system, and we want to encourage that, but obviously, do it in a very safe and thoughtful way in our own settings and settings where we have joint ventures and equity interest in. We've been very thoughtful, as have a number of our provider partners in making it safe and constructive for our members to come back and see their doctors. So they don't have some of the challenges that you mentioned. I think the other thing we're focused on is screenings and routine visits and the like. We're hopeful that those really start to bounce back. It's important that they do. And again, we're working really hard to get the members the care they need. But it is definitely top of mind the care that our members need to get and making sure that they are seeing their senior clinician. So I think the issue is going to be more, honestly, if there's a second wave. I think if there's not a second wave and as we see the economy opening up, we are seeing people utilize the health care system again and feel better about it.

Got it. Okay. So maybe to follow-up on that, drill in and kind of invoke pricing here for next year a little bit. You mentioned that maybe May is coming -- April was worse than expected, or down, I should say, lower level of procedures than expected in your analysis, but May may be bouncing back. And again, kind of trying to get at how does that make you think about -- maybe more from a provider standpoint, recapture procedures within the calendar 2020, does that make that more likely? How much of that falls over into '21? And how do you think about management of that excess amount of procedures falling into '21, vis-à-vis pricing? And then, of course, the last part of that would be the HIF and how that factors in as well?

Yes. So we submitted our Medicare bids earlier this week. It was a major effort, as it always is. And this year, obviously, with this additional complexity, makes it even more challenging. But I think we've been very thoughtful about how we've priced utilization and priced the product in light of what might happen. We tend to be more on the conservative side to make sure we've captured the various costs and what could happen. But I think we've also, with the HIF being a help, I think, been able to offer a pretty compelling benefit package for our members in the fall. So we'll see where it goes. We've tried to balance growth and margin as we always do, and we've tried to be very thoughtful about various utilization patterns. I think there is -- it's not inconceivable to think that you will see more shifting out of the sort of traditional settings into less institutional settings, which tend to be lower cost. We certainly haven't priced that in. So we're not counting on that, but I think that, that is certainly a possibility. There are some scenarios where, as you said, some of the catch-up utilization bleeds into 2021. I think it's possible. Assuming there's not a second wave, our expectation is that a lot of it will catch up this year. We've seen -- I think in May, you saw really pent-up utilization that had to happen, happen. Critical surgeries, et cetera, get done, and we're really happy to see that. I think it's a question of, on the supply side, can the system really operate at a premium to normal -- premium to par for any sustained period of time? I think that's challenging. And then does the demand really exceed the 100% threshold for a period of time? It's possible. And I think, certainly, we wouldn't be surprised as we recover through the summer, that you get -- for a period of time, it possibly runs higher than normal, but we don't think that's going to be sustainable. That being said, I think we've been thoughtful in our pricing for '21 to capture any eventuality that might occur.

You've mentioned a couple of times, assuming no second wave, maybe to be more direct on that point, what is Humana's posture about the possibility or likelihood of subsequent waves that have some material interruption to normal business?

It's really hard to say. And certainly, a number of experts think there could be a second wave. How serious it is and how impactful it is to people's behavior, I think, is still an open question. It's just -- it's really hard to -- I mean, there's so many variables going on right now, as we all know, that it's really hard to predict that, and whether people will take it in stride and sort of decide that this is the way life is going to be for a period of time until there's a vaccine or whether if it really picks up, does that create another stay-at-home phenomenon? I think it's possible that, particularly for the senior population, they're going to be more cautious and we understand that. We are going to work hard this summer to get people into the medical system or come to see them through in-home assessments and the like, and have doctors and nurse practitioners in the home, which really serves 2 purposes. One is to ensure they're getting the care they need as we talked about. The other is to ensure that our members are documented appropriately for risk adjustment purposes and we get paid appropriately. So we're very mindful of that and ensuring that we have adequate funding and opportunities to go into people's homes to make those things happen. So we are, as you can imagine, all over this.

Yes. Sure. That's -- you mentioned risk adjustment, that's a good segue. I think management had highlighted that the inability or maybe kind of the hands-off, soft, kid-gloves nature to interactions with providers in a time that -- where they were particularly stressed, was not a time to kind of ask them to produce charts and things like that. Where does your activity stand in terms of being able to collect the appropriate documentation, make sure risk adjustment is reflected accurately for the revenue that comes from that, looking out into the subsequent year?

Well, I think we're proceeding at pace and ensuring we get the charts that we need. It is challenging today because we're not able to go into people's homes generally and people aren't coming into the medical system. And so we've done a number of telephonic visits. We've -- CMS has allowed telehealth for a video to count for risk adjustment purposes, which has been a positive and something we appreciate. And so we will continue to leverage those channels, but we are prepared. And in some states, we're already beginning to reanswer people's homes, and again do to the clinical intervention, which is essential. And in the process, also collect those codes as you mentioned. But it is something that really, over the next few months, will be essential that operationally we execute on our plan there. We feel good about that. We have the resources and the focus to be able to achieve that. And so now we need to execute that. And we're certainly very focused, as I said.

Do you think about that in terms of a percentage of the new member cohort that you've been able to address or not address and how that compares to prior years? Is there a way to benchmark that?

Yes. I would rather not comment specifically on that. But remember, it's both new members and old members because the old members need to be redocumented as well, so we are focused very broadly. A lot of times, this happens organically, right? We're not doing anything different. People just go in and they go to the doctor, the doctor just submits the payment codes and that indicates the condition. When you're not seeing the doctor, it's that organic submissions that aren't happening to the same extent. And that's where I think we'll need incremental in-home assessments to -- or telehealth -- video telehealth assessments to ensure that, that occurs. And that's where we're very focused.

Coming back a little bit to -- I've left -- I tried to jam 3 things into the pricing question. I didn't think a fourth was fair. So I'll come back to the fourth now. The addition of end-stage renal disease patients to -- or potential addition to MA Plans in '21 certainly adds a new wrinkle. What is Humana's current view on uptake from that population? And then how also do you factor that into pricing to be able to absorb what I think you've historically said is the money-losing population?

Yes. I mean we -- I don't think really anything's changed per se in our views. I mean I think we're assuming that it's a reasonable proportion of the population will enter Medicare Advantage. We've been very focused on -- with the clinical side of how we manage these members as well as the unit cost side. The CMS flexibility around the network adequacy has been helpful. We appreciate it. And I think, particularly over time, encourage innovation in the space, which is a great thing. And so we've been very focused on this for many, many months, as you know, we've talked about it. And I think we're getting to a good spot. I think we feel better about where we are with respect to ESRD members coming into Medicare Advantage next year.

Are the network flexibilities and negotiations around unit costs, as you just mentioned, are those enough? Do you feel like just so far that you've gotten yourself to a point of being able to, say, breakeven on the ESRD population? Is it possible to quantify that?

I'd rather not specifically comment on our network discussions. I would just say that we feel better about it. We're working through it. I think as we get later in the year, when we finalize things, perhaps we can comment more, but I think we're getting to certainly a better spot.

Yes. Okay. And then from a sales standpoint -- I think we've got a couple of minutes left here. I think the most recent comments, you talked about some slowdown in new sales, perhaps understandably, because of the dislocation in the world and difficulty and engaging people in conversations, but also fewer terminations in late March and April. How do you think about your -- kind of the sales progression, newly eligible Medicare recipients? And then how do you think your sales channels may evolve as you move toward the 2021 selling season, in what could be an effective environment?

Yes. Well, so as you pointed out, as we mentioned, we have seen sales being impacted, particularly, not surprisingly, in the channels where people are going into -- brokers are going to people's homes to market the Medicare product. Terminations have also been down. So we've been seeing a nice growth here, as you've seen in the numbers. And we raised our guidance last quarter and feel good about that. We are very focused, though, on the continued migration into the telephonic channel and hopefully, ultimately, the digital channel. I think that's still longer time away just because of the complexity of the sale. It's not a simple sale. But we are very focused both on our own internal sales force as well as our external partners, allowing them to make that transition to telephonic and digital, giving them the resources and capabilities they need to do so. I think we're very focused on the fall selling season. As we've said before, a majority of our sales -- a nice majority of our sales come from telephonic and digital. The in-person channel has been shrinking year-over-year. And so telephonics become much, much more important. It's also growing more rapidly. You've also seen, frankly, more brokers get a lot more sophisticated in the sales on the telephonics side. You've seen a lot more advertising than you've seen in the past. And so we think the market is moving that way. And so I think we'll be in a good position in the fall. But it's nonetheless, something that we are focused on because to the extent that the over-the-kitchen-counter sale becomes -- continues to be difficult in the fall, we want to be prepared to make sure we can still sell our products.

Do you think the net effect of all of those things is still a relatively normal growth curve? Or is growth impacted on kind of a net-net basis by coronavirus?

I think -- well, again, we have to see what happens, the whole second wave thing, and whether -- does that change people's mindset, we feel pretty good about the market growth and where it's going. I mean the market is still growing very nicely this year. It's growing more than last year. Could it have grown faster if COVID didn't happen? It's possible. But you see the growth levels, they're meaningfully above last year, even with the HIF coming back. Now you got the HIF going away. We feel pretty good about where the market is growing -- growing now and where it's going to grow next year, and our position in that market. And as I said, to your earlier question, we've tried to put out a product that we feel good about, that we think our customers will feel good about in terms of the benefits they get.

That's great. Brian, thank you very much for your time. Sorry for the technical difficulties at the beginning, but glad we got you connected. I appreciate your insights and appreciate the technical guys giving me a little extra time. Thanks to the audience for the attention, and we'll talk to you soon. And have a great day.

You too. All the best, Dave. Thank you. Bye-bye. Bye.