Humana Inc. (HUM) Earnings Call Transcript & Summary

You're good, Matt.

All right. Okay. So assuming we're live, this first session of the BMO 2020 Healthcare Conference is going to be audio-only. Some of them will be audio, some of them will be video. We're delighted that you're here to join us. And again, this is Matt Borsch, and I cover healthcare services here at BMO. We are very excited to be hosting Humana today represented by Chief Financial Officer, Brian Kane, along with Amy Smith, Head of Investor Relations. So welcome to you both, and thank you for participating this year.

If you like, I can dive back -- dive right in. Although what I'm going to say just initially is, as we've gone through your appearances recently, I know you talked a lot about the utilization statistics. So I'm actually going to bear down on some more issues that maybe have gotten a little bit less coverage. Although I wanted to just open with the question since your last appearance, which I believe was 2 weeks ago, has anything changed in terms of the utilization figures that you're ready to share with us or the outlook?

Well, first of all, good morning, Matt. It's great to be with everyone today. With respect to utilization, I don't think anything materially has changed. I mean we are seeing a bounce back as we expected. It's still below normal, both inpatient admissions and other service categories are below normal. But I would say nothing materially has changed since we spoke 2 weeks ago.

Okay. Okay. Great. All right. With that background, what I'm really going to do is focus on Medicare Advantage here. And I just want to start by acknowledging your success, you and Bruce and the whole Humana team, in achieving both strong enrollment growth and solid profitability, and that's continued so far this year, even if on enrollment growth, we are likely to surpass the record pace that we hit last year in 2019. So with that as the backdrop, can you tell us how the pandemic has impacted Medicare Advantage in your enrollments thus far? What we can see from the monthly CMS enrollment is it looks pretty similar month-to-month after the open enrollment as it did last year. But is there a deeper story underneath to these numbers in terms of new sales and retention?

Well, I appreciate it. I would say that the answer is yes to that. On the margin, we have seen a decline in new sales versus where we were before the pandemic started, but we've also seen an improvement in retention or lower terminations. And so they've largely offset one another. I think that really is just a function of the fact that there were fewer -- many fewer brokers and agents in people's homes, in the communities, doing what they normally do to generate leads and drive sales. But because of that, there's less terminations, there's less shopping for -- particularly for the switchers for the functional duals, et cetera. So I think that's driving really, I would say, a similar outcome, but getting to it in a different way.

Right. Perfect. Perfect. And taking that mix, though, if we assume, and may not be the case, but if we continue to see that pattern or some other patterns that you expect, what do you think about the pandemic impact such as it will be when we get to it when the 2021 AEP starts in October, specifically, if the degree of person-to-person contact limits to sort of pitch and table discussion type there? Will it be a significant impact?

Well, we'll see. I mean, we've definitely seen a move long before the pandemic towards more of a telephonic model where a good majority of our sales are done telephonically. So those -- obviously, those channels are much less impacted by the pandemic than the field force. So I do think if it continues, and that's a big question. I mean, when will people be comfortable with people coming back into their homes? We'll see what happens over the coming weeks with the various caseloads, et cetera. And obviously, if we see a continued spike in cases and seniors are less comfortable having potential sales agents in their homes, then that could impact it. But I'm hopeful that, again, it will be on the margin, just sort of what we're seeing now and the same dynamic really should be at play with maybe slightly lower terminations and slightly lower sales. So I am not very concerned by any means, and we're preparing for it. And I think the sort of the distribution channel more broadly is preparing for it. And people who used to do sales through the in-person mode have really tried to equip themselves and convert to more of a telephonic or -- and/or digital model, leveraging both capabilities with members, and we're helping them do that. People -- even people who used to get their leads from these community -- sort of community centers and being in the churches and synagogue, et cetera, are finding other ways to generate leads, and we're helping them with that. So I think there could be an impact, but I'm hopeful that it will be pretty modest.

Well, I suppose there's always a chance that CMS might make some changes as well, perhaps I'm just throwing this out there, but maybe extending the open enrollment period, but we'll have to wait and see on that, I guess.

Yes. And listen, well, I mean, anything is possible. Although, remember, we do have an OEP after the AEP where members do have the ability to switch. But obviously, if they extended the annual enrollment period, that would be a much more meaningful change for sure.

Right. I guess, on a separate dimension, do you think that what we're partly testing here or will test is a degree of trust that people put into Medicare Advantage and Humana? Meaning if seniors are facing the question apart from the enrollment communication, but they're taking the question. Today, given the COVID-19 background, do I want to be in Medicare Advantage with Humana? Or do I stick in traditional Medicaid, if there's a prospect that I might get severely ill with COVID-19. Any thoughts on that?

Yes. I would say that for those who are aware of what the Medicare Advantage plans have done and what Humana has done, in particular, I think, would say, I'd rather have a Humana Medicare Advantage plan. I mean we're the first to waive all co-pays on testing and treatment. We then expanded that to all primary care and behavioral for 2020. But in addition to the financial incentives we've given, we've also engaged, I think, with over 1 million of our members at this point in phone calls, outreaches from our nurses and social workers, making sure our members have their prescriptions, have food in the refrigerator, understand their housing and sort of loneliness situation, all of which are important social determinants of health, sending meals into the home, doing a host of things that traditional Medicare just doesn't do. And then when you get sick, you have someone helping you navigate the health care system, and we're with you every step of the way. So I think as that becomes more well known, I mean a lot of times people talk about Medicare Advantage with respect to its benefits, financial benefits, which are real relative to traditional Medicare. But I think it's the care coordination side that's also very powerful that people might not originally or initially realize. But as more and more of these stories get out and people realize that they're getting better care, that we want a client to choose us. So I think you're seeing people vote with their feet. I think as you see the market growth rates this year continue to accelerate from last year, which is obviously a good sign, I guess, that people are voting with their feet.

Absolutely. Great points, a chance to showcase the advantages of Medicare Advantage and Humana specifically. So as we look ahead to the upcoming 2021 open enrollment, are you concerned about wider-than-normal variation in benefit offerings from competitors, given that we lack a reliable cost base for 2020 off which to project 2021? I realize that's already been done because the bids are in. I'm just curious since we don't know what they're going to look like from the other plans, what are your thoughts on that?

Well, it's a great question. And certainly, there is a risk that people took very different perspectives on potential treatment costs here and testing and other things. I think, though, the major players, my guess will probably lean forward a little bit and make sure that they offer a compelling benefit package while also being fiscally responsible. I think the health insurance fee helps in that regard. It provides significant additional funding that allows you to overcome any headwinds related to COVID. So I think there is a chance that there are some wild swings. But my guess is the major players are going to want to offer a compelling package as we move into the fall here. And I think people for the reasons you said, I think we want to demonstrate that, that this is a compelling product for people relative to fee for service.

Right. Okay. Good. Good. Thank you for touching on HIF repeal because I wanted to get in -- not get into it because I don't think there's a lot to say there. But yes, a good thing that we have that tailwind, given everything else we're dealing with. Let me ask you on a separate dimension. One thing that is different this year versus at least 2018 and 2019 is we are seeing some of the nonpublic health plans make some gains this year for the first time really since, I guess, 2016 and '17. It will look similar magnitude to that. But 2018 and '19, we saw the expiration of the phase out of the cost plans. I'm just curious to what your thoughts are on the competitive -- current competitive stance and the potential from the after profits, which have not really been that competitive with the major companies in this space.

Yes. I would sort of divide the competition up into several buckets. I think the first is sort of the major players, the big payers that everyone knows. And certainly, I think those continue to be, by far, our major competition. And so we see them in almost every market in which we play. And sometimes certain players are stronger than in some markets just like us versus others. But I would say that's sort of the first major bucket. And I think people are really, really want to grow this business, not surprisingly. And I think we've demonstrated over the last few years, we've held our own. There's been other categories I would describe as sort of more a provider-based Medicare Advantage plans. There are sort of for-profit, more start-up type plans, the Devoteds and Oscars of the world. And then there's, I would call, you mentioned sort of not-for-profits, the Blues and the like in various markets. And I think it's fair to say that it really is highly dependent on geography. So -- and there are just some instances where these plans have been successful. They have just a position in a local market. Typically -- particularly, I would say the for-profit start-up plans were -- we have seen some growth in certain limited geographies. Their benefit packages, tend to be very, very rich, and they lead with benefits, which is -- look, it's understandable because they want to get a market position. And I think they're trying to sort of create a new experience, I would -- sort of customer experience. I would tell you that we have focused very intently on our customer experience. It really I think underpins all the investments that we've made in our various delivery channels and care coordination channels around the home and primary care and all the technology investments we've made. So we certainly would never underestimate either those guys or the not-for-profits or the Blues, for example. But I think we've been able to more than hold our own. I do think for those who, say, the not-for-profit, big Blues and the like who don't focus on Medicare Advantage, it's just -- it's harder to be successful if it's just not where you've traditionally focused. It really is a different business than traditional commercial insurance. And it just -- it requires different skill sets. And so again, we don't underestimate any competition. And there are certain markets where they're not-for-profits that play very strongly, some of the start-ups play very strongly, but I like how we're positioned more broadly as we move forward here.

That's great. Thank you for that elaboration, particularly on how the start-ups are competing. I will note in a note we published yesterday, we looked at the year-to-date growth. And amongst the top 15 nonpublic Medicare Advantage plan growers, 3 of the start-ups, I believe it was Devoted, Clover and Alignment, were in that list, even though none of them are in the top 15 nonpublic markets here. Although at the growth rate that they posted, which is very uneven, but it's about 45% by year-over-year, they would need to maintain that sort of growth rate for about 5 years before they were taking -- up to the point of taking about 10% of growth that we would project in new MA otherwise. So it does seem like that's a fair distance away before the competitive plan, there is really moving the needle necessarily. We'll see.

But we'll see. And again, I think it's very much based on the local market where they participate. But even in those local markets where they're in, we more than hold our own.

Right. Okay. Fantastic. And I wanted to ask if you have any recent insights or updates on the uptake of MA generally. I haven't really had a chance to ask you about this recently. But to the extent you have any numbers or reliable anecdotes, what proportion of seniors do you think are selecting Medicare Advantage as they first become Medicare eligible versus, I think, the pattern that we've talked about in the past years, although not that far past, is selecting traditional Medicare, either by default or choice for the first 2 or 3 years, and then opt Medicare Advantage. Curious how the pattern may have changed, if at all, for each of them.

No, it's a great question. And I would say what you said is still the case, which is we see our lowest adoption rates when people first turn 65, and then it gradually increases up through sort of the mid- to late 70s where we hit our peak and then it -- and as you get -- people get really old, they transfer of Medicare at end of life. And so I would say that overall, over the last number of years, that curve at every age band has moved up meaningfully. But I would say it's hundreds of basis points difference in the sort of 65, 66 versus the 75, 76 category. And really, I think the reason is severalfold. For one, when people first qualify for Medicare, they really don't know what they want yet. And I think they want to just see what's out there, and they just enroll in and try to understand what the options are because there's no reason to quickly make the choice. I think that's spurt on by the fact that if they want a MedSup policy, they're able to get a MedSup policy without getting underwritten for a period of time, and that's helpful. So if they choose Medicare Advantage and decide they don't like it, want to go back to traditional Medicare with a MedSup plan behind it, they'll get underwritten. So if they get sick, then they have a problem as opposed to choosing it out of the box. So I think for reasons of just trying to learn the options and some of the dynamics of Medicare supplement is the reason why you see lower penetration initially. But as I said, that's come up over the last number of years just at every age band, but still meaningfully lower than, say, by the time people get into their 70s when they're choosing Medicare Advantage at a very high rate.

That's excellent point, Brian, particularly thank you for touching on the issue of the period or medical underwriting or, I should say, a lack of medical underwriting when people turn 65. It will be interesting to see if policies change regarding how that communication and that set up is sent over to seniors when they turn 65. But that's been something out there for a long time. Thank you.

Yes.

Well, I guess, my question then just coming back to this, though, is, do you think -- assuming, well, we are in a recession. I think we're still in a recession, how long it lasts will be remain to see, do you think that is or will have some impact on uptake or no?

Well, I think, again, it will probably be on the margin positive. In times of recession where people have less disposable income, then they're going to want products that cost less. And I think Medicare Advantage is a product that costs less and delivers higher benefits. And so that in of itself, I think, would be attractive to people who have less disposable income. But remember, in the Medicare population, people typically aren't working. So therefore, they're less sensitive or less impacted by a recession. And so it's not like in the commercial book or the Medicaid book, where I think we see a more meaningful impact than in Medicare. But I do think on the margin, recession should be helpful for Medicare Advantage.

Right. Well, we only have a few minutes left. I wish we had more time. But to the extent I can, let me ask you a few more questions. And this I realize is a wide open one, but what are your thoughts about the outlook for health policy and regulation relative to the possible outcomes for the election this November?

Well, I mean, obviously, there's a lot of things going on in politics today. And so it's hard to predict what exactly will happen. I will tell you that there is a lot of support for Medicare Advantage on both sides of the aisle. We've said that before. We continue to see it. There's really, I think, a bipartisan realization that Medicare Advantage is one of the sort of public-private partnerships that really works well, that actually is worth emulating rather than hurting, and that I think other areas of government should work in this way. I think we've heard that from multiple politicians and regulators. So I think the likelihood of sort of dismembering or dismantling our Medicare Advantage is highly, highly, highly unlikely, no matter who wins, no matter what happens. Could you see some kind of expansion of Medicare Advantage in Medicare? It's certainly possible under Biden administration and Democratic Congress, I think you could see -- possibly you could see that. And it's -- it wouldn't be crazy to think that if Medicare is expanded, that Medicare Advantage would be an option that's offered. But we'll have to see what happens. And obviously, as part of that, it's important that funding environment remains strong and remains actuarially sustainable. So that's something that we would obviously be very focused on if there were any expansion. But I think that's certainly a possibility, but there's just a lot of uncertainty out there as to where this goes. I think on the regulatory side, there's also been a lot of support, I think, across the aisle for some of the incremental -- and we talked about this a few minutes ago, some of the incremental benefits that Medicare Advantage can offer, how we've acquitted ourselves in the crisis. CMS has provided a lot more flexibility with respect to benefits and the like that we're permitted to offer. Expanding the use of telehealth is just another example of that. I think some of those things will become permanent, we'll see. We certainly are hopeful in that regard. And so again, I think there is bipartisan support for the things we're doing. But again, it's impossible to predict because the political situation is obviously pretty volatile today.

I would imagine if Biden were to win, you would be watching closely to see, I mean, amongst other appointments who he would appoint as head of HHS and maybe even more so CMS.

No doubt about it. I mean, I think CMS today in this administration has been extraordinarily constructive. I think they really support Medicare Advantage. They are, I think, been very forward-thinking in experimentation and really trying to see what would work fast to deliver best -- better health outcomes at lower cost to our customers. They'd really push the head on that, which is great. I would say in the prior administration, too, it was obviously under a different administration, but generally, Medicare Advantage was pretty successful during the Obama years, notwithstanding the significant rate cuts we had from the Affordable Care Act, the industry still performed quite well. So again, I do think that we'll be well positioned no matter what happens here.

All right, Brian, it looks like we've run out of time, and this has been a great discussion. I want to thank you and Amy and Humana very much for participating. And I hope that we will be able to host you live in person next year.

I look forward to it, Matt. Thanks, as always, and I hope you have a great conference.

Thank you.

Thanks very much. Take care. Bye.