Humana Inc. (HUM) Earnings Call Transcript & Summary

Good morning. Thanks for joining us today for our next presentation, and we're very honored to have Humana presenting today. And presenting for the company is Brian Kane, Chief Financial Officer. We're going to be doing a fireside chat. And if you have any questions, there should be a box in the webcast that you can put that in. And if we have time, we'll try to get some of those questions in as well. So Brian, thanks for joining us this morning.

Great. Well, good morning, Charles, and good morning, everyone. It's good to be here.

That's great. And so let's just jump right in. And I just wanted to talk about the Medicare Advantage business. And I guess, overall here, right, you recently provided '21 guidance of $21.25 to $21.75, with the midpoint above the high end of your long-term 11% to 15% growth rate. Obviously, one of the big factors, swing factors in this is how utilization plays out in '21, which could -- which will have an impact on your risk scores and revenues this year. Can you talk a little bit about how utilization is -- how you see utilization trending throughout the year and some of the initiatives that you're undertaking to encourage members to return back to the health care system.

Right. Well, again, good morning, everyone. It's great to be here with you virtually. As we said on the fourth quarter call, we expected a pretty depressed first quarter; a second quarter that would still be depressed, but a little bit less depressed; third quarter, more in line utilization; and then the fourth quarter, and this is all including COVID, the fourth quarter, a little bit above par. And so far, obviously, we're only through -- really through February, and we don't have final February data yet on the authorization side for inpatient. But that so far is tracking with expectations. We said on the earnings call, I think, that January inpatient, largely authorization is down 20%. February is down around 15%, 16%, which is in line with what our expectations were. So that's good. I would say COVID costs have declined markedly in February, again, not surprisingly. You see it as well. But that, from a unit cost perspective, is a positive development because the COVID unit costs are higher than the non-COVID unit cost. And so the average weighted unit cost is down in February, certainly, versus our expectations. Obviously, the COVID curve is coming later than we expected when we gave 4Q guidance. What we don't have yet is a non-inpatient view and a perspective there and where that goes. It's a much longer completion factor there, and so that's going to take some time to work through. And so that's still an uncertainty and really trying to understand how that correlates with inpatient. It tends to go hand-in-hand, although as we said on the fourth quarter call that non-inpatient wasn't quite as depressed as inpatient. My guess is that's still the case, but we have to see where that plays out. But I would say, overall, we're in line with what we said in the fourth quarter call and continue to reiterate our guidance as you just laid out.

That's helpful. Assuming the vaccine rollout goes smoothly and as we are talking utilization starts to rebound as you think it will, you should think that a good portion of that $700 million to $1 billion in risk adjustment headwind should go away next year. What are some of the key metrics you're tracking for risk adjustment here? And what are some data points investors should track to get a sense of how much of the headwind could abate next year?

Yes. So I would say just in terms of the -- let me start in terms of '21 and then in terms of '22. So in terms of '21 on the risk adjustment side, we're still collecting data from CMS. We get a monthly revenue tape, and we evaluate that revenue, the dollar -- dollars that show up in our bank account and see how that stands relative to expectation and then we -- expectations, and we run it through all of our analytics models to say, "How are we doing on '21 relative to expectations?" In a normal year, I would say, by -- certainly by the first quarter call, we have a pretty good sense of how we're doing. Let's call it late April, early May, we have a pretty good sense of where we are from a revenue perspective and whether there are any adjustments one way or the other. This year, I think it's a little bit different just because the historical patterns are different. And this year, it's particularly important that we see what's called the mid-year payment. That's the payment that comes in July that effectively rolls forward the determination of the risk of the membership that we have from sort of a mid-year '19 to mid-year '20 to a full year 2020. And that's an important data point because that's sort of the last 6 months of 2020, which is ultimately how we're going to get paid in that full year 2020 that we don't have up till now. And so now it's just an estimate. And given that historical completion has been different, we really won't know that until probably July time frame. And so that becomes important. That's not to say we won't have some preliminary data, we will. And as we've, I think, been very transparent with our investors, we'll continue to be with what we know on the first quarter call, but that just gives you a sense of the cadence. So as it relates to then 2022, we had to decide, first of all, how are the utilization patterns going relative to expectations. Because, again, just to reiterate, the utilization patterns in 2021 are what will determine our 2022 payment. So that's, that lag again, just like we're dealing with this year based on 2020. So as we get to our pricing in early June, basically, mid-May is when you effectively put pencils down, and you say, "Where are we?" And so we'll see if what we've expected from utilization pattern has held up. But we still have to make an assessment of what we think the back half of the year will be because -- plus in our '21 guidance is a rebound in net utilization. So we'll have to make the determination, do we still believe that's the case? How much conservatism do we want to put in -- put against that? And that's something that we're going to work through over the coming months with the goal of, as we said on the fourth quarter call, ensuring that the $21.50 is the right baseline off of which we can grow to get to a '22 number. And so in order to do that, you got to feel good about your risk adjustment for 2022 and priced for what you think might be any headwinds. And really, as part of that, what you would do is you would try to understand where you think your competitors are going to go. How much -- how aggressive they're going to be on pricing? How conservative are they going to be on pricing? How do you trade-off top line growth from membership versus sort of bottom line EPS? Our goal historically, as you know, has been to outperform on earnings. It's certainly what we endeavor to do. And so we just got to sort of factor that all in and then see what would United do, what will Aetna to do, et cetera, CVS and figure that out and make that determination. So we'll have more -- certainly more information than we do now when we price. We will not have perfect information. And so that's the -- effectively the determination we need to make on pricing as to how much do we want to put in there for, not only, frankly, MRA, but also where do we think utilization will go in 2022. Will there be -- continue to be a catch-up? Will our members have greater acuity in terms of their health? We have not seen that yet. But do we put something in there for that in the event that happens? Those are all the types of things we're figuring out as we speak.

Given that we already have the '22 rates, it gives you a lot more time to kind of set up your bids for '22. Usually, you only have a couple months. With this much time like runway, what does that allow you to do more? Or is it just you kind of get the work -- it doesn't really add to the work? Or is there more you can do to refine your thought process? Or how does it help?

Yes look, I think more time is better than less, for sure. And with -- there's still a lot of uncertainty that was just -- particularly that we need to work through. Obviously having the final bids in place now allows us to get sort of our models set up and everything ready to go more quickly. So then we can arguably spend more time on some of these more difficult assumptions that we have to make in our bid. So I would -- certainly a positive. Obviously, the rate notice was encouraging and reflects some of the trends that we might see in 2022. So it allows us to price for some of those things. And having this data now is, [indiscernible] helpful for sure.

Certainly. And then when that all kind of mixes together, right, it kind of gets to the equation where you're trying to reach back to sort of target margins in your individual MA, right? I think you've been tracking back towards 4.5% to 5% target margin range. And you were heading that way before the pandemic, and obviously, probably be a bit below again this year because of the headwinds we've been talking about. If you get a large portion of the $700 million to $1 billion back in '22, is it reasonable to think that you would be within your target margin range all else equal? Or do you think we'll still be slightly below?

Look, I -- without giving too much '22 guidance, I would say getting back to our margin range is a several-year path. Our intention is to do that. I always remind investors that well, 2017 might seem like ages ago, a lot happened since then. But at the end of 2017, we finished above 5%. Then 2018, tax reform happened, then [indiscernible] go away. And then all these crazy things where geography affects the margin sort of after-tax versus pretax. And so that's created some volatility in the margin line. Ultimately, our goal is 11% to 15% earnings growth with strong top line growth at or above the market, which we've been able to achieve on the membership side and also make sure we're able to invest for the long term and create that long-term sustainability that we endeavor to do. So those are about the sort of the 3 sort of guidepost that we look at when we set pricing. Margin is a really important input. It's very much a focus of ours and something that we're committed to getting back to. It's just -- we're going to ultimately balance those 3 factors. And as balancing those factors, I think you will march towards that target, but we want to make sure we care for those other objectives there.

Helpful. President Biden, I think he recently picked Chiquita Brooks-LaSure to head CMS. In her prior work, Brooks-LaSure she's written about -- advocated for both Medicare and Medicaid buy-in options. It's probably unlikely it's going to happen anytime soon. But what are some factors to consider if a buy-in option was implemented?

Well, she has, and it will be interesting to see how this ultimately plays out. I agree that's probably unlikely, just given some of the challenges that the Democrats have had of even [indiscernible] minimum wage, et cetera, that just creates more challenges to do something as significant as that. But you never know. We'll see what happens. Obviously, that would be a good thing for Humana. I think a couple of things. One is what is the age, obviously, that you have buy into? How much does that cost, right? The greater the buy-in or the lower the age, the more it's costly. How much would members have to pick up or new members? In other words, would they just have to -- would they get to buy-in at the Medicare rates? Would it be covered by CMS, like it is today if you're over 65? In terms of getting the benchmark payment, will they get a similar amount? How would they adjust that? And so that's a whole host of complexity that you would have to work through. And so -- and just -- what will the benefits be? Would it be similar to what it is today? Would it be different? A lot of complexity would have to be worked through, were they to do this, but it certainly would be a way to get people insured at under 65. But there are a lot of costs that the government have to work through, a lot of issues around what the provider rates would be and how the providers would react to that because Medicare rates are lower than -- meaningfully lower than the commercial rates. And so there will be a host of factors that would have to be considered before I think this could become law.

But bottom line from a Humana perspective, probably better because your overall risk, the acuity mix goes down. Is that sort of a general way to think of it? More members to [ go after? ]

It all depends on the rates we get, right? I mean, I think that is true. I mean, we would have a lower acuity population. I presume they would adjust the rates to reflect that. In some respects, we like the sicker members, as we've talked about, because we're good at caring for them. And so we're able to, I think, differentiate ourselves. But I think it's fair to say, were they to lower the rates, it would be a positive for Humana, just given the fact that our commercial business is small relative to others. And so we wouldn't have a lot of commercial leakage, and we pick up a lot of additional members, being able to use our Medicare chassis, assuming they literally bolted on to the Medicare infrastructure that's in place. So again, I think it would be a pretty positive thing for Humana. I think there's a lot of game to play before that would transpire.

Certainly. And I think that's kind of a nice segue a little bit. I want to talk about your Healthcare Services business here. Right now, you've got about 70,000 primary care providers in value-based relationships. And I think you said it covers about 2/3 of your individual MA members. If we look at the pandemic, right, providers and value-based arrangements generally have fared better than fee-for-service during the pandemic here. Do you think the pandemic has affected the way providers think about the risk opportunities of transitioning to value-based care?

I think on the margin, for sure. I mean, for one thing, they get cash flow, which is a nice thing, right, because the way competition works is you get a payment at the beginning of every month, and you're not worried about utilization. I have to see my members because if I don't get utilization, I don't get paid. So I think just on that alone, I think that has been a wake-up call in some respects. I do also think that they -- that the people are starting to recognize the quality differences that can happen. And when your incentives are aligned and when you're enabled by technology, like the telehealth that we've seen a major increase in, but they're incented to use it, I think on the margin, I think for sure, it's been positive. We've had, I think, pretty good discussions about this with our provider partners. I think you're seeing more and more doctors wanting to work in a value-based setting. So one of the things that we always ask ourselves as you expand your primary care business, as you put down more clinics in various markets, are you able to attract, recruit the doctors because these are effectively startups, organic startups. And the answer is, yes, we have been able to. And I think it's a more pleasant place to work. Obviously, it's a different workflow. It's a different way of working. But once you do, they're highly incentivized to spend as much time necessary with members to make sure they're -- they gain the care they need as opposed to sort of churning them out because they got to work on a fee-for-service basis. I think the -- it's an appealing setting for sure.

And so this has been a key area of capital deployment for Humana. And obviously, today, you announced another acquisition this time of Florida Physician Network. Can you tell us a little a bit about it, and why this network specifically?

Yes. No, Dr. Bansal has been a partner of ours for a long time. And the health plans work [indiscernible] He has a very good operation. We're excited to welcome him and his team as part of the Conviva operation. It's a Palm Beach, [indiscernible] Palm Beach operation, we think in 12 clinics and a number of affiliates. It fits really right into our strike zone of where we want to be in Conviva, which is really growing and being an important partner to our health plan and other health plans in South Florida. So this is the type of acquisition we want to do. We feel good about the economics. I think everyone is in a good spot from that perspective. And it's an opportunity to bolt this on to our Conviva platform and enable us to really grow and get a lot of benefits from it. So you'll continue to see us do these things. We're pretty prudent about the acquisitions we do. We want to be thoughtful about the purchase price and those sorts of things. I mean, there are some assets that trade at say, healthy valuations, and we're mindful of that. And so we're trying to be thoughtful when we do M&A and really balance M&A with organic expansion.

This practice as well as and most in Conviva, can you remind us what the mix in terms of reimbursement between, say, value-based arrangements versus -- is it the same here, kind of 2/3, 1/3 value-based to fee-for-service? What's the mix?

Yes. It's almost entirely a value-based system. It's senior large -- almost entirely Medicare, largely pretty much capitated. I mean, it's very -- it's right into the sort of the South Florida playbook of capitated senior MA.

Okay. You have -- Humana also had a lot of -- several other investments in primary care, such as Partners in Primary Care, and you have an investment in Oak Street Health. We know at least with Oak Street, right, their patients report very much higher NPS scores compared to health care overall. How has COVID changed your thought process around these kind of investments? And how does it help differentiate -- how do you think it helps differentiate Humana in the market?

Well, I think as you said, we have a number of investments. We're going to continue to expand those. We think it's a good use of capital. We're trying to be thoughtful about our use of capital. I mean we've [indiscernible] a lot of these primary care companies, whether it's Oak Street has done really well. They're a great partner of ours or Iora or ChenMed through our JenCare JV, and there are others as well. Cano is another one that we've invested in. So we want to continue to expand that -- those platforms and let them grow because as you said, we get better customer experience, better quality outcomes, higher revenue per member per month. And so it's a good model. But importantly, we want to expand our own model, our 100% owned model. And that's been a big focus of ours. As you mentioned, we have -- we operate under several brands, and we're working through those brands, but we have Partners in Primary Care, we have Family Physician Group and obviously, we have Conviva. We are continuing to sort of unite those organizations and really focusing on their operational excellence and performance. I think some of the meaningful EBITDA growth you've seen in health care services this -- over the last few years has been a big turnaround in the Conviva operation. And they've done a really nice job focusing on that and getting to profitability at this point, which is a good thing. And so that's a business we're going to continue to expand. We have a we think a very attractive partnership with Welsh, Carson with economics that particularly in today's market, we feel very, very good about. And so we'll continue to expand our presence. We're investing in -- expanding in multiple markets. We're in Houston, Vegas, Georgia, Louisiana and that's just wholly owned. And then as I said, we have our JV partners as well. So we continue to expand this business, and we think it's a good use of capital. And we think COVID has validated for the reasons we said, we think our members have gotten better care, the physicians are highly aligned to ensure that they get their care. Their risk scores are better because the physicians are incented to see these members. And so we're seeing less of a degradation in those risk scores for our capitated providers. So it's a good thing.

When you think about expansion, what is -- what are sort of the investments that you plan to make in this area as we think about CapEx spend or just overall investment spending over the next few years? Is this -- should we assume this is an increasing piece of the investment spending? And how -- if you can remind us sort of what your CapEx expectations are for this year? And how we should be thinking about that over the next few years?

Yes. I mean, if you look at our CapEx spend over the last few years, it has increased. Some of it's definitely from primary care. Some of it's on the technology side. I mean, we continue to ramp up our technology spend, and we have partnerships with Microsoft and Salesforce, and cloud conversions are expensive. That's why these guys are $1 trillion market cap companies. So -- and we're -- so we're working through that. We haven't given specific CapEx numbers for our PIPC, Partners in Primary Care expansion, other than to say that we do have a $600 million facility with Welsh, Carson that effectively mitigates some of that spend, both on the CapEx side as well as on the sort of the P&L cash flow burn side. But yes, we continue to want to expand that. We'll do, call it, 20 centers a year. We always think about should we do more on a wholly owned basis. Obviously, we just did this Conviva acquisition. We'll continue to acquire. So that's 20 organic, and we'll look to continue to acquire businesses. And we may decide to step-up that pace of expansion as well. But we also have our partner platforms, like we mentioned some of those names, where they're also growing. So we really are trying to create a nice balance where we're not too dependent on any one, but we have an opportunity to really significantly expand the membership base in these primary care platforms.

And just to make a distinction here right, organic growth is mostly through partners and primary care is going to be even more of an M&A strategy then to expand that brand?

I think it's a fair point. I think there will be some organic expansion. We've -- we're putting out some clinics in Texas with Conviva, San Antonio and the like, where we're sort of bringing in some of our affiliates and having them be wholly owned. And so you'll see some of that in Conviva. But -- and so there'll be some clinics. But yes, I would say M&A is probably more of a focus of Conviva's, particularly rolling up some of our affiliates where we can easily bolt them in because they're already taking risk. It just becomes more efficient to operate them on our platform. And by affiliates, I mean, we're -- Conviva as an MSO is taking risk. Downstream, they have relationships with those doctors. And so there's an opportunity to bring them on to the chassis and employ them directly. And so it's an economically good trade for both parties. So that's really where Conviva, I would say, is focusing a lot of its capital deployment. And you're right, Partners in Primary Care is more of an organic, put down new clinics. But they also look at acquisitions as well. And I wouldn't rule those out either.

Okay.

But these aren't major deals. I mean, none of these are -- they're not material from a Humana perspective.

Yes, certainly, of course. I want to shift over to technology. Obviously, that's been a very big focus for Humana over the last several years. 2020 was a big year for telehealth, and you mentioned it earlier. Can you talk about how your telehealth strategy has evolved over the last year and how you envision it as a part of your benefit design care delivery strategy going forward?

Yes. Look, I think telehealth is here to stay. It's clearly been a really positive development coming out of COVID, coming out of the pandemic. We are big proponents of it. I would say, though, most of the telehealth that we're seeing and that we're paying for happens in the doctor's office. In other words, the doctor is using the EMRs in their workflow and effectively contacting patients in that while they're sitting in their office. And that's where we see, particularly Medicare, that, that's really where the growth is going to be. And again, it's many multiples of what we're paying sort of for the independent telehealth folks, and we expect that to continue. We expect that to be an important adjunct to our risk providers as they work to see their patients because again, they're highly incented to do that. And so they're going to continue to avail themselves particularly the video telehealth. I think you'll see that as part of their model. I don't think there's a substitute for in-person visitation in terms of being able to diagnose clinically challenges that a member may have or patient may have. But telehealth will be a nice subset of that. I think you could see us on the specialty side leveraging telehealth more, particularly behavioral, where there's really a shortage of specialists there, and there's also a comfort level sometimes with telehealth that might be more conducive to telehealth. So I think you'll see us use telehealth from a specialty perspective -- specialist perspective, particularly where it's hard to reach certain members depending on where they live. I think you might see more use of, what I would call a company telehealth or assisted telehealth where a nurse, say a Kindred nurses in the home or Dispatch. We work with Dispatch, as an example. They're in the home, and they can have sort of a telehealth capability where they can leverage expertise back at headquarters or wherever that doctor may be or clinician may be to enhance the clinical experience. So I think you're going to continue to see a use of both primary care in the home with telehealth. Heal is another platform that we use. And again, I expect that to be used more and more, but also in our both owned JV and affiliate providers, we'll continue to see telehealth ramp up.

Do you think it can be by itself a meaningful cost saver for Humana in long term? Or is it more that it's going to be used as your providers or providers in general, right, are in capitated arrangements. And so they're incented to use it because that's a way to keep a low cost. Is that do you think the bigger driver? Or by itself, it's -- because it's a lower cost of care at a...

Yes. I would say -- I think it's more of the former, particularly for Medicare. I mean, we beg our members to see their doctor. Like the stuff that's the best, highest value utilization we can have to see their doctor. And so for us, the more telehealth utilization there is, particularly with primary care, the better. And so for us, it's less about sort of cost and unit costs. So there is a differential, though I would tell you, at least today, we're reimbursing in -- sort of in-office telehealth visits at the same rate as normal formal in-person visits. And we'll -- that may -- we'll see how long we do that for. But so I don't think there's -- I don't think we're going to focus on sort of the unit cost differential, but rather how telehealth assists in our ability to effectively manage the clinical conditions of our sickest members. On the commercial side, I think you'll see a bigger embrace of telehealth. We have a program called On Hand. It's a telehealth-first network, working with doctors on demand that's been successful, where effectively you're able to use a lower-cost delivery mechanism to offer a more compelling product. I think on the commercial side, you could see some of that. But again, I think on the Medicare side, it's going to be more about telehealth effectively as an adjunct or in addition to some of the traditional care that we provide.

And maybe -- we're running out of time here. So maybe the last question, you have a lot of partnerships on the technology side here and in telehealth with like Doctors on Demand and a few others. One of your competitors, they just acquired MD Live, which I think you partnered with as well. Does that mark a shift you think in strategy across managed care in general as utilization really ramps up and telehealth becomes a really accepted part of care delivery. Does that change sort of the calculus on whether to have it in-house versus continuing to partner with outside vendors?

Yes. Owning one of those providers outright sort of a generalist provider is not a [ teleprovider, ] probably not where our focus is going to be. Look, I would never say never and rule anything out. We'll see how the world evolves. But that's certainly not where our focus is today. Remember, as I mentioned, most of the telehealth happens inside the doctor's office through their EMR. So it's for us, could it be a good stand-alone independent business, I certainly wouldn't opine on that. And so that's a different strategic approach that I'm not saying telehealth is a bad business. It's just a question of how is it integrated into our operating model. And for us, we don't need to own that kind of thing. I mean, for us, we want to own and control sort of the integration points or the choke points however you want to describe, in the areas where sort of decisions are influenced, care decisions are influenced. So that's primary care, if that's the home, if that's pharmacy, those are areas where you're really influencing the way care is delivered. And that's what we want to control and integrate into our system versus more ancillary type services where we can rent. The other thing is we're -- while we are a technology company in a sense that we are embracing technology in a major way, and as I mentioned, with Microsoft and Salesforce and others, we continue to expand our technology partnerships. We don't pretend to be the experts on technology. We want to leverage the benefits that technology brings on analytics, machine learning, all those sorts of things that people are using and get the benefits of the cloud, et cetera. But we're never going to be able to contemporize a technology platform and keep it modern. It's just not what we do. What we want to do is create a partnership where we have them spend the money to keep it contemporary and make it the best and that we own the IP that's created from the partnership that we have with them around the health side. And so that's sort of been our general view of the world, how we manage our capital and where we deploy our capital.

That's really helpful, and I appreciate that. And I think with that, we have reached time. So Brian, thanks, as always, for spending time with us and Amy as well. And thank you, everyone, for joining us today, and stay tuned for your next panel. Thank you.

Thanks, Charles. Good to see everyone. Take care.