Humana Inc. (HUM) Earnings Call Transcript & Summary

All right. Great. Good morning, everyone. Welcome to the Barclays Global Healthcare Conference. I'm Steven Valiquette, the health care services analyst here at Barclays. I'm pleased to kick things off with Humana this morning. With us from the company, we have CEO, Bruce Broussard; and also Amy Smith from Investor Relations is on as well. So welcome, Bruce.

Hi. Good to be here, Steve.

All right. Great. So this will be a fireside chat. So I guess, we'll just go ahead and dive right in. So yes, let's start with COVID. Obviously, extremely topical right now. On your last quarterly conference call, Humana discussed how, in relation to the COVID impact for '21, there's some natural countervailing forces between trends and COVID treatment costs and trends in non-COVID utilization. Now in the real-world marketplace right now, it's pretty evident that COVID cases have been coming down materially over the past month or 2, certainly positive news overall. But I guess it's less clear if there's been a simultaneous uptick in non-COVID utilization in connection with that or if that's further down the road. So maybe we'll just start off by talking about whether the current trends are still pretty neutral for Humana. Or could they be more net positive in the short term? And I guess, we'll start there.

Yes. As we -- at our February fourth quarter call, we mentioned that we were expecting a depressed utilization for the first quarter and part of the second quarter. And we've seen that. That's been our experience, although February is just coming in and the utilization hasn't been finalized. What we saw in January is about a 20% decline in utilization, and what we've seen in February is around 15% to 16%, which is where our expectations were. So we're content and really feel confident where we are based on that. The second thing is that we have seen, as you just mentioned, a decline in the COVID cases, and that's got 2 positive effects: One positive effect is, obviously, just the cases themselves and the hospitalization. But the second effect is the rate that is -- that we pay for COVID cases, which is materially higher. And so both of those were having a positive effect on us. One thing we don't have a clear finalization on for the first few months is inpatient -- non-inpatient, and so we are waiting for that. But what I would say overall, based on what we see, that we continue to be confident the guidance that we gave in our fourth quarter call continues at the -- meeting our expectations.

Okay. All right, great. Yes, just to circle on that for a second, I don't expect you to change any guidance on this sort of agenda, obviously. But so like Humana is expecting $525 million to $925 million in COVID-related costs in '21. Is there any sort of gravitational pull whether it goes to one end of that or the other, just given what's happening with the rapid case count and vaccination success thus far? Or is it too early to make that call?

It's too early. I mean, as I mentioned, we're meeting our expectations right now for the first few months. But as Brian says often, 2 months don't make a year, and so we're continuing to monitor that. But I -- and we haven't been giving specific breakdown of the COVID costs. But as we've talked about, we do see it declining and that gives us more confidence.

Okay, I guess the other factor, too, I guess I'm curious, just as a quick follow-up, just how front of mind it might be for Humana around the risk of seasonal recurrence of COVID that might happen late in the year, plus any unknowns related to new strains. I'm wondering if those are factors that are still kind of at the forefront of your mind as well when you think about this.

Yes, we continue to monitor that, and we continue to think through that, and this is pretty unpredictable right now. So I would just say we'll monitor it. We don't have a view on it one way or the other.

Okay. Okay, and then maybe 1 or 2 more questions around this topic, not to beat it to death. But I think in my mind, the part that is much more difficult to decipher is the non-COVID utilization trends. And as such, for me, personally, I'm not surprised to see that Humana put a pretty wide range on this in the context of the $1.3 billion to $2-point billion tailwind from depressed non-COVID utilization. So again, I know you just made some comments around all that, but is there any thoughts around how much of that was occurring in the first half versus the second half? Any change there? Or is it all just sort of still TBD as far as...

Steve, I cannot hear you. So I don't know if it's me or you. Now I can hear you. Perfect. Yes.

Yes, I'm not sure what happened. Yes, just again, as far as the non-COVID utilization, any different thoughts around how much of that occurs in first half versus second half as far as the tailwind from the depressed non-COVID utilization?

Yes, well, we saw -- what we projected is really for the first quarter to be the highest depressed in the year, and then the second quarter, a little less depressed. And then the third quarter, we see it being in line with the utilization. And in the fourth quarter, we anticipated a little above par. And so we saw this sort of continued increase over the year. We still feel confident with that, especially with the first few being -- the first few months being -- meeting our expectations, so we'll continue to see that. But I do believe if we have a good first and second quarter, yes, the third and fourth have a much more in line or above utilization. So the first few quarters are important to us as we think through our estimates.

Okay, great. All right. Well, shifting gears here a little bit now. A little more time has evolved in 2021. And curious if there's any additional color you can provide on how the Medicare Risk Adjustment or MRA headwind may shake out for this year. Again, you guys put a range on it of $0.7 billion to $1 billion. That's what's supposed to evolve as the year goes on. Curious if there's any thoughts, or is it still too soon to say whether this is trending more to the lower end or the higher end of the range.

It's too soon. And just to put some context around this, unlike our utilization where it is updated on a frequent basis, what we really are going to wait for is for the midyear, which is going to be in June, to give us a really great understanding of how our 2020 documentation show, which is really, as you all know, documentation is in the lag. And so we're really waiting for 2020 to see how we carry forward in 2021. Until we know that, it's going to be a little bit based on the estimates that we are making based on the utilization that we saw. So we continue to be comfortable with our range, but I think in the summer, we'll be able to give firmer guidance around that. But there's nothing that has led us to change that guidance today.

Okay. All right, great. And also on this same topic. So from a -- what we all kind of learned is that a lot of this clinical interaction with the patients, if it is happening late in the calendar year each year, just curious if Humana's doing anything as we think about calendar '21 and hoping to avoid something similar happening that may impact 2022. Is there any way to pull forward this patient interaction activity? Or what else can you do as far as leverage you can pull to avoid the lack of clinical interaction that sort of led to the -- this temporary setback around the MRA?

Yes. There's really 2 reasons. I mean one is around the documentation side, but the other is continuing to ensure that our members are getting the proper proactive care. And so we're constantly trying to ensure that we are getting the clinical needs filled on a proactive basis. So we are very active in providing in-home assessments today to our members. And in fact, we have seen a good few early few months in the year, and I feel confident that we are getting ahead of the game. And again, as you said, we are trying to ensure for 2020 that we enter -- sorry, 2022 in a really solid year. And so the activities we're doing today not only are for 2021, but they would be also for 2022. And so we will continue to do that, both in-home assessments, and in addition, continuing to ensure that we are encouraging individuals to get to the physician and be able to have the proper preventative care that's needed.

Okay. One other question on this, just around the in-home assessments. Is this something that's fully outsourced by Humana? Or do you have any in-house capabilities to do this? Just curious on the split up of that. And then does it make sense to have more vendors to do this? Just curious around that dynamic.

Yes, yes. We do have an in-house capability called Your Home Advantage, that I'm estimating is about 20% of our volume or so. The rest is outsourced to 2 to 3 other vendors depending on the time of year. So we do use outsourced vendors. But we do continue to try to build our internal capabilities to allow us to have much more dependable supply over the long term.

Okay. Great. Okay, shifting gears here a little bit. So obviously, for 2021 MA membership growth, expecting pretty strong numbers this year, 11% to 12% growth. Now that we're a few months into the year, and I get this question every time around this time of the year. But just any early thoughts around the acuity of this new MA membership base, associated profitability or margin profile. Any color around that? It seems like Humana is -- talks more about these members not being that profitable in year 1. I guess there's some mixed views around some of the companies. But just curious how that's shaping up versus your expectations as far as the year 1 profitability so far of the new member base.

Yes, they continue -- are meeting our expectations, as we mentioned in your earlier questions. The utilization is meeting our expectations. So we don't see much difference this year than we have in the previous years with our new members and the specific utilization.

Okay. Okay, shifting gears to Medicaid. You've had some wins, Oklahoma, expansion to South Carolina, acquired a plan in Wisconsin. So you're racking up the number of states. Just curious if you can remind us of other shots on goal that you may have, either in Medicaid RFPs or just any other areas you might be targeting as far as the Medicaid expansion plans.

Yes. Just to put some context. Obviously, we began serving Kentucky Medicaid in 2020, and that was a big book of business for us. And obviously, we recently announced, as you mentioned, South Carolina and the Oklahoma win, and now in Wisconsin. So you're seeing these small, either small acquisitions or organic wins. And I think that's just a testimony to this low capital approach that we can be picked and pick the markets that we want to go into in a much more proactive way. We did, as you well know, win the Louisiana award that will come back out. It was canceled as a result of some protests. But we're understanding in 2021, that will come back out for bid. And we did participate in the Ohio RFP, and we're waiting for results coming out of that. We are expanding our Illinois dual plan. We used to be in just a few ranges. Now we're going to go statewide, and that will start in 2022. And so you'll see us continue to find these areas where we can build organically and have some smaller acquisitions in our approach. We really don't share on a proactive basis. We are proactively involved in a number of RFPs. We haven't shared the ones that we -- publicly, the ones we're going to participate in. But I think as I mentioned in the last few conferences, that we will be very active this year in these RFPs in states that we feel are most appropriate, based on our geographic concentration. In addition, just the state's profile around how friendly they are, what the rates are. In addition to we feel that it's a state that we can be competitive in.

Okay, great. Maybe just sticking with Medicaid for a moment here. There's obviously a lot of unknowns around Medicaid with redetermination or reverification timing a bit up in the air, some states facing budget pressures. I know you touched on the redetermination piece being baked into your guidance with a wider range. But how are you thinking overall about potential state budget impact as states begin to reassess Medicaid budgets post pandemic?

Yes, that's always a risk, obviously. And as we all know, the budgets for the states have been impacted as a result of the COVID and the increased unemployment. We -- obviously, the stimulus package that's coming out will provide further funding for states and give them another level of stability. As you mentioned, our guidance for Medicaid, specifically up 50 -- I mean down 50 or up 100 really is around redetermination. And we do believe that has a high likelihood of continuing. So we probably will continue to see the -- probably the upper end of that, if our projections are right relative to what the states do. And so we're optimistic on the state side and optimistic on the support from the federal government to continue to keep the Medicaid roles at the proper levels. And I do believe based on the democratic agenda, that's probably something that we'll continue to see be reconfirmed over the coming year.

All right, great. Okay, just shifting back to Medicare Advantage for a moment. I know it's a little bit early to discuss the 2022 individual MA benefit plan design, but doesn't hurt to try to ask. Because I'm just curious if there's any learnings from the competitive landscape for the '21 enrollment cycle that may lead Humana to make some adjustments for '22. If you can talk just any preliminary thoughts around that.

Yes. I would say, like every year, we had learnings in both what we found as being really good and the ones that we need to adjust. But as we say every year, we really -- it's too early. We're just entering into the planning and the bid cycle process. We usually don't share any of the preliminary thoughts we have until we finalize them and do -- and basically until all the rates are finalized for our competitors there. So I'd love to be able to provide all those learnings to you, but it's too early.

Yes, okay.

But it was a good try. It's a good try.

All right, great. So all right, bouncing around here a little bit just on the health care services segment. The pharmacy or PBM business performed pretty well last year in 2020. And your mail order penetration rate, over 37%, I think is the highest among -- by far among any of the major PBMs. I'm not sure how much that mail penetration rate benefited from COVID. I mean I'm guessing the higher that is, the more profitable the overall operation is as far as that mail order penetration rate. Is there any chance that, that comes back down as things normalize? Or do we not really see that much of a tailwind from the COVID impact on the mail penetration?

Yes. I mean we did see some COVID impact, especially with the 90-day prescription orders early in the COVID time in the April -- March and April time frame. and so we've had some benefit from that. But I would tell you today that we are also seeing that there's more awareness of the convenience of mail order. And the -- and in addition, our consumer experience has been a really big focus for us, both in the time of delivery and in addition, just being able to make it much easier for people to order their drugs and be able to get -- provide the prescription from the physicians. So there's a lot of removing of the friction in the system that is going on. And I would say that we're optimistic that, that rate will continue to maintain at the levels that we've seen historically. And over time, we are really organizing around how do we improve that rate. Because that is, as you mentioned, an important profit driver for us in our pharmacy business. But at the same time, it's a great way to integrate care together within the -- both in the local markets and in addition, within the pharmacy side. And the more we can integrate that care, I think the better we can proactively provide that care for our members in a much more holistic way. And so I think you'll see us continue to invest in that, and we're very optimistic of the opportunity we have and continuing to increase that rate.

Okay. Great. Also, sticking with health care services. Obviously, Humana has a lot of success in your home health programs, lots of organic growth there. Pretty obvious way to save medical costs for sure. Besides the organic growth, just curious if this is an area of focus from an M&A standpoint for the overall company on top of the organic growth. Just curious how front burner this is to further grow and expand this part of your business.

It's a combination of 2 things: First, it's a combination of how do we change the clinical programs within home health and have a much larger impact on the downstream cost. And this past year, we've taken about 50,000 episodes and used those as a test to see how effective we can reduce the emergency rooms visits and in-patient hospital admissions. And we've seen some substantial impact on that and changing the clinical model of how the nurses are going into the home, which traditionally has been more -- the clinical models have been developed around how they get paid as opposed to the downstream payment there. So we are excited about the impact we can have on the downstream cost. As you mentioned, it also provides another opportunity. We will orient to completing the Kindred acquisition over the coming year or so and being able to bring that in. And then subsequent to that, because of the fragmentation of home health, it is a great opportunity for us to have the ability to grow via acquisition but in smaller ways that you can aggregate up with them. It's capital, but it's very productive capital. It's not at the multiples that you've seen that these large transactions have traded. And so it's a great way for us to build in a capital-efficient way and at the same time, continue to build our distribution channel. That's specifically in the home health for nursing. We do have the physician-in-the-home strategy going on too. Obviously, we made a large investment in Heal. Ultimately, we have the opportunity to own that business if certain milestones are met. And that will also give us another platform to grow of being able to bring primary care into the home. Our third area will be really taking and how do we -- the ability to manage costs on the post-acute side, utilizing the home. And you'll see us continue to refine our market approach to being -- bringing more of an MSO, management service organization, to managed downstream post acute. So the home has a number of opportunities all the way from refining the clinical impact to being able to acquire and build in a fragmented industry a large platform, to being able to take primary care and putting it into the home. And the last being able to manage post-acute costs downstream by being able to build a post-acute MSO wrapped around the home delivery.

Okay. All right, great. I've got a minute left here. Maybe just the last question around Group and Specialty. So obviously, this has been a segment that's been facing a little bit of pressure from competitors. Maybe you can just dive into that a little bit more and talk about the progression of the remedy actions that Humana has taken to try to improve this part of the overall company?

Yes, a few things there. I think, first, we are geographically concentrated here as opposed to being national. And that is really to build off our Medicare platform and both the relationships we have with the provider in the marketplace, but also just our brand in the marketplace. So you see us taking a strategy that's much more following our size and scale in the marketplace, and we've picked a number of geographic regions. That leads us to more employers that are in that regional market. And municipalities and school districts, et cetera, are a common theme for us to focus on there. We've made some great progress, both in our talent recruiting. And we changed out our management team a few years ago, and they have built a really, really great management team. And we're seeing some fruits from that, just not only in stabilizing the business and putting some really great operational discipline into it, but also now seeing the ability to grow our membership over the coming years. And then the last thing that we've also done is really leveraged our relationship with the providers and become much more thoughtful and being able to impact the cost of our medical cost by continuing to build deeper relationships with our providers. And the team has done a wonderful job over the last 2020 in utilizing really COVID and some of the circumstances that the providers faced and -- during that period of time to build deeper relationships. So we are optimistic about the geographic markets we're in over the coming years of being able to have an improving business there and a growing business. And we have a great management team to do that.

All right, great. And with that, I think we're out of time. So I'd like to thank Bruce for his time today. And everybody, enjoy the rest of the conference.

Thank you, Steven. Hopefully, next year, we'll be in Miami.

Yes, let's hope so. All right. Great. Thanks, again.

Bye-bye. Bye-bye.