Humana Inc. (HUM) Earnings Call Transcript & Summary

All right. Great. I want to thank everyone for joining us today at the BofA Virtual Health Care Conference. It's my pleasure to introduce Humana. Humana is one of the largest providers of Medicare Advantage insurance in the country. It also has a commercial and increasingly growing provider business as well. So presenting today, we have Susan Diamond, who is the interim CFO and President of the home care solutions business; we have Brian Kane, who is the outgoing CFO; and then Amy Smith from Investor Relations as well. So I want to thank everyone for joining us today.

So I guess a few questions for you here. I guess one of the questions we're asking everybody, and it seems to still be a much open-ended question here, is how are you thinking about the pace and timing of the utilization rebound off of what has been depressed COVID utilization over the last several quarters?

Sure. Kevin, thanks for having us. I'll start and then Brian can certainly add additional comments if he'd like to. So as you can imagine, we've been monitoring the utilization very closely, really all of last year and leading into this year. And so far, what we've seen, the first quarter, we performed well relative to our initial expectations. As respects to utilization, we are beginning to see where the COVID utilization is starting to come down. As we see the COVID treatment and utilization come down, we are seeing a rebound in the non-COVID utilization, which we had expected. In total, results were largely in line with what we expected, which we view as quite positive given that we were expecting the largest amount of depressed utilization in the first quarter. And through the rest of the year, we'll continue to see utilization creep back up to more baseline levels, such that by the end of the year, we actually do expect for a short period of time to probably see utilization actually exceed the historical baseline due to some deferred care and other things. So all in, I would say, we're pleased with what we saw in the first quarter. And in total, we're seeing overall utilization on par with what we expected. We're seeing a little bit of higher bounce back in the non-inpatient side, so outpatient physician costs, than we might have expected. So we'll continue to watch that. But by and large, as expected.

Okay. That's great. And I guess maybe with that context that things are kind of playing out the way that you expected them to with Q1 and things are shaping up well, I mean, Q1 kind of beat the street expectations. I guess there's always a delta potential between your expectations and the street. But then we also got a sequestration delay, which seems to be a pretty meaningful positive to you, and yet, the company only reaffirmed guidance. So how should we think about those moving pieces? Is there anything that you're particularly worried about or focusing on in the back half of the year that might mitigate this? Or any other reason why we didn't see more of a raise from you this quarter?

Sure. That's a great question. As we described when we issued our initial '21 guidance, there were a number of uncertainties really related to risk adjustment and utilization trends that we were watching as we headed into the year. So you might recall that we did issue guidance for 2021 that did, in fact, deliver against our long-term targeted growth range, while, at the same time, providing transparency to the potential headwinds that might emerge. So as I mentioned a minute ago, the first quarter did emerge favorably, which, again, was quite positive given our expectations for utilization in the Q1. However, it's still very early in the year. There's a lot still left to emerge. And so we wanted to make sure we had an opportunity to continue to monitor the utilization trends through the second quarter and see how quickly they do recover to pre-COVID levels. There also is a little bit more uncertainty as it respects to the midyear risk adjustment payment due to the depressed utilization in 2020 and the resulting impact that has. That's particularly true for new members from whom we don't have full visibility into their historical claims, which is what drives the 2021 payment. So while the sequestration extension is certainly a positive and will otherwise mitigate any additional risk adjustment or claims pressure, should it emerge, we felt that it would be prudent to continue to watch results before adjusting guidance. And just as a reminder, sort of by comparison, most of our peers chose to issue initial guidance that was well below their targeted growth rate. And while many did raise guidance off their initially lower estimates based on favorable Q1, most are still below their targeted long-term growth rate. Whereas, as I mentioned, we came out initially with guidance that was in fact in line with our targeted growth rate.

Okay. Yes. I mean I guess, if I think about that comment, you guys also, though, coming into this year, had more of a tailwind from HIF being repealed. And so coming in, I might have thought that you would have been in a better position than the peers to kind of provide guidance in line or above the long-term growth rate. So it is a little, I guess, still hard for me to kind of reconcile why that guidance isn't higher. Is there -- I guess this comment about the risk adjuster coming in midyear, do you feel like then that, at that point, if that comes in as expected, that there is upside to the numbers? Or -- and yes, just trying to understand that a little bit better.

Sure. As it respects risk adjustment, I would say, we've done our best to estimate what we think the payment will be. And certainly, for our continuing or concurrent numbers, those we had last year and this year, we have greater visibility, so we can assess the impact in that population and use that to inform what we believe the payment will be related to new members from whom I mentioned we don't have the full claims history. So while I think we've done a nice job estimating that, we just recognized that because of COVID and the impact to utilization patterns, there's just more uncertainty, and therefore, we can get [ creative ] to make sure we have visibility to that as we consider the full year estimate. At the same time, again, we're all estimating what the utilization patterns will do over the course of the year. While it seems unlikely, certainly any additional spikes that we might see from COVID could have an impact. But I would say the bigger question is just as, hopefully, COVID treatment and utilization comes down and we see further rebound in non-COVID, there's just a question of where will it plateau and sustain. And recognizing that we're still only 1 quarter in, we think it makes sense to watch that emerging experience through the second quarter, which will better inform our estimates for the rest of the year.

Yes, Kevin, it's Brian. The only thing I would add is to your point about the HIF, just remember, though, it is true that we had the HIF tailwind, but we also had a much bigger MRA headwind as a result of the percent of our business that Medicare comprises. So I think they [ can enhance ]. So I think we feel pretty good that we held our guidance. And obviously, we've got to see what happens exactly, as Susan described, over the next few quarters here.

Okay. That makes sense. I guess when I think about sequestration, though, we were estimating that it might be almost $1.5 to EPS, which would be a pretty big number. Is that in the right ballpark?

Yes. Brian, have we disclosed the -- or Amy, I don't know if we've disclosed the actual estimate...

Yes, that is about right. Yes, incremental dollars. That's correct.

Okay. So that then would be -- how to think about when you get that clarity, that's -- a portion of that may come back into the numbers. Is there any reason why that number, if your risk adjustment is in line, any reason why that full $1.50 wouldn't come back in? Or is there anything that might mitigate that?

Well, again, as Susan said, I think we want to just be very thoughtful about a, where the risk adjustment comes in, in summer, let's see where that [ comes ] out. And then, b, I think we want to be prudent about the back half of the year because little swings in utilization can have a pretty material impact. And so I mean we've spoken about the '21 reaffirmation that we did. We're also focused on '22 as well, and that's where investors, frankly, should be focused. But we want to be prudent about our '21 guidance is what I would [ point to ].

Okay. And I guess maybe to that point then, as you guys think about bids for 2022, I mean, how are you thinking about that? Do you feel like, to your point, you don't have the risk scores coming back until after you've bid? So how comfortable are you in kind of that visibility into the costs as you bid for next year? And how are you thinking about pent-up demand or COVID cost as it pertains to next year?

Sure. So as you can imagine, we're watching all of those things very closely. As it respects the risk scores, we have developed expectations really for each week sort of to watch the level of what we call organic submissions that will come in from primary care, hospitalizations, et cetera. And so far, we've been really pleased to see that the diagnosis submissions that we're seeing are very much in line with what we would expect to see a full sort of rebound in 2022. We know that utilization plays a big role in getting full and complete and accurate documentation for our members. And so seeing primary care visits, particularly annual wellness assessments and annual physicals, are very important. And so far, we are seeing nice rebound in the level of services in those categories that are so important. We, like many others, have programs where we will do annual comprehensive assessments oftentimes in a number of homes. We have seen that those partners that we work with are seeing much higher rates of acceptance in terms of allowing us to come into the homes and do those comprehensive assessments than we were seeing this time last year. So far, I would say, on the risk score front, all the early indicators that we have access to are suggesting that our assumption that the 2022 reimbursement will be -- return to baseline levels is holding. So that's very positive. In terms of utilization, we're certainly being aware of the continued uncertainty related to COVID and running a range of scenarios around vaccination rates, treatment costs, vaccination costs and other things and taking all of those things into account as we do our 2022 planning. The rate environment is certainly positive. And so that's allowed us to, again, just take a fulsome look at the range of potential scenarios. And I think we're being very prudent in the way we approach our bids to make sure that we will continue to deliver against our long-term growth commitments.

I guess would it be fair -- I mean, obviously, 2020 was a year that was extremely hard to forget, 2021 somewhat so as well. But do you feel like 2022, in general -- you talked about looking at a potential range of outcomes, do you believe that the 2022 number is a lot less variable? Or do you still kind of feel like there are a lot of uncertainties as you bid?

I would say one of the big questions -- again, I think we are feeling good about the risk scores based on what we're seeing. So assuming that continues, I think we have pretty high confidence that the reimbursement will be where it needs to be. On the claims side, I think, again, we're taking what we feel is a prudent approach and assuming how utilization will return, looking at our 2019 baseline and then what sort of more typical trends would look like over that 2-year period that we're bidding forward. So I think that we are being appropriately prudent in the way that we're thinking about it, such that we can be -- feel confident in the range that we'll ultimately issue later this year.

Yes. Just to build on that. I mean, when we say appropriately prudent, I think we're preparing for a range of outcomes with respect to our bids so to the extent there are some adverse developments, we're able to handle them obviously within the reason. So -- and I think we are mindful of the 2021 experience from 2020, and that is influencing our 2022 pricing level.

Okay. That's helpful. I guess when we think about the profitability today, I mean it looks like on your Medicare business, you guys are well below your 4.5% to 5% margin target. So how do you think about balancing that margin improvement versus the membership growth? And I guess, from the outside looking in, going from, let's say, 3.5% margin to 4% margin would add a lot to earnings growth, more so than I would think it would add to membership growth at this point. So how do you think about the math of balancing those 2 as you try to deliver on the 11% to 15% over time?

Sure. As you can imagine, this is a point of debate every year internally with our Medicare partners. We always strive to balance growth versus margin. It's something we always consider heading into the bid planning cycle and really considering both the near-term and the longer-term impact. And that's certainly true, in the near term, you could deliver more margin at the expense of membership growth, but longer term, that compounding effect of membership growth is quite powerful. So we're always looking to create a balance of both of those dynamics. We'll consider the rate environment, the market and the competitive dynamics and many other factors as we sort of debate where we'd like to land within the growth range as well as the earnings commitment. Again, we recognize we're operating in a heightened environment of uncertainty. As Brian mentioned, we're taking that into account. And we'll also evaluate our near- and longer-term investment needs that will drive continued innovation to ensure that we're well positioned to continue to deliver against those longer-term growth commitments. And then the one other thing I would just remind you to keep in mind is that the permanent repeal of the HIF in 2021 did impact pretax margins as we did invest a portion of that tax impact into benefits, which created some depression of those pretax margins relative to historical. So all of those things will be fully considered so that we can deliver on our commitment around membership growth as well as, again, the long-term enterprise earnings commitment.

Okay. That makes sense. And then it looks like there's a lot of companies going public today who are looking to grow in MA. Basically, they've got interesting technologies and medical management capabilities, and they're basically underwriting todays pricing off of what they expect to be able to deliver in 2 or 3 years from a cost basis. So basically, unprofitable today on the expectation that through G&A leverage and medical management, they'll get to profitability in a few years. How does that competitive dynamic work for you? How comfortable are you that you're going to be able to continue to grow at or above the market when you've got some new competitors who are, I guess, either, a, looking at things slightly differently and potentially have new models that might be competitively advantageous or, b, just able to price below trend for some period of time because they obviously went public and raised a lot of money?

Sure. It's interesting. I think we would argue that in order to deliver -- successfully deliver sustainable growth, it requires high performance across a number of areas. Certainly, high value and effective product design is important. Omnichannel distribution strategies, we've seen, are particularly important, especially in the environment we're operating in. Certainly, strong brand and customer satisfaction plays a role, high-quality providers, but also proving risk management and clinical programs. All go into really delivering sustainable growth. We continue to invest in all of these areas, which we -- it allowed us to deliver industry-leading Stars performance, better outcomes for our members. And we think results in our ability to offer a sustainably compelling value proposition and that sustainable, consistent growth. We see some competitors introducing products that do have outlier benefit investments from time to time. Although we find typically that they -- those strategies often prove to be unsustainable mid- to long term if they don't necessarily have the other critical success factors within their models. The other interesting thing that we see is that brokers tend to realize this, and they do value health plan partners who have a consistent track record delivering sustainable value to their customers. And the last thing they want to do is enroll one of their customers in a plan that provides value and then the next year, experience significant benefit degradation and have to continuously move their books. So they definitely prefer health plan partners who can deliver a sustainable and compelling value proposition, which is what we seek to do every day. So there are certainly pockets where we'll see certain competitors experience disproportionate growth. Although they're typically smaller by nature, so they -- while they may have outsized percentage growth on, an absolute basis, it tends to be less significant. And we've just seen that over time, that we are able to demonstrate superior growth long term due to the quality of our model.

All right. Great. And then you guys have been making a pretty large investment here in Kindred at Home. Can you talk a little bit about the benefits of owning the home health provider versus just contracting with them? I mean I guess we've seen maybe one other peer do some home-based acquisitions. But for the most part, we haven't really seen a lot of the managed care companies get in to home health.

Yes. So obviously, we made our initial investment in Kindred back in 2018 with a 40% investment. And that original investment was really predicated on our belief that more care would be delivered in the home longer term. And given the fragmentation in the space, we recognized that in order to do that, we would really a nationally scaled platform of nurses on which we could innovate and deliver the type of care that we envisioned. We also have a strong belief that innovation and a value-based mindset is needed in the delivery of home health, which the current fee-for-service reimbursement model really fails to support. So that's what we've been working closely with the Kindred at Home leadership team on the last 3 years. And what it's allowed us to do is really better understand the barriers of taking a total cost of care approach in the way home health is delivered under the existing fee-for-service model. And you're able to learn, frankly, a great view about what additional care models are needed and innovations are required to improve patient outcomes and reduce unnecessary hospitalization events. So over the last, I would say, 12 to 18 months, in particular, we have been able to introduce on a test basis, new care models and clinical interventions, and we've seen the positive impact to patient outcomes as a result of that work. So all of that gave us the confidence that a value-based operating and payment model will work, which led to our desire to accelerate the integration as we prepare to introduce those models at greater scale. We would argue that given the level of transformation we hope to implement on the home health side, the total integration really was necessary in order to fully align our incentives and objectives towards a more value-based model relative to the fee-for-service model that's prevalent today. So that's really where -- what let us to want to accelerate. We were able to successfully negotiate an attractive price with the financial sponsors relative to what we likely would have paid if the [ cost ] structure had played out contractually. And we also announced at the same time, an intent to divest our majority stake in the hospice asset. And that was really predicated on a belief that the hospice clinical model really works quite well in the delivery of the care needed for patients who are approaching end of life. We do think there's opportunities for more patients to have access to that type of care and better transition support as they approach end of life and better care coordination. We have been able to implement some of those enhancements through a demonstration that CMS introduced just starting in 2021. And we were successfully able to do that with Curo, which is Kindred's hospice asset, but as well as many other high-quality hospice providers. So our ability to do that gave us the confidence that a majority of stake really wasn't necessary to support that, while a critical part of the care continuum, we could do it through a partnership model or minority stake. And given the favorable multiples on those assets today, that was another reason for us to look to accelerate the full integration, which will then allow us to also move forward with the divestiture of our majority stake, which significantly [ buys ] down the net effective price of the home health asset, which we do feel is important to own.

That's helpful. I guess the value-based concept is a little bit unusual. I mean you hear the home health guys talking about it to some degree, but can you help us frame what that actually means? Does that mean more revenue per visit than we would normally be seeing in a typical home health provider? A higher margin or a lower margin, but higher profit dollars if the revenue is higher? What exactly does that mean? And how does that flow through the economics?

Yes. So our intent is actually to implement a full capitated model. We actually like the idea of having it applied to home health as well as DME and infusion, which are often provided to patients who need home health support. So we're actually looking at all 3 of those spaces, but our intent would be to offer a full capitated arrangement to the health plan. And we intend to do this in an agnostic way, not just for Humana members, but really all MA payers. So the health plan would benefit from a capitated arrangement, which would inherently provide savings to the health plan. We will likely have what we've referred to internally as almost an MSO-like structure that we facilitate all of it. They would then support the sophisticated analytics, utilization management and network management functions that are needed to then deliver all of those services at a cost lower than the fee-for-service model provides today. We think it's important to introduce all of that clinical innovation that I mentioned as another source of value creation. And then ideally, we would want that MSO partner to work with an owned downstream home health provider who can actually implement all of that clinical innovation. And so that's obviously the role that Kindred will play. And we'll also work with a couple of other partners, obviously, recognizing Kindred has about 65% coverage of our member population. So that's how the pieces will work together. The savings, as I mentioned, delivers to the health plan through a lower capitated rates than they would experience historically. There is margin in the home health assets from the increased volume that we can refer into those high-quality models and then the margin that's embedded in the MSO-like model. By having all of those functions fully integrated, it gives us a lot of optionality in terms of where we want that value to show up and how we use it. Certainly, we can invest it -- reinvest in health plan benefits to drive further growth or profitability. We can invest in enhanced clinical models, which, in early stage, we'll certainly need to do. But there's a lot of opportunity to create additional value beyond what we've seen in the traditional fee-for-service model today.

As a public service announcement, Susan is going to talk a lot about this at our Investor Day in mid-June. So you'll get all the details.

Looking forward to that. I guess maybe just one last question then on that. Does that mean that you'd be interested in owning some of the other capabilities, infusion or DME? Or are those things that if you're in charge and you have the home health capabilities, all you're going to do is just contract within the MSO?

Yes. I think we'll look at a number of models. I think, certainly, where we have sufficient density of customers, owning would be highly attractive. Fully integrating just allows for more seamless experiences than what you can do when they're not integrated. But there's -- certainly less dense areas, certainly more rural environments, we'll have to rely on partnership models as well. But certainly, I think where possible, you'll see a range of models, including owning those capabilities as well.

Okay. Great. And then I guess, when you think about the provider side of the business, the care delivery side, physicians -- you guys have been building out your own capabilities. You're owning your own clinics, but you're also investing into your competitors, I guess, to some degree, like Oak Street and Cano. I guess I understand the short-term benefits of expanding the capitated model and how that benefits MA plans, but does that create a longer-term friction for you? I guess how do you think about the ability to grow that internally yourself versus enabling others to kind of go out there and gain share during kind of a pretty wide open white space opportunity?

Sure. So you're right. So you've seen us invest in a variety of models, including our owned strategy, which we're quite proud of. Our goal, fundamentally, is really to have as many of our members have access to high-quality value-based primary care as possible. And while we would love for all of those members to be served by a Humana clinic, the reality is it's not practical to provide the level of access we aspire to through solely a proprietary model. So we'll continue to partner with other high-quality models, which, in its own right, creates significant value for the health plan [ and ] the way they deliver care. The other thing I would say is the health care services offerings that we're building out are largely designed to be payer agnostic. And so that allows not only our own, but also our network providers to fully leverage the range of capabilities we're assembling, which can create significant additional enterprise value if those services are leveraged. So we do think that you can deliver the greatest value and the best experiences when they are fully integrated. So we're doing some work now with our proprietary primary care partners as well as all the capabilities we've assembled in the home as well as our pharmacy assets and other things to demonstrate exactly what that incremental value and lift is when all of them work more seamlessly. And I think that probably is better than what we can do in -- with nonintegrated partners. But even still, the experiences that we can deliver and the interventions that can be made available even through contracted provider partners is still quite significant and the impact for the patients and providers. So we will continue to build out those other capabilities even in the absence of full integration, while also doubling down on our efforts to create more seamless experiences through our proprietary capabilities as well.

Okay. That's great. And I guess, when we think -- we've been asking this to a lot of the companies, COVID's obviously caused a lot of disruption, caused a lot of changes in how care is provided, changes in how companies are operating their businesses. Are there anything -- is there anything that you'd point to that happened that you've done in response to COVID that you think is going to be a long-term shift in how you operate?

Yes. I would say probably 2 things most significant. One is the advance in telemedicine during the pandemic. We had provider partner physicians, in particular, work under stress when all of the nonessential services were shut down. So one of the things we did initially in support of our physician partners and specialists, [ really all ] providers was to implement paying policies where we paid for virtual medicine on par with any clinic visits. And that was really 2 motivations: one to support our provider partners and their cash flow to make sure they can sustain their practices; but two, to make sure that our members receive the necessary preventative care that might otherwise get without. And frankly, pre-pandemic, the use of telemedicine and virtual visits was extremely low. And when it did take place, it was often in a sort of nonlongitudinal relationship with a doc on demand or those types of services. So what we were really frankly surprised to see is the significant increase in virtual medicine. And really, it was adopted by our primary care physicians and specialists. And so what that allowed us to do is make sure that our patients are receiving preventative care, and we actually saw a higher medication adherence during the pandemic than actually pre-pandemic, which was quite positive. But it also worked to build confidence, I think, within the provider community about exactly the range of care and the quality of care that can be delivered virtually. And so we think that will be a real accelerant to the adoption of those technologies and leverage more long-term best practices in order to create additional touch points with their patient population that they can't necessarily do just with face-to-face interactions, which we view is quite positive. The other thing I would say is the interest in home-based care more broadly. As you can imagine, with the pandemic and the implications to those facilities in terms of going on lockdown, whether it was a hospital setting where you can't have visitors or certainly longer-term settings like skilled nursing facilities, loved ones were often isolated. Their family members couldn't get access. So what we've seen is sort of what we think will be a sustained shift in moving patients out of facilities and into the home. And skilled nursing is a space where we've seen the greatest decline in use, and it has been the slowest to bounce back. It has not returned to pre-COVID levels like some of the other settings have. So as we've talked to providers and others about that, they would acknowledge that pre-pandemic, they were probably more inclined to recommend a patient to a facility, particularly a more frail, complex patient into a facility where they felt like they had confidence they'd be cared for. And now what we're seeing is this heightened of sense of risk of putting a patient in a facility, and so they are deferring -- instead defaulting to home-based care when possible. So I really do think we've seen a tremendous uptick in hospital at-home services, not only by independent companies, but by hospital systems themselves who arguably are less incentivized to adopt those models, but we're seeing tremendous interest there as well as in skilled nursing. I think we'll sustainably shift to more home-based care and a greater to accelerant to [ treatment-at-home ] models than we would have seen in the absence of the pandemic.

All right. I think that's all we have time for. So I want to thank everyone for joining us today, and look forward to doing this in Vegas next year.

That's great. Thank you.

Thank you.