Humana Inc. (HUM) Earnings Call Transcript & Summary

Good morning, everyone. This is Lance Wilkes. I'm the health care services analyst for Bernstein. Appreciate everybody coming here this morning for our Strategic Decision Conference. This is going to be the Humana session. And in a moment, I'm going to turn it over to Bruce Broussard, the CEO of Humana. Before that, let me just do a little housekeeping. [Operator Instructions] And with that, what I'd like to do is, Bruce, obviously, one of the things that's great about this event is we have a large audience of specialists and generalists who are portfolio managers and the like. And so maybe if you could just give a quick introduction of yourself and of the company, and then we'll move towards the fireside chat.

Sure. Well, I'll spend less on me and more on the company here. So I'm Bruce Broussard, the CEO of the company, have been CEO for -- since really 2012, '13 here. And just a little bit about Humana. I think Humana is well-known for its focus on seniors, specifically seniors with chronic conditions. We do -- our largest part of our business is Medicare Advantage, and Medicare Advantage is a program within the Medicare system where beneficiaries for Medicare have the choice of choosing what we refer to as a Medicare fee-for-service, which is sort of given certain benefits and those are defined by the federal government, or being able to utilize a private offering through Medicare Advantage. And that is really an offering where the consumer decides at what plan they want to choose. So it's kind of a competitive marketplace, and there's a lot of customization that happens. But it's also very expansive in their benefits. And one of the unique things about the Medicare Advantage program is that companies like Humana, which today we have about 21% of the market share, are able to reinvest the savings and the cost effectiveness and the improving health outcomes back into benefits which allows us to offer benefits that really Medicare fee-for-service can offer. In addition, Humana is now also oriented to growing their health care service business. Today, we have the fourth largest PBM that primarily services seniors both in the Part D plan, which is the prescription drug plan for seniors, and also Medicare Advantage. And in addition, we have a primary care platform that is focused on seniors. And we are just now in the process of integrating a large company focused on home health for seniors that has a whole host of connections to services in the home, all the way from the traditional home health to physicians going into the home and also areas like in home assessments. So we do have a commercial book of business in the health insurance side. It's mostly focused geographically. It's not nationwide. We're more geographically oriented. In addition, we have a growing Medicaid platform that is adjunct to our Medicare platform as part of that. And then we also serve half of the TRICARE recipients out there and through our -- through our military platform.

Great. Well, appreciate that framing of the company. So let me just start off, this is a strategic decision conference, so we try to ask pretty broad questions and really look at some of the strategic outlook for companies. So let me just start off with sort of long-term vision for Humana. Obviously, you've done the recent Kindred at Home transaction, at least closed and fully brought in that business. Can you talk a little bit about, as you see the company 5 and 10 years out, maybe the proportion of the business that's in kind of the managed care MA sort of business versus health care services and Medicaid? And/or do you see other rising businesses that are necessary to kind of fulfill your vision over that time period?

Lance, maybe just to give you a high-level view, we believe that over the coming years that there will be structural changes that are happening in health care. And really, those structural changes are being enabled by two overarching trends. One is technology, and then the second is payment models specifically focused on outcomes, health outcomes and, in addition, cost. And if you take those 2 sort of enablers, we see the continued evolution of where care is being done to be moved from more institutional oriented, all the way to areas where that's much more convenient to the member or patient that allows you to be much more holistic in your care delivery. So moving from an inpatient to an outpatient has traditionally been the case, but we see moving to home, moving into the ability to utilize more primary care as a result of that and in addition, to be able to leverage the telehealth side. On the other side, we also see who's doing the work, we see continuing to be pushed down from specialist-oriented health care to more of a generalist that is also allowing people to practice at the top of their license. So if you take those 2 trends enabled by technology and value-based payment models, where we are positioning the organization is really to advance that. First, our strength is in Medicare Advantage, our brand, our capabilities of being able to do that. And Medicare is the most mature value-based payment model out there. And so as we see the growth and we continue to see that being a great opportunity there, you'll see the organization continue to focus on that arena. The second part of our initiative is really to continue to advance from that platform to grow in other areas. So Medicaid is an example of that. You've seen us over the last few years organically grow in Medicaid. But in addition, what we see and one of the reasons why we're really oriented to our health care service business is that we see the opportunity not only to serve our existing members and capture more of the value and the value stream around the provider side, but we also see that platform as being able to take value-based payment models in other markets, whether it's serving other payers, and a lot of our businesses today do serve other payers, and in addition, prepare for Medicare fee-for-service value-based payment models. The most recent example of that is direct contracting. But we really feel over the coming years that there will be more and more opportunities to serve the broader Medicare fee-for-service side. So if you think about it today, Medicare Advantage is about 40% of the business of Medicare beneficiaries. There's a whole another 60% that is really being untapped, and we feel the opportunity to do that both in an insurance product, and in addition, in a provider-based business gives the opportunity to really expand your total addressable market.

That's really helpful. In a moment, I'll dive a little deeper into some questions on value-based care contracting and the collection of assets, both owned and stakes and partnerships you guys have. But before that, maybe just hitting on some of the policy questions that arise from this and kind of your point on where Medicare fee-for-service will go. And maybe if you can just start at a high level, over the -- not just over the next build, but over the next 4 years and looking forward, 8 years and 12 years, what do you see as sort of this long-term policy direction with respect to not -- both Medicare, but also beyond that, just the general societal view on coverage from government?

Yes, let me give some context of just how it's evolved. And when the Obama administration was in, they made some changes to Medicare Advantage that really established Medicare as a program that has sustainability and support from both sides of the aisle. There were some complaints by the Democrats how Medicare Advantage was overpaying and they made those adjustments. And what we've seen since then is really a few things. We've seen just great growth in Medicare Advantage as a result of the innovation. At the time of the Obama administration, it was in the high teens. Today, it's in the 40% level of penetration of Medicare beneficiaries. And in addition, we've seen just great support by both the Democrats and the Republicans on the program, because it's really proven itself. It's proven itself to be a consumer choice. Obviously, more seniors are choosing Medicare Advantage, the Medicare fee-for-service, so there's something there. And that's really the value proposition where they're not only getting health benefits, but they're also getting benefits that help them with outside of their direct care, such as being able to get over-the-counter benefits or transportation or dental or vision. And so it's a much more holistic offering there. The second thing that we're also seeing is that it is proving to have better outcome. STARS scores is a great example of that. So Medicare Advantage has gotten the support both from the seniors, but in addition, our broader policy holders and is held up as an example of a very successful program. I say that because as we look into the future, what we do see is elements of Medicare Advantage being taken into other parts of the health care system. And probably a long-standing example of that is exchanges where they introduced a concept called risk adjustment into that program. That is a very similar, calculated a little different, but similar concept as it is in Medicare Advantage. And so you see these elements in the Medicare advantage that is being sort of put into other parts of the health care system if and when they come out to programs. Direct contracting, the recent example of that, has some elements, not all elements, but some elements of Medicare Advantage there. So we look at Medicare Advantage as sort of the poster child for other ways government can reimburse it. I do think the government would love to have a more broader coverage program. I do believe the difficulty is finding the dollars and the budget dollars to fund it. I mean Medicare for All, for example, is the most extreme. There's just not the budget to be able to fund that. And so what we do believe is the continued use of private and public partnerships will be required for the government to be successful in the future to have any expansions. We've seen that in Medicaid. Almost every state, there's only a handful of states that haven't outsourced their management of the medical program within the states to the private enterprise. And so to answer your direct question, what we do believe is we believe the Medicare Advantage is on a really good footing. We believe that Medicare Advantage is an example of successful private-public partnership, and elements of that really have driven innovation, lower costs and improved outcomes. On top of that, we do believe that there will continue to be innovation in health care by the federal government, but they are going to use the private/public sector to do that. I think that no matter what is in the newspaper, I think the federal government has agreed that they do need the private sector to coordinate care and to provide care.

Got you. Can you talk just a moment about Medicare solvency and thinking about the trust fund, whether it's '25 or '26 as being sort of a looming issue? And as part of that, what do you see as sort of policy remedies to that? And could that have impacts, positive or negative for MA or for direct contract?

Yes. I would say when you -- listen, I think health care is a significant part of the federal budget here, 20% -- 20%. And the affordability is always a question there. So I do believe that any time you have solvency questions on the Medicare trust or budget deficits, health care will be at the top of the list there, so I do believe that. I do -- there's a number of ways to approach the health care cost. One is around how do we reduce prices we pay, and that's traditionally the lever that people use. And that, I think, is a short-term lever. Longer-term lever is how do you make structural change for health care that really incentivizes providers and the private sector to lower the cost? And that's really where Medicare Advantage has proven itself, is the ability to continue to drive healthier outcomes. Today, a lot of those benefits [ adhere to ] a broader benefit package for consumers as a result of how we reinvest. But I do believe that longer-term structural change is going to be required. And so getting back to the solvency issue. I think the government really needs to take on not only reducing prices, which I think I'll come back to that in a second and how that affects Medicare Advantage, but I believe that structural changes, which is what Medicare Advantage is really pushing is where you're going to gain larger savings into the health care system. Specifically, on Medicare Advantage, there are some changes that can be made over the coming years within the program, they could optimize it more. I think in areas like risk adjustment or STARS or some areas like that, that could be regulatory improved. I think those are small changes. They are not material to the program. And in addition, one of the things that -- within the Medicare Advantage program is we are sort of a price giver. When reimbursement is reduced, then we have to decide how much we pass that out to the customer. That is unique to Medicare Advantage than most other parts of health care, because if we reduce an MRI payment for a hospital, they're a price taker. And part of that, why that's important is, first, we have the lever of what we pass on to the customer. And then the second thing, that customer is a voting customer. They're 40% of the seniors. And therefore, when their price changes, they could be vocal about that. And so when you think about the politics of that, there's another lever that also gives us some protection as we think about the changes in any kind of reimbursement payments.

Great. Let me dive a little deeper into the MA space. Then I think we're going to pivot over, and we're starting to get some questions in on the primary care and value-based care space. Before we get into some of the specific questions that come up, could you just maybe ground us a bit in how Humana differentiates an individual MA? Is it product? Is it distribution? Is it network? I'm sure it's a little bit of everything, but helping to frame, "Who is Humana and why do you win in local markets?"

Well, a number of things. First, the off-value proposition in the product is important. And what we've seen over the last number of years is continuing to customize that product to the needs of certain segments. D-SNP or dual special needs program, that product itself is very catered to a very under-resourced population cohort. It usually has high-chronic conditions. And so things like extending the over-the-counter benefit to that particular market is a good example of that. There's other parts, transportation is a good example of that. So sort of customizing to the needs of that. We have a product that focuses on the Asian population and where the service is a little different. The sales techniques are a little different. The -- even the digital platform is a little different. So we find that these segments are really important. So when you ask how we compete, it's really finding the segmentation and customizing and personalizing it there, but it has to have a value proposition that is competitive to the marketplace. What we always try to do is not be the cheapest in the market. We want to be in the midstream where people have to sort of say, "Do I want to pay a little extra for the Humana brand?" But we back that up with great customer service. If you look at our Net Promoter Scores and you look at our brand out there, it rises to the top there. Just recently, we were announced by the J.D. Power, #1 customer service, both in our commercial area and our Part D area. And that's just as an example of just how we oriented our service. And we believe that service, when you're in that sort of pricing category, will differentiate you and give you a little extra push there. And then in addition, we're very oriented to how do we improve the health outcomes. Because at the end of the day, if we lower the cost of care through keeping people out of the hospital and keeping -- utilizing the health care system, we then are able to reinvest those in the benefits. And then we call this the circle, that if -- the more we're able to lower the cost, the more we're going to offer better benefits, the more we can grow. And so that differentiation is really in the clinical area. And long term, we believe that you have to differentiate in the service and the personalization and the empathy that you offer and the simplification. And then you also have to compete in the clinical area to be able to reduce the cost of care. And those two, if you look at our investments in everything we're doing, it's really -- those are the 2 pillars we're really oriented to.

Got you. And one more item on that is, as you look at kind of results associated with -- your internal results associated with your efforts in the local market, do you notice that particular things drive greater market share gains, et cetera? What I'm thinking about that is value-based care contracting really important in differentiating? Is it having dominant share in a market that's more important? Maybe just a little color on that.

Again, as I mentioned before, it's probably a number of different things. I think first, it always is helpful to have a strong share in the marketplace. But unlike the commercial book of business, that doesn't get you to the end. Strong relationships with providers in the marketplace is very helpful and specifically, you pointed out value-based relationships. Because what we find with the value-based relationships is that we have lower cost, we have higher customer satisfaction, we have higher quality scores. And the more we have providers that we are partnering with that are serving our members in a value-based relationship, the stronger we find our results are and the stronger we find our retention. And so the relationship with the provider is really important in that marketplace. But the distribution channel is important, too. The sales channel is -- this is a complicated sale. It's not something that you're just comparing price because you have so many different choices. So the broker distribution channel is an important channel to help in that sort of nonbiased sale. And the relationships that you have with the brokers in the marketplace are really important, both in helping support them and their marketing costs and so on, making it easier using technology to help them service their customers. And in addition, you have a product that is competitive in the marketplace and it stays consistent in the marketplace. Because the last thing you want to do is put somebody in a Humana product and then it's the lowest cost price and they choose enough cost, and then the next year and the year after you raise the price, the broker looks -- it doesn't look good in that case. And therefore, you're not only making the member mad, but you're making the broker mad.

That totally makes sense. [Operator Instructions] I got a couple that are specific to this area. One is what are you seeing as far as the return of utilization as we kind of move out of COVID? And one thing particularly that we wanted to check on was if you're seeing actually increased acuity as a result of the deferral of care yet.

Yes, let me answer a few of those questions there. First, I'll answer the latter one. We have not seen the increase in acuity. That doesn't mean it's not going to come. I think there is, as you all know, a delay, both delay and impact from -- on the health side. And then secondarily is also a delay just in being able to gain the data and understand the trends there. So there is a little bit of pause there. And I think that will be important as we think about 2022, and I'll come back to that in a minute. In the utilization today, we were anticipating what we call par, but below normal utilization, for the first part of the year, and we saw that. We saw it in inpatient. We saw a quicker decline in COVID cases than what we were anticipating as a result of the vaccine. That's all positive. We did see a more rapid increase in the outpatient side, but it was offset by the inpatient reduction, both in the vaccines and the COVID side and in addition, in the general inpatient utilization. So today, what we continue to anticipate is that we will end the year below par utilization. How that looks for the next 6 months, I think we have all kinds of models that demonstrate them. But right now, we feel comfortable, based on what we've seen today, that the utilization continues to be in the estimates that we've put out there. As we enter 2022, I think we all are believing that it will come back to the par level. And as we think about 2022 pricing, we really are -- we're thinking that -- and the way we've priced is to be back at normal levels in 2022. 2022 is an interesting year for us because of just all the havoc that COVID's played out, the MRA issue, the risk adjustment issue, as a result of the health care system being shut down in 2021. And so we're approaching 2022 in a conservative perspective and to ensure that our pricing has remained stable in 2023, that we're able to enter that year more conservatively. It's just there's a lot of moving parts and we don't want to both jeopardize our earnings trajectory and at the same time put a lot of havoc in our pricing in the following years.

Got you. And just one clarifying item. When you say that you expect to end the year below par utilization for this year, is that for the totality of the year? Is that more in the fourth quarter, you're expecting it still to be par?

That's for the totality of the year. And again, as I mentioned before, so there's all kinds of ups and downs over the next 6 months. And if you want to get really frustrated, sit down with our actuaries and listen to all the ifs, ands, buts and you sort of -- you sit there and say, okay, I get it. And I think I get the longer term, but the week forecasts are really hard to follow.

I appreciate that having spent tons of times with actuaries over my years, and still living here in Avon, Connecticut, where probably an actuary on both sides in [indiscernible]. So one more question that's sort of specific to MA, is coming a few times over the last day or 2 is your view on the impact of the Alzheimer drug from Biogen that may be approved. And maybe broadening that up, so how is that generally dealt with as you start to look at drugs like that, that could get approved mid-year or things like that?

Yes, yes. For the more generalists on the call, I'll just give some context and then give a better explanation of what this means. So when we are setting our prices, we set them at a time -- this time of year. In fact, we are filing our pricing on Monday for 2022. And so there's a lot of lead time in advance of that with Medicare. And so the risk of any kind of drug that comes into play is when it is introduced subsequent to our introduction of the pricing before we reprice it the following year. And so when you think about Part D, specifically in -- or Medicare Advantage with Part D in it, you have that risk. And Alzheimer's drug like what you're talking about, that creates that kind of risk because it's an expensive drug. One of the things that we've seen in the past on some of these expensive drugs like the Alzheimer's drug that you're referring to is that there is a policy, it's really a significant cost policy, that has been used in the past. And that is when a drug gets to a certain percentage, it was a very small percentage, around 2% or so of the total cost that they introduced this policy that really keeps the drug out of the Part D pricing for a year and is sort of held in the fee-for-service environment. And then that gives the companies to then take that pricing and incorporate it into the pricing of the products, the insurance products in the subsequent years. And so our anticipation -- although that hasn't been determined, but our anticipation considering the size of this drug, if it was to be approved, then it would take some of the same direction that historical drugs have taken that have the same characteristics, high-cost drugs, and be put in place outside the Part D program, then being incorporated in the Part D program after a certain time trajectory.

And just as background, I was at Cigna, more focused on employers back then, but when the hep C drugs came out, was that policy in place? Or have there been other drugs that have kind of followed that...

Hep C was an example of that.

Okay. Great. Next question, and this is shifting towards the value-based care. And actually, some of the interesting questions we're getting coming in on digital are going to lead into this, in disruptions in these spaces. But before we move into sort of your owned assets, your stakes and things like that, maybe you can just tell us a little bit about what are some of the approaches you're taking and the benefits you're getting from the contracting? So thinking about it from the MCO side and value-based care. And how does that differentiate you, before we talk about delivery?

Yes. It significantly benefits us. Putting a little plug, we do have our Investor Day in a few weeks, and we'll give you a little more detail about that. But we have this graph that really demonstrates as people move from a traditional fee-for-service relationship to a full risk, which is taking upside and downside risk of the premium. You see this alignment around better cost, better quality and better satisfaction. And it really is -- it evolves to the way the physician and the practice, practice. It is much more around lower volume, spending more time with the member and patient and by doing it in a way that ensures that they're helping them manage downstream costs. So they're ensuring that they're going to the specialist when needed. They're ensuring that they have food at home. They're ensuring that their medication adherence is there. So there's a lot of management of the care coordination that happens as you move to the risk side of the equation. It gives better satisfaction because you're helping the patient. It gives better outcomes because the quality of care is better, especially on the preventative side. And then third, you're lowering the cost because you're really lowering the cost -- the downstream cost, kind of a hospital admission is going to be $20,000. And if you're spending a few hundred dollars on a nurse being -- spending the time with the physician, it's well worth the investment. And so we just see these great outcomes there. And we, as a company, have been advocated this for many, many years. In fact, as you probably know, Lance, we were one of the original companies that started the staff model years ago before we broke the company apart between a hospital base. It was within the hospitals. And when we split the hospitals off and ultimately we went to HCA, and the -- but the plan stayed as a Humana plan. So we're big believers in it. Today, about 67% of our members are in plans that have value-based attributes.