Humana Inc. (HUM) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to day 5 of Morgan Stanley's Global Healthcare Conference. I'm Ricky Goldwasser, Morgan Stanley's healthcare services analyst. It's a real pleasure for me to introduce our next speakers. With me today is Bruce Broussard, President and CEO of Humana; and Susan Diamond, Humana's CFO. And this is, I think, Susan's first investor conference since she stepped into the CFO role. So Susan, great to have you here with us. Before I kick it off over to Bruce, just wanted to make a couple of introductory comments. First of all, I wanted to highlight to everybody, Morgan Stanley's Alliance for Children's Mental Health that uses the resources of the Morgan Stanley foundation in collaboration with the expertise of our key nonprofit member organizations in the mental health space to help address children's mental health, specifically the challenges of stress, anxiety and depression. And now more than ever, we need urgent coordinated efforts to prevent the existing global crisis in children's mental health from escalating and all of us can pay a role in this effort. So we really encourage everyone to learn more about the issues the children are facing around their mental health and become advocates for change. And to learn more, you can visit the Morgan Stanley website, and we have a mental health alliance dedicated area. For -- on the disclosure side, this webcast is for Morgan Stanley's clients only, not for the members of the press and for any risk disclosures and holding disclosures, I would refer you to the Morgan Stanley website. And with that, Bruce, great to have you here with us. I would like to pass it over to you to spend a few minutes to help frame the conversation for us.

Thanks, Ricky. Just -- I thought I'd give a little bit of context and also ask Susan to give some context on our 8-K. But first, I just want to give you a perspective on the industry a little bit. I know there's a lot of questions as we enter into the public policy arena. I just -- I think some important notes there first. Now there's 27 million members today that are in Medicare Advantage. It's almost 40% of the beneficiaries within Medicare. So it's a significant part of the senior population that has grown significantly since 2010. And one of the main reasons for that is the value proposition that MA has proven over the last number of years. And it starts with benefit design. And what we've seen over the years is the increasing use of social determinants of health has allowed organizations like Humana to really build a broader holistic view of someone's health and been able to help them not only in navigating through the health care system, but also being able to navigate through some lifestyle issues. And that has been really important as we've seen the outcomes of the downstream prevention of health issues, whether it's maintaining A1C with a diabetic, preventing heart attacks. That's not only good for the member, but it's also good for society from a cost point of view. And what this does is it really shows up in the statistics. We see a 98% satisfaction within MA today. And we see a close to $1,600 worth of savings in MA. So when we think about the strength of the program, these results are really a result of health companies like Humana and others are taking the savings that they're able to achieve and the more efficient use of the health care systems, slowing disease progression down and reinvesting them in benefits and benefit design and care coordination that allows that to happen. Another outcome has been that the program is where we move to help the under-resource, the low income, the minority communities. And today, we see a significant larger proportion of members in these communities being in the Medicare Advantage program. Now you can attribute that to the social determinants programs that we offer, the 0 premium programs that we offer, care coordination that we offer. But all those, when brought together, provides a significant value proposition. And then the last thing I'll say is, as you listen today and further questions, you'll see that in 2021 and as we plan for 2022, we've made great strides in our strategy of continuing to advance our holistic care, not only in the areas of continuing to provide benefits in the insurance side and a much more larger value proposition. But in addition, what you're seeing is a very concentrated effort in building more value-based relationships, extending our clinical services to be able to offer more proactive and preventative care to really get to how do we slow disease progression down? How do we continue to advance the value proposition of Medicare Advantage? So with that, Susan, do you want to just spend a few minutes on the recently filed 8-K and give a little more detail about that?

Sure. Happy to do that. And thank you for inviting us. I'm happy to be with all of you this morning. So first, what I'd like to do is just remind everyone to note that as we outlined in our recent 8-K filing that we have maintained our full year adjusted EPS guidance as we believe that the spike that we are seeing in COVID utilization will be offset with further depression in non-COVID utilization. And so related to that, I'd just like to stress a few key points specific to our Medicare Advantage results. First is that the surge we're seeing related to the Delta variant is on par with levels that we saw in January and February of 2021. And it is primarily driven by the unvaccinated population. And while it's certainly still a very fluid environment, the surge does seem to be following a pattern similar to others that we've previously experienced, and we do believe that we've seen the peak and are on the downside of the curve with this most recent surge. This is obviously resulting in higher COVID costs than we anticipated when releasing our second quarter earnings. Since the beginning of the pandemic, COVID surges have actually resulted in depressed levels of non-COVID utilization that more than offset the total treatment cost of COVID. In our current guidance, we are assuming that non-COVID costs are depressed only to the degree needed to offset the incremental treatment costs associated with this latest COVID surge. This results in an expectation that non-COVID costs will run approximately 5.5% below baseline on average in the back half of the year, which includes the 2.5% below baseline we discussed in our second quarter earnings call, plus the higher-than-anticipated COVID costs resulting from this most recent surge. As you would expect, given the unanticipated -- the anticipated decline rather in the case curve, the majority of the incremental non-COVID depression is expected to occur in the third quarter. Based on our historical experience with the pandemic and its impact on non-COVID utilization, we believe that this assumption around incremental depression is reasonable. In terms of some additional detail on emerging trends since our second quarter call, there are a few additional points I'd make. As we said before, we have much greater visibility into real-time inpatient activity. And to date, non-COVID hospitalizations have decreased at a rate comparable to the increase we've seen in COVID hospitalization, which is consistent with what we've seen historically and what we're anticipating in our updated guidance. It is too early to assess the level of depressed non-inpatient costs as we didn't begin to see the suspension of nonessential services until later in July. However, based on our previous experience, we believe that it's reasonable to assume that we will see further reductions in non-inpatient costs, sufficient to offset the higher average unit cost of a COVID hospitalization and non-inpatient COVID treatment costs, which will ultimately result in no net impact to our 2021 guidance. We hope that the additional detail and context around what we've seen historically and our most recent experience is helpful in assessing our latest at 8-K statement. So Ricky, I think I'll turn it back over to you for the next question.

Great. Thank you, Susan. And for everybody who's listening to us on the webcast, if you have a question for Bruce or Susan, please just type it into the browser, and I'll make sure to relay it on your behalf. So thank you for all the context, the background and the clarification around the 8-K. Wanted to talk a little bit about the bridge from '21 to '22. '22 will mark this third year since the onset of the pandemic. And as we think about next year, what are the tailwinds and headwinds that we need to consider? And are there any swing factors that could impact next year's earnings power?

Sure. I'll take that one as well. Great question. So again, I think there's a few things I would highlight. First, we've been very clear about the impact that the pandemic has had on our 2021 result as it respects Medicare Risk Adjustments. So first, it's important to reiterate that from an MRA perspective, we've worked really hard to make sure that our members are receiving annual wellness exams and other needed preventative care. And as a result of that good work, we have seen the diagnosis code submissions continue to run consistent with what we would expect to support our 2022 pricing assumption. We now estimate that our risk adjustment submissions are 88% complete, which is significantly higher than the same period in 2020, and also higher than what we experienced in 2019 pre-pandemic. Second, as it respects our 2021 baseline, we do continue to believe that the midpoint of our guide of [ 2,150 ] is still the correct jumping off point. Its cost do continue to run below baseline for 2021. And third, I think it's important to reiterate that the underlying core business fundamentals do remain quite strong. We'll hopefully talk more about that in a subsequent discussion. But as it respects Medicare growth, the core fundamentals of Medicare Risk Adjustment and many of our other lines of business continue to perform quite well. And to your point about uncertainties, certainly, we appreciate and recognize that COVID remains a dynamic environment, and we will continue to evaluate the assumptions about the longer-term impact into 2022. And otherwise, I would just say that at this point in the year, it does remain too early to give any specific guidance for 2022, which, as you know, is consistent with our historical practice.

Great. And we already had a question regarding your 2021 comment. So can you just remind us how much COVID costs were on a quarterly basis, just for context for the audience?

Bruce, you can correct me if I'm wrong. I don't believe we have shared specific quarterly estimates with respect to COVID. We did share, in our second quarter call, the overall net headwind of $600 million that our guidance at that time anticipated. So as we've updated our 8-K most recently, and the comments I just shared provided that further detail, that 2.5% below baseline that we estimated previously, which we now estimate at 5.5%. That difference would allow everyone to calculate sort of how much that net gross headwind has increased by, which, as I said, we do expect based on our historical experience to see further depression that would result in no net impact to 2021.

Great. We've got some questions here on the rate environment. So if you think about the last 2 years, you really managed the business through unprecedented complexity. And at the same time, you made some pretty meaningful investments in the business as you adopt and evolve the enterprise to align with the sort of evolving forces that are shaping the health care marketplace. And investors always appreciated your leading position in Medicare Advantage and the enterprise assets that you've built to manage the member population to the best outcome. But more recently, what has been occupying investors, and we see it by the questions we just received, has really been the rate environment. And I just want to address it upfront before we dive into the strategy. So there's some concern in the marketplace that with the administration funding exchanges that they need to balance outside spending with -- could potentially come in the form of either MA benchmark, rate cut or changes to risk coding, intensity adjustments. So what are you hearing out of your conversations in D.C.?

A few things, Ricky, is as we've said on many times in the past when we get into the rate notice and in how we approach our bids, that we do consider to be a little more conservative in 2022 and frankly, in thinking about 2023. So as we've approached 2022 and some of the comments that Susan has mentioned, we've also thought about it as a more than a 1-year cycle there, recognizing that the '21 -- the '22 rate notice was very favorable for the industry. But in that, I would say the initial indication that's coming out to the various different bills that are being worked on, we're not seeing any kind of indication, both on MRA or the benchmark. That's not to say that, that won't be a discussion later in the debates that will happen between now and in the final -- whatever the final resolution is. So we are very active with our public policy efforts, both at a grassroots campaign and in addition within the Bellway of D.C. I would say the biggest emphasis on what our experience has been over the last decade as we've transitioned and during the ACA side is stability for the Medicare beneficiaries. We have found any kind of changes that are abrupt really creates disruption for them. And if you -- I get many e-mails from our members that if we change something $5 or $10, it's very meaningful. And so we continue to reinforce to Congress through a grassroots campaign and through our direct conversation with them that stability is really, really important. And as we think about where we are in the political cycle, I hope they'll consider that in being able to ensure that they do keep stability, whether it's a risk adjustment or whether it's in the benchmark area because the program has had such great advancement over the last number of years, especially in the areas of under-resource and minority communities. And we don't want to take a step back and we don't want to have a circumstance that we create instability in those marketplaces.

So let's talk value-based care. It's at the heart of your strategy, and integrating the different members' touch point, a longer health care journey is a critical success of value-based models. In long term, reduction in medical costs and spend. So on the provider side, you own clinics, but you also invest in your partners. So what's your long-term thinking about owning versus that arm's length type relationship? And from your experience, what are the differentiating benefits to owning an independent asset versus partnering with one?

There's a few things that has transpired over the years. One is around our investments in multitude of organizations, it's really been an understanding of what works and the innovation that comes from having different views of different organizations. And over the last number of years, we've been doing this almost a decade, Ricky. And we've seen some just great advancement moving all the way from sort of Southern California and Southern Florida and the traditional value-based payment models and the risk-taking models there to now being in sort of Central America here. And so you see, we see this opportunity that now really can be leveraged across the country as opposed to certain geographic regions there. And we do find that the geographic regions, the health care is local, the uniqueness of those require us to have another one-stop shop, so to speak, that we have multiple different partners to go through, both capacity of our existing resources that we have, the capacity of our partners' resources and the needs of the local market. And so we really have a 3-pronged approach here. One is to partner with the existing providers in the marketplace by asking -- adding resources to their existing capabilities, whether it's technology resources, information, data and obviously the contractual terms. And those contractual terms can vary from a bonus type of arrangement to a full risk arrangement, and it can transition over a period of time. The second is to take some other partners that are building clinical capabilities, primary care clinics in the marketplace and be able to expand in those marketplace. If they're already existing in those marketplace and it makes sense from a complementary point of view of leveraging their existing platform in the marketplace. And then the third is obviously taking ours to the marketplace. I think over time, you'll continue to see us have a preference between if there's not a provider in the marketplace that we can do a value-based relationship with us to continue to be able to expand our assets. There is limitations to that, both in capital limitations and how much money -- dollars we want to put in that market as a result of some of the J-curve issues that it takes to get these operating, i.e., the losses that occur over the first few years. And then secondarily, just our managerial capacity and how do we balance that. But I do believe that what it has proven that value-based relationships, especially in the primary care area and especially in lower income areas, is a really strong strategy that provides value not only to the customer, to the clinician, but also to the plan and in addition, lowering the cost for society there. So I do see it as it is a great strategy. And we feel fortunate that we have multiple levers to pull to be able to not only expand our capabilities, but also leverage existing capabilities in the marketplace.

So Bruce, at home care is another critical component of delivering value-based care. You now own Kindred, which is a pretty meaningful kind of like add, right, to the portfolio. Have you begun to implement sort of that value-based arrangement for your members? How are conversations progressing with other payers for those?

Yes. On the primary care side, I'll go back to the primary care side, it is a holistic payer-agnostic approach. And so we, today, serve a number of other payers. And frankly, that's why it is not branded. Humana's branded CenterWell to allow that separation and to ensure that members do not get confused between plans and providers there. So we do continue to believe that an agnostic approach on the provider side is important. It serves everybody. Obviously, it serves us because the total addressable market is larger. It serves other payers that are not investing in the clinical area and gives them a choice with like minds relative to managing risk and being able to do that in a way that they are going to be benefiting from the skills and capabilities that we have. And then the third thing it does is it also allows a broader market for us to leverage the scale within the market as a whole. Home's an interesting strategy for us. We see home in a few different opportunities for us. First, just on the underlying reason why home is such an effective area is because it's convenient for the patient, the member. It's also very, very -- it's an opportunity for us to see and observe what's happening in a members life. And home is such an important part to understand that you don't get in a doctor's office, et cetera, and it's a low cost setting as a result of being able to do it with nurses and being able to accent with telehealth. We do see home traditionally has been more of a fee-for-service environment, and that fee-for-service environment has not been as oriented to downstream prevention cost. And what we are really oriented to is how do we take the homes channel and all the benefits of it and be able to convert it to having more and more opportunity to slow disease progression and prevent ER visits and hospitalizations and really reward the home health business as a result of that and change the payment model from a fee-for-service payment model to more of a value-based payment model. And when doing that, there's also other resources that are brought into play, whether it's DME resources that are brought into play, other post-acute services, especially as you think about nursing home, downstream costs and et cetera. So there's an opportunity to really have a post-acute value-based approach through the home while leveraging the convenience of it. We also see home as a great opportunity for us as an organization to test more acute services where you can bring primary care and other services that traditionally have been more institutional or office-based into the home and bring it as a convenient area that -- especially when you think about the lack of mobility for some of our members. And so we're able to get to them in a way that potentially they wouldn't have the services there. So it's a great opportunity for us to leverage the convenience, to be able to leverage the -- going into the home and have a clinical model that prevents downstream costs and reward for that. And then the third, to continue to expand its use into other areas of clinical capability.

We got a number of questions here, not surprisingly, around the 2021 and 2022 comment. So I just want to make sure that we get to -- at least to most of them. So let's see here. There are a couple of questions that really are around contact 2022. So one of the questions here on 2022 to confirm is that around the -- Susan, this one is for you. If you can expand on the greater visibility on risk adjustments impact in 2021 versus recent years, the 88% reference. If you can elaborate on how it compares and what it means to visibility? And another question on MRAs is really to the extent that non-COVID utilization remains depressed, as you expect it will, would it impact your ability to recapture the MRAs in 2022?

Sure. Great question. So as it respect to the MRA for 2021, as I mentioned, based on what we expected in '22 pricing, we have seen submissions that suggest that our data is about 88% complete. That compares to -- please correct me if I'm wrong, I believe the comparable for 2020 was about 80%. And even if you go back to 2019, it was a little bit higher than that, but our 2022 submissions are even on pace to exceed what we experienced in 2019, which is pre-pandemic. We do continue to watch the trends very closely in terms of the type of care our patients are receiving. Are they visiting their primary care and specialists? Are they having hospitalization events and understanding where those diagnosis submissions are coming from? We also continue to watch the level of in-home assessments and other annual wellness assessments, which are a large contributor to ensuring that we have complete and accurate sort of clinical profiles for all of our patients and members. And so those continue to remain on track as well. Patients continue to invite us into their homes or continue to see their primary care providers to have that needed -- a more comprehensive exam, which is fantastic. To this point of, should we see some further depressed utilization in the back half of the year, based on our current estimates, the teams have reviewed that and feel confident that based on what we've seen year-to-date because we have seen depressed utilization, obviously, year-to-date as well. They believe that our current estimates -- they're comfortable that we should still be able to meet our 2022 pricing target. Should we see depressed utilization is significantly higher than we're expecting? Could there be some impact potentially? And we'll continue to monitor that closely and evaluate it. But right now, we're not seeing anything that would suggest that's the case. If we would see that level of depressed utilization, we'd also need to evaluate whether that in and of itself presents a tailwind into 2022 as well from a claims perspective, which may potentially mitigate any risk adjustment pressures to distribute.

And one follow-up question on that, and it relates to the 2022 bid. So just to confirm, did your bids assume 2.5% below baseline on core?

No. So for purposes of medical cost pricing in 2022, we assumed bid cost would be at baseline. And so we projected costs off of a 2019 pre-COVID level, assumed as if COVID had never happened. Then through 2022, we would trend it forward using historical trend factors that did not assume any ongoing depressed level of utilization as a result of the pandemic. So we are projecting at baseline for 2022.

And the follow-up on that was -- and also, did you assume any COVID cost in 2022?

So as we sit on the second quarter call, we did anticipate some COVID costs, but much like we had anticipated in the back half of the year, they're fairly minimal. Certainly anticipated the cost of vaccination and some ongoing testing costs and a lower level of COVID. I think going into our pricing for '22, we all believe that the vaccination rollout would be successful and it'll be highly effective. And so our assumption was that by 2022, that it would be less of an event that we had to manage through. Obviously, that's not what's materialized. Plus we continue to evaluate what we believe the long-term implication is. Does it turn into more of an annual flu-like event? Or have seasonality associated with it? How effective is the vaccine at treating any new variants that might emerge? So those are all things that we will have to consider in 2022. Now that is also, as Bruce mentioned, one of the reasons we did take a more conservative approach to our pricing in '22 than we might have otherwise recognizing that there was continued uncertainty. And so our hope is that we can manage through that. But to your point, we did not anticipate in 2022, the level of continued COVID activity that we've seen this year.

Very helpful. So we have time for one more question. So Bruce, as we balance the portfolio that you've built with some of the external factors that we discussed today that you have less control over in all the assets that you've put together. Are long-term margin targets of 4.5% to 5% still reasonable? And how should we think about the balance of growth versus margin and the timeline to get there? And then what do you think investors are missing about the story? Humana is sort of trading at an absolute discount, at a relative discount to historical. What do you think is going to be more evident 12 months from now that people might not seen yet?

Two things on the margin side, I think one of the most important things that we constantly balance is margin and growth and investments. But what we do when we go through our planning, multiyear planning, we look at really, how do we drive long-term sustainable EPS growth and return on invested capital. A margin is an input to that, but not the overriding factor that we look to make a decision on. So I would say it's a balance to multiple different things that we look at, as you can see from our historical performance that our long-term earnings per share, and our return on GAAP has been quite leading in the industry there. But we do continue to use margin as a great opportunity to keep pricing discipline in our company to drive productivity and ensure the investments we make provide the proper value outcome for us. So it's a great -- well, I consider it's a great discipline for us to continue to focus on how do we continue to grow our margin and improve our margin and really maintain that longer-term margin of 4.5% to 5%. There's been some squirrely things that's happened over the last few years as a result of the HIF and pretax and post-tax and stuff like that, and it's throwing some of the comparators a little confused there. And so we continue to maintain that. We try not to make that the final decision, but we do look at that as a continued orientation for us and we will achieve it in some years, and some years, we'll be below it, but it is a discipline that we put in place and continue to believe that it's achievable year-by-year. In regards to what's sort of the pressure on the valuation side and some of the discounts there. Obviously, the public policy environment is an important part that investors are looking at and some of the unknowns that are there, and we totally appreciate that. As you look at long term, I would just continue to remind the investors that Medicare Advantage and the attributes of Medicare Advantage are really the long-term direction of health care where you have a consumer choice, you have a government public/private partnership. You have delegated risk with adjustments around the acuity through MRA type of payment models. That really gives a structure that has a lot of opportunity in continuing to advance the societal needs of lowering and making it affordable for people, and I think Medicare Advantage has demonstrated that for years. And the growth in that program over the growth in Medicare fee-for-service, I think, is a great attribute to that. The second thing it does is that really reward companies for innovation, innovation on making the health care system easier and innovation on continuing to improve the health outcomes. And so we are actively engaged on the short-term discussion in the marketplace today around public policy and the different options that we see relative to the public policy efforts and this particular bill. But in the long run, we just see great opportunity in a market that has wonderful demographics, growth and need because of the health care issues and the growing chronic conditions out there that the structure of MA, the strategic direction of Humana and the market positioning, I think, gives us a long history and a long future of success.

Thank you, Bruce, and thank you, Susan. Great to have you here this morning.

It was great seeing you. Again, I look forward to doing this in person someday.

Next year.

Okay. All right. Bye-bye.

Thank you.