Humana Inc. (HUM) Earnings Call Transcript & Summary

Hi everyone. I'm A.J. Rice, health care services analyst. We're very pleased to have next up presenting Humana. We've got Bruce Broussard, Chief Executive Officer of Humana; and Lisa Stoner, Head of our Investor Relations effort. Thanks for participating once again, guys in the conference. We're glad to have you.

Maybe just a high-level question to get us started. We see MA grow. You're obviously 1 of the 2 leaders in the space. I think CMS is talking about 39 plans chose to -- 39 new plans come in increased participation across the spectrum. How do you assess the competitive landscape today as we move into next year? What sort of Humana secret sauce for how you've been able to continue to grow in line or even better than the market in the last number of years in the midst of all of that increased competition. And we hear a lot about the smaller plans, making efforts in the market. Do you think we'll see a shakeout at some point in the future there?

There's a lot in that question, so I'll try to break it down a little bit. First, we do see significant more activity in the general market through increased marketing, which for us, that's a positive to create better education on the benefits of MA. I'm really pleased more beneficiaries wanting to go to our MA. So I find that as to be a positive. It creates more competition as more people are trying to compete for those individuals, but we do find higher growth in the industry is really a result of the higher marketing and the education that's happening now. We do see competitiveness in different markets on our benefit design. We traditionally, I think many of our investors know we try not to be the cheapest in the marketplace both from the benefits offered and premiums. We really try to be either middle of the pack or somewhere in -- not at the top. And that really has served us well in many different markets. But I will tell you, there's a number of large and small plans that have taken some pretty aggressive approaches this year relative to [ asset ] design and we caught back that, but the combination of both benefits and premiums there. So we still feel we're very, very competitive there. And 1 of the reasons why we feel competitive is as our brand continues to stand out, whether it's our experience as you see us leading the industry in Net Promoter Score, which gets always continued support from third parties of us leading in customer satisfaction. And in addition, we spent a lot of work on segmentation as we find that personalization of design in particular markets, whether it's something like a military offering, grow great in D-SNPs as another opportunity and been fairly innovative in the social determinants area. So you see us the segmentation also being a great part. But just in the long-term we feel that for you to be competitive in this marketplace, you really have to have that deep clinical capabilities. We see over time that 85% of any of our -- in any company's costs on the medical side and continuing to improve the health outcomes, slow disease progression is really where it's going to go, and that's why you see us investing in technology, our health care services business, and specific areas of really slow disease progression down or eliminate preventable events in the appropriate areas. So we feel very positive about the future, and we feel very strong about our positioning. And in addition, we continue to see growth in the market as a result of this awareness of Medicare Advantage.

And I think the companies since it is -- it has laid out 11% to 15% long-term earnings growth target. Can you remind us in whatever way you want to slice and dice that what the key building blocks are to get into that type of growth number?

Yes. First, it is just growing our existing businesses. And obviously, for us, MA is a large part of that, growing membership growth is a large part of that is an important aspect of it. The second area is really running Medicaid. You see us having a very successful organic growth over the last few years in Medicaid and it has contributed nicely to our organization. And then in addition, growing newer businesses and specifically in the health care service area, where you see us investing in primary care, the home continuing to grow in pharmacy is 3 great examples of that. And we see those businesses also adding to our growth rate. In addition, I know you've seen over the years, we've taken significant cost out of the system as a result of our focus on productivity and improving our administrative cost areas. Sometimes we reinvest that in benefit. Sometimes that goes back to the shareholders. But shareholders are getting the ability to drive further productivity is an important part of what we do. And then capital deployment, we've had a combination of both share buyback and in addition, the ability for us to do accretive transactions. Obviously, Kindred was the most recent and largest part of that, they were fairly small in nature and a lot of our capital deployment was going back to share repurchases there. But some offsetting that is our investments strategically like technology, things like the primary payer areas are all a little bit of an offset, but it is something that's how we do include in our -- and how we're growing the business. So membership growth is an important part of both Medicaid and Medicare. Our new business growth in the areas of health care service, driving productivity, capital deployment, accretive transactions by giving capital back to the shareholders. And then partially offsetting the investments in areas like technology and primary care and other areas like that.

Okay. That's great. I think on the Q3 call last week, the company said that the right jumping off point would be for 2021 and thinking about EPS would be about $21.50. And if you felt at this early date that you could at least say 11% growth at the low end of that 11% to 12% and 15% target was attainable, I think that gives us something like a $23.85 number on simple math. Am I thinking about the comments you made last week the right way and coming up with that number. And then I guess, if I am, what are some of your biggest open questions and variables, as you think -- I know you went through some put and takes, but I often give us puts and takes, but some of those are pretty well known and some have a lot of swing factors still associated with them. And I guess we're looking for what were the open questions in your mind.

Yes. First is philosophy. This year, in 2022, we really wanted to be more conservative and more thoughtful on setting the growth rate early in the year because of just the evolution of COVID. We just didn't know how COVID is going to materialize over the coming year, and we wanted to put some ability to withstand that any kind of a challenge there. And so as we expect the 11% range, we also expect in there the ability for us to have COVID headwind and to be able to offset some of the COVID if there is any headwind that we would be able to offset some of that. And so our estimate on the lower end of our growth range is really a result of us being more purposeful on incorporating some COVID headwind. We don't know if that will evolve or not, if it doesn't evolve, then obviously, it will go back into the shareholders through higher EPS growth. As you think about just some of the unknowns as we enter 2022 and some of the reasons why we were approaching it conservative. Obviously, the pandemic was part of that. And that's 1 of the reasons why we would put that -- the COVID headwind in there at the lower range. And then secondarily, we're also just trying to understand -- we were building off of 2019 trend. We were hoping the latter part of 2021, would have given us more insight into that but with the recent spike of the Delta variant despite that really has now allowed us to see what a normal trend would be. And so we're -- that we're estimating of some 2 years' worth of history. That's an area where it could be a positive, but it could be a negative. But again, as we've indicated to the shareholders on many different occasions, we really approach 2022 in a very conservative way as a result of some of these unknowns, both in how we did the bids, which I think showed up in our -- where we are competitively. And then in addition, as you think about the setting of the EPS range.

Okay. One of the questions we get is, obviously, the MA bids have to go in fairly early in the year. In June, we've obviously had a lot more information about COVID. I'm not sure you project any differently given the way it's played out. But it sounds like you price conservatively. So everything you've seen in the back half of the year makes you feel like you're okay in the way you bid, even though you bid earlier in the year on that.

Yes. We today don't have significant concerns from the bid point of view, we feel that we've been able to incorporate what we see today in the bid. And obviously, just coming out and estimating the lower end of our range, reconfirms our confidence in that. And so we feel comfortable entering 2022 again with the caveat that we did approach it conservatively.

And I know the company always used to talk about a 4.5% to 5% target margin, and you get asked every quarter about when are you going to get back to that. You haven't been asked recently, but it sounds like when you're pricing, there's a good chance you might actually see some margin improvement in the individual MA book next year. Is that a fair way to think about it? I'm sure it's somewhat dependent on what happens with COVID, but it sounds like there could be a chance we see margin improvement next year?

We really haven't given disclosure about 2022, and I know you're trying to get it out of me A.J. But as I mentioned we did approach the year conservatively and we would anticipate some of that conservativeness if [indiscernible] come back to the financial performance of the business have some impact on margin.

One of the interesting things with the senior population has been the deferrals, offset by the COVID dynamics and that seems to be sort of a toggle back and forth. The market was encouraged last week when Pfizer reported they might have an effective treatment for COVID and whether it's that drug or something else. And there was a magic pill that wiped out COVID on January 1. When you think about it, would you change your outlook that you've given so far for '22 on the basis of that? Or what would you do?

I think -- I mean, right now, we're watching it, and we'll take that into consideration. It's hard to understand the impact of that. And obviously, you have -- what we've seen in the historical aspects of COVID is that when you have a spike in COVID, you have a reduction in the health care utilization in the nonessential care. And so we -- we look at that and say, well, it's really more of the capacity of the health care system that we're trying to manage and how it's being used, whether it's COVID or not COVID is probably more of the issue than actuate the utilization in totality and COVID is more expensive than the traditional utilization. And so we were really -- it would be interesting to see, and we are hopeful both for the society and in addition for our members that they do come out with the science and is able to deal with it as you described, but I think we're on the wait and see area.

A couple of things about the Washington landscape. To build better plan. Obviously, we don't know [indiscernible] contemplates hearing benefits starting in calendar '24. Obviously, there's a long way to go on that. But assuming it passes, how do you think that impacts your MA business, if at all?

I mean, right now, as we know in the DDD, as I call it, the hearing is a possible benefit that will come through on 123. And that to us is -- and it's going to be included in the benchmark. It's a small amount of dollars. It's an amount of material benefit ads. But from a competitive point of view, I don't think it has a significant benefit there. And we do see MA continuing to remain very, very strong from a growth point of view. And mainly because its value proposition. The value proposition is really greatly improved as we've seen other more important benefits being included in there such as over-the-counter, such as healthy food cards, even things like broadband access in some of the rural areas are all examples where MA becomes a much better competitive product there. So we don't -- we're not concerned about what some DDD today. We think it's good for the Medicare beneficiaries overall. But from an MA point of view, it continues to have a strong value proposition, and we continue to believe that you'll see a great industry growth trend going forward.

Yes. And another aspect of that build back better apply on the language. We put some caps on the Medicare Part D plans as well as -- and by inference, I guess it has some impact on MA. How would you think about that? If it caps the out of pocket for the beneficiaries. I know you guys have sort of pointed to Part D being less attractive a little bit in the last few years anyway. But what would that do? Would that -- would you be able to make that up in the way you bid generally? Or would that be a problem for, I'm going to ask a lot of questions about that.

Yes. Our view is it's positive for Medicare beneficiaries. So we look at it as a good thing. I think this is a circumstance where you're going to price for that X amount of pocket change and its point of raise premiums overall in the industry and that will result in everyone paying a little more premiums, but people like to utilize the drug and has benefits probably going to be the beneficiaries of that while everyone else would pay an increased premium. And so from our vantage point, it's more around the -- if it was less because we're priced for it, but we do believe it's very beneficial for Medicare plan.

Right. Okay. And you mentioned that Kindred is the largest acquisition you've done in a long time, I guess. It's mostly fee-for-service today. It sounds like you want to see a pivot to more supporting value-based arrangements, particularly with your own individual members in MA. I wonder how easy is that shift? Is it going to take away from some of the fee-for-service business they currently do? Can it just be completely additive? Do you think how you had thought through the integration and where you go with that?

Yes. Well, I think and as similar to many parts of the health care system capacity is a challenge and specifically the labor capacity. So in home health, the capacity is an issue. And so as you see us trying to construct this ability to find those regions where we do have excess capacity and can use that capacity for the particular initiative going on around value-based payment models. So you see us finding those areas of excess capacity. And we do have some conservative markets there. But in addition, we're trying to create more capacity through investing in the nursing labor pool and becoming much more -- our culture becoming much more supportive of that. And so we do believe that we will be able to recruit and build on that capacity. The second thing is as we think about the home health business, there's really 2 businesses within home health, the [indiscernible] fee-for-service business, many are Medicare Advantage. And what we've experienced and seen with Kindred is the Medicare Advantage business is actually a less profitable business for home health. And 1 of the benefits of the value-based payment approach is actually allows them to participate in downstream savings which allows it to be a much more profitable business for them because they will -- basically taking part risk. And therefore, we see this as an opportunity not only to health outcomes, reduce the cost of care and also turn today a less profitable business into a more profitable business as a result of being able to participate in the downstream costs.

Right. And when you think about Kindred, do you look at that from the perspective of how it helps you on the Humana MA side as well? Or is it strictly sort of looking at those arrangements from what Kindred stand-alone profitability?

Yes. We first and foremost is we do want Kindred to continue to grow healthy and therefore, the profitability is an important part of what we do. We do have an enterprise view of looking at how does the enterprise overall, is this better than -- does it help our Medicare Advantage book of business, that's a win. I would say we want to grow Kindred and grow it in an agnostic way and ensure that it is profitable. And so you won't see us convert 100% of our business to Kindred in a short period of time, you'll see us be very thoughtful of how we grow the business, build it and then integrate our members into their programs, but do have a value-based way where Kindred is participating in the upside of the arrangement.

Sounds a little bit different than what you're doing on the physician side because on the physician side, there was clearly quite a bit of savings as you move people into your various physician shared risk models, am I hearing that right, that more comes back and help stop the Humana MA book quite a bit more, obviously, it almost sound like there's more upside from that than there was from the margin you get on the physician practices whereas it sounds like Kindred is a little different. Is that the right way to think about it?

Well, the primary care models, obviously, after you get through the J-curve and the contribution is actually a very profitable business for us. But more importantly, it is a business that also contributes greatly to the other important parts of our relationship with our members, specifically around quality and the service side and Net Promoter Score. So we did see some great outcomes coming from those businesses. But in general, when we find more alignment with physicians on a value-based payment model, the insurance company benefits from that just because it's greatly reducing utilization in the health care system. And so whether it's our assets that are in -- I can't say right for others we find that the insurance business benefits well. So the business on the primary care stand-alone is right. We want more of our members and value-based payment models, whether it's ours or others. And therefore, you see a win-win from both sides, primary care side and the insurance side.

Right. And when you think about the CenterWell and the offering you have there, how much of that business is directed toward Humana clients or members versus external. Is there a significant external business in the CenterWell...

There is. In fact, a number of our sites is more payer-agnostic members, other payers versus Humana members. And that's really, as I mentioned on the call, just recently that's the reason why we really wanted to brand it separate from Humana because we really want those services, whether it's Kindred, whether it's CenterWell, even in our pharmacy business is to continue to grow as the market grows and being able to offer those great services to other parts of the health care system and that just gives the shareholders and a larger total addressable market outside of just the insurance product of Medicare Advantage.

Is there a sense of that how much it would be? Are we talking about 50% external, 45% or?

Yes. Given those disclosures, but as I think Susan and Lisa have articulated, we're going to -- as we enter the second quarter of next year start providing shareholders more statistics around our primary care and in addition, our home health business because the company has evolved. And I think we're at a point in time, there's more transparency needs in the health care services side of our business.

And when you think of that, we got to know you've got a lot of different ways you're approaching that market. What is the growth trajectory. We've got people out there saying they're going to add 1,000 of these things -- type of things we got others you've had a much more measured approach to it. How do you think about growth? And do you think it's going to be harder to get the doctors you need to have to grow CenterWell going forward?

A.J. one of the most important things that make or break the success of those clinics locally and as the recruiting of the clinician, doctors, special workers, nurses. And so that's a critical part of that. We have been building up our capacity over the last few years as a result of starting from basically from scratch. And this year, we'll do close to 30, we probably do 30 to 50 a year is what we'll probably get to at some point. And I think that's a digestible number for us. I do believe at some point in time your quality goes down greatly as you begin to start ramping up and we have a little bit of concern there. But I think our historical will start increasing the ones we've opened historically to maybe a little higher number of 30 to 50 or something you probably see in the 2020, 2023 time frame.

And just to have a little perspective on the comments around the individual MA enrollment growth target of 8%. I think CMS has come out and forecast that they think the overall market growth has been -- for next year to be 9.7%. So slightly below market. Obviously, you may have a little more data from OEP over enrollment period. Now you -- give us your thought on that. I mean CMS sometimes forecast of more optimistic view as to where it's going to shake out. So whether the 9.7% actually ends up being the right number or not -- what's embedded in that assumption of 8% is the open enrollment that you see so far confirmatory in that thinking or make you think you're being conservative?

No. We are still comfortable with the 325,000 to 375,000 member growth this year, which is the 8% that you referenced. I do want to also just reinforce one of the reason why that's probably just a shy sort of the industry is because how we approached it. We just -- we put more dollars to ensure that we are able to keep benefits stable over a multiple year period of time as a result of some of the uncertainties in the industry. And so that's what you really see why we're at the lower end of that. And so I think as we look at this over a longer period of time, it has grown greater than growth, and I think we will continue when you take multiple years the above market growth, but this year we'll -- because it was more strategic and how we approached it, you'll see us a little below that.

Right. And someone is asking me here, can you ask about acuity please, the backlog of patients with misdiagnosis dodge these and it feels like that could be a headwind for MLR next year. It sounds like you've taken some of that into pay off. But anything you'd say with respect to that?

Yes. We've studied that hard about delayed care and the different parts of it and then it could also be in diagnostic -- diagnosis in oncology could be another good example of that. We haven't seen it today. We've put a little bit of conservativeness in our bids and our clinical areas to reflect that. And so it is a possibility. I think we have not seen the specifics of it, but I think the hypothesis is still out there, and I think it will -- we'll see more. I would say that we -- we've also just been very oriented to diagnosis and getting our members into primary care. And I think that's been helpful on maybe following some of those that delayed care down, but we've incorporated some of that in our thinking as we -- in our MLR for 2022.

And when you think about on the pricing side, you got a decent update for next year in the benchmark rate update. And then there is all this risk adjuster, risk coding, not only the normal year, which hopefully we have this year, but some level of catch-up. Obviously, you got to take into account the churn of the members too from 2020. But where do you think the all-in rate will be? Do you have a yield side number on that at this point...

Yes, we have not disclosed that yet A.J. But I can give you elements so that we feel good about it. At first, we spent a lot of time and effort in showing that our members are getting to the physician and utilizing the health care system to get them properly documented. As importantly, for us, it's really getting our care plan established so that we can manage that care plan, especially in the client area. So we feel good where we are in our documentation and the development of the care plan and the proactiveness as we enter 2022, we won't be entering -- there was a headwind that we were entering 2021 but I think you'll see the yield on the revenue side. But more importantly, I think you will also see us being able to manage the clinical side more effectively because we'll have better diagnostics to help them. So I think we entered 2022 with the confidence, both on the ability and the revenue side but also on the ability to manage our clinical side.

Is -- so there is going to be a more normal year of your ability to score for '21. I guess an open question to us how much of an extra benefit is what was left on the table from '20 that now that will be caught up as well. And I don't think we think about it as a full second year of risk coding benefit for you, but it's some variation on that. Is there anything you can say about that?

Very well could be. I mean we're studying that on that. We're not concluding that one way or the other and we obviously haven't had a disclosure on that.

Okay. And you said on the third quarter conference call about the Medicaid business, you expect Medicaid membership growth. One of the back and forth there is the whole reverifications and what that might mean and what point that gets implemented. What are you -- is that comment that you expect Medicaid numbers to grow inclusive of making assumption about reverifications coming back?

We anticipate that the reverification will come back. The timing of that and how that progress will be -- there's some delay in that, but we do believe that, that will be the case and our estimate does reflect that reverifications will happen.

Okay. Okay. And on the Medicaid RFP front, you mentioned that you indeed have enjoyed some recent successes there. I know some of those will be a challenge. But what do you -- when you look out to the RFP pipeline the next year or 2? And think about the opportunities there? Is it still mostly an organic opportunity from your mind even -- sometimes in Medicaid, there's obviously big opportunities, but the results of tuck-in deals, would you look at the tuck-in deal potentially if that was to become available?

And we've got a few of those in states that we want to be in the iCare in Wisconsin is a good example of that and that got us in that market. So we were continuously looking at those opportunities. But for our success on the organic side, we feel that for the shareholders outside those in the smaller acquisitions and organic clinic model is the most effective and the highest return. And I think you've seen us be successful in those areas.

Yes. Yes. And obviously, one thing also you guys called out on the call is the D-SNP performance. I think you said your offerings now covered 65% of the potential population. What -- maybe that's not as transparent. So what is the competitive landscape there look like and the outsized growth we've experienced, is that something that can continue for a while you believe?

We feel really good about the D-SNP side for -- we've had about 40% growth in 2020 and 2021. So it's been obviously a big contributor to our membership growth. This is an area where we've really bellowed down on social determinants of health and incorporated a number of those benefits into the benefit design that has allowed us to personalize the approach to the specific numbers, and that's been I think one of the reasons why you see the growth and obviously geographic expansion is part of that, but really the penetration in those markets as a result of the product design and in addition to service component of that. So that -- so we're excited about that. That does come with a higher turnover, so we have to manage and try to have the turnover. That way we maintain the -- an average higher retention. So there's a lot of work going into servicing and ensuring the satisfaction of those individuals as we think about multiple year relationships because that's really where the benefit is, we're going to have an impact on their health over a longer period of the time the longer the stay was.

Yes. Yes. And it was interesting -- and the way you described the physician side, the home health side, the desire to make sure that it's an attractive all for external third parties as well. The PBM business is everyone in the industry tells me how efficient operation you have, obviously, I haven't had a chance to tour the mail order facility, and [indiscernible]. Why not be more externally focused with that and try to leverage that. And I know you did a strategic review of that a few years back given how the market's evolved, is there a reason to think about revisiting that?

I think we continue to be committed to keeping it in the family, we feel that it has still good growth, specifically from mail order side and then contribute -- the contribution of the mail order is very, very great business for us. In addition, the convenience of the mail order now everything moving to the home is just sort of moving into installment there. And seniors use about 4x more prescriptions than the commercial side. So how to utilize benefit for us as a company. As you mentioned, we built capacity into the business over the years and have really refine the efficiency of that. So we do want to continue to maintain it as part of the intended family. I think where there are opportunities that we can expand that and serve others, we are very much open to that. I think our sort of stated capability is more in the senior side than the commercial side. And so as we find others that are wanting to leverage our -- the PBM platform and the narrower platform that is an area where we'll obviously be entertaining those areas, and we have a few to those possible opportunities out there. I think going into the commercial market for us, it probably doesn't make sense.

Okay. And then I got 1 e-mail question, I'm going to ask and then -- but I'm going to ask my capital deployment question first here. In the recent years, the company's favored undertaking an accelerated share repurchase program at year-end to maximize accretive impact on the year ahead. Is that part of activity continue to be contemplated. Has there been a change in your priorities for capital as you think about the future?

We're working with the rating agencies right now because we obviously we want to ensure that we maintain the ratings that we have. And our debt-to-cap ratio as a result of the Kindred acquisition is about 43%. Our target was around 35% pre-acquisition. So we want to ensure that we maintain the rating and can we maintain it at a higher debt to cap. Because now we have cash flow that's more unregulated there's an opportunity to do that. So as we work through that, I think our hope is that we'll be able to continue to maintain our share repurchases as we progress forward.

Okay. Okay. And any priority changes on what you're going to use capital for and where you like to see...

I think we've been pretty consistent. Organic growth is the first. And as you all know, in our business, statutory capital and those things require the selling of that. And then MA, just the acquisitions, but not large ones, most of the small ones will be the key areas of capital deployment that really giving money back to the shareholders. But typically, we have also been able to give money back to the shareholders through our consistent dividend and the share repurchases.

Okay. Actually, second e-mail here. So 1 person just wants a confirmation. You said that you thought the hearing would be in the benchmark if they do move that forward. Is that something that you're hearing? Do you have a firm commitment on that? I know -- but have you gotten the...

We are hearing that, that is the case, obviously, it doesn't pass as you mentioned, but we are hearing that it will be incorporated in the benchmark.

Okay. Okay. And then investors can e-mail these questions, so it comes from them and not from me, but person is asking, can you ask Bruce why he -- about his recent stock sale basically. Could you make a comment on that?

Yes. And it mostly is really around tax plan. We're really trying to get the taxes in 2023 versus kind of 2021 versus 2022, there's no reflection on my commitment, as I think if you do the research, I have a lot of dollars at risk in the organization and my conviction for the company is much more around tax planning.

Right. Okay. Well, once again, I really appreciate Humana participating in the conference again this year. Thanks, Bruce. Thanks, Lisa. And hopefully, next year, we'll be doing this live. And in the meantime, I wish you guys have a great thanksgiving.

You too. Thanks A.J.

Take care.

Take care guys. Thanks.

Bye-bye.