Humana Inc. (HUM) Earnings Call Transcript & Summary

All right. I want to thank everyone for joining us today at the BofA Healthcare Conference. Presenting today are now we have Humana, which is one of the largest providers of health insurer, specifically to seniors in the U.S. Presenting today, we have Susan Diamond, who's the Chief Financial Officer. Lisa Stoner from Investor Relations is also with us. And Susan, we thought was a fantastic presenters here, not only as the CFO of the company, but also given her experience with the home care division within Humana. So thanks for joining us.

I want to spend the majority of the time talking about what you're doing on the home care side, but I think maybe spend the first 5 minutes or maybe 10 minutes, just kind of talking about some of the broader managed care Humana themes that are going on right now. So maybe just to start the conversation. It felt like it really wasn't necessarily Humana specific, but it did look like Humana struggled during 2021, maybe a little bit more than some managed care companies. And it seemed like where most companies were seeing the pressure around costs in 2021 were really on the commercial side, less on the government side, and yet you guys seem to still have some issues. Can you talk a little bit about what you saw and maybe why it seems, specifically from the outside that you experienced a little different than what the rest of the industry was seeing?

Sure. And first, Kevin, I just want to say thank you for inviting us in. I'm happy to be here and talk a little bit more about our home strategy, which, as you mentioned, prior to becoming CFO, I was leading the Home segment for Humana so definitely excited to talk about our progress there. But to your specific question in terms of 2021, as you mentioned, I think that there was a perception that Humana was experiencing something different than some of our peers throughout the year. But we would argue that, in fact, what we were seeing was largely in line with what others were speaking to. The difference was though that we took a bit of a different approach to setting our initial guidance heading into the year. Most of our peers disclosed an explicit COVID headwind contemplated in their guide and Humana did not. You might remember, at the end of 2020, we were experiencing what at that time was the largest surge in COVID cases we had experienced to date through the pandemic. And so as we enter 2021, we are experiencing significant levels of depressed non-COVID utilization. And predicting the rate at which that would rebound to more normalized levels, we recognize was going to be challenging. In addition, the industry across the board saw revenue pressure as a result of the significantly depressed utilization we all experienced in 2020. And so given the uncertainty about how some of those things might develop and the significance of those items and also recognizing the disproportionately large contribution of Medicare to Humana's results, we took the approach of going out with an initial guide that was actually at the midpoint on the higher end of our typical range. And then we're explicit and transparent about the range of potential headwinds and tailwinds we might experience throughout the year. And then through the year, then continue that perspective of transparency and shared what we were seeing in terms of emerging experience. On our Q3 call, we did obviously reduced our guidance by $1 in midpoint. That was specifically recognizing a net COVID headwind for 2021, which we would say really does put us right in line with what our peers had acknowledged in their initial guidance. So we would argue that our experience is quite similar. We just took a different approach. Already we ended up in the same place as others. But we recognize that, that different approach did make it a little bit more difficult for the investors to assess our performance. We did sound different than others. I mean that creates some frustration. I would say, as with respect to the net headwind we did ultimately adjust our guide by -- that, I would say, is predominantly related to the bounce back in claims that I mentioned that we were having to forecast in the first half of the year. We did mention that COVID costs were coming down much more quickly in the first half of the year than we had anticipated given the successful rollout of vaccines, particularly in the Medicare population, but we did see a faster bounce back in non-COVID utilization in the first half as well. So the second quarter, when we updated our guide. While we maintained our guide, we were clear that, that guy contemplated the utilization would continue to run 2.5 points below baseline in the back half of the year. And as we disclosed on our third quarter call, despite the delta surge that we experienced that we had not previously contemplated, we did see a full offset of those costs and then some additional depression but ultimately experienced a 1% net below baseline trend for the third quarter versus the 2.5 we had contemplated. So it's really a result of that. And again, the difficulty estimating the rate at which non-COVID utilization would return to more normalized levels that was sort of the ultimate headwind that we acknowledged in our third quarter guide, which again, we think is pretty consistent with what others have ultimately disclosed as well.

Yes. I think that's helpful. I think to your point, most of the companies talk about government being below and you're saying it still is below trend. It's just not as below as you were initially forecasting, so that makes some sense. But again, as we think about 2022, the thing we all like about managed care is that is the short-term insurance business to price every year, but the costs are coming in differently than you thought as the year progressed. How much comfort and confidence you have in the 2022 kind of bids and getting to the -- to your target margins?

Sure. It's a great question. So as we went into our 2022 bid planning last June, we certainly were cognizant of the fact that there was a large amount of uncertainty that we would be dealing with in 2021 and that some of that may continue into 2022. And to the degree possible, we wanted to try to minimize any continued overhang going into our performance for '22. So as we approach to bid, we try to take a more conservative approach. As we thought about revenue, we did have a perspective that utilization would ultimately return to more in line with baseline levels over the course of the year such that our reimbursement in 2022, we expect it to return to more normalized levels. You might recall in our initial disclosures at the start of the year, we identified a very significant headwind. At the time we estimated $700 million to $1 billion as the impact from the lower utilization in 2020 on diagnosis code submissions and revenue for 2022. And then ultimately, in our second quarter call, shared that the ultimate experience was coming in about $300 million worse than that original expectation. We do a -- did have a perspective that, that would bounce back in 2022 and are happy to see that as we've continued to track diagnosis code submissions over the course of 2021, we continue to feel confident in that assumption as we are seeing this level of diagnosis code submissions that we would expect as our members are generally seeing their primary care doctors and their specialists at the rate we would expect in order to deliver that return to normalized revenue. So that's all very positive. On the claims side, to your point, we recognize that there was going to be continued uncertainty depending on what happened with COVID, how further variance might impact results and utilization. And so what we decided to do is we have seen consistently that any COVID surge was offset by depression in non-COVID utilization. So as said again, we were still running below baseline. But what we've seen for 2022 was that medical costs would fully return to baseline levels trended forward as if COVID had never occurred and that, that is what we plan for from a medical cost perspective in our bids. In addition to that, we embedded additional conservatism beyond what we normally would for normal course items, just recognizing there could be some lingering uncertainty in terms of how behavior changed both in the provider community as well as patients, the longer this goes on. And again, to the degree possible, I wanted to make sure that we can eliminate any sort of uncertainty and position ourselves as well as we could from a position of strength going into 2022. So again, we feel really good about the revenue. We're planning for medical costs at baseline, even though we may end the year below baseline and then have some additional contingency on top of that. On our third quarter call, we did signal that we do intend to take a more conservative approach to our initial guidance in 2022 with the hopes of being able to deliver and hopefully beat on that. We do intend to come out more on the lower end of our typical long-term range, which is 11% to 15%. And within that original guide, we will allow for an explicit COVID headwind. History would say that COVID should be net neutral. But again, we recognize the longer this goes on, behavior change -- behavior might be different. And so therefore, we do plan to allow for an explicit COVID headwind, we have not disclosed that amount at this time, but we do intend to be transparent when we issue formal guidance points around how much is included such that if it does prove to not be needed, then you would see that materialize with additional earnings over the course of the year as we became comfortable releasing that.

Okay. That's helpful. I guess United at their Analyst Day said that they were still expecting a COVID drag next year. It sounded like they were backing off, though a little bit from the concept of fully regaining the coding benefit. That might be some of the drag in 2022. Do you feel like your coding will be pretty much back to normal for 2022? Or is there still going to be some disruption there?

Yes. So far, like I said, we are seeing diagnosis code submitted consistent with what is needed to support our pricing assumptions for 2022. Depending on what they had assumed going into their bid pricing may have been different than ours, but at least relative to what we planned for, which was a return to more normalized levels. We developed very granular estimates of what we should expect to see from actual submissions to feel confident that, that would be delivered and those continue to come in as expected. I will say commercial results do not fare as well as Medicare through researches. You don't see the full level of offset. So recognizing there are different sort of mix of business within each of the peer set. Certainly, those with larger commercial books. Depending on what they did in pricing on the commercial side may be more pressure than we might on the Medicare, which at least at this point, have consistently seen an offset any time we see 1/3 on the medical cost side.

Okay. And then maybe just last question before we jump on to the home health discussion. You guys have consistently talked about this 4.5% to 5% margin. And operating below that because you see the long-term value of that customer growth. I guess, is there some way to think about that? Because just from the outside looking in, it feels like if your margin in Medicare is 3 or 3.5 today and you bought it to 4% tomorrow, that's a pretty significant 14% growth in earnings. And it just seems from the outside like that 0.5% on pricing wouldn't drive enough membership to kind of make up for that. But can you just help us kind of understand exactly how you think about how much more membership you're growing by pricing a little bit below your target margin today and how that ends up creating more value over time?

Sure. And we do recognize that there is sort of increased interest in that long-term margin target and the path to achieving that target. We heard that increasingly from investors over the last number of months. And so we do remain committed to that as our long-term target. We think we do continue to believe in the long-term earnings profile of the business. But as you said, there is a balance that we try to strike each year between membership growth and margin, recognizing that it is very important that we continue to grow in our minds, hopefully at or above the industry rate while we're in a period of additional MA growth and penetration. We certainly want to participate in that and garner our fair share given that we tend to keep members 7 or so years, and so the long-term contribution of those members is significant. And so that's the balance we we're always trying to strike and to make sure that we remain competitively positioned. To your point, there is an explicit trade-off in terms of benefit enrichment at the expense of margin. And we go through a very detailed exercise each year and try to sort of gain theory out what competitors will do. We certainly listen to their commentary and their results and what they're saying. We also look at individual impacts that we see in pricing and try to assess is that a Humana dynamic or an industry dynamic to understand how we may be positioned relative to others in the hopes of positioning our plans at a spot where we think we can, like I said, grow at or above the market rate. Obviously, this year, we have signaled that because of the more conservative approach we took the '22 pricing, we did expect that we would grow at a lower rate than we have in the last number of years. And as we said on our Q3 call, based on our current estimate, that is likely to be lower than the industry rate. And so we did toggle on that a bit this year, again, to make sure to the degree we could we could reduce any uncertainty and overhang in terms of our ability to deliver against our earnings target for the year, which we felt was very important given what we've been experiencing in the last 1.5 years or so through COVID. I think it's also important to note that we've been talking more about just the enterprise contribution potential of our health plan members. We shared some of this at Investor Day. We said that 4.5% to 5% target, probably 10 or more years ago. At that time, our Healthcare Services segment was much more nascent. Since then, we've built out the home business. We've been accelerating and expanding the primary care business. We've expanded the specialty benefits included in our MA plans. And so there is a lot more enterprise margin potential that can be generated from that health plan membership as well. And so as a result of that, we definitely think it's important to consider all of that in the context of that trade-off. And so while we're not stepping away from that target, you will hear us talk more and more about the enterprise margin potential, the progress we're making in driving expansion of access to those services and then penetration of those benefits such that we should see overall margin expansion across the enterprise. How and where that shows up, we're committed to being more transparent about going forward. As we mentioned, we plan to come out in the second quarter of 2022 with some additional messaging and transparency on a variety of topics this being one, knowing that there is some increased interest in what the path to achieving that long-term margin is.

That's a great segue to why you're here, which is the home health side of the business, which is part of that enterprise contribution. So you guys completed the acquisition of Kindred at Home. I guess, what are the benefits of owning home health versus simply contracting with providers that may just say, yes, putting this capital to work with as an attractive use of capital?

Sure. And as you said, we made our initial minority investment in Kindred in 2018. And the reason we opted for that approach, one, was just to give us the opportunity to learn more about the delivery of home health care. We did have a belief that more and more home-based care would be not only possible but desired by consumers and patients in the future. And we knew that one of the barriers to doing that historically has been the fragmentation in the home-based care delivery models today. So while Kindred is the largest home health provider today, they have about 7% market share. So the ability to deliver home-based care solutions at scale, we felt was going to require partnership with a nationally scaled home health company, which is what drew our interest to Kindred in the first place. What we've learned though over the last number of years is that the home health industry does very much operate on a fee-for-service basis. Original Medicare is the largest customer. And we think that, that business is significant and has the ability to grow significantly. So we will continue to support that core fee-for-service home health business that Kindred provides today. But what we aspire to do on the MA side is introduce an actual -- a true value-based home health model. The patients who benefit from home health tend to be some of our more complex. They're 5 to more times more likely to experience a rehospitalization than those who don't require the support of home health, and that cost Humana over $800 million a year, just for those rehospitalizations that occurred during home health episodes. So our belief is that if we bring a total concept of care mindset to the home health space and have the clinicians really comprehensively assess the patient needs, address emerging issues and make sure that primary care is actively engaged and approach it with that mindset that we have the ability to meaningfully reduce avoidable hospitalizations not only during that episode but hopefully for some period afterwards as well. And as we learn more about the barriers to sort of implementing that model through our partnership with Kindred over the last number of years, it just increased on our confidence in the need for that model and our ability to impact total cost of care through some of the pilots that we've done, but also reinforce our conviction that fully integrating the asset was necessary in order to make the needed investments and drive the level of transformation that we feel is required in order to do that. We also recognize that additional capabilities would be needed to fully deliver on a value-based model, things like analytics, enhanced clinical models, network and utilization management protocols. And so that is what led us to our acquisition of onehome earlier this year. onehome provides a value-based model to about 270,000 Humana members in South Florida and Southeast Texas today. They provide home health D&E and infusion services under a capitated model. And so we bought onehome to sort of round out those capabilities and are currently working to expand that model in mid-2022 with the goal of ultimately supporting at least half of Humana members through that true value-based model. While onehome -- their model today, while it is a capitated model focused on home health theme and infusion, it's still really managing that discrete spend. Our goal working with Kindred and onehome and then the Humana Health Plan is to truly bring a total cost of their mindset to that offering such that they will have a much greater impact on hospitalizations, generate more savings we would expect the value-based model to share in that through risk-based arrangement. But a lot of those savings will certainly materialize on the health plan side and help them get to that higher margin that we talked about a minute ago. And then ultimately, we do expect this to be an agnostic offering that we will make available to other health plans in addition to Humana as well longer term.

Yes. So actually -- yes, so I was going to bring up onehome eventually, but I guess since you brought it up. So are they a care coordination business? Or are they actually providing the infusion and DME services themselves?

Yes. I think it's a really interesting model. What we love about their model because today in the way home health works is the referring provider, which oftentimes is a hospital system and a discharge planner, they're responsible for coordinating the home health episode, the DME to the degree required infusion services. And there's a lot of challenges doing that today, just getting the case place, making sure all of that arrives at the same time for patient care. So in the onehome model, what they do is they actually have the discharge planner or whoever the referring provider is refer the patient directly into onehome. And then onehome takes responsibility for all of that. So they will place the case, they obviously are going to place the case with -- ideally a own home health agency where they can ensure that their enhanced care models are going to be deployed, but they can control that referral. And so that's the aspect of the model that should allow us to refer additional volume into Kindred once we deploy this value-based model because you take control of the referral. They also do the DME and the infusion and those are services. They run the warehouses, and they run the logistics to actually deliver those services. They run the compounding pharmacies. So they are actually doing all of that. And our intent is we build this out where there's sufficient density that we would provide all of those services with onehome acting really as a convener but also managing the network, managing the utilization management services and then those referrals into the actual home health agency.

Okay. That's really interesting. We haven't really seen the other home care companies look to own services across the 3. We've got home infusion providers, we've got DME providers, we've got home rehab providers. So we don't really see that, at least at a national level, across -- I mean, 1 company earlier was kind of saying, well, we're not sure that our patients actually match up all that well. What -- is that you see all the patients -- so does that matter? Some will go here or there, that's fine? Or do you see true value to be able to provide 3 or 4 different services in the home to the patient at home?

Yes. We do think there's value in coordinating all of this, as I mentioned, when you try to coordinate the home health services and the DME and the infusion, if those are not well coordinated and the nurse shows up that before the DME or the infusion, it just makes for inefficient care and lower quality care and patient dissatisfaction. So we do think there's a lot of value in controlling all of that and ensuring it's coordinated in the way it needs to be for those patients. On DME, it's interesting. We didn't know a lot about sort of where the opportunity in DME was before we became involved in onehome because there's been -- competitive bidding that's been in place with DME, and so the price points have really been lowered. What we've learned is where the opportunity is the waste in DME and fee-for-service DME, if things are sent out to the home, the DME company is less incentivized to make sure that those assets are being utilized if they're sitting in the corner and they're still in the home, they continue to get paid. And so onehome works very hard to make sure that the DME is being utilized. If it's not, they're alerting the primary care provider because arguably, there's a need for those services and if they're not being utilized, we want to make sure that's addressed. But when they're not being no longer needed, making sure they come back into inventory, they're refurbished and able to be reused. So there is a significant amount of savings that can be generated under a value-based model for DME is what we're finding. And on the infusion side, similarly, either you're going to want to be careful if there's a new prescription that's ordered, making sure the patient can tolerate that medication and giving them a more limited dose while they make sure that they can tolerate it, it can lead to additional savings there. So again, we think there's a lot of value in that. There's also value there in stand-alone services so DME is a great example. Not only does onehome provide the DME to those value-based members, but we would be able to offer the DME services to all Humana members. And we do intend in markets where we deploy the model that we'll use their DME services beyond just those benefiting from home health. And so there's greater savings value that we can generate for the health plan by using those capabilities more broadly.

So, okay, that's really helpful. I guess one of the things that you're seeing is, we see companies in home care and in fact, Kindred when you first bought it, had a hospice business and did a large hospice deal while you owned it, but it looks like you're trying to get out of the hospice business. Why doesn't a hospice business combined with the home health business makes sense or hospice business within a Medicare Advantage company makes sense? I'm not sure why -- which reason you're divesting it for.

Yes. And you're right. I mean, it actually -- it's not that it doesn't -- our view isn't that it doesn't make sense necessarily to own both of those capabilities. But as we, over the last 3 years, sort of work to understand these spaces better, before we finalize the deal to accelerate the integration of Kindred, we stepped back and said, okay, based on everything we've learned, how important do you think it is for Humana to own the home health and the hospice business. And for the reason I just mentioned, we felt very strongly that owning home health was necessary because of the level of transformation that we feel is necessary to implement a value-based model. On the hospice side, the fundamental care delivery model, we think is quite strong. We don't think there's any major adjustment that need is there because if you remember, hospice care is about comfort care, its end of life care not curative care. And so the underlying care model, we think, works quite well. We do think there are opportunities to enhance the patient and provider experience. We think more patients should have access to hospice care. We think that there should be continuity of care across the transitions from palliative to end-of-life care, where today, there are hard handoff because the patient is moving between original Medicare potentially and Medicare Advantage. And so we were really excited when CMS implemented the demonstration program, which allowed an MA plan to take responsibly for hospice care, and Humana has participated in that. What we have found is that we were able to implement the desired enhancements to the program as part of that demonstration, both in partnership with Curo, Kindred's hospice business, but also with third-party hospice partners. And we've been equally successful in both partnership and owned models. So that really led us to a perspective that delivering on the experience and program that we thought was needed really didn't require ownership of the model to do that. And so given the amount of capital that was invested in the asset and the opportunity to potentially monetize the value of that asset and spin it off or set it up for independent operations in some fashion, we thought made sense. It will allow us to delever much more quickly and free up capital to be deployed against other things that we have a stronger conviction around the need to own. And so that's really the motivation. We think hospice and palliative services are a very important part of the care continuum, and we will continue to work with a variety of hospice partners to ensure our patients are supported. But our decision to divest our majority stake was really just a belief that it wasn't necessary to own the asset to deliver the service and product that we think is necessary and that would free up capital that we can deploy in something else where we had a stronger conviction that we need to own the asset.

Okay. So when you think about how big Kindred is today, I guess, maybe some general ballpark as far as revenue and EBITDA. And then once you sell off the hospice business, what catered home care broadly speaking is going to look like?

Sure. So when we announced our acquisition earlier this year, we did share some detail, and we know that we do intend to update our disclosures in 2022 as well, recognizing the full acquisition of Kindred such that we'll provide additional detail. We know in the current segment reporting, that's harder to see in the way we report today. So we'll certainly be doing that going forward. But we did share at the time of the acquisition announcement is that the total estimated '21 revenue for Kindred was about $3.2 billion based on the purchase price and EBITDA multiples that we provided, you can infer that there's about $650 million of EBITDA for that business on a full year basis, which is about a 20% margin. That is split close to 50-50 on a revenue and EBITDA basis between home health and hospice. Hospice has slightly higher margins than home health with a little bit over indexed on hospice on the margin side, but it's close to 50-50. So depending on if and when we're able to effectuate some path to independent operations and how quickly we might sell down our position, which likely will occur over time versus at once that will have some impact on exactly what the results are from a consolidated basis within Humana, but that can give you some sense of the size and scale of each underlying line of business.

That's helpful. And I guess when you think about just maybe just the home health business that you're going to be focused on, how fast do you think the industry is going to grow over the next 3 to 5 years? And how do you think about -- you talked about in MA you're being able to grow equal to or faster than the industry? I mean how do you think you're going to be able to grow versus that industry growth rate?

Yes. We would argue that just the favorable sort of census demographics, the increasing sort of prevalence of chronic conditions across the Medicare population in addition to what's been a relatively favorable rate environment in the last couple of years. We would argue that in normal times, growing the top line organically about 6% or so should be reasonable. And then there may be opportunities through M&A to accelerate that as well. We have always said, as we mentioned before, that the ability to implement a value-based model in home health that we think we can cover, call it, approximately 50% of Humana patients over the next several years. So we've always said that there is a significant opportunity given the way that onehome model works as I described earlier, where we take control of those referrals and then have an opportunity to direct them into high-quality home health like Kindred that we should be able to significantly increase their top line growth. The challenge that we're all facing, which has only been exacerbated near term because of COVID is the dependency there is hiring and recruiting and retaining enough clinicians to take on that volume. So that's something that, frankly, we've been focused on since we made our initial investment in Kindred. When we may the investment, we learned that attrition and turnover in the nursing population in home health and hospice weren't higher than what we had historically been used to on the health plan side. And so that's something we learned a lot more about. Frankly, it seemed like the industry has sort of just accepted that as a sort of cost of doing business. And we've really been challenging the Kindred team to sort of buck that theory and say that, no, this is addressable, and we want to make sure that Humana really is viewed as the employer of choice for that talent, recognizing how important it will be to us delivering on our strategy. So we've taken a lot of with Kindred over the last 3 years. As I think COVID has unfortunately created some additional challenges with nurses hopefully temporarily leaving the workforce because of COVID concerns or childcare issues and other things that we hope will normalize in the coming months. And once said, there's still some systemic challenges underneath in terms of just the need to train more nurses as right now, the demand for nurses is outpacing supply, given the shift to home-based care. So that is a core dependency, and we continue to work very hard to understand operationally things we can do to improve just the sort of the work of the nurses as well as make broader investments in order to recruit and retain more nurses as well as really do some granular market-based assessment to understand on a more targeted basis what needs to be done in order to again be viewed as that employer of choice locally so that we can hire many more nurses than we have historically.

Yes. And I guess your move to value-based care, is that staffing model different than a fee-for-service staffing model? Do you need more nurses per basically, you're going to be giving a lot more care coordination and holistic care, can you do it with a similar staffing which you have?

Yes, it's a great question. The onehome more historically has been -- they prefer to own the home health agency so that they can control that care model. And one of the things I would say that they've done really well, more so than fee-for-service is, they are very incentivized to understand sort of the underlying complexity of the patient and the risk of readmission of that patient. And so they will look, and I think do a better job assessing that upfront and then designing a care plan that better matches the sort of underlying acuity and risk of readmission. We think there's even still a lot more that can be done if they were truly sort of orienting that plan around total cost of care. But I would say relative to fee-for-service they've done a better job. So on a, call it, visit per episode basis, I would say they're not that different than what you seen fee-for-service. But underneath, I think, the distribution of how those visits are dispersed based on the acuity, the patient probably does look a bit different. So those are things that, again, I think analytics can go even further in making sure that we really know on the front end, who are those most high-risk patients, do a better job than matching the skill set of the clinician to that patient and doing everything we can to make sure that there are more comprehensive set of needs are addressed in order to really avoid those unnecessary hospitalizations that occur within the system today.

Okay. And you mentioned it a couple of times you want to get to value-based care model to 50% of membership. What's -- why isn't it 100%? Is it just the labor issue that you mentioned? Or is there anything structural about it?

I would say one of the big things is density. And you do need a density of membership in order to sort of put the assets on the ground that can do that model. Certainly, if and when we're able to make this an agnostic offering that certainly should help and allow us to expand to even greater geographies. But I would say density of membership is one of the bigger sort of dependencies in terms of being able to drive that greater than 50% of the Humana membership.

Okay. That's helpful. And then is there anything that you still need to make this value-based care? It sounds like you've got the systems in place, you've got a broad home care infrastructure. But is there anything else that you look at and say, yes, you make this fully work, we still need to do XYZ?

Yes.Well, we are -- today where that model deployed, like I mentioned, is in South Florida and in Southeast Texas. Those are more heavily risk-bearing PCP penetrated market. And so what we're looking to do is take this model into other markets where you don't have the benefit of that high penetration of risk-bearing PCPs. And what you see in those risk penetrated markets is that the PCP themselves do a really nice job of sort of managing out any sort of overutilization of home health. Once we move into markets where you don't have the benefit of value-based PCPs to the same degree, that is -- that utilization is likely going to come to onehome and they're going to have to work to manage that. So that's one thing we've been -- we wanted to test and as we deploy this models one, make sure we can replicate the results we've seen in South Florida and Southeast Texas today. That requires a lot of provider education. As I mentioned, we are going to ask them to do business differently than they have historically since that they refer that case into onehome rather than coordinating that directly, which we would argue is an experience enhancement for the providers and remove them the administrative burden from them. But it is a change. And so we'll have to make sure that they understand the model and then we don't see any leakage outside of it. So that will be some of the initial work that we have to do. Then what we hope to do again is continue to then bring analytical advancements and further enhance the clinical models to truly address total cost of care. And that will take some test and learn to say what is the optimal level of care? What are the types of interventions that are needed to actually avoid that exacerbation? We know from the work we've done with Kindred so far that oftentimes the reason you see patients sent back in the hospital is less about the home health care that they're receiving and more an issue related to the broader sort of lack of preventative or supportive care that they may be receiving. So that may be a primary care issue. And do we need to engage a center well physician or another high-quality primary care physician for those more complex patients. Today, if there's an exacerbation, the home health nurse oftentimes there's no option but to send the patient into the ER. So if dispatch health or other ER-based services are available in the market, make sure that they're referring to those services so we can keep the patient at home. And there are a variety of other things that we know are the main drivers of rehospitalization. And so we will look to bring those enhanced clinical models to bear and evaluate what is an effective intervention and what's not, and that will take some time. But for us, we would say there's just proving the model outside of headways penetrated market and then really understanding what is the potential in terms of the impact that you can have on total cost of care. We set the ambition really high, and we've got to prove out what is actually possible and what interventions are required to actually take advantage of that opportunity.

Yes. So it's actually kind of interesting because you guys obviously keep the value of home care. But we've talked to the home care companies, it sounds like they're always -- try to negotiate better rates with MA and MA in general is paying less than -- well less than fee-for-service, 10%, 15%, 20% less than fee-for-service. So what is that disconnect of the value that you see and then what you pay on the MA side?

No, you're exactly right. The way that -- again, fee-for-service home health has been run is just a rate game. And so as you said, oftentimes, MA claims have been very successful in negotiating rates that are well below fee-for-service. And so that creates some tension where the home health companies, all of being equal, would rather take a fee-for-service patient than an MA patient because the margins are higher. So we recognize that tension was going to be an issue in general. Our goal has always been that -- again, we continue to support the core fee-for-service home health product, and we'll continue to do that while hopefully adding incremental volume related to the value-based model that we hope to implement, which today makes more sense in the Medicare Advantage space just because we're responsible for total cost of care. And in the fee-for-service world, especially with original Medicare, right, there's no opportunity to participate in that. So our goal has always been to ensure that this new model allows for incremental volume contribution to Kindred versus we'd be very sensitive to cannibalizing their existing fee-for-service business. We said again, we recognize that hiring nurse is going to be a key dependency to do that. So we'll be very thoughtful about it. That's one of the factors that we consider where to expand the value-based model. We are looking at where there are more or less capacity constraints within home health, Kindred in particular, is one thing we'll consider in terms of where we take the product first. But our hope is that, again, based on the investments we're making in the clinical, not only the operating model, but then direct investments and benefits and other things that as we are able to demonstrate that we do have a preferred model and can recruit more nurses that, that will be incremental contribution margin to Kindred. Having said that, over time, if we can get really good at managing down unnecessary hospitalizations and ER utilization, my hope would be that over time, the margin profiles to Humana of Kindred supporting that patient would potentially be larger than the fee-for-service margin such that actually would be net positive even if it were to cannibalize. But our preference and goal would be not to. And then longer term, our hope is that as we demonstrate the outcomes from this model that we can continue to work and aggregate with CMS and see that they adopt some of these principles on the fee-for-service side as well and implement more value-based principles such that hopefully these operating models can come closer together over time as well and just make it simpler to support.

Okay. We're coming up at last couple of minutes here. So but I guess maybe just nail down that, the rate -- the best you're paying them less than fee-for-service. Is that just because of supply/demand that there are a lot of home health providers and everyone take less to fee-for-service. So you can negotiate or that you believe the service they provide isn't as valuable and that when you move to value-based you be willing to pay more for it?

Yes, I think in the fee-for-service role, it's a function I said that industry is very fragmented, right? Even Kindred only has 7% share. So there is an opportunity to negotiate and if you can demonstrate impact to referral volumes that matter, the availability of home health, all go into your ability to negotiate those rates. I do think -- and oftentimes in MA, they also pay differently. Fee-for-service pays on a per-episode basis. So an episode -- a home health episode and they claims often will do that on pay for individual visits. So there's another way to manage that spend down. To your point, in the value-based model as we learn over time, it may be that we may want to spend more in home health because if we do, then we can positively impact admissions. And so those are all things that we'll learn over time and then will lead to different payment models once we better understand the level of savings that are possible and how much should we reward the home health agencies for driving that versus how much will show up on the health plan side. And those are all things that we're going to look to improve as we expand the model.

Yes. And then I guess second to last question. Labor costs. I mean you mentioned it's difficult and there's some temporary pressure hopefully it will get better. But where are wages right now? And what are you expecting for next year?

Yes, it's been interesting. So far, there's been less, I would say, pressure on the actual wage side. What we've seen is most companies are using things like sign-on bonuses and things like that to attract talent and then embed some level of retention associated with that. I think there's a belief that some of this anyway, is temporary. So I think looking to avoid anything that we'll get into the permanent run rate cost structure. And so, so far, we have seen more, what I'll call, onetime in nature retention/sign-on bonuses. I think I would expect there probably will be some wage inflation, though, which is the longer this goes on and the demand for home health care labor, I would expect to see some. And then ultimately, you should see that show up in the reimbursement rate such that we're compensated for it. But there'll probably be some lag to that, but I would ultimately see some wage inflation and then see that reflected in the reimbursement rate.

And then last question. We kind of ask all the companies this. I'll give it to you both ways as companies have been doing answering it both ways. But in one word -- and then if you want to expand on it afterwards. How would you describe the future of home health? Or what would be the best way to describe the future of home health? And if you want to add a few clarifying sentences, then go ahead.

So I feel really exciting. I would say Humana, obviously had a conviction about the home well before COVID was ever an issue. And we just really believe that higher quality care can be delivered in the home. Certainly, there is an opportunity in the lower acuity care and particularly for a more complex Medicare patient, in particular, dealing with multiple comorbidities, social determinants of health, being able to get into that home and understand the way in which they win and what barriers may be getting in their way of optimizing their health is really powerful and really hard to do within a clinic-based setting for a variety of reasons. So that's all very interesting. What I've been most excited about and one of the few positive things that really have emerged from COVID is on the provider side and patient side, this better interest and appreciation for home-based care, particularly on the higher acuity side, so whether that's ER or hospital home. And I had an opportunity to go do a ride along and visit a patient who was late '80s of CHF exacerbation, not in great health. And seeing what she experienced receiving true hospital level care in the home, she was walking around -- she's on oxygen, but she's walking around, making her own lunch, clearly very different than what she would have experienced because she'd been in the hospital, bed bound, likely decompensating and probably frailer, have to the issue of discharging when she entered. So what's nice about what we've seen lately, I think really a multiyear acceleration in terms of interest in ER, hospital and skilled nursing level care and home than we would have ever seen in the absence of COVID. And so there's been a lot of flexibility CMS has introduced reimbursement reform, hospital systems are much more interested than they ever were pre-COVID, primary care physicians are much more interested in home-based models because of the risk that they perceive, facilities posing to an elderly Medicare patient. So all of those things have really just made me that much more committed to and excited about what's possible with these models.

All right. That's great. We could probably take a couple of hours. This is fantastic. I appreciate you guys coming to present at the conference, as always, and thank everyone for joining us.

Great. Thank you again for having me. Really appreciate it.