Humana Inc. (HUM) Earnings Call Transcript & Summary

Great. Good morning, everyone. This is Whit Mayo. I lead SVB Leerink's efforts covering the health care provider and managed care sector. It's my pleasure to have Bruce Broussard from Humana has joined us today. Also, we have Lisa Stoner, that runs the Investor Relations effort. So I really appreciate you guys joining us today.

I thought it might just be helpful, Bruce, to go back to some of the developments that occurred during AEP this year, both from competition, planning design, a lot of changes sort of in compliance and changes around how you guys engage and work with third-party marketing organization. So maybe just a starting point, if there's anything new that you could share, any additional observations? And then maybe we'll just pivot to sort of some of the changes into 2023.

Yes. Well, first, thanks, Whit, for having us. It's great being here. I first want to just highlight that the industry continues to be very strong and the challenges that we saw in the industry are more decisions we made about pricing conservatively in the marketplace and then some compounding issues just with the competitors in the channel. But I would say, first, we continue to be -- have a very, very long-term belief in the strength of the industry. So I just wanted to start out with that. When you look at the AEP and we've had time to analyze it, there's a few things that we were disadvantaged to. One was around just our competitors really took a number of our innovations and built on them. I think first one is the area of the healthy cards that were then added with the over-the-counter and combined and also increased. And that's great innovation, and they basically outsmarted us on our own product there. The second thing is we did see a number of things in the area of Part B Giveback. That was another area where we saw some aggressive pricing. And from a customer's point of view, that's wonderful. It's a product that's got a lot of value. And then the third area is expansion. We saw a number of areas where we saw more competition in the marketplace than we've seen in the past. And then lastly, I would just say in the maximum out-of-pocket period, and just there's a number of companies that took a more aggressive stance. I would say this is competitor by competitor, not everyone did everything the same way. So different competitors won differently in different marketplace and segments. In regards to the sales channel, I'll just spend a few minutes there. First, as you all know, we've had a very strong internal sales, about 2,400 salespeople. We've used that over our existence in Medicare Advantage has really proven to have great retention, builds a longer-term value relationship for individuals, not only just on the sales side, but more importantly, on the care area there, and we find that our relationship is deeper with individuals that are in that sales channel. But we realize today the power and we've participated in the telephonic channel and it's considerable part of our sales efforts there. And that channel continues to be strong. I think it has really created an awareness around Medicare Advantage, which, we and all of the competitors in the marketplace have been beneficiaries of that. It does have a different sales approach. It's much more feature driven as opposed to value in totality. And therefore, we -- if you don't have the value proposition in some of these areas, then you're going to be disadvantaged. And we saw that in this marketplace where a combination of our value proposition, the amount of dollars that were put in the marketing channel and then in addition to this channel all contributed to us underperforming. We didn't underperform so much in sales. It was really retention. And it was really in areas where we -- our value proposition that was weaker than others. And traditionally, we've been able to sell through that. But this year, it's different just because of the competition, specifically around the sales channel, in general. Just I know a number of our investors have asked around the compliance area and did that have any impact. And I would say we are leading the pack in that, but not doing anything different. We really feel the verification process is important. What we have found in both our compliance side and in addition with our customers that they sometimes don't know what they're buying and sometimes don't even know they bought it. And the ability to ensure that they understand what they're purchasing is an important part of this. I mean, obviously, seniors are being sold something. It's a very complicated product, and therefore, confusion does happen. And we just want to make sure, especially in the telephonic area, we just want to make sure that our customers are there, and we're not, again, doing anything different than others. We did really encourage this, but the compliance area really has come out that others are -- it's a requirement or will be a requirement. So we do believe it's the right thing to do, but an important thing.

Got it. Maybe just to unpack a few things there. On the broker strategy, I think you alluded on your conference call that maybe you would look to internalize certain capabilities more. Can you maybe help us think a little bit more about what the strategy is going to be, at least on the broker side, what you're going to be internalizing, how quickly you can make this pivot, just what this may look like? And you've got plenty of time to sort of build up into 2023. So I know there's a lot of internal discussion and strategies being built around this. [Technical Difficulty] All right. Well, I think we had a little bit of technical difficulty. I think we showed that Humana has very strong contingency plans within its organization in real time. So Bruce, I guess, where we were going were some of the initiatives around the broker strategy, how that's evolving, what you're going to be looking to internalize as we -- as you plan for 2023.

Yes. Well, first, as I mentioned before, the broker channel is an important channel. It gives people that are looking for choice to be able to have a conversation that's just -- that's broader than just a one plan. So we really will continue to support the broker channel. I think both -- especially the telephonic and base area, churn is an important area where I think people are realizing that just sales is one thing, retention is another, and we can see that on lifetime value. And so I think all of us are online to have a much more retention-oriented approach. And so we are partnering and continuing to work with our sales partners in being able to improve the retention area. So that's one area that I just want to say that we're investing in and we feel that there's a good effort in a number of our relationships there. The second, this is an area where we find when we have really deep engagement with our members, we are much more successful in retaining them. They begin to see the value of what Humana can offer all the way from the service component to the care coordination efforts, and really, a lot of the areas improve the proactive care that we have. And so one of the things that we are spending a lot of time is just how do we retain them, the ones that are not engaging in their health today or are not having an active relationship with them, and that is an area where we are oriented to internally -- that's more segment oriented because we do find like areas like D-SNPs have more churn than somebody that's had a longer-term relationship with us. That's how non-D-SNPs that we are spending time more on the customer itself and thinking through what are their important needs and ensuring that we are getting to them earlier. I would say both of those things will help with our retention. And we have not put any estimates what that means from a retention point of view, but we do have high belief that it will impact us. At the end of the day, that, when combined with the value proposition improvement, will be -- will both be important. I don't think you can do one without the other. And so we really are oriented to the value proposition side. Relative to moving from the channel, we'll continue to evolve our sales channel. Obviously, as I mentioned, we value that channel significantly, but we also value the internal side. And we, as I mentioned before, we feel that it's a channel that does allow us deeper engagement at the outset.

I want to go back to just the third-party marketing just for a minute, and this is a topic that we've received a lot of inbound questions on. And this goes back at least a year now, right? Like CMS has been putting on a number of memos and letters stating their desire for you, the industry, to maybe not work differently, but to ensure that there's a proper level of compliance with the marketing material that's out into the field. I guess what I was looking for was maybe some historical perspective around this and CMS' intent. And now that you guys have, again, a lot of time to plan for 2023, what does this mean for Humana? What are you doing internally? And I'll just leave it at that.

Yes. I would say, in general, with CMS and the regulators are similar to what I was saying before is that there is sometimes that people don't fully understand what they're buying. And what we have seen over the last year -- but it has been -- it started and a year before that is that there is a lot of compliance complaints around the -- I don't know what I bought. And so what you see is -- as a result of that, you're seeing the regulators figure out how to be able to approach that best. They don't regulate the marketers, they don't regulate the brokers. They regulate the plans, and so they're putting the owners on the plans to come up with the programs to ensure that there is the proper follow-through and people are being treated appropriately. And that's what you see as an example of the verification process that we put through is to ensure that our customers are being -- are -- know what they're buying and that they realize all the details of that. And I think you'll continue to see scrutiny in this particular area over the coming period of time because there is a evident of the churn. There's just a lot of movement and they want to make sure the seniors know what they're buying and that they're being treated properly.

Yes. I was curious -- I mean, I don't have any great data on this, and presumably, you guys do. But as I think about that lead gen as a distribution channel, if we want to call that, or an access channel, how many members find their way into a plan through that distribution channel? Do you have any great idea?

Yes. I mean, I can say for us, it represents about 50% of our sales. So that gives you some perspective. It does -- it is different between different payers. I think United is less. I think Aetna is about the same level. So it does have differences. But I would say a significant amount of beneficiaries are buying from that plan -- I mean, that channel.

Yes. Yes. Back to the -- you made a comment earlier about the Part B premium buydown products. And I've spent a lot of time trying to think about just the sustainability of this strategy. And one can argue that you're pricing for membership and then we go through the cycle of pricing for membership, pricing for margin, pricing for membership pricing for margin. So it will be interesting to see kind of what happens. And you're attracting a certain member that is solely focused on price, right? And they're not that engaged with the delivery system. They're not probably getting their annual wellness visits. It can probably compromise your risk scores, your premiums, your risk pool, and then you see more churn and impact to Star ratings. So I mean it's more of a high-level question for how do you think the evolution of this strategy plays out when you see plans that invest more, pull back, invest more, pull back?

Yes. I mean, our experience has been, over the years, Whit, as you do, you start to lose some credibility as you sort of have this fluctuation, as you've mentioned. That's one of the reasons why we priced this year as being conservative. We wanted to ensure as we went into 2023 that we kept our plan stable. Obviously, the particular rate notice that just came out a few weeks ago gives us the opportunity to invest. But I do believe that you have this ups and downs, up and down, that creates distress for the broker community and distress with the community as a whole, of beneficiaries. And as you mentioned, we find the deeper we have the relationship we have with our members, we're able to really help them with their care, ultimately also helping them with that drives better quality and better ability to help with the care plan development, which also drives better risk scores. And so we find just having a longer-term relationship is the best for everybody. It's the best for the plan, it's best for the member, it's best for the health outcomes. And just selling the insurance side is really -- I mean, it is not utilizing the value that Medicare Advantage provides.

Got it. Okay. So I think consistently, the theme we hear is the consistency of having similar product in the marketplace is very important. On the advanced notice, and we'll see what the final rates end up looking like. But obviously, as you alluded to, a little bit more favorable, at least than maybe we expected, hopefully, not at this -- hopefully, it's more in line with what you expected. But as we think about the $1 billion that you've outlined for taking costs out and reinvesting back in, does that change that $1 billion at all as you think about it? Does that give you the opportunity to invest more? Just maybe help us think about what does that mean?

The way we look at the two is, one is a relative measurement, and that's really what everyone is getting. And it does vary between different plans based on Star ratings and other -- where are they sitting in geographically and so on. So it does have some variation. But in general, everyone is going to have similar dollars to invest or to fund the trend that's there because it does fund trend. But for us, as a company, we look at the $1 billion as really helping with the advancement of the -- of our value proposition. And that's where we look and we believe investing in that is important. And so we believe that still the $1 billion is important.

Got it. When you talk about pricing more for margin, I just want to make sure that I'm thinking about this right. Is it we're pricing for our MA margins? Or is it more of an enterprise margins? How should we really visualize this from kind of a model standpoint?

Yes. First, on the $1 billion, that, we really believe is going to go back into the value proposition of the member side. So that really isn't pricing for margin, it's is really oriented to how do we continue to improve our positioning. But when we do price for margin, we do look at it at a segment level. And so our pricing is much determined by margin targets. And obviously, that takes in a whole host of many different things, but we do look at on an individual segment. Only thing about enterprise margin, we do think as that is accretive to the existing margin, but our pricing is very oriented to the margin of the segment itself.

Inside the advance notice, there was some interesting but positive language around what we'll call it, capitated risk sharing providers and maybe it's the first time that we've seen CMS discuss this a little bit. And it's -- really the question is, how do you sort of see CMS' view of this physician risk taking? And what type of engagement are you having with policymakers so that they properly understand the value proposition that the strategy that you're building on internally aligns with the objectives that CMS has?

There's been a long objective inside CMS to evolve the payment model to value based. I don't think there's a -- there's been a CMS administrator or administration, in general, that doesn't believe in it. Fee-for-service Medicare is a bit more difficult. I mean, the infrastructure and the way things have been developed over many, many years has really made that a business model that is deep inside health care. Medicare Advantage has really allowed us to use innovative ways and relationships and to be able to evolve that. But that innovation that we are able to approach in Medicare Advantage is really difficult and the structures -- system like Medicare fee-for-service because you're trying to chain one system with one policy kind of activity. So the aspirational from a CMS point of view, I think, has been there and will continue because they realize that it is very, very important. And for us, as an organization, we are actively engaged with them and look frankly as a leader in being able to help with them -- and help them in developing value-based payment models. The challenge is it's also politics in the Medicare fee-for-service area where the flexibility in Medicare Advantage is much greater. I guess, companies can work with providers that develop it in the marketplace. But on the fee-for-service side, it's much more political and therefore, more difficult to get accomplished or whatever administrator -- administration that's in office.

Got it. Staying on just the topic of your physician strategy. I know you've had your successful partnership with Welsh, Carson for a number of years. And that partnership has a beginning and sort of an end as we know it today, at least with the structured joint venture. Any update as to how you're thinking about maybe do you look to extend that? Do you pivot and decide we're going to buy up a bunch of the clinics? Just any update around like what the current thinking is?

Yes. And I do want to compliment the investors that have given us feedback on this because we really were trying to understand what was important to the investors. Earnings growth and -- which is always important, but is there -- do we look at earnings growth as the top priority or do we look at cost of capital as being the top priority. And those 2 are not mutual exclusive, obviously. What has been a resounding note to us is that earnings growth is important. Earnings growth from a point of view of where the 11% to 15% that we communicated, and really, we want the people -- investors want to stay within that. And so what we've concluded that we will utilize -- continue to utilize off balance sheet financing for the development -- for our organic growth. That was a period of time as we utilized that financing and then it comes back and onto the balance sheet as they -- as we call them, cohorts, begin to become profitable, usually 3 to 4 or 5 years after that. What we do worry into is then how do we -- how are we utilizing it for capital that is more accretive such as acquisitions. And so what you'll see us do is we will build our centers on the organic side, and then from an off-balance sheet point of view, but on the -- our acquisitions will be on balance sheet.

Got it. Okay. So continue to fund the J-curve of off-balance sheet cohort as you look to buy. What is the -- and I should know this. But I mean is there a structured put call arrangement with the different vintages? How does it work if you decide that we're going to buy up 1/3 of the clinics, 20% of the clinics? How do we investors sort of trying to wrap our arms around what the capital cost could be for you?

What we -- it's really contractual. So we set it up at the time that we set up the off-balance sheet financing. And then that contractual has been set that's really after the cohorts, that timeframe that we feel the cohorts will be profitable.

Yes. Okay. So the classic S*** call that we've seen out there for 3 to 5 days now. Super helpful. I wanted to go back for a minute to sort of your strategy around special needs or just D-SNP. In general, this has become, you know better than I, one of the fastest-growing subsegments within the MA population. How you've refine your strategy? What's different today versus 2 or 3 years ago and what we can expect in terms of sort of innovation around some of the benefit design.

Yes. Obviously, we want to keep that a little quiet just because of the competitive side. So I won't give you details there. But we do believe an important part of the D-SNP side is both the service side. So helping them with things like Medicaid and other areas where they can qualify and continue to be appropriately supported in the areas from the welfare point of view. Social determinants of health are an important part of that. And then as you well know, they are clinically complex. I mean, there's a number of -- D-SNPs are really in a circumstance that they do need care coordination area. So it's those 3 areas we look at, obviously, the benefits and design of it is important. But it's the ability to provide service to help them with their welfare, the ability from a social determinants of health and then in addition to provide them the coordination of care. And as we find that their needs are greater, there -- where they begin to value our services in a much deeper way.

I haven't heard anyone talk about ESRD in a while. And I'm curious, just as you reflect back on sort of year 1 and 2 of having ESRD members as your members. Anything to share that surprised you one way or the other?

No. I mean, they continue to grow as a percentage of our business, and they will approach over time, probably the standard -- the level of participation that Medicare has in proportion into all beneficiaries. What we are very, I think, I don't want to say, proud, but very happy is our relationship with our providers. We've seen especially some of the providers that traditionally have been more fee-for-service. We've seen some really strong relationships that have been built around how to manage the holistic aspect of the population and really trying to get to it earlier as opposed to letting it proceed into just dialysis. And so I think that for us, the area that we have been a little bit surprised, but really happy with is the evolution of our relationship with the providers because that has been really important. It's allowed us to manage that risk in a much more effective way because I think in a fee-for-service environment, it'd be very difficult. And in addition, I think it's going to improve health for these very complicated members over time.

Got it. I've got a couple of questions that have come from the audience from certain investors. And there have been 3 here around just the retention programs and things that you're doing differently as you think about 2023 and thereafter. Can you be a little bit more specific or expand upon some of those retention programs, what they are to the extent that you can share them?

Yes. I'll just say, in general, what they are, are really how do we engage with our members in a deeper fashion earlier on. Because if you think about it, people engage with their health insurance at the outset when they use the insurance. And if they're only using a small part of the insurance, then their engagement is less with us. And there's a lot of things that we can do for them early on, all the way from helping them with their medication to the ability for us to ensure that they're utilizing all their rewards programs, their social determinants of health. And so how are they maximizing the use of the benefits would be an example of that. But there's a -- it really wraps around how do we engage with them earlier.

Is there a level of investment that needs to be made to accomplish any of these initiatives? Or is it really just prioritizing the resources that you have internally and having people focus on the engagement level in a different way?

A lot of it is the investments we've made over the years and so we call it our journey work, but are we looking at the customers, how they sort of flow through our system and so leveraging those resources that we've had, and they've done some wonderful programs that have greatly improved our Net Promoter Score. We're taking those resources and really orient to certain populations, like D-SNPs, that they are now becoming much more oriented to what are the needs of that population, specifically around retention.

We've only got a minute or 2 left here, and I wanted to just throw out one last one. Kindred at Home consolidated the business. You've announced that you're going to pursue some alternatives for the hospice platform, not a surprise, I think, anyone listening here today. But maybe just an update around like how you think about scaling, growing and allocating capital inside of the home health business. And then anything that you'd care to share around hospice. And I don't want to -- can't pin you down on any dates or times or thinking, but just anything that you'd care to share to the audience here.

Yes. What I would -- I'm going to have to go without my video, if you're still there.

You're perfect.

Okay. The -- in regards to just on hospice, we'll give you an update on the second quarter and be able to give you more detail on that. I think you'll see that it's progressed quite well. And I think it will be, as you said, it won't be any surprises to any of our individuals -- I mean, any of our investors. In regards to home health, I would say that the area there is we are really oriented to moving home health to value-based payment models. And that's where a lot of our energy is focused right now. Obviously, we've purchased onehome. We have a number of regional areas that are oriented to bringing that on. You'll see that being our orientation over the next few quarters. And that's a 3-year rollout, so to speak, but we'll -- the next few quarters are big quarters for us. Relative to growing home health, I think you'll continue to see us that we will add geographic business through acquisitions, obviously, same-store growth, but also through acquisitions.

Great. With that, I think we were just out of time. Lisa is putting an order to the building management for new generators, as we speak.

Yes, yes.

Thank you so much. It was super helpful. Lisa, thanks for organizing all of this. If anyone has any questions, please reach out to myself. Everyone, enjoy the weekend. And thanks for sticking with us through day 5 of the SVB Leerink Healthcare Conference. Thanks, everyone.

We want to thank you -- Thank you and I apologize for the technology.

You're fine, Bruce. Thank you.

All right, thank you.

Thank you. Bye.