Humana Inc. (HUM) Earnings Call Transcript & Summary

All right. Great. Well, welcome, everyone, to our next session here. I'm Steven Valiquette, the health care services analyst here at Barclays. This session will be with Humana. We have Susan Diamond, the company's CFO; and also Lisa from Investor Relations as well. This will be a fireside chat. So I think we're just going to kick things off with the questions, right?

Okay. Yes. Sounds good.

Yes, so I think the topic is your -- around Humana has been some of the things that happened this last AEP around individual Medicare Advantage. It's been talked about pretty lengthy at this stage. But maybe just any additional color you can provide just on the learnings from this past AEP in terms of how that relates to the competitive landscape by channel and how things might proceed from there? I guess we'll just start with that and just kind of more from there.

Sure. No, I'm happy to address that. So as we've been really commenting throughout the latter half of 2021 after we submitted our bids, we acknowledge that we took a more conservative approach to our 2022 pricing than we anticipated that some of our competitors might. And the motivation for doing that was really recognizing some of the financial uncertainty that we were navigating in 2021. And certainly, appreciated some of the frustration that created within the investor community. We need to ensure, recognizing that COVID continues to be an uncertainty that we had adequately considered and planned for that within our pricing and to the degree we could that we could eliminate some of that sort of overhang and ongoing uncertainty going into 2022. So we thought it was a prudent thing to do to take a bit of a more conservative approach, layer some additional contingency into our pricing. And at the time, based on all of our analytics and the information that we had, we had an expectation that, that would have some impact to our 2022 growth. As we came out on our third quarter call, we acknowledge that our anticipated growth rate would be lower than we've demonstrated in recent years and slightly lower than what we thought the industry growth rate would be. As we began to see the emerging experience coming out of AEP, particularly on the disenrollment side, which we get visibility to a little bit later, we saw that we were seeing higher disenrollments than we had initially anticipated, which then led to our revised guidance that we came out within early January. As we began to understand that, what we acknowledge was that the conservatism we layered into the pricing was having a greater impact than we had expected, which would lead then to the need to have a greater level of reinvestment going into '23 than we had originally anticipated. And we began in earnest sort of thinking through how we can create sufficient capacity to make the needed investment. I would say in terms of some of the learnings, certainly, at the time we did the bids, clearly, our analytics and other inputs didn't give us the right signal in terms of what we should expect. There were some things that we would argue materialize differently than we've seen historically in terms of some of the marketing performance and the sort of effectiveness of that marketing, which led to, again, the disenrollments which were higher than we would have anticipated given the fact that we did invest in benefits in 2022, just not to the same degree as some competitors. And historically, what we found is if we could create -- keep our plans stable and not deteriorate benefits or make some incremental investment that usually those members would be satisfied and wouldn't have a reason to shop. What we saw this year is that just small changes in that can have a meaningful impact to membership. And what we saw is that we saw some slightly higher responsiveness of our members to some of that marketing. And they did, ultimately, switched at a higher rate, partly due to the fact that our product was not as well positioned as it would have been in previous years. So as we thought through that, certainly are working to improve our analytics and the modeling, the granularity of some of that modeling, the breadth of inputs that we use to ensure that as we make decisions that we have the best information possible and have a greater confidence in the outcome. So that's certainly what we're doing concurrently. At the same time, we recognize there are product investments we need to make to ensure that our product continues to be competitive and differentiated where possible. We also recognize we make some advancements in our marketing strategy and distribution based on some of what we saw this year. All of that is being considered as we think about our '23 planning. We announced the $1 billion value creation goal. That was in direct response to some concerns we hear from investors around. We have confidence you can get back to growth, but how can you do that not at the expense of your long-term earnings target. So we're very public about our stated goal to increase confidence that we are making some of the tough choices that are needed to ensure we can create enterprise capacity to invest in product, distribution and marketing while also delivering on our EPS goals in 2023 and then more sustainably long term. So those are all things that we're very focused on as an enterprise currently.

Okay. Great. We talked about this a little bit last night as well, but the -- there are still some mixed views across the market around the level of churn in the AEP, whether it's from some of the public telephony broker companies or even just your peers on the carrier side. But maybe just to drill in a little bit deeper as far as traditional MA members versus duals, there might have been some nuances there from a marketing perspective. Any other additional color you can offer around just some of the mechanics around that when thinking about the different subpopulations within MA?

Sure. I would say that at the highest level, we did see higher disenrollments across sort of all of our cohorts, if you think about 10-year duals, nonduals. And that, we think, was primarily a result of the lower level of investment we made in product relative to others in conjunction with the higher level of marketing spend and the increased effectiveness of that marketing led to that. In the call center channel, in particular, that is where we did see the highest increase in incremental attrition year-over-year. Some of that's a function that those firms tend to have lower tenure overall because they've only been around for a number of years and the growth that they've seen, the average tenure of members sold by those channels is higher. And we know lower tenured members do disenroll with a higher rate than longer tenure. They also disproportionally enroll duals and duals do also switch at a higher rate. That's partly due to the fact that they have the ability to switch plans once per quarter, whereas nonduals outside of the AEP and then the OEP election period, for the rest of the year, they're largely locked in absent sort of relocation or other things. So they do tend to see a higher disenrollment. But we did see it incremental attrition across the board, which, again, was we think primarily resulting from the disadvantaged position. We think what was more intense this year across the third-party call center channel, in particular, is the competition amongst those firms. There was an increased level of marketing relative to what we would have expected for 2021, recognizing in 2020, we had a very high level of marketing across the industry. That was partially funded by COVID and the depressed utilization across the health care system that created some capacity for further marketing investment. We expected that to moderate in 2021 as health care utilization rebounded. It did in some cases, but then in others, there was maintained levels of marketing, which was not something we anticipated. I think that has done some good for the industry in a sense that it has created more awareness for Medicare Advantage and the value proposition that it offers that I think has led to some of the increased MA penetration we've seen in recent years versus previously. So that's all very positive. But we do think it's led to some unnecessary churn, particularly as lead aggregators have been spending more and they're generating these leads that are going into these call center brokers. The incentives today largely incentivize brokers to want to switch members for the sake of those incentive payments. And so that, we do believe has created a higher level of churn broadly. And you can certainly see that in some of the results that some of these firms have come out with in terms of the impact that's had to their lifetime value and write-downs that they've experienced. From a carrier perspective, we think Humana was more impacted by that than some of our peers just again because of that value proposition wasn't as strong as it had been in the past. So as that shopping was occurring, we were just slightly more susceptible to higher disenrollments, which is why we think we've seen some greater impact from that than some of the others.

Okay, great. Tying some of that together with the sort of the chronology of the MA membership adds that you might have throughout the calendar year. So obviously, now just to frame this for everybody in the audience, now you're expecting 150,000 to 200,000 individual MA members. That's around 4% to 5% growth year-over-year. The original guidance was closer to 9% growth. From the latest CMS files, you've already added some 130,000, 140,000 members. And historically, once you get beyond the first 2 months of the year, in the last 10 months, you've added an average of 150,000 members per year. So curious to hear more about how that dynamic might play out for the rest of the year in relation to some of the things you talked about. And could you be on a trajectory to potentially exceed your more conservative guidance? Or how should we think about the chronology as this flows across the various books?

Sure. No, great question. So if you look historically, you will find that the -- what we refer to as rest of the year. So the growth that you'll see, once you get out of the AEP -- OEP right, to say, March to December, is proportionately sort of relevant to what you see in AEP. Because in large part, what you will see is influenced by your competitive positioning, in large part. So while you're correct that in the last year, certainly, we grew 150,000 March through December, that was off of an AEP growth of about 300,000. For this year, in AEP, we grew 130,000, again, reflective of all the things we just talked about. So we would expect to see less growth proportionately in the rest of the year than historical, just again, a further reflection of the impact of that value proposition. I would say the other factor to consider is the dual element. You do see disproportionate dual movement again in the rest of the year because they have the ability to switch. As I mentioned, those members do historically switch at a greater rate consistently. And so that's also one of the reasons why in terms of the seasonality of our growth projections, you'll see less growth in the rest of the year in 2022 than you might have historically, just given the success we've had in growing duals.

Okay. All right. That's helpful. Then thinking beyond '22 and into '23, obviously, we had a very favorable rate update -- proposed rate update so far for MA for next year. But that's one obvious catalyst to get the overall MA pie still growing strong. But maybe just talk about that and maybe other factors and just your outlook on just the overall Medicare Advantage pie. It is still growing. How you see the industry view for the next couple of years?

Yes. As I mentioned, we certainly think the increased marketing and sort of distribution intensity has certainly added to awareness. Maybe we'll see that pull back a little bit in 2023, given some of the challenges some of those firms have been talking about. As I mentioned, I do think historically, that has fueled some of the increased penetration. To your point, though, for '23, we have another year of very positive rate increase, and we would anticipate that most of our peers would invest a significant portion of that into further benefit enhancement in '23. So I would argue that, that probably will compensate for any pullback you might see in the distribution channel, such that I would anticipate we see very strong growth continued into '23 across the industry. That's one of the reasons, again, that we're so motivated to make sure that we get our product positioning back where it needs to be so that we can participate in that. As we think about where that -- where are those growth opportunities, certainly, duals continue to be a high priority. Those dual members have historically been underpenetrated relative to nonduals in terms of MA. That is Humana and others have further refined our dual offerings to better meet the needs of duals. You've seen increased growth in recent years. We would expect that to continue, just given the strong value prop that we can offer to those members. When you think about the nondual space, we at Humana continue to work towards other versions of consumer and product segmentation that has worked really well for us in the dual, and then veterans is another place where we've demonstrated that because there's further opportunity to continue to mature our offerings in the nondual space to better meet the needs of individual consumer segments. So you'll see us continue to refine that. I would say we've looked -- as we think about the investment we want to make in '23, we've really studied sort of where is the growth occurring. So looking at markets that have above-average MA penetration versus those below, and what you'll see is there is more growth happening, obviously, in the markets that have below-average penetration. So that, I think, creates a pipeline into the future that will allow us if we can really take advantage of that, continue to demonstrate leading growth. Agents, interestingly enough, a couple of years ago were lagging the overall penetration of MA. They have largely caught up and are buying and selecting MA at the same rate as the overall population, which is great. So that's again, relative to historical, a nice opportunity that's also contributed to some of the increased penetration we've seen. I would expect that to continue as seniors, again, continue to become aware of and fully understand and appreciate the value that MA offers relative to original Medicare. I think longer term, MedSup in this space will continue to watch. CMS took some action in terms of limiting the ability of enrolling full coverage plans, the historical Plan F. MedSup consumers, it's still about 20% market share. They're still buying now the next richest offering, which is still pretty rich. So should CMS take further action to introduce more cost sharing in MedSup space? And that's certainly, I think, positions MA with that population more strongly. And so our hope would be that over time, we see more opportunity from that space as well.

Okay. All right. So the stocks had a pretty nice recovery since the trough earlier this quarter. I guess I'm curious as we think about the equity as a currency around potential M&A, maybe just give us your latest thoughts on whether the company is focused more on smaller scale M&A. Whether it's on the kind of the payer assets or even on the provider side? And also, any thoughts around just large-scale M&A with your currency, at least, back end vote here, people kind of see the benefits of the rate update, but also just the overall Medicare Advantage growth outlook I think people realize that maybe the stock got overdone. But just the question really comes around just your thoughts around M&A. How you're thinking about a small scale versus large scale?

Sure. And as we've said, we did obviously the Kindred transaction last year, which is the largest transaction acquisition we ever completed. So currently, it's clear. Our debt-to-cap is certainly higher than our targeted level. So what we've said consistently is that near term, we would not expect large scale M&A. That's not the saving we wouldn't look at it if an opportunity presented itself. But our near-term focus is less about larger-scale M&A. And what we continue to prioritize are assets within our primary care space, potentially some within the home space. But would expect those to be smaller to sort of midsized tuck-in opportunities that allow us to get greater scale more quickly, again, with an emphasis on primary care, maybe some in the home space to fill in some geographies where Kindred maybe doesn't have coverage. But on the primary care space, and you saw in 2021, we did a number of smaller tuck-in M&A that significantly contributed to our center count growth year-over-year and patient count growth. And that has been highly attractive. We've been able to see good valuations. Those tend to be more immediately accretive. And we actually -- historically, as a contracting practice, we're incorporating right-of-first refusal provisions in some of our contracts, particularly in, say, the South Florida area. That's provided a very nice pipeline for us to facilitate some of that M&A. So we expect to continue that as a complement to our de novo growth on the primary care side and continue to see us do that. We've said publicly, we do think that it makes sense for us to divest of our majority position in hospice. As we said, we hope to have a more meaningful update to provide you in terms of timing and likelihood on our first quarter call in a few weeks. But we continue to actively pursue strategies there, believing that strategically, we don't need to own that asset, free up some of that capital to delever and then give us more capacity to do potentially other strategic M&A beyond what we have the capacity for currently.

Okay. All right. So let's shift gears here a little bit, talk about one of the other key topics for today and just focus on utilization trends, breaking it down again between COVID cost versus non-COVID cost. Obviously, there's been some oscillation so far in the first quarter where January had pretty heavy COVID. It's all reversed over the last 2 months, obviously. So maybe just get your latest thoughts on how things are progressing, if you're able to provide any updates around this particular topic.

Sure, happy to. So as we mentioned for 2022, as we thought about our expectations, as we've said, we are planning to -- and assuming that COVID costs will be offset by depressed non-COVID, which is consistent with what we've seen throughout the pandemic. We did, though, on top of that layer in a dollar's worth of potential contingency related to COVID, which then would allow for some sort of net COVID costs should trend vary from what we've seen historically. Otherwise, what we've assumed is that health care costs get back to what we've referred to as baseline trend. So even though throughout 2020 and 2021, we were running below what we view baseline to be as a result of the pandemic, we have not assumed that, that continues into 2022 and are planning for a full return to baseline medical utilization for the year. What we've seen so far in January and February, as we entered the last 2 weeks of the year, as we said, we saw a significant and probably the fastest increase in COVID hospitalizations that we've seen to date. We did see that peak in January. It was the highest level of COVID we've seen to date. And that was interesting in the sense that it was more severe -- less severe in terms of the percentage of people that had severe complications. It's just the rate of transmissibility was so much higher with Omicron than previous. It just resulted in overall more hospitalization. We did continue to see full offsets across our Medicare and our commercial book in terms of depressed non-COVID utilization on the inpatient side, which is great. What we have experienced is that the surge peaked faster than we had anticipated going into the year, and it has come down more quickly than we anticipated going into the year. And so honestly, on the commercial side, the last week of February and the first week of March, it's literally running 0.2 admissions per 1,000. So it's virtually 0 on the commercial side, which is fantastic. Non-COVID has not bounced back quite yet to full baseline levels just as quickly as COVID came down. On the Medicare side, we're also seeing it come down more quickly than we thought. We, at the first week of March, reported about 5 APTs per 1,000. To give you some context, the lowest we ever got in 2021 before the Delta surge was about 3.9. So we're pretty close to where we ended up at a low point, which again, we view very positively. One of the things we've been concerned about is whether in normal course, we'll just see an elevated level of ongoing normal course COVID hospitalizations because of the higher transmissibility of the latest variant. And why that's important is because, one, will you continue to see an offset from a utilization standpoint? But two, recall that those COVID hospitalizations cost 20% more than a non-COVID hospitalization because of the incremental payment allowed for under the PHE. So that's one of the things we watch closely. Our concern was would we ever get as low as sort of low single digits or would it stay high single digits because it just becomes a more normal course sort of flu sort of level, but you're still paying the extra 20%, would you continue to see sufficient depressed non-inpatient utilization to offset that higher unit cost? So it's something we continue to watch. It's increasingly important as we're seeing meaningful increases in the percent of patients who are admitted and have COVID, but are not being admitted because of COVID. So they go in for a knee replacement or some non-COVID-related procedure, they get tested, they happen to test positive. They aren't necessarily symptomatic, but they get the 20% bonus. So that becomes increasingly important for those what we refer to as incidental COVID because you do need an offset to cover that higher unit cost. So that's then we'll continue to watch. But so far, I would say the inpatient utilization has been positive. We don't have the same near-term visibility to non-inpatient. So we'll certainly need to watch and see how that emerges over the coming weeks and months. But generally speaking, I would say what we've seen on the inpatient side we view as positive. But also I just want to caution, it's still quite early. We'll have to see how this plays out the rest of the year. And there's still a lot to be learned as with respect to COVID and the long-term impact.

Okay, great. Okay. Just going back to Medicare Advantage for a moment. So another thing that we've talked about kind of off and on is the margin expansion target you guys have for your individual MA. And we talked about this a little bit that several years ago, that was almost a proxy for the overall corporate margin because it is such an important part of the company. But I think as investors now focus more and more on looking at managed care companies for their MA margin, but also their -- with other provider assets, maybe just give us your latest thoughts or how you're thinking about the overall margins for the overall company versus just individual MA. How are those getting more intertwined with value-based contracts, et cetera? Just any updated thoughts around that might be helpful.

Sure. So as we think about sort of expectations, we obviously have our stated EPS growth target of 11% to 15%, which we remain committed to. Exactly then how we deliver against that, we think, has evolved over time. And as you said, 10 years ago, the majority of the earnings were obviously demonstrated by the Medicare members in particular. That's still obviously a disproportionate contributor. But as we've built out not only the MA membership but then the benefits offered within MA, we've embedded dental benefits, vision and hearing in all of our MA claims. Largely, the richness of those benefits has increased. That creates additional enterprise margin opportunity against our specialty business, which reports in the commercial segment. We've built out our pharmacy business and continue to drive industry-leading penetration, which generates additional margin off of that membership within our Healthcare Services business. And as we continue to expand our primary care assets and provide more members with access to those models as well as then with the acquisition of Kindred and the expansion of the value-based model on the home side, there's significant additional margin potential across the enterprise off of that health plan membership. And you heard us talk about this at the Investor Day and provide some visibility to what that margin profile can look like. A member -- a health plan member who uses every one of those other capabilities, there's 2 to 4x additional margin opportunity available to us. The penetration of that today, with the exception of pharmacy, is quite low. And so what we are as an enterprise focused on is expanding the access to those services, primary care being a good example; expanding the value-based home assets then getting more members to use that, which should be additive and incremental to the margin that we should be able to deliver off of the health plan. We still continue to believe there's the ability to expand the margin within the health plan discretely to provide additional earnings growth, but then even just a significantly or even potentially more significantly, particularly around the primary care business, as that business matures and starts to deliver more mature margins, there's significant incremental margin contribution that we can expect, all of which will help ensure that we can sustainably deliver against our long-term 11% to 15% EPS goal long term. So those are the things we're focused on. You'll just hear us talk more about that opportunity and how successful we are at driving that enterprise contribution, just recognizing how significant it can be going forward incremental to the health plan market, which continues to be obviously very important.

Okay, great. With that, our timer has under 1 minute left. So I want to get to a couple of audience response survey questions. Everybody has a clicker in front of themselves here. Happy to say we have another full house at our in-person Barclays Healthcare Conference, just to iterate that. So question number 1 for the audience, the investors in the audience here. So with the company revising individual Medicare Advantage membership growth from 9% down to 4% to 5% in 2022, what do you think Humana's final individual MA growth number will be in '22? So number 1 would be less than 4%. Number 2 would be 5% to 6%. Number 3 would be 7% to 8%. Number 4 would be 9% to 10%. And number 5 would be greater than 10%. It looks like the overwhelming response was 75% or so are saying 5% to 6%, which should be slightly above the guidance and only maybe mid-teens would think it'd be under 4% in some lower numbers. Nobody believes double digits, but that's fine. Okay. So with that, that kind of ties into question two. So going out 1 year and thinking about a potential rebound, what do you think Humana's individual MA membership growth will be in 2023? The same answer. So number 1 would be less than 4% individual MA membership growth for Humana next year in '23. Number 2 would be 5% to 6%. Number 3, 7% to 8%. Number 4, 9% to 10%. Or number 5, greater than 10%. Okay. So it looks like the number 1 response, 47% I think it will be 7% to 8%, still kind of a low number, low single digits for greater than 10%. The 20% of the people think 9% to 10%. So 2/3 of the people think it will be between 7% to 10%. So...

A few [ testaments ]. Okay.

Skews more favorably versus the '22. So I think that's encouraging to see. So with that, we're out of time. So I want to thank management for their time today, and thanks, everyone, for participating in this session. Thank you.

Thank you for having us here.

Thank you.