Humana Inc. (HUM) Earnings Call Transcript & Summary

Hi, everybody. Thanks for being with us today. My name is Ben Flox, I work with David Windley here at Jefferies on managed care. Unfortunately, Dave is currently stuck in COVID jail. So you're stuck with me today. With us today, we have Susan Diamond, the Chief Financial Officer of Humana. Based out of Louisville, Kentucky. Humana is one of the largest health insurers in the country. Its primary business today is serving seniors in the Medicare Advantage market, which is among one of the fastest-growing segments within managed care. Humana also participates in Medicaid and commercial health markets and also has a blossoming Healthcare Services business. So with that, Susan, thanks for being with us here today. And I figure we just dive right in.

Yes, absolutely. Thanks for having me.

Great. So I just wanted to start on kind of quarter-to-date trends in utilization. It seems like April was rather soft, but I think we all know COVID kind of ticked back up in May, and that seems to be continuing. Can you just talk a bit about what you've seen with regards to volumes and acuity?

Sure. So we've really seen a continuation of much of what we have disclosed that we saw through April in terms of overall medical cost trends. So on the inpatient side, we continue to see lower inpatient utilization than we would expect. And I'll be talking mainly about the individual MA business in these comments. But it continues to run lower from a utilization perspective than we would expect. Some of that in the first quarter, we attributed to the very rapid decline of COVID hospitalizations, which is more quick than we had seen in previous surges. And we thought initially that, that was just a delay in the bounce back of non-COVID utilization. As we've continued to watch it, though, it has continued to stay at a level that is lower than we would have expected coming into the year. Now some of that, we do know is a reflection of lower flu throughout COVID. We have seen lower flu utilization, and we've continued to see that through the first 5 months of the year. One other thing that we've also been able to assess is further migration of procedures from the inpatient setting to outpatient. And we now have some visibility into the early non-inpatient trends, which we've disclosed before. Those take longer to develop, we're depending on claims data, and so we don't have real-time access. So we'll give you some visibility into what we're seeing for non-inpatient. But what we have been able to see is some of that lower inpatient utilization is the continued shift of procedures into the outpatient setting. We were actually expecting some shift back to the inpatient setting for 2022 due to CMS lifting or reinstating rather than inpatient only. What we've seen is that's not been the case, and we continue to see movement of procedures to the non-inpatient setting. So from a utilization perspective, all in, we are seeing lower utilization than we would expect. We are seeing somewhat higher unit costs on the inpatient side. Some of that is expected when you see lower average utilization, you do tend to see those lower cost events be the ones that are not occurring and what's left behind tend to be higher cost events. Also, when you see shifts from inpatient to outpatient, those tend to be lower than average cost procedures. And so the resulting utilization that you're seeing tends to be higher unit cost. So that is mitigating some of the favorability we're seeing on the utilization side. As we think about COVID, as you said, that has remained very low. We have seen in recent weeks particularly in May that, that has started to tick back up a little bit, but still very low and, call it, mid-single digit roughly for the Medicare business in the month of May. So still quite low but higher than what we were seeing in the month of April. On the non-inpatient side, as I mentioned, we are seeing more procedure shift to the non-inpatient setting. But we would say in total, and we have decent visibility into January and February at this point. In total, despite that shift, we would say in the aggregate, we're still seeing overall non-inpatient costs in line with what we expected. So all in medical cost trend then you can think of as being somewhat favorable off the back of that lower utilization somewhat mitigated by that higher unit cost.

Got it. Really appreciate that update. You touched on this, but just to kind of hammer home the point. You've talked over the last 18 months about this COVID, non-COVID relationship, kind of this toggle, COVID comes up, non-COVID comes down. As each passing variant comes, it seems to be less severe than the previous, like how well is that relationship holding up in your view?

Yes. So really, from the onset of the pandemic, it was very consistent. I mean you would get that one-to-one offset both as you enter a surge and reached the peak and then as it came back down. It was very consistent across the Medicare population and was a one-for-one offset. In the commercial setting outside of the first initial onset of the pandemic and subsequent surges, you did not see the same dynamic. But Medicare was very consistent. So when we came off of this latest surge, that was the first time on the way back down. We did not see a full bounce back in utilization as it descended. On the way up, we saw the one-to-one offset. But so far, we have not seen it fully recover. Now there's a lot of things that went into our estimates for 2022. One of the things we've talked about is there were about 100 basis points of excess deaths as a result of COVID in 2021 from a mortality perspective. We've had to evaluate how we think about those excess deaths, what does that mean for the resulting morbidity. What does that mean about our assumptions for utilization in 2022. And so there's a lot we'll need to study as the -- hopefully, the COVID activity continues to stay low, then we can have an opportunity to really revisit some of those assumptions around morbidity and what we're seeing. But again, so far, we have not seen a full bounce back to the level of non-COVID utilization than we would have expected. From a service category level, we have seen some elevated surgical scheduled procedures, and we do attribute that likely to pent-up demand. We saw a similar dynamic this time last year. We're coming off of the fourth quarter surge of 2020, we did see a temporary increase in surgical procedures. It was a relatively short in duration. By June, it came back down. And so that's something that we're watching now because we are seeing a little bit elevated surgical relative to what we would have expected. And we'll see if it continues to follow the curve that we saw last year. And if it does, then we would attribute that to some level of pent-up demand that's working through the system.

In that curve you're referring to, it seems like that pent-up demand works its way through the system pretty quickly.

Yes. Last year, it was less than 90 days, we saw it come back down. So we would say right now, it upticked in the same time frame that we saw last year. And so we'll look to see if it comes back down more in the June time frame, which is what we saw last year.

Right. Very helpful. Any comments on the Medicaid side of things? I know you're fairly concentrated, but...

Yes. Medicaid, and we mentioned in 2021, some of our commentary, we saw outperformance in Medicaid in '21. That was one of the items that offset some of the COVID headwinds we had last year. What we would say is most of that is attributable to the PHE. We had about 100,000 additional members that were enrolled as a result of the public health emergency. Those members have proven to be generally lower acuity. So we tend to see a lower MLR for that membership. So we've certainly seen some of that -- we contemplated some of that in our 2022, obviously, with the expectation initially that the PHE would at least be in effect until the end of April. Obviously, that's now been extended, and so that will contribute some positivity for us. Some states do you have the ability to go back in intra-year and make adjustments if they deem appropriate. We've seen states like Kentucky do that and acknowledge that lower acuity. But certainly, we are seeing positive results so far this year develop for our Medicaid business, just as a result of the continued PHE.

Great. With regard to the higher unit costs on the Medicare side of things, I didn't hear you call out the kind of that 20% markup the providers are getting as a result of the public health emergency. Is that still a factor?

That is a factor that we have to be mindful of. I would say the levels of utilization we've seen -- so far in the second quarter, I would say it's not as significant. When we are running lower to mid-single digit on admissions, it only applies to those COVID admissions, which we track closely. So to the degree we would see another surge and see actual hospitalizations, then that would be something that we'd be mindful of. But I would say, while we've seen an uptick in the case rate for COVID, the rate of hospitalization has been lower, just a reflection of the lower severity that we're generally seeing with the latest activity. So that's just something we'll have to continue to monitor. What we've always said in the past is, like I mentioned, historical surges, if you had a real material surge, you've seen an offset on the utilization side. But because of that higher average unit cost in order to fully offset the cost of that surge, you need to see depression on the non-inpatient side to offset that higher unit cost. So we do continue to monitor, but I would say at these relatively low levels, it's less of a factor. We'll just have to see if it ticks up again.

Got it. And then on the public health emergency more broadly, I know we're all a little skeptical if and when it ever goes away at this point. But your Medicaid mix is relatively small, so redetermination seemingly less of an issue for you. Can you just talk about the other ways the end of the public health emergency will impact your business, either positive or negative?

Yes. Really, the 2 main ways are the PHE and the 20% additional cost that we have to pay for inpatient events on the Medicare side. And then it's the additional membership and the favorable MLR that we see on the Medicaid book. We have contemplated for 2023 that the PHE will end by the end of 2022 is our expectation. And so we've made an assumption around then the rate at which those redeterminations will occur and impact our Medicaid business. And then our assumption going into our '23 pricing is that we will not have the ongoing issue in terms of the 20% because the PHE will have ended.

Okay. Moving on to Medicare Advantage. You've been explicit this year about improving your competitive advantage in the '23 selling season. Some of the '22 challenges seem to be a combination of product design and distribution channel investments. On the product design, you've commented to us that Milliman's MACVAT data doesn't really capture some of the nuance, some of the product differences that are most important to choosers today. Can you just elaborate a bit more on the nuance there? And then given that and the inherent kind of lower visibility you have into what competitors are doing, what gives you the confidence this year that you've made the right product investments?

Sure. So I'll answer your first question in terms of the MACVAT and then answer your broader question about growth. So the challenge with the MACVAT tools and many tools are that they don't do a great job of valuing supplemental benefits. So things like dental vision, transportation on the dual side, you see over-the-counter benefits, food cards. They don't effectively calculate sort of the benefit of those. And so some of those benefits have become increasingly important to consumers and the basis on which consumers are making planned decisions. And so because their tools don't accurately reflect the value of those benefits, just comparing the macro values doesn't necessarily give you a fair relevant comparison in terms of the real offering or at least the perceived value to consumers. And so we recognize that, and so we do some work internally with our own analytics to sort of create a better comparator in terms of how we think we're positioned. In terms of how we think about growth in 2023, obviously, we're very committed to returning to industry-leading growth. It's a critical part of the strategy, given our dependence on the Medicare book of business and then the positive impact that has across the enterprise from the pharmacy business to specialty and our growing Healthcare Services businesses. So as we approach 2022, we've been very clear that we did take an intentionally more conservative approach to pricing. We thought given the challenges we had in 2021 and the frustrations that everyone had in terms of just the sort of uncertainty about our earnings, to the degree possible, we really wanted to eliminate that overhang going into 2022 and so explicitly priced for a potential net COVID headwind and incorporated our guide. When we made that decision based on all the information we had, we expected some impact to growth, although we thought it would be much smaller, and we thought it was a reasonable prudent trade-off. As we started to see the results from AEP come in, we recognized that we were going to be -- see a greater impact than we had originally estimated. And then that led to a revised guide in January. As a result of that, we recognize we were going to need to create some capacity in order to make additional investments in the Medicare product as well as the Medicare marketing and distribution support. That led to our $1 billion value creation goal, which we came out with a number of months ago. The intent of that is to create the capacity across the enterprise to fund those needed investments, not at the expense of margin, so that we could get the product positioned well and strong for 2023, support it with appropriate distribution and marketing and make significant progress in getting back to growth while still delivering on our 11% to 15% long-term EPS target. We've taken a lot of ground and continue to gain confidence in our ability to realize that $1 billion of savings. We filed our Medicare bids this week. We are counting on our ability to deliver against that based on the way we filed the bids. We had the benefit of the $1 billion, which is you can think of as the majority of which going to the Medicare business. The majority of those [ hours ] then going to product and then distribution and marketing to a lesser degree. So the team had that to work with, but then we also had a very favorable rate notice in 2023. So it was, call it, about 4.5%. That makes our job a little bit harder. And we had to really think about how we thought competitors would use that rate notice, how much would be invested in products. So making sure that we don't catch up to current state, but that we maintain a strong position based on what others might do with those favorable rates. So what I would say is the team has done a tremendous amount of work going through market level sort of assessment of what is our -- what we call right to win. How are we positioned from a network perspective, distribution brand, product, et cetera. And I think we're really thoughtful in how they are deploying the dollars that we've made available to them across enterprise. I'd say they're feeling really good about what they were able to accomplish with the investment capacity we created and feel really good about our ability to again demonstrate really strong progress on growth next year. We'll just have to see how the competitive landscape comes out to sort of validate that can we get back to industry-leading in 1 year. We'll take a little bit more time. But I would say, minimally, we feel really good about what we've been able to do and feel confident that based on all the work we've done that we should make strong progress in '23 admittedly.

Great. Great. That last comment there was my next question. I guess the last thing on '23 bids, how are you thinking about coped utilization when you formulated those bids?

Yes. So what I would say is given what we've seen so far in terms of 2023, there are certain things like vaccinations, testing and those things that we will be responsible for. There's treatment -- the new treatment costs and those things. That one is largely being funded by the government right now. What I would say in terms of core COVID, we would say that we are not anticipating any net headwind within our 2023 pricing that we expect that we will not see a net headwind that were carried forward -- that we're carrying forward into 2023 .

And with regards to kind of all-in baseline for '23, are you assuming any sort of material change for '22?

Yes. So a great question. So even though we are seeing some favorability so far this year, we are not assuming that, that will run rate and that, that will benefit 2023. So you can think of our core assumptions in our Medicare pricing for '23 is assuming sort of baseline trend. We are not counting on any depressed utilization or lower utilization in '22 that we carry forward. If we do see lower utilization or lower net medical costs in 2022 and if that provides some favorability, it's important to keep in mind that we would have to think about than any sort of mitigating risk adjustment considerations for that as well because given the way that program works, '22 claims will then form '23 premium. So if we do see claim favorability, it's important to keep in mind that we'll have to consider any risk adjustment offsets as we think about '23.

Perfect. Thank you so much. I guess switching gears to the value-based opportunity here, particularly CenterWell. I guess just kind of an opening question actually on CenterWell, the marketing -- is everything in the service business under the CenterWell umbrella at this point ex the hospice business like what's sort of going...

No, not yet. So the Primary Care business, in terms of the de novos are all under the CenterWell brand. We do still have even some legacy centers that have not yet migrated to the brand. So the Conviva brand is what is utilized in, say, South Florida as an example. We are we are planning to migrate the Pharmacy business. And so that is on the docket to get that one converted. And Kindred Home Health just actually recently began the migration. And so they've got a phased approach. By the end of this year, we will have all of Kindred Home Health migrated to the CenterWell brand. The hospice given our announced plans to divest that, that will not have the CenterWell brand. That will actually be looking at launching a new brand once they -- once we successfully closed that transaction with CD&R.

Perfect. Thanks for the clarification there. So back to the senior primary care piece of that, scaling the business to cover a mature percent of your MA members takes time getting that to a point where it's a material contributor to consolidated EPS takes time, especially since you're keeping some of that unit development off balance sheet for now. Can you just talk about how you're thinking about the mix of de novo growth, JV development, acquisitions and all of that kind of with respect to EPS accretion?

Sure. So we have about 214 centers we operate today. They cover about 180,000 Medicare lives under risk-based arrangements. You can think about most of those as on balance sheet. There's today, about 40 or so of those that are under the Welsh Carson agreement. That first JV, there's -- by the end of that 2022, we should have, call it, 67 or so centers that were launched into that first JV under de novo basis. And we've said that going forward, we intend to add about, call it, 50 centers a year through both de novo expansion. So think of it is about 30 de novo expansion a year and then about 20 added through M&A. You've seen us in the last, say, 2 years or so, do more M&A. That's going to be smaller to midsize practices. And we've got a nice funnel of pipeline from that, a lot of our Florida and Texas contracts from a just a network contracting standpoint, have right of first refusal language. So that's created a nice pipeline for us to do organic M&A. The nice thing about the M&A transaction is they tend to be more immediately accretive. So we won't tend to do those on balance sheet outside of the Welsh Carson arrangement and then look to mature those models over time while also continuing to drive further growth and performance in those legacy Conviva centers. The de novo, as you said, those take a number of years to get full patient panels and then to break even and then further a couple more years to get to actual sort of meaningful contribution. So as we structured the Welsh Carson deal and as we had talked to investors around the different options for supporting the level of growth that we aspire to do on the Primary Care side. The general feedback was, and then the main preference was try to do that in a way that is not dilutive to earnings or earnings growth. So we're really pleased with the terms we've been able to negotiate with the second JV with Welsh Carson. We were able to negotiate a lower cost of capital associated with that, given all the positive proof points we demonstrated from the first JV. We intend to support the next 3 years of de novo expansions under that second Welsh Carson partnership. It will also have a quick call structure, much like the first one. And so you can think of it as generally within 4 to 5 years, we would bring that cohort back on balance sheet. And that's the point at which it is achieved breakeven and then will start to more meaningfully contribute to enterprise earnings. We'll be coming out in September with an Investor Day, and we'll be sharing a lot more information about the Healthcare Services business including sort of how you can think about the future earnings contribution from both Primary Care and home and I'll walk through some of that complexity of Welsh Carson and what period will they start to more meaningfully contribute as those cohorts start to come on in 2025.

Perfect. You mentioned, I think, kind of smaller scale M&A, but obviously, valuations in the space in general have come down a lot. How fertile do you view kind of the current environment? Would you consider doing a bigger deal? And then also like how close does the target model have to be your own for it to be attractive to you?

Yes. So I would say, obviously, with the Kindred transaction, we were above our sort of target debt-to-cap. So that created a little bit less flexibility, particularly for larger scale M&A. We're comfortable we've got the capacity to sort of some of the tuck-in M&A that we intend to do on the Primary Care side, but larger scale M&A would be a little bit more challenging in the current environment til we are able to deliver. Now certainly, divesting the hospice majority interest will help us do that and create some more flexibility, so we're excited to get that done. I would say on Primary Care, and we will certainly look at larger deals if they become available. I would just say even at the current valuations, while they're lower, they're generally still fairly dilutive. So it would be probably more difficult to do unless there was a real strong strategic rationale for doing that. It's got the same -- they're all growing de novo too. And so there's the same challenge in terms of just the pressure that would put. So we would certainly look at it, but there is some challenges in doing that larger scale. I would say, generally speaking, we have found -- we've tried to convert nonrisk practices to risk. Historically, that proves to be very challenging. So our preference certainly is to look at practices that are operating under a risk-based or value-based arrangement today is a priority. It's not to say we wouldn't look at something that's under a fee-for-service arrangement. We have found that that's more difficult to drive the success that we're looking for.

Okay. That's great. So with that in mind, I do think the value-based senior Primary Care business is probably better understood by investors than value-based home health or value-based Pharmacy does seem a little more opaque. Can you just shed a little more light on how you go about integrating all 3, a bit on what those cap arrangements actually look like and how seamless it is for the consumer?

Yes. So I would say, so -- so we've got mature and well-established value-based arrangements on the Primary Care side. I would say in the home space, that's the next one we're very excited about and it's really the sort of genesis of why we wanted to invest in great Kindred in the first place. We do have a belief that more care will be delivered in the home over time because consumers would prefer it and technology and other enablement will make that possible. Some of the barriers for others trying to do home-based care at scale in the past has been not having access to a nationally scaled labor force. And that was what was really attractive about Kindred. We've done a lot of work the last number of years through our partnership with TPG and Welsh Carson and Kindred, where we've learned a lot more about some of the challenges in the way home health is today. And what we're excited about is they serve a higher acuity population. Members who have a need and they're eligible for home health, they're hospitalized at 5 times the rate of people who are not eligible. So it is a complex population and we believe there's a lot of opportunity to reduce unnecessary ER events, which tend to lead to admissions and oftentimes post-acute care and oftentimes, those individuals never make it back home. So a lot of value if you can keep them in the home. We have a belief that there is a need to bring a value-based mindset to home health, which just frankly doesn't exist today. It's largely a fee-for-service environment. We acquired Kindred, which gives us a nationally scaled labor force. We also acquired One Home, which does value-based home health DME and infusion today for us in Florida and Texas and brought the additional capabilities we need around utilization management, network management and some of the clinical capabilities. So we actually just launched the first expansion of that model in our Mid-Atlantic states actually June 1. We intend to layer that on top of about 50% of our members within 5 years. And the way that model works is we contract with One Home on a capitated basis for home health deeming infusion, and they're responsible for managing that spend down. They do that quite effectively today. They act as a convener and take hold of that authorization that comes in and then take care of actually referring all of those services. So it allows you to also direct into high-quality providers like Kindred so we can drive a greater degree of penetration than we could otherwise. So we're getting ready to expand that. We will continue to bring clinical innovation to that. And also, we believe have greater impact than you see today on ER events, admissions, et cetera, so that we create even greater value for the health plan. And then the last thing I would say to your point of broader integration, we are in the early stages, I would say, of really proving what's possible when you use all of these assets in conjunction with the health plan. And we have dedicated leadership whose job it is now to figure out. We've got 2 markets Atlanta and Houston, where we broadly have all of our capabilities and their job every day when they wake up is to figure out how do I get more health plan members utilizing our Healthcare Services. The goal is to have them using 2 or more of those services. How do you get more people that are staying Kindred home health, you don't have a strong Primary Care provider into our CenterWell clinics. If they're in original Medicare and they don't have access to all the benefits of MA, how do we get them into our sales centers, so they can learn about the benefits and hopefully enroll in MA. So we're working on now, and we're excited over time to just share what we're learning and what value beyond the discrete earnings contribution of those lines of businesses we can draw, whether that's increased hours, increased retention and loyalty, better outcomes, and we're excited about what we think the potential is, and we'll share that with you as that work matured.

Perfect. I think we're a couple of minutes over already. So I really appreciate you being here. Thanks for all your comments, and I hope everyone enjoys the conference.

All right. Thank you.