Humana Inc. (HUM) Earnings Call Transcript & Summary

You've reiterated '22 guidance today. As we think about inpatient/outpatient utilization levels compared to your initial expectations, maybe just talk about how things came out for 2022? And then, are you looking for any pent-up demand as we start to think about 2023?

Yes. So for 2022, one thing that's important to note is that looking at '22 and heading into the year, you had to fully assess an account for the impact of mortality as a result of COVID on claims trend and the resulting morbidity of the population. And we really think we were probably ahead of some others in fully analyzing that. Disease rates were up about 25% as a result of COVID. And while that doesn't maybe sound like a one on an absolute sort of number basis, it's quite significant when you think about the impact to both risk scores and revenue yield and claims trend because the individuals who are more susceptible to pass away due to COVID tend to have multiple chronic morbidities, much higher than average risk scores and much higher than average claims. So all of that we assessed and built into our expectations for trend in 2022. And so that resulted in some negative premium yield discretely and negative claims trend. As we saw claims develop over the course of the year up until the fourth quarter, which I'll comment on separately, we continue to see even better medical cost turn than we had anticipated. As we analyze the source of that, what we found is our estimates around morbidity and mortality were actually spot on, like we got that right. The source of the favorability was largely improved performance from our utilization management programs and better-than-expected results, continued inpatient to outpatient movement. Our initial expectations were that it would be relatively flat because CMS had reinstated the inpatient-only list, and we thought provider behavior would shift procedures back to the inpatient setting more broadly. We are very pleased to see that we continue to see movement of particularly orthopedic and musculoskeletal to the outpatient setting and then flu in the first quarter, as I said. So that was really consistent throughout the first 3 quarters of the year. As we got into the fourth quarter, again, we were seeing that until Thanksgiving. We did then see the uptake with flu and COVID, as I said, that did result in overall higher admissions than we had expected. And then we also had to deal with, some of you may have seen, CMS changed the reimbursement for 340B. It was effective as of September 28. That's not small. That's discretely impacting the fourth quarter. It does not carry into 2023, but will impact us discretely in the fourth quarter. So previously, we've shared that we thought the consensus on MLR for retail and consolidated was in line with our expectations. We now think that we will probably come in slightly above consensus for the fourth quarter because of those dynamics and because of the fact that we want to maintain the reserve strengthening that we've commented on in the third quarter and earlier this year. We don't want to compromise that just for the sake of fourth quarter MLR. When these are discrete things in the quarter that do not have any carryover impact into '23. And that's why you saw us reiterate our guidance this morning for '23 because these items are just discretely onetime items that we'll deal with in the fourth quarter. And then your question about pent-up demand, I would say we've seen some of that has historically been where we've seen really high spikes in COVID throughout the pandemic. And after that, we would see within discrete service categories, typically elective surgeries as well as chemotherapy, we would see some, what we call, above baseline utilization. But then it would typically in a reasonably -- reasonable period of time come back down. We haven't had any of those major surges of COVID in a while. So our view would be that there really isn't pent-up demand that we have to be concerned about. What we are more concerned about is the rebound in health care capacity. We all know that there's some level of constraint within staffing, the timing impact on utilization. We have anticipated some return of that capacity and resulting utilization in 2023, although we do think it will take a number of years before it fully restores to pre-COVID levels, but we are anticipating incremental health care capacity returns in '23.

What about acuity levels? Like we've heard other managed care companies talk about that perhaps if you put off a surgery last year now that you need some -- you're not going to get a second surgery, right, but maybe it's going to be a higher level of acuity surgery. Are you anticipating that going into 2023?

We haven't seen anything that we would call an outlier or have a significant concern. I mean it really is interesting, the impact of mortality. The morbidity of the population is much lower than it used to, and it will take a number of years for that to, frankly, even get back on par with where it was pre-COVID. And so again, the pent-up demand, we feel like has worked its way through -- throughout the pandemic and our primarily our value providers, where it's really hard to make sure members were getting the care that they need. They were staying medication adherent. We were making sure they had access to food and other things and getting their vaccines and screenings and everything else once the system opened back up. So far, we haven't seen anything. There have been some reports that suggest that if you had COVID, you might be more susceptible of mortality or heart attacks in particular, cardiac events. Subsequent to that, we have analyzed that and so far, at least we haven't seen that within our population. So we'll certainly continue to monitor it. But I would say anything -- in terms of the trends that we anticipated for '23, we feel really good about it.

A couple of topics out of DC. First would be just MA rates for 2024. We'll hear about the preliminary rate in the first part of the year and then say the final rate. But I've heard you talk in the past that you believe that this is going to move more towards normalization than what we've seen in the last few years. Maybe just explain your line of thinking of what you think the rates could potentially look like for 2024?

Yes. So in general, I would say our view, which we said this last year, so take that for what it's worth because we got it wrong last year. But what our view is, is that we benefited from some favorable rate noticed just the last couple of years. We didn't necessarily anticipate that, that would be as strong in 2023, and that proved to be wrong and it was quite strong. So we continue to maintain that we don't anticipate that, that sort of 4% plus rate environment will necessarily continue long term. At the same time, there continues to be and support for the program. Nearly 50% of all Medicare beneficiaries have chosen Medicare Advantage. So there's a strong desire to maintain stability in the program. So we certainly think it will be more modest, we would say something in the 0% to 2% range would not be unreasonable to expect. And in that environment, we think that we can continue to deliver and maintain the strong value proposition and industry-leading growth that we've seen this year. But however, as you think about '24, there is the complexity that we anticipate will come through the rate What I just described on mortality and morbidity, I'm not convinced that, that was fully factored into the '23 rate notice that came forward. And so if there is some sort of negative restatements that come through this year's rate notice, the thing that should offset that, based on our analysis, is the normalization factor. And that factor is designed to return the risk for to a 1.0 average. And the last couple of years, that has been a negative adjustment as the risk scores creeped up as the demographic population ages and risk was progressed. So they had to bring it back down to 1.0. With COVID, as I mentioned, because of the individuals who passed away, had a much higher than typical risk score, it's now dropped below 1.0. And so in theory, you need a positive normalization factor to bring it back. What you saw in the '23 rate notice is, for the first time, they did not bring in 2021 data into the normalization factor. And they explicitly said they didn't do that because of the impact of COVID and noise they believed was in there. That's all true. It just doesn't go away. It's still there. So when they do that adjustment this year and bring that data in, if we do see some negative impact in terms of restatements to trend, we would expect then that you would see mitigation through the normalization factor, which would -- should also acknowledge the impacts. And there's other complexity of how do they think about the cost of COVID treatment and vaccines and things where at least initially, we're hearing that they may be priced higher than what they've been charging the government. So those are all things wanting to understand how CMS is considered in the rate book as well as just the inflationary environment, what do they assume for provider reimbursement changes, which -- so we all know, unfortunately, don't get set until after the bid. So it's something we need to be thoughtful about as we develop our pricing for '24.

Great. The other big topic in DC is February 1 RADV. I supposed the ruling is supposed to come. I think probably a lot of people in this room know want to understand this. But how is Humana thinking about it? And what are going to be the key variables for us to watch when that announcement comes?

Sure. So lots of interesting questions. We have the same interesting questions as all of you. Unfortunately, CMS has not really engaged with the industry since the comment period has closed. So we don't really have any visibility into how they're thinking about it. But when the proposal came out, I think Humana and everyone across the industry was fairly consistent in our feedback to CMS. And our issue with the proposed rule fundamentally was related to whether or not they acknowledge the need for fee-for-service user in program. We absolutely think a fee-for-service adjuster is needed. The proposed rule suggested that one was not. And so that's really where the commentary focus. So what will be -- they did send something to OMB for scoring. So it does appear that they have something that hopefully they're prepared to release prior to the [ 21 ] deadline that they've set. What we'll be looking for is hopefully an acknowledgment that a fee-for-service adjuster is necessary to recognize the inherent error rate that's in sort of all claims data sets within Medicare. Assuming that they do acknowledge that, then the question will be, okay, how is it calculated, how is it defined and do we view as sufficient based on sort of our own analysis? And that will be complex and require an assessment of exactly how they define it. Is it retrospective? Is it prospective? How are they going to run the audit programs going forward? How will they extrapolate the results? There's a lot of complexity that we'll have to work through. But primarily, we'll be looking for an acknowledgment of the need for an adjuster and then hopefully be able to assess the fact of whether it's reasonable or not. If they take a position that an adjuster is not necessary like they did in the proposed rule, then I think as we and others have said, the industry is likely to result to litigation is a way to ultimately resolve it, which will tie us all up in litigation probably for a number of years.

And I think the question we've gotten around that, and I think you've heard this question as well, does that put a stay on this? Like what would happen if you were to litigate as an industry?

It's a great question. I mean, there's no way to we'll have to evaluate from a just legal perspective, what the options are and the likelihood of that prevailing. I would say there'll also probably be a very strong public policy response to. I think it was something terribly onerous that was going to impact '24 pricing for beneficiaries. I think you'd see a very strong sort of public policy reaction to that and say, look, is this really what you intend to do and try to seek some relief there as well. It's complicated because so far, CMS has only audited through 2014. So this is all sort of well in the past. The question is, are they -- whatever they decided to be, where they going to now go back and audit 2015 through current? Arguably, that's all about whether or not there's any obligation that we would have retrospectively. And is there reliability associated with that, we'll have to deal with. In terms of 2024, who knows when they might audit 2024, and that's what you would arguably bake into pricing. I think what you can expect from us is if it's an onerous position by CMS, I think what we would say is, look, we're not going to have a really negative impact to pricing that we're going to put for it, there's real uncertainty about what's going to happen. I think we'll let it play out. If they come out and acknowledge need for a fee-for-service adjuster, and it's reasonable, then this is an administrative burden but a nonissue because from all the work we've done, there's no reason to think that the error rate within MA is any higher than fee-for-service. And frankly, it should be lower based on all the things we do to ensure accurate coding and documentation. If they come out and say there's -- they acknowledged need for an adjuster, but we think it's insufficient, that's where it's a little bit grayer. And if it was sort of reasonably close to what we thought was necessary, maybe the industry just says, look, we'll just price for it and move on to just get this past us. If it's viewed as materially insignificant, then I think we're back in the square of, okay, we're going to reduce litigation. But I would say we're not going to do anything highly disruptive. You could probably expect for something that is highly uncertain in terms of the ultimate resolution.

One other thing that's come up when we think about 2024 pricing is that Eli Lilly's Alzheimer's drug is projected to get approval, there could be pricing from CMS. How do we think about big drugs like that and the time line of that and how you'll absorb that as a health plan?

So right now, all of these drugs are covered by the NEC that's been issued for the class. And so there are some significant limitations in terms of how to access those drugs as a result of them. So it has to be part of a randomized controlled trial. You have to have certain sort of test run to sort of validate the presence of certain things. So based on all of the limitations in place currently, our belief is that you will see very low uptake in utilization. And so it's really not a material item. We do think some of these manufacturers may look for, go back and ask them to reevaluate the NEC. That tends to be a longer process, probably 6 or more months, and so we'll have to evaluate if that would occur. If it would and they would get it opens up in terms of the utilization, then it goes back to, okay, will trigger the significant cost policy, which does provide some installation for us until we can get it into pricing. Longer term, as these drugs go through trials and if they do prove to be effective, then that's something that obviously the industry would look to price into its products going forward.

You started the conversation today talking about CenterWell, right, and talking about some of those businesses. You have many irons in the fire today as it pertains to primary care with investments in Cano, Oak Street, You're building out the CenterWell clinics, de novo and through your JV relationship, building centers, both inorganically. But when we think about your current strategy and we think about opening large primary care deals or continuing this de novo, like is there one preference that you have versus another? Do you see M&A opportunity in the marketplace?

Yes. So I think as we laid out our Investor Day, we continue to support the continued de novo expansion, which we feel really good about. As I mentioned on the MA side, we saw strong growth in the health care side, and some of that benefits our CenterWell assets as well. We grew in areas where they have a strong presence as well. And so as I think I mentioned, we expect to see sort of 2x the growth this AEP versus last. So we feel really good about sort of their continued ability to demonstrate that they can deliver against that J-curve that we shared with you at Investor Day, which in the early stages for de novo is all about sort of patient panel growth and then getting engaged with those members and then sort of building risk for progression and health outcomes over time. So we feel really good about that. They intend to open, call it, roughly 30 centers a year. And we think just given sort of all that, as you said, that they're managing that that's sort of the right level of ambition for them to make sure that we can sort of do that well and continue to deliver against expectations. The same time though, they do intend to continue to focus on probably more smaller to midsized tuck-in M&A. We've described before that we had some creative contracting provisions sort of early on, particularly in Florida and Texas that give us a right of first refusal around a lot of these primary care assets. And so if they have come to market, it's provided a really nice pipeline and attractive economics for us to integrate those assets into our existing portfolio. And so you'll see us continue to do that. I would say we'll continue to look at other platforms. And if larger ones come to market, and we've had a lot of questions about this previously and certainly, valuations at one time were somewhat prohibitive. They would be highly dilutive typically, particularly those that are growing. So that would be a challenge for us. Obviously, valuations in some cases have come way down. So we'll certainly always look at those. We would be looking for can it strategically advance our capabilities? Can it address sort of a geographic area of interest? Certainly look at it from a defensive position if we had any concerns. But I would say, generally speaking, we're less interested in the larger scale opportunities. We just feel really confident about what we've been able to do organically. And as we've demonstrated historically, continue to be efficient with our deployment of capital, creative in how we've thought about partnerships there. And so I think you continue to see us look for ways to do that, but probably continue to focus on smaller and mid-sized tuck-ins.

You touched on home health earlier. I think you said 750,000, 14% penetration, getting to 50% over time on the home health side. At your Analyst Day in September, you talked about the 3 health care services, CenterWell, Home Health, and Pharmacy could drive 2 to 4x higher margins. You noted that at that time, there were very few that utilized all 3, right? So can you give us an idea like the time line to get more of your population onto that platform to be able to achieve that, that margin improvement?

Sure. and so when we laid out some of our ambition here at Investor Day too and recognize it's sort of early innings in this work. But we do have now dedicated leadership and staff that's focused on this. I would say, historically, we've approached it more sort of discreetly each line of business sort of did its own thing to try to drive penetration and whatnot, but not in a coordinated way as we could, and certainly not thinking through how we can truly sort of improve the experience and data sharing and interoperability and many other things that could actually accelerate some of that adoption. So we now have that infrastructure in place. The Pharmacy asset is certainly the most mature. We've had that for quite a long time. And so we have industry-leading penetration. So we demonstrated that when we're focused on it, we can drive that utilization. In terms of CenterWell Primary Care, that's been more of an issue of just expanding the footprint, which we continue to be focused on. And as I mentioned, we're really pleased with some of the strong growth that they'll report this year. As the number of members in our primary care assets continues to grow, that really is, I would say, our greatest opportunity to drive then that integrated sort of experience we're looking for because if you can get primary care, they sort of hold the string, like they can control something refer into CenterWell Pharmacy, they can refer into CenterWell Home Health based on the benefits they know will be received through that. So we do have our primary care assets very focused on for the patients that they're managing. CenterWell Home Health is one example. We'll roll out the value-based model and that will inherently get more people in the model. But what we really want to see is the CenterWell Primary Care physicians then work with our Home Health assets to say, okay, what -- when you are serving my patients, why are they seeing a readmission, what is it that's needed? And if you brought us in the primary care physician, could we offer another alternative that would keep them at home and avoid that readmission? So that's what we're hoping to accelerate is really deeply understanding the drivers of some of those adverse outcomes and see what intervention is required and do those assets give us the ability to offer an alternate intervention. So while we don't have a lot to share yet, we do think over the next couple of years, as we have more patients using multiple of those services and we increase our learning that we'll be able to share with you, what are the outcomes that we can demonstrate, both in terms of reducing total cost of care and admissions, but also just deeper engagement, which should lead to better STARS scores, which should lead to better revenue yield and then hopefully, retention and other positive benefits both for the health plan and health care services over time.

So Susan, as we sit here today, you're in a great position, right? You just came out with membership numbers that were far better than we expected when you think of the lineup of those members better than kind of bringing out new members. You talk about this whole health care strategy that you have. What do you think investors don't understand today that you'd like them to understand better over the next 12 months about Humana?

I do think Investor Day went a long way to sort of better sort of educating everyone on the breadth of the capabilities that we have. I think prior to Investor Day, understandably, a lot of focus was on the Medicare Advantage Health Plan, which it should be. It will continue to be the largest driver of earnings and EPS progression. But we haven't shared a lot of detail on our primary care capabilities in particular. And certainly, as other assets came to market and the industry investors better understood the value of those assets and then we said "Well gosh, we've got the biggest one and the most mature one" and people sort of scratched their heads and said, "Well gosh, you don't get any value for that" and we agree. So that was really the goal of Investor Days to make sure everyone understood the breadth and depth of those assets, what the current sort of expectations were for those assets and why you didn't see more earnings contribution, but yet demonstrate the value of those assets. And then what our expectations are much longer term and the contribution you can expect more sort of post 2025. And so I think what we will continue to try to do is demonstrate proof points and demonstrate that we are on the trajectory we laid out that you can have confidence and continue to build your confidence that, that value is coming. And so long as we're going to be measured and valued based on earnings sort of contribution, we need to get past that 2025 day when those assets will really start more materially contributing to our earnings progression. And so I think for now, there's still probably this is okay, well, that's really coming and when. And so I think we'll continue to look through our disclosures to show additional proof points that demonstrate we're on the trajectory we told you about and are able to long-term value that...

I'm looking forward to it. Thank you very much for joining us today.

Absolutely.

That's great. Thank you so much, Susan.