Humana Inc. (HUM) Earnings Call Transcript & Summary

Thanks for joining us. Gary Taylor, cover health care facilities and managed care here at Cowen. It's my pleasure to introduce Humana. Most of you know, one of the largest Medicare Advantage health insurance and provider companies in the U.S., over 17 million members in this insurance segment also provides primary care, other related health care services via CenterWell and over 230 primary care centers, a growing value-based care home model operates Humana at Home, and we have Chief Executive, Bruce Broussard with us today. So good morning. Thanks for joining us.

Thanks for having us.

A lot of stuff going on in Medicare, at least from a regulatory perspective right now. But maybe just first, walk us through the journey that Humana has been on a little bit over the last year or so, where you made this concerted effort to find savings across the enterprise to invest that in benefit. It appears you've done that very successfully, given the amount of enrollment growth that you're going to see this year. But is there anything about that, that surprised you? And what's sort of your reaction to the amount of enrollment growth that you guys have been able to generate for 2023?

Yes. Maybe just to put it in context, last year, we ended 2022 with a below-expectation enrollment, 4.5% or so growth, which is unusual for us. We've been growing greater than market since -- really since the '15 timeframe. So we needed to really step back and reinvest in the product. We go back a little bit, but the market also is very aggressive in 2022 and came back in 2023 sort of our way. A few things that we've done to invest in the product. First, we invested in where our core product is through the Part B giveback area, really invested in the duals through healthy food card and that has been successful. And then the third area is, we really expanded our supplemental benefits, specifically in the dental area. And those 3 things really helped us grow in the marketplace and disposition the product. The second thing that helped us this year and probably was really one of our surprises is just the dependability of the brand. The brand last year and the aggressiveness of some of the growth by some of our competitors, they really ran their pump coverage in. And they resolves really frustrated brokerage thing and that brokerage community is like a very dependable brand. They're a brand that has strong retention, the ability to predict that retention. So included in that was our Stars performance this year and the ability for them to see multiyear in that. And I think the combination of our product positioning, our service and our Net Promoter Score along with our Stars and our relationship and the investment that we've made in the brokerage community this year has created this ability not only to compete by the product itself, but also the ability to have dependability over multiple years.

And how would you best summarize some of the changes you made in the distribution channel with the brokers? I think you felt, in 2022, that electronic channel kind of let you down and you wanted to shift to some degree away from that. How would you summarize what you've done, and how well that's gone? Currently it's going pretty well, but...

A few things there. First, we really didn't run away from the telephonic channel, which is really what we saw a lot of churn in and we really worked with them to not only focus on sales, but focus on retention. I think that's good for their business model along with our business model. And so we worked with them and giving them incentives to not only get paid for the sale, but also get paid for retention. So that was a good investment. But then the second thing that we did is, we really invested in the field brokerage channel, both our internal and external and the ability to do that in a way that creates consistency because what we find, the lifetime of value in a more personal relationship is much greater. The churn is less, the long-term value is greater for us. And so we've invested in that, not only in the investment of servicing them better, obviously, ensuring that we're competitive on the commission side, but also the ability for us to expand our relationships over the last number of years and especially, last year.

And when you think about sort of the enterprise-wide value creation or cost savings strategy or how do you describe that? Do you think that majority of that impact has been invested in 2023 benefits, 2023 distribution channel changes? Or is there ongoing investment that can continue to play out in '23 or '24? Or this -- in other words, this kind of -- we made a big shift, we got a big bang for the buck and then we'll just back to normal from there? Or do you think there's sort of multiyear legs on some of these changes that you play?

Obviously, the majority of it was invested in 2022 and for 2023 benefits, the distribution channel and marketing. Every year, we have the opportunity to continue to invest through our leverage areas, which would be in our trend vendors, continued clinical cost management. Second area would be in our administrative activities that we have, productivity improvement, which -- those 2 areas drive a considerable value for us each year and allow us to invest in that. I would say, '22's investment for '23 really positioned us in the marketplace to be where we want to be and maintaining that position is very critical for us. And you'll see, the company worked very hard to maintain that position going forward as compared to our competitors. So I think we're in a really good position. I think when you combine that with our Stars performance as compared to others, it really positions us to compete well in the foreseeable year.

And how do you feel -- I think now with your -- I think you've raised your enrollment guidance at least twice since you initially gave it. And so on quarter that core individual...

That's 3x, but...

3x, okay. 3x. I think we're all going to be up almost 17% year-over-year there. Is there a level -- I get this question a lot, is there a level of growth that is too much? Is there -- you might end up growing twice the market when it's also done and CMS gets its files together, we can actually see the real enrollment growth. But is there any concept around adverse selection or maybe the benefits were too rich or anything at that level of enrollment growth that give you any pause?

No, we feel very comfortable with the growth today and managing it for a number of reasons. I think, overall, we look at a very minimal impact on our medical loss ratio being maybe 10 basis points or so. So very minimal impact of ours. Over the years, a new member is usually breakeven to a little bit positive. The second thing that's unique for 2023 is that we had a really great growth in our core markets with the Part B giveback. And the Part B giveback what we're seeing attracts a more healthier customer then. The other aspect is that we have had good growth in the duals area specifically for the healthy food card. And in our estimate for 2023, we assumed a very high utilization of the food card. And what we're seeing in our trends and our admissions per thousands today is very consistent with our expectations. So we feel really good about the year. We feel good about the book that we have and it's very manageable. On top of that, our ability to manage just the volume has been very well executed. Our Net Promoter Scores for the first few months have been really solid from a service point of view. Our hold times have been meeting our standards. So we don't see any kind of dilution in our service, and we aren't seeing it in the utilization.

Got you. It's not intuitive to me -- I guess, 2 things on the Part B giveback piece. One, that's a far less common benefit than I sort of naturally -- I don't know, inherently assumed we sort of look through. Everything last year, we find it's not really -- it's common of a benefit, but it's not intuitive to me why that tracks a healthier customer. Is there a thesis on it that or it is just what it is?

We usually have a lesser benefit and because the -- obviously, the premium is much less. It's a negative premium, and therefore, you have to position and price it that way. And so there's not as rich list of benefits and they're taking that trade off. If you want to put an analogy, it's similar to the Part B low-premium plans that you have, is that usually you get a healthier population there.

Got you. That's interesting. Just going to the CMS files for a second. So we keep -- you've guided this enrollment growth. CMS keeps putting out the files, and we're not yet seeing what you think you have, and now we're told, the March file will be fully corrected. Is there anything to add on that? Why CMS doesn't have the numbers together yet? Or you know who signed up and you're solid on your guide and...

February is soft. January was a little messy, but yes, in February, they've card-approved. It showed $500,000 for us, and that's what we were estimating it to be, but -- so we're in good shape.

Okay. Before we take -- before we dive off the cliff here into all the regulatory stuff, let's do one more -- let's do something else different first. So last week or the week before, you announced you're exiting your commercial business. It's not the largest part of the company by any respect, but just kind of walk us through that process. How you got there? Why now? It hasn't been a significant contributor to earnings for some time. So why now have you decided to exit?

A few things there. First, as we've -- over the years, we've really tried to optimize that business, both from a cost point of view and also from a -- just a pricing point of view. And when you optimize, you're not making investments and also you're shrinking the book. And a few years ago, we decided that we really need to exit it as a result of just not being competitive in the marketplace and also the opportunity cost that had for us as an organization. And we have a rich opportunity in our Medicare Advantage. We are growing in our Medicare business quite well. Our CenterWell provider assets are doing quite well. And so this was a distraction from resources for the organization, both capital and in addition, people resource. And in addition, we weren't investing in it to keep it competitive. So we decided to exit it. The question we went through and I answered, is it better to sell it? Or is it better to exit and just take the statutory capital? We went through an abbreviated process to see if that made any sense to sell it. We came to the conclusion it did not for a few reasons. First, just the length of the justice process isn't -- is long, and we felt that it was going to be elongated for that, one reason. The second, the contracts are fairly short, and they're year contracts. So if you're putting the book up for sale, it's usually going to mean that is probably a good bit of your customers during that period of time because we announced a transaction that will go through the justice process. And then you have stranded cost and fixed cost, and therefore, we'd like that and said, we're going to be holding on to this book during this process. We're going to have to how we lose some customers, and we went through the calculation and made more sense to take out the $700 million or so statutory capital and do it really equivalent.

Got you. And so the accounting for that is not going to be a discontinued up. So your GAAP accounting is still going to reflect it, but I think, I've been able to get all of the Street to sort of successfully move to sort of a non-GAAP metrics. Okay.

The intent is to be non-GAAP.

Got it. And that sale is going to free up $500 million or $600 million?

About $600 million or more than that.

$600 million. Over 18 months or...

Before the state released it or whatever.

Okay. So let's move to some of the MA regulatory questions because I think since the RADV rule came out and the advance notice came out, it's probably 85% of all my incoming calls are about what do these rules mean, how do they impact the Medicare carriers. So let's start just with advance notice. So CMS puts out negative 2.3% all-in. That included, on average, about 1 point of Star rating decline, which you won't have. So just sort of we think from the get-go, maybe for Humana, maybe it's a little more like negative 1%, but still quite a step down from what we've seen in recent years and maybe the weakest rate update in almost a decade. So maybe just high level, a negative rate update, how does that impact your 2024 outlook that you've provided?

Maybe just some context about the rate notice. And first, I would -- the rate notice should not for the investors take any pause in the support for the program. If you were to take out the medical education component of that, the indirect medical education and take out also the risk adjustment -- I know we'll get into that detail in a minute. The rate notice would have been very similar to what it has been these 2 adjustments, which are more onetime versus long-term adjustments are similar to what we've seen in the past. So I would say, first, it still has the support both within Congress and within the general public. As we look at the rate notice and think about the positioning for 2024, there's a lot that goes into that. We're not in the time to share how we're going to approach it, but just a few things I think investors should think about. One is, as you mentioned, our Stars performance will carry us rather than others in the 2024. Second, the growth that we've had in 2023 are exceeds what we were estimating in our $37 commitment that we made in our investor meeting in September, and therefore, that gives us a great running room for that. Our positioning with the distribution as being -- channels being very dependable, having really good retention. I think really sets us up for a strong 2024 irrelevant of the rate notice. How we deal with the rate notice in each of the markets because it is geographically very dispersed, and how we deal with that, I think, will be something that's in what we've done with -- in the past, we were dealt with the ACA implementation. We dealt with this in 2016 and '17 when they had recalibration with the risk adjustment similar to what they're doing now. So we've been able to deal with it. And what we found in those years is that actually, we do better. We do better as a result of our position in the marketplace, our ability to compete, our relationship with the distribution side of the equation. So we feel really good about it, but the details will be coming over the next 3 or 4 months.

Better in terms of share gain versus what? What happened in there?

We usually grow greater than the month. Yes.

So if you just think about -- and you could even throw in the health industry key, but came in and out of the numbers, I think, 3x with all the holidays as a small example of sort of addressing essentially like an adverse rate impact inside your bid strategy and your benefit. But every year is a balance between emphasizing benefits and therefore, likely enrollment versus margin. So it would seem if the advance notice stands, everybody has to -- well, you have that same balance to do, but it sure seems to lean towards I want to protect margins, I want to do less in benefits and I would think and see to believe that would have some impact in terms of industry enrollment growth. So I mean on the face of it, do you think it's unrealistic to think the industry growth flows to some degree in '24, if this is what -- if everybody is trying to rain in benefits, it's a little bit to protect margin, maybe you're doing less of that than others. But is it reasonable to think you have a slower growth year? Or do you think that's not necessarily...

Obviously, it's an industry and company. Those are 2 different questions. On the industry side, we still see a robust growth, now whether that's the 9% or whether that's 7%. I think it's -- that's something to debate on. I really believe that MA has such a great value proposition over Medicare fee-for-service that people will choose in there. In our analysis, it's about $184 difference between -- on a PMPM basis between Medicaid -- Medicare fee-for-service versus Medicare Advantage. So a much stronger value proposition. What's being proposed does not deteriorate that anywhere close to what the value is, and so we see a really good opportunity to continue to grow as an industry. As I mentioned before, we found in the years that there's really pressure on the rate notice. We do much better, and I feel that 2024 will be [ much better ].

Interesting. And then the Street has become sort of conditioned to think the final notice is always a little better than the advance notice. I think in the last 5 years, it's improved 100 basis points or so, though usually, I think that tweeting a little bit of fee-for-service normalization, a little bit of USPCC trend. Whereas this year, the biggest negative weight inside the rule -- inherent in the rule is the risk for model change. So any reason to be more or less optimistic about the final rule getting a little better? And then maybe specifically on the risk score, we had a KOL panel yesterday that was optimistically speculating maybe a 2-year phase and last time, the risk remodel changed materially as a 3-year phase in. So anything yet to share to be optimistic that the rule improves or it's phased in or I think the industry has a health equity angle that is suggesting that the risk score model impacts some populations disproportionately. I mean, we've got 3 weeks ago, I guess, or a month, almost, but anything there that you're optimistic about yet? Or you think for now we should just assume...

I would say first, yesterday, we submitted our comments to CMS on the rate notice. So that we're in the -- we're now done with the comment moving into their analysis of it. I would say that CMS is listening and taking input from both the industry and from the general public. And congressionally, I think there is also activity that's there, not from a regulatory point of view, just from Congress understanding what it's doing to their constituencies. So I think there's a lot of conversation going on between CMS and the administration, congressional and the industry. That's always a positive. It's always positive to have that. What that ultimately turns out to be, I think, is speculative. You could see it phase in based on history. That could make some sense. It's not as blunt -- could obviously then saying them putting their feet on the ground and saying, no, it's going to be just a implementation and all of it. But I do believe there's comp heads that are working to try to get what we see it done according to CMS, but to do it in a way that is going to not hurt the beneficiary in any material line.

And just going to the risk score model, specifically, what we've been hearing from some of the actuaries and some of the plans is that negative 3.1% that's embedded, that's supposed to be sort of the industry average. For some plans, for some risk-bearing providers that numbers, double-digit negative. For others, it's double-digit positive. That is a really wide range. And my understanding is, CMS sort of gave you a tool you could just plug in, all the patients you had and sort of see where you land. Is there any comment there yet on how the risk model specifically has impact on your patient population?

We ran the same analysis, both using their tools, but also using our internal tools and came very close to what their estimate was. So for us, as an organization, that is aligned with what they had published. But you're right, it is -- the dispersion of impact is very high. And the dispersion, the commonality of that is, if you have a high risk score, you're going to be impacted more. That's sort of the commonality. And what does that mean? Usually that means the higher chronic conditions and populations like duals and under-resource populations are going to be impacted the most because their conditions usually are high. Therefore, they have higher risk scores. Providers that have high-risk scores, the more value-based oriented providers will probably be impacted more than the ones that are -- have lower risk scores and less oriented to the more complicated conditions. And then that really looks into geographic areas. So places like -- South Florida would be an example of that. California, Nevada, South of Texas would be an example where the geographic impact could be greater. The unique thing of some of those geographic markets is that they also have higher benefits, and therefore, the ability to reduce the benefits without significantly impacting the value when compared to Medicare fee-for-service has a lot more options, too. So you do have this dispersion, and that's why I said, it's not as easy as just playing 3% or 4% change in the rate. And therefore, I think there's going to be a lot of science that's going to have to go into how you adjust your benefits going into the 2024 timeframe.

And does this impact the risk score model change and sort of that dynamic of higher coded, more chronic patients, tools et cetera, which obviously has been a big focus of the industry to grow into that because, one, it's highly reimbursed, but it's also very target-rich in terms of medical savings opportunity. Is this -- is the risk score model change significant enough to -- do you think it has any impact on your value-based care strategies that you guys have been pursuing? Is there anything to rethink there? Or you think it's just we live with it and we...

We adjust and move on, but Gary, the trend of value-based payment is a trend that will be with us for quite some time, and it's a line that's like this. Now does that line goes straight up? It goes like this and has a little bumps here and there. We saw this in '16, there was some recalibration in the diabetes area. And so I would say that I -- we are highly committed to that payment model. We're highly committed to that population. This is just a change as you have to manage them.

Got it. And you had alluded to this a little earlier, but 2025 from Investor Day, $37 per share earnings' target. We haven't added -- not going to have a chance to talk about RADV. We've talked about advance notice. But that $37, you still feel solid about that, if not a slight tailwind because of how much enrollment growth you've had in 2023?

We feel good about it and where we are today. And I guess, Susan remarked a few weeks ago, we're just getting done with our first 2 quarters since announcing it, and we're going to stay firm on the $37 now.

Okay. Well, thanks for joining us. I really appreciate it.

Have a good conference.