Humana Inc. (HUM) Earnings Call Transcript & Summary

Introducing Humana as one of the largest health insurance companies focused on the senior population, also has a Medicaid business as well as a growing senior-focused services business. Presenting today, we have Bruce Broussard, who is the President and CEO; as well as Susan Diamond, who's the CFO; and Lisa Stoner from Investor Relations is in the room as well.So I think we're going to just jump right into questions. So I guess one of the things that I'm trying to get a strong answer to throughout this week and asking everybody is just about Q1 utilization because we've seen really strong volume numbers from the providers. from the med tech companies, broadly speaking, and the managed care companies routinely say, no, everything is fine. So we'd love to kind of hear your view about how we can square those 2 seemingly in congruent concepts?

Sure. Happy to. So as you mentioned on our first quarter call, part of this is obviously how is it performing relative to what you expected? And we've been saying throughout the back half of last year, that as we price for 2023, we did contemplate that we would see normalized trend development in 2023, off of our 2022 baseline. And so we did plan for a normalized trend, and you can think of that as just sort of typical trend that you would apply for utilization and unit cost on top of your starting point. The other thing that is specific to the first quarter is that if you remember this time last year, we were experiencing in January, in particular, a COVID surge. So we actually had the highest level of COVID hospitalizations that we had seen through the pandemic. What was interesting is that surge came down much more quickly than we had seen in prior surges. And as we commented this time last year, we did not see a rebound in non-COVID utilization at the same pace that COVID decline. And so therefore, in the first quarter of '22, you did have some overall depressed utilization that we experienced. So as we thought about 2022 trends on a percentage basis, we would have said you should anticipate a higher trend in the first quarter of '23, particularly if you're referring to non-COVID utilization trends. So that was something we anticipated. Over the rest of the year, if the absolute utilization level stays similar, that would translate just to a lower percentage increase year-over-year on that same utilization base. I think the other thing that is -- you should keep in mind is when you hear commentary from the provider systems is sometimes it's not clear if they were referring to commercial versus Medicare or overall trend. And so parsing out the differences sometimes can be difficult. The other thing to keep in mind is if they are referencing Medicare and particularly Medicare Advantage trends, because of the continued adoption of Medicare Advantage and the penetration increases, just the sheer numbers of individuals that are in Medicare Advantage is increasing. And so the absolute level of utilization and the composition of that within the provider system is going to be larger, and the trend is going to be much higher. And so when you hear us talk about our trends, we are typically commenting on admissions per 1,000 on the inpatient side. So how many events per 1,000 members. So it's normalized membership growth is not part of that utilization metric that we will refer to. And so that's where you may see us talk about things that would seem to be inconsistent with another or have different outcomes when in fact, we anticipated some of those higher trends in the first quarter. And if you actually included volume -- overall volume in our numbers, the trend would obviously be much higher as well. So for us, as we commented on the first quarter call, we have the greatest visibility at this point into inpatient utilization. That has emerged favorable for the first quarter. Some of that was lower COVID than we expected. Some was lower flu. We had anticipated lower flu given the peak in December, but it still did come in somewhat lower. But even after accounting for those 2 pieces, the residual hospitalization rates were still lower across both new member cohorts and our concurrent population than we had anticipated. So some slight favorability. So we view that very positively. When you think about non-inpatient, we have much less visibility because we're dependent on the claims to come in. On the inpatient side, we have authorization requests that prove very predictive in terms of the overall utilization. So we are dependent on claims that takes more time to develop. We have some visibility of January. And we would say, again, we did anticipate some higher trends in January, in particular, but we would say that early indicators suggest that, that is coming in as we expected as well. So based on what we know, we feel good, but it is still very early in the year, and we'll certainly continue to watch the trends develop over the rest of the year. But so far, what we're seeing is, again, slightly favorable expectations on the inpatient side. And overall, we would say consistent, if not slightly positive for the first quarter.

So just to be clear, what you're saying is that, if utilization on an absolute basis, kind of stays at these levels, that's what you assume. If the year-over-year growth rates sit at these levels, that's when you might have a problem?

Yes, if we would continue to see, on a percentage basis, that maintained across the subsequent quarters, then that could create some pressure relative to what we would have expected.

So I guess like as we think about so far, you talk about what you see in Q1, is there anything in Q2 that you can kind of tell us about how utilization is trending?

Yes. So what I would say -- what we will comment on is just how to think about second quarter MLR, which I know we got some questions in our follow-up meetings after the first quarter. So as you look at where consensus is today on a consolidated basis, it's about [ 86.2% to 86.3%. ] And we would say that's in a good spot relative to our internal estimates. And then when you think about the insurance segment in particular, you can think of once you account for intercompany and eliminations, that tends to run 40 to 50 basis points higher than the consolidated. So if you guys take a look at that versus your models, then you should be in a good spot.

Okay. So just -- so [ 86.2% to 86.3% ] consolidated MLR, but insurance MLR insurance -- we say insurance just to make sure because you've got going concern MA, Medicaid, is that excluding commercial, you're saying?

Yes. So commercial, we have non-GAAP. So this is the reported insurance segment. They are now reporting which excludes group commercial.

Okay. So that should be 86 ...

40 to 50 basis points center.

Okay. Okay. All right. I think that all makes sense. So then I guess the other thing though that kind of confused people is that a lot of the reserve metrics kind of didn't look right. So companies were beating, but the reserve metrics look bad. And I guess, the first couple of times people looked at it and said, "Oh, wait, something is wrong here," but it seems like everybody is doing it at the same time. So is there something that explains why claims are just being paid faster? Or anything -- how would you describe that?

Sure. So the reference is to the DCP or days in claims payable metric. And as we've explained, I think, in the past, there are a variety of things that run through that calculation, both on the expense side and then also the liability side, the IBNR, some of which don't run through both. There are a few things we've consistently called out as items that could create disproportionate impact in any given quarter that you'd want to make sure you understand to appreciate the change you might see year-over-year or sequentially quarter-to-quarter Those 3 things tend to be, pharmacy, is one of the largest. Pharmacy claims have little to no IBNR because the claims are paid in near real time. And so you will have changes in terms of the days in expense related to pharmacy. And that's a result of the way that the program is structured and the planned responsibility and the seasonality of that as you go through the year. At the beginning of the year, the plan has the highest responsibility that as members work through the coverage gap and then the catastrophic phase. In the fourth quarter, in particular, CMS bears a much higher portion of the responsibility, and that results in reinsurance being recognized. So from fourth quarter to first quarter of every year, you're going to have a natural impact related to reinsurance resetting to 0. And that would have a decline in days in claims payable, all other things being equal. So, for the sequential quarterly change this year, we mentioned that 3.5 days of the decline that we experienced was related to that dynamic. Now if you go back historically and look at that, you won't always see that same exact change, materialize in each first quarter. And again, that's because other items may be offsetting it in the other direction. And the 2 other items that tend to be contributing to that are, one, would be provider payables and capitation in particular. And so as we continue to increase the number of members supported by risk-based providers the way the capitation works, it doesn't pay like a typical claims payment and the cycle times are different. You will contractually pay any surplus amounts out at -- in certain time periods based on the contractual arrangement. And so as the number of members grow that are supported by those arrangements based on the provider performance and the timing of those payments, it can have an increase or decreasing effect to days in claims payable. That does not impact the strength of the reserves nor does it impact the income statement in that period. And then the last thing that tends to have some impact is just pure, sort of inventory levels, and that can be impacted just by as simple as what day does -- of the week does the quarter end on. And based on our just normal claims payment cycles that can result in more or less inventory being held at the end of the -- of a particular period. So as we explained our sequential change, in 3.5 days was related to the reinsurance dynamic. The rest was attributable to just that inventory levels and natural timing of claim payments. That fully -- that latter fully explains the year-over-year change. So what we said is, look, you can continue to look at that metric, just recognize it is not a core metric as we are -- as far as we are concerned for all of those reasons. If you -- we did point you to another metric that you can also look at, which is the trend in membership versus the trend in IBNR, which no metric is going to be perfect in terms of what you guys are trying to assess, but I do think it's probably more stable and should be more consistent in terms of how those 2 things trend. So as we mentioned on our first quarter call, if you do look at that for the first quarter, both of those trend at about 10.5% in the first quarter for us.

Okay. And so if we think about the 2024 MA rate, you got an MA rate that -- the final rate was a little bit better, but overall, a pressured rate. How are you thinking about pricing for 2024 and your ability to grow at or above the industry average?

Yes. Well, first, we are happy that as a phase-in because we believe a phase-in will allow us to adjust accordingly both with CMS and within the company there. So I think the phase-in really allows us some flexibility. As we think about the -- going to adjust the benefits, they will be decreased or -- our premiums will increase. So that is a given. And the question is, how much does that each of our competitors change their benefit plan and how aggressive are they. For us as an organization, we continue to believe that we are in a -- in the preferred spot as a result of our Star scores, and that will benefit us quite a bit in 2024. And at the same time, we're coming off a great year from a brand point of view and our relationships with the brokers. So the combination of those 2 just without any any changes to the benefits that positions us well. As we look at our benefits, we are continuingly looking at what is the most valuable from the customer's point of view and ensure that we maintain those. And then over time, we'll adjust the ones that are less valuable to them. And that might be different than an actuarial value because what we do see is perceived value versus a number of our benefits are much greater than the actuarial value. So we're going through that analysis. Obviously, we weren't going to spend a lot of time and all the different ways we're looking at the market, but we are looking at it from a customer point of view. I do want to emphasize for our investors that it is a market-by-market dynamic in places like South Florida, you'll see different changes and some vice the Midwest area as a result of the penetration of value-based providers. We see in those markets, there's more need to adjust the benefits as opposed to in a more fee-for-service environment.

So even with your Stars advantage, you think that Humana would have to cut benefits to some degree to adjust to the rate update?

And just on that, Kevin, what we do believe is that over a 3-year phase and you want to do this in a way that is incremental as opposed to just waiting to the very end. So as we think about it, is as we are trying to do it in a way that is more gradual for our customers.

And Kevin, I would add to that to the -- because of the overall strength of the MA value proposition, relative to original Medicare, even in this environment where we do expect to see some benefit moderation broadly, although as Bruce said, probably more significantly in areas that have disproportionate plan value to begin with, that the strength of the program is still quite strong. The value proposition to consumers is quite strong. And so it might have some impact in terms of the overall industry growth in 2024, but we would still expect the industry has the potential to grow still high single digits. Now maybe on the lower end of high single digits than the higher end that we've seen in the last couple of years. But we do feel good about the strength of the program. For Humana specifically for all the reasons Bruce mentioned, our '23 and '24 advantages, we continue to believe, even if the industry growth moderates a little bit that we should still be able to deliver on the high single-digit growth that we had committed to when we set the targets in last September. And so we continue to feel good about that. And even if the industry growth rate moderates that we should still be able to deliver high single-digit growth.

When you think about it from just investors, there has been so much value that's been provided to our customers over the last decade when you compare fee-for-service. So there's about a $2,400 difference between Medicare Advantage on an average than on the Medicare fee-for-service when you look at the benefit side. And so that value is not being degraded significantly in this phase-in. And then the second thing is when we saw the -- the significant adjustments in -- from the 2010 to 2017 time frame, our rates were -- went down to almost 24%, we saw still really solid growth in the low single digits to the high single digits.

So, I guess when we think about 2024, you're going to have -- you're going to have a Stars advantage. Does that become a headwind relative to peers if they start fixing Stars in '25? Because they're all talking about investments and improving that and getting back to normal. So is that part of the reason why you're saying we're going to cut a little bit now because you want to be consistent? Or how do you think about the Stars dynamic in the next several years?

Well, I hope we have continuing performing stars -- as we look going forward. Our pricing more is for a customer point of view as opposed to a competitive point of view is keeping -- it being incremental that the customer can manage it as opposed to a big change at some period of time. Because what we do find is that, a, if you're in the market and your -- are competitive. But secondarily, also trying to keep the benefits as stable as possible in the environment is important. And so incremental changes are much easier to manage than big changes.

And I would add, Kevin, that I think, one thing I'll just have to see is what level of benefit adjustment to some of our competitors with larger headwinds have to ultimately implement. And to the degree they do then as their Stars improve, that will allow them in theory to maybe add back and get back to a position that's more competitive. And then the second is many have said that they are going to resort to margin reductions and in some cases, price the entirety of their book at a negative margin. So again, the improvement will arguably go to backfill that versus be plowed into the actual product value. So a lot we'll still have to see and learn. But I would -- I think the other thing that's important, and I think we benefited from this year is just the credibility and stability and relationships with brokers. And they value stability. And so I think this year, when they saw some of the potential changes on the horizon with some of our competitors and given the strength of our offering relative to others, why would you enroll a member into a plan that may see disproportionate disruption, and so they selected the Humana plan given the strength of our plans, our Stars performance and in theory, the durability that they thought we could provide. And so I think we benefited from that. And if we can continue to deliver on that, then I think long term, that will have sustainability.

Yes. So like you have a 3-year phase in of a cut. I always wonder when this happens, like is it easier to offset the first year because you have low-hanging fruit and there's things you can do or every year, it gets harder to find the next thing to offset the next part of the cut? Or is it relatively easy now to map out how to offset each year?

Obviously, it's cumulative. So your last year is going to be harder. Well, we're oriented to as a 3-year plan as we think about the benefits and the changes going forward. So we are thinking over the 3 years. But to your point, the first year is a little easier than the second and third year. But again, I think the industry will continue to adjust the benefits because, as I mentioned, there's been so much value that's been provided, especially in some markets like if you take South Florida, the MACVAT value South Florida is in the mid-300s compared to other markets where it's in the mid-100s to 200s. So there's a lot of value there that can be reduced over a period of time. And those markets are the ones that are larger that have the larger hit because of the value-based payment model.

Yes. So the extent you're saying that basically anything that's more capitated is going to get hit more from this. Has this changed your view at all about capitation, this is a big part of CenterWell growth? I mean is cap in positions?