Humana Inc. (HUM) Earnings Call Transcript & Summary

Okay. Well, welcome to day 2 of the Stephens Annual Investment Conference. I'm Scott Fidel, I'm the healthcare services analyst for Stephens. We're really delighted to have Humana joining us today. We have Susan Diamond, who is the Chief Financial Officer. We've also got Lisa Stoner and Ashley Yuhas as well joining us from Investor Relations in the audience. Susan, thanks so much for coming. It's great to have you here.

Yes, absolutely. Thanks for having us.

I'm sure most of you know Humana. Humana is one of the largest health benefits and services companies in the U.S. The company has the second largest Medicare Advantage platform in the country and also a robust and growing clinical services platform through their CenterWell brand.

So Susan, I thought we'd start out maybe with some topical things. And obviously, we're further into the 2024 Medicare Advantage and enrollment period now. The company did give us an update on the third quarter call with expectations to grow at or above the market. I would be interested if you want to sort of just bring us up to speed on any additional observations that you're seeing through the AEP as we continue to move through the process.

Yes, I'm happy to. So as we said on the third quarter call, we did give some commentary around our expectations and really so that we have every reason to believe we should grow at, if not slightly above the market rate. Historically, we've given more of an actual range. And just this year, we decided similar to what most of our peers do to comment more relative to the market growth rate and our expectation versus the range, recognizing it's become increasingly difficult to pinpoint a precise point estimate. And the industry rate has been moving around a bit. So as we sort of went into our planning for 2024, we were advantaged coming in, just given our strong position in 2023, our lack of a stars headwind in 2024. And so we really did expect the industry to see, in addition to just the rate pressure the from the risk model recalibration, we did expect the industry to largely have to cut benefits in response to some of those changes, including ourselves, although to a lesser degree, given the reasons I mentioned. As we try to position ourselves to continue to deliver strong growth, we actually thought there was a potential for another year of potentially outsized market share gains just because of our strong position going into 2024. As we got some visibility late summer and certainly into October when all the data was released, what we saw was that some of the competitors actually cut less than we would have expected. Centene and CVS in particular, not only didn't cut in the fase of some of the large headwinds, but in fact in adhesive space in particular made some pretty significant investments, which we wouldn't have expected. As we look at that and our relative positioning, as Centene didn't cut, but they're still sort of on par with what the rest of us are offering in terms of benefit designs. CVS off of their investment is advantaged, we would say, in terms of D-SNPs from a value proposition. So we do expect them to take some share this year. We still feel good about our positioning and the early signals from our broker partners, reinforces that quite well in D-SNPs and frankly, maybe a little bit better than we would have expected given sort of the competitive landscape. On the non-D-SNP side, which as you recall in '23, we took a lot of gains there. We had been sort of lagging the industry, frankly, in growth for some number of years. And so we sort of regained that position in '23, which is great. It is by far the larger population relative to duals. And so making sure that we can deliver industry average growth in that space was important to us. We continue to support through our benefit designs, and we did see that the competitors did cut more in the non-D-SNP space. So we should be well positioned there. So while it's still early in the AEP, we would say our assessment of our positioning, again, leads us to believe that we should grow at, if not slightly above the market rate. All the feedback we've received from brokers today reinforces that belief in terms of how we're faring relative to competitors. And I know there's been some reports out recently that I think you guys do check-ins with brokers, you're hearing similar things. This enrollment is always a big factor. It's still too early, that information comes to us on a lag because the consumer has to make a choice to get processed by CMS and then communicate it to us. So still too early on disenrollments, but we are planning for a slightly elevated disenrollment rate this year, just recognizing we did cut benefits in a balanced approach to our pricing. And so do you expect as a result of that, we'll see some consumer shopping a little bit elevated relative to last year. But again, that's contemplated in our forecast. So we'll continue to watch it. And certainly, on our fourth quarter call, we'll be interested in sharing more details based on the ultimate outcome.

Okay. Great. That's great color. Maybe if we could just parse that out a little bit and just sort of thinking about some of the overall growth rates for the industry. For 2024, CMS, atleast is projecting around a 7% growth rate for the industry. The D-SNP market has been growing substantially faster. It's been growing north 20% plus. When you sort of talk about that at or above the market, are you thinking holistically against that sort of 7% CMS and because, obviously, in the D-SNP market, the growth rates have been substantially faster than that. So just interested in sort of how you would maybe parse that out a little bit between D-SNP and individual [indiscernible].

Yes. To the CMS assessment, which is in theory based on what all of us have seen in our bids. And we would say that's a reasonable estimate as you think about what the market has done in the last number of years. We would expect D-SNPs to continue to grow at a faster rate relative to non-D-SNPs just because of the strong value prop. And we would argue that all dual members should be enrolled in MA. There's really no other offering that competes with it. Whereas in the non-dual space, you're going to have a mix of -- you're going to have people that have access to group retiree coverage. So we just continue to believe over the next number of years, you'll continue to see strong dual growth in D-SNPs. The one thing we are watching this year, is there were some changes from CMS in terms of the marketing guidelines. The way I think about it generally is that they sort of allow for some more genericizing of the marketing, for lack of a better word, where you can't necessarily call out specific benefits nationally to the same degree that had been done in the past. And that has proven to be very effective in terms of that marketing. So I think we're all going to have to just see does that marketing change have any impact in terms of overall response rate by consumers. And if so, it's possible you could see some slight impact to the overall growth rate as a result because it is the first sort of selling season when we're all navigating that, I imagine that we'll all learn some things based on what we see that will allow us to sort of tweak the strategy going forward. And hopefully, if we do see any degradation, adjust sort of the strategies in light of that, to get that back. But that's the one thing we would say for AEP that we all need to monitor and to see in general. The lack of benefit adjustments that didn't occur and then those marketing changes, doesn't have any impact overall.

And then thinking about that point you just made, is it fair to assume that those changes in the marketing guidelines from CMS would probably create a little bit of mix shift around distribution channels and -- or not really. I mean I would tend to think about those prior types of ads having been most effective in the sort of DTC channel. And just wondering if you're seeing any sort of mix shifts. I think I asked [indiscernible] call.

It's a fair question. And I would say we, Humana, in our proprietary advertising, do you tend to do more local advertising than some of the call center partners that are operating at a national scale and doing more national advertising. And I would say the marketing changes have a greater impact on national marketing than they do local because one of the requirements is that you can't say, "Hey, do you have XYZ benefit?" if it's not available in all the geographies you're marketing. So that makes national marketing a little bit more difficult or more expensive. So I would say I probably would expect that some of the national call centers see more impact from that and then our local sort of proprietary channels and then some of the independent FMOs which operate more locally as well, I would say, probably have less impact and probably on a year-over-year basis, we'll be better than the national call centers [indiscernible].

And there's sort of 2 elements here because, obviously, CMS had sort of enforced some changes to the marketing guidelines for the 2024 AEP. CMS also just put out their annual regulatory sort of technical update, which tends to always have some nooks and crannies in it. It seemed like broker compensation was sort of a key thrust in that proposal. I know it just came out relatively recently, but certainly would be curious in your initial observations around whether there will be any real meaningful impacts from that or anything that -- how you would even view that from a positive or negative perspective for Humana?

Yes. So actually, there are a couple of things that were focused areas in the proposed Part C&D rule. And it is a proposal. So the industry will have the opportunity to comment on it. And so we would expect that the final will sort of be responsive to the commentary they receive and probably ultimately look different than the proposal. Interestingly, on the broker commissions, they are clearly focused on it and have a lot of questions around particularly not just the writing agent commission, which is really what they called out in the Part C&D rule, which is for years, right, they've sort of dictated a cap on writing agent commissions. There is no technical cap on other payments that are made to sort of agencies that sit on top of those brokers. And there are arrangements between all health plans and those brokers that might allow for co-op marketing, administrative fees for some of the services that they perform for their brokerage. So that was not specifically addressed in the proposed rule. We still have some questions about whether it was intended to be considered in that overall cap. We don't think that's the case. And so I think there's going to have to be some commentary. But I think CMS is certainly focused on wanting to understand those payments and figure out if there should be more specific guidance provided as to how those payments work, whether that's a cap or some other mechanism because there is a fair amount of variation across I think the payer set today. So I would expect in the final, based on the commentary they received that there'll be some further clarification but I think continued interest in compensation. And what they said is they just want to make sure that the distribution is not incentivized to sort of recommend one plan over another, that the beneficiary's best interest continues to be the focus, which we are imminently supportive of. So that was one area, which, again, I think there'll be more to come on that. Duals and D-SNPs, I think it's clear from the proposal they continue to like the idea of integrated offerings for Medicaid beneficiaries. We certainly agree that we want to make sure that those beneficiaries are well supported and that there's coordination at a minimum across their Medicare and Medicaid. But we would argue that full integration is not necessarily the only way nor even the best way necessarily to do that. And we've certainly demonstrated success in markets where we have Medicaid and Medicare but also where we don't, in providing terrific care and quality to our dual members. So we'll continue to provide feedback there and suggest other mechanisms by which we can ensure the beneficiaries are supported, not requiring full integration, which ultimately just limits the choice the beneficiaries have, which we don't think is really the intended outcome. In addition to that, I'm trying to think [indiscernible] -- I think there is a continued focus on supplemental benefits and just wanting to make sure that there is a case to be made that it really does impact health and reduce cost of care. And as some of those benefits continue to expand into the '24 offerings, I think probably start to stray from some of the obvious linkages. So I think that's something that'll continue to ask the industry to be responsive to and provide our perspective on how those benefits actually improve beneficiary health. So we'll continue...

Things like pest control and...

Actually, that -- I think actually is a good -- so anything that keeps someone in their home and allows them versus having to go into an institutional setting, we think that there's things like we've heard -- I think CMS referenced something like golf clubs or something and pickleball which from a health perspective, that might be a positive thing, but I think there'll just be continued pressure on the industry to make sure that we're using the dollars in a way that really does improve member health and reduce total cost of care.

Okay. Curious -- I know it's still early in terms of sort of understanding the profile of the membership coming in, but against now your sort of latest view of sort of at or above industry growth, maybe any insights into sort of how the population that's coming in looks relative to expectations from a demographic acuity profile? Or is it still a little early to sort of understand that yet?

Yes. I would say it's probably too early. We certainly watch that. The disenrollment rate is one key assumption. Obviously, retained member is always the best member. But then as we said last year, we did increase our share capture of agents in 2023. We have every reason to think we'll do that again in 2024, just given some of the new offerings that we've introduced that are particularly attractive to that population, which while they pressure sort of MLRs and to a little bit pretax because they tend to run 100% MLR in the first 2 years. From a long-term perspective, the lifetime value contribution is very positive and the incremental contribution you'll see as they continue to age and flip to risk adjustment. We've also seen that for agents, if they choose Humana when they first become eligible, they do tend to have a higher retention rate than someone who comes at a later point. So that's also positive. So I think we'll continue to do that well there. As I said, the dual so far is positive in terms of what we've seen, especially given some of the competitive investment. So we're pleased to see that. And then geographic mix is always something that we'll be mindful of. But I'd say a little bit too early to say exactly how that might be coming in.

Maybe shifting gears to just a couple of other sort of recent topical things. There's been some sort of chatter again about sort of consolidation dynamics. I haven't had anything to do with that personally. But just interested in your sort of your observation on sort of the -- I guess, the sort of the backdrop. And in particular, just thinking about it from the Humana perspective, obviously, the company has been enjoying very strong growth is in an end market that is really one of the most attractive in the sector, penetration has been rising. But as we look out 5, 10 years, MA penetration continues to rise, maybe it starts to hit some sort of natural ceilings where there's still strong growth, but can it sustain high single digit, low double digit like it's been doing. And just as Humana sort of assesses for the long-term perspective, is the current sort of platform and chassis that the company built is that clearly, in the next 5 to 10 years, it seems to be extremely well positioned. How do you sort of think about that even longer relative to sort of the current chassis or evolving that for maybe a couple of -- even decades to come.

Yes. So I would say, certainly -- and we provide a perspective at our Investor Day as well in this. But we continue to believe really, call it through 2025, 2026, certainly the potential to still see high single-digit growth in the MA space just based on aging the population and then additional penetration gains that we think are possible. We do agree that once you get beyond, say, 2026, you'll probably see some slight moderation in that as the boomers are fully aged in and we reach higher penetration levels. So we do expect there will be some moderation. Now I still think it will be mid-single-digit growth, right? It might not be high single digit but mid. What's interesting is the block does begin to slow in terms of growth, you actually get some additional premium yield off of that block relative to when you're growing faster. So you get a little bit of that back from an overall premium perspective, which is positive. So we expect to continue to participate in that. And I would say, we obviously have national scale. There are a couple of places like California, like the coast generally. California, Upper Midwest or upper Northeast and then the East Coast, New York, Boston, like those are places where we still are arguably underpenetrated. So I think you'll see us continue to look in for ways that are there opportunities whether it be partnership. I mean it's possible you can maybe do some small M&A in those places where we have less of market share today, but we'd have to see. I mean that's been challenging to find opportunities that make sense. It's certainly something we continue to explore. Then I would say on the CenterWell side, that is where over time, you'll see increasing contribution from those investments, particularly on the primary care side where we've intentionally partnered with Welsh Carson as a financing mechanism to support the de novo expansion, which, as you all know, is expensive and dilutive to do on balance sheet. And so that relationship allows us to do that off balance sheet, so we don't experience the dilution. And then there's a financing mechanism and a call structure where we can bring those back on really at the point at which they reach breakeven and then start contributing. So as we said at Investor Day, when you look beyond 2025, at the point which you'll see some MA moderation begin and you see the increased contribution from primary care, in particular, some from home as well that really should allow us to then continue to deliver those strong returns that we committed to in our 2025, $37 EPS target. So that's how we think about the algorithm. And so they're continuing to position ourselves well for MA growth and continuing to focus on segmentation and designing plans that uniquely meet the needs of different consumers, should allow us to hopefully create some differentiation, continue to support the pharmacy business and specialty benefits, which then tend to sort of grow along with individual MA and then continue to invest in the CenterWell and demonstrate that we are delivering against the J curve as we say. For the de novos, which we've shared, we continue to track against our goals there as well as then on our wholly owned demonstrating continued performance, which we've updated every quarter. And at this point, almost 90% of our centers at breakeven or better performance. And I think about 25% at the full mature contribution margin. So I think we continue to show proof points there. The risk model recalibration does have an impact on high-performing risk providers starting in 2024. That will be a headwind into the industry. Our team has been working really hard and has developed a comprehensive mitigation strategy where they think by the time it is fully phased in, in '26, so they can fully mitigate that and be back on track to the commitments that we had made last year. But we do think because it will take time for some of those mitigation strategies to mature, that we will see a headwind in '24, less than in '25 but relative to what we would have thought at Investor Day. So at a high level, we sort of say we might -- if you go back to the slide we shared at Investor Day and say it might be 1 year sort of delay in some of the contribution we would expect because of that, but again, by 2026, that they would have fully mitigated that. And so that will be certainly a focus for us now and over the next couple of years in terms of making sure the execution of that meets the expectations.

Great. And clearly, think about CenterWell, the provider platform, the primary care platform, still very early in its life cycle. Lots of scaling opportunity ahead. As you said, obviously, there's going to be some sort of ripples in the [indiscernible] next year or 2 because of the risk model that the whole industry will need to sort of absorb. Curious -- just so you've got the 3 primary verticals now that you've sort of built as the pillars, CenterWell, with primary care, with the home and with pharmacy. As you sort of think about the longer-term plan or strategy for CenterWell, should we anticipate or assume that there ultimately could be additional verticals that could be added on? Or do you think that the focus really will be on continuing to strengthen and build out these 3 verticals?

Yes. I'd say, near term, we'll continue to focus on those. And I think from a capital deployment perspective, you'll see us continue to do tuck-in M&A across both primary care and home. We've been able to build a nice funnel with primary care, partly due to our just health plan contracting strategies over the years where oftentimes, particularly in Florida and Texas, we've got embedded ROFRs or other terms within the contracts that if and when the physician is ready to retire or for whatever other reason, exit, then we have sort of a first look. So that's provided a nice funnel and consistent opportunity for the tuck-in M&A, which can either add to our wholly owned centers or, in some cases, even outside of Florida and Texas, accelerate sort of our de novo strategy, where instead of having to put a center in the ground from scratch, we can leverage one of those acquisitions to sort of start with a center and some level of [indiscernible] to begin with. So we'll continue to do that. And it's more programmatic where repeatable, scalable, we've been consistently delivering the outcomes we expect from those integrations, which we're pleased to see. We're trying to do the same thing on home. We've done 2 tuck-ins this year. I think that's, again, another space you'll see us look whether it's to fill in some of the coverage gaps we have across the country, whether that's CON states or otherwise. But also we can see there's real value when you can create greater density in the home health space in the market, and so it can help us allow for some greater density in some cases. So I'd say near term, those will be the focus areas. We still don't have as much flexibility in terms of M&A that we would like just because we're still sort of delevering from the Kindred transaction and working through that. But over time, as the CenterWell businesses continue to grow and post 2025, as we start to bring them back on balance sheet, we actually do create more cash flow -- free cash flow from the unregulated. And so what we would say is when we have that opportunity, I would say, there are some additional spaces, certainly continue to invest in the core and those core strategies, but things like an MSO. We have some capabilities today, and we certainly have some affiliate relationships down in Florida, but I think there's still an opportunity to potentially expand the reach of the primary care opportunity through a more expansive MSO like model where you're partnering versus owning and leveraging the investments and the capabilities within our primary care business to support providers even more vastly than [indiscernible]. So that's certainly something we're interested in. In the home, we continue to obviously be focused on value-based models and what you can do with those capabilities. Today, it's more in a traditional sense where home DME and infusion and where we can reduce costs and improve outcomes. I would say we're doing a great job creating value through more traditional levers by network contracting and UM and some of those things. And the team continues to work on the clinical innovation, which we think is the real unlock and where they're substantially more dollars to be generated across the enterprise. And that I'd say we're still early innings. They're still trying to figure out exactly what interventions are necessary and how to best deploy them to really realize the value potential we see there. And as they figure that out, then I think they will look at whether it's higher acuity care in the home. We're doing that today through more partnership models with people like Dispatch and [indiscernible] and some others, but there may be an opportunity for things like sniff at home where arguably our capabilities are better positioned today even to support some of those models. Once you do the ER, diversion and hospital home, the capabilities look a little bit different. So we've chosen to partner just recognize again its early innings there, a lot to learn about unit economics, consumer and provider demand and acceptance of those models. And so we're choosing to do that through partnership. And as those mature, those may be spaces that ultimately we might look to have a larger interest in as well. But I think, again, a lot to learn about what's possible. And then I'd say integration across the health plan in CenterWell is a huge focus. And whether there's additional technology capabilities or analytic capabilities or other services, that might allow us to do even more and create what we think is a truly differentiated experience for both our health plan members and CenterWell patients is something we're focused on. And we've got dedicated leadership now working on that every day, trying to figure out how we can advance that. And a lot of value creation that is possible if we can only just get more of our members using those services, but then truly create differentiated experiences in terms of Starz revenue, retention value and ultimately, even for improving cost of care. So those are things we're focused on. And I think from both organic growth and capital deployment are the areas you'll see us focus on.

That's great. A lot of interesting tidbits for us to sort of decipher from that. And maybe sort of in one of those areas that you talked about, the home. Be interested maybe sort of bring us up to speed around really 2 things. One, CMS did come out with the final 2024 rates, pretty much exactly where I think most of us were expecting those would land. Certainly not spendthrift at 0.8%, I sort of call it the CMS has had a program of fiscal austerity against the home for some reason while saying how much they love the home, which is intriguing. I guess, one, have you been able to evaluate yet what Humana's specific rate -- final rate for Medicare fee-for-service will be. And then again, sort of the construct of now having visibility into that, sort of how your plans for continuing to scale up the value-based care side in 2024. How should we think about that further growth for next year?

Yes. So obviously, the proposed rate was negative. And so we were hoping for some improvement, which you typically will see ultimately in the final. So certainly pleased to see at least get into positive territory, certainly insufficient relative to trend and other labor cost trends and other things. But I do think -- we are anticipating that we will continue to see rate pressure in the home health space. The margins are healthy in that space. And so I think it invites some potential further rate moderation. So what we were planning for the negative environment -- just and said, look, we need to be able to operate this business in that environment. And so as we looked at it in the traditional fee-for-service base, we would say, generally, the industry hasn't invested significantly in technology and analytics and other things. So there is a lot of opportunity to just reduce sort of inefficiencies in terms of just even drive time with the nurses, administrative burden and time [indiscernible] so we can increase capacity for patients and improve the cost structure fundamentally. There's still a branch model where you get a lot of decentralized functions. And so I think a lot of opportunity. And so we're going to invest there to make sure that the model can be sustained even in a negative rate environment, which, again, we're going to anticipate. So that's been very healthy, I think, to get the team focused on that and create a comprehensive plan much like our primary care business is doing. As part of that, even in the traditional fee-for-service base, for us, it just reinforces the need to bring value-based payment models and clinical models to that space. Fee-for-service, for the sake of fee-for-service, we think does not have a longevity. So in the traditional fee-for-service side, we are working hard and actually looking to introduce a case rate versus just a fee-for-service sort of payment model. And that's where they would take responsibly for the total case of care -- episode of care, offer some reduced rate to the health plan, but then also create the opportunity to participate in upside, whether that's quality outcomes, total cost of care outcomes. So we can get that organization thinking differently than they have historically about how they can create value for their health plan partners in CMS and patients ultimately. So we're doing that work, while at the same time, we have a separate organization that's working on the true more comprehensive value-based model where you said we expect to roll that out over 40% of our MA lives by 2025. So that work continues. And like I said, they're having nice success. Today, it's more traditional sort of levers where they go into a market, take full capitated responsibility for home health DME and infusion from the health plan and then introduce either slightly different networks. In the case of DME, we've significantly narrowed the network and being able to extract some additional savings as a result of that. Over time, we would look to hopefully have proprietary DME in infusion. You just recognize it's inefficient to do de novo out of the gate and try to scale it up. It's much easier to narrow the network and then over time either look to acquire or then more easily shift that volume into a proprietary model. So that is going well. I think what we keep pushing on though is the clinical innovation. As we said in Investor Day, patients that are eligible for home health are 5x more likely to end up in the hospital than someone who doesn't, and that's a reflection of the comorbidities and higher acuity of that patient population. And for Humana, during a typical 60-day episode and you can think of about 10% of beneficiaries needing home health in any given year, for those beneficiaries for that episode of care will still incur about $1 billion of ER and inpatient spend even though a nurse is going into the home arguably every week. So again, we just -- it just continues to reinforce there is an opportunity if you approach that intervention differently and more holistically that you can take ground on reducing that $1 billion of spend. And so that's where, again, still early innings. We had some progress, but a lot more to go, and we'll look forward to sharing sort of what we're learning and the value that we can create over the coming months and years as we continue to mature that elemental model.

Well, we've gone 2/3 of the way, and I haven't even asked about utilization yet. So I think it's time to ask about utilization. So obviously, it's been an intriguing year from the utilization perspective. And clearly, we've had sort of the year of normalization in the Medicare population post pandemic, and that's had some shoots and ladders to it over the last couple of quarters. Obviously, you have sort of a revised framework that you sort of laid out on the third quarter call around sort of the outlook for the remainder of the year and then how you're thinking about that sort of playing out into the outlook for next year and targeting more of the low end of the long-term EPS algorithm of 11% to 15%. Obviously, we ran halfway through the quarter now. Any observations you can give us just against that sort of latest sort of assumptions that you've built in now on utilization, how the environment looks in the fourth quarter, particularly around some of the categories where we have seen more uplift, outpatients, some of the elective areas and some of those types of areas. And then again, sort of on the respiratory flu, I mean, we've been tracking all that COVID. You sort of did pull forward some of those costs into the third quarter. It doesn't seem like things are spiking environmentally from what we're seeing, but certainly, I want to hear your -- what you're seeing on that front.

Sure. So as a reminder, in the second quarter call and then even prior to that in June when United Us and others came out and acknowledged we were seeing some higher trend than anticipated, for Humana, we saw the same thing on non-inpatient that everybody was sort of pointing to where we did see an elevated level of non-inpatient utilization relative to what we had expected. In the second quarter, the absolute PMPM that we saw and the trend that, that reflected. It did reflect moderating trend relative to the first quarter on a percentage basis. And that was just, again, it's important to remember, in '22, we saw over the course of the year increasing PMPMs because we had a COVID surge at the beginning of the year where we were seeing depressed non-COVID utilization. And as COVID subsided, then we saw a return of some of that non-COVID, both in inpatient and non-inpatient. So PMPMs are increasing over the course year. So in theory, if you reached a new capacity threshold in '23 and it stabilized then you should see a reducing trend year-over-year, which is what we said in the second quarter and our estimates at that time, I assume that the higher absolute level of spend we were seeing in the second quarter would persist through the back half of the year and into '24. And as we talked to providers and did some further analysis internally, what we did see is because a lot of that was sort of more discretionary orthopedic procedures, we also called out some things in ER and observations as well. But the larger driver was the orthopedic outpatient services. And what we did see is if you do go back and look over the couple of years of COVID, even when you adjust for mortality and morbidity, there was a lower level of services being utilized than you would have expected. And so what providers have said and what our data seems to support is that there was just a sort of prolonged, slightly deferred level of activity happening. And that now that we've gotten beyond sort of the really terrible parts of COVID, people are just finally getting those things addressed. And at the same time, we heard that over that period, the providers were also making some investments. They weren't seeing more surgical labor capacity, but rather than invested in the teams around the surgeons where they were getting 1 to 2 more procedures per day out of their surgeons. So the sort of combination of more supply and more demand than created this new elevated level of utilization. We did get a little bit of pushback on that at the second quarter and said, "Well gosh, what if that percentage trend holds in the back half of the year, then would that be an incremental headwind" and we acknowledged that it would. But at the time, we didn't think that was reasonable based on what we were seeing in hearing. At the same time, we did acknowledge that we were also seeing some elevated -- slightly elevated inpatient activity which others hadn't commented on. And that was, we would say, more just a reflection of we had a lot of new enrollment this year and the only role visibility you have into that population is the risk score. And so based on the risk score, we made an assumption about what we thought the claims would run, and we were just seeing slightly elevated relative to what we would have thought. Not a problem per se, it's just when you have small percentages on big dollars, they're big dollars. So we're seeing a little bit of that as well. And then the third thing we called out was something we do think is more Humana-specific, which is higher sort of downline Flex card utilization relative to some of the benefits that we offer were just being utilized at a higher rate than we had assumed in pricing. So all of that, we said into the second quarter. As we evaluate our third quarter results, and as we shared on our call, we continue to see those trends in terms of inpatient and dental and Flex. The non-inpatient, what we were surprised to see is that the claims data mostly for August paid claims that we received in September and then again, September paid claims we received in October suggested that we actually were seeing a sequential uptick in the PMPM in the non-inpatient space, which we were surprised by and did suggest a percentage trend that would be more consistent with what we saw in the second quarter. So a continued sequential uptick. So again, based on what we were seeing, we thought it was prudent to assume that, that would persist. And so we -- in our updated assumptions have carried that through the end of the year and assume that we'll jump off that higher baseline into 2024. To be honest, that's a little bit inconsistent, I think, with what some others are saying, although sometimes it's hard to tell because you have different business mix, et cetera. But we've received some pushback this time saying are you being too conservative. That's not what others are saying. That's not what providers are saying, and I certainly hope that proves to be true. But what we didn't want to do is have to come out and say, hey, yes, we're seeing this, but don't worry, it will get better, and we'll be fine. But we wouldn't just say, look, if this does persist, that we can manage through it, and so did reaffirm our full year EPS but do you expect in the fourth quarter, while we had an outperformance on EPS relative to consensus in the third quarter, that will be offset in the fourth quarter. Just we did have some outperformance in our provider business in particular in the third quarter, which we don't expect to recur at the same rate in the fourth quarter, which is why you'll see that sort of adjust and then ultimately, reaffirmed our full year EPS guide. So we're working hard to offset some of the higher churn that we didn't anticipate, both for '23 and '24 and have a variety of levers to do that, not the least of which is some of the productivity work that we've continued to focus on and continue to be pleasantly surprised that there's been more opportunity than we would have thought when we established a 20 basis point commitment last year in terms of operating leverage. And so I think for the next year or 2, we've got some more disproportionate opportunity, which has been very helpful, certainly in '23, and we expect again in '24 and even '25 to help mitigate some of this.

Okay. Great. So as we think about some of that additional margin for adverse deviation that you've built into your picks now for utilization, is it fair to say that now you're comfortable with what's built into the assumptions relative to what you're seeing on the utilization front?

Yes. I mean, I think we're being as reasonable as we can in terms of, again, stepping up to that higher percentage trend that we saw on second quarter and carry that through. To be honest, when you look at the PMPM, our team keeps saying, there's no way you can do that but we did feel like it was prudent now. I can never say it can never get higher. But I think based on, again, what we're seeing, what we've stepped up to relative to others, it does seem a little bit conservative. So that would be my hope. On the inpatient side, we get more real-time visibility because we get off data. So we know in real time how our inpatient is performing. Unfortunately, the non-inpatient you're dependent on claims. And you typically need at least a 60-day lag. So July is the most mature. We certainly have some visibility into August, but we'll obviously have to continue to see how that develops. But I think we've been as prudent as we can in terms of how we've thought about the estimates.

Okay. Great. Well, I'll take that as net encouraging update there. Wanted to toggle over to Medicaid. And an area where, frankly, I think Humana has done a really impressive job of building out this platform in a very capital efficient way. Thinking about it, it becomes a competitive space with a number of Tier 1 players and I view Humana now as being one of those Tier 1 players in Medicaid, which was not the case 5, 10 years ago. So it's been impressive. There's a couple of -- we've had a lot of different procurements going on over the last 12 months plus CMS has been sort of catching up from a bit of slowdown sort of during COVID, still a couple of more big ones on the way. Florida obviously is sort of all eyes on that. But Georgia as well could be a potential greenfield opportunity for Humana in an area where Humana more broadly has a lot of corporate exposure. So interested if you can maybe bring us up to speed on sort of how Humana is positioning and preparing for those 2, obviously, Florida is already a large incumbent market for you, along with many others, but how you're sort of thinking about the next sort of key RFPs that are coming up on the calendar?

Yes. So -- and we agree, we think the Medicaid team has done a tremendous job or largely organically building the platform where we expect to be in 9 states and serve about 1.5 million beneficiaries by year-end. I can remember a number of years ago when we decided really as a defensive mechanism to make sure that we can continue to support the duals in the Medicare program when it was expected that many more states might require full integration to continue to support. I remember when we were investing there and bringing the team together, there was a lot of skepticism like, we can't do this. Like, are we really going to compete with incumbents. And so a real debate around it, you have to buy your way in some way. And so again, kudos to the team, who've done a fantastic job largely organically building the business. And it was interesting, too. Medicare is a federal program. So we didn't have a lot of state infrastructure. And so we had to make investments there to have people on the ground that had state relationships and understood their priorities. What was important to them and then really ensure that did we feel like we had solutions that could help the state achieve their goals and understand, do we think the state would be a good and reasonable partner as well as reimbursement is important. So initially, I'd say our focus was very much on those states where we believe the need for integration was highest and still continue to prioritize those states to make sure we can continue to serve duals in the Medicare program. So that continues to be the first priority. Beyond that then, I would say, more opportunistically look at places where, again, based on the state's priorities and our competencies. And as you said, other assets that we might have in the market, do we think we can be a good partner to the state and help them achieve their goals. And we believe that's true and that they're a reasonable partner that will then sort of -- even in the absence of a potential integration risk that we'll go ahead and bid on those. And again, I've been very successful. The team has been, I think, balanced to make sure -- we want to make sure while we'll be in United States, it's still just 9 states and making sure as we get new implementations that they go very well. And so I think as they build additional scale, might give them more comfort, do you mean more. But I'd say at this point, doing 2 or so a year, I think they feel good about. We obviously implemented the 2 this year, got 2 coming up next year and then the active procurements, like you said. Florida is obviously the big priority. We've got a statewide contract there. We do very well. The team is very optimistic about that. They have a great relationship with the state, have great outcomes for the state. So they continue to feel very good about the outcome of that reprocurement that we'll hear about in the first quarter and then continue to actively look at other procurements. I'd say, at this point, there was more just pressure on how we think about prioritization, we can't do them all and so what do we think are the best spots and where we have the best chance of being successful. So again, team's done a great job, made a lot of investments that have really delivered value to our state partners, which we're quite proud of.

Great. Would you be able to comment around how you would view Georgia in that prioritization?

Yes. So we typically don't comment proactively on procurement for competitive reasons, but so we do -- Lisa is going to make sure I would say anything that [indiscernible].

Fair enough. I have 5 hours more of questions, but we only have 5 minutes. So I did want to stop and just see if there's any questions in the audience?

Would love to get more color [indiscernible]

Sure. And your first question you said was inpatient? So in patients, like I said, in general for the year, what we've said is -- and again, this gets hard -- especially when you talk about a category level, like with the level of new enrollment we had, and again, you've got risk scores and you make some assumption in claims overall and then how do you spread that across the service categories, there could just be some variance there. But we did see -- especially just relative to the agent share that we ultimately saw that we achieved, they have lower admissions than average. And so based on that mix, we would have expected -- because we are seeing year-over-year declines in absolute levels of inpatient, just not as much as we would have expected given the mix because those agents should have created some negative trend just because of the lower utilization. So what we would say is we're just seeing slightly higher utilization than what we would have expected given that mix. And over time, that will get corrected in pricing and other things, but in 3 years creating some pressure. In the third quarter itself, we also spoke to the fact that we were seeing COVID. If you remember, historically and consistently every time we've seen a bit of a spiking COVID, you've seen an offset in non-COVID utilization. And so we did not have as COVID spike assumed in third quarter, we had assumed 1 would occur in the fourth quarter. Although we did assume that it would demonstrate the same patterns as historically where you'd see some offset in non-COVID. This surge, if you want to call it that, it was not as severe as anything we've seen before. And so I think for that reason, as well as the fact that it was lower severity in general. And as you did hear people talk about it. And then third, there just wasn't as much press and other commentary about it. So I think for all those reasons, you likely probably didn't see patient behavior change or provider behavior change, where we really did not see any offset despite the rise in COVID in the quarter. Arguably, that's a pull forward of what we had assumed would happen in the fourth quarter, and that will, in theory, get that back. But for purposes of our estimates, we -- as we updated our full year left the COVID in, in the fourth quarter and just recognizing, look, we didn't see an offset on the way up. We're going to assume we don't see an offset the way down. It has started to subside, but we went ahead and left that in. So again, hopefully, that will be proved conservative. We also have our normal course flu in the fourth quarter. So far, flu is running in respiratory in general, slightly lower than we would have expected. So hopefully, that will continue and maybe produce a little bit of a tailwind relative to our estimates as well. On CenterWell on the quarter, yes. And so it was an interesting dynamic where we had obviously the elevated insurance MLR that was fully offset and consolidated, and that was due to the outperformance in several primary care. They've really had a variety of factors went into their performance for the quarter. One, they continue to have more positive patient panel growth than they expected. That is positive for primary care and mostly because the results you're seeing are largely are wholly owned centers, right, because the de novos are off balance sheet. And so that's largely Florida and Texas. Those are very heavily risk penetrated market. So typically, when they see growth in those centers, it's typically someone who's already been in MA and also likely supported by another high-performing provider. So typically, they will come with positive contribution out of the gate. So some of it was additional growth. They also had favorable mid-year risk adjustment payments. And so that, in particular, you get sort of a disproportionate benefit to the quarter because it's a catch-up of 9 months, right? You get a year-to-date catch-up in the quarter. So you'll have some favorability in the fourth quarter, just not to the degree you would see in the third quarter itself. They also have favorable prior year development. And again, that's in the quarter, and we would not expect that to recur in the fourth quarter. And then they also had some current year positive development, which again is sort of a -- you can think of it as more of a 9-month catch-up, although the more recent periods would be the disproportionate amount. And again, you wouldn't necessarily expect that to fully repeat in the fourth quarter as well. And some of the reason they see that sort of later in the year, PPD and CBD is because they are from the non-Humana panels, they're obviously dependent on our other payers to provide that information, which tends to be on a lag much like our risk providers get information on a lag. And so it's not uncommon for them to see some development later in the year as they receive additional information from other payer partners.

We can maybe get one quick one here because we're pretty much out of time. So let's make it a...

[indiscernible].

So it's been more of an issue on the commercial side generally. And so we've certainly seen some of that on our commercial book, which obviously we're in the process of winding down, so less of an issue. Employers are certainly deciding whether they want to cover those. And if they do, it looks like they're generally sort of executing rider agreements and other things to address on the commercial side. In Medicare, at least for weight loss, it is not approved. So it's not something that is covered for that utilization. And so we have implemented edits where it does require a diabetes diagnosis in order to be covered for Medicare. Despite that, we have seen a little bit of an uptick relative to what we would have expected, but not nearly the headwind that you would probably see in some of the commercial books. We continue to watch and really to have it covered for weight loss would require a legislative change. And so a pretty big lead time where we would be able to anticipate that in pricing, it would ultimately get into our reimbursement as well to ultimately be resolved. We are watching now for other clinical indications like a report came out this week around reduction in cardiovascular events. And so that is something as that receives FDA approval, et cetera, we would have a coverage determination decision to make. I think we have like 180 days to make that. In this case, there are other therapeutics that have those same benefits. And so we have to just ultimately decide based on the cost of that treatment relative to others and the efficacy, do we want to provide coverage or not. So those are things we'll think about in '24 -- for '23 and '24, but are not required to cover it because there are other therapeutics.

All right. Unfortunately, we'll need to wrap it there. I want to thank the Humana team for joining us.

Thanks for having us.