Humana Inc. (HUM) Earnings Call Transcript & Summary

Good morning, everybody. Gary Taylor, cover health care facilities and managed care. My pleasure to host Humana this morning. Most of you I'm sure know, Humana is the second largest Medicare Advantage health insurer in the U.S. They also operate a PBM, home health and physician clinics in their CenterWell segment. We have the Chief Executive Officer, Bruce Broussard; and Chief Financial Officer, Susan Diamond, this morning. So welcome to the Cowen Conference. Thanks for being here.

Thanks for having us.

I think I'll start with the 8-K this morning. So you reiterated the guidance for 2024. I think we were hoping maybe for a little more commentary around utilization and what you're seeing. So anything there you want to update us on?

Yes, sure. So this is always the case. This time of year, we're always reviewing all of the sort of leading indicators, particularly across the Medicare book. I would say think about things like membership growth and the mix and composition of that membership growth better visibility into premium and risk scores with the CMS reimbursement, certainly watching admission levels, which I'll speak to you in a little bit more detail. But also Part D emerging trends, which complete more quickly. Ministry of costs and then prior year development is something we would also watch very closely. I would say this year, in light of the regulatory changes that were implemented on January 1 around the utilization management programs, those sort of results are also something we're watching very closely in terms of actual expectations -- or actual versus our expectations. I would say, the highest level all in, I would say things are generally in line with what we've expected. So nothing that's giving us any significant concern in what we're seeing. I'll start with prior year development. We're always watching this time of the year to see how our year-end reserves ultimately held up, I would say, with the January paid claims in the aggregate, very consistent with what we had reserved to at year-end. We did see some positive development in our inpatient unit costs and physician cost estimates that we talked about at year-end, but that was largely offset by some negative restatement on the non-inpatient side. But again, all in, in line with expectations as it respects to prior year development. Admission levels that we're watching very closely are trending up year-over-year, which we anticipated because of the 2-midnight rule changes, which we always anticipated would lead to observation stays that were historically submitted now being submitted and paid and approved as an inpatient stay. So we are seeing that. The other thing we're watching is the actual avoidance rates relative to our utilization management programs. I would say initially at the start of the year, they were slightly lower than we had anticipated. So we weren't seeing as much impact, but those have continued to improve each week, and I would say with where they're performing at now are very close to what our expectations were. So feeling pretty good about what we're seeing. We are going to have to watch denial rates over a longer period of time just to see if those patterns change relative to historical. I would say, initially, we are seeing some higher appeal rates. And that's not completely unexpected. I think as we and the providers are navigating the changes. I think we're all trying to sort of understand the rules and now we interpreting them the same. So I'd say what we're seeing now does see some higher appeal rates, natural overturn rates. So one thing we'll watch is does the sort of remaining tail of the appeal sort of time line result in lower appeals in the future than we would have historically seen. We're not counting on that right now. And again, that will take some time to further evaluate. I would say, of the other emerging sort of leading indicators that I referenced, I would say there's nothing really of note that we would say requires calling out in terms of significantly positive or negative. The one thing I will say is, typically, by this time, we would have our early view of February paid claim restatements. I would say, unfortunately, just given the changed health care disruption that we're all navigating that is much more difficult to assess. With the date of the incident that happened, it did impact inventory levels, obviously, beginning on that date and then paid claims towards the end of the month. So we would say until that is ultimately resolved, and the backlog of inventories work through, it will limit to some degree, our ability to fully assess sort of the paid claims, which, as you guys know, will impact our review of prior year development, but also as we get further into the first quarter, sort of the inpatient unit cost and then the non-inpatient claims, which are largely dependent on those paid claim levels. The one final thing I would note is, and some of you asked about this is the doc fix that's being proposed in the spending bill. They -- as of 1/1, 125 basis point adjustment was implemented, which was contemplated in our plan. The current proposals, I think, will be voted on this week suggests that, that get rolled back. So that would be a headwind. You can think of it as about $150 million in total. So certainly something I'd prefer not to have to deal with, it is an emerging headwind assuming that, that does get approved, which we think is highly likely, but something I think in the context of the overall plan is something that we would look to manage.

Okay. I'm going to take the question list and throw it out the window because I want to follow up on a lot of that. Maybe just starting with -- I want to make sure I understood you use this term avoidance rate. I'm not sure I understand exactly what you're talking about there. So can you just explain that a little bit and what you're watching on that one?

Sure. So our utilization management programs are designed, and provider will submit, say, an inpatient admission authorization, we will review sort of the clinical sort of notes underneath that and make a determination whether we think an inpatient admission is in fact necessary. Oftentimes, the impact that we see from those programs is probably redirection or avoidance rate of an inpatient stay. It gets adjusted to an observation stay, which has a much lower unit cost associated with it. And so that, again, is something we watch very closely in real time. We have an expectation of what we think the avoidance rate will be for all submitted authorization requests and that's what -- initially, like I said, we saw -- it wasn't quite where we thought it would be after the team in night rule changes. But then over the course of the weeks, there were some retraining and other things as people got accustomed to the new changes and currently been running much one line that we expected.

So was running -- it was running worse than you thought initially or...

Initially, it was running lower, right. For every hundred submissions, how many will get redirected? We were seeing fewer redirections than we initially had anticipated. But then that improved over the weeks where now it's running more like we'd expect.

And are you yet at the place to sort of -- I mean, can you quantify 2-midnight rule anymore, I guess, where I think where I've struggled a little bit is, I mean, my understanding is that they clarified the reg, it kind of -- this was kind of 2 phase. Like you're subject to the reg, we're clarifying that, but you're still allowed to do clinical review the max and the rack scan for fee-for-service, but you can still do it for MA and some of your competitors have put out transmittals like we're not changing anything. We've put that in public in sphere to their hospital providers. So -- and then also, we're tracking nationally observation rates with the thought that the inverse of that would perhaps be the best indicator of short-stay admissions. And in that latest data still seemed like observation rates hadn't come down a lot. So anyway, I'm just trying to sort of circle like in your -- is there a way to sort of quantify in your guidance, like what you think the 2-midnight rule is to earnings or the trend or just something to help us think about it?

Yes. So -- and I don't think we've given any disclosure previously on exactly what the impact was. As we assess, to your point, the underlying utilization management programs remain intact, but there was some clarification in terms of how to interpret sort of the expectation of how long a patient might stay in the hospital. And so as we assess that, we really looked at the duration of the stays. We've seen historically the avoidance rates we would see. And largely, we assume that for stays that were 3 or more nights in length that we expected that you would see much less impact as a result of the even programs relative to historical. The shorter duration stays the 1 and 2 next days, [indiscernible] in fact, where observation stay was likely -- would continue to prove more appropriate. So I would say in terms of at the time of bids, what we anticipated, without being extremely specific, I would say, think of it between, say, 50 to 75 basis points in terms of impact -- in terms of the gross impact of that change, which we would have incorporated it into our pricing. As we talked about in the fourth quarter, one thing we thought we were seeing, which was not initially anticipated, was additional provider behavior change where they would potentially have organically submitted observation stays historically that they're now in light of the changes that 2-midnight rule are now actually submitting as inpatient stay. So an absolute increase in the overall authorization volume. We mentioned we saw some of that in the fourth quarter. And so given the way we've thought about, our 2024 estimates and jumping off that fourth quarter baseline, you can think of that as also now being incorporated into our estimates. So it's part of the overall MLR change that we've stepped up to in 2024 and is something out to continue to monitor. We did mention that we did see a reduction in observation stays on an absolute basis. The data was still quite early, but we saw with December paid claims mostly from end of October and the various things [indiscernible] some negative restatements on non-inpatient. I would still say observation stays still are trending negative in the fourth quarter, which, again, we think further supports the fact that you're seeing some level of provider behavior change, which, again, at the end of the day, you can think of resulting in a higher overall unit cost. So I think we've been prudent in how we've thought about it in our '24 plan. As I said, our initial indicators seem to suggest that we're trending currently in line with those expectations, but the appeal rate is something that will take a little bit longer to assess that we'll have to continue to launch.

Got you. That's helpful. And then to change, that was like a new question. It was going to be top of my list. You guys have proactively talked about it. Can you give us a little sense of -- are you just using change for your -- tell us how you're using change. CenterWell is using it to send it to different payers, you're using it to downstream pay providers out of Humana. And do you have other EDIs that you've used historically and you're able to shift some of that around? Or how are you handling the outage?

Yes. I would say, to be honest, we're still trying to evaluate all of the impacts of the ones that we were certain of -- about 15% to 20% of our medical claims are dependent on change where they will come through change before coming to us in terms of claims, submissions and ultimate payments. It's a higher percentage in terms of impact to our dental claims. Although interesting enough, on the dental side, we also rely on them for the submission of certain clinical documentation. So we may be receiving the claim, but can't process it because we don't have the actual clinical documentation. So that's some of the complexity that we're trying to figure out is, what's the impact of this not only on paid claims but also on inventory levels, both of which would impact how we think about claim restatements and the completion legs and all of that. So it's a significant impact given the magnitude, but I think -- I don't -- we also use it for things like verifying eligibility for dual eligible status. And so that's more on the sales sort of front end, having confidence in whether someone is dual eligible and having confidence you're enrolling them in the right plan. So things like that, where we also have operational dependencies. And to your point, I think everyone's looking for workarounds. So that's something we also have to figure out is you don't necessarily know in real time who's figured out to work around. So we're just monitoring inventory levels, paid claim levels. Just try to get a sense for that as well as looking with availability and others to understand what they're seeing and sort of who they're working with to better understand. And the longer this goes on, the more important that will be as we continue to assess the impact.

We do see our primary clearinghouse is available. And we are seeing a pretty fast movement from change to other clearinghouses, of which availability is probably one of the more predominant ones going that we do see over time irrelevant if whatever change is able to correct, but a lot of that business will move into another clearinghouse.

And one thing I would say just reiterate because I know it sounds like, oh my gosh, you don't have all these claims, which I certainly would rather have them than not have them. I will say, just keep in mind, at this time of the year in the first quarter, given that we always require a 60-day lag in terms of how we book, it will have less impact technically to how our first quarter results ultimately play out. We have real-time visibility to inpatient utilization levels, the avoidance rates, like I said. But we would largely be relying on trending and other things for purposes of unit cost and non inpatient in the first quarter differently. But certainly, the longer this goes on, if it carries into the second quarter, it's something we'll have to be mindful of just in how long it takes to work through the backlog and really assess all the implications.

Yes, I was going to ask about that. I mean just your reserving approach in the absence of seeing this, hopefully, you wouldn't assume the claims don't actually exist. So you preserve consistently in I guess if it got fixed fairly quickly, somewhere in the 2Q is when then we'll figure out if that reserving approach was conservative or inadequate or whatever and just add a little more variability to maybe seeing that reserving.

Yes, I think that's exactly right. And so as an example, even though we technically know what February claims, they obviously look positive as you would expect them to, because we're in theory missing some claims. So we will assume that is not real and that we will see further claims come in at any time. I think if this does continue getting granular in terms of the percentage of claims for inpatient versus physician versus other things will become increasingly important so that we can have a better understanding of what we can have more confidence in versus less depending on the order of magnitude.

Gary, just keep in mind that the providers are obviously focused on getting their launch process. And there are other options for that -- and so I do see that even though change might not be able to completely deal with their issues, the industry will deal with the issue in another way and just there will be other clearinghouses that will clear. And CMS has gotten involved in this and they are actively bringing together the other clearinghouses to help out.

Got it. And then on the doc fix, 2 questions. I guess, one, the most direct one is, I mean, $150 million is maybe $0.80 or so a share. So if this gets finalized, I mean, given the other -- given the trend challenges already in place for '24, I mean, is that just the fact though we do the math the way I just sort of did? Or is there opportunity where you think -- some of that could be offset? Or is there any -- how would you want investors to think about that?

Yes. So I think we reiterated our guidance this morning. We're aware of the proposed change. We are assuming it gets implemented as proposed. So you can think of us as expecting that within our reaffirmation today. And I would say, again, while I prefer not to have it, then I have it, it's in the context of the overall plan and what we're seeing is some of the emerging sort of leading indicators that we feel comfortable that we can address.

And then just thinking about bids, I mean, Congress kind of routinely like fixes this or I think 2021 was the last time we had like a midyear or early year sort of change. So I mean, just why wouldn't you just bid assuming conversion rates going to be flat and Congress ultimately will fix it.

Yes. I think -- and we've been having this debate internally, but 2021 is when they gave the additional payment, and it was supposed to be recouped initially the first year and then obviously that didn't happen, and they've been taking a portion of it. So they have taken a portion of it back. Unfortunately, what was further expected to take back this year, they've now proposed to reverse. So I do think even though they are going to propose another cut for 2025, I think we've talked internally and just given what we've seen I think in light of the trend and everything else we're navigating for '25, we will likely take a more conservative position on this and assume that it will ultimately not be implemented. And then ultimately, we talked with government affairs about the need to try to sync up the processes between CMS and the rate notice and how that works. Ultimately, we get reimbursed for it to the degree there's a change. It's just on the lag, but it does prove challenging in terms of the way the pricing cycles work. But I think in light of everything we're navigating, we will not take an aggressive approach to whatever it might be proposed, just given the history.

Okay. Well, that was super helpful. And now I'm going to go back to the regular scheduled agenda here, but that was a good update. Glad we got to that. I want to step out just big picture for a minute and think about '25 in your latest thoughts. I mean, I've written in my personal view, I think the 6 largest MA plans, I think all are going to earn below target margins this year, not everyone's yet conceded that to the marketplace. But the combination of the trend acceleration we saw through '23 and my view or our analysis of the benefits for '24, I think it's the same margin challenge for everyone. And if that's right, our thought is we are going to see maybe for the first time, some material benefit reductions in '25 and a pivot to more focus -- or more focused on margin by the industry. But you don't get the benefit of knowing that in advance. You've got to do the usual game theory that you always have to deal with, but it's maybe higher stakes heading into '25. So give us just kind of your latest thoughts on balancing enrollment versus margin because I get a lot of questions about how much could they cut, what could they do? What subject TBC limits, what's not? And I think what technically you could do in terms of benefit and margins probably still exceeds competitively what you'd be willing to do, but I'd like your latest kind of thoughts on that.

Yes. I would say, overall, Gary, is that we are oriented to margin this year, we do believe the industry is not sustainable at this level. Even in our '23 pricing, we priced [indiscernible]. We priced for profitability. Obviously, the fourth quarter utilization and the things that happen change that outlook and changed our outlook for 2024. But we do feel and are oriented to pricing for the proper profitability in the industry -- it might take us 2 years to get there. But we do believe it's required. And we see that, I think in your note at one time, you said we're at a trough within the industry margins, and we agree with that. We agree that there is going to be changes within not only the regulatory side, but we just see competitively that we don't see the competitors being able to continue to be pricing at this level. At the same time, we also see the great opportunities as growth continues because we think the value proposition for membership will continue to have good membership growth. And in that context, we see the ability for us to also see that as the book ages it continue to see a natural increase in our revenue side as a result of risk adjustment. And then lastly, we see margin opportunity in the productivity side. And I think you've seen the organization take great progress in the productivity area. And we continue to see that as a great opportunity, both in being efficient, which we've always tried to, but a lot of the investments we made a few years ago are starting to really show their proof there and specifically on the technology side. So we see margin at a low. We see pricing required to be -- to create sustainability. We are committed to that as a company and the ability to us to build from that. We see both growth, the aging of the book and the productivity as being a great opportunity for us to see margin enhancement.

Maybe I'll put the same question a little more directly the way sometimes investors ask it to me, but is there still sort of that game theory on market share enrollment versus benefit? Is that still relevant in your '25 bids such that your -- you wouldn't do the maximum you technically could do in year 1, and that is why you're anticipating like a multiyear cash recoveries that's still part of the thought process?

Great nuance on the question. Yes, we will continue to have a view of what our competitors are doing. That would be a natural thing we would do. We would price with the view of getting to our target margins in a 2-year period of time. And so that price -- if we could accelerate it earlier, then we would do that. So the competitive nature would sort of put a balance on that, but we wouldn't compromise that margin improvement over less than 2 years -- more than 2 years, sorry.

And Gary, I would add to that. While the industry talks about averages a lot is what the average margin is, and we've been pressed on this, right? Obviously, our capitated -- plans that are more capitated are deeming fine, which means those that are non or not deeming quite as well. And so I would say, as an industry, there are plans that are not performing well that are seeing disproportionate growth. And that's true of everyone in the industry. And so I think while the averages are interesting, what's more relevant, I think, is ultimately sort of how each company decides to make changes to the products that we know are not sustainable as Bruce suggested. And so that's where we've done a lot of broker and consumer research to really inform sort of how do consumers and brokers think about the trade-off choices and how can we best position the plans at a more sustainable margin level that still will be highly attractive to [indiscernible] growth. I think all of us will have to address that. And I think we'll all be oriented to protecting plans like the D-SNPs and things that do deliver against the expected margin profile where there are other types of claims where I think we all have work to do to create a more sustainable margin profile going forward.

Got it. I want to get into advanced notice a little bit. So CMS published a 16 basis point cut, including about a 15 basis point star headwind for the whole industry. So let's just talk exclusive of STARS, roughly 0-ish, but your own 8-K of kind of running through the impact on your plans and what I've heard from -- I guess, I won't name the tickers, but most of the other large plans are exclusive of STARS coming to something that looks more like at least negative 1% before you get into a company-specific star ratings so that -- how are you thinking about that? So -- and we've talked to some of the actual material firms as well. And then obviously, the better Medicare lines put out a piece [indiscernible], saying negative 1%. So is this something we should view as an error? Or is that too strong a word? Is it just that the larger plans are having more V28 impact? Is it because CMS created these new normalization factors for an MAPD versus PDP? Like -- I feel like everyone is circling that the rate notice understates the magnitude of the cut, but I don't feel like the DUCs are sort of yet in a row on like what the message to CMS is. And maybe I'm wrong on that based on what we're hearing, but tell me how you guys are thinking about that and how you're asking CMS to respond to it.

Yes. First, it doesn't reflect the utilization that's going to -- and I think that's one of the large messages that we are bringing to them, not only through the fourth quarter, even what they incorporated in the restatements and the assumptions of...

Yes, bringing the forward year trend adjustments down after the year just had isn't actuarial...

So you see a lot of energy around that. Now the normalization and MRI normalization, that area, we've also commented on because we do think that there is some calculation corrections that need to be made there. And those 2 areas are probably the largest areas that we're oriented to, to be able to correct. But the biggest, I think, impact will be in the area of the utilization side.

I do think it is the normalization in the way that they have reflected it in their summary, which is why there's a disconnect between what they have suggested and what the industry has largely suggested around whether it's negative or not. And I think that's fairly consistent, we all agree with that. The absolute level of impact, as you said, will vary, particularly based on how penetrated your risk book is. I think trying to directly compare what we might be saying to others, it's a little bit complicated because it's relative to what you expected not -- so versus -- and we've all said, look, while we know we have a different point of view from CMS on the impact of V28 and it will vary that it's not the source of our difference. We know what that -- we've always known what that would be and has been incorporated. It's really what Bruce suggested. It's the negative restatements, which we would not have expected and do not think are reflective of a trend. And then this technical [indiscernible]. I think the industry is very aligned on those 2 challenges that we are all giving feedback to CMS. And historically, we have seen reasonable meaningful improvement between the preliminary and the final we would hope to see that and then some in light of the feedback that we're providing, and we'll just have to see ultimately what the final rate notice incorporate.

Is there any -- besides kind of the historic trajectory where the final notice usually is better, is there any solid basis yet that the arguments are finding purchase with this administration because they really seem to have a view of that? I mean, literally, that the industry cries well if they're never actually going to cut benefits and somehow you don't need a rate update even though there's underlying cost trend and it seemed to be a challenging risk maybe for them to take what might be a close election here. So I'm with you on the bull case for sure and probably on the base case too is -- so I guess the question is, how is that -- is that argument gaining any purchase yet or...

We just [indiscernible] our comments on Friday. So we haven't really been engaged with them. But we'll see over the next 30 days.

Got you. And then just sticking with advanced notice, your bridge from '24 to '25, it's $6 to $10 of earnings improvement, margin improvement. I hate to bring up the bear case. But when I kind of look at the near-term bear case, if the advanced notice holds, which is not our base case, and hopefully, it's not, I think the $6 to $10 would be very, very challenging given what they've delivered on the rate. Earnings growth at all or material earnings growth would look to be challenged. Can you comment on that? Are you willing to comment on that if the rate held like what happens to the $6 to $10 bridge?

Yes. So I think as we've said, we were very clear about the assumptions that we relied on when we set the $6 to $10. And within that range, as we said, at the lower end of that range, the things that might ultimately cause you to be at the lower end might be a rate notice it's not quite in line with what we expected or the competitive environment is such where we're taking larger benefit changes and see larger membership impacts as a result. To get to the higher end of the range, you might have to see a slightly favorable rate notice or the competitive environment more level where think of more like spot membership versus membership declines. Certainly, if we saw no improvement in the final rate notice, that would be a meaningful difference, obviously, relative to what we expected and would certainly can see that it would make this $6 to $10 more challenging, and I would argue definitely take the high end of that off the table. We would still work very hard to try to deliver within that. But I think in all fairness, we'd have to see what that looks like. We did not run every scenario imaginable. And so we would have to see ultimately where the rate notice comes out to the degree it's different, what does that look like? What are the opportunities to optimize the plans underneath. There are still opportunities, so I don't want anyone to think it doesn't see any improvement that there's no opportunity for EPS and earnings improvement, there is. As we've said, we do have some plans that are not profitable today. I've noticed that, that onerous would make that a bigger number. And so we would certainly look and say at a plan and county level, if there are plans where the path to profitability is just too far into the future and can't -- and if there are things in [indiscernible] whether it's provider environments, et cetera, that can't be addressed, then we would look to exit. And that would have sort of no regret membership implications, but the opportunity to improve the earnings profile. And I would just say there are other opportunities if that were really the environment we were working in, where to your point, you're limited by TBC and other real limitations maybe the response to that would be, again, either exit more plans or potentially consider launching new plans that allow you to create a benefit construct that we think is more sustainable. So those are all things we would do. But in fairness, if it really saw no improvement given the magnitude of difference, we couldn't say with certainty what that might mean in terms of '25 at this point, we'd have to do the work and then certainly, post bids would be providing us with an update on what you can expect. But our hope is that we will minimally see the level of change we've historically seen, if not more, given the environment that allows us to be much closer to what we assumed.

Agree. Fingers crossed on that. Last question would just be '25 technical notice had this change in the broker compensation limits where they would apply this measure of fair amount -- fair value of administrative services to the brokers, but not to the FMOs and the TPMOs, and I've read your comments on this to CMS. I've read everybody's comments on that. So I think there's hundreds and hundreds of pages of comments on this. My instinct is, this gets pushed off and not finalized. It seems very vague what exactly was proposed. And anyway, do you share that view? Do you have a thought that maybe they won't be in a position to finalize that in April? Or what do you think the implications would be?

I don't know if they'd be in a position or not. It's just a question. It's -- it be a question of do they want to take it on right now. It needs to be done because your word of vague really creates a lot of challenges in how you pay the brokers. And what are administrative fees and what goes to the broker, and we would like to see clarity around this because [indiscernible] we do find that the channel is very valuable for members to fully understand what their needs are and to be able to educate them on that. And we want to find the right incentives that provide the broker that because at the end of the day, it's really the broker that does this. And to create an even playing field and people are not interpreting it from one to another way of approach and therefore, that you create this disconnect in the industry where you have some players paying a lot of administrative fees, which is what we see today. While others like ourselves and even United are paying much less administrative fees. And so you create this odd incentives that we're not competing in the same way and therefore, it also creates misincentives.

Got it. Are we at time or over time?

Over time.

2 minutes. We are over time. Okay.

That's what the red light means.

Thanks. That's what the red light means. I don't pay a lot of attention to it because we started early, that's why. It's only 9:40, but class dismissed.