Humana Inc. ($HUM)

All right. Well, let's go ahead and get started. It's my pleasure to have the team from Humana with us. We've got Jim Rechtin, Chief Executive Officer; and Celeste Mellet, the Chief Financial Officer. Thanks, guys, for being here. And I think, Jim, you wanted to make some comments before we get into some Q&A?

Yes. I just wanted to hit a handful of themes, which are really kind of the themes that we've been hearing since the first quarter earnings call. I'll start with -- I'm going to take us back to our Investor Day last June, we essentially made two commitments at the time. One is getting back to -- getting Medicare back to a stable and compelling margin of at least 3%. And second is getting the earnings power of the business back in place by 2028. And we just want to reinforce that those things have not changed. We are still committed to the things that we said last June. What that means, of course, is that we have to make adjustments to the environment that we're in. And so what I mean by that is medical cost trend, rate environment, we will have to adjust benefits to accommodate the environment that we're in, both from a funding and from a medical cost standpoint. And that has led a number of people to basically say, "Okay, so clarify what you mean when you talk about lifetime value of a member in that context." And first of all, I want to be very clear that when we talk about lifetime value, it's not a theoretical concept. It is rooted in math. The economic value of November in year 2 is substantially better than year 1. Year 3 is better than year 2. Year 4 is better than year 3. The jump from year 1 to year 2, in particular, is driven by those acquisition costs, which are higher than retention cost and it's driven by the fact that MER matures from year 1 to year 2. And it matures as we get to know a member better, we understand what their conditions are, and we help them manage those more effectively. And so the -- when we talk about lifetime value, what we're talking about is the economic incentive to make sure that we are minimizing attrition or maximizing retention of our members from year-to-year. For that to work, for that lifetime value calculation to work, we still need a compelling MA margin over time. I think there were some questions, do we believe that CenterWell margin can replace or substitute the Medicare margin? The answer is no. The Medicare business has to stand on its own. The CenterWell business has to stand on its own. Combined, it makes the economics more attractive. But we needed a stable, compelling MA margin. We need to continue to run a good CenterWell business and combined, it creates a lot of incentive to keep our members around.

Okay. So I think the theme there is you can balance your lifetime value, strategy, adjust benefits and still achieve the desired outcome?

That's exactly right. We have to do that. That is the nature of the business at the end of the day. And obviously, as we adjust benefits, we want to do it in a way that takes -- that protects our customers, our consumers the best we can, but it has to be fiscally prudent at the end of the day.

Yes. And Whit, if I can just add to that. So the acquisition costs, I think, are when people generally understand they're higher in the first year, but the difference between the first and the second year is massive. We're talking over $1,000 on average per new member in the first year, and that's halved in the second. So that's a huge difference. But you have to have the medical margin to follow up on it, too, so you'd have to adjust your benefits. But this constant churn within the industry just generates a ton of money that's going to the broker pockets, it's not going to the enterprises, the shareholders or the members.

And I would think game theory, if the entire market is responding by adjusting benefits that further enables you to achieve the desired outcome and still focus on lifetime value?

Yes. That is exactly right. In periods of time where the industry funding is not keeping up with medical cost trend, you would presume that the entire industry is making an adjustment. And then the question is not are we making adjustment. The answer is yes, we are. The question is, are we a little bit better at making those adjustments in a way that are less abrasive for our members. And are we doing a better job of communicating and interacting and engaging with our members so that they are better able to absorb those adjustments.

Okay. Strong AEP this year, over 1 million members. Maybe just refresh us on some of the numbers around switchers retention, growth in D-SNP, how many are returning members?

Yes. So these are the metrics that we're looking at during AEP in many cases and then in some cases, in early January to basically ask ourselves, "Are we seeing the type of growth that we want to see?" And we have felt good about where those metrics have come in, what they're telling us about the membership that has onboarded in January. So for example, about 70% of our new members are switchers as opposed to new to MA. On average, switchers are economically better in year 1 than a new to MA member. Now you look at that and you then say, "Okay, well, are you concerned that a bunch of those switches are coming from planned exits?" and the answer is we actually feel pretty good about the mix of planned exits versus non-planned exits. We absorbed about 12% of the planned exits. So that's less than our market share. That's less than -- if you think about it, our kind of fair share of the market and which means that we have -- we essentially have brought on board a lot of very positive switchers who are coming from other types of plans, not from planned exits. In addition to that, about 70% of our new members are in 4-star better contracts. And so that also makes this a good mix of membership coming in. We also have about 75% of these members coming through channels that are more attractive sales channels. So we're looking at our sales channels, some tend to have higher retention. Some tend to have more engaged members. We are seeing about 75% of our members coming in through channels that we consider to be higher-quality channels. And so each of those looks, gives us a snapshot into the membership mix in a way that, right now, presents very positive.

And I would just add, it's not an accident that we're seeing an improvement in the sales channel mix. We have taken very deliberate action to as you think about some of the actions we took in AEPs to trim the lower performing call centers and broker partners. So we looked at Stars, we looked at retention, we looked at all of the things that drive the economics for the business. We weren't just cutting for cuttings safe, but we're really focused on the quality of the membership that we were going to acquire through whatever channels we had open.

Yes. And so for all those are the reasons that you feel confident in your ability to double the margins before the Stars headwind still?

That is correct. Yes.

Mix of HMO, PPO, it was largely unchanged versus the mix last year, correct?

That's exactly right. It looks very similar to our historical mix over the course of the past few years.

I believe -- I know you've got your January premium payments from CMS, your February payments from CMS that gives you a look with the [ NNR ] stuff. And any observations, things you care to share any changes in RAF versus expectations?

Yes. So the things that we -- there's obviously the things that we see during AEP that we will then adjust to over time. And then there's the things that we don't really see until January. So we have the MRA tape that comes in, in January now February. We've got a pretty early look on medication utilization. And you get early data on APTs, admits per thousand, you get some pretty early look at prior authorizations and what -- how that's trending. And on the whole, all of these metrics are kind of pointing to the same story, which is the mix of members coming in looks very consistent with what we were expecting again, as we were making all of our adjustments in AEP. Like again, to Celeste point, we made a whole bunch of deliberate decisions to try to shape the type of growth that was coming in. And the data that we're seeing across all those different metrics reinforces that what we ultimately absorbed is pretty consistent with where we expected to be at this point in time.

Knowing what you know now about the competitor benefit design action that was taken, would you have changed your bids at all?

Yes. You're saying if you went all the way back to last June, would you have done something different?

Totally unfair question.

Look, I will tell you, every year, you see what your competitors have done and you would have done something different. Like that is just a given. When we were submitting our bids, did we expect to have the type of growth that we had this year? No. The answer is, at that point in time, no, we did not. As data began to come into the market even over the summer, you begin to see some of the actions that your competitors take even before the product is out there. You begin to realize kind of the direction that things are headed, and that's when you're stepping back and you're saying, "Okay, now on a forward-looking basis, what do we need to do differently to shape this environment in the direction that we want to shape it?" And again, that goes back to what Celeste was pointing to. We made very deliberate decisions both geographically, product type, how we commission the channels that we were using from a sales standpoint to take advantage of the situation that we're in and shape it in a direction that made sense for the company. But to go back to your original question, yes, you would go back and you would do some things differently if you had full visibility into what your competitors are doing. And having said all of that, we actually feel good about where we landed. A little bit different place than where we expected to be, but we feel good about where we landed.

Yes. I get asked a lot of questions about just the various margin profiles on different members and you had members in a 4-star plan last year that was one. And as those new members go to a new 4-star plan, is it 1, is it 2? And maybe it'd just be helpful to rank some of the margins, Celeste, on old members, the switchers and new lives from fee-for-service, et cetera?

Yes. So the bulk of our concurrent members, old members, are on plans with less than 4-stars. Then 70% of our new members are in plans with 4-stars or greater but you have the acquisition costs. So that would -- the acquisition cost pulls them down closer to the overall pool. So we've talked about sort of being breakeven in insurance and slightly negative in MA, but the profile is different. Now typically, switchers do have higher margins. So if you start -- if you just strip out Stars and everything, and let's just -- like UM, utilization margin, you would -- your switchers would be the highest then your new to Medicare would be the lowest because they tend to be -- they don't -- they're not coded yet. You get paid more over time as they age in. So it's -- there's a lot going on beneath the surface with the margins, but if you strip away the noise of Stars and acquisitions, you get -- your switchers are still going to be your best.

Right. Maybe growth in D-SNP this year and maybe just update us on kind of what the margins look like on those members now last year versus this year?

The margins on D-SNP. The last year versus this year, I don't know that I actually know that off the top of my head.

It's going to be better. Yes.

A little bit better.

Well, I mean, if we're -- if you think about it, we're doubling ex Stars, if we were doubling for the book, then the margin improvement would be across all of the membership. So if you think about the drivers, so we have the rate notice plus trend vendors plus operational efficiency is greater than trend, which is what gets you the margin improvement that would be across the whole book.

The D-SNP remain, on average, higher margin than the non-D-SNP last year and this year?

Yes. I don't think the differential is any different than it was last year though.

Yes. Some of your competitors, I hate doing that, sorry. The tend to say that they don't feel like they can make money on PPO? Why is it that Humana feels like they can make money on PPO lives?

Yes. I don't understand where the notion that you can't make money on PPO product comes from, to be perfectly honest. Like at the end of the day, you have a risk pool, you have the ability to price product to that risk pool. The profitability of the product has everything to do with how are you structuring the product, how are you structuring your network within the product. And yes, it has to be appropriate to the risk pool of the members who use that product, but the product itself is not inherently profitable or unprofitable. What we have -- we took two years of pulling back on benefits across the board, but in particular, much of that was in the PPO market because we did recognize that, that market over a number of years had kind of gotten out ahead of itself in essence that it was being priced too aggressively. But we took 2 years, we pulled that back. We, in essence, walked away from kind of where the industry had been, which is pricing for a thin margin in year 1 and then trying to deliberately ratchet back benefits in year 2 and 3 driving a lot of churn, but then making money on the members you retained. That was part of what was going on in the industry. We walked away from that 2 years ago. And so when you walk away from that and you're pricing appropriately, the product should do fine. You just have to recognize what the risk pool is that you're serving and how to adjust the business to it.

I'd be curious to get an update on some of the engagement initiatives, early engagement with new members, either on the MA business and also maybe CenterWell, how that compares to prior years.

Let me start and -- Yes, I'm happy to jump in. So we have been much more proactive this year in engaging our members really starting at the point of sale. So if you think about the pre-effective period between point of sale and the policy going into effect in January, you essentially have a window of engagement where you can get ahead on closing Star gaps on scheduling primary care appointments on getting your annual wellness visits scheduled and moving and so we've had a higher level of engagement than we've really ever had largely driven by deliberate actions that we've taken in and post the sales period to onboard our members more effectively. It has helped with taking that approach has helped with call center volume, call center service levels. It has helped us get a head start on Stars performance. I've had a lot of benefits and frankly, we're excited to be managing that process in this way going forward.

I'd say generally, because we had a lot more switchers this year, 70%, they're going to be more engaged. Even the ones who come in under coded, they know how to use the program. They know how to use their benefits, they're much more familiar with it. So from that perspective, in addition to the actions we're taking to engage them faster and sooner, we're not seeing any cause for concern at the moment.

About 25% of our switchers we have actually had as customers in the past.

30%, yes.

Is it 30%? Yes. So we can look back at how those members performed and engaged historically. And again, it's good membership mix. It is highly engaged members who are active in their care, which again is positive for Stars. It's positive for MER.

All right. That's where I was going to go next. All that aligns with the investments and things you're doing with Stars. Maybe just elaborate a little bit more on the Stars investments, how you feel like you're tracking beyond some of those member engagement initiatives.

Yes. So the Stars -- operationally, Stars performance continues to perform well. We have made very positive strides year-over-year. We hope to share more about that, a little bit more color around that as soon as the hybrid season is over here in another couple of months. But the headline is operationally, we're doing the things that we felt like we needed to do. We've got the inherent uncertainty of not knowing what your competitors are doing in a program that is created on a curve. But operationally, we feel good about the place that we're at. And that's both looking at the HEDIS and patient safety metrics that we were working on last calendar year. That is also true in metrics that are kind of in play right now, which is call centers and [ caps ] and house metrics. So look, we're optimistic about where we're headed in the Stars program. And like every year, we need to see where competitors land to understand the final outcome.

Well there is some positive, I guess, near-term developments with Stars, the preservation of the reward factor was certainly, I think, a welcome development. And the technical note of CMS is now proposing some changes within Stars, maybe eliminating [ 12 measures ]. I mean you can run it through a model and see that it's a modest headwind to your raw score. What do you think the outcome of this is going to be just from a policy perspective at this point in time? And feedback maybe that you're providing to CMS. I know it's a busy week for you.

Yes. Well, look, on the Stars front, what it feels like CMS is trying to do is put more emphasis on health outcomes at the end of the day. Moving away from some of the administrative metrics that while meaningful to an extent, would also tend to drive costs up, cost burden up in excess of the actual benefit that members are seeing. So we came out in support of the changes. We recognize that when you look at historical performance, it would appear to be a modest headwind. But a lot of our effort over the course of the last roughly 18 months now has been in those very metrics that CMS is emphasizing. So we've been putting a lot of effort into the quality and the patient outcome-oriented metrics. And so we feel good about where we're actually positioned at this point in time relative to the changes.

I get asked the question on Part D, where PDP margins are today and what sort of incorporated within the outlook and framework this year.

Yes. So we -- again, like last year, priced for margin, but we're guiding to effectively breakeven just given the continued evolution of that program, I think this -- the changes this year, then we'll sort of be more settled based on what we know today, that can continue to make changes. So just given the pipeline -- so we have a good view into the pipeline, but exactly when they hit and what the utilization looks like is the risk we're looking out for there, but we don't have heroic assumptions in terms of what we would earn in that business this year. But over time, we would expect as the program settles that you begin to generate more consistent profitability.

Yes. How strategic do you think about PDP now? I mean it's been, I don't want to call it a commodity, but when you've seen other competitor exits out of the market, it's helpful for the PBM in some ways, but long term, how's the thinking evolving around that business?

Yes. So there's a couple of components. One, it is a good starter product. We have a few products that are starter products for folks who may just start in one and then eventually switch right? You have much lower acquisition costs. You have a relationship. You have a sense-ish for their help. Two, you do have, as you think about the PD and then MAPD, the leverage and the insights and the risk pool across a broader set of individuals, which is beneficial. We have, as you know, our PBM in that business is structured very differently. So it's -- I mean, we get paid. It's more of like a transaction fee than we don't have like the massive markups. So it's beneficial to us, but we've structured that business very differently. So -- but obviously, we're going to continue to reevaluate it every year just as the regulatory environment changes and the rules for the program change to ensure that it makes sense.

Yes. Maybe just we'll hit on the rate notice obviously, some disappointing results and outcome of the preliminary rule. I don't know if there's much to share, Jim, but just -- I'll just throw it out as an open-end question with no answer.

Yes. I think you just summarized it in many ways. There is no answer at this point in time. Obviously, the industry has been very active and frankly, advocates for seniors have been very active in communicating to Washington, the potential implications of this rate notice. I think those implications are well understood. You can't have mid- to high single-digit cost trend and flat funding and expect benefits to remain the same. It's just the math doesn't work. And so again, I think policymakers understand that where things will land, it's hard to know. Obviously, CMS for all the right reasons, does not advertise where they're headed with a final rate notice. Our hope is that we see some amount of relief really for the benefit of our members, right? Like it is less about the impact it's going to have on us as a company and it's much more the impact that it's going to have on our members. And we'll know here in another couple of months.

And if I can just add that hope is not a strategy. So we understand what needs to be done to deliver on the targets and the margins that we laid out at our Investor Day. So it's better, it would be -- the productions or the adjustments in the industry will be less, but we understand what needs to be done.

I like that message. One of -- I've been studying a little bit this unlinked chart review thing, and there were some really interesting studies that have been able to show the wide variation and the potential impact of what this could be for participants within the industry. I've seen studies showing upwards of north of a 6% headwind, not 1.5%. And you guys don't feel like you're going to see as large of a headwind is that 1.5% but I'm asking more specifically around just like the industry and the wide variation and maybe the notion and idea that something like that could be phased in over a period of time?

Yes. I think -- while we do believe that there will be some variation. The variation is not going to be the same magnitude that it was with v28. I also think some of the variation that you see even today can get managed over time. So you've got companies that have kind of been -- that have essentially invested more in having the capabilities to link encounter data to chart reviews and then you've got companies who have lagged in doing that. But the whole industry is going to move there over time, and that will narrow the variation in the impact over a year or two. Having said that, when you look at just the totality of the changes that have been introduced, the recalibration, combined with the chart review and then the skin substitute adjustments. When you look at all the magnitude of all of those adjustments and what it's had on the industry, what it will have on the industry, it's pretty significant. And so I think the question is, do you face some of these changes in over time more to allow the industry to have time to adapt to them. I think that's a real question that CMS is going to have to wrestle with.

But I think from the chart review perspective, from a policy perspective, they've been pretty clear about that. So that is -- they want to make sure that whatever is being paid for happened.

On CenterWell, you've got the relationship with Welsh Carson and in any given year, there's the put call and there was some -- I mean, you've seen that there were some press reports out there suggesting that perhaps that a put or call might be active. I don't know if that's true or not true, but just what's the latest update on the put or call.

So in '25 and '26, the ball is in our court. So we could call starting in '27, they could put and there's a lag. So there are a number of cohorts. So the '25 -- the first year, the first cohort, we could call in '25 or '26. And if we don't, they could put it in '27 and then '26 would be '28. So it's a 2-year period. And we'll take a look at where we are, we do a bunch of analysis. That decision would need to be made by June. As you saw last year, we did not call it.

Correct. Maybe last one here is you've announced a couple acquisitions of some risk-based, risk-bearing groups down in Florida. I'd like to just hear a little bit more on the strategic thinking about how those complement the business down in Florida?

Yes. In both cases, these acquisitions kind of filled, essentially, geographic gaps in our CenterWell portfolio in a broader geography, meaning the state of Florida and the Southeast. That's very important to us. And so we looked at these opportunities and said, "Hey, one, they're very good geographic fit." They are also unique in that -- in both cases, there's a limited number of other options in those geographies. So it's -- if you're going to build out your footprint and your network in those geographies, this was the opportunity to do it. And in both cases, they were operationally good fit. And in particular, with MaxHealth, this is a very, very, very high-performing group. And I actually think we CenterWell will learn some things from what Max Health is doing that we can apply to the rest of the portfolio in a very positive way. So they're good assets. They're geographically an important fit. And I think the last thing I would just emphasize is as we grow CenterWell, one of the primary questions that we are asking ourselves is what does the primary care supply chain look like in any given geography. And are we exposed or do we have risk because it's too concentrated or it's concentrated in either competitors or less strong partners of ours. And in those types of situations, it is very important for us to be building out a primary care footprint of our own. And so strategically, these made sense not just short term but long term to protect and preserve the business.

But to be clear, they have to stand alone as investments, right? They have to stand alone on the CenterWell, just like MA needs to stand alone, and we need to be able to make the math work without the sort of planned element and network element.

Okay. Well, great. Well, maybe we can do a field trip to the villages. I want to see what that place is all about.

I'm supposed to go in a couple of weeks. I have a field trip.

All right. Lisa set it up right. Jim, Celeste, thanks so much for joining us today.

Yes. Thank you so much. We appreciate it.