Susan M. Diamond
Chief Financial Officer at Humana
Thank you, Bruce, and good morning, everyone. Today we reported adjusted EPS of $6.89 for the second quarter, in line with our previous expectations. Our underlying core business fundamentals remained strong, and we experienced a positive start to the year across our segments with the first quarter coming in modestly ahead of our previous expectations. Our results moderated back to expected levels in the second quarter, albeit with variation in the way specific underlying assumptions emerged, with COVID treatment costs coming in lower than expected, offset by non-inpatient utilization continuing to bounce back faster than originally anticipated. As I will describe in further detail in a moment, uncertainty remains for the balance of the year due to the pandemic, specifically as it respects COVID hospitalizations and the rate at which non-COVID costs normalized inclusive of both volume and unit costs.
Recognizing the majority of today's call will focus on our emerging experience and our 2021 guidance, I want to quickly touch on operating performance across our segments before diving into that detail. Our Medicare Advantage growth remains on track and consistent with our previous expectations with individual MA growing solidly above the market at an expected 11.4% at the midpoint. Our Medicaid business results are exceeding our initial expectations given membership increases largely attributable to the extension of the public health emergency as well as higher than expected favorable prior period development.
In our Group and Specialty segment, consistent with our commentary on our last earnings call, medical membership declines are lower than we expected coming into the year. Our Specialty business results are exceeding expectations as utilization, particularly for dental services, has been slower to bounce back than initially expected. Finally, within we set our healthcare services operations, pharmacy continues to see increased mail order penetration as a result of customer experience improvements and additional marketing initiatives. The home business, CenterWell Senior Primary Care and Conviva are performing slightly ahead of expectations, and we remain on track to open 20 new clinics this year with Welsh Carson. In addition, as Bruce indicated in his remarks, we now expect the Kindred at Home acquisition to close in mid-August subject to customary state and federal regulatory approvals.
Before I go into more detail on our 2021 guide, I want to reiterate that the uncertainty we are seeing in 2021 relates solely to the difficulty estimating the impact of the pandemic and is not expected to carry forward into 2022. We remain comfortable with how we approach 2022 pricing, which I will expand on later in my remarks.
Turning to full year 2021 guidance. I would remind you, our adjusted EPS guidance represents growth at or above the top end of our long-term target of 11% to 15%. Our philosophy regarding 2021 guidance has been to provide transparency into the uncertainty caused by COVID-19 and the ability to deliver our targeted earnings growth with solid underlying core business performance and largely offsetting COVID-19-related headwinds and tailwinds. We have been consistent in and remain committed to this philosophy.
There is a reasonable path to achieving adjusted EPS within our initial guidance range. And accordingly, today we are maintaining our full year adjusted EPS guidance of $21.25 to $21.75, while acknowledging the continued uncertainty as it respects to COVID hospitalization trends as well as the pace at which non-COVID costs bounce back and at what level they ultimately normalize. Additionally, we expect our third quarter adjusted EPS to reflect a low-20s percentage of our full year adjusted EPS.
As Bruce indicated, given our experience to date, together with our current estimates for the back half of 2021, we have effectively recognized a $600 million COVID-related headwind for Medicare Advantage in our full year guide, offset by favorable operating items. These favorable items include, among others, higher than initially expected prior year development, the previously discussed better than expected specialty and Medicaid results and the expected contribution from Kindred at Home given the transaction is expected to close in the coming weeks.
Now let me provide an update on the underlying changes since our initial detailed guide in February, articulate key assumptions regarding utilization in the back half of 2021 and expand on the continued pandemic-related uncertainties I described. I will begin with Medicare Advantage revenue. As discussed last quarter, given our significant exposure to Medicare Advantage, we are disproportionately affected by COVID's impact on Medicare Risk Adjustment or MRA. Recall, our risk-adjusted revenue for 2021 is determined by 2020 dates of service, medical utilization and resulting documentation, which as previously discussed, was materially depressed in 2020.
As we have indicated since the beginning of the year, the MRA headwind we are facing in 2021 is significant, and we have closely monitored it over the course of the year. Our April guide recognized we had $300 million of additional pressure from MRA relative to our initial expectations for the full year, which was offset by the net benefit of the extension of sequester relief. In July, we received the mid-year MRA payment, and it came in modestly lower than expected. We are however taking operational steps now to be able to recover some of the MRA revenue in the final payment for 2021. Accordingly, our MA premium estimates, net of capitation, remained largely in line with our initial expectations when factoring in the net sequestration benefit.
Now turning to benefit expense. At the beginning of the year, we indicated that we expected non-COVID costs for our Medicare business to run 3.6% to 5.5% below baseline. We define baseline and 2019 experience trended forward based on a normalized trend factor excluding the effects of COVID. In the first quarter, we acknowledged that non-inpatient costs were bouncing back faster than initially expected. However, that was offset by COVID utilization decelerating faster than expected. We also recognized, however, visibility into non-inpatient claims were significantly less than inpatient. And therefore, we acknowledged that there was more uncertainty around non-inpatient service categories in terms of exactly where we stood.
However, at that time, we could still tolerate overall utilization returning to baseline late in the year if the non-inpatient acceleration we were seeing was due to pent-up demand and leveled off in the second and third quarters. In the first and second quarters, non-COVID costs run approximately 7% and 3% below baseline respectively with the bounce back outpacing expectations in the second quarter. Non-inpatient utilization did not level off and instead continue to increase in the second quarter and was offset by lower than expected COVID costs and other business outperformance.
As the healthcare system has been open for several months and a high rate of the senior population has been vaccinated, our current guidance now assumes that non-COVID costs level off and run approximately 2.5% below baseline levels in the back half of the year. Consistent with our original forecast, our current guidance assumes minimal COVID testing and treatment costs in the back half of the year. That said, we do acknowledge that we are seeing increases in COVID admissions in recent weeks, although it is too early to determine if they will be offsetting declines in non-COVID utilization and we will continue to monitor this recent development.
Finally, as it respects to our 2021 guide, for our commercial business, we expect all-in utilization for COVID and non-COVID to continue to run above baseline as anticipated. In summary, I want to emphasize that 2021 is a COVID transition year. There is a reasonable path to deliver against our guidance expectations. However, if non-COVID utilization or COVID treatment costs increase beyond our expectations in the back half of the year, it will present a headwind to our guide absent offsetting tailwind.
I also want to reiterate that the $21.50 midpoint of our original guide continues to be the right jumping off point for 2022 adjusted EPS growth. Our members continue to engage in routine interactions with their providers, which we anticipate will result in more normalized Medicare Advantage revenue next year as providers are able to ensure that our members are receiving appropriate care and that their conditions are fully documented.
During the first half of 2021, provider interactions and documentation of clinical diagnoses that will impact 2022 revenue outpace those experienced in the first half of 2020 and are approximately 80% complete in line with the estimated completion rate for the same time period in 2019. Lastly, I would remind you that our Medicare Advantage bids for 2022 reflected the continued uncertainty associated with COVID-19 as it relates to our premium and baseline non-COVID claims trend assumptions with a focus on maintaining benefit stability into 2023.
Before we open up the line for questions, I'm excited to announce two finance leadership changes that will promote the growth and versatility of our finance leadership team. First, with the expected integration of Kindred at Home, our home business is growing significantly, and Amy has accepted the role of Vice President and CFO of Home Solutions. She will be a key member of the Home Solutions leadership team, responsible for the financial oversight and planning and forecasting for the segment. Lisa Stoner will succeed Amy, accepting the role of Vice President, Investor Relations. Lisa has worked with Amy over the last four years and is well known and respected by our investors. We are excited about the opportunity this affords both Amy and Lisa, and Lisa's continuity in Investor Relations will allow for a seamless transition.
With that, we will open up the lines for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.
