Susan M. Diamond
Chief Financial Officer at Humana
Thank you, Bruce, and good morning, everyone. Today, we reported full year 2022 adjusted earnings per share of $25.24, ahead of our expectations of approximately $25 and representing a compelling 22% growth year-over-year. As Bruce shared, we delivered this impressive earnings growth while making significant advancements in our strategy, including a quicker-than-anticipated return to above-market individual Medicare Advantage membership growth for 2023 and further advancement of our CenterWell platform.
Before discussing details of our performance and outlook, I would note that we realigned our reportable segments in December, moving to two distinct segments: Insurance and CenterWell. I will speak to our 2022 results and 2023 outlook in terms of the new segment structure with references to the old segments to provide clarity as needed. I will start by discussing our fourth quarter results and underlying trends before turning to our 2023 expectations.
We reported fourth quarter adjusted EPS of $1.62, above internal expectations and consensus estimates. Results for our Insurance segment were modestly favorable to expectations. As recently shared, total medical costs in our Medicare Advantage business ranged slightly above previous expectations during the fourth quarter, driven by higher than anticipated flu and COVID costs as well as higher reimbursement rates implemented for 340B-eligible drugs. Collectively, these items had an impact of approximately 80 basis points on the fourth quarter benefit ratio for both the Insurance segment as well as the previous Retail segment.
Importantly, these are discrete items in the quarter and do not have a carryover impact into 2023. Excluding these items, total medical costs in our Medicare Advantage business were modestly below our previous expectation. Our Medicaid business continued to perform well in the quarter with lower-than-anticipated medical costs. In addition, the favorable utilization seen throughout the year in our commercial group medical and specialty businesses persisted in the fourth quarter. All in, excluding the discrete impacts related to flu, COVID, and 340B I just described, medical costs experienced in our Insurance segment were favorable to expectations in the quarter, continuing the trends experienced throughout the year. This segment also benefited from administrative cost favorability driven by our ongoing cost discipline and productivity efforts while also covering incremental marketing spend.
Within our CenterWell segment, each business performed largely in line with expectations in the fourth quarter. Our primary care organization continues to improve the operating performance in our wholly-owned centers, and we're pleased to report that we increased the number of centers that are contribution margin positive from 88 at the end of 2021 to 110 at year end 2022, a 25% increase year over year.
In addition, we increase the number of centers that have reached our $3 million contribution margin target from 18 in 2021 to 31 at the end of 2022. In our de novo centers, we grew over 9,000 patients in 2022, or 91%, while our de novo center count increased by 18, or 56%. As Bruce shared, we expect both center and patient growth to further accelerate in 2023.
In the home, total admissions and our core fee-for-service home health business were up 9.1% year over year for the fourth quarter and up 6.3% for the full year, in line with our expectations of mid-single-digit growth. In addition, we continue to expand our value-based model at the expected pace. We implemented the full value-based model in both Virginia and North Carolina in 2022, ending the year covering just over 760,000 members, or 15% of our Humana MA members, up from 5% coverage in 2021.
Finally, our pharmacy results remain strong, reflecting industry-leading mail order penetration at 38.6% for our individual Medicare Advantage members. The benefits of mail order extend beyond our pharmacy operations, leading to better medication adherence and health outcomes benefiting our members and health plan. As an example, members who utilize CenterWell pharmacy demonstrate medication adherence rates ranging from 650 to 840 basis points higher than we see in traditional retail pharmacies for cholesterol, blood pressure, and diabetes treatments.
Now turning to our 2023 expectations and related assumptions. Today, we provided adjusted EPS guidance for 2023 of at least $28. This represents 11% growth over 2022, which is in line with our previous commentary, and overcomes a headwind of approximately $0.92, or 3.6%, related to the divestiture of a 60% interest in Kindred Hospice in August 2022. Our 2023 outlook reflects top line growth above 11% with consolidated revenues projected to be north of $103 billion at the midpoint, driven by growth in our individual Medicare Advantage, Medicaid and CenterWell businesses. These increases were partially offset by the divestiture of a 60% interest in Kindred Hospice and expected declines in our group Medicare Advantage, commercial group medical, and PDP membership. At this time, we expect first quarter earnings to represent approximately 35% of full-year 2023 adjusted EPS.
I will now provide additional detail on the 2023 outlook for both of our business segments, starting with Insurance. As Bruce discussed, we anticipate individual Medicare Advantage membership growth of at least 625,000 in 2023, a 13.7% increase year over year. We added approximately 495,000 members during the Annual Election Period and anticipate continued strong growth for the remainder of the year.
Touching on group MA, we continue to expect a net reduction of approximately 60,000 members in 2023. This reduction is primarily driven by the loss of a large group account, partially offset by expected growth in small account membership. We remain committed to disciplined pricing and a competitive group Medicare Advantage market.
For our PDP business, we now expect a membership decline of approximately 800,000 members for 2023, an improvement from our pre-AEP estimate of a 1 million member reduction. This improvement was driven by better-than-expected sales and retention in our Walmart Value plan. We are committed to providing affordable coverage for beneficiaries while also improving the contribution from our PDP business and remain focused on creating enterprise value by driving mail order penetration and conversions to Medicare Advantage. We are projecting approximately 80,000 of our PDP members to convert to a Humana Medicare Advantage plan in 2023, which represents a disproportionate share of all Humana PDP members who are expected to switch to a Medicare Advantage plan in 2023.
In our Medicaid business, we anticipate that our membership will increase 25,000 to 100,000 members in 2023. This change reflects membership additions associated with the start of the Louisiana contract, which went live January 1st, as well as the Ohio contract which began today. We expect to add approximately 140,000 members in Louisiana and 65,000 members in Ohio at implementation with Ohio membership ramping to 130,000 by year end and to a total of 225,000 in 2024. The 2023 membership gains in Louisiana and Ohio will ultimately be offset by membership losses resulting from redeterminations beginning April 1st, which will continue for 12 months.
We are proud that our Medicaid footprint will now span seven states and cover over 1 million members, a strong platform that we have established largely through organic growth. We intend to continue to invest to grow our platform organically and actively work towards procuring additional awards and priority states.
Finally, we anticipate the total commercial medical membership, including both fully insured and ASO products will decline approximately 300,000 members in 2023 as we remain focused on optimizing our cost structure and margin in this line of business. The Insurance segment revenue is expected to be in a range of $99.5 billion to $101 billion, reflecting an increase of nearly 13% year over year at the midpoint. The year-over-year change includes the impact of the phaseout of sequestration relief beginning in the second quarter of 2022, as well as the impact of changing member mix within our Medicare Advantage business. The segment benefit ratio guidance of 86.3% to 87.3% is 20 basis points higher than the 2022 benefit ratio of 86.6% at the midpoint, driven by the targeted investments made in our Medicare Advantage plan designs in 2023 as well as Medicaid growth, which carries a higher benefit-to-expense ratio.
Importantly, we have assumed normalized trend into 2023, including the expectation that provider labor capacity will improve modestly throughout the year. In addition, we have assumed the flu favorability seen to date in the first quarter is offset by higher flu costs in the fourth quarter. In summary, we are guiding to Insurance segment income from operations in the range of $3.2 billion to $3.5 billion for 2023, an increase of more than 12% over 2022 at the midpoint of the range.
For our CenterWell segment, we expect EBITDA in the range of $1.3 billion to $1.45 billion for 2023, a slight decrease from 2022. The 2023 outlook reflects the impact of the divestiture of a 60% interest in Kindred Hospice in August 2022, which created a $150 million year-over-year headwind, largely offset by continued growth in our primary care, home, and pharmacy businesses.
In our core fee-for-service home business, home health admissions are expected to be up mid-single digits. While we have strategies in place to continue to take share in fee-for-service Medicare, we do acknowledge it is a shrinking market with the increasing penetration of Medicare Advantage. Accordingly, our projected admission growth for 2023 reflects a slight decline in fee-for-service Medicare admissions year over year, more than offset by strong growth in Medicare Advantage.
In addition, CenterWell home health is focused on increasing nursing capacity through recruiting and retention initiatives. Our voluntary nursing turnover improved from 31.9% in 2021 to 30.6% in 2022. We continue to invest in clinical orientation and mentors and technology focused on reducing administrative tasks and drive time for clinicians, which we expect to drive further improvement in nurse recruitment and retention.
With respect to our value-based home model, we expect to expand coverage to approximately 1 million additional members by year-end 2023, 800,000 of which are currently served under the utilization and network management model. In our primary care business, as Bruce shared, we expect significant center expansion throughout the year through a combination of de novo builds under our joint venture with Welsh, Carson as well as programmatic M&A. All in, we anticipate adding nearly 50 centers in 2023, an increase of approximately 20%.
In addition, we expect to add 20,000 to 25,000 patients during the year in our de novo and wholly-owned centers representing nearly 12% growth year over year. Finally, our pharmacy business will benefit from the significant growth in individual Medicare Advantage membership in 2023 as we anticipate maintaining our industry-leading mail order penetration rates.
From an operating cost ratio perspective, we are guiding to a consolidated operating cost ratio in the range of 11.6% to 12.6% for 2023, a decrease of 100 basis points at the midpoint from the adjusted ratio of 13.1% in 2022. This decrease reflects the divestiture of a 60% interest in Kindred Hospice in August of 2022, which has a higher operating cost ratio than the company's historical consolidated operating cost ratio as well as the incremental run rate impact of our value creation initiative.
Touching now on investment income and interest expense. We anticipate investment income will increase approximately $450 million in 2023 resulting from the higher interest rate environment, coupled with the impact of approximately $100 million in realized losses experienced in 2022 that are not expected to recur. From an interest expense perspective, while the majority of our debt is fixed rate, we do expect interest expense to increase approximately $110 million year over year.
I will now briefly discuss capital deployment for 2023. We will continue to prioritize investments to drive organic growth. From an M&A perspective, we remain focused on opportunities to enhance our CenterWell capabilities with a particular focus on growing our primary care and home businesses. And finally, we recognize the importance of returning capital to shareholders and expect to maintain our strong track record of share repurchases. We will consider the use of accelerated share repurchase programs as well as open market repurchases to ensure we maximize value for our shareholders. We also recognize that dividends are important to our shareholders, and we are committed to growing our dividends.
In closing, I would like to echo Bruce's sentiment that we enter 2023 in a position of strength. The strong earnings growth delivered in 2022, combined with the robust membership growth and financial outlook for 2023, increases our confidence in the mid-term target of $37 in 2025. We look forward to providing continued updates on our progress towards our mid- and longer-term targets throughout the year.
With that, we will open the lines up 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.
