Humana Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Humana Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Stoner, Vice President of Investor Relations.

Speaker 1

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer and Susan Diamond, Chief Financial Officer, We'll discuss our Q3 2023 results and our financial outlook for 2023. Following these prepared remarks, We will open up the lines for a question and answer session with industry analysts. We encourage the investing public and media to listen to both management's prepared remarks And the related Q and A with analysts. This call is being recorded for replay purposes.

Speaker 1

That replay will be available Certain of the matters discussed in this conference call are forward looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10 ks, our other filings with the Securities and Exchange Commission In our Q3 2023 earnings press release, as they relate to the forward looking statements along with other risks discussed in our SEC filings, We undertake no obligation to publicly address or update any forward looking statements in future filings or communications regarding our business or results. Today's press release, our historical financial news releases and our filings with the SEC are also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP.

Speaker 1

Management's explanation for the use of these non GAAP measures and reconciliations of GAAP to non GAAP financial measures are included in today's press release. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. With that, I'll turn the

Speaker 2

call over to Bruce Broussard.

Speaker 3

Thank you, Lisa, and good morning, everyone. Today, Humana reported financial results For the quarter of 2023 with adjusted earnings per share of $7.78 Slightly above our expectations. Results for the quarter include outperformance in our Medicaid and Primary Care businesses And a continued focus on driving sustainable operating efficiencies, offset by the impact of the modest Higher than anticipated utilization on our Medicare Advantage business. We reaffirmed our full year 2023 adjusted EPS Yes guidance of $28.25 reflecting a 12% increase over 2022. In addition, we are pleased to raise our guidance for full year individual MA membership growth by an additional 35,000 members to 860,000 driven by continued higher than expected new sales.

Speaker 3

Our full year membership growth Estimate now reflects a 19% growth rate, significantly outpacing the industry. As we've shared previously, our ability to deliver on our targeted earnings growth rate in 2023, while also achieving this impressive membership growth It's supported by the strength and scale of our organization, underpinned by a continued focus on disciplined investments, Driving sustainable productivity improvements and delivering consistent fundamentals, including industry leading STARS results And higher customer satisfaction is reflected in our net promoter scores. Further, our strong membership growth creates significant As we advance towards our 2025 adjusted EPS target of $37 Susan will provide additional details on our Q3 performance and our full year expectations in a moment. I'll now provide an update on our operations and outlook, including a view of the 2024 Medicare Advantage landscape An exciting growth we've seen in our primary care business before turning to an update on our ongoing productivity initiatives. Beginning with Medicare Advantage, we took a thoughtful approach to 2024 bids, recognizing the need to balance the rate environment with our Commitment to achieve industry average or better membership growth.

Speaker 3

Our 2024 strategy was informed by Stents of consumer and broker research and in-depth analytics regarding what Medicare eligible consumers prefer. We preserved or enhanced key benefits across our portfolio that were identified as most important to Consumers and continue to provide differentiating offerings that focus on improving health outcomes And member experience. More specifically, we continue to prioritize 0 premium offerings, Low cost share for highly utilized services, including primary care and Part D maintained highly valued Supplemental methods like dental and Part B givebacks. From a dual eligible special needs plan or a DSNET perspective, All plans include 0 co pays, uncovered Part D prescriptions and offer healthy options allowance with a rollover feature, A key differentiator in the marketplace. Our product enhancements are coupled with Humana's leading position in quality and experience.

Speaker 3

Humana continues to deliver exceptional quality to our members as measured by our CMS star ratings. For 6 consecutive years, Humana has maintained the highest percentage of members in 4 star or higher rated contracts among national health In 2024, 94% of our members will be enrolled in plan rated 4 stars or higher And 61% in plans rated 4.5 stars or higher. For our Humana contracts covering approximately 709,000 members nationwide received a perfect 5 star rating, more than doubling our 5 star membership from 2023, enabling year round enrollment in these plans. In addition, for the 3rd year in a row, Humana has been ranked number 1 among health insurance for customer quality in Forrester's proprietary 2023 U. S.

Speaker 3

Customer experience benchmark serving. Menace also ranked number 1 in customer satisfaction with MA plans in Florida Based on a comprehensive 2023 study by J. D. Bauer. And we're proud that Humana once again has been named the best overall Medicare Advantage Insurance company by U.

Speaker 3

S. News and World Report, which created an honor roll based on CMS's newly released star ratings for MA plans. Additionally, Humana ranked as the best company for member experience and was declared the best company for low premium plan availability. Collectively, these results are testament to our commitment to putting the health and wellness of our customers first. From a distribution and sales perspective, we are building upon our omni channel strategy in 2023, Where we've seen a 50% increase in our internal sales year to date, which is our highest lifetime value channel.

Speaker 3

Our goal is to deliver best in class agent and customer experience and have made investments in AI powered tools And telephonic infrastructure to reduce consumer hold times and transfers. Finally, we are Excited about the strong growth of our internal payer agnostic channel, which is expected to double its sales production year over year this AEP. All in, we expect our balanced approach to our 2024 product strategy positions us well, And we anticipate 2024 individual MA membership growth to be at or above the overall industry growth rate. We look forward to sharing more in the coming months. Within our CenterWell segment, our primary care platform experienced significant growth in the quarter, Now operating 296 centers serving nearly 285,000 patients representing a year over year growth of 33% 17%, respectively.

Speaker 3

This includes the impact of the 24 centers recently acquired from KNO Health, Approximately 12 of which are expected to be consolidated into existing centers are closed as we integrate the business by year end. As a result of the 2023 de novo bills and M and A activity, we expect to end the year with net growth 60 to 65 above our previously communicated annual center growth target of 30 to 50. Susan will provide additional detail on our CenterWell Primary Care performance in a moment. Turning to our ongoing productivity efforts, which span the organization. Our focus on productivity continues to drive sustainable value for the While creating more streamlined processes, better experiences for our members, patients and provider partners And driving best in class quality and customer service results.

Speaker 3

Let me share a few examples of this important work. Our primary care organization is executing on a multi pronged plan to mitigate the ultimate impact The risk model changes that will be phased in over the next 3 years, including numerous operational efficiencies such as centralizing and streamlining administrative functions, Standardizing the clinic operating model and improving clinician productivity. As an example, we are enhancing our use Risk stratification of our patient base offering new and enhanced clinical programs and care team interventions to our highest risk patients, Which we expect to further reduce avoidable hospitalizations and readmissions, while we optimize our preventative touch points with lower risk patients to Increased collection capacity. In the home, as a complement to developing value based home health payments, We've launched a comprehensive initiative to reimagine our scaled home health operations. These efforts will be deployed across More than 350 branches that will include automation, consolidation and implementation technology and AI solutions.

Speaker 3

This will minimize administrative tasks while improving clinician productivity, including optimizing their schedule. We believe these initiatives, some of which require incremental investment, will ultimately streamline our operations And lead to increased clinician productivity and satisfaction. As an example, CenterWell Home Health has introduced an innovative AI enabled digital wound management solution, which allows our clinicians to effectively capture Vital Lune details with a simple picture. We are pleased to report a notable 18% improvement in visit efficiency, Thus enhancing the experience both clinicians and patients. This has been instrumental in clinical Decision making contributing to an accelerated wound healing time by 35%.

Speaker 3

Finally, within CenterWell Pharmacy, we've been focused on Investments in digital channels and have seen greater than 800 basis points driven in scripts received through our digital channels year to date, Now representing approximately 38% of our total scripts. Increased use of digital channels provides an efficient and user friendly Experience for patients allowing for real time formulary and adjunction of the ability to The value for the enterprise through cost saving and value acceleration from previous investments. All your drivers include areas such as streamlining our real estate portfolio as we continue to refine new ways of working post COVID. We've also identified operations to rationalize our IT portfolio as we've focused on building and leveraging enterprise capabilities, providing the opportunity to move away from and or consolidate certain standalone business specific systems And applications that will meet the business needs of the future. In addition, there are certain initiatives kicked off as a part of our 1 billion Our value creation plan in 2022 that required implementation of technology to improve processes and drive efficiencies.

Speaker 3

And we therefore take time to realize the full benefit. As we continue to focus on and advance these initiatives, we've identified additional value to be We anticipate activities related to the additional value creation initiatives that continue throughout 2024 It results in certain one time charges that will be adjusted for non GAAP purposes. Collectively, our ongoing productivity and value creation Initiatives are driving sustainable value for the enterprise. We expect this work will create value beyond the 20 basis points of annual operating leverage Business mix adjusted basis that we committed to our at our 2022 Investor Day, aiding in our efforts to offset the near term utilization and reimbursement headwinds currently impacting the industry. Before turning it over to Susan, I'd like to Touch on our recently announced leadership transition plan.

Speaker 3

We are pleased to announce that the healthcare industry veteran, Jim Richton, We'll join Humana as a President and Chief Operating Officer on January 8, 2024, as part of a long planned CEO transition. Jim will report to me until the latter half of twenty twenty four, at which time after leading Humana for over a decade, I'll step down and Jim will assume the CEO role. As we work to make this seamless transition in the coming months, I look forward to partnering with Jim. He brings a collaborative, thoughtful and innovative leadership style to our organization, making him a natural fit for the culture of today and the future. Jim brings a strong combination of operational industry and CEO expertise.

Speaker 3

His firsthand experience leading through challenges The changing health care services continue will help them accelerate our integrated care strategy. We look forward to introducing Jim to our stakeholders when he joins the team in early 2024. With that, I'll turn the call over to Susan.

Speaker 2

Thank you, Bruce, and good morning, everyone. Today, we recorded adjusted EPS of $7.78 for the 3rd quarter. Results in the quarter were slightly positive, slightly above initial expectations, driven by outperformance in our Medicaid and Primary Care businesses and continued focus on driving sustainable productivity gains, offset by modestly higher than anticipated utilization in our Medicare Advantage business. I will provide additional detail on recent utilization trends in a moment. Our performance to date continues to reflect the strength and agility of the enterprise, demonstrating our ability to successfully navigate the higher than anticipated utilization, while delivering on our earnings commitments and driving Individual Medicare Advantage membership growth that significantly outpaces the industry.

Speaker 2

We now expect to add approximately 8 1,000 members in 2023, reflecting a 19% growth rate. Further, for the full year, we have reaffirmed our EPS guidance of at least $28.25 which reflects a 12% increase over 2022. I will now provide additional details on our Q3 performance and full year outlook by segment, beginning with Insurance. This morning, we reported that our insurance segment benefit ratio exceeded expectations by 40 basis points Due to higher medical costs in our Medicare Advantage business, we continue to experience an increase in COVID admissions in the 3rd quarter, Whereas our forecast previously assumed this would occur in the Q4. To date, we have not seen an offset in non COVID utilization, which diverges from the consistent patterns seen previously.

Speaker 2

As it respects non inpatient trends, we previously communicated that we expected the higher PMPMs reported in the second quarter to continue throughout the back half of the year, reflecting a moderating year over year trend percentage. The most recent paid claims data suggested a modest uptick in TNPMs for the Q3 versus the stable levels we anticipated. Considering the most recent trends, we are planning for the higher level of utilization seen in the Q3 to continue for the remainder of the year. As a result, we are increasing our full year Insurance segment benefit ratio guidance to approximately 87.5%, which implies a 4th quarter ratio of 89.5%. This guidance also reflects the increased individual MMA membership growth, which continues to include a higher than expected proportion of agents.

Speaker 2

As we have previously discussed, agents initially run a higher benefit expense ratio In the average new member, which negatively impacts the current year benefit ratio, but results in a larger margin expansion opportunity on these members over time. We anticipate that the higher 2023 Insurance segment benefit ratio will be offset by additional administrative expense reductions, driven in part by the sustainable productivity initiatives Bruce discussed, improved net investment income and other business outperformance. Turning to Medicaid, the business exceeded expectations in the quarter, primarily driven by favorable membership due to redetermination timing, which continues to track slightly favorable to our expectations combined with disciplined medical cost management initiatives and lower than expected utilization. Moving now to CenterWell. The segment continued its solid performance seen throughout the year, outperforming expectations in the quarter.

Speaker 2

Our primary care organization results exceeded expectations, driven by better than expected patient volume and revenue, combined with lower than anticipated utilization, resulting in improved medical margin in our wholly owned centers. We continue to see better than expected patient growth, adding over 17,000 patients or nearly 89% growth In our de novo centers since December 31, plus 15,000 patients in our wholly owned centers, representing 9% growth year to date. We now anticipate full year patient panel growth of approximately 34,000 to 36,000 As compared to our original estimate of 20,000 to 25,000 patients, more than doubling the patient growth achieved in 2022. Our primary care organization also continues to improve the operating and financial performance of our wholly owned centers. We continue to positively impact patient outcomes with hospitalization levels trending down year over year.

Speaker 2

In addition, in part due to our continued Patient satisfaction scores continue to reflect the quality of care delivered with net promoter scores averaging 82 nationally. And we are proud of our quality scores, which are tracking ahead of last year's trajectory with a 4.5 star performance year to date on provider influence measures for engaged patients. We now expect to increase the number of wholly owned centers that are contribution margin positive From 110 at the end of 2022 to approximately 130 at year end 2023, An increase from our previous expectation of 125 and representing an 18% increase year over year. In addition, we expect to increase the number of centers that have reached our $3,000,000 contribution margin target from 31 in 2022 To approximately 44 at the end of 2023, an increase from our previous expectation of 40 and representing a compelling 42% increase year over year. The better than expected primary care earnings in the quarter resulted in our consolidated benefit expense ratio Being 100 basis points lower than our insurance segment benefit expense ratio as compared to our previous expectation of a 40 to 50 basis point reduction.

Speaker 2

As a reminder, on a consolidated basis, we report from the perspective of the health plan and as such, Intercompany earnings from these services are eliminated against benefit expense. At this time, we do not anticipate that the primary care outperformance We'll run rate into the Q4. Therefore, we continue to point you to a 40 to 50 basis point reduction between our insurance and consolidated benefit expense ratios For the Q4, with a reduction of approximately 60 basis points for the full year. Turning to the Home. In our core fee for service business, year to date episodic admissions are up 8.6%, while total admissions are up 5.1%, Tracking in line with our full year expectations of a mid single digit year over year increase.

Speaker 2

As Bruce discussed, We are working diligently to identify clinical and operating efficiencies to offset industry headwinds, including rate reductions, Declining original Medicare admissions due to increasing MA penetration and ongoing labor pressures. From a capital deployment perspective, we have completed approximately $1,000,000,000 in repurchases to date and continue to anticipate share repurchases Approximately $1,500,000,000 in 2023. Before commenting on 2024, I would like to take a moment to The significant progress we have made towards the mid term targets we shared at our Investor Day 1 year ago. As a reminder, our 2025 adjusted EPS Target of $37 represents a 14% CAGR from 2022 and is expected to be comprised of 10% enterprise earnings growth, Largely driven by the contribution from our Medicare membership, 20 basis points of improved operating leverage and a 2% contribution from capital deployment on an annual basis. While allowing for continued growth and investment in our Medicaid and CenterWell businesses as these high quality assets are expected to meaningfully contribute to our long term earnings growth as they continue to scale and mature.

Speaker 2

Over the last year, We have outperformed against virtually all of these goals, including above industry average membership growth in our Medicare Advantage business, Significant outperformance of our productivity goals and increased share buybacks as we saw stock price dislocation earlier this year. We continue to invest in and grow our Medicaid and CenterWell businesses, outperforming top line growth goals across these businesses as well. At the same time, we've experienced higher than expected medical cost trend within our Medicare Advantage business and have worked hard to mitigate the impact of these trends in order to deliver on our enterprise earnings and EPS commitments. All in, we are proud of the significant progress we have made and remain committed to the targets we shared last year, including our 20.25 adjusted EPS target of $37 I will now take a few moments to provide additional color on our early outlook for 2024, starting with membership. As Bruce shared, while it's still early in the AEP, we expect that our balanced approach to our 2024 bids positions us to grow individual Medicare Advantage membership at or above the overall industry growth rate, while planning for a modestly higher attrition rate given the benefit design changes we implemented in response to the rate environment.

Speaker 2

As we always caution this time of year, it is early in the AEP selling season. The outlook we provide today could change depending on how sales and volunteer disenrollments ultimately come in. Broadly speaking, 2024 competitor plan designs reflect less benefit degradation than anticipated, which will likely lead to fewer consumers shopping and therefore less opportunity for Humana to meaningfully outpace the industry growth rate. Specific to Humana's performance relative to the market, Initial feedback from brokers is positive, supporting our expectation of atoraboveindustryaverage growth. Finally, recall that we have limited visibility into member disenrollment data this early in the AEP season as those results take longer to complete and we look forward to providing further commentary on our Q4 call.

Speaker 2

In our Group Medicare Advantage business, we expect membership growth of approximately 45,000 In 2024, driven by small and midsized account wins and remain committed to disciplined pricing and competitive group Medicare Advantage market. With respect to single and PDP, the overall PDP market continues to decline as Medicare beneficiaries select Medicare Advantage over original Medicare and PDP. In addition, we remain disciplined in the pricing of our PDP products as cost trends continue to rise. As a result, our Walmart value plan will not be as competitively priced as it has been historically and our basic plan will The low income benchmark in 16 regions in 2024. We currently expect a net decline of approximately 750,000 PDC members in 2024, including a loss of approximately 220,000 members as a result of exceeding the low income benchmarks.

Speaker 2

As we look beyond 2024, we will evaluate the impact of the various proposed regulatory changes, which are likely to result in higher PDP claim premiums Broadly and could lead to further industry wide movement from standalone Part D plans to Medicare Advantage plans given the strong Medicare Advantage value proposition. Our focus remains on creating enterprise value from our PDP plans by driving increased mail order penetration and conversions to Medicare Advantage. Finally, in our Medicaid business, Humana continues to demonstrate the ability to deliver unique value to communities by building on a strong operating model It integrates physical and behavioral health and develops meaningful partnerships and innovations to address health inequities and social determinants of health. After successfully implementing the Ohio and Louisiana contracts in early 2023, we look forward to beginning to serve members in both Indiana and Oklahoma in 2020 And continue to expect to bring our total Medicaid footprint to United States and approximately 1,500,000 members Turning now to our expected 2024 financial performance. I would reiterate that we expect to grow 20 24 adjusted EPS within our targeted long term range of 11% to 15%.

Speaker 2

Recognizing the increased utilization we have now seen in 2023 And prudently assuming this level of utilization continues into 2024, we currently anticipate growth at the low end of this range. We look forward to providing more specific 2024 guidance on our Q4 earnings call in February. Looking ahead to 2025, as previously mentioned, We remain committed to our 2025 adjusted EPS target of $37 reflecting a 14% CAGR from 2022 to 2025. It is important to note that our 2025 adjusted earnings growth will benefit from the maturation of our robust individual MA membership growth Expected in 2023 2024, advancement of the mitigation activities, our primary care and home organizations Are implementing to offset the impact of their revenue headwinds, capital deployment activity as well as the sustainable productivity and value creation initiatives discussed In addition, we anticipate certain discrete pricing actions to be taken across our individual and group Medicare books in response to the higher utilization and trends experienced. In closing, I want to say thank you to our over 55,000 teammates.

Speaker 2

Our success is enabled by your dedication to putting our members and patients at the center of everything we do. I would also like to thank our shareholders for their continued support. Finally, I reiterate that Humana's fundamentals are strong and we remain well positioned to drive compelling earnings growth in the mid and longer term. With that, we will open the line for your questions. Operator, please introduce the first caller.

Operator

Our first question comes from the line of Kevin Fischbeck with Bank of America.

Speaker 4

Great. Thanks. I guess maybe my question would be on the Outperformance in the physician business, which is just a little bit counter to, I guess, what some of your competitors have done in a higher MA Why there's that disconnect there? Why it's not flowing more through that side of the equation? And I guess the fact that you keep growing membership Faster on the clinics, why isn't that the same kind of MLR pressure there that you see in the MA business when that grows faster than expected?

Speaker 4

Thanks.

Speaker 2

Sure. Hi, Kevin. So yes, you're correct. We did see outperformance in the primary care business. The first thing I would point out is we've been consistently saying all year that Some of the higher trends we are seeing on the health plan side has been disproportionately impacting our non risk plans versus risk providers.

Speaker 2

And some of that is a reflection of some of the product mix. We're seeing more pressure in our LTPO offering versus our HMO. And our CenterWell Primary Care business, particularly the wholly owned centers are going to disproportionately index to HMO plans and then geographically, obviously, in Florida in some of our higher performing markets as well. With respect to the specific outperformance we've seen in primary care this year, There's a variety of factors contributing to that. They've seen positive prior year development as well as positive current year development in the quarter And both seeing outperformance across revenue and medical costs.

Speaker 2

So really a variety of factors. The last thing I would Some of the information that they rely on comes from the agnostic providers, and they do get some of that information on a bit of a lag. So you can just see a little bit more later in the year for PPD and CPD as they receive updated information. I would say from the agnostic book, it's mostly,

Speaker 1

I would Revenue related where

Speaker 2

they see some positive pickups in risk towards an MRA reimbursement relative to our internal expectations.

Operator

Our next Question will come from the line of Stephen Baxter with Wells Fargo.

Speaker 5

Yes. Hi. Thanks. So in terms of the higher insurance The 20 basis points higher is in the high end of the range you previously pointed to. Is any of that increase related to COVID?

Speaker 5

Or is COVID just indeed purely a timing shift From Q4 into Q3. And then just in terms of the modest step up in non COVID cost PMPMs that you talked about in Q2, Q3, could you just spike that out a little bit in terms of what categories are driving that and many categories move in the other direction as well? That'd be helpful to know. Thank you.

Speaker 2

Sure. Hi, Steve. Yes, so as it affects COVID, as we called out in the commentary and we disclosed this in some of our public commentary during the quarter, We have seen an uptick in COVID within the quarter. As we mentioned, our internal forecast for the year initially anticipated an uptick in the 4th quarter versus 3rd. So initially, we said, well, that could be just the timing and a pull forward of that.

Speaker 2

We have started to see COVID start to decline, so it is coming down. But as we mentioned, we have to date not In an offset, and so it resulted in just net incremental utilization within the quarter versus what we might have otherwise expected based on historical trends. As we thought about the year, what we decided to do in an attempt to just be somewhat conservative is to assume that the COVID that we anticipated in the 4th quarter From an admission standpoint, we remain. So we did not take that out of the forecast and they eventually show up as non COVID ultimately. But we did keep that in the forecast such that our ATT expectations are consistent with what we would have expected previously and didn't take that out.

Speaker 2

On the non inpatient side, I would say the drivers of that are consistent with what we've been saying since the turn developed on our second quarter call And the discretionary sort of orthopedic and surgical procedures, some of the ER and observations that we've seen, those have continued and obviously the drivers

Operator

Our next question comes from the line of Scott Fidel with Stephens.

Speaker 5

Hi, thanks. Good morning. Would be interested if you could give us some of your initial observations on the 2024 AEP as it relates to your marketing and distribution strategies and Where you feel that things may be resonating the most, definitely seeing the Humana guide, for example, on plenty of ads recently. But more broadly, just in your distribution strategies, what you think seems to be working the best and then any areas where you may even be making some Adjustments to the strategy here, sort of inside of the AEP, as you continue to look to drive new sales? Thanks.

Speaker 3

Yes, a few things there. One is, we are getting, as Susan said, positive feedback to just where our positioning is in the channels In the various broker channels, so both the call center and in addition to the field. So I would just say, in general, people seem to be Very content with how we're positioned both from a benefit point of view, but also just from our quality scores that we obviously received both in Starz, but also our customer service The second thing is that we do have continued to have a balanced approach in how we are going to market with our distribution From continuing to support and build our relationships with our call centers, our external call centers And in addition, our field representatives that are external field representatives. So we do continue to see Good engagement with them. We continue to see working with them not only from a sales point of view, but also from our retention point of view, which is consistent from last year As we continue to make proper investments with our partners there.

Speaker 3

But we do see good results Coming out of our field, external field channel, we continue to see really strong results They are and probably they are overachieving from our budget. And in addition, we continue to see good results from our agnostic channel. As I mentioned, we're predicting to double our sales there. We're not making much adjustment today. I mean, we continue.

Speaker 3

We're only 2.5 weeks Into AEP, we feel like we're consistent with what our expectations are. And so we're going to continue to execute, but maybe in a few weeks, we might adjust accordingly. But today, I think it's what we set out to do last year.

Operator

Will come from the line of A. J. Rice with UBS.

Speaker 6

Hi, everybody. Maybe just following up on some of the MLR related questions. I think last quarter you said with what you were seeing on the utilization front, You were comfortable that you had sort of incorporated that in your expectations around 24 pricing. Given the incremental commentary today, are you So comfortable or do you need to have some level of offsetting efficiencies to mitigate a Sequential uptick in utilization that you're assuming will continue next year. And I guess just part of that as well is obviously part of what's impacting your Medical loss ratio this year is all the enrollment growth you've got.

Speaker 6

So you've got utilization being a little higher, but you've also got The drag of all these new members, can you is there any way to parse out how much of the variance that you're seeing is utilization versus The drag of the new members can give us some flavor on that assuming that the one might start to ease next year?

Speaker 2

Hi, Angie. Yes, it looks like great questions in there. I'll try to get all of them. I would say, in terms of this incremental trend that we are announcing the Q3 and then stepping Obviously, this would not have been known at the time of pricing. There will be incremental mitigation that we need to do to offset that in 2024.

Speaker 2

If you recall, the Q2 call, we did reaffirm that we intend to be within our long term historical range of 11% to 15%, And we reaffirm that today, although acknowledge that as a result of this higher trend that we would expect to be in the low end

Speaker 7

of that is our initial thinking.

Speaker 2

I would say, as we saw the trend develop, we certainly recognize that we would need to identify some additional mitigation. I would say, our ongoing efforts around productivity We have continued since the work we kicked off in 2022. And as we said before, we have continued to identify more opportunities than we might have initially anticipated, which is Built a nice pipeline of opportunity that will certainly mitigate it from the trend this year and will continue to do so next year. To your point, the higher enrollment growth, particularly aging component of that, which we have seen a nice uptick in market share there, That puts some pressure on MLRs. And even some cases pretax because as we said, they run about 100% MLR Typically in the 1st 2 years before flipping to full diagnosis based risk adjustment, typically more so in the 3rd year.

Speaker 2

We said before, you can think about with the level of enrollment, hiring on some agents this year, you can think about on a full year basis that, that would impact the MLRs about 20 basis points. And so that is contemplated in our 2024 thinking. Obviously, one of the things we'll still have to assess as we Refining Thinking for 2024 will be this year's membership growth and the composition of that, the new enrollment versus retention and those are all things we'll continue to And comment on further when we provide our updated guidance on our Q4 call.

Speaker 6

Okay. Thanks a lot.

Operator

Our next question will come from the line of Justin Lake with Wolfe Research.

Speaker 8

Thanks. Good morning. I wanted to ask about CenterWell. Just given the PVP losses, some of the pressures that we're hearing about, both in the home health And the physician business, can you talk about the trajectory from 23 to 24 and then 24 to 25 First is kind of what you had previously laid out at the Investor Day in terms of those improvements that were before some of these headwinds set in?

Speaker 2

Yes. Hey, Justin. So yes, you're correct. The center of pharmacy is going to be impacted by the MA growth as well as the decline in PDP growth. We shared previously the millimeter penetration rates for those populations and the PDP does run significantly lower Then the MA book, and part of that is the disproportionate percentage of duals in the PDP book, which tend to use mail order at a significantly lower rate.

Speaker 2

So some of the losses in 2024 will be disproportionately low income because of exceeding the benchmark. So that will have less impact than average certainly. But those are certainly things we're contemplating in our thinking for 2024. I would say, in addition to that, you're going to you just got a lot of movement between HealthLane and the pharmacy, Both in 2024 and then certainly in 2025 too, as we continue to see the pharmacy changes implemented. So For 2024, you're going to have things like the DIR changes going to 20 sales.

Speaker 2

So that will have an impact between the 2. There are going to be more changes in 2025 that frankly we're We would anticipate we're looking at formularies, which might impact drug mix in the pharmacy. How you think about pricing between the Healthline and the pharmacy will also have to be considered in light of some of the shifting liability in the changes planned for 2025. So We'll certainly plan to provide more commentary as we work through some of those in a more detailed guidance. But there are a lot of changes to your point, but we are contemplating that number

Operator

Our next question will come from the line of Joshua Raskin with Nephron Research.

Speaker 5

Hi, thanks. Good morning. First question is just, are the new members coming in at higher than expected MLRs even for 1st year members or is it just a mix because they're mostly agents? And then if you could just refresh the MLR Trends for members that are in fully capitated arrangements versus those that are in sort of fee for service providers and has that delta changed much in the last year?

Speaker 2

Hey, Josh. For your first question, we are seeing that new members are running higher MLRs than you would expect, but we would say that is Attributable to the overall trend that we're seeing, we have looked at new members versus concurrent members to see what variation we're seeing at various cuts, Plain level geographic and what we say is relatively consistent. So we continue to believe that the impact that we're seeing are broadly industry related trends versus versus Humana specific. With the exception of some of the things we pointed out previously, which we continue to see like some of the down investments we've made, we are seeing some higher utilization. But beyond that, I would say that the other impacts are relatively consistent across new and concurrent, but obviously driving higher and more than we would have expected across the board.

Speaker 2

In terms of the progression of members in the risk providers, we can follow-up on any specific question you have. But I would say in general, I would say the trends haven't changed Significantly, over the last number of years, at least nothing that we've seen or called out.

Speaker 5

Okay, thanks. And I'd be remiss without congratulating Bruce On the pending change and welcoming Jim as well.

Speaker 3

Thanks, Josh.

Operator

Our next question will come from the line of Gary Taylor with Cowen.

Speaker 9

Hi, good morning. Just a couple, maybe one question, one clarification. I know last year at this time you gave very precise Enrollment growth guidance and perhaps that was because of the shortfall in the 2022 enrollment. But I guess Maybe in absence of that, are you still generally anticipating when you say you would grow at industry or better that the industry would grow High single digit, is that still your general expectation? And then just a slight clarification, I guess, to the back half of Josh's question, you do talk about benefit design change as impacting MLR and certainly some of that was Attentional, we knew that coming into the year, our benefit investments made.

Speaker 9

CVS this morning was talking about more OTC I just wondered if year to date, given the pretty substantial investment you made in OTC and Flex and that sort of thing, If you're learning anything about how members are using those benefits over the course of the year, Is the monthly utilization of those allowances accelerating as the year has gone by, etcetera? Thanks.

Speaker 3

I'll take the first question just on the growth guidance and then I'll let Susan take the second question. On the growth guidance, we continue, as we mentioned, believe that we'll grow at or equal to the industry. I think there's Ranges of what the industry estimate will be, ranges from 6% to the 8% or so, but we feel really comfortable with that. And that comfort, Gary, is coming from our continued feedback from our brokers, not just where we are positioning In the marketplace, we continue to see both the brand and the benefits continuing to Being competitive, never the cheapest, but to be competitive in the marketplace. So we're getting really good feedback there.

Speaker 3

So I would just say, We just feel that today we will follow the growth of the industry. We do feel we're not as competitive As we were last year and the way we've positioned our product and therefore that's why we've backed a little bit off of being disproportional To being right at the industry or greater growth.

Speaker 2

I think, Gary, as it relates to your second question, So as you think about the benefit investments we made, there was obviously within contemplated in our pricing in our initial guidance and accounted for in our initial MLR guide. As we've seen the higher utilization, particularly some of the benefits you mentioned like that are more of a raising measures like the Dental and the Flex as we've spoken to. I would say we are seeing higher utilization on some of those benefit investments than you would have expected. But again, we're seeing across the existing membership base as well as in the new members. So it's again not a selection issue where we're just attracting people that are attracted to that benefit.

Speaker 2

We're seeing existing members You now have access to those Richard, if it's also utilizing them at a higher rate as well. Particularly on the dental side, I would say but also the vision, we're seeing across both. Just more Dollars being utilized versus more utilized overall. So sort of the cost per visit, as you can see, divide going up where I'm sure The dentist and the optometrist, when they got a patient in there, they're trying to maximize that sort of revenue per patient. So we're seeing some higher cost procedures Our services like dentures and some other things routinely within that utilization.

Speaker 2

With the way some of those benefits are designed, particularly to flex, we do have less Opportunities enter year to try to mitigate some of that, and it does require adjustments to the benefit design. And so as we saw some of that, particularly on the Flex Benefits early in the year, We did make some adjustments in our 24 plan designs to account for that and implement some additional restrictions and benefit reductions. That is one thing you'll see. So we'll continue to monitor, I would say, broader utilization just relative to what we had expected off of that benefit enrichment that we implemented in a few of those

Speaker 3

Thank you.

Operator

Our next question will come from the line of George Hill with Deutsche Bank.

Speaker 10

Was that George Hill? So I'll talk.

Speaker 2

Yes. Hi, George.

Speaker 10

Sorry, Susan. The end of the operator cut off at my end. I just want to make sure I heard you right where you said, were you seeing higher MLR pressure in PPO versus HMO plans. And I guess my question I want to make sure I heard that right. And then my question would be, Is there a meaningful MLR difference typically between the HMO and the PPO plans?

Speaker 10

And kind of how should we think about that going forward as we know you're kind of seeing broader demand for the PPO plans And kind of that share is expected to increase in mix going forward.

Speaker 2

Hi, George. Yes. You did hear me correctly that we are seeing more pressure in our PPOs versus our HMOs. Some of that's a reflection of a lot of the newer plane designs we've implemented over the last couple of years have been more PPO and you saw the introduction across Industry of the $0 LTPO is an example. Do you tend to have a lower margin profile than our legacy HMO products?

Speaker 2

Some of that's also a reflection of this geographic mix differences. Obviously, we have strong repeat penetration in HMO products and some of our legacy Florida and highly risk

Operator

Our next question comes from the line of Sarah James With Cantor Fitzgerald.

Speaker 11

Thank you. So the hospitals this quarter have pretty consistently been talking about Pressure on the claims review process for physician fees, especially the ED and The difference between inpatient versus monitoring and I'm wondering if you're seeing any savings on those on your claims review process For those in 'twenty three or what you expect in 'twenty four and if there are some areas that you're looking to

Speaker 2

Would you mind repeating that question? We didn't get most of it. I'm sorry.

Speaker 11

Sure. So the hospitals have pretty consistently been talking about Some pushback on the claims review process for physicians, physician fees, physicians and ED as well as the inpatient versus monitoring classification. And I'm wondering if that's an area that you're seeing any savings in, in 2023 or expect to in 24. And if not those areas, if there are some areas that you're focused on for claims review as you approach 24 and managing MLR.

Speaker 7

Got you. Thank you, Sarah. So yes, I think you're referring to some of the utilization management Practices, and those are typically done on the front end. We do that wherever possible where we will have the opportunity to review for medical necessity and appropriate So whether that's a full inpatient admission or an observation stay. We've had those programs in place for many, many years.

Speaker 7

There are some changes coming in 2024, based on some new CMS, regulations and those do change the way some of those programs will work. But those don't take effect until January of 24. So I would say no meaningful changes experienced in 2023, but we are those changes in 2024. Those did represent a headwind to us, recognizing that we won't be able to have as much impact as we have historically from those Efforts, and we did account for that in the bids, but that is one of those things we'll certainly want to watch next year, how that develops relative to our expectations, Recognizing there may be some behavior change that we see within the provider community as they adapt to those changes. So that's something we'll continue to watch, but it is something we anticipated and included in our

Operator

Our next question will come from the line of Lance Wilkes with Bernstein.

Speaker 8

Yes. Hopefully, you can hear me here. Operator cut out on me too. Just a quick question. You made a comment about Modestly higher attrition you're expecting in 2024.

Speaker 8

I was wondering if you could maybe just give a little more color on the drivers of that, if it has to do with Distribution channels or maybe the greater proportion of non duals or something like that? And then also if you could just remind us for the $37 target in 20 25, What's the kind of implicit MA rate increase that you're expecting that we ought to be starting to see in February that's kind of baked into that? Thanks a lot.

Speaker 3

Okay. I'll take the first one and Susan can take the second one. On the modestly higher attrition, really, it's just coming from what we our history When there are changes, significant changes in benefits, what we do see is people shopping more. And in result, when they're shopping more, We've seen increased attrition. So it's really more the environment we're in as opposed to dramatic changes in And our distribution channel are our benefits.

Speaker 7

Yes. And then, Lisa, as restricted to the $37 I would say, in general, as we've commented, we have been anticipating that the rate would not continue to be as favorable as we've seen in the last number of years. Obviously, for 2024, the industry is absorbing the more negative rate environment. And with the Phase in of the risk adjustment model changes, we anticipate that that will be implemented over the next the remaining over the next 2 years. That will certainly have an impact to our primary care business, which we've talked about.

Speaker 7

While the business has a mitigation plan and they believe they can fully mitigate the impact, they do think it will take So we are anticipating a headwind in 2024 that will be somewhat lessened in 2025 as they continue to mature and scale Their mitigation plan initiatives and then fully offset by 26. Within the health plan, I would say we obviously know what the impact of The risk adjustment model change phase in will be, but we'll have to obviously see what the core rate adjustment looks like in light of some of this higher trend. In theory, you would see some Positive restatement embedded in there. So we'll have to see what that looks like and whether it's sufficient to cover normal course trend. The way we generally think about it though is that is going to impact the industry broadly.

Speaker 7

And so in theory, we should be on par with everyone else and assuming everyone reacts Rationally, then it wouldn't put you in an advantage or disadvantage. We are very pleased though, again, to have the really strong STARZ results We published recently and that again is a nice durable advantage for us where we do know some others will have some challenges to deal While others may have some improvement. And so those are all things that we consider, as we plan for 2025. I would just reiterate, we remain committed to Delivering the $37 committing to continue to grow at or above the industry rate for MA membership growth, and wanted to highlight recognizing It requires an accelerated growth rate for earnings in 2025. We wanted to make sure we highlighted some of those more unique tailwinds that we will benefit from in 2025 That allow us to achieve that higher than typical rate, in order to deliver the $37 And we'll certainly share more, on our Q4 call.

Speaker 12

Okay. Thanks.

Operator

Our next question will come from the line of Nathan Rich With Goldman Sachs.

Speaker 13

Hi, good morning. Can you hear me?

Speaker 3

Yes.

Speaker 13

Great. Susan, maybe just building off of that last comment there on the 2025 target. How should we think about the margin progression for the Medicare Advantage Business between 2024 and 2025 seems like maybe a bit of a bigger step up than what you'd anticipated previously. And you also made reference to some additional earnings levers like pricing actions. Could you just go into a little bit more detail on what you're considering there?

Speaker 7

Yes, absolutely. And so as I called out in my prepared remarks, there are some tailwinds that we'll benefit from in 2025. As we said, the Outside membership growth and the progression you will typically see in the margin profile of those new member cohorts improves over time. The higher agents in particular, as I mentioned, they typically don't see the real step up in performance until year 3 when they fully convert to risk adjustment. So the member the new agents we've got in our 2023 book will then see disproportionate improvement in 2025, that will help Contribute to that higher earnings growth that would be required to get to the 37%.

Speaker 7

We have continued to see favorable net investment income as you've seen in our results. And so some of those Things are improving relative to what we would have thought, going into 'twenty four and will continue into 'twenty five. And then certainly, our continued focus on productivity It's something that has continued to prove to be a mitigant for the near term pressure, and then we expect to continue to see More than the 20 basis points of operating leverage that we committed to, and then some of the capital deployment will benefit as well. So The way I think about it, when you try to isolate some of those things, sort of then what's left is what you say is more normal progression within our historical targeted range. We do acknowledge that given what we're seeing in the trends and also in some of the discrete utilization we've seen in some of the benefits we've discussed, We do expect that we will take some discrete pricing action for 2025.

Speaker 7

We will certainly be targeted in the way we do that, so that we're addressing some of those Spots that are driving less earnings progression than we would have expected at the time of pricing. And so while they might have some impact to membership, we would say We would plan to target in a way where that's okay, but it's the appropriate thing to do to balance the membership and the earnings progression that we'd be looking for, and still feel confident that more broadly, we should be well positioned such that we should be able to continue to generate membership growth at or above the industry rate.

Operator

Our last question will come from the line of Mayo with Leerink Partners.

Speaker 12

Did you say Whit Mayo?

Speaker 7

Yes. Hi, Whit.

Speaker 12

Okay. Sorry, that's consistent theme today. Just one clarification just on that Last topic of the agents. Can you quantify, Susan, the growth that you're seeing this year inside of the 19 percent growth in what you're thinking for next year. And then I'm just wondering where you are on sort of the evolution of the delegation of risk on One Home, how much of the medical spend you've transitioned and maybe how much of that is driving the growth on your Home Solutions business?

Speaker 12

Thanks.

Speaker 7

Okay. I got the first one. Would you mind repeating the second question? So the first question is about agents. What was the second question?

Speaker 12

Just one home and how much you've delegated The risk on that business today in terms of like the post acute or the DME and how much of that is driving growth on your Home Solutions business?

Speaker 7

Sure. As far as the agents, I think with some of the information we shared about the increased penetration that we've seen, you can think of that as about 250,000 Additional sales for agents for the full year, and then we see the incremental benefit of the margin Like I said, it's disproportionately weighted to year 3 by the time those members ultimately convert. In terms of 1 home, It's about 15% of MA membership, I think is an answer to your question.

Speaker 12

Okay. But how much of like the if I take all of your post acute spend, how much of that have you fully rolled out in terms of the full delegation of risk?

Speaker 7

Yes. Why don't we we can get back to you with a specific answer on that. Let us look at that, and when we talk late tomorrow, we can have that answer for you.

Speaker 12

That's fine. Thanks.

Speaker 2

Thanks.

Operator

That concludes our question and answer session. I'd like to turn the call back to Bruce Broussard for closing remarks.

Speaker 3

Thank you, operator. In closing, I'd echo Susan's thanks to our 65,000 employees. We truly appreciated their hard work and dedication to bring each day to serve our members and patients. I'd also reiterate the thanks Our shareholders for their continued support. Humana's fundamentals are strong and we remain committed to leveraging the strength and scale of our enterprise Navigate near term challenges, while continuing to advance our strategy.

Speaker 3

And importantly, we remain committed to our 20.25 adjusted EPS target of 30 $7 reflecting a 14% compounded annual growth rate from 2022 to 2025. Hope everyone has a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Humana Q3 2023
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