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GPTW Health Care Large 2023-Humana

Employees say: 
 
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F500-2023-042-Humana

The health insurance company that serves tens of millions of customers in the U.S. reported fiscal year 2022 revenue of $92.9 billion, up 10% from the previous year, thanks in part to growth in membership and premiums from its Medicare Advantage plans. 
<ul> 
 	<li>Humana announced plans in February 2022 to reinvest $1 billion into its core business, specifically its Medicare Advantage plan.</li> 
 	<li>In May 2022, Humana’s CenterWell Senior Primary Care and the investment firm Welsh, Carson, Anderson &amp; Stowe announced a joint venture to develop and operate primary care clinics for Medicare patients, the second such JV between the two partners.</li> 
 	<li>In 2023, Humana anticipates strong growth from its privately run Medicare Advantage program due to high retention and a projected expansion in new members.</li> 
 	<li>Humana has climbed 10 spots on the Fortune 500 list in the last four years.</li> 
</ul>

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F500 2022-Humana

Founded in 1961, Humana is the fifth-largest health insurance company by membership in the U.S., offering coverage for over 20 million Americans. The company’s revenue grew to $83.1 billion in 2021, a 7.7% increase in revenue from 2020. Much of that growth was driven by Humana’s Medicare Advantage programs, which enroll roughly 5 million people; the company projects that membership in those programs will grow by another 8% in 2022. In April 2022, Humana announced the sale of a 60% stake in KAH Hospice, the nation’s largest home health and hospice provider, for $2.8 billion to private investment firm Clayton, Dubilier &amp; Rice.

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G500 110 Humana

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F500-2021-41-Humana

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G500-2020-166-Humana

In 2019, the health insurer's consolidated revenues grew to nearly $56.5 billion, a more than $8 billion spike from the previous year. Like other insurers, Humana was able to take advantage of the suspension of a health insurance industry fee, which lowered its tax burden. The company also boosted its earnings-per-share numbers with the help of stock buybacks. Humana’s dedication to the lucrative Medicare Advantage market, where it has captured some 18% of enrollment, continues to serve it well.

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Humana

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

Best Workplaces In Health Care

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A health insurance company, Humana is one of the largest administrators of Medicare Advantage, a U.S. government program that provides health care to older Americans via private insurers. Humana plans are available in nearly 3,000 U.S. counties, the most of any Medicare Advantage provider. Humana also runs state-based Medicaid plans for lower-income Americans; CenterWell primary care centers for seniors; as well as home health and hospice businesses.

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Q4 2024

Humana (HUM): Company Profile, Stock Price, News, Rankings

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Good day and thank you for standing by. Welcome to Humana's Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Lisa Stoner, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechton, Humana's President and Chief Executive Officer and Chief Financial Officer, Celeste Mallet, which will be followed by a Q and A session where Jim and Celeste will be joined by George Roniden, President of Humana's Insurance segment. Before we begin our discussion, I need to advise call participants of our cautionary statement. 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 K, our other filings with the Securities and Exchange Commission and our fourth quarter twenty twenty four earnings press release as they relate to 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.

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. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, this call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. With that, I'll turn the call over to Jim Rechton.

Thank you, Lisa, and good morning, everyone. Thank you for joining us. I have three topics today. First, we have some new members of the team to introduce. I'm going to spend a minute talking about our performance through the framework of the four levers that drive this business.

Those are the levers that were introduced in the CEO letter last summer. And I'll spend a minute on industry context. First, let me just reinforce a couple of headlines. 2024 adjusted EPS is in line with our initial guidance. This does include the investment that we made in STARS and in growth in the back portion of the year.

We are reaffirming our 2025 outlook. We remain committed to achieving at least a 3% margin in individual MA, and we do view 2025 as a key year in that journey. And we have some new management team members to help us bring fresh perspectives to that task. I'm pleased to introduce them today. I'll start with Celeste Millet, our new Chief Financial Officer.

Celeste joins us with a lot of experience leading finance in organizations that have worked their way through difficult external headwinds. This is a good experience given the circumstances in our sector over the past couple of years and today. This includes her experience at Morgan Stanley and at Fannie Mae. You will of course be hearing from Celeste today and I look forward to introducing you in a moment. We also have Michelle O'Hara joining us as Chief Human Resources Officer.

Her experience has been focused on evolving HR capabilities through periods of change. She comes to us from SAIC. And we're introducing Jopin Mehta as our new Chief Information Officer. Jopin brings a wealth of experience managing large IT organizations in scale regulated industries. He also has experience using data and digital to better engage customers.

This is a big part of our future, we believe. He was most recently at Citi. Now, let me turn to the four things that drive this business. The first of those four levers is product experience, which drive customer growth, retention and lifetime customer value. In this area, we feel that we are moving in the right direction, though we also believe that we're just scratching the surface of what can be done.

As a reminder, in 2024, we proved to have a good year of growth with nearly 5% membership growth despite repricing our product to reflect the elevated medical cost trend that we began to see nearly two years ago. When we look at the most recent AEP and expectations for 2025, we are accomplishing the things we wanted to achieve. We're shedding unprofitable plans, we're resetting expectations in lower margin plans, and we are shifting our membership mix with a focus on sustainable long term value. The membership losses that we've experienced have largely been consistent with our strategy. The exception to this is our position in the D SNP space.

However, we are comfortable that we can quickly improve our positioning in this space. I also want to emphasize that we feel very good about the new member mix that we've been attracting. The second lever is clinical excellence. This is the engine of the business. When we deliver better outcomes for our members and our patients, we also reduce system costs.

When we reduce system costs, we improve our own product profitability. Clinical excellence starts with delivering on STAAR's performance. In the fourth quarter of twenty twenty four, we closed 650,000 care gaps. This is a significant improvement from where we started in September. We feel good about the progress that we made over the last quarter of the year.

And the question of course is will these steps that we've taken be enough to return us to an industry leading position in 2027. As we acknowledged back in October, it will be tight and ultimately it will depend on the final thresholds. Having said that, I will reemphasize that we feel good about the progress we made in the fourth quarter. We are right now putting all of our energy into measurement year 2025, that is bonus year 2028, where we have a full year of runway to drive operating improvements. Our third lever is operating with a highly efficient back office.

We have made a lot of progress in this domain over the course of the last couple of years. In 2024, we improved our operating expense ratio by 40 basis points. Just to provide a few examples of what enabled this, we optimized our care model, we unified shipping activities across the enterprise, we outsourced some non core capabilities and we streamlined our internal distribution capability. I'd like to note that our internal distribution team performed better this year than ever, even while driving efficiency. Efficiency does not mean a decline in performance levels when we do it the right way.

It is important for our team to note this and for our investors to recognize it. Despite the good progress over the past few years, we believe there is more to do and we expect to communicate a path towards additional efficiencies in the upcoming months. Finally, let me touch on the last lever, which is capital allocation and growth. We feel good about the opportunities we found to expand our primary care footprint in the second half of twenty twenty four. We also feel good about the continued expansion of Medicaid organically.

However, in the near future, we will need to strike a balance. Priority number one is recovering MA margin, as we have repeatedly said. This will require being prudent with our balance sheet as we navigate the STARS recovery. And we must continue to grow our earnings capacity through organic reinvestment and through acquisitions. This is clearly a second priority, but it is a priority nonetheless.

Both CenterWell and Medicaid are important enablers of our long term strategy. We will be thoughtful in identifying opportunities that make sense in our current environment that allow us to continue to grow our earnings capacity while being prudent with our balance sheet. Then let me spend just a moment on the insurance industry and on Medicare Advantage. It's been a volatile couple of years and more so it's been a volatile few months. The U.

S. Healthcare system is complicated, fragmented and it's expensive. I think all of that has been pretty well established. Americans understandably want high quality affordable care that is easy to navigate. Too often that is not what they are receiving today.

There is no one company and there is no one sector that is responsible for this. It is a system challenge. It is the challenge of our American healthcare system. Still, as I mentioned in my CEO letter last summer, Medicare Advantage plays an important role. Medicare Advantage delivers better outcomes than original Medicare.

If you need evidence of this, look at the steady improvement in HEDIS performance that has been driven by MA programs. Medicare Advantage operates more efficiently than original Medicare. This can be demonstrated in our recently published value based care report or through the work done jointly with Harvard University looking at value based primary care, which operates inside of the Medicare Advantage system. Medicare Advantage also enables more affordable healthcare access to seniors. There is a reason that more than 50% of eligible Americans choose Medicare Advantage.

It is of good value. It makes healthcare more affordable and easier to access. And of course, the Medicare Advantage program can be improved. And we are open to partnering with anyone interested in engaging constructively to do that. In the meantime, there are things that we, Humana, can do on our own.

While we cannot fix the entire healthcare system on our own, we can make it easier for our patients and our members to navigate. We can make it easier to understand what our members will have to pay when they see a doctor or require a procedure. We can do more to support our members with reminders to do preventative care and to manage their chronic illnesses. We can take complicated healthcare topics and we can communicate about them more clearly and simply to our members. We can provide them better service every time they call us with a question or concern.

Those are the things that we can do, that is our intent and that is the work that is underway within Humana. With that, I will turn it over to Celeste for her to share a few words on our first month at Humana. Celeste?

Thank you, Jim. I'll start by echoing your belief in Humana's value proposition. This is a great company with a long successful history, strong DNA and differentiated capabilities that has demonstrated it can improve outcomes for members and patients while driving significant value for shareholders. While our long term potential remains strong, our industry is in transition facing significant regulatory and other headwinds. I have had the opportunity to lead companies and regulated industries through similar periods of volatility.

It is incumbent upon us to evolve how we serve our members and operate the business to be more nimble, better able to absorb fluctuations and more consistently deliver compelling financial performance and shareholder value. As we execute on the four levers Jim has articulated, we will be stronger and better. I am thrilled to join an incredible team that will guide Humana through this transition. I have enjoyed getting to know my team and many of my colleagues over the last several weeks and it's been great to see how talented and committed the company is to serving our members and patients. I am energized by the opportunity to bring a fresh perspective and challenge the organization to rethink our norms, so we are constantly improving, while at the same time ensuring the aspects of our culture that have been so critical to our past successes are retained and enabling long term profitable sustainable growth.

And I look forward to working with many of the participants on this call over the coming months. With that, I will turn the call back to Lisa to start the Q and A. Great.

Thank you, Celeste. Before starting the Q and A, just a quick reminder that to fairness and those waiting in the queue, we ask that you please limit yourself to one question. So operator with that please introduce the first caller.

Our first question comes from Ann Hynes with Mizuho.

Okay. Sorry. There was a kind of a time out. Okay. I just want to focus on twenty twenty five MLR guidance.

Can you just break down the levers of the increase? What is what base you're assuming? What's the overall cost trend? How much is driven by IRA changes? And what the impact of the greater than expected loss of DSNP had on MLR, that would be great.

Hi, Anne, it's Celeste. Thanks for your question. So to give you some additional color on top of what we included in our prepared remarks. First, I'll give you the drivers of the decreases in the ratio, which is are improving the ratio.

First, the majority of the improvement is driven from the MA plan exit, which all had very high benefit ratios. We also made other adjustments to our benefits in our remaining plans, which also improved the ratio. And then finally, the favorable calendar in 2025 given both how the days fall and the extra day in 2024 due to the leap year. Second, the increases to the ratio which are a drag. First, business mix changes given Medicaid is growing.

Medicaid carries a higher benefit ratio versus MA as you know. Second, the IRA impact, which increases the benefit ratio given increased revenue with offsetting increases in claims. And third, incremental investments, which are important to the long term, but increase the benefit ratio in the near term. The arrows we provided in our prepared remarks are in order of size, and we gave you the puts and takes, but we'll leave the modeling to you in terms of the impact overall.

Our next question comes from Justin Lake with Wolfe Research.

Thanks. Good morning. As you might expect, people are trying to look through now that you gave us 25, trying to look through to 26 and understand the moving parts there. Maybe you could just I assume you're going to give us a lot more at the Investor Day once you have the outcome of the appeal. But maybe you could just frame for us, if you think about it in two buckets.

One, the core business. Last year you said, before the rates came out disappointing, the company could grow $6 to $10 of earnings. Rates seem to be coming in better. Is that a reasonable framework, ex the STARS? And then how would you think about STARS relative to that to give us an idea of how 2026 kind of moving parts might shape up?

Hey, thanks Justin. Let me just start by acknowledging that we typically do not provide guidance that far out all the way out to 2026. And really that is driven by several of the factors that you just outlined. There's a bunch of unknowns that we're still navigating. The SARS litigation is a big piece of that.

The final funding for MA is a big piece of that. Obviously, the preliminary notice is out. Things can change between the preliminary notice and the final rate notice. And so we'll be waiting to see how that plays out. What I can tell you is that what we are focused on differentially is how do we drive operating performance.

And so what are the things that we can do fully under our control to get better at managing the business? When we do that, that leads us to a place where we can get to a sustainable, compelling, competitive position in the market and then look at some level pricing and benefits become easier and they take care of themselves if we're nailing that underlying operating performance. And so that's really where the orientation is right now on 2026. And when we talk about operating performance, what are we talking about? We're talking about that second and that third lever.

It's clinical excellence and all the components that go into it, and it is driving an efficient back office. Those two things more than anything else is really the focus for 2026, but we're not yet ready to provide guidance around that.

Our next question comes from Sarah James with Cantor Fitzgerald.

Thank you. How do you think about the path to 3% margins? Does that assume any sort of STARS improvement needed to get there? How does that balance against what you're doing on cost and pricing? Do you think the book has to shrink further to get there?

And then should we think about that as being ratable or back end loaded? Thanks.

Yes. The way to think about STARS I'm sorry, the way to think about the 3% margin is, yes, you would need to have a competitive STARS position. And I'm going to go a little bit back to where I was before. You need to have a reasonably normalized rate environment and then you need to have optimal operating performance on the levers that I just described on clinical excellence, which again is STARS. It is accurately understanding our patients' needs and doing the follow-up care that goes with that, all of which then positively impacts both quality and medical trend.

And then you need to optimize G and A. You need to be at a competitive place on G and A. When you get those things right, you have the financial capacity to price your benefits competitively in the market and achieve 3%. So, STARZ is absolutely a part of that, but that's those are the operating levers that we are super, super, super focused on because those are what give you the freedom to price the right way in the market. And look, we feel like we have opportunities in every one of those and that is what we're driving right now.

Some of those will hit in 2026, some of those will hit after 2026, but it will be a steady March.

Jim, if I can add to that, One of the things you've talked a lot about in the past, I think to this audience is we need to get better at multi year planning, including getting better at looking around corners and looking ahead. We have to be a lot more proactive in our decision making and planning to be much more flexible to react more quickly and we need to be better at making trade offs, really creating the capacity as you called out for the most important things. We need to be ruthless about stopping things that are not driving better outcomes for our members and better returns for our shareholders. And again, really focusing on creating capacity to do the things we really want to do and creating the most long term value. As part of this, we'll continue to assess how to balance the aspects of our cost structure that are fixed versus variable and how we evolve to over the longer period of time become more variable in our cost structure.

I really believe there's an opportunity here, which will allow us to absorb change faster and drive more consistent results. Along with STARS, this is one of our top priorities.

Our next question comes from Joshua Raskin with Nephron Research.

Hi, thanks. Good morning. You spoke to a few hundred million of investments that are offsetting the underlying earnings growth in 2025. Can you just give some details on like the major buckets of those few hundred million? And then are those going to be ongoing each year?

Are those truly one time in nature? And then obviously the last one may be more of a follow-up even on the prior discussion, but should we think of 2025 as a floor EPS number? Or do you need to win the appeal on STARZ for that to happen?

Hi, thanks for your question. So just to be clear, we make investments in our business every year. What we've called out and what's included in our guidance are incremental investments of a few hundred million dollars. It's across a set of initiatives designed to improve our operating performance. So we're focused on STARS, of course.

We're investing in clinical excellence, membership strategies and other areas. And we'll share more detail as the year progresses as to where the ratios they hit either the operating cost ratio or the benefit ratio and we'll leave it at that.

Our next question comes from Joanna Gadgett with Bank of America. Joanna, your line may be on mute. Our next question comes from A. J. Rice with UBS.

Hi, everybody. And good luck Celeste in the new position. Look forward to working together. Let me maybe just come back to Star's commentary. Obviously, for 26 paying a year, a lot's riding on the appeal and so forth.

But I noticed in your prepared remarks, the way you're describing and I know this is out there, but we're also trying to just think about our earnings power of the company going forward. There's discussion about 2027 payment year and it sounds sort of cautious about that, but then 2028 sounds like the year where you think the investments you're making will bear fruit and pay off. I'm trying to understand the issues around '26 STARS seem to be totally different than what you're highlighting or quite different than what you're highlighting for '27. And maybe that's some of the underlying way in which STARS calculations are changing. I wonder if you could speak a little more to why there's a little bit of caution on 2027 and whether a favorable appeal in '26 makes any difference for '27 and the '28 seems like the year where you really think you'll and these are payment years obviously really be back to a normalized star rating level?

Yes. Hey, A. J, this is Jim. Let me take this one. First of all, let me just start by saying we are not trying to communicate anything different about '27 than what we communicated back in October.

So we are trying to hit the same tone. If anything, I think what we'd say is, we feel good about the operating progress that we made in the fourth quarter of the year. So that actually is a positive. We communicated that there would be uncertainty because of threshold movement back in October and we are simply reiterating that that still remains the case, right? Like there's just a bunch of uncertainty around the thresholds and we want to be clear and transparent about that.

But that is not different. The 2020 so now let me try to tease apart the different pieces here real quick. So 2026, again, not much we can say about the litigation. It's progressing as you would expect. It is unrelated to 2027.

So whatever happens in 2026 with the litigation does not impact performance in 2027. In 2027, I'm just going to reiterate it one more time, we feel good about the progress we made operationally in the fourth quarter. I think we told everybody I know we told everybody back in October that the thresholds that came out last year represented a different level of performance than what we had anticipated at the time. We were resetting our targets in the fourth quarter to reflect that and we were on a sprint. We did sprint.

We made a lot of progress. We feel good about the progress and we don't know what the thresholds are going to look like next year. Like it's kind of that plain and simple. And then as we move into the current measurement year, so think about the activities that we're doing right now in 2025, that influence 2028, we have a whole year of runway now. And we have the ability to layer in more buffer or more cushion to our targets.

And so we feel better entering with the new year with a full year's worth of runway. And that's really what we're trying to convey to everybody. George, is there anything I was wordy there?

No, that's okay, Jim. I would just add to that, A. J, that we saw that a lot of the new things we tested in the fourth quarter of last year delivered the results we are looking for. We saw great progress from the outreach we did to our members. We saw great progress of our teams working with our providers through various means to help our providers close gaps in care.

And we also have seen great progress in our working with our vendor relationships. So on every front that we talked about back in October, even before that when we had our STARS call, we have made significant progress and feel very good about that progress. As Jim said, though, we are taking a very prudent approach to how we think about setting our thresholds and targets in the future and have set them in a way to have them be a significant stretch to our organization to push them to continue to excel. And so that's the reason for some of the caution you're hearing and that we are pushing our teams. We've seen great progress and feel good about where we stand right now.

Our next question comes from Ben Hendricks with RBC Capital Markets.

Hey, thank you very much. You discussed in your prepared remarks higher than expected DSNP attrition for the year and caution around change in SEP rules. And I was wondering if you could provide some more detail around how you're thinking about the range of outcomes there? And then by extension, how is the attrition you saw in the SEP in that population kind of impacting or informing your MCR guidance range? Thanks.

I'll start and then maybe Celeste can add on the benefit ratio. So look, first of all, we are pleased with the outcomes of our AEP given the members we gained versus those we lost. We have seen that our pricing strategy worked and that we are retaining members that are on the path to necessary margin recovery and expansion that is critical to the point that Jim made before. We are seeing members that have a shift to higher lifetime value segments and membership. We're seeing strong performance to date in markets with a strong concentration of our best value based partners, including states like Florida, Illinois and Texas.

We are seeing higher than historical percentage of our non SNIP, our core members sales coming from member switching from our competitor MA plans. And as Jim mentioned, we're seeing continued shift to our higher value distribution channels. So all those things feel good in our pricing strategy. However, as you point out, we retain fewer members than we expected in our dual products. There's a lot to be learned there and we are learning from that.

We have a number of pilots in the AEP that will help us progress towards our strategies moving forward and help in our D SNP repricing as Jim has called out. I would also add that when you think about the dual product, don't disconnect that from the very exciting success we've had in Medicaid RFPs. With the recent wins we've had in Georgia and Texas that takes us to 13 states. And as I think you all are aware, the connection between Medicare and Medicaid is growing stronger and the integration and the rules that are coming out. And so having a larger Medicaid footprint successfully implementing those states will also help us going into the future.

So while we've retained fewer members than we expected, we feel good about how we're set up for the future.

Thanks, George. Just to come back to what I had said earlier on the benefit ratios. So, the majority of the improvement that the underlying improvement is from plan exits. But if you recall, we deliberately exited unprofitable plans. So additional DSNP losses helps on the margin, but most of the underlying benefit improvement was something we did very intentionally.

And then we also made some adjustments to benefits in our remaining plan. So the improvements are very intentional. Just one thing I wanted to add to George's comments on DSNP is 30,000 of the DSNP losses were due to redeterminations. As you know, the way each state did it with what varied from state to state. So about 30,000 was included in that number.

Our next question comes from Whit Mayo with Leerink Partners.

Hey, thanks. May have missed this, but just wanted to get an update on expectations for Part D seasonality this year given all the changes this year and the higher deductibles that we see in the market. So just any observations would be helpful. Thanks.

Hi, Whit. It's George. So as we think about our PDP strategy, we are pricing for margin given the additional risk of the IRA and we've taken a very disciplined approach to how we're pricing that given that increased plan liability. As you know, we're participating in the premium stabilization demonstration and we are expecting to see growth of roughly 200,000 members versus our prior expectation of flat. There are a number of competitive dynamics that are driving that increase, including number of plans available in 2025.

Of course, the premium stabilization demonstration has an impact on that. And we've maintained strong relationships with our brokers. We feel good though about the way we price the product. While we price for margin, we're taking a measured approach in our assumptions to our guidance given the IRA changes and given the uncertainty there. We are monitoring throughout the year the most recent data given that Part D and MAPD does complete more quickly in the drug space, we don't see any problems there at this point.

We see that the current data supports our pricing strategy and tactics that we've taken.

that in terms of seasonality and I'll address the seasonality in our guidance in general since the IRA is the biggest piece of it. So first, to remind you, our we expect 60% to 65% of our earnings in the first quarter, which is a significant shift from last year and prior periods. And there are really four key drivers of that. First are the IRA changes, which shift more responsibility to the plan, but seasonality also changes because members are working through their MOOP earlier in the year and plan liability increases as the year progresses versus CMS reinsurance kicking in, in the back half of the year like in 2024. Second is plan benefit design changes, including the addition of deductibles, that were made in line with the focus of driving sustainable long term membership growth.

In both the cases of the first and the second, the member bears more expense in the beginning of the year and we bear more expense in the end of the year shifting earnings more towards the front of the year. There are two more drivers, which are less impactful. One, and I called this out earlier, is the change in the number of days and how they fall on the calendar, including the leap year in 2024. And then finally, the timing of when we expect to make the investments we mentioned previously.

Our next question comes from Erin Wright with Morgan Stanley.

Humana (HUM) Q4 2024 Earnings Call Transcript

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