Humana Inc. (NYSE:HUM) Q1 2024 Earnings Call Transcript

Humana Inc. (NYSE:HUM) Q1 2024 Earnings Call Transcript April 24, 2024

Humana Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $6.02. HUM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Humana First Quarter 2024 Earnings Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Lisa Stoner: Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, both of which are available on our website. We will begin this morning with brief remarks from Bruce Broussard, Humana’s Chief Executive Officer; and Jim Rechtin, Humana’s President and Chief Operating Officer. Followed by a Q&A session, where Bruce and Jim will be joined by Susan Diamond, Humana’s Chief Financial Officer. 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 first quarter 2024 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 and 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 Bruce Broussard.

Bruce Broussard: Thank you, Lisa, and good morning, everyone, and thank you for joining us. I hope you had the opportunity to review our prepared remarks, which we posted this morning along with our earnings release. We’ll spend the majority of our time today on Q&A, but I’d first like to highlight a few key messages that we want you to take away from our discussion. First, we had a solid start to 2024 and we’re pleased to reaffirm our full year adjusted EPS guidance of approximately $16 while increasing our individual MA membership growth outlook by 50,000 to 150,000 net growth. Early medical cost trend indicators in our individual MA business are largely in line to positive relative to expectations, and we have seen strong year-to-date patient growth in our primary care business with 20% growth in our de novo centers and 7% growth in our more mature wholly owned centers.

In addition, we are incredibly proud of our continued organic success expanding our Medicaid platform with recent contract wins in Florida, Texas and Virginia. We are pleased that 2024 is trending in line with expectations. As we look ahead, we acknowledge that the industry is experiencing a dynamic and challenging time we must navigate. And while the current environment will create disruption for the industry in the near term, we continue to believe in the strong core fundamentals and growth outlook of the MA industry and our ability to effectively compete in MA market remains intact. Specific to 2025, we expect benefit levels, planned stability and choice for seniors to be negatively impacted by the final MA rate notice, which is not sufficient to address their current medical cost trend environment and regulatory changes.

Considering the significant difference between the final rate notice and our previous funding assumption, combined with the inherent pricing limitations imposed by the TBC change thresholds, we no longer believe $6 to $10 of adjusted EPS growth is the appropriate target range for 2025. Importantly, we believe that the industry will adjust to the current funding regulatory over time, continuing to deliver strong top line growth and normalizing at an appropriate margin of at least 3%. In that context, we remain committed to margin recovery and profitable growth through a multiyear pricing actions, creating value for our shareholders over the long term. Our 2025 adjusted EPS growth outlook will be impacted by several variables to which we will not have clear visibility until later this year, including finalization of our MA bid pricing decisions, the continued evolution of the industry cost trends, and the level of competitor pricing actions in 2025, which will impact our net membership growth.

In addition, we continue to evaluate opportunities to drive growth and further productivity across all lines of business to support 2025 adjusted EPS growth. We appreciate your desire for more detail regarding our outlook for 2025, and we will, therefore, provide an update on our bid strategy post bid finalization, with further update in the fall once we have visibility into our competitor plans and expected membership implications. Before turning it to Jim for a few remarks, I’d further emphasize that we continue to believe there is strong bipartisan support for the MA program and that the strong core fundamentals and growth outlook for MA and value-based care remain intact. In addition, Humana’s platform, unique focus on MA, and expanding CenterWell capabilities will allow us to compete effectively and deliver compelling shareholder value over the long term.

With that, turn it over to Jim.

James Rechtin: Thanks, Bruce. I just want to echo your comments that the outlook for Humana specifically and for the MA industry more broadly remains strong. The industry is navigating a challenging time, but it’s important to recall that this is not the first time that we’ve had to navigate challenging times and that we’ve seen difficult periods in the past. Humana has navigated this period successfully adjusting as needed and continuing to grow. While we anticipate disruption in the near term, the sector fundamentals are sound. This includes favorable demographics, a compelling value proposition relative to traditional Medicare. We believe the industry will continue to grow, and Humana will be well positioned to remain a leader in the market.

I also want to reiterate that we are committed to pricing discipline and margin recovery in this bid cycle. We are actively evaluating plan level pricing decisions and the expected impact to membership. We are evaluating opportunities to drive productivity, we are focused on the levers to support adjusted EPS growth in 2025 and beyond. And as we have incremental data on 2025, we will share it. We appreciate everyone’s ongoing support and look forward to providing additional updates, our performance and outlook throughout the year. With that, we will open the line 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.

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Q&A Session

Operator: [Operator Instructions]. Our first question will come from the line of Ann Hynes with Mizuho.

Ann Hynes: I just want to focus on cost trends. Did you see any change in cost trends versus 4Q? Also in your prepared remarks, it sounds like the company believes they took a conservative approach to reserving just given the change healthcare situation. Can you suggest that early indicators suggest trends were in line or better. Can you just elaborate on that comment, that would be great.

Susan Diamond: Yes. This is Susan. So as we evaluate the first quarter cost trends, as you guys understand, we do have good visibility to inpatient utilization from their more real-time authorization data. On unit cost and non inpatient, we are more dependent on claims. And so typically, in the first quarter, have limited visibility and given the change healthcare disruption even more so this quarter. But as you might remember from our fourth quarter commentary, one of the things we did experience was an unexpected uptick in inpatient utilization, which we did believe was in some way related to the expected 2-midnight rule changes that went into effect in January. As we said in our fourth quarter, we anticipated that those higher utilization levels would continue into the first quarter and then be further impacted by the changes we had always anticipated in response to the changes to utilization management programs.

So as we evaluated the first quarter inpatient utilization, I had provided some commentary a couple of weeks ago at a conference and acknowledged it. For January and February, we did see slightly higher inpatient utilization, where the ultimate impact of some of those program changes was a little bit different than we had expected, but we had commented that the results were improving week to week. We continue to see that, such that, while we were exiting February, we would say that the last week of February results were much more in line and we saw that continue into March and even some slight positive favorability such that for the full first quarter, as we said in our posted commentary, inpatient utilization overall is in line with expectations.

So that’s positive. We’ll have to see how the non-inpatient trends and inpatient unit costs develop as we get more visibility into the claim maturation. The other early indicator is how prior year development matures. In the first quarter, we feel like we have better visibility for incurred claims through the third quarter of 2023. We think that the change healthcare disruption was more impactful to incurred periods of the fourth quarter and more recent. So we felt comfortable relying on what we saw through the third quarter. And as we said in our commentary, we did see positive favorable — positive prior year development, particularly for the third quarter across both inpatient and non-inpatient. So we view that as positive. As the claims further mature, our hope is that we’ll see some further into the fourth quarter.

But for purposes, our quarter-end reserving, we did not contemplate that just because we recognized we have limited visibility. As you said, as we did our analysis for the first quarter, we made an explicit adjustment for what claims we believe were missing due to the changed health care disruption. And just based on those results, we would have seen some net positivity in the quarter all in. Because we did recognize that we didn’t have full visibility, we did go ahead and book additional claim reserves that ultimately reported our MLRs in line with expectations. So our hope is that we will see that, that proves to have some conservatism. We will see how that continues to develop as all of those claims are received and processed, and we’ll keep you guys updated on any intra-year development.

But otherwise, hopefully, that’s helpful in understanding what’s reflected in the first quarter.

Operator: Our next question will come from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck: I wanted to just maybe focus on the commentary around the 3% plus margin, which seem to be orienting towards kind of the lower end of the 3% to 5% margin than many of your peers are talking about and maybe a little bit lower than what you were talking about before. Is that — if that’s true, then why would that be the case for you guys? And then I guess over the last couple of years, you’ve been trying to reorient this towards an enterprise margin. I would love to just kind of hear how you think a 3% MA margin translate into what the implied enterprise margin might look like.

Susan Diamond: Kevin, yes. So yes, we continue to be oriented to enterprise margin and maximizing that across the health plan and CenterWell capabilities. And so don’t intend on a recurring basis to speak specifically to the health plan. But given the magnitude of the impact we’re anticipating for 2023 and 2024 and our acknowledgment that the margins currently are sitting closer to breakeven, we felt it was important to reiterate our view of what the long-term margin potential should be minimally for individual MA, not only for Humana, but the sector more broadly. And we do believe that 3% plus is a reasonable margin longer term. Now to the degree the industry ultimately normalizes to something higher than that, we’re not trying to suggest we would intentionally suppress it.

We would expect to have a margin on par with the industry and competitive, and we think that would be minimally 3%. I would say, as we think about the CenterWell opportunity, as we’ve said before, there’s literal incremental opportunity from just further penetrating our CenterWell capabilities by health plan members, which we continue to focus on. And then in addition to that, we do believe over time, if we can create differentiated experiences for our members who use those services, then we can increase claim satisfaction, and patient satisfaction, increase engagement, which should ultimately lead to better service results, improved loyalty and retention and overall improved total cost of care health outcomes, which can be driving further incremental margin and also reinvest it back in the business to support further growth.

So we remain as optimistic as ever about the long-term potential and do just acknowledge in light of the final rate notice our progression back to that minimum 3% health plan margin will take a little bit longer than we had initially expected.