Humana Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
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.
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.
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.
[Operator Instructions] Our first question will come from the line of Ann Hynes with Mizuho.
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.
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. .
Our next question will come from the line of Kevin Fischbeck with Bank of America.
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.
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.
Our next question will come from the line of Gary Taylor with TD Cowen.
Two quick things I just want to make sure I understand. Back on the first quarter call, we asked about TBC and you felt it wasn't a constraint to margin recovery for '25. And I think what's changed is that might have been true with the 0% funding assumption, but at a negative [ 1 6 ] you're just more underwater, so to speak, from an underwriting perspective. And so now TBC is more relevant to '25. So I just want to confirm that.
Yes. Gary, and you are correct. With where the final rate notice came in, it will require larger benefit reductions to achieve stable margins and approach the TBC thresholds in some cases. And so that's where, as we said all along, we will be evaluating plan and county exits where the TBC limits impede our ability to price products at a reasonable margin.
Our next question will come from the line of Justin Lake with Wolfe Research.
Hello, can you hear me?
Yes.
So one, I wanted to follow up on Kevin's question and then I got one of my own. The 3% margin, the 3% plus target, my recollection is when I did the math for 2025, when you originally had the $37, I was getting to about a 3.5% individual MA margin within that $37. Is that the right ballpark that you'd previously assumed just so we can compare or contrast?
Okay. Yes. So I think that was 6 questions in 1, but I will do my best to hit them all. To your first comment about the $37, you are correct. And here in that initial modeling, you can think of it between 3% and 3.5% over that period. And we had always said that our belief was that any margin progression and improvement would largely come from productivity and efficiency, not MLR gains and then any sort of revenue and claim trend vendors would sort of support the product to remain competitive and continue to grow. .
Our next question will come from the line of Stephen Baxter with Wells Fargo.
Just to clarify the TBC commentary, our understanding is there are a lot of benefits that are not governed by TBC like flex cards. And it seems like you're suggesting that you're not comfortable making up the incremental rate headwind by cutting benefits that are outside of TBC. I was hoping you could elaborate a little bit on this dynamic and how you're thinking about the sensitivity of benefits that are outside of TBC thresholds.
Yes. Sure, Stephen. So I would say on the non-D-SNP side, as we talk about the [ benefits ], most of the benefits are [ submitted ] to TBC. So even things that are technically supplemental things like dental, Part B givebacks and for those are for purposes of TBC accounting tools. There are some items that fall outside of TBC, some things like transportation, OTC, fitness and a few other things, but are relatively small versus those things [ due to product ] TBC.
Our next question will come from the line of Ben Hendrix with RBC Capital Markets.
I was wondering if you could provide a little bit more information on a previous utilization question. You mentioned earlier some measures you took to address the higher mix of short-stay inpatient volume versus observation stays. You saw earlier in the year, and I believe you've noted some training and other measures to bring those inpatient avoidance rates back in line. But just curious to what degree those measures impacted your APT performance for the quarter. And if there could be, that could be a source of some outperformance through the balance of the year versus your 90% [ MER ] guidance.
Yes, Ben. So you are correct. So as we said on our fourth quarter call, we were anticipating in light of the 2-midnight rule changes that we would see an increase in short stays and things that under the old rules were built as an observation, they would now flip to an inpatient's stay. And we saw that in the fourth quarter start to emerge and did continue to see that in the [ first ] quarter incrementally. .
Our next question will come from the line of A.J. Rice with UBS.
Can you hear me?
Yes, A.J.
Sorry, just went dark there for a second, so I wasn't 100% sure. Just two things real quick, you had talked about, I think, with the fourth quarter and even some of the year-end commentary that the road to recovery on the margin was about, you thought the market could absorb 100 to 150 basis points of annual improvement over the next few years. Calling beyond that might be disruptive from a competitive standpoint or for seniors and you thought you could get that.
Yes, A.J., certainly. So in terms of our thinking on the trajectory to the 3% longer-term expectation, we would say that we do acknowledge this is going to be a multiyear process to recover margins. And the exact timing of that will be dependent on the funding environment, regulatory environment and then certainly the competitive environment. .
Our next question will come from the line of Scott Fidel with Stephens.
Can you hear me?
Yes, Scott.
I was interested if you can maybe talk about how you would think about the value prop for seniors, potentially comparing between MA and traditional Medicare in 2025. Obviously, we're all very focused on the headwinds to the MA value prop as it relates to the challenging reimbursement outlook. But it also feels like seniors in traditional Medicare are going to be facing some meaningful headwinds as well when we think about the IRA impacts on Part D.
Scott, thanks. I'm sure Susan is saying thank you, too, to give her the break of all the questions that have been asked relative to the financial side. Relative to the value proposition for Medicare Advantage to MA, we continue to believe we will have a significant value proposition. And really for a number of reasons. First, just the economics itself, I mean, today, we see about $2,400 a year. You see that stepping back a little bit for 2025 as a result of the benefit changes, but not material to make it something that we feel shopping to the Medicare fee-for-service side will increase. .
Yes. On MedSup, interestingly enough, the change health care disruption was particularly disruptive to our MedSup business. And so I don't know if that's a function of just CMS not working with providers for redirection versus the MA plans, I'm not sure, but we did see a disproportionate impact to MedSup. And so I would say that our current visibility is a little bit less than it would typically be. .
And Scott, I think your other question was just relative to the growth of Medicare Advantage and just how that looks. And we continue to see and believe over the coming years that it will be a mid-single-digit growth, and that will be a combination of demographic growth, maybe slowing a little bit in the latter years of this decade, but we continue to see that along with the penetration of more beneficiaries using Medicare Advantage.
Our next question will come from the line of Joshua Raskin with Nephron Research.
Just getting back to the 3%, I guess, how did you come to this long-term industry margin of 3% plus? What does that mean for Humana relative to the industry? And what do you think that translates into in some form of like return on invested capital?
Josh, so as we think about the 3%, and as Justin had asked earlier, that even historically had been -- how the business has been performing and expectation that we would be able to continue to maintain that level of performance and believe that the industry will minimally require that level of margin, just recognizing the inherent sort of risk in the insurance business the regulatory capital that has to be established. But that just feels like an appropriate margin on a sustainable basis and certainly reasonable and still be able to provide a very strong value proposition to consumers. .
And just on the return on capital, Josh, as you look at the math, we put about 10% statutory capital in the business, and this is a 3% margin kind of activity, which creates a significant amount of incremental return on capital for us. And since all this is organic growth and not any kind of acquisition growth. I mean it's highly accretive to the overall cost of capital to the company.
Our next question will come from the line of Nathan Rich with Goldman Sachs.
I have a few follow-ups. I guess, first on utilization, there's some thought that some of the March trend could be related to calendar dynamics around Easter versus more sustained change in the trend. I guess, could you maybe just give us your view here?
Yes, Nathan, in terms of the first quarter and utilization seasonality, I would say, common, this is leap year. So all of things being equal, you would have had a higher trend in February because of leap year. But then there was other workday seasonality over the quarter such that we would say, in total, there's really not a seasonality impact and relatively consistent with the prior year. And those are all things we would have anticipated in our initial plan and then the guidance we gave for the first quarter. .
Our next question will come from the line of Andrew Mok with Barclays.
You revised your individual MA membership growth target up 50,000 versus your initial expectations of growth for 100,000. Hoping you could elaborate on the drivers of that. Was that just conservatism on your end? Or did you see any unexpected changes in the distribution channel during the open enrollment period that resulted in higher membership.
I would say the main difference is just how we performed in OEP. And I think that's a combination of a few things. I think it's some of our competitors having challenges in servicing their growth has been a benefit to us, and we've seen some recovery from that.
Yes. And just to add to what Bruce said, the increase was largely attributable to non-D-SNP sales, retention in total was largely in line. We saw in the OEP higher volume than we had expected, both in agents and switchers from other MA. And so as we think about the rest of the year, some of that agent favorability drove the increase. The switcher is obviously less so once the OEP ends. .
Our next question will come from the line of Lance Wilkes with Bernstein.
Could you talk a little bit with the CEO transition as to Jim, what your impressions of the opportunities are? Are there any value creation opportunities that maybe are more structural or larger in scale, like outsourcing PBM or things like that? And have you guys made any sorts of operational changes in leadership or structure, again, contemplating both the market dynamics and the CEO transition?
Thanks for the question. This is Jim. No, there are not any changes to the team. So let me hit that one real quick. Second, are there opportunities? We're still in the process of evaluating opportunities. We certainly believe that there will be a continued need to drive efficiency. That's both on the operating side as well as continuing to get stronger in how we do medical cost management over time. We're still evaluating those opportunities. And the expectation is that by the end of the year, we would have more to say about where exactly the opportunities are and how we intend to go after them over time.
Our next question will come from the line of Lisa Gill with JPMorgan.
Susan, I want to go back to your comments around the PDP and the IRA for 2025. Can you talk about what you've seen for conversion over to MA in '24? And then how are you thinking about stand-alone PDP in 2025? Will that become unprofitable on a stand-alone basis? And then just secondly, I just want to understand, when you talk about the update for the bid strategy, will it be a separate press release? Or are we waiting for Q2 to get that update?
Yes. So in terms of the IRA impacts and our thinking on stand-alone Part D, your first question around PDP conversions, I would say we continue to see a disproportionate opportunity to capture movement from Humana PDP members to Humana MA. For those members that choose to convert to MA, and we have visibility, right, in terms of any MA offering they choose. We tend to get a higher market share of those individuals that are making that decision than we do in just the overall individual MA space. So that continues to be very positive.
Just, will it be a separate press release around your bid strategy? Or is that something that you'll update on Q2?
Yes. I would imagine we will likely do that on the second quarter call. I don't know if we're scheduled at any conferences in between. My guess is, no. But my guess is it would be the second quarter call.
Well, thank you for your time and interest today. In closing, I would reiterate that Humana had a solid start to 2024. And while we acknowledge that the entire MA industry is navigating a difficult near-term environment, we continue to believe the strong fundamentals and growth outlook of MA and value-based care remain intact and the strength and scale of our platform and differentiated capabilities will allow us to effectively manage through the uncertainty, compete effectively and deliver compelling shareholder returns over the long term.
This concludes today's conference call. Thank you for participating. You may now disconnect.