The operator introduces the conference call for Humana Inc.'s second quarter 2023 earnings, and Lisa Stoner, Vice President of Investor Relations, takes over. Bruce Broussard, Humana's President and Chief Executive Officer, and Susan Diamond, Chief Financial Officer, will discuss the results and financial outlook for 2023. Joe Ventura, Chief Legal Officer, will also join for the Q&A session. The call is being recorded for replay purposes and will be available on Humana's website later. A cautionary statement is also provided about the risks and uncertainties associated with forward-looking statements.

Humana reported financial results for the second quarter of 2023 with adjusted earnings per share of $8.94, in line with expectations. They have reaffirmed their 2023 adjusted EPS guidance of at least $28.25 and have raised their guidance for full year individual MA membership growth by an additional 50,000 members. They are focused on making disciplined investments, driving productivity, and delivering consistent quality in order to meet their targeted earnings growth rate and membership growth.

Humana has seen significant growth in their MA platform in 2023, with 40% of industry growth and a 170 basis point increase in market share. Agent sales have increased 75% year-over-year and retention for agent runs is 5-8% better than overall new members. The MA program has a margin expansion opportunity on these members over time due to the structure of the program.

Humana expects to see strong growth in the MA industry in 2024, and has developed a product strategy informed by consumer and broker research and in-depth analytics. Humana is focusing on preserving benefits and providing differentiated offerings that improve health outcomes, while selectively enhancing products with improvements like zero premium plans. Humana is also prioritizing maintaining product value for duals, and will enter the 2024 selling season in a position of strength, supported by momentum from their 2023 growth and industry-leading quality.

Humana has diversified its operations, including the growth of its internal payer-agnostic channel and the acquisition of IFG, leading to an increase in sales agents and MA application volume. It has also received recognition for its customer experience and member-centric approach. In addition, Humana has been recommended by the Oklahoma Healthcare Authority to deliver health care coverage to Medicaid beneficiaries across the state. Furthermore, its CenterWell Primary Care platform is now operating 250 centers serving 272,000 patients, with improved retention and patient visit rates. The company is on track to end the year with 30-50 new centers through a combination of de novo build and programmatic M&A.

Humana is making progress in advancing their clinical capabilities and operational efficiency, and have implemented strategies to mitigate the impact of risk adjustment model changes over the next three years. In Home, they have a value-based strategy that covers 830,000 members of their MA members and plan to expand this by 2025. In North Carolina and Virginia, hospital admissions rates are 210 basis points lower than other providers. CenterWell Pharmacy is advancing their clinical capabilities and have seen an increase in adherence to hypertension, hyperlipidemia, and diabetes medications. Humana members who utilize CenterWell Pharmacy have fewer inpatient admits per 1,000 as compared to non-CenterWell pharmacy users, and CenterWell Specialty Pharmacy is driving longer therapy durations on higher adherence levels. Humana expects to create $110-150 million of annual enterprise value creation by 2025 from their value-based home health model.

Humana and CenterWell are working together to create a more integrated clinical model to improve member and patient satisfaction, retention, and clinical outcomes. As an example, drug costs, planned benefits, and patient assistance programs are reviewed for members in the wholly-owned centers. The teams also review high-risk patients and collaborate on a more comprehensive care plan. Humana and CenterWell are encouraged by the early results of their integration work and plan to expand their focused markets from two in 2022 to more than 20 by year-end.

Bruce highlighted Humana's strong fundamentals and their confidence in their ability to achieve their 2025 adjusted EPS target of $37, with support from their 2023 membership growth, strong MA positioning in 2024, consistent quality scores, and continued growth and integration in CenterWell. Susan reported that they met internal expectations for the second quarter of 2023, despite higher-than-anticipated utilization in their Medicare Advantage business, which has since stabilized. They also experienced better-than-expected favorable prior year development, a more positive midyear Medicare risk adjustment payment, slightly favorable investment income, and other business outperformance. This has allowed Humana to exceed their expectations for individual Medicare Advantage membership growth in 2023, with an 18% growth rate.

The company has reaffirmed its adjusted EPS guidance for the full year, and has provided additional details on its second quarter performance and full year outlook. They have noted higher-than-anticipated non-inpatient and inpatient utilization trends in their Medicare Advantage business, but have seen positive restatements for the first quarter and stabilizing outpatient utilization levels in April and May. They point to the top end of their full year Insurance segment benefit ratio guidance range and will continue to monitor emerging trends, which also includes individual Medicare Advantage membership growth post the annual election period.

Bruce discussed the higher benefit expense ratio than the average new member, which will negatively impact the current year benefit ratio, but will result in a larger margin expansion opportunity over time. It is anticipated that the higher than expected benefit ratio in 2023 will be offset by various factors, such as higher-than-expected favorable prior year development, administrative expense reductions, higher investment income, and other business outperformance. The pricing for 2024 is anticipated to allow for earnings growth and the target is to be within the 11-15% range. The Medicaid business is performing better than expected due to favorable membership results, cost management initiatives, and lower-than-expected utilization. Redeterminations are tracking slightly favorable to initial expectations and the Louisiana and Ohio contracts are performing as anticipated.

The company has improved its full year guidance from down 800,000 to down 700,000 members in its stand-alone PDP business, largely due to better-than-anticipated retention. The Primary Care organization has also seen impressive growth in both de novo and more mature centers, with patient panel growth estimated to be 27,000 to 30,000 for the year. The number of centers with contribution margins of $3 million or more is also expected to increase from 31 in 2022 to 40 at the end of 2023.

The company has seen strong growth in new start of care admissions and episodic admissions, but is experiencing pressure on recertifications due to utilization management programs. Quality ratings have improved significantly, and the company is making progress towards its goal of covering 40% of its Medicare Advantage membership by 2025. The Pharmacy business has also seen positive results due to higher-than-expected individual Medicare Advantage membership growth and favorable drug mix.

Humana's Medicare membership mail order penetration is 40 basis points lower than the prior year due to retail pharmacy co-pays. Investment income is expected to increase by $500 million year-over-year and the company has completed $800 million in repurchases to-date. The company is expecting $1.5 billion in share repurchases in 2023 and the third quarter earnings are expected to be 25% of total earnings. The Insurance segment benefit expense ratio is expected to be 87% before increasing in the fourth quarter. Humana is pleased to have grown individual MA membership by 18% in 2023 and is guiding to a 12% year-over-year increase in adjusted EPS.

Susan Diamond confirms that the higher Medicare Advantage utilization trend that they have seen in 2023 will continue into 2024 and that they did not fully embed that trend into their bid for 2024. She also mentions that they have identified cost offsets that will allow them to deliver on their EPS target for this year.

The company is confident that they can deliver an EPS progression in 2024 that is consistent with their historical range. They are also confident that they will be able to offset the higher trend they are seeing this year in 2023 with favorable prior year development, investment income, and administrative expense reductions. Some of these offsets will carry forward into next year, while others are viewed as more onetime this year.

Bruce Broussard explains that Humana has focused on improving retention by focusing on benefit design and customer experience. He believes that they are well-positioned for 2024 and feel confident about their ability to retain members.

Bruce and Susan Diamond have discussed the importance of benefit design and service experience in retaining members. They also mentioned that disenrollment rates are higher in the earlier years of tenure, but that retaining the book for longer should provide an incremental benefit. They also noted that getting members their initial eligibility is incrementally positive and that it takes about three years for either an agent or a member to reach mature contribution margin.

Bruce Broussard believes that industry growth will remain at historical levels due to aging demographics, the value proposition between MA and fee-for-service Medicare, and the underpenetrated duals segment. He also notes that agents are becoming more integral to growth and that they should have a positive impact in 2025.

Bruce Broussard discusses the benefits they have been researching in order to provide an appropriate value proposition for Medicare beneficiaries, taking into account the reduction in funding from the rate notice. Susan will discuss the margin side of the equation.

This year, the company has increased their premium plans and coverage, and they have ensured that they are providing ample support for supplemental benefits for their duals population. They have found that they can compete in the market if they are within shouting distance of their competitors in terms of benefits. They have never prided themselves on being the cheapest, but rather on the quality of their service and the ability to service their members. In 2024, some competitors may focus their investment on duals, which may put them under incremental pressure from Stars.

In 2023, the company lagged the industry in non-dual growth but outperformed on duals, allowing them to be in line or better than the industry on average. They are optimistic about how they are positioned for 2024 and have received positive feedback from brokers. The company is confident that they will deliver against their historical range for 2024, but will have to evaluate a number of things such as membership growth, composition of growth, and emerging trends to determine their margin.

Susan Diamond discussed how they are approaching coverage of Alzheimer's drugs and emerging therapies in 2024, and that they have priced it into their bids. She noted that they do not expect the drugs to trip the significant cost policy, which requires $1 PMPM of expense discipline level. She also mentioned that they have proactively pulled levers midyear to better contain the elevated Medicare cost for the back half of the year, such as prior authorization policies and other coverage factors.

Humana is expecting the second half trends to continue and not be mitigated by any actions or levers they might take. The main lever they are relying on internally to offset some of the elevated trend in the back half of the year is more administrative expense savings. Humana is also looking at coverage to make sure they have the appropriate controls in place on the dental side.

Bruce Broussard and Susan Diamond discussed their expectations for the non-dual growth rate in 2024 and the potential for margin expansion in the book from 2023 to 2024. They are optimistic about the growth and anticipate that agents will orient more towards the zero premium plan. Additionally, they believe that they may be better positioned than competitors due to a lack of focus on duals.

Susan Diamond responds to Gary Taylor's questions about the source of the stronger PYD and the materiality of the sweep revenue. She explains that the stronger PYD is due to outpatient ambulatory and final inpatient acuity, and that the sweep revenue is higher than usual for the second quarter.

This paragraph discusses the drivers of the PYD, which is a conservative posture to year-end reserving, seasonality models that may have overstated claims in December, and a positive mid-year risk adjustment payment. It also mentions that the higher trend was likely reflected in the mid-year payment, and that the payment was not material from an annual basis.

Susan Diamond explains that the company's intent has always been to deliver on the $37.25 EPS growth target for 2024, despite the higher claims they have seen this year. She believes that they are well-positioned to achieve this goal due to their lack of Stars headwinds and their strong performance in 2023. She is confident that they can still deliver on the needed earnings and EPS progression for next year.

Bruce Broussard of Humana discusses how the company's 10% earnings growth for the upcoming year will be driven by core business growth, productivity, and capital deployment. He also mentions that the rate notice will impact the benefits they receive, and that they anticipate growth in 2024 and 2025 as a result of their focus on productivity and capital deployment.

Susan Diamond answers a question posed by David about the geographic breadth and population-based trends of medical cost trends. She states that the trend is broad-based and not concentrated, but there is some concentration in dental trends in Florida markets. She also states that duals are performing better than non-duals, but there is more pressure on non-risk-based providers.

Humana is growing at a faster rate than anticipated, and they do not need to grow membership in 2025 to meet their $37 target. They do not believe that they need to reprice to higher trend due to industry-wide trends, and it would not affect their competitive positioning.

The company is expecting to outperform industry growth in 2023 and 2024, and is striving to sustain industry growth rates or better in the future. They are making some benefit adjustments in 2024 and potentially more in 2025 due to dental costs, but believe the broader medical cost trend is consistent with other companies. They may need to take additional pricing action in light of what they are seeing in 2025, but they would not expect to be in an outlier position relative to others.

Bruce Broussard thanked everyone for their support and participation in the conference call and expressed his gratitude to the 70,000 team members who made their success possible. He then concluded the call, thanking everyone once again and wishing them a great day before the operator ended the call.

This summary was generated with AI and may contain some inaccuracies.