The operator introduces the Humana Fourth Quarter 2023 Earnings Call, with a reminder that the call is being recorded. Lisa Stoner, Vice President of Investor Relations, will lead the discussion with brief remarks from Bruce Broussard, Humana's President and CEO, and Jim Rechtin, Humana's President and COO. The operator also advises participants of the cautionary statement regarding forward-looking statements and directs them to review the press release and Form 10-K for more information. The call will also include financial measures that are not in accordance with GAAP.

The management of Humana has explained the use of non-GAAP measures and provided reconciliations in their financial press release. The call is being recorded for replay purposes and will be available on the company's website. The management is disappointed with the update provided today, as the Medicare Advantage sector is facing challenges with regulatory changes and increased medical costs. The company's long-term outlook remains positive, but they have adjusted their 2024 EPS outlook due to the recent uptick in utilization trends.

Humana's initial claims data shows that the increase in medical trends is not driven by seasonal factors. The company is committed to addressing this change and expects earnings growth in other lines of business. The MA program is designed to respond to changes in medical trends and the company is evaluating pricing actions for 2025. Jim Rechtin, Humana's president and COO, is optimistic about the company's future despite current challenges and is impressed by the leadership and sense of urgency demonstrated by the team in addressing utilization trends.

The speaker shares the management team's belief in prioritizing margin recovery in 2025 and the potential for long-term value in the healthcare sector. They look forward to meeting others and limiting questions to one per person. The first caller asks about the thought process behind the 2025 EPS improvement and whether the industry will prioritize margin similarly. The speaker responds that they are confident in the business and will continue to grow until reaching the $37 EPS target, but the margin target may change in the medium term.

The speaker believes that the industry will need to reprice in the coming year due to increased utilization and ongoing regulatory changes. Their organization has maintained disciplined pricing in the past, but they anticipate the need for appropriate pricing in the future. There are dependencies on factors such as the rate notice and competitor actions, and the organization plans to be targeted in their pricing to address underperforming areas.

The speaker discusses the potential impact of competitor pricing actions on future growth and membership in 2025. They mention that they cannot comment on the following years, but will provide updates on pricing and emerging trends. The speaker also addresses a question about their margins in Medicare Advantage and explains that they may need to cut benefits by $10 to $15 in order to achieve their projected 1% to 1.5% increase. They compare this to previous years when benefits increased by $20, and state that the current situation is a "100-year storm."

Susan Diamond is responding to Justin's questions about the target margin and earnings improvement for 2024. She agrees with his mathematical estimates, but clarifies that the $6 to $10 earnings improvement is on top of any necessary pricing actions for the rate book. She also mentions that a third of the book is supported by risk providers, so the impact on earnings will be minimal. She reminds readers that if the 2024 trend continues to improve, it will be added to the earnings improvement for next year.

The company is expecting to see positive development over the year which would result in further appreciation. They need more time to assess the trends and their likelihood of persisting. The company is committed to restoring margin and is trying to be thoughtful about profitability. They are also considering the price elasticity of their members and do not want to lose members while improving margin. The magnitude of improvement in 2025 may not seem significant, but the company is taking incremental actions related to pricing to improve earnings.

The speaker responds to a question about the company's operating expenses in 2024 and 2025, explaining that they were able to mitigate higher outpatient trends through cost reductions and plan to continue finding opportunities to improve. They also mention using technology and AI to further reduce costs in the future. The speaker also asks for clarification on the question about pricing.

In this paragraph, Stephen Baxter and Susan Diamond discuss the company's earnings trajectory and how it has been affected by a significant increase in trend. They explain that this trend was not previously accounted for and will need to be absorbed in 2024 and 2025 pricing. They also mention potential long-term solutions such as rate adjustments and risk adjustment.

The speaker discusses the challenging competitive environment and Humana's focus on profitability over growth. They mention that if their peers do not also price for 2025, Humana may prioritize profit over market growth. However, the speaker believes that the competitive environment will eventually change and that Humana will continue to focus on sustainable and profitable pricing. They compare this approach to their strategy in Part D.

The speaker discusses the company's strategy for competing in the market, stating that they use their brand, relationships with value-based providers, and quality scores to compete, rather than pricing. They believe their capabilities are their competitive advantage and will continue to focus on differentiating themselves through these capabilities. The speaker also addresses an increase in inpatient utilization, attributing it to both the growth cohort of 2023 and seasonal factors. They clarify that they have kept most of the 2023 cohort, but some may have transitioned to competitors. In response to a question about enrollment, the speaker explains that while the company may have underpriced for the 2024 trend, they do not expect a significant increase in enrollment, which is unusual compared to past trends.

The company previously saw a rise in inpatient pressure due to new enrollment growth and limited information on medical cost utilization. However, the increase in inpatient authorizations in the fourth quarter was unexpected and not related to previous trends. Additionally, there has been a decline in observation stays starting in November, but more time and claim development is needed to fully understand the underlying reasons for these changes.

The speaker discusses the retention mix and enrollment data for AEP, stating that there are no concerns so far. They also mention that benefit reductions may have led to some disenrollment, and that the unexpected trend in 2024 was not fully accounted for in pricing. The company made more benefit adjustments than others, but still saw higher than expected trend. They plan to evaluate this trend for 2025 pricing.

The speaker is asked about the $6 to $10 projection for 2025 and the potential impact of attrition on reaching that range. They mention that the range accommodates different scenarios and takes into account the potential loss of hundreds of thousands of members. They also mention the possibility of exiting certain counties or plans if necessary to restore margins, but their goal is to find solutions and potentially moderate benefits to maintain a compelling value proposition.

The speaker acknowledges that some areas will experience larger cuts and this will have a significant impact on membership. They will provide updates on the extent of these cuts later in the year. In response to a question about utilization, the speaker mentions that they are still evaluating the drivers of utilization and have not seen any early data points in January to suggest a higher trend. They also clarify that their long-term goal is to restore margins, and their view on long-term margins for the individual MA business has not changed.

The fourth quarter results showed an increase in respiratory activity, but it was lower than expected. The increase in utilization is not related to respiratory issues and is expected to continue throughout 2024. January data confirms this trend. The company will continue to evaluate the drivers of this increase, including changes in utilization management regulations. At Investor Day, the company moved away from setting specific targets for individual MA and is focused on maximizing margin contribution across the enterprise.

Humana expects to restore margin to a reasonable level in the health plan within a short period of time, but they are also focused on expanding enterprise margin. In their scenario analysis, they have assumed that the higher costs will continue throughout 2024 and have applied a normal trend on top of that. There has been internal debate about the extent of continued utilization trend on top of the higher baseline in 2023.

The speaker explains that they were cautious in their estimates and guidance due to the uncertainty of certain factors. They will continue to monitor these factors, but it is difficult to predict their impact. The speaker also mentions that the changes in v28 were taken into account in their 2024 pricing assumptions, which led to benefit reductions. They note that duals D-SNPs may have been less impacted earlier in the year, but are now experiencing more pressure, especially in terms of inpatient care. More data is needed to fully understand the impact on both plan and member levels.

Scott asked for information on the estimated medical cost trend for Medicare and MA in 2023 and 2024, as well as the extent of competition in the market. Bruce Broussard mentioned that this year, one large competitor is dominating the market, but smaller competitors come and go. Susan Diamond stated that they have not shared specific trend percentages, but earlier in the year they saw high single-digit trends for non-inpatient and outpatient services.

The speaker discusses the company's margin numbers, stating that they are slightly above double digits and have been increasing sequentially. They attribute this increase to higher trend and give a rough estimate of the impact of this trend on their MLR. The questioner asks about the company's margin expectations for 2025 and how their competitors' strategies may impact their margin in the MA plan business.

Bruce Broussard discusses the company's philosophy on restoring margins and the importance of providing value to shareholders and individuals. He mentions the growth and scalability of CenterWell as a way to expand services and drive better value for the enterprise. Broussard also mentions the separate decisions made around pricing and the company's competitive advantage in the market. He believes that market share gain and membership growth, along with the company's brand, quality, and relationships with value-based providers, will continue to drive success in the future.

Susan Diamond explains that the majority of the EPS improvement in 2024 will be driven by individual MA, and that in order to achieve growth targets, both the health plan and services side of the business will need to progress. She also mentions that in 2025, they will prioritize markets with further integration opportunities, particularly in primary care, to drive growth and support enterprise integration and margin expansion.

The speaker explains that they do not have a specific target for enterprise margin, but they are committed to long-term EPS growth. They plan to provide more clarity on this later in the year. They do not see the 2025 range of $22 to $26 per share as a baseline, but rather expect continued improvement. They also continuously consider the benefits of size and scale in the industry, but their focus is on being best-in-class.

The company values their relationships with providers and their integrated model, which they believe gives them a competitive advantage. They have also been able to improve their cost structure through productivity efforts. The management team will continuously evaluate what is in the best interest of shareholders, but currently, they believe that being a specialty player in the fastest growing part of the industry is the best value for shareholders. The company has adjusted their pricing assumptions for 2024, with 50% of the increase in MLR being related to inpatient stays. They have seen an increase in inpatient stays in November and December, and are looking into the reasons for this and why it was not identified earlier.

The increase in MLR in 2024 is likely driven by unexpected inpatient trends in the last two months of 2023. The company is seeing less of this trend in their Florida HMO market and is analyzing utilization management in different geographies. The unprecedented and rapid change in inpatient trends makes it difficult to predict, but the company uses authorization data for over 99% of inpatient events to accurately book reserves. The non-inpatient trends are based on claims with a 60-day lag.

The speaker discusses their estimation for November and December and how they are leveraging real-time information to make forecasts. They also mention their efforts to improve analytic and forecasting models and discuss partnerships with capitated medical groups. The speaker is asked about the potential for these groups to carve out certain benefits and bring them back onto the company's P&L, which could be a headwind.

The speaker was asked if shutting down the commercial business would have any impact on their network or rates. The speaker explained that their rates are mostly based on Medicare rates and they have good relationships with their providers. They do not see this as a headwind for them, but they do anticipate challenges for less sophisticated providers. The other speaker added that as risk providers absorb the impact of v28 and higher trends, there may be pressure for the industry to reflect these trends in benefits. They also mentioned that they have already cut benefits more than anyone else.

The speaker discusses the frustration among payers and providers over the level of benefit investment and the need for pricing discipline. They also mention the potential for benefit adjustments in certain markets to improve the value proposition for members. When asked about the 2025 earnings pickup, the speaker explains that it implies a 100 basis point improvement in insurance segment margins, but factors such as negative rate updates and positive cost trend growth may require using a portion of the TBC threshold. The remaining improvement would then be used to recover earnings.

The speaker explains that the company is anticipating a similar impact from the rate notice in 2025 as in 2024, with an average benefit cut of $13 per member per month. They are also taking significant pricing action and will continue to evaluate trends to maximize impact and maintain a compelling value proposition for consumers. However, the upper bound of what is possible is around 6-10% earnings appreciation, and this may change depending on any developments before pricing is submitted.

Susan Diamond, Bruce Broussard, and Gary Taylor discuss the company's efforts to improve efficiency in healthcare costs and the impact of the current rate environment. They also address concerns about claims clarity and potential regulatory changes.

The speaker discusses their company's reliance on paid claim progression for non-inpatient services due to insufficiently high authorization data. They mention that they have accounted for changes in utilization management for 2024 and have already factored them into their initial pricing and targets. They also mention that they will have real-time visibility into how these changes are affecting utilization trends.

The speaker is discussing the impact of higher utilization on their business and the potential changes in provider appeals and uphold rates. They acknowledge that it may take some time to fully understand these changes, but they remain confident in the long-term prospects of their sector and are grateful for their employees' dedication. They thank the participants for their time and end the call.

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