The operator introduces the Humana Second Quarter 2024 Earnings Call and advises that it is being recorded. Lisa Stoner, Vice President of Investor Relations, will lead the call with brief remarks from Humana's President and Chief Executive Officer, Jim Rechtin, followed by a Q&A session with Susan Diamond, Humana's Chief Financial Officer. Participants are advised of the risks and uncertainties involved in the discussion and are directed to review Humana's press release and SEC filings. The discussion may include financial measures that are not in accordance with GAAP.

The second paragraph of the article introduces the speaker, Jim Rechtin, who is the President and CEO of Humana. He thanks the company's Board of Directors for the opportunity and acknowledges the previous CEO, Bruce, for his mentorship. Rechtin also encourages readers to read his letter on the company's Investor Relations website, which discusses the company's second quarter results and overall industry outlook. He emphasizes the importance of remembering that CMS, the government, and taxpayers are also Humana's customers, and that the company's business creates value for all stakeholders.

The speaker emphasizes the need for a regulatory environment that allows for the full potential of the company to be realized and stresses the importance of collaboration and adjustment. They acknowledge the external challenges but urge a focus on what can be controlled. The speaker then briefly discusses the second quarter performance, stating that it exceeded expectations.

The company is performing well at mid-year, with their Medicare business exceeding expectations and member growth being higher than anticipated. However, they did experience some medical cost pressure due to higher inpatient admissions. The company is taking measures to mitigate this pressure, such as ensuring clinical appropriateness of admissions and negotiating with providers. They also have some modest claims pressure in Medicaid, but do not expect it to impact their full year results. Additionally, their Primary Care and pharmacy businesses are performing in line with expectations.

The home business has seen growth in admissions and is working to improve their cost structure through automation. The team has also made progress in managing administrative costs and has several initiatives in place to reduce costs and improve the consumer experience. They have reaffirmed their guidance for 2024 and are looking ahead to continued growth in adjusted EPS and a path towards a normalized margin in 2025. The company is confident in their bid assumptions and product portfolio for the upcoming year.

The speaker is excited about the momentum and opportunities ahead. They have posted their prepared remarks on the Investor Relations website and will now focus on Q&A. The first question is about inpatient trends and whether the pressure is only from the 2-midnight rule or other factors as well. The speaker explains that while there has been some variation in inpatient results and avoidance rates due to the rule, they have remained stable and in line with expectations. However, the inpatient absolute level has seen more variation, likely due to further impacts from the 2-midnight rule implementation.

The paragraph discusses the consistency of reported results from hospital systems in terms of volume and revenue per patient. It also mentions a slight increase in COVID cases in July, but overall stability in the second quarter. The guidance for the second half of the year anticipates a higher MLR due to continued higher inpatient volumes, offset by lower average unit costs and observation stays. Workday seasonality also impacts the quarterly progression, with the third quarter expected to have an 80 basis point impact. The higher July activity will be reflected in third quarter results, not the second quarter. There is no specific quantification of the July impact on MLR.

The company's second quarter performance has shown a slightly higher amount due to COVID, which is not a major concern as it is expected to be temporary. The MLR (medical loss ratio) is expected to increase in the third quarter compared to last year, but remain relatively consistent for the full year. The fourth quarter may see higher MLR due to abnormal trend on top of last year's high utilization, but this will be offset by favorable workday seasonality. The company also expects about 100 basis points of pressure on MLR due to higher inpatient costs.

Susan Diamond is responding to a question about the impact of pressure on MLR (medical loss ratio) and how it will affect their 2025 bids. She explains that there are some year-over-year impacts and that the first half of the year will see some favorability in offsetting higher costs. She also mentions that there are some one-time factors that won't repeat in the second half of the year, such as prior year claims development and a final MRA payment. This may create differences in expectations for the first half and second half of the year.

In the second half of the year, the company assumes that inpatient volumes will remain high and that there will be offsetting factors such as lower unit costs and observation stays. The company's 2025 bids did not take into account the current inpatient pressure, but they did not anticipate the positive factors such as higher risk scores and lower costs. Overall, the company remains confident in their bid assumptions and their ability to deliver on their margin and earnings expansion goals. In terms of the 2-midnight rule, it is estimated to have a 50-75 basis point impact on the MLR. As for the company's cost-cutting efforts, there may be concern that they have cut too much and may not have the resources to react quickly to any future cost increases.

The speaker addresses two questions about the 2-midnight rule and cost management. They mention that the impact of the 2-midnight rule was higher than expected, but it has been partially mitigated by prior year development and favorable MRA. They also mention that there is no evidence of cutting costs that would harm the company's operations. The company has implemented some quick cost-saving measures but is also investing in long-term cost management strategies.

The speaker discusses the potential for cost reduction through technology in the business, but notes that it will happen gradually over the course of several years rather than a sudden jump. They also clarify that the multiyear margin recovery plan remains the same, but there may be changes in how the company evaluates expenses in the future.

The speaker discusses the need for consistent performance and optimizing shareholder value over multiple years. This is not a change for Humana, but rather an area where they can improve and become more disciplined. The Medicare Advantage business is an annual cycle business, with annual repricing, rate notices, and member growth.

The company faces challenges in making disciplined long-term investments in the current environment. This applies to both capital and operating investments. The company acknowledges the need to improve in this area. On the provider side, the results are similar to the health plan, with less inpatient pressure and better management of authorization requests. However, the impact of change in the system makes it difficult to estimate CenterWell's performance. The company is cautious in its approach to predicting their performance. The next question asks about expectations for the PDP segment in 2025, including membership, profit, and margin.

Susan Diamond, speaking on behalf of the industry, discusses the recent benchmark data and its potential impact on bids for the 2025 standalone Part D plans. She mentions that each company may have approached their bids differently based on their product strategies, but overall the industry was focused on mitigating increased exposure and liability risk. The benchmark data, which suggests higher direct subsidies, is seen as reflective of the higher costs the industry will face in 2025. Diamond also mentions that there are still questions about the upcoming demonstration project and it is too early to determine if they will participate. She declines to comment on the direct impact of the subsidies and benchmarks due to ongoing bid submissions and competitive reasons.

During a conference call, an operator introduces a question from Ben Hendrix of RBC Capital Markets about Medicaid utilization and acuity. Susan Diamond, the speaker, explains that their results are different from others due to their conservative approach in forecasting the impact of redetermination. She mentions that Florida is performing better than expected, but there is some pressure in newer states like Oklahoma and Kentucky due to pharmacy and behavioral issues. The team is working on mitigation opportunities in these states.

The speaker clarifies that they feel good about their discussions with state partners and expect them to adjust rates to reflect current trends. They also feel good about their Medicaid performance in 2024 and 2025, but are not offering a specific EPS target for 2025. They feel confident in their assumptions and plan for 2024 and 2025.

The company is facing limitations and trends that will affect pricing and margin recovery in 2025. However, exiting certain markets where the plans are running at a loss will provide an opportunity for margin expansion and increase in earnings. The company is closely monitoring the performance of their plans in each market and will consider exiting if they cannot become profitable in a reasonable amount of time. The absolute level of earnings growth is dependent on membership change, which is uncertain in the current environment. The company raised their revenue guidance by $3 billion, with the largest driver being membership changes, but there are other factors such as Medicaid and CenterWell that also contribute to the increase.

The company is expecting an increase in membership and this will drive revenue and claims. They have seen some favorable performance in their final year MRA and revenue estimates, but the majority of the increase is due to membership. The company is also undergoing a strategic review and making changes to their management process to improve accountability and measure performance over multiple years. They are also focused on reducing expenses to recover their margin.

The speaker is discussing their process for implementing management processes and cost management within the company. They mention that they are going deeper than usual due to being new to the team. They will have more details about the outcomes next year. They also mention improving variable costs through process redesign and technology, such as their partnership with Google. The speaker then addresses margin recovery, stating that it will take multiple years to reach a normalized margin and that they expect to be back to normal in 2027. They feel confident about the direction the team is taking.

Michael Ha asked about the timing of lower administrative expenses and how it may impact the company's bids for 2025. Susan Diamond clarified that the lower expenses were due to timing and will likely even out in the third or fourth quarter. She also mentioned that the higher inpatient utilization was not factored into the company's bids for 2025, and if it continues, it could affect their MA margin progression next year. She explained that this was not anticipated when the bids were filed.

The company expects incremental pressure on medical costs due to higher risk scores, but also anticipates lower unit costs and observation stays. These factors are expected to largely offset each other and result in a similar MLR position as planned for in 2025 bids. The higher risk scores seen in the first half of the year have resulted in favorability on the 2023 file, but the impact of the v28 in 2024 and 2025 is unchanged.

The speaker addresses two high-level questions, the first being about the industry's advocacy efforts in Washington and the second about the potential for reducing G&A costs. They mention that they are currently working on a strategic review and will have more information to share in the future.

The speaker discusses the company's DC policy and how they deliver value to members and patients by providing better outcomes and lower costs. They also acknowledge the need to better understand and explain the value that accrues back to taxpayers and collaborate with CMS to create a long-term value proposition for taxpayers and stability for Medicare and Medicaid. This will benefit the MA sector, members, and taxpayers.

The speaker is discussing the company's strategy for the 2025 bid and how it relates to removing or restructuring plans in order to preserve or pursue margin. They have already exited unprofitable plans and are working on improving margin for others. They are not willing to give specific numbers for competitive reasons but have stated that they expect to reduce membership by a few hundred thousand due to plan exits.

The speaker discusses the company's growth opportunities, including in CenterWell and Medicaid, and the potential synergies with the Medicare book. They believe these areas are key for future growth and are aligned with the company's past strategies.

The company is focused on deploying capital strategically to drive lower total cost of care and offer attractive returns on investment. They are looking at the same areas as in the past and evaluating what will drive long-term shareholder value. On the topic of inpatient activity, the company is performing higher levels of appropriateness checks and potential mitigation activities, which may result in revisions on claims for medical necessity. They are also negotiating with providers for closer alignment, but details on this were not provided.

The company has a postpay review process to ensure appropriate utilization and value from claims. They have good information and tracking of the impact of their programs and do not expect any major changes. They are also looking to improve alignment with contracts to manage utilization and care. The company is performing well at mid-year and reaffirms their guidance, but there is pressure in the inpatient sector. They thank their teams for their hard work.

The speaker expresses their excitement to continue working with the listeners on the phone call and their team at Humana. They thank everyone for participating and the call is now ending.

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