Humana Inc (HUM) — Q2 2018 Earnings Call Transcript

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Brian Kane, Chief Financial Officer, will discuss our second quarter 2018 results and our financial outlook for the full-year. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. We encourage the investing public and media to listen to both management's prepared remarks and the related Q&A with analysts. 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. 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 second quarter 2018 earnings press release, as well as in our filings with the Securities and Exchange Commission. Today's press release, our historical financial news releases and our filings with the SEC are all 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. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Good morning and thank you for joining us. Today, we reported adjusted earnings per share of $3.96 for the second quarter of 2018 and raised our full year 2018 adjusted EPS guidance to approximately $14.15, primarily reflecting continued strong Medicare Advantage results. Over the last year, we've continued to make significant advancements in our enterprise strategy, particularly in the past few months as demonstrated by our recent investments in both Kindred at Home and Curo Health Services. With a continued focus on helping seniors achieve their best health, we are striving to reshape healthcare by expanding access to high-quality value-based care in both primary care and home health. Driving quality and improved clinical outcomes remains a top priority, as it is removing friction points by simplifying both the consumer and provider experiences through enhanced analytics. As you will see from our results and key metrics, we haven't ceased our focus on the day-to-day activities that drive consumer engagement. In primary care, we've had a busy first half of 2018 with the launch of Conviva, the acquisition of Orlando-based Family Physicians Group and continued growth with Iora, Oak Street, and other alliance primary care partners. We remain payer-agnostic and as an example are proud to be continuing to serve third-party customers of FPG. This multifaceted approach to primary care enhances our ability to bring differentiated integrated care to more seniors more quickly and gives us the flexibility to tailor our approach based on the differing needs of each local market. And as you know, last month, we announced a test and learn opportunity with Walgreens in Kansas City where we are co-locating our wholly-owned Partners in Primary Care clinics in two locations and co-creating with Walgreens health navigation services for seniors starting in five locations this fall. Conviva manages the clinical operations in 110 staff model centers and also provides MSO services to more than 800 independent physicians in South Florida and Texas. Since announcing the creation of Conviva in February, the team has successfully combined the South Florida and Texas provider operations including MCCI, and created a new organizational structure aligned around the goals of improving quality outcomes by integrating care and simplifying the patient experience. In addition to managing the staff model centers and providing MSO services, Conviva is one of the largest physician practices in the South, employing over 400 clinicians and caring for approximately 200,000 Medicare Advantage patients. Conviva is a physician-centric organization that is self-governed and clinically autonomous. This group is driving cultural change through peer-to-peer accountability and reviving entrepreneurial spirit. Physician retention, recruitment, and patient quality measures are all trending in the positive direction. Over the next 12 months to 18 months, we will rebrand the staff model clinics as Conviva care centers. We're always looking for partners to work with us to advance our strategy and are routinely engaged in discussions with a variety of potential partners. The collaboration with Walgreens in Kansas City is evidence of our commitment to advancing integrated care. This collaboration will establish a senior-focused, neighborhood-based approach to health, creating unique integration among the primary care physician, the pharmacist, and a health plan navigator under one roof. The two in-store clinics will be complemented by health navigation services offered in multiple Walgreens stores in Kansas City, expanding our reach in the community. They will be staffed with Humana employees who will be available to serve both Humana members and any customer who comes into the store. The staff will help customers navigate their personal health journeys including basic health information such as one-on-one education sessions on chronic health conditions and answers to simple questions like how to change your batteries in a monitor; or identifying local resources to support customers' holistic health needs, including access to healthy food, grief counseling groups, transportation, and translation services; or helping to find assistance with financing their health needs, including, for example, counseling and support to switch to lower-cost alternatives. In addition, they will offer special services for Humana members who need help with their Medicare Advantage or prescription drug plans, including finding local specialists, understanding bills, and resolving customer service issues. With Walgreens, we also extend this integration through an omni-channel approach, including robust digital enhancement – engagement with the goal of increasing transparency, reducing friction in the experience and driving improved health. The partnership with Walgreens will allow us to test a retail strategy with a highly efficient capital investment. As we learned from this partnership, we could look to expand our collaboration into other markets over time. Turning to Home, we recently announced the completion of the acquisition of a 40% interest in each of Kindred at Home and Curo Health Services, collectively the largest home health and hospice operator in the nation. As we previously indicated, we are striving to do something that has never been done before in home health, transform the payment model into one that is value-based, encouraging a transition from maximizing volume to focusing on health and managing chronic conditions such as COPD, congestive heart failure, and diabetes to prevent or slow disease progression. This movement to value-based care and away from a predominantly therapy-based model is aligned with the recent CMS proposal for changes to the home health payment methodology, which was anticipated when we entered into the transaction. In that regard, we appreciate the model proposed by CMS and welcome change that aligns home health with pay-for-value and improved clinical outcomes, reducing preventable events. While the ultimate transformation will take many years, upon closing of the transaction we immediately launched test-and-learn pilots aimed at both operational and clinical improvements in four markets: Richmond, Virginia; Charlotte, North Carolina; Virginia Beach, Virginia; and Dallas, Texas. These pilots incorporate a pay-for-value mechanism in addition to the traditional fee-for-service payment based on four quality measures: hospital admissions; hospital readmissions within 30 days; emergency room visits without hospitalization; and timely initiation of home care, specifically within 48 hours of referral or an MD order. In addition in order to create a differentiated home health model, we have the opportunity to reap the richness of Humana at Home telephonic and at-home engagements as well as Humana Pharmacy resources into the skilled nursing provided by Kindred at Home clinicians. Over the next year, we plan to leverage Humana predictive modeling to identify additional clinical interventions, integrate Humana Pharmacy resources to conduct comprehensive medication reviews and extend our care management best practices from Humana at Home into the Kindred at Home homecare environment. We will also reduce friction in the authorization process to ensure Kindred professionals are in the home within 48 hours of a referral or supplement the ordering physician through telehealth with a virtual MD to expedite the delivery of care. We expect the changes we are making in the home health space will not only benefit our Medicare Advantage members but also our Medicaid members over time. The continued development of our in-home capabilities together with our demonstrated clinical capabilities in Medicare Advantage uniquely position us to serve the Medicaid population, giving us confidence that we'll be successful in growing our Medicare platform through procurements. Under our recent statewide award in Florida, we expect to serve an additional 141,000 members, an increase of 44% from our existing Medicaid membership. The Florida contract was awarded based upon the ability of plans to achieve the Medicaid agency's goals. These goals included creating enhanced provider and member experience, the ability to reduce preventable inpatient and outpatient events, high-quality scores, innovative and effective methods to deliver integrated care, and integration with the community in support of Medicaid beneficiaries. We've been successful in achieving strong results across these areas by leveraging the capabilities that have positioned us as a top Medicare Advantage plan, including our capabilities in chronic condition management, integrated care delivery, value-based provider relationships, and community programs designed to address social determinants of health such as food insecurity and social isolation. While we are confident in our capabilities and expect to be successful in the procurement process consistent with our previous remarks, we will continue to assess length of time to scale and potential barriers to entry at the state level while considering potential M&A opportunities in the Medicaid space. Before turning the call over to Brian, I'd like to touch on 2019 Medicare Advantage bids. As you know, the bid process is not yet final and accordingly, I will keep my remarks brief. The positive Rate Notice from CMS as well as the health insurer fee moratorium for 2019, among other factors, allow us to offer compelling products to our members for the 2019 benefit year. Nearly all of our members have stable or enhanced benefits. In addition, we've continued our broker outreach to cultivate excitement about our products and processes in the broker community. This year, we've rolled out significantly improved agent assistance and enrollment tools in one of the largest broker experience enhancement cycles we have ever undertaken. We look forward to further discussion on our third-quarter earnings call. With that, I'll turn the call over to Brian.

Thank you, Bruce, and good morning, everyone. Today, we reported adjusted EPS of $3.96 for the second quarter, ahead of our previous expectations. We continue to see favorable medical utilization trends particularly in our Retail segment. To reflect this better than expected utilization, we are raising our full year adjusted EPS guidance to approximately $14.15 from our previous guidance of $13.70 to $14.10. We expect third quarter adjusted EPS to approximate 31% of the full year number. I will now comment on our individual segment level performance. In Retail, led by individual Medicare Advantage, we are seeing inpatient admissions as well as pharmacy utilization running better than our previous expectations, partially offset by higher than expected outpatient utilizations as members transition from the inpatient to outpatient setting for some of their care. Specifically, we are witnessing a notable decline in inpatient admissions relative to both last year as well as our initial expectations. Consistent with the early indicators we saw last quarter, this inpatient admission favorability is resulting in a higher cost per inpatient admission as lower acuity procedures move to the outpatient setting or are classified as lower cost outpatient observations. Importantly, a major operational focus of the company has been to ensure that a member who is in the hospital setting is appropriately classified. And as such, we have seen a significant increase in lower cost observations versus higher cost inpatient admissions. We continue to work with our hospital partners to ensure appropriate reimbursement for any procedure undertaken. Additionally, CMS' removal of certain procedures from the protected inpatient-only list such as knee replacement surgeries has also caused a movement from the inpatient to the lower cost outpatient setting. In summary, while it's still early with Medicare Advantage claims data only effectively complete through the first quarter at this point in the year, we feel good about the overall medical utilization trends we are experiencing, but have carried only a portion of that favorability through to the rest of the year in our guidance. Accordingly, we raised our full year Retail segment pre-tax income guidance to a range of $1.525 billion to $1.675 billion from a range of $1.45 billion to $1.61 billion and lowered our benefit ratio to a range of 85.1% to 86% from our previous guidance range of 85.2% to 86.2%. Turning to Group and Specialty, the segment continues to perform well overall. We raised our revenue guidance by approximately $100 million to reflect higher sales of our profitable level-funded ASO small group, as well as individual dental specialty products with TRICARE results also outperforming, particularly as a result of higher than expected positive final settlements from the prior contract. This was offset in the quarter by the performance of our community-rated small group fully insured product as a result of the 2017 risk adjustment true-up, which I will discuss shortly. We remain comfortably within our expectations around core health trend of 6% plus or minus 50 basis points and our pre-tax income guidance remains unchanged for the year. While healthcare trend remains well-controlled, the second-quarter medical benefit ratio is higher than last year's as expected. This is due to more seasonality in this year's quarter, lower PPD, which we saw come disproportionately in the first quarter of this year versus last, and the migration of healthier small groups from small group fully insured plans to level funded ASO products in 2018. Our level funded ASO products are appealing to healthier groups, who prefer to avoid the higher-priced community rated pool and this also provides a more predictable profit stream for us. In fact, over the last 18 months, we have seen over 58,000 members move from small group fully insured products to level funded ASO products. This bifurcation of the membership leaves the less healthy groups in the fully insured block negatively impacting that benefit ratio. In addition, as mentioned previously, the second quarter of 2018 reflects the impact of a change in estimate related to commercial risk adjustment as a result of the final risk adjustment notice received in June of this year for the 2017 coverage year. Our 2017 risk adjustment payment was approximately $20 million unfavorable relative to our expectation and this also impacted the 2018 accrual. It is important to note that while the amounts are immaterial for the segment and especially to the company overall, because small group comprises a disproportionate amount of the premium in this segment, given the relatively lower amount of large group business that Humana has, any change in risk adjustment results in a more meaningful benefit ratio impact than otherwise would be expected. This new estimate for commercial risk adjustment coupled with the impact of certain reinsurance agreements we entered into during the quarter resulted in an 80 basis point increase in our Group and Specialty segment benefit ratio for the full year to a range of 78.3% to 78.8%. As I will discuss further later in my remarks in connection with the expected sale of our closed long-term care business, we entered into a series of reinsurance agreements to fully cede our Workplace Voluntary Benefit and Financial Protection Products. These reinsurance transactions have a de minimis impact on pre-tax for the back half of the year but disproportionately impact the benefit ratio because these products carry a very low benefit ratio and higher admin ratio. Shifting to the Healthcare Services segment, our performance this quarter was consistent with prior expectations. The provider and clinical businesses are performing largely as expected. On the pharmacy side, we are experiencing lower than anticipated utilization overall consistent with our discussion in the Retail segment. However, this lower utilization has been offset by higher than anticipated mail order penetration specifically in our Medicare Advantage business resulting in overall pharmacy results in line with our prior expectations. We are however making a change to how we present the Healthcare Services segment to our investors to enhance transparency into our results. First, our previous segment pre-tax income guidance included the pre-tax results of Kindred at Home. As we approach the July closing of the transaction, we determined that the most appropriate way to show Kindred was to break it out separately and show the after-tax Kindred results which will be consistent with what is shown on the face of our income statement. Accordingly, we removed the Kindred results from our pre-tax income guidance for the segment and are therefore now guiding to full year 2018 Healthcare Services pre-tax segment earnings of $800 million to $850 million excluding Kindred as compared to our previous guidance of $825 million to $875 million including Kindred. Second, as we continue to expand and evolve the Healthcare Services segment businesses, we have concluded that the most appropriate way to measure and discuss the financial performance of these businesses is through adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA rather than pre-tax income. The recent acquisitions of Kindred at Home and Curo Health Services together with the company's evolving care delivery model and the creation of Conviva result in higher levels of amortization, depreciation, and interest expense that distort and mask the true performance of the underlying businesses when assessed on a pre-tax basis. Further, we believe that adjusted EBITDA is the relevant measure used to value and assess performance for other services businesses in the industry. As a result, we are transitioning our financial reporting for Healthcare Services to focus on adjusted EBITDA performance moving forward. In our earnings press release, we included a bridge between pre-tax income and adjusted EBITDA. Our full year adjusted EBITDA guidance is approximately $1.025 billion to $1.075 billion which includes 40% of Kindred at Home's expected EBITDA in the second half of the year which corresponds to our ownership stake in the company. Specifically, we have added back $225 million of segment depreciation and amortization as well as the 40% of Kindred's second half EBITDA to a pre-tax guidance to arrive at our adjusted EBITDA guidance. Beginning with our third-quarter 2018 earnings conference call, our intent is to provide Healthcare Services guidance on an adjusted EBITDA basis only. I will now turn to an update on our long-term care sales process. We are very pleased to report that we have made substantial progress towards receiving the State Department's insurance approvals necessary to complete the sale of our wholly-owned subsidiary, KMG America Corporation, which includes our closed block of non-strategic commercial long-term care insurance policies to Continental General Insurance Company. Accordingly, during the second quarter, we recognized a pre-tax loss on the expected sale of $790 million including transaction costs and recorded an associated deferred tax benefit of $430 million for a net impact of $2.59. Importantly, this tax benefit will result in meaningful cash savings to the company and is greater than the sum total of the statutory capital and negative purchase price transferred to the buyer. We also classify KMG as held-for-sale and aggregated its assets and liabilities separately on the balance sheet at June 30, 2018. The loss on the expected sale of the non-strategic closed block has been excluded from our adjusted earnings. In addition, in connection with the expected KMG divestiture, during the second quarter, we entered into a series of reinsurance agreements to fully cede our Workplace Voluntary Benefit and financial protection products to ManhattanLife Assurance Company of America. These products were previously reported as supplemental benefit offerings in the Group and Specialty segment and are expected to result in a reduction in our specialty membership of approximately 450,000 members for the full year, approximately 430,000 of which were ceded during the second quarter. In addition, in connection with the reinsurance transactions, we expect to transfer a total of approximately $245 million of subsidiary cash along with the related reserves to ManhattanLife, $230 million of which was transferred during the second quarter of 2018. This transfer of cash had no impact on cash and short-term investments held at the parent company. These reinsurance transactions did, however, result in the transfer of cash being classified as an operating cash outflow that was not previously contemplated in our operating cash flow guidance. However, we only reduced our operating cash flow guidance for the year at December 31, 2018 by approximately $100 million to $2.1 billion to $2.5 billion reflecting the outperformance of our business. Needless to say once these transactions are completed, we will no longer have any balance sheet, income statement, or cash flow exposure to these non-core businesses. With regard to capital deployment activity more broadly as expected, subsidiary dividends paid to the parent in the second quarter were approximately $1.95 billion. This represents an increase of over $500 million from what we received for the full year 2017, primarily reflecting higher regulated subsidiary earnings in 2017 relative to 2016. Additionally, in July, we completed the Kindred and Curo transactions utilizing approximately $1.1 billion in parent cash on a combined basis. Before I close, I would like to echo Bruce's comments regarding what we believe are our compelling Medicare Advantage product offerings for 2019 and reiterate our intent to drive meaningful EPS growth of a new baseline of $14.15 in excess of our long-term target of 11% to 15%. I will now briefly discuss our 2019 headwinds and tailwinds. As far as headwinds are concerned, we expect that our PDP membership will decline given the competitive nature of the industry and the price discipline we are employing. This has the impact of constraining the growth of our pharmacy business, which will therefore rely on Medicare Advantage membership growth and improved productivity to fuel its results. We also expect lower TRICARE profits in our Group and Specialty segment given that the positive final settlements received in 2018 associated with the previous TRICARE contract will not recur in 2019. Our 2019 tailwinds, which are significant, include the positive Medicare Rate Notice, the HIF moratorium, the continued solitary impacts of tax reform, our incremental membership from the statewide Florida Medicare Medicaid contract award, and our general Medicare business momentum. In addition, we expect reasonable adjusted EBITDA growth in our Healthcare Services segment as the Kindred results are annualized and our other businesses in the segment, particularly our owned clinics, improve. With that, we will open the lines up 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.

Thanks. I guess maybe just following up on that 2019 commentary there, I mean if you could just provide a little more color to what you've already provided around how you thought about 2019 bids as far as thinking about getting to that target margin versus growing membership.

Sure. Good morning, Kevin. As we've mentioned before, we're consistently taking a balanced approach to growth and margins. We want to emphasize again that we will make significant progress on our margin targets aiming for 4.5% to 5% on a pre-tax basis. While we won't reach that goal next year, we will achieve meaningful advancements. Additionally, we are confident that we have a strong product to offer. Our internal and external broker sales teams are enthusiastic about the upcoming products, and we are optimistic about our growth prospects for 2019.

Okay. Can I just follow up on that because I guess every company is talking about some of the same tailwinds as far as a good rate update and HIF going away. And so it seems like everyone's talking as if everyone's going to grow above average next year. I mean how do you think about what differentiates what you're able to put out in the product into the market versus what everyone else is doing? Thanks.

Sure. Well, I understand that it is obviously a competitive marketplace and people want to grow. This is a very attractive segment. We have a lot of capabilities in this area that we've articulated many times in terms of our clinical programs and capabilities that allow us to offer we think a very compelling product to our members. And our members are going to see reduced premiums. They're going to see lower maximum out of pockets. They're going to see better co-pays. I think the product that we're putting out on the street is going to be compelling and we'll see obviously where the competition comes in. We don't really have clear visibility on that yet but we feel good about that. But I would also echo what Bruce said in his remarks, which is the work that our Medicare team has done with the broker community. We have made this a real focus of ours. I think we took a step back during the transaction with Aetna but I think we've really made up that in a very material way both in terms of the tools that we provided, we've really invested in those, as Bruce has said. I think the product, as I said, that we're putting out for them to sell is going to be very compelling. And also the relationships that our team has developed with these brokers are very strong. Bruce and I also spent a lot of time with them and I'll tell you that they are very excited about Humana. And so we're looking forward to the open enrollment process.

Next question, please?

Thank you. Good morning. Brian, I appreciate your insights on the challenges we faced in 2019. I would like to ask you for a bit more detail. The straightforward calculation indicates that the HIF improvement, or the HIF contributing positively to earnings as seen in 2017, coupled with a significant improvement in the Medicare Advantage margin, potentially provides around $3 in earnings capacity, aligning us with the consensus for 2018. The information you shared regarding the headwinds and tailwinds for 2019 related to our core business was very beneficial. Can you share your perspective on how these factors balance out for the core business if we exclude HIF and the individual Medicare Advantage margin growth? Do you believe the core will actually experience growth next year, or do you think the headwinds will counterbalance the core growth?

Good morning, Justin. I would rather not go into all the details, but I can tell you that our core business is strong and continues to grow. We anticipate ongoing financial improvement in the core business from a margin perspective. There are various factors to consider, including the pre-tax impact of the HIF and the Rate Notice you mentioned. However, I believe we have also provided compelling benefits and made certain productivity and trend assumptions to create an attractive product and enhance margins. It's difficult to specify the exact impacts of the HIF or the Rate Notice, but overall, we expect a very strong 2019 for the reasons I outlined. We are optimistic about our position and prospects for 2019.

Thanks. Good morning. Two questions, just the first is with the significant investment in sort of home-based care as a major differentiator for you. I'm curious how you think about the future. And it sounds like today it's focused on kind of post-acute care. But where can that level of acuity end up in the home? Can you sort of avoid primary or specialty or even acute care costs by bringing that in home? And then the second question is just around the Walgreens test phase of the Kansas City initiatives. What's the timing around that? And when do you think you'll have results to sort of better understand what a more retail-focused strategy should look like?

Good morning, Josh. On the home side, we are approaching it step by step. We believe that in the long run, home care will increasingly focus on acute-oriented services, primarily due to telemedicine. We envision a scenario where telehealth integrates with physician offices, whether they are specialty or primary care, alongside a nurse visiting homes equipped with the proper devices. This setup will facilitate comprehensive interactions between physicians and seniors or chronic condition patients, offering convenience and access, especially for those in rural areas or individuals without transportation to medical facilities. Additionally, we see potential in mobile solutions that pair ER doctors with nurses to manage higher acuity patients, helping to prevent emergency room visits through effective remote monitoring and advanced analytics. This combination of telehealth and in-home nursing is promising for treating more complex cases. Regarding Walgreens, the timeline for seeing results is a few years out. Initially, we anticipate positive responses reflected in membership growth and our capacity to support existing members, which will enhance our Net Promoter Score. As time goes on, we expect to observe impacts on health outcomes and Star ratings due to a proactive approach with HEDIS measurements. Our long-term vision is to see growth and significant improvements in health outcomes. The process will be gradual, starting with market receptivity, followed by short-term clinical interactions, and ultimately leading to health outcomes improvements. It will take several years to realize the full potential, but we will keep our investors updated on our progress, as we believe this collaboration with Walgreens offers a promising opportunity to deliver convenience and effectiveness to our customers in a cost-efficient manner.

Next question, please.

Yes. I just – is there anything that you've been able to glean from the environment about the nature of the competitive offerings that you think you'll be facing in the upcoming open enrollment season for Medicare Advantage in particular?

I would just say, Matt, there are a lot of rumors out there, and I think Kevin mentioned earlier that it appears to be a competitive marketplace in terms of pricing. We would likely say that competition will vary depending on the market. So we will have a clearer picture in about 45 to 60 days of what to expect.

Right. So the timing is the same for you as it is for us, the October 1?

Yeah.

Okay. Got it.

If you discover anything earlier, please let us know, Matt.

Well, I'm just going to spread rumors for now.

Okay.

Let me ask you one follow-up which is the – on the group MA business, do you have any particular outlook for this year? Do you expect more conversions than usual? Are there any big jumbos that might be moving that you have sight on?

As we enter 2019, I would say that the pipeline appears to be less robust compared to last year. Therefore, I do not anticipate the same mid-teens growth this year as we experienced last year. The pipeline seems a bit diminished, although we do have several promising prospects that we are evaluating. We'll see how those develop as we are currently in the midst of that process. Additionally, we have organic growth from our existing accounts, but I do not expect to see the same level of significant growth in group MA as we did in 2018.

Next question, please.

Getting back to the strategy for 2019 around the health insurance fee, you talked about $1.80 of the health insurance fee being the non-tax deductible component of that which in 2017 you excluded that from earnings. So going to continue are you thinking about that $1.80 or if you talk about the Medicare portion of that, you maybe call it $175 million of upside. Is that something you're including when you're talking about not quite getting to your 4.5% to 5% Medicare margin target? Or is that on top of that when you think about that?

Well, I just want to make sure I understand your question. I mean the margin target we think about is on a pre-tax basis. So I guess the way I would say it is you can still generate nice margin improvement without getting to your pre-tax margin, but you have the additional tax benefit below the pre-tax line that you obviously benefit from an EPS perspective. I would say that we're looking at it all the benefits together that we have the HIF pre and post tax, the Rate Notice, our trend benders, productivity, et cetera. Obviously, then have to overcome healthcare trend and then any benefit improvements that we want to make and so that all goes into the mix. But again, I wouldn't want to parse out one or the other because it's all in the stew for lack of a better word. But to a prior question, we do expect core improvement from a financial margin perspective in our products. And then obviously, there's a tax benefit that we're going to get as well.

So we should think about that $1.80 as being on top of anything else that you're targeting for your normal Medicare business?

I'm hesitant to answer that question definitively because it's all part of the mix. We know we have about $1.80 from a tax perspective to consider as we plan for next year and think about the bids for 2019. That contributes to the overall picture, but it's also crucial to improve the pre-tax or core business performance. I can't isolate that figure for you; we could add $1.80, but that may not provide the correct answer due to different pre-tax margin assumptions. We certainly took all this into account when setting our goals, specifically regarding 2020. All these elements were considered as we established our benefit design and targets for 2019.

And Peter, just maybe add to that I know you're trying to get into the details of what happens on a per line basis. I do want to just to really communicate to the shareholders that we continue to be committed to growing our membership appropriately. And we continue to be committed to improving the efficiencies of the organization which will ultimately show up in the margin that we have. As Brian is articulating, we put all that into the mix and calculate by market, how are we competitive in that marketplace as we think about how our competitors are going to respond and at the same time, how we want to look to improve the margin of our business there. And I know everyone wants to sort of say what we do line by line but it is, as Brian has well articulated, it fits in all one big pot. And we begin to start working what's best for our customers and what's best for our shareholders.

Good morning. I want to return to the healthcare segment in relation to Dave's earlier question. I understand the strategy and the shift towards value-based models for Kindred at Home. However, how do you approach balancing any potential conflict with your majority partner, who likely benefits more from a fee-for-service model, against your own interests? I would appreciate any insights you have on how this may unfold. I also have a follow-up question.

We fully understand the conflict. As we began investing in Kindred at Home, we conducted extensive research in Washington, D.C. We concluded that the home model is evolving to become increasingly nursing-oriented and focused on chronic conditions, which is highlighted by recent developments. This indicates a shift toward serving a broader patient population rather than just a therapy population, which is a significant change. Additionally, in our collaboration with Kindred and our investors, we have established incentives for them to focus on acquiring more members in a value-based system compensated for outcomes rather than just service volume. This alignment promotes shared success and helps us identify the right areas for experimentation and learning. However, I believe our partners recognize that fee-for-service will remain an important aspect of the business in the short term, especially since we own 40% of the business and want to maintain its health. The partnership with Humana also allows us to gradually enhance the strategic value of Kindred as a whole, considering long-term healthcare trends.

Got you. My second question is regarding the Curo acquisition and your interest in the hospice business. With hospice currently excluded from the Medicare Advantage benefit, what are your short-term and long-term perspectives? Additionally, what are your thoughts on the future of value-based purchasing for hospice? Thanks.

Yes, we view hospice as a service that we provide to the healthcare community. Ultimately, it is up to the caregiver, family, and physician to determine the best place for an individual. Once they decide to shift from restorative to pain management treatment, we are ready to support them by integrating that into our offerings. Regarding whether it falls under Medicare Advantage, we focus more on what's best for the family member and helping them transition to a better quality of life. We believe that hospice and palliative care will become increasingly important in the care model as the need for it grows. People are living longer, and treatment options at the end of life are becoming either more intense or limited. This is an area of healthcare that is underused but can have a significant positive impact on people's lives as they consider their life stages. We are advocates for providing this service to our members if they choose to use it, and the payment model is not a primary factor in our decision-making process.

Hi, good morning. I have a couple of clarifications I would like to address. Brian, you mentioned lower TRICARE final settlements as a headwind for 2019. Can you provide details on what those figures were for 2017 and 2018?

I'd rather not get into that level of detail. We know we don't provide that. I mean I obviously called it out because I think it'll impact particularly as you're modeling your Group and Specialty pre-tax for next year. There'll be some impact there. I think that will constrain the growth in the segment. But I'd rather not call it the specifics. We typically don't do that. That's okay.

And then second question is on the group MLR guidance raise in terms of lifting that MLR, it looks like the $20 million of the risk adjustment represents about 30 basis points on the full year. So the other 80 basis points, are you increasing your own accruals for the rest of the year? Or is it the reinsurance? Or is it just some of the mix shift that you talked about in that segment?

Yes. So a fair question. So, on the guidance specifically because the mix shift was anticipated, it's related to the reinsurance transaction. And yes, we also have accrued more, a bigger payable for 2018 on the back of 2017. So that's included in that MER increase.

Well, like always, we wouldn't be able to have the success we have without the 55,000 people that are part of our organization every day helping our members to do that. So I'd like to thank each and every one of them for their dedication to the company. And like always, we appreciate the support from our investors and continuing to believe in the success of the organization and helping us through being successful. So thank you and everyone have a wonderful day.