Humana Inc (HUM) — Q3 2020 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 third quarter 2020 results and our updated financial outlook for 2020. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Our Chief Legal Officer, Joe Ventura, will also be joining Bruce and Brian for the Q&A session. 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 latest Form 10-K, our other filings with the Securities and Exchange Commission and our third quarter 2020 earnings press release as they relate to forward-looking statements and to note in particular that these forward-looking statements could be impacted by risks related to the spread of and response to the COVID-19 pandemic, including the potential impacts to us of one, actions taken by federal, state and local governments to mitigate the spread of COVID-19 and in turn relax those restrictions; two, actions taken by us to expand benefits for our members and provide relief for the healthcare provider community in connection with COVID-19; and three, disruptions in our ability to operate our business effectively; four, negative pressure in economic, employment and financial markets among others, all of which creates additional uncertainties and risks for our business. Our forward-looking statements should therefore be considered in light of these additional uncertainties and risks along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements in future filings or communications regarding our business or results. 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.

Thank you, Amy, and good morning. I want to begin by thanking our associates for proactively reaching out to check on our members, making sure they have access to care and medications, and for showing up on members' doorsteps for delivery of much-needed food. Our associates continue to go above and beyond to meet the needs of our members and providers. Our team's discipline and continued focus on quality is evident in Humana's recently announced Star ratings, again putting us in a leadership position among our peers. A key tenet of the Medicare Advantage program, the Star rating system incentivizes plans to focus on quality in both care and the consumer experience, driving improved clinical outcomes. Plans then invest the Stars bonus dollars in additional benefits, improved care, and better member experiences. We are proud that approximately 4.1 million or 92% of our MA members are currently enrolled in plans rated 4 stars or higher. For three straight years, our CarePlus MA plan in Florida, which covers more than 164,000 members, received a 5-star rating. In addition, more than 99% of our retirees and our group MA plans remain in contracts rated 4 stars and above. These outstanding results are a testament to our associates' commitment to building trust with our customers through simple, personalized, and empathetic experiences. It is what we call human care. You have probably seen our new human care ads. Human Care is more than an ad campaign. It is a strategy for how we run the company, centering on holistic care that addresses our members' most important healthcare needs. Our newest ad stresses the importance of continuing to take care of your health during the pandemic and how Humana is making it easier for members to seek care safely. This is one of several messages to our members, encouraging them to continue to engage with their doctors for managing their ongoing health conditions. As you know, Humana, in partnership with CMS, was among the first in the industry to quickly implement benefit changes for Medicare Advantage members that remove financial barriers, improve access to care, and address social determinants of health needs during the pandemic. I've described numerous initiatives to support our members, providers, and associates over the past few earnings calls, so I won't repeat them. However, as the pandemic progresses, our actions will continue to evolve to meet the changing needs of our constituents. For example, the pandemic has highlighted the importance of social needs, such as social interaction. In response to this need, Humana extended a program that matches college students with members identified as lonely or severely lonely in several South Florida communities. I'd like to share a story about Otis, a Humana member. While registering Otis for the PAPA program, the case manager noticed that it was Otis' birthday and began singing happy birthday to him over the phone. Otis was overcome with emotion, noting it had been years since someone had wished him a happy birthday. His reaction impacted his case manager so much that she reached out to PAPA's Corporate team, and Humana, who immediately took action and had a birthday cake delivered to Otis' home. Sometimes the smallest action can make a big difference in someone's life. Programs like PAPA are an important element in addressing the holistic needs of our members. As we look forward to 2021, we are able to provide stable or enhanced benefits for most of our members with plans that continue to reflect our commitment to their holistic health. Our strong clinical and quality programs drive improved clinical outcomes and cost savings, allowing Humana MA plans to invest and expand member benefits beyond those covered by original Medicare Part A and B, including supplemental benefits like dental, vision, hearing, coverage, prescription drug benefits, and gym memberships, as well as programs that address social determinant health needs like the PAPA platform. For 2021, all Humana MAPD members will enjoy a number of benefits, including zero telehealth co-pays for primary care physician visits, urgent care and outpatient behavioral health, zero co-pays for COVID-19 testing and treatment, and 14 days of home-delivered meals for members with a COVID diagnosis, along with a health essential kit with useful items for preventing the spread of COVID-19 and other viruses like the flu. Other 2021 plans and highlights include nearly 60% of our members will be in plans that offer care coordination services and enhanced benefits not offered under original Medicare for zero member-paid premium. Primary care co-pays of $20 or less for approximately 93% of our members, including nearly 60% with zero co-pay. An insulin savings program included on approximately half of Humana's MAPD plans and a third of our PDP plans will allow members to pay no more than $35 for a 30-day supply of select insulins. In addition, eligible Humana Medicare Advantage members who need help remaining independent at home have access to their own personal care manager through Humana at home. We are pleased that for 2021, all Humana MAPD plans are recommended by USAA, a company known for its customer satisfaction and commitment to the financial security of current and former members of the U.S. military. Our ability to offer enhanced benefits relative to original Medicare is due in large part to our chronic condition management programs and our focus on value-based care. The Medicare Advantage program incentivizes a holistic focus on health and offers an opportunity for private organizations like Humana to partner with providers on value-based care models, customized to meet both the unique dynamics of the local market and the risk tolerance of a given provider. This ability to customize is key to driving deeper and faster adoption of health-based care models, and together with our industry peers, we are structurally changing the healthcare system. Approximately two-thirds of Humana's individual Medicare Advantage members are cared for by providers in value-based arrangements, with just under one-third in full-risk arrangements where the provider is responsible for the entirety of the member's care for a capitated payment. We are pleased that approximately 86% of our value-based care partners are in surplus, demonstrating the success of driving improved clinical outcomes in these models. Our annual value-based care report for 2020 included several key findings based on 2019 experience. Humana Medicare Advantage members under the current care of physicians in value-based arrangements would have incurred an additional $4 billion in planned covered medical expenses if they had been under Medicare fee-for-service. Prevention screenings, improved medication adherence, and effective management of patient treatment plans all contributed to creating these reductions. Humana Medicare Advantage members served by physicians and value-based arrangements had a 29.2% lower rate of hospital admissions and a 10.3% less emergency room visits compared with original Medicare. Physicians in value-based arrangements with Humana from 2016 through 2018 had an average of 4.44 HEDIS star score at the end of 2018, compared to 3.1 for physicians in non-value-based arrangements. Our deep value-based contracting experience positions us well to participate in other value-based care models, including the new direct contracting program. Initially, we intend for both our health plan and primary care assets to participate as direct contracting entities on a limited basis. We are working very closely with CMS, as there are still a number of points of clarification needed before the programs begin in 2021. While we believe this could be an interesting opportunity to take on original Medicare fee-for-service members, we do not expect our participation to have a material impact on our results or operations for 2021, as we will employ a test-and-learn approach to implementing and evaluating the direct contracting program. Before turning the call over to Brian, I want to touch on our stand-alone Medicare Part D or PDP offerings for 2021. As we've discussed the last couple of years, PDP plans have become a commodity with the low-cost leader essentially capturing all of the growth. As a result, after our meaningful PDP membership losses in 2019, we made significant changes to our portfolio for 2020, combining two plans to create space to offer a new low premium plan co-branded with Walmart. This low premium plan was the most competitively priced plan in the majority of our regions and grew substantially by adding almost one million members. For 2021, the PDP industry remains extremely competitive with multiple carriers offering low premium plans. We've taken a disciplined approach to pricing, balancing membership growth and the overall impact to the enterprise. As a result, the Walmart value plan will not be the lowest cost leader in 2021 but is priced in a similar range to other low premium plans with competitive benefits. However, one plan sponsor is an outlier with an offering priced well below the rest of the market. While we once again anticipate the overall PDP market will shrink in 2021, as seniors increasingly choose Medicare Advantage plans with prescription drug coverage, we expect PDP to continue making meaningful contributions to the overall enterprise, with high mail order pharmacy utilization and more PDP members converting to MAPD over time. Our premium plan will include the new senior savings model demonstration, where members can get certain insulins at a maximum monthly cost of $35. In addition, all of our three PDP plans have expanded preferred network pharmacies to improve member access, convenience, and options to reduce their out-of-pocket costs. Despite our enhanced offerings, the very competitive price marketplace will be a headwind for the PDP membership again in 2021, as Brian will discuss in his remarks. Turning to the importance of the day, I would be remiss if I didn't encourage everyone, if they have not already done so, to get out and exercise their civic duty to vote on this election day. Regardless of the outcome of the election, Humana is committed to public-private partnerships that are solution-oriented and drive results that will meaningfully benefit the healthcare system in the coming years. With that, I'll turn the call over to Brian.

Thank you, Bruce, and good morning, everyone. I would first like to begin by also thanking our associates. Several years ago, we made the Medicare Stars program an enterprise-wide priority and everyone across the organization rose to the challenge. As a result of these efforts, for the third year in a row, we led our peers, with 92% of our Medicare Advantage members in four-star or higher plans. This great accomplishment gives us the ability to invest in enhanced benefits for our members and offer compelling Medicare Advantage products to drive continued membership growth. Turning to our financial results. Today, we reported third quarter adjusted EPS of $3.08. These results were impacted by increasing utilization compared to last quarter, COVID-19 testing and treatment costs, and the financial impact of the company's ongoing crisis relief efforts. As I will discuss in a moment, we continue to expect our results for the second half of 2020, including an anticipated loss in the fourth quarter, to entirely offset the significant outperformance experienced in the first half of the year that resulted from historically low medical utilization levels. We continue to see non-COVID medical utilization trending slightly below normal, all in, though well above the trough levels experienced at the end of March and early April. In September and October, medical utilization was running at approximately 95% of pre-COVID expectations, with inpatient running a bit higher and outpatient and physician running a bit lower. With the number of COVID cases again increasing throughout the country, we continue to expect non-COVID Medicare medical utilization to remain modestly below pre-COVID expectations through the end of 2020. From a business line perspective, we have seen non-COVID utilization recover a bit more quickly in our Group and Specialty segment compared to a slower rebound for our senior and Medicaid members. Regarding COVID utilization, we have seen an increase relative to our previous expectations, with per member treatment costs also higher than anticipated for both our Medicare and commercial products. As a result, we now expect COVID testing and treatment costs to approach $1 billion in 2020. From a pharmacy standpoint, script volume has largely leveled out, and we continue to expect pharmacy utilization to net out close to normal levels for the full year, with early refills seen in the first and second quarters representing more of a pull-forward within the year rather than a run rate change. However, we are seeing more new starts. And as I said last quarter, the increased number of members utilizing Humana's mail order pharmacy is expected to persist as those members continue to use the service, which benefits not only healthcare services through higher EBITDA but also the health plan as mail order generally results in better medication adherence. As we have indicated since the beginning of the pandemic, we fully expect that any impact we experienced from lower medical utilization will be entirely offset by the support we provide for our members, providers, employer groups, and the communities that we serve. Given that the lower than previously expected utilization we are experiencing is largely offset by higher COVID testing and treatment costs, we expect our levels of support of approximately $2 billion to remain largely the same as previously communicated for the full year. Accordingly, in the fourth quarter, we expect to record a loss of approximately $2.40 on an adjusted EPS basis, and are tightening our full year 2020 EPS guidance to a range of $18.50 to $18.75, still within our initial guidance expectations prior to COVID. As I reminded investors last quarter, historically, our fourth quarter EPS contribution is always the lowest, and in 2020, as expected, the fourth quarter will be impacted by the continued support for our constituents, which is more heavily weighted to the fourth quarter, along with the impact of increasing COVID-19 testing and treatment costs and rebounding utilization levels. As a result, we expect our fourth quarter consolidated medical expense ratio to be at least 300 basis points higher than our third quarter 2020 ratio, with the Retail segment sequential increase modestly lower and the Group and Specialty segment sequential increase meaningfully higher than the consolidated increase. The sequential increase in the Group and Specialty segment benefit ratio reflects both a seasonally adjusted higher MAER as well as a disproportionate investment in this segment in the fourth quarter relative to non-COVID utilization levels. Moving to operating costs. As I described last quarter, we are making significant investments in our Medicare distribution channels, including equipping and training brokers so that they can interact with consumers telephonically and digitally, as well as increasing the marketing dollars we provide to our distribution partners for the AEP. As you know, these marketing costs are heavily weighted to the back half of the year, primarily the fourth quarter. These costs, along with our previously announced contributions to the Humana foundation and other COVID-related costs to support our associates to enable them to work virtually in response to the pandemic, are now estimated to be higher than the estimate we provided last quarter. Consequently, we now expect the full year consolidated operating ratio to be approximately 120 basis points higher than our pre-COVID expectations. The modest increase over last quarter is primarily due to an increase in the investments in our Medicare distribution channel. Turning to membership. We are increasing our full year expected individual Medicare Advantage membership growth to approximately 375,000 members from the previous range of 330,000 to 360,000 members, representing expected year-over-year growth of approximately 10%, in part reflecting continued compelling D-SNP sales. As of September 30, our D-SNP membership had grown to approximately 391,000 members, a net increase of approximately 103,000 lives or 36% from December 31, 2019. Additionally, MA new sales and terms more broadly have returned to more normal levels as the year has progressed after being reduced by the pandemic. Furthermore, today, we are modestly improving our Medicare standalone PDP membership outlook for the full year 2020, primarily due to the extension of the grace period for nonpayment of premium. We now expect to lose approximately 500,000 members as opposed to our previous estimate of 550,000 members. Accordingly, previously expected membership losses in 2020 due to nonpayment will likely occur in 2021. With respect to Medicaid, the September 30 membership of approximately 730,000, increased over 261,000 members or 56% from December 31, 2019, primarily reflecting the transition of the risk for the Kentucky contract from CareSource as of January 1, as well as additional enrollment, particularly in Florida, resulting from the current economic downturn driven by the COVID-19 pandemic. In our Group and Specialty segment, we are tracking the challenging economic environment, especially for small businesses, although medical membership declines on account of COVID have been less severe to date than we anticipated. Lastly, in our Healthcare Services segment, adjusted EBITDA increased 27% year-to-date, primarily fueled by operational improvements in our Conviva assets, and overall lower utilization in our provider businesses as a result of COVID-19, along with higher pharmacy earnings as a result of Medicare Advantage membership growth, partially offset by the anticipated PDP membership declines. These improvements were partially offset by administrative costs related to COVID, including expenses associated with additional safety measures taken for our provider and clinical teams who have continued to provide services throughout the pandemic, along with additional costs in the company's pharmacy operations to ensure the timely delivery of prescriptions during the crisis. Regarding Kindred at Home, you'll recall we mentioned on our first quarter earnings call that new home health admissions have been adversely impacted by COVID. As the year has progressed, volumes have stabilized, and early signs of a rebound in demand are beginning to materialize. Further, the company has been able to offset these initial challenges with strong clinical and overhead cost controls across the organization. In our provider business, our clinic expansion continues, and we are on pace to double our partners in primary care footprint through our partnership with Wells Carson over the next few years. Despite the challenges of COVID, in the last 45 days, we have opened 5 of 8 planned clinics in Las Vegas, with the remainder to be opened later this year and early in the first quarter, and further deepened our footprint in Houston, opening 5 additional centers, with 2 more expected to open by the end of 2020. Including Conviva, by the end of the first quarter next year, we will operate approximately 160 clinics under these two brands. Turning to 2021. As Bruce described in his remarks, we are pleased to be able to offer stable or increasing benefits for most of our individual Medicare Advantage members due in large part to the permanent removal of the health insurance industry fee. Based on what we're seeing early in the ongoing annual election period, we expect to grow our individual MA membership by 350,000 to 400,000 members in 2021. This represents growth of approximately 9% to 10%, which is at or a bit above our view of 2021 individual MA membership growth for the industry. However, the number we are providing today could change materially depending on how sales develop and where voluntary terminations ultimately come in. As is typical, we have very little membership termination data at this point in the AEP cycle. With respect to Group Medicare Advantage, as we have previously stated, growth can vary widely from year to year based on the pipeline of opportunities, particularly large accounts going out to bid. We have experienced compelling group MA growth the last couple of years, with particularly robust growth in 2020, including winning a large account from a competitor. As we look ahead to 2021, large group accounts, particularly jumbo accounts, continue to be competitive. While we expect nice membership growth in the small and mid-market group segments, we are seeing some membership pressure in the large group MA space for 2021, where we have both won and lost contracts. Accordingly, net-net, we expect our group MA membership to decline by approximately 45,000 members in 2021. Regarding PDP, as Bruce described in his remarks, the Walmart value plan will not be the low-cost leader in 2021 but is priced in a similar range to other low premium plans with competitive benefits. However, one plan sponsor is an outlier with an offering priced well below the rest of the market. Based on what we've experienced in the annual election period to date, we expect a net decline in PDP membership of approximately 350,000 members in 2021, which includes membership losses that were originally anticipated in 2020 that have been deferred to 2021, as I previously described. However, we would caution that we are still early in the AEP. I will now briefly turn to our expected 2021 financial performance. From an earnings perspective, we believe we have struck the appropriate balance between membership and earnings growth while continuing to invest in our integrated model to create long-term sustainability. Given our balanced approach and taking into account the permanent removal of the health insurance industry fee, which was not deductible for tax purposes, we expect the midpoint of our initial guidance for 2021 adjusted EPS to be modestly above our long-term EPS growth rate of 11% to 15% off of a baseline of $18.50, the midpoint of our initial adjusted EPS guidance for 2020. Given the pandemic, we are mindful of the uncertainty it has created and acknowledge there are multiple moving pieces that will impact our estimates, including our per member per month revenue, which is determined by our final 2020 risk scores, as well as the impact from COVID treatment cost and non-COVID utilization levels as we enter 2021. Accordingly, our adjusted EPS estimate will evolve as visibility increases around the expected duration and severity of the pandemic. We look forward to providing more specifics on our fourth quarter earnings call in early February. 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.

Operator?

Great. Thanks for the question. I guess, Brian, maybe just to go back to the initial view on 2021, very helpful to have the starting point. You mentioned the half, could you maybe share a little bit more on how you're thinking about reinvesting versus letting some of the HIP drop through? And then just any other major moving pieces that you would highlight as far as headwinds and tailwinds. I know it's a tricky year with COVID, but any other major moving swing factors that we should be considering as we think about that initial look at 2021?

Sure. Good morning. Regarding the HIP, as I mentioned earlier, we aimed for a balanced approach. If the HIP had been implemented for 2021, it would be approximately $2.50. Transitioning from 2020 to 2021, it's about $2, based on the calculations. Out of that $2, we have returned some to shareholders and some to our members. I won't specify exact amounts, but we've adopted a balanced strategy in that regard. That's why we anticipate being modestly above the midpoint of the 11% to 15% range. Concerning other headwinds and tailwinds, the significant factors primarily involve COVID. We are still assessing its effect on our revenue related to Medicare risk adjustment. As investors are aware, the 2021 revenue will depend on the risk adjustments in place from 2020. If our members are not engaging with healthcare providers, it could negatively affect revenue. We are actively working to connect with our members to ensure they receive necessary clinical care while also gathering the necessary documentation codes. Additionally, the costs associated with COVID treatment and non-utilization present uncertainties. As previously stated, non-COVID related utilization on the Medicare side is still slightly below normal, and we will monitor how that develops. Those are the principal headwinds and tailwinds we are addressing.

Appreciate that. Thank you.

Thanks. I was surprised by the D-SNP growth this year and wanted to know if you think that trend will continue. It's challenging to gauge due to COVID, but I see significant growth. I'm curious about your thoughts on the underwriting for that business and whether you anticipate similar growth moving into 2021.

Yeah. I think we feel pretty good about the D-SNP growth. I mean, I think the retail team has done a tremendous job really identifying this opportunity, developing a product design that really appeals to these members and then our sales team, marketing team going out and really finding these members and getting them to buy Humana. So we're very excited about the growth we've achieved. And I would say, our footprint relative to a few of our competitors is actually smaller. And so, we've been seeing really great growth in our markets, particularly when you adjust for the fact that we're in fewer markets. And so, we're excited to continue to grow that product and expand the footprint, which we'll do. We feel good about how we're positioned for D-SNP growth in 2021, and we're going to continue to go after that product. I would say, from a financial perspective, as we've always said, these members are riding on our strikes, so because they allow us to manage their clinical conditions and we get paid because of those clinical conditions and higher per member per month revenue number. And so, it's a very attractive segment and it's one that we're going to continue to pursue.

Just Kevin, on that, I think, what we're experiencing, a lot of the plan itself is an important part of that, the basic medical plan. But we're also finding the additional benefits we offer around that really supports some of the social determinants and lifestyle issues, where we're finding really, really strong demand for. And as Brian indicated, this is sort of our strike zone and a lot of the work that we've done, both on the social and determinant side, our pharmacy medication adherence, and some of the over-the-counter benefits we offer.

All right. Great. Thanks.

Yes. Thanks for taking the question. Brian, can you confirm that when a member transitions from one of your Medicaid plans to a D-SNP plan, which is also a Humana plan, that the member generates a higher margin because you are already managing their care across both programs? If that’s the case, are you successfully enrolling members who previously participated in your Medicaid programs into your D-SNP plans?

Yes, it's a fair question, Charles. Good morning. Our biggest opportunity is Florida, and the team has done a great job identifying D-SNP members where we have Medicaid plans in place and working to convert them to a D-SNP plan. I would say it's more on the margin right now in terms of the incremental benefit we receive since they are already in our Medicaid program. However, as we continue to expand our Medicaid footprint, we are committed to identifying D-SNP members as valuable opportunities from our Medicaid population. We're focused on providing them with a more coordinated experience through a D-SNP opportunity. We do see this as an opportunity, and I think you'll hear more about it over time.

And if I could just follow-up real quick then. If we think about the margin profile then for these new D-SNP members, if they're coming kind of de novo, do they come in at a higher cost initially? And maybe, are they more profitable down the road at sort of a run rate? Maybe just compared to maybe your typical MA retail member? Thanks.

I would say that they are more profitable when they come in initially than a traditional Medicare member. As you know, in our non-D-SNP, typically members when they initially come in, they're more breakeven. You have a high selling cost. They're not in our clinical programs. Depending on where they come from, they're not documented in the same way. And so, it takes several years to get them up to our margin. I would say, D-SNP is on a steeper path there, where they come in a little bit more profitable, but then really take off as they get into our programs and through the things that we do to drive performance and outcomes. So, like I said, it's a very attractive opportunity for us.

And Charles, the other thing that we experienced on the D-SNP side is that their revenue or cost of medical side is usually higher than a typical individual MA member. And so as we think about profitability, it's as much about the margin as it is about the contribution dollars.

Great. Thank you.

Thanks. Good morning. If I remember correctly, you indicated coming into 2020 that your individual Medicare Advantage margin target coming into the year was about 4%. And given you're reinvesting the HIP tax benefit into the business here for 2021, by my math, your margin target might be closer to 3.5% for next year in individual and Medicare Advantage. So first, just wanted to understand, am I in the right ballpark without getting too specific? And if so, can you talk about the potential path investors should think about sort of getting back to your 4.5% to 5% target going forward. Thanks.

Good morning Justin. So, on the margin side, look, without giving specifics, I think broadly, the way you're thinking about it is right, which is to say where the dollars show up, whether it's sort of pretax or after-tax because of the impact of the HIP can change the geography a bit and so we are below our target. We recognize that. It's something that we intend to march back towards our target of the 4.5% to 5% is something that as an organization we're committed to. Every year, we try to balance growth and margin and really EPS growth. I would say, as you've heard me say multiple times, a margin is an input, not an output, though it's an important input. But ultimately, we want to achieve that 11% to 15% bottom-line EPS growth while also having a very attractive top line by growing membership. And so we're going to continue to strike that balance. Margin is a really important input. And I would imagine, over time, we'll continue to bounce back to our targets, which we have in the past. I mean we've had a couple of years where we've been above our target. So, we just had a lot of variability over the last number of years with tax reform and the HIP coming in and out. It's created a lot of distortions on that margin line, as you know.

Hi. Thanks. Good morning. Interested if you can give us any early sense on how the mix of your individual MA sales by distribution channel will evolve in 2021 versus 2020 when thinking about traditional sort of physical agent sales versus digital versus telephonic. Obviously, COVID having a lot of impact on that, but I know that you've also been implementing a variety of strategies to the digital and telephonic side, so interested in how that mix will look to shift for 2021?

Yes. For several reasons, including the impact of COVID on our ability to reach individuals and community programs, we are witnessing growth in the telephonic channel. This growth is supported by our internal efforts and our dedicated telephonic program with agents, as well as our relationships with external partners developed over the years. This response has been particularly beneficial during the pandemic; without these channels, our situation would have been much more challenging. To directly address your question, we are seeing continued growth in telephonic sales, although this comes at the expense of face-to-face interactions and our internal career channel. However, I believe this shift is both timely and more convenient for us. We are also observing a small but increasing use of digital channels. This year, in anticipation of COVID, the company made significant investments to enhance the member experience, simplifying the sign-up process and enabling better analysis and understanding of plan options. We see an opportunity to use both digital and telephonic channels as complementary tools in lieu of face-to-face interactions.

Okay. Got it. Thanks.

Good morning, guys. Thanks for the question. I just wanted to ask how you guys are thinking about the puts and takes inside of the fourth-quarter outlook. So specifically wondering if it try to sort of parse out the impact of the force you're providing for members sort of the direct or discretionary elements of the plan? And then the OCR side, I guess more on a full year basis, the 120 basis point increase versus starting point for the guidance, I think that's worth about $900 million. Wondering if you could give us a sense for how much of that reflects the reinvestment in the business and how much of that may be, the increase in marketing dollars for the distribution partners that you guys called out?

Overall, we remain committed to the $2 billion of support that we've extended to our various stakeholders. This includes some investments in our distribution partners, which is crucial. Our focus has been primarily on our customers and providers, while also investing in our business for a robust future. Given the current challenges with the shift from in-person sales to telephonic sales, we wanted to ensure our partners are well-equipped for this transition. We have invested in that channel. Additionally, we’ve witnessed an uptick in COVID treatment costs, but non-COVID utilization, particularly for Medicare, has remained below expectations for a longer period. This situation largely offsets one another. Some of our spending adjustments relate more to shifts between MER and operating cost ratios rather than an overall change in spending; it’s mainly about how we allocate resources as programs develop. I hope this provides a clearer picture of the various factors at play.

Yes. That's helpful. And maybe if I could just sneak 1 more in on the reinvestment of the HIF, obviously, a big number of $7 pretax, $2 nontax deductibility going away. It sounds like you've reinvested north of $7. So wondering, is the Part D senior savings model a part of that, just the funding for the $35 cap on and so we did notice premiums went up there, but I wonder how that gets funded? Thank you, Brian.

Sure. All the dollars are included in the overall budget. So implicitly, yes. Any product that includes the HIF payment benefits from its removal. It all contributes to our various expenditures. We need to find a way to cover the insulin benefit, which we believe is the right move. We implemented this in several of our Medicare Advantage programs as well as in our enhanced second enhanced plan on the PDP side. This is part of our overall strategy.

Hi. So I try to pick up on the last question with Steve. So are you saying that the magnitude of the change in out-of-pocket costs that we may have calculated when the MA products were first unveiled ahead of open enrollment. It looks quite a bit more than we've seen in quite a bit more than the HIP would suggest. And we've been – yes. Still a little bit puzzled there.

Yes. No, it's a fair question. Some of the way that on the website that some of these benefits were portrayed, I think was a little confusing for folks. I would just say that we've been – we try to be very thoughtful in this crisis and recognize our members are going through a lot, and the HIP has certainly helped finance a really nice increase in benefits for a number of folks. And as Bruce said in his remarks, almost all of our members are either stable or up. And so as is always the case, there are some markets where we invest more, some markets where we invest less. But I would say that HIP was an important part of the financing of those benefits. But not as extreme as what might have been portrayed on the website there. So – but still, I think, a compelling benefit package.

And Matt, I would just really emphasize, as we look at our calculations of total actuarial value. We are – I think our changes are fairly similar to our competitors.

Okay.

So I think there's – every year, there's some that are more aggressive and others that are less aggressive. I would say that we're sort of in the mid-tier there and not out there.

Hi, thanks. Good morning. Can you speak more specifically to the benefits broadly of having these capitated physician groups and sort of what works best for Humana and how you're trying to grow that in the context of your path to risk strategy?

Sure. I'll begin, and Brian can add his thoughts. Generally speaking, we experience excellent results with meaningful relationships, particularly those based on value. However, we recognize that each local market has its own unique characteristics. One reason some Medicare programs fail to gain traction is that they aren't tailored to match the risk tolerance and specific needs of local providers. Our program is designed with these local dynamics in mind, which leads to our concept of a path to risk. This approach allows for varying levels of risk, from limited downside with the potential for some upside, to more significant risks that providers can engage with at their own pace. Unlike in the 1990s, when risk sharing was more common but often lacked ongoing support, the situation today is different. We offer substantial support through technology and human resources, which includes placing social workers and coordinators in provider offices. We aim to transition more of our members to risk-based providers. While our participation has stabilized in the mid-60s percentage, this isn't due to fewer members joining; rather, as we grow, we need to integrate more members into this model for sustained success. This year, we take pride in the fact that providers in our program are now operating profitably, with 87% reporting surpluses, meaning they are earning more compared to traditional fee-for-service models. This presents a significant opportunity for them. We see our program continuing to create value for both members and providers through ongoing support. Furthermore, we aspire to enhance our value base by expanding our clinics and home health initiatives, which include our primary care partners and Conviva products, as we continue moving toward value-based payment models, whether through our own providers or external partnerships.

And just to follow-up on that, the financial implications for Humana, is it fair to say that you're seeing now a differentiated financial result for the health plan side of things as well?

Yes, absolutely. When we consider the value-based approach, it encompasses not only the financial value but also the positive outcomes we observe. We see retention among members who have a longer-term lifetime value. Therefore, the plan is experiencing significant benefits from this, and we believe it represents the best health care available in the system today.

Thanks.

Thanks. Good morning. Just quick clarification on the initial 2021 commentary, I think you said modestly above the high end of the 11% to 15%, not modestly above the midpoint of the range. Just want to clarify that. And then in the press release, you noted the commercial segment utilization returned faster. Any reasons why MA wouldn't just be a lag? And then what about acuity, we've certainly seen the providers cited and then given your population base, how concerning is that acuity factor going into next year? And how can you factor that in or manage it? Thanks.

Good morning, Ralph. I will address your questions in order. Regarding our guidance, we anticipate the midpoint will be slightly above the high end. In terms of commercial versus Medicare, I agree with your observation. We expect that seniors will take longer to return to the medical system compared to commercial members for understandable reasons, and we anticipate this trend will persist. Once vaccinations are rolled out, we hope to see an increase in seniors' comfort levels in accessing medical care. We actively encourage our seniors to seek the health care they need, which is why we have implemented outreach programs. As for acuity, we are observing increased per member costs, especially related to COVID. The 20% premium associated with Medicare claims that include a COVID designation contributes to this increased acuity, and we have factored this into our expectations. However, we have not noticed a significant deterioration in our members' health, which is something we monitor closely. We are optimistic about returning to normalcy to ensure our members receive the necessary care, which is why our proactive outreach continues.

Hi, everyone. I appreciate the insights regarding the competitive landscape surrounding the PDP and the comments on the landscape files. Now that the plans are available for review, it can be challenging to compare one MA claim to another due to the nuances involved. There are several incremental factors to consider for next year, such as the potential of a vaccine, new therapeutics, ongoing testing, possible further deferrals, and pent-up demand. Could you share how you approach these aspects when establishing your plans for next year? Are there any significant outliers in the competitive environment that you would like to point out, similar to what you mentioned about the PDP, that could lead to market disruptions? Additionally, regarding your comments about the tax benefit being partially 'reinvested', is some of that being reserved because there is uncertainty about how these factors might develop, ensuring that you can still meet your goals if these aspects become challenging?

Good morning, A.J. As we always try to do, we try to be prudent and thoughtful and balanced about how we set our financial targets. I would say, with respect to the benefits, as Bruce said, we feel good about how we're positioned relative to our competitors. People clearly invested, largely; some pulled back. But most people did invest, which was our expectation. So from that perspective, I think, as reflected in our membership guidance, we feel good about how we're positioned there. The financial side is clearly more tricky. I mean, there's no doubt about it. There always are a lot of variables as we try to predict various claims, trends, and revenue trends. But with COVID, on top of that, that adds additional complexity. I would just say, again, we try to incorporate all the potential variables that exist on account of COVID and non-COVID and try to blend that into both our initial pricing in the bids back in June. And then, now as we roll it forward, as we gave a high-level financial guidance today, it reflects what we know. We did point out, and I would want to reemphasize the fact that there is still a lot of uncertainty and variability as we go into next year. And clearly, we would update you with any thoughts we have on the fourth quarter call with respect to 2021 financial guidance.

Yes, hi. Good morning. So first of all, just following up on clearly, there's a lot of variability into next year. But just to clarify, with your early guidance as you think about utilization, are you assuming that utilization is going to be backed to baseline or above? And my second question is around PDP. You mentioned a couple of times on the call the structural shift of PDP lives to the MA product. So, as you think about this shift longer-term, is there a point where you think that you reach sort of a balance or do you expect ultimately that entire benefit to be integrated? Thank you.

On the utilization side, I prefer not to share specific details. There are clearly opposing factors at play. With the introduction of the vaccine and our expectation that it will be covered by Medicare, we are not concerned about that expense. However, as the vaccine is implemented, it may influence non-COVID utilization, which means that people will be more willing to seek medical attention, although treatment costs could decrease. There is a natural balancing act that we are monitoring. While I won't provide specific figures, we consistently evaluate various scenarios regarding the vaccine and how individuals re-engage with the healthcare system, and we have included these scenarios in our financial planning. Additionally, I'd like to highlight the question regarding Medicare Advantage revenue moving into 2021 and how we close the year in 2020 concerning crucial documentation. On the PDP side to MA, as Bruce mentioned, we notice a shift towards MA, which offers a more comprehensive product, particularly in terms of benefits. Generally, most plans combine Medicare Advantage and prescription drug coverage, allowing members to access drug benefits often at no cost due to zero premiums, along with additional benefits that Bruce outlined. Importantly, our organization delivers significant care coordination and support throughout the member's journey, beyond the financial advantages that Medicare Advantage offers compared to standalone PDP. As a standalone PDP member, even if you have supplemental coverage for some expenses, you might not receive the same level of engagement, such as wellness calls, meal deliveries, or clinical support that Humana provides. We regard this as a key differentiator of our product, which we believe will lead more individuals to transition to Medicare Advantage as we have observed.

With the Medicare Advantage penetration just continuing to increase and the growth is greater than the demographic growth, I mean, it's just a natural aspect that you have a declining part of the business. And as Brian articulated, the value proposition in MA as a result of companies like Humana is really increasing, whether you look at the value proposition in the 0 premium plans and where we are today to care coordination to the social determinants of health, and it's a great example of how we're taking the inefficiencies of the health care system and reinvesting them into programs that are continuing to and improve the outcome, the health outcomes of the individual and also the system.

Thank you.

Great, thanks. Good morning Bruce and Brian. Thanks for taking the question. So the initial outlook for individual MA membership gains for '21, obviously, looks pretty positive. Just regarding that from the data we attained, it looks like the company has made a fairly balanced push forward on the number of plans with 0 premium offerings on both the HMO and PPO side. But it seems that some of your competitors have made an even bigger push on the PPO side for next year. So just curious if you can just give us a little more color on how you're thinking about the competitive landscape in individual MA considering HMO versus PPO offerings, and then now your expected membership gains skewed more heavily around that one way or the other for 2021.

I will begin and then ask Brian to add his thoughts. We have exited all the plans, and I believe our growth has been fairly balanced between HMO and PPO. The organization has maintained that balance in terms of geographic and product concentration. We anticipate that next year will continue to offer us opportunities to attribute our members to physicians and keep them in the HMO, which provides the dedicated care we've emphasized in the value-based approach. At the same time, we have care coordination capabilities that support people in broader platforms, such as Humana at Home, chronic care, and the technology we utilize to assist in navigating the healthcare system. Among all companies, we believe we are well-equipped to meet the needs of our members, whether they prefer the efficiency of an HMO with its enhanced benefits or the flexibility of a PPO. We offer both options. As Brian mentioned, our marketplace approach is much more balanced. While some competitors have grown significantly in their offerings, especially in the PPO, we have expanded in recent years but will remain focused on broader product offerings rather than relying solely on one for growth. I would emphasize our goal to serve the market in a broader capacity without depending on a single product. Brian, do you have anything to add?

I think it's a perfect answer. I agree.

Hi, good morning. My question is around capital deployment. You have not been very active on share repurchase this year. I can't recall if it was ever officially suspended or just sort of held in check sort of pending the uncertainties related to the pandemic. But cash at the parent is building. You haven't repurchased much stock. You're in the low 30s on debt to cap. So maybe just a little bit of your outlook on capital deployment in the next two years. And does the 2021 guide rely upon share repurchase in any disproportionate way? Thanks.

Good morning, Gary. We do have ample capital and flexibility, which we believe is important. I would say that over the next few years, we expect to have a balanced capital deployment strategy. We're always on the hunt for M&A opportunities in the strategic priority areas that we've identified, whether it's around home, primary care, pharmacy. We always look for opportunities in the plant health plan space. So to the extent there's a Medicaid plan in a particular state that's of interest, we look at it closely. There are fewer opportunities for us. But even if there were a Medicare plan in a state where we were able to complete a deal there, we would look at that. So I would just say that our capital deployment plans will be balanced on the M&A side. And clearly, share repurchase is an important part of our capital return strategy. We will continue to do that. Our 2021 guidance does assume some capital deployment, and we're working through how we'll do that, but there is some capital deployment in that number.

Hey, there. Good morning. And I think most of my questions have been answered. I guess I'll just do one follow-up on the PDP space. It sounds like you guys wanted to have a highly competitive product there. But you saw an unusual competitive environment. And I guess, given the growth in MA, how important is PDP to the company going forward? And have you guys historically seen it as a funnel for MA conversions, or if people with a kind of a different setup in PDP, have a different motivation, I guess, does it make sense to have a middling product there as opposed to a highly competitive product?

Well, I think it's a product – I think Bruce remarked on initially, which is to say, it does contribute, particularly to our pharmacy business. It's become much less of a contributor over the last few years. The pharmacy business has had extraordinary growth in EBITDA, as you see in the numbers, it's really – our EBITDA has been driven by pharmacy and really Conviva driving its turnaround. And so pharmacy is an important part of our EBITDA growth element there and PDP is part of that, although the care advantage as well as, candidly, all the efforts that the pharmacy group has undertaken to increase the mail order penetration rate and have that continue to be an important part of the interaction with our members. You've seen a nice increase year-over-year, particularly on the MA side, on the mail order side, and you'll continue to see that. PDP is part of that. As it relates to contribution to Medicare Advantage growth, over the last few years, we've really amped up our strategy to convert those members. We do think that over time, that will continue to be an important funnel strategy for us into MA. Over the last few years have seen nice growth. We'll expect nice sort of cross-sell this year as well. That's our expectation for 2021, as we saw in 2020 and 2019, I think we would all say we have even more opportunity than what we've tapped so far. And so it's definitely an important growth element of the company and our PDP teams and our Medicare teams and particularly on the sales side and working closely together to figure out how we can make that cross-sell happen.

With the Medicare Advantage penetration just continuing to increase and the growth is greater than the demographic growth, I mean it's just a natural aspect that you have a declining part of the business. And as Brian articulated, the value proposition in MA as a result of companies like Humana is really increasing, whether you look at the value proposition in the 0 premium plans and where we are today to care coordination to the social determinants of health, and it's a great example of how we're taking the inefficiencies of the health care system and reinvesting them into programs that are continuing to and improve the outcome, the health outcomes of the individual and also the system.

Thank you.

Great, thanks. Good morning Bruce and Brian. Thanks for taking the question. So the initial outlook for individual MA membership gains for '21, obviously, looks pretty positive. Just regarding that from the data we attained, it looks like the company has made a fairly balanced push forward on the number of plans with 0 premium offerings on both the HMO and PPO side. But it seems that some of your competitors have made an even bigger push on the PPO side for next year. So just curious if you can just give us a little more color on how you're thinking about the competitive landscape in individual MA considering HMO versus PPO offerings, and then now your expected membership gains skewed more heavily around that one way or the other for 2021.

I'll begin and then ask Brian to chime in. We have withdrawn from all the plans, and I believe our growth has been well balanced between HMO and PPO options. You can see that our organization maintains this balance, whether through geographic or product concentration. We expect next year to continue this trend as we seek opportunities to assign our members to a physician and ensure they are in the HMO, which allows them to receive the dedicated care we've emphasized in our value-based approach. We also possess care coordination capabilities that enable individuals to utilize broader platforms like Humana at Home, managing chronic care and employing technology to facilitate important interventions and assist individuals in navigating the healthcare system. Among all companies, we feel very well equipped to meet our members' needs, whether they prefer an HMO, which offers more effective benefits, or a PPO, which provides flexibility and variety in care models. We are able to provide both options. As Brian mentioned, we have a balanced approach in how we offer these in the marketplace. We recognize that some competitors have expanded significantly in one product area, more so than us. While we have made additions over the past few years, we will keep this product in mind, though it will not be the primary focus for our growth. We aim to serve the market in a more expansive way rather than relying solely on one product for our growth. Brian, do you want to add anything?