Humana Inc (HUM) — Q4 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 fourth quarter 2020 results and our updated financial outlook for 2021. 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. Additionally, we have posted supporting materials to our Investor Relations page for reference during Brian's prepared remarks. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, later today. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain 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 fourth quarter 2020 earnings press release as they relate to forward-looking statements and to note, particularly, that these forward-looking statements could be impacted by risks related to the spread of and response to the COVID-19 pandemic. 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, and thank you for joining us. Today, we reported adjusted earnings per share of $18.75 for 2020, consistent with our commentary throughout the year, as expected, reflecting a loss in the fourth quarter largely driven by our investments and programs to support members, patients, employers, and providers in the communities we serve. Our fourth quarter results were impacted by the continued waiver of Medicare Advantage cost-sharing, including for primary care and COVID-19 treatment, delivery of meals, masks, and preventative tests to our members, in-home assessments, investments in programs to assist underserved communities, and efforts to ease the financial burden for our provider partners. For the full year, these initiatives, among others, exceeded $2 billion. Defined by the worldwide pandemic, 2020 was an unprecedented and challenging year. I'm proud of the resilience and response of our associates, putting our members', patients', and providers' holistic health at the forefront while continuing to advance our strategy. Despite the pandemic, Humana continued to accelerate on all fronts in 2020, including our short-term operating and financial performance, our ability to drive and invest in our long-term strategic objectives, and in our customer-centric efforts. The strength of our underlying core business is compelling. In our Healthcare Service business, we delivered double-digit percentage growth and adjusted EBITDA year-over-year in 2020, with our pharmacy, provider, and home business all performing well. In our pharmacy business, we processed 478 million prescriptions and drove mail-order penetration up over 37% in MAPD. Today, our pharmacy business has organically grown to the fourth largest Pharmacy Benefit Manager or PBM. In our provider business, we ended the year with 156 wholly-owned primary care centers after opening 15 new centers in 2020, including expanding to Louisiana and Nevada. In addition, our Conviva primary care clinics delivered significant clinical and financial improvement as the turnaround in the business continued, including a 5% reduction in admissions per 1,000. In the home, we've made important investments in our strategy to offer primary care and post-acute services in the home through minority investments in Heal, a pioneer of in-home primary care, and Dispatch Health, a provider of emergent in-home medical care. In addition, Kindred at Home successfully managed to transition to the new CMS payment model, while also implementing a new operating system in 2020, setting it up to drive further operating model advancement in 2021. We demonstrated in over 50,000 home episodes that integrating new proactive clinical models within the nurses' workflow significantly reduces downstream emergency room visits and hospital admissions. The success of these clinical test-and-learns provides us with the confidence that scaling these programs will offer meaningful quality and cost improvement in 2021 and beyond. We also delivered strong fundamental results in our core insurance business. While investing for the long-term, we remain very focused on the consumer experience broadly across all platforms and are proud to have driven an overall 670 basis point increase in our net promoter score or NPS in 2020, with a meaningfully higher increase in our NPS for our commercial group business. We announced that 92% of our MA members are in plans rated four stars or higher, leading the publicly traded MA companies. We ended the year with approximately 4.6 million total Medicare Advantage members, reflecting year-over-year growth of 11%, fueling consolidated revenue growth of 90% in 2020. The positive momentum continued in the 2021 Medicare Advantage Annual Election Period or AEAP. For the full year, we are expecting individual MA growth of approximately 425,000 to 475,000 members or 11 to 12%. Importantly, as in prior years, this robust growth is balanced across multiple MA plan types as a result of the strength of our clinical programs, provider partnerships, and distribution channels, as well as our broad offerings that allow for deeper personalization to meet the member needs. In the AEAP we led the industry in each of HMO special needs plans or DSNP, and MA-only membership growth and continue to grow our LPPO membership. We also launched Author by Humana in South Carolina in January, managing five Medicare Advantage plans with approximately 13,500 members. Author is designed to meet the emerging expectations of digitally savvy seniors aging into Medicare, leveraging health coaches, digital, and artificial intelligence to create a simplified and integrated experience for consumers. We plan to scale Author by delegating more MA lives over time and look forward to sharing our learnings. We continue to focus on how we can expand our presence within underserved populations in an effort to drive improved clinical outcomes and reduced health disparities. In Medicare Advantage, we experienced industry-leading growth in DSNP in 2020, increasing DSNP membership approximately 41% year-over-year. We expect another year of robust DSNP membership growth in 2021. Our Medicaid strategy is built on the core strengths of our Medicare chassis, including our clinical programs, provider relationships focused on value-based care, and our commitment to investments in the communities we serve. We are able to offer states an individualized approach to care that considers the physical and mental well-being of beneficiaries as well as the critical social determinants that impact the population. We began serving Medicare members in Kentucky in 2020, and recently announced our entry into the South Carolina Medicaid program as well as the acquisition of iCare in Wisconsin. We firmly believe organic growth is the most efficient use of capital for our shareholders and remain committed to further organic Medicaid growth supplemented by smaller tuck-in acquisitions. We have a long history of success growing our Medicare Advantage and pharmacy businesses organically. And just last week, we were awarded the managed Medicare contract in Oklahoma, a state that previously did not offer managed Medicaid. I want to thank the Medicaid team for their tireless efforts and congratulate them on these key wins. As I reflect on what we learned from the pandemic, I am energized by the way the collective healthcare system responded to the crisis and how the actions taken to combat the pandemic strengthened and accelerated critical tenets of the system. As an industry, in partnership with policymakers, we took deliberate and sustained actions to remove financial barriers and enhance access to care in response to the pandemic, easing some of the burden on our nation's most vulnerable populations at a time when they needed it most. Supported by CMS, health plans, and providers proactively addressed social determinants of health that were exacerbated by the pandemic and quickly pivoted to telehealth and in-home care. We advanced in a matter of months what may have taken years absent the pandemic. Our combined actions underscored the strength of the Medicare Advantage program as an enduring public-private partnership that puts seniors and their holistic health at the forefront. Humana's pandemic response continues to evolve. We are actively engaged with the Biden administration including HHS and CMS, as well as state and local governments regarding our role in the vaccination process as both a primary care provider and as a health plan, representing a significant portion of the nation's most vulnerable populations. Our role is multi-faceted, and we stand ready to assist further as the nationwide distribution progresses to later phases and more individuals become eligible for the vaccine. Driven by our strong care coordination capabilities, our role includes identification of eligible members utilizing our analytics, vaccination education, reminder services, and ensuring we follow up on any complications. We are also engaged in industry-wide efforts to conduct vaccine surveillance, identify regions where vaccinations are lagging, and intervene to help our members access the vaccine. By collaborating with other health insurers, we can align regional communication efforts to educate and engage members, and reduce disparities in vaccine use across the U.S. Equity in healthcare is an area that we are particularly focused on recognizing that we must play a critical role working closely with our industry and governmental partners to address the imbalance that exists today. Data shows that Medicare Advantage is continuing to grow as the preferred option for those who are low-income and for racial and ethnic minorities. Of the nearly 26 million Medicare Advantage members, there is growing diversity in enrollment with more than 28% of the beneficiaries being racial and ethnic minorities as compared to 21% in traditional Medicare. This demonstrates that as we think about disparities in healthcare for underserved populations, Medicare Advantage plans are uniquely positioned to address the needs of these members. Humana is committed to leverage our business platforms to support local communities in their efforts to lower social and health disparities. This includes enhancing access to care by continuing to expand and build primary care centers in underserved markets, offering supplemental benefits including over-the-counter medication coverage, transportation, dental, and vision, as well as taking a leadership role in enhancing innovative solutions aimed at addressing social determinants from Medicare and Medicaid. In addition, we recently named Dr. Nwando Olayiwola to the newly created position of Senior Vice President and Chief Equity Officer effective in April of this year. Dr. Olayiwola will set direction and establish strategy to promote health equity across all Humana lines of business including our care delivery assets while working collaboratively with the broader healthcare community to advance health equity so healthcare works better for everyone regardless of background, age, or economic status. In closing, we remain 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.

Thanks, Bruce, and good morning everyone. Today, we reported full-year 2020 adjusted earnings per share of $18.75 consistent with our guidance commentary throughout the year. As Bruce described in detail, despite the unique challenges we faced in 2020 due to the pandemic, our fundamentals remain very strong with the underlying core business delivering compelling results for the full year, including a 19% increase in consolidated revenue and an 11% increase in our total Medicare Advantage membership. We were also pleased to maintain stable benefits and premiums for our members despite the return of the $1.2 billion health insurance fee or HIF, which was not deductible for tax purposes and disproportionately impacted our business relative to the competition. Additionally, I would like to echo Bruce's congratulations to our Medicaid team for our recent contract awards in Oklahoma and our announced expansion in South Carolina. These awards further demonstrate our ability to drive organic Medicaid growth and, together with our Eye Care acquisition in Wisconsin, expand our Medicaid presence from three states to six. I will now turn to our fourth quarter results and underlying trends, which provide important context for our initial 2021 guide. As expected, we reported an adjusted loss per share of $2.30 for the fourth quarter of 2020 on account of the significant investments made in all of our constituents because of the pandemic. Further, as disclosed in our 8-K filed January 8, we experienced a significant increase in COVID treatment and testing costs across the nation in November and December. For full-year 2020, we incurred $1.5 billion in gross COVID treatment costs, $1.3 billion of which were related to Medicare or $825 million net of capitation to providers in risk arrangements. As a result of the dramatic increase in COVID during these months, we also experienced a decline in non-COVID utilization in the fourth quarter, particularly for Medicare as fewer people sought non-emergent care. Overall, utilization in the quarter, including COVID costs was a bit below baseline for Medicare and above for commercial. The decline in non-COVID utilization in the quarter, relative to our prior expectations, more than offset the increase in COVID treatment and testing costs. We were therefore able to increase our spending for ongoing pandemic relief efforts and investments to advance the company strategy. It is important to note that investments in the group and specialty segment in the quarter, particularly those intended to ease financial stress for providers, while positioning the business for long-term success, disproportionately increased the segment's benefit ratio. I will now speak to our expectations and related assumptions for 2021. Today we are providing adjusted EPS guidance for 2021 of $21.25 to $21.75 reflecting approximately 16% growth off of our $18.50 2020 baseline at the midpoint. While this guidance is consistent with our previous high-level 2021 commentary from our third quarter earnings call, the embedded COVID assumptions and today's guidance have changed materially since that time with largely offsetting headwinds and tailwinds in revenue and benefits expense. Importantly, in an effort to simplify any explanations we provide, we have included a slide on our investor relations website, which summarizes the expected full-year impact of the various material headwinds and tailwinds to our guidance today. At the time of that call, we reflected both revenue and expense puts and takes into our high-level commentary about expected 2021 financial performance. Since that time, the magnitude of the COVID-related impacts have increased significantly. Therefore, as I said, we will provide full-year estimates inclusive of where we stood at the time of the third quarter call. I would note that this heightened level of transparency, whereby we provide granular assumptions on a number of variables, is necessitated by the unique uncertainties that the pandemic creates for our 2021 financial outlook. I would also note that the numbers we are providing today are for individual and group Medicare Advantage only, as the net impact of the pandemic on our other lines of business is currently expected to be relatively immaterial. Additionally, it is important to note that we are providing reasonably wide ranges given the inherent uncertainty of our estimates for each line item. After taking into account our capitation agreements in which provider groups take risk in whole or in part on the member, I will now discuss the material COVID-related headwinds and tailwinds facing our Medicare business in 2021. We now expect Medicare risk adjustment revenue headwinds of approximately $700 million to $1 billion, representing 1% to 1.5% of Medicare premium for the full year. As a reminder, Humana's 2021 Medicare Advantage revenue is primarily driven by the risk assumed to care for our membership, established through conditions documented by providers within the 2020 calendar year. While we know the 2021 perspective payment amounts from CMS based on diagnosis codes incurred through June of 2020 and submitted by the first Friday in September, over the coming months, these payments will be adjusted to reflect additional conditions documented for claims incurred within the 2020 calendar year. Let me spend a few minutes addressing the drivers of this increased uncertainty. First, while we worked tirelessly throughout 2020 to ensure members had access to and were receiving the appropriate level of care including by significantly increasing outreach and availability of in-home care and providing access to video telehealth clinician visits, the meaningful drop in non-COVID medical utilization in November and December was not expected. Those are important months as they round out our ability to drive meaningful clinical interactions with our members. And therefore, the unexpected decline in utilization affected our ability to appropriately document their conditions. Second, the mix of utilization was very different in 2020 relative to prior years; for example, the dramatic increase in the number of telehealth visits from 2019 to 2020, although critical and allowing our members to access care while affording us the opportunity to document their conditions nonetheless creates greater uncertainty around the type and volume of diagnosis codes collected. Accordingly within the mix of submissions from 2020 that drive our 2021 revenue, we also expect organic diagnosis code submissions tied to COVID claims for which we have limited visibility at this time. These are just two examples of how emerging experience in 2020 creates more uncertainty in our MRA revenue projections for 2021, because we were not able to place the same level of reliance on historical trends as compared to a normal year. I will now discuss COVID-related utilization. As a general rule, we have seen an inverse relationship between COVID treatment costs and levels of non-COVID utilization. As surges in the pandemic led to less non-essential care being sought by our members, while the ratio of COVID treatment to non-COVID depressed utilization has varied, to date we have seen in our Medicare book that the level of depressed utilization has more than offset the treatment costs. The shape of the COVID case curve is one of the largest drivers of these two related factors. And as such, they remain the two largest sources of uncertainty for 2021, given the unprecedented nature of the pandemic. To set a bit more context around what we are seeing currently, the COVID and non-COVID utilization trends we saw in the fourth quarter persisted throughout January. Medicare inpatient non-COVID utilization is running approximately 20% below baseline with non-inpatient reduction percentages in the low teens, with a significant caveat that we have a much better view of inpatient admissions for which we receive weekly authorization data than we do for non-inpatient utilization. Importantly, the increased COVID treatment costs incurred in November and December 2020 ramped up quickly, with the reduction in non-COVID utilization initially lagging that ramp as would be expected. We expect the inverse to occur in 2021 such that when COVID treatment costs begin to decline, the rate of decline will likely be steeper than the bounce-back in non-COVID utilization, creating a favorable impact for a more prolonged period of time. As a result, we now expect Medicare COVID treatment and testing costs of $525 million to $925 million, which, when combined with the Medicare physician fee schedule increase that I will discuss in a minute, represents approximately 1.9% to 3.1% of normalized Medicare claim costs. This is similar to what we experienced in 2020 and is consistent with the expectation that the pandemic will begin to subside as more people get vaccinated through the first and second quarters. In addition, subsequent to the third quarter call, a net claims headwind of $175 million to $200 million resulted from the increase to the physician fee schedule rates for 2021 as part of the December stimulus bill, partially offset by a net $80 million to $90 million impact from the Medicare sequester relief extension through March 31. Our guidance today does not assume that the sequester relief will be extended for the rest of the year. Finally, for full-year 2021, we currently expect a reduction of $1.3 billion to $2 billion in Medicare non-COVID utilization off a normalized claims pattern, including lower flu costs, which are significantly reduced compared to normal seasonal patterns. This reflects overall non-COVID annual reductions of approximately 3.6% to 5.5% of a normalized claims pattern and inclusive of COVID treatment costs, a reduction of approximately 1.7% to 2.4%. For full-year 2020, the all-in reduction, with and without COVID, was approximately 5.9% and 8.6% respectively. We acknowledge that the ranges we are providing are wide and are a consequence of the continued heightened uncertainty surrounding the ongoing pandemic. We recognize that it will take at least several months to ascertain from CMS the negative impact on our 2021 revenue growth expectations resulting from decreased utilization experienced in 2020, including in particular the unanticipated depression in non-COVID utilization in the final two months of 2020, and to the extent that this reduction in utilization and associated medical costs persists into 2021. Regarding quarterly utilization patterns, our guidance ranges assume that we will experience non-COVID utilization levels that reflect double-digit percentage reductions to baseline levels throughout the first few months of 2021, before ramping back up and running slightly above baseline levels towards the end of the year. Similarly, we assume COVID testing and treatment costs will continue to run at the higher levels experienced in November and December in the first quarter of 2021 and trend down as the vaccine becomes more widely available in the second quarter. That said, there are a range of potential scenarios, and we would expect any variance in our assumptions around COVID treatment costs to be more than offset by a change in non-COVID utilization. As I said before, we expect that COVID and non-COVID utilization are driven by naturally countervailing forces. Also, as a reminder, we believe that capacity constraints in the healthcare system will prevent non-COVID utilization from running materially above baseline and also limit the amount of time a modest increase above a normal baseline could continue. Therefore, given the deviation from historical patterns, forecasting quarterly EPS splits is much more difficult than usual, but we do expect a meaningfully higher portion of our earnings coming in the first quarter than we typically see. As such, we expect the first quarter to contribute just below one-third of the annual total versus a more typical first quarter, which contributes 800 to 1000 basis points less. As an important aside, while utilization patterns will be most significantly affected in the first quarter of the year, we expect the negative impact on revenue to be more equally split throughout the year. Now that I've walked you through the material Medicare headwinds and tailwinds, I'm going to turn to our expected operating performance by segment. I encourage you to reference the waterfall slide provided on our investor relations website with the webcast materials. Our 2021 consolidated revenue guidance of $80.3 billion to $81.9 billion at the midpoint reflects year-over-year growth of approximately 8% from adjusted 2020 consolidated revenue. This growth is primarily driven by our expected 11% to 12% individual MA membership growth, partially offset by anticipated declines in group MA and standalone PDP membership. The revenues are also adversely impacted by the MRA headwind previously discussed as well as fewer months of sequester relief in 2021 versus 2020. Our 2021 adjusted EPS guidance of $21.25 to $21.75 reflects growth of 16% from the $18.50 baseline at the midpoint, modestly above our long-term target of 11% to 15%. Since 2017, following the termination of the Aetna merger, the company has achieved an adjusted EPS compounded annual growth rate of 16.4%, which is above the top end of our long-term growth commitment we have made to our investors. While it is very early, I want to close with some preliminary thoughts on our current view of 2022. Our expectation is that 2022 will be a more normal year, and as we get into the spring and summer, we expect the vaccine to take hold and COVID utilization to decline, allowing non-COVID utilization to trend back to more normal levels, enabling providers to see our members in the ordinary course and appropriately document their clinical conditions resulting in more normalized medical costs and revenue expectations for 2022. Therefore, barring any major unforeseen circumstances or significant changes in the course of the pandemic, the midpoint of the 2021 adjusted EPS guidance that we provided today at $21.50 is the baseline off of which investors should think about growing earnings for 2022. As we do every year, we will consider a variety of factors as we approach our bids in the spring, including any lingering impacts of the pandemic either on revenue or utilization relative to baseline as well as other external dynamics. Before I open up the line for questions, I also wanted to announce that we plan to host an investor day on Tuesday, June 15th, 2021. Please save the date. With that, we'll 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.

Great, thanks. Maybe just following up on that last point about kind of how you guys are viewing this year's guidance as a baseline. I guess when you guys submitted your bids back in June, obviously there's been some slight changes, things like that that have happened. So, basically what you're saying is that COVID has completely offset all of the kind of external legislative changes and everything else. I just want to make sure that I'm understanding that correctly, and that I guess everything can be reprised, I guess I'm just struggling a little bit with $2 HIFs and how to think about that over a multi-year period, it feels like it's a relatively low net addition over time.

Well, good morning, Kevin. Let me just try to provide some context on our bids and how we roll forward today. When we approached our bids in the spring and early summer this past year, we obviously knew we had a significant pandemic we had to contend with, and we ran a host of scenarios on the revenue and the cost side to put into pricing what we felt was an appropriate adjustment. To our certainly countervailing forces, we anticipated that there could be a revenue headwind; we ran various utilization scenarios to see whether there would be any offsets, and we put our assumption into our pricing. Rolling forward to the third quarter, when we provided guidance, obviously a lot of things changed since pricing, and sort of the high-level guidance we gave at the time reflected our current view of those headwinds and tailwinds that we would face. I would also remind you that, as we've said multiple times throughout the year, our operators were spending a significant amount of time working to try to mitigate any of those revenue headwinds by really trying to see our members, which was really important to get into their homes, visit them either in-person or via telehealth, where we would also have the benefit of being able to document their conditions. As we approached the third quarter, we understood where we were relative to those expectations and obviously updated our utilization expectations for 2021, and in that context, we provided 2021 guidance or a high-level guidance. November and December happened, a lot changed, significant decrease in utilization which was unexpected as the COVID pandemic really took off and hit levels that exceeded any expectations and were much higher levels than were even hit in the spring. So, that clearly impacted our perspective. We felt it was important to get out to our investors and provide some high-level commentary on what we were seeing on potential countervailing headwinds and tailwinds. And so, we've done that. Here we provided obviously a lot of granular detail on that. But, there's a lot of variation in these numbers. There are wide ranges. We think what's on this page is reasonable. There's nothing that we're seeing that suggests that these numbers aren't reasonable. But where we fall in these ranges on all these variables matters a lot, and that's something obviously that we're going to continue to watch closely, and as appropriate, we would update investors on that. But, I would just say as we said in our remarks that 2021 has heightened uncertainty relative to what we thought coming into the year, and to your question on the HIF, we actually feel we achieved an appropriate balance between giving dollars back to our members through higher benefits, which we did, and giving higher EPS growth to our shareholders where we're exceeding our typical 11% to 15% growth and at our midpoint; notwithstanding all the COVID headwinds and tailwinds, we're still able to guide to a midpoint that's above that range. So, we think we've achieved the right balance. There's no doubt that 2021 has a heightened level of uncertainty and we're going to be monitoring it closely and keep you updated.

Kevin, just to add a little bit on the HIF side, our historical practice has been passing the pre-tax onto our members, both the cost and the benefit come and gone during the year. So, this past bid season was very consistent with what we've done on the pre-tax side, and then the post-tax side, the tax benefit, we've always tried to be fair to both our members and shareholders, and we've typically divided that 50-50 both on the cost side and on the benefit side there.

Thank you.

Yes, hi, good morning, and thank you for all the details. Just a couple of questions of clarification, when we think about your guidance and sort of the balance, the cadence between first-half and second-half, what are the embedded assumptions for return of utilization for the Medicare population versus baseline, or at least what is the range? And then secondly, when we think about 2022, to your point, we want to anchor in 2022 off that starting point of $21.50, but when you think about the 2021 COVID-related headwinds, can you maybe help us quantify what is reasonable for us to back out of the 2021 numbers that we think for more normalized 2022? I think they are truly one-time in nature.

Let me start with utilization patterns and then discuss 2022, keeping in mind that we've just provided guidance for 2021. Therefore, we won't share many specifics about 2022. Regarding utilization patterns, we anticipate the first quarter will experience the lowest utilization and the highest costs related to COVID treatments. We expect utilization to remain low in the second quarter, though not as much, and then to gradually return to normal levels, potentially slightly exceeding normal, as we move into the latter part of the year. It's quite challenging to provide specific details about 2022 at this time. We'll need to assess the situation in the spring to determine what should be factored into our bids, remaining cautious about the influences of COVID on revenue and utilization, similar to our approach this year. Beyond that, I would refrain from commenting further, except to say that we believe $21.50 serves as a reasonable baseline to consider for 2022 without going into additional specifics today.

Next question please.

Hi, thanks. Good morning. I know you have previously discussed how new members and MA typically start with higher MLRs in their first year. Can you provide us with an idea of what the usual first-year MLR is for an MA member? Also, is the inability to risk-code impacting new lines at all, or is it mainly affecting the existing book that usually sees revenue growth? Additionally, I understand we are not seeking guidance for 2022, but is it fair to think that there will be some positive impact from premium benefits, particularly with older members being coded accurately along with the new cohort from 2021? Is that an appropriate way to understand the MRA benefit for 2022?

Yes, good morning, Josh. Instead of concentrating on MLRs, I prefer to focus on pre-tax, as we've discussed previously. It's reasonable to say that new members typically break even or perform slightly better initially, but they don't contribute much to profitability in their first year. However, as we move into the second and third years, we start to reach our normalized margins once we can document our members' conditions and enroll them in our clinical programs. This situation remains unchanged, consistent with our past experiences and our typical planning for bids. Without going into too much detail about 2022, it’s likely you'll notice a catch-up effect this year. Any MRA revenue headwinds we encountered in 2022 were due to our existing membership base. It's important to remember that it involves not just the long-standing members but also the new members who joined from other Medicare plans. If those members switched, we ended up having less documentation for them than usual for the same reasons, as our competitors also struggled to document those conditions. Consequently, you'll see an increase in documentation issues for the 2021 cohorts and some other groups where we couldn't re-document their conditions. We will plan for this as we assess what level of normalcy to expect for 2022 based on 2021's utilization. Hopefully, that clarifies things.

Yes, perfect. No, perfect, thanks.

Okay, thanks, Josh.

Thanks, good morning. Just wanted to go back and understand the assumptions on the core again, or the non-COVID utilization. I think in the slide it said minus 3.6 to minus 5.5. Sounded like that was off of a 2021 normalized baseline. Just wanted to make sure that's right. And I guess it would be helpful to understand what you normally assume for utilization increases or maybe even just how it compares to 2019? And then it sounds like the first quarter is running down 20% on the non-COVID, did I hear that right? Thanks.

Yes. We won't provide specific utilization assumptions, but we can share some transparency regarding our quarterly data. In relation to utilization, we've carefully considered normalized trends and their impact when we set our pricing for 2021 based on the various factors we've discussed. By normalized baseline, we mean that if we exclude COVID entirely, we can estimate claims based on our usual inflation factors from 2021 compared to 2020. This approach helps us understand the net trend excluding COVID. To clarify, the baseline reduction compared to a 2020 scenario without COVID is about 8.5% to 8.6% down, compared to the 3.6% to 5.5% we project today. We believe this figure is reasonable, although there's a wide range of potential outcomes and more uncertainty surrounding the 2021 estimates than usual. Normally, we rely on extensive historical data and a team of experienced actuaries to develop our trend assumptions. However, the pandemic has introduced a new set of challenges in forecasting, as we lack historical experience to draw from.

Okay, that's helpful. Thank you.

Thanks. Hi, everybody. Just to drill down a little bit on the '21 outlook. So, you've had the COVID testing and treatment headwind is substantially less than the tailwind for, as far as COVID utilization, but you're talking about the interplay there. And I think in the prepared remarks you said as the vaccine gets widely disseminated, you'd expect the COVID testing and treatment to come off quicker than the utilization of non-COVID to come back, so longwinded setting stage for the question. So if the vaccine gets widely distributed quicker than you think or later than you think, does that move the assumptions around within the range, or could that throw you outside the range? And I guess I'd also ask, and you've talked a lot about the investments that you made this year. I know a lot of that investment was just giving help to your constituents. But does that give you any flexibility within this guidance range because you pulled forward investments in 2020 that would have otherwise could have happened in '21? How much flexibility does that give you in your range?

Good morning, A.J. I would say on the first question, there's a lag really because as people are not for seeing their doctor and going to the hospital, they're not able to schedule the surgeries, for example, it just takes time for the system to ramp back up. So there's a natural trail-off that just given the volumes we're talking about, they're not insignificant. It takes time to get the gears cranking again. We certainly forecast that, but there is that delay. To the extent the vaccine rolls out more slowly or there's a variant in the virus that we've heard about, and they're not as effective, that for sure can affect our ranges here. We try to capture what we think are reasonable ranges based on today's sets of facts and circumstances. To the extent those facts and circumstances change, it's conceivable that some of these sorts of COVID treatment versus non-COVID costs effect could be impacted; again it's likely that, because there's that inverse correlation, it will offset one another. Although in the Medicare business it tends to lead to a tailwind, as we've mentioned. The commercial business is not as clear. As we mentioned in the fourth quarter, we are running a little bit above par all-in. But for the Medicare business we were below. The investments, to your question there, we really, I would say, pulled all those out for 2021, so there's really not any additional flexibility there. We were very clear to confine those investments to 2020. We've described how we benefit all of our constituents and really gave back a lot of those dollars, which was important to do, but that was not baked in, in any way, into our 2021 pricing or to our guide.

Okay, thanks.

Thank you for the question. To revisit the MRA headwind, I understand it's a complex issue. Regarding your tactical question, if you anticipate non-COVID utilization to decline again due to COVID, and considering the risk adjustment challenges we faced at the beginning of this year, I’m curious about the specific actions you plan to implement in 2021 to ensure proper risk coding. Given that we may encounter similar dynamics for part of the year that contributed to our challenges this year, are you considering a different or more aggressive approach to risk coding this year?

Yes, Brian, I’ll take that. In the third and fourth quarters, we made a strong effort to ensure our members were engaging with the health system, providing in-home assessments and other necessary documentation. We plan to continue this approach in the early part of the year and throughout, as we reassess our strategy and take a more proactive stance. Our biggest challenge remains the typical issue of individuals not utilizing healthcare services. We are actively working with our value-based providers and engaging with our members to encourage visits to physicians and use of the healthcare system. Our dedicated team is focused on facilitating this, whether through arranging transportation, offering telehealth services, or conducting in-home assessments. We will maintain the initiatives we implemented in the previous quarters, as encouraging healthcare utilization is both our greatest opportunity and challenge.

Thanks, Bruce.

Good morning. Just a couple of questions here on numbers, first you've given us a lot of detail here. Can you tell us what the total Medicare risk adjustment impact was for 2021 on a gross basis, meaning how big of an impact is it to your yields overall? And what do you expect your yields to be for 2021 on a year-over-year basis? And then just on Medicare Advantage margins, looks like your retail margins were about 3% and within guidance. Can you confirm that's kind of where you expect individual Medicare Advantage margins to be in 2021? Thanks.

Good morning, Justin. Regarding the MRA side, the headwind we are facing is the total headwind after taking mitigation efforts into account. As Bruce mentioned, we worked hard to get our members into the healthcare system. This headwind represents the full extent of the challenges we currently face, and we aim to be transparent about it. In terms of yields, we typically do not provide guidance on PMPMs, but I can say our individual MA PMPM expectations are roughly flat, perhaps slightly increasing. There are various factors that influence this, such as MRA, rate notices, and decreased months of sequester relief this year. Business mix plays a significant role since rates vary widely across the country, affecting growth. Many elements impact yields, and I understand your inquiry. I would be disappointed if you didn't bring up the margin situation, so I'm glad you did. When considering overall retail margin, it's essential to recognize the multiple businesses within the retail segment. The margin has been affected by some challenges, including non-deductible impacts and geographical differences. While we've managed pre-tax considerations, the after-tax impact has influenced our pricing. Geographic factors can depress margins as well. Additionally, as we discussed concerning PDP, a large portion of the margin has diminished from that product, with most of the margin now coming from the pharmacy side. The product has become more commoditized, making it difficult to profit on the insurance side at current premium levels, but we are performing well in the pharmacy area and will continue to pursue aggressive strategies here. As Bruce noted, our mail-order penetration is reaching very high levels for both MA and PDP. It's important to keep geographic issues in mind when assessing individual MA margins. Furthermore, your group MA has experienced margin impacts from larger accounts shifting between major competitors. When there's margin in those accounts and they are re-bid, it can take years to restore that margin. Currently, we are below our target of 4.5% to 5%, and I would say we are reasonably below that target. We are committed to returning to that target in the long term, but many factors are influencing that number, and there are several variables in the retail overall guidance you’re reviewing.

Thank you, next question.

Yes, can you talk a little bit about the investments in provider assets in particular? Was interested in what we're seeing as far as in a large differential and growth rate differential for members and lines of business that are value based care partner or owned primary care assets? Thanks.

I'll take that. We see great results in the primary care clinics, both the ones we own and the affiliated ones. We would see and we've showed a slide on a number of years as physicians continue to evolve deeper value-based relationship models, we see superior performance and star scores, typically greater than four to four and a half. We see great MLR, significantly below what the average is in the industry. And we also see a great net promoter score. All that combined, that's why you see us aggressively pursuing both our affiliated relationships and in addition, building our primary care clinics to place our members in those clinics. The challenge with the clinic side is just their organic; there's not enough capacity in the marketplace to fill the demand. So you see a lot of startup clinics from a startup point of view being invested into build capacity there. For us, it's more of a capacity constraint as opposed to for our growth. Our growth has traditionally been equal to and greater than what you see in the traditional 10% to 12% growth that you've seen over the last few years in these clinics and getting more and more members in those clinics. I think you'll see that growth accelerate as the capacity becomes more and more available for us. On the value-based provider side of the business outside of the ones that are clinic oriented, we continue to see really, really great good results from that. Those results are a little less than the clinic results we see. Good star scores, four and above, and we see good net promoter scores, but does not compare to the outcomes that we see in the clinic side.

Great, thanks.

Hi, thanks. Good morning. I wanted to ask just about maybe an update on how you're thinking about some of the puts and takes with the ESRD coverage expansion that played out. And obviously, that was already one of the big changes for MA in 2021 before COVID kicked in. So just interested maybe first if you can, if you have an estimate of how much your MA membership for ESRD actually changed for 2021. And then as we think about the impacts of the pandemic on that population, and then try to overlay that into the rates that you have, how you're thinking about sort of the overall margin profile expectations that you have for that population now versus pre-pandemic? Thanks.

I'm pleased to begin, and Bruce can provide insights on the strategic aspects. From a membership perspective, we have approximately 10,000 lives related to ESRD in the ADP, bringing us to around 29,000 to 30,000 members, which aligns with our expectations. As we've indicated for several quarters, we anticipate that reaching our goals for Medicare Advantage penetration will take a few years, and we continue to believe that this remains true. This aligns with our expectations; however, these members are not yet profitable. Over time, as we focus on managing their care and collaborating with partners to address their needs before they reach ESRD and to slow disease progression, we see genuine opportunities for enhancing profitability. We are approaching a breakeven point instead of incurring significant losses on these members. Bruce, do you want to add anything?

I'd just add, Scott, I know this was an active conversation for us in 2020 and how we were going to deal with it. I really have to take my hats off to the team and how they've been able to really develop some deep partnerships with the two major dialysis providers and really be able to evolve relationships to a value-based payment model that shares the risk and that has helped us in being able to effectively manage the clinical side of this and the cost side. We continue to invest in innovative models both around the coordination of care and then also where the care is provided. Those two strategies really have given us more confidence in the ability to manage these patients. As Brian said, the patients will continue to be costly and continue to be no margin or very, very low margin businesses for us going forward. So again, I think we're in great shape from where we were a year ago. We began talking about this, and as Brian also said, we do see this will be years in the making to see the penetration to the average penetration of MA overall.

And, Bruce, do you think that the pandemic itself has much impact on this population? I know that some of the providers here have talked, given some updates recently, just thinking about that population as it relates to the pandemic itself?

Typical to any vulnerable population, whether it's ESRD or other chronic conditions, you do have a higher likelihood of having more severe cases in those populations. For us, we are very active in managing the populations that have those as vulnerable conditions. I would say they're different than the average population because of their conditions. But they're not different than our other chronic members, and how we effectively reach out to them and manage them. They are reflected obviously in the results that Brian was talking about in arranging where we look at COVID being more costly in our forecast.

Yes, thank you. Maybe I could ask about Medicaid, what you are assuming or how you were thinking about the Medicaid rate process, given the actions states took in the second-half of last year. And then maybe also, what you're assuming on the resumption of re-determinations, if you can just address that?

Sure, I'm happy to take that. So just on the rate side, we're waiting to see in our major states are Kentucky and Florida. I think we expect some rate adjustments, and we're waiting to see and we've surely baked what our expectations might be into our Medicaid budget. With respect to re-determinations, you see, we've got a pretty wide guidance range on Medicaid membership. Effectively, the assumption is the public health emergency ends in April. If that happens, we expect to lose some lives because we saw a nice increase this past year. However, as the re-determinations happen, that will cause the membership to decline. I would say that's sort of our base case expectation, as we think about our overall guidance and revenue, etc. To the extent that the public health emergency is extended, and re-determinations don't happen, that will cause the increase in membership to continue, which again, I think would be relatively immaterial to the overall enterprise, but would cause us to have a higher membership at the end of the year and that, of course, excludes anything from South Carolina or Oklahoma, which will kick in later this year. Our guide excludes that.

Great, thanks. Good morning. So maybe just a question for Bruce, just on the COVID cost risk, as you do think about your ability to control the medical costs in '21 versus 2020, specifically for COVID. Has there been any evolution on the provider side for '21 where value-based providers that wanted to go at risk for any sort of episodic bundled payments related with patients, or is that not really evolved? If not, are there any other evolving payment arrangements that providers you can talk about specifically tied to COVID that's different for '21 versus '20? Thanks.

Yes, good question. We don't have a bundled type of payment model for COVID. I mean, we have many bundles and other conditions but not for COVID. We haven't seen that really any uptake with physicians on that. Keep in mind that a lot of the COVID cost is on a DRG basis and incorporated into DRG side, while the testing is something of lesser magnitude here. Going at risk for that is fairly small and material. I think, to broaden your question a little bit, what we do see is that when we do have value-based relationships, the proactiveness of really helping the member in this time is so important for us, especially as you think about downstream costs and other conditions that could occur if not properly maintained and treated. To answer your question, we do not have much in COVID bundling and a type of payment. We do see different proactive care models in our value-based payment relationships in this time especially with the more vulnerable populations.

Okay, got it. Okay. Thanks.

Yes, good morning guys and thanks for taking the question, Bruce. I just wanted to circle back and make sure I heard you right to say that pharmacy Mail Penetration was 37%. Was that for the quarter or for the year? I assume it was for the quarter. I guess is it your expectation that kind of comes down a bit as things return to normal and would love to hear you talk a little bit more about the strategies that you guys have used to drive Mail Penetration to such a high level.

Sure. Over the year, we noticed an increase in Mail Penetration, particularly during the early COVID pandemic in March and April when people were concerned about lockdowns. Many were taking 90-day prescriptions and relying on Mail-Order services since they couldn't visit drug stores easily. As a result, we saw more individuals transitioning to Mail-Order due to its convenience and our service enhancements. The pandemic helped inform consumers about the advantages of Mail-Order, encouraging ongoing use beyond the lockdowns. We view this as an accelerator for our growth. We're also actively investing to make Mail-Order more consumer-friendly, which includes improving digital platforms and delivery times to meet customer expectations. Our aim is to increase Mail-Order penetration in our current business. This high penetration is the result of a focused effort from our management team, our service centers, and our relationships with providers and Specialty pharmacy areas to consistently highlight the benefits of Mail-Order. This ongoing engagement has significantly contributed to our ability to raise penetration rates, making our performance superior compared to the industry average.

Thank you.

Hi, good morning. Thanks for taking my question. I wanted to ask about telehealth, Bruce, you've mentioned it a couple of times during the call. How has Humana incentivized telehealth? How are you looking at it as a facilitator to know whether it's the primary care effort that you're putting forth home health and extension there, yes, I'm just wondering where are you using it aggressively and how are you incentivizing and reimbursing its use?

We're strong advocates for telehealth because it provides convenience for our members and engages them actively, particularly those who are vulnerable and face transportation challenges. In terms of incentivizing telehealth, we're focusing on two main strategies. First, we've maintained the zero copay for telehealth services this year and will continue to do so. Additionally, we ensure that providers receive the same compensation for in-person visits as they do for telehealth visits. These steps have been instrumental in lowering barriers and encouraging the use of telehealth. We have several strategies in place. One involves assisting providers who lack telehealth capabilities by offering them technology to implement it. This is a minor need for external providers as they familiarize themselves with telehealth. Our internal providers are equipped with advanced telehealth platforms to enhance their outreach. Lastly, we are collaborating with hospital systems, particularly in specialized areas where there may be a shortage of specialists in certain markets, to provide convenient access in local communities. Our goal is to support both members and providers, with a strong focus on partnering with hospital systems to extend specialty care to remote areas.

Can I clarify real quickly, is that reimbursement a parody? Is that in your commercial book as well as Medicare?

I don't know if we're different. Amy, are we giving the different payment by the different divisions? I don't think we're providing that. I would just say in general. I know in general we're providing, but I wouldn't want to get into the specifics too.

Okay. Thank you.

Welcome.

Hi, good morning. Thanks for all the color. I just want to maybe just go back big picture just for a second. Brian you had talked about a lot of the MRA COVID-related headwinds normalizing as you move into 2022 using the 2150 as a jumping-off point. So when we think about 2022 given, we've got an early and known final rate notice above historic rate increase. Is there any reason from this distance that we shouldn't be thinking about the long-term 11% to 15% growth, also that 2150 in 2022?

I really don't want to provide guidance for 2022 on this call. At a high level, our goal is to achieve 11% to 15% growth, which is our long-term growth rate. There have been times when we exceeded this rate and times when we fell below it. Our aim is to reach that 11% to 15%. However, we always need to consider the facts and circumstances at the time we set our pricing.

Right, understood. I know it's way off just thinking about from where we are at this distance, but I appreciate the comment. Thanks.

Welcome.

Yes. Thanks for taking the question. I just wanted to follow-up about telehealth. I think in the prepared comments, you spoke about how documentation with using telehealth creates some uncertainty around coding. I think later on Bruce you've talked about the number one issue is trying to get people back into the healthcare system itself. It sounds like is there a disconnect then that when telehealth is used to accurately kind of code people to understand sort of their actual health status and is that a fundamental problem with the way telehealth is being deployed? I know on just the previous question you talked about how you're trying to incentivize your or all providers to use it. Is this an integration issue or is this an issue itself that how telehealth is being deployed?

It's really more on the member side. What we find first telehealth, if you use the audio and video today can support documentation. So that is possible and regulatorily came into place the latter part of last year. It is a way to be able to bring documentation. The problem is that what we see is once there's, when someone uses telehealth, they then use it more frequently. So, we see a significant use of telehealth, but the members that are using it are more contained, I should say are more refined. It's not across all our membership. So we could see a significant increase in telehealth but that increase in telehealth will be over confined membership base, as opposed to across our broader membership base. That's where we see a lot of work needs to be done is to be able to broadcast telehealth for broader membership base as opposed to the narrower membership base that it has today.

Yes, if I could follow up, does that mean when you talked earlier about going into 2021, you're uncertain whether the documentation you're receiving regarding telehealth usage will continue at that level?

Telehealth is being used, we're receiving documentation from on those members. The next visit could be a telehealth visit. Therefore, it's not going to improve our documentation any better. We would love to see another member that isn't documented as being able to receive telehealth, but they're not comfortable with using telehealth for whatever reasons attributed to. So, our penetration is more in a narrow our membership base and we are working hard to broaden that, but there are a lot of barriers that require that whether it's access to the technology itself, or the ability to educate people on how to use telehealth. That really is what's that's indeed the barriers, because it is narrowing the membership that we only are penetrating the smaller membership for documentation.

Great, thank you.

Welcome.

Well, thanks everyone. Again, we continue to thank you for your support and especially in this time of complexity and through the pandemic and through 2021. As you can see the organization is performing quite well at all levels strategically from our consumer point of view and our financial performance. Thank you to our 50,000 employees that have been dedicated to really delivering these results on behalf of all our constituencies. Thank you again, and I hope everyone is safe and have a great day.