Humana Inc (HUM) — Q3 2021 Earnings Call Transcript

Thank you, and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer, and Susan Diamond, Chief Financial Officer, will discuss our third-quarter 2021 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. Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan 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 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 and other filings with the Securities and Exchange Commission. In our Third Quarter 2021 earnings press release, as they relate to forward-looking statements, and to note in particular that forward-looking statements could be impacted by risks related to the spread 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 website. All 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 reconciliation 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, Lisa. And good morning and thank you for joining us. Today we reported adjusted earnings per share of $4.83 for the third quarter of 2021, slightly above consensus estimates. Our year-to-date results reflect the strength of our core operations as we continue to see strong underlying fundamentals across all lines of business. We have remained focused on ensuring our members receive the right care at the right time, despite the continued disruption caused by the pandemic. While our underlying fundamentals are strong, 2021 financial results have been impacted by the ongoing pandemic, which has resulted in an adjustment to our full-year adjusted EPS guidance. As detailed in our earnings press release, we have updated our guidance to approximately $20.50 from our previous guidance of $21.25 to $21.75. This reduction of approximately $1 in adjusted EPS is a direct result of COVID and corresponds to our current expectation that the total Medicare Advantage utilization, inclusive of COVID costs, will run 1% below baseline in the fourth quarter, which is 150 basis points less than our previous assumption of 2.5% below baseline. This update reflects a more conservative posture going into the final months of the year, and notably, $21.50 remains the baseline on which to grow for 2022. As a reminder, prior to this guidance update, we had not recognized a COVID headwind in our 2021 guidance, as many of our peers did. Our adjusted EPS guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth. This update results in an expected adjusted EPS growth at the lower end of our long-term range, and importantly, it is not reflective of any concerns with our core operations. I will now turn to our operational and strategic update. Our Medicare Advantage individual above-market growth in 2021 of 11% can be partially attributed to our industry-leading quality and consumer satisfaction scores. We are pleased to be recognized by CMS for having 97% of our members in 4-star or higher-rated contracts for 2022. We also increased the number of contracts that received a 5-star rating from 1 contract in 2021 to 4 contracts in 2022, the most in our history. We are also excited to highlight that adjustments made by CMS to the 2022 star ratings due to the potential impact of the COVID-19 pandemic had minimal impact on our ratings. This further demonstrates our enterprise-wide focus on quality, clinical outcomes, and best-in-class customer service, which has been recognized by notable organizations such as Forrester, JD Power, and USAA. Looking ahead to 2022, we are pleased to be able to provide stable or enhanced benefits for the majority of our Medicare Advantage members, offering plans that support members' whole health needs while continuing to deliver the human care our members have come to expect from us. Our strong clinical and quality programs drive improved clinical outcomes and cost savings that allow our Medicare Advantage plans to continue to expand member benefits on those covered by fee-for-service Medicare. Our plans include highly valuable extra benefits, including dental, vision, hearing, and an over-the-counter medication allowance, transportation support, fitness program memberships, and home delivered meals following an inpatient hospital stay. Over the last few years, we've made great progress in addressing social determinants of health and health equity by expanding our Medicare Advantage benefits. Examples of those impactful areas include, respite care, distributing 1.5 million meals during COVID, sending fans to seniors with COPD during a heat wave, and providing support for financial need impacting a senior’s health and well-being. Given the increasing demand for health equity across America, we have aggressively expanded our efforts to address it. We continue to advance our consumer segmentation efforts, developing plans that are tailored to the unique needs of specific member populations. We have seen disproportionate growth in our D-SNP plans designed for dual-eligible members, where we have grown our membership approximately 40% in both 2022 and 2021. We've expanded our D-SNP offerings for 2022 to cover nearly 65% of the dual eligible population nationally. To reduce food insecurity, 97% of our members enrolled in our D-SNP plans will have a healthy foods card, which provides a monthly allowance to purchase approved food and beverages at various national chains. New for 2022, many of our D-SNP members will have reduced Part D drug co-pays as a result of the D-SNP prescription drug savings benefit, which will help address the financial barriers some members face when accessing needed prescriptions, leading to better medication adherence, an important driver of overall health outcomes. As previously shared, we took a more conservative approach to our 2022 bids, recognizing the continued uncertainty associated with COVID-19 and potential impacts to premium and claims assumptions, allowing us to prioritize long-term benefits stability for our members. While it is early in the selling season, we believe we struck the right balance and are competitively positioned for continued growth in Medicare Advantage. Our brand promise to deliver human care resonates with seniors, given our comprehensive set of offerings and focus on providing a patient-centric experience based on their specific needs. Susan will provide more detailed 2022 commentary in our remarks, including high-level EPS and membership guidance. I now would like to highlight the continued progress of our strategy through the build-out of our healthcare service platform, starting with our primary care business and then moving to our growing home solutions offerings. We have the largest senior-focused, value-based primary care organization in the country, which by year-end will include approximately 200 clinics serving 300 thousand patients across 24 markets in 9 states. We are accelerating organic and inorganic growth nationally and plan to open a total of 30 DeNova senior-focused centers in 2022, up from 24 in 2021. This faster pace of expansion comes as we continue to gain conviction in our DeNova center model with panel growth in centers launched in 2020 and 2021 exceeding plan, and clinical performance in our more mature markets continuing to improve. In our more mature centers, hospitalizations and ER visits are down 12% year-to-date versus 2019 pre-COVID levels, with star performance tracking to 4.5 stars and an NPS score of 90. We will also continue to expand through inorganic growth, completing seven acquisitions through the third quarter of this year, bringing 21 newly wholly-owned centers to our portfolio. We plan to continue this pace of acquisitions focused on markets where we have established presence to provide more access and high-quality care to our patients. Turning to the home, we completed the acquisition of Kindred at Home in the third quarter, making us the largest home health and hospice organization in the nation. As previously shared, we will be migrating Kindred at Home to Humana's payer agnostic healthcare service brand CenterWell. Our efforts to transform home health to a value-based model come at a pivotal time for the industry, as seniors increasingly choose Medicare Advantage. There is a meaningful opportunity for home health organizations to engage differently with patients in Medicare Advantage payers, to more holistically address patient needs and improve health outcomes, reduce the total cost of care for health plans, and share appropriately in this value creation. We've made substantial progress towards our goal of scaling and maturing a risk-bearing, value-based model that manages the provision of home health, durable medical equipment, and home infusion services. With the acquisition of One Home earlier in 2021, a delegated post-acute management services organization for the home, we have the capabilities to be a value-based convener, providing risk-based contracting and referral management. We continue to develop technology enabling us to coordinate with other adjacent services, which include gap-in-care closure, primary or emergent care in the home, as well as coordination of meals, transportation, and other services to positively support social determinants of health. We currently care for approximately 270,000 Humana members under our value-based home care models in South Florida and Southeast Texas, where we have seen improved outcomes, including emergency room utilization, being 100 basis points better than Humana's national average. We are now focused on expanding to select markets in North Carolina and Virginia, which we've chosen based on multiple criteria, including market density, opportunities to significantly reduce home care expenses, and a robust Kindred at Home footprint. We expect to begin the rollout in the second quarter of 2022 with the goal of covering nearly 50% of Humana Medicare Advantage members under this value-based home health model within the next five years. We are excited about the continued progress of our strategy in the home. However, consistent with our home health peers, we recognize that the national nursing labor shortage poses a significant risk to the industry. We are taking proactive steps to address it as part of our well-developed integration process with Kindred at Home. In some markets, the nursing shortages have resulted in inadequate capacity to meet demand, negatively impacting our ability to grow the top line. We believe that Humana's CenterWell brands, supported by our patient-centric culture, will bolster recruiting and retention efforts for nurses. We've seen increased nurse satisfaction and engagement in pilot markets, where we have deployed value-based concepts with voluntary turnover and nursing turnover improving nearly 10% among home health nurses in 2021. In addition to ensuring sufficient capacity to meet our growth goals, we are implementing broader operational improvements and benefit enhancements while also making targeted investments in capacity-constrained areas to enhance nurse recruiting and retention. With respect to hospice, our intent remains to ultimately divest a majority interest in this portion of the asset. Our experience has demonstrated that we can deliver desired experiences and outcomes for patients transitioning from restorative care to hospice through partnership models. Since we closed the transaction in August, we have continued to explore alternatives for the long-term ownership structure for the business and have initiated steps to reorganize the hospice business for standalone operations, also ensuring business continuity and monitoring underlying trends. We do not have a further update on the specific transaction structure or expected transaction timing, but we will provide additional updates as appropriate moving forward. Given the continued expansion of interest in our healthcare service platform, we are committed to providing additional disclosure to give further transparency into the performance of these businesses, beginning with our first quarter 2022 reporting. Before closing, I want to touch on the current regulatory and legislative landscape. As you know, last week the White House and congressional leaders released their plan, known as Build Back Better, which includes several proposed changes to the Medicare program, including establishing hearing benefits starting in calendar year 2024, which will be included in the Medicare Advantage benchmark. Given that today more than 40% of Medicare beneficiaries, over 27 million seniors, and those with disabilities are enrolled in Medicare Advantage, we were encouraged to see that the package did not include any payment reductions to the program. As this legislation continues to advance and likely be modified, and as we look ahead to the annual CMS call letter and rate notice period, we will continue to work with policymakers and the Biden administration to further improve Medicare Advantage. Building on the programs, innovation, and significant progress in areas like value-based care, social determinants of health, affordability, and financial protection for beneficiaries, as well as reducing the total cost of care. These attributes, along with the deep consumer popularity of Medicare Advantage, have enabled it to have strong bipartisan support with hundreds of members of Congress on record supporting the program. As Medicare Advantage serves as a leading example of a successful public-private partnership, I am optimistic we can continue to lead on important healthcare issues facing both individuals and society, including addressing health equity and improving health outcomes, and expanding value-based care.

Thank you, Bruce. And good morning, everyone. Today, we reported adjusted EPS of $4.83 for the third quarter and updated full-year 2021 adjusted EPS guidance to approximately $20.50 to reflect a net unmitigated COVID headwind resulting from our current view of utilization levels for the balance of the year. Before beginning, I would point you to Page 4 of our earnings press release for details of our previous assumptions for Medicare Advantage utilization in the second half of the year, actual third-quarter utilization results, as well as current projections for the fourth quarter. I will now walk you through these details, starting with a reminder of our previous commentary. As of our second quarter call, full-year guidance had indicated that non-COVID Medicare Advantage utilization would run 2.5% below baseline in the second half of the year, with a further assumption of minimal COVID testing and treatment costs for the same period. In September 2021, as a result of the surge in COVID cases due to the Delta variant, we updated our commentary on full-year guidance to indicate that we expected non-COVID Medicare Advantage utilization to be 5.5% below baseline in the back half of the year, while being partially offset by 3% of COVID costs. Therefore, we had anticipated total utilization would be 2.5% below baseline in the back half of 2021. What we've seen develop for the third quarter is that total utilization is running 1% below baseline versus the previously anticipated 2.5%. COVID costs have been higher than initially anticipated as the Delta variant resulted in hospitalization levels on par with what we experienced in January of 2021 and was overwhelmingly driven by the 20% of our Medicare Advantage members believed to be unvaccinated. These higher-than-expected COVID costs were fully offset by the press non-COVID utilization in the quarter. As COVID hospitalizations increased or decreased, we continued to see an approximate one-to-one offset in non-COVID hospitalization levels. We also continue to see significantly reduced non-inpatient utilization when surges occur, offsetting the higher average cost of a COVID admission. However, for the third quarter, in total, we saw a 1% incremental reduction in utilization beyond the level needed to offset COVID costs versus the 2.5% contemplated in our previous guidance. As a result, we have adjusted our full-year guidance to now reflect the fourth quarter running similarly, with total Medicare Advantage utilization running 1% below baseline, inclusive of estimated COVID costs, consistent with what we experienced in the third quarter. We realized higher than expected positive current period claims development in Medicare Advantage in the third quarter, as well as other operating outperformance, largely mitigating the lower than anticipated depressed Medicare Advantage utilization, allowing us to report results that were slightly favorable to street estimates. Our revised guidance does not assume that the higher levels of favorable current period development seen in the third quarter will continue. Taken together, our updated full-year 2021 adjusted EPS guidance reflects a more conservative posture going into the final months of 2021. It's important to note, as we've consistently shared throughout the year, the midpoint of our original guidance range of $21.50 remains the correct baseline for 2022, given our approach to pricing. I will now briefly touch on operating results across our segments before sharing early thoughts on 2022 performance. Our Medicare Advantage growth remains on track and consistent with previous expectations. We have refined our full-year individual Medicare Advantage membership guidance to up approximately 450,000 members, consistent with the midpoint of our previous guidance of up 425,000 to 475,000 members. This outlook represents above-market growth with an increase of 11.4% year-over-year. Our Medicaid results continued to exceed initial expectations due to higher-than-anticipated membership increases, largely attributable to the extension of the public health emergency. We now expect to add 125,000 to 150,000 Medicaid members in 2021, up from our previous expectation of adding over 100,000 to 125,000 members. Utilization trends continue to be favorable relative to initial expectations and the Medicaid team is working diligently toward a successful implementation in Ohio, with go-live anticipated in July. In our Group and Specialty segment, fully insured medical results were impacted by higher-than-expected COVID costs in the quarter, while our Specialty business results continued to exceed expectations as utilization, particularly for dental services, remained lower than previously anticipated. Recall that our guidance as of the second quarter did not contemplate significant COVID costs in the back half of the year, and the commercial business is not seeing the same level of utilization offset experienced in Medicare Advantage. From a membership perspective, we have increased our expected group medical membership losses from 100,000 to 125,000, reflecting the expectation of additional losses in the fourth quarter as a result of rating actions taken to account for the expected impact of COVID in 2022. Finally, within our Healthcare Services Operations, the pharmacy and provider businesses continue to perform slightly better than expected, with pharmacy benefiting from increased mail-order penetration as a result of customer experience improvements and marketing campaigns. The provider business is seeing continued operating improvements in our more mature centers, which are now aligned under the same leadership in our DeNova centers. As Bruce mentioned in his remarks, we are actively integrating the Kindred at Home operations, and results post-integration have largely been in line with expectations. Similar to our home health and hospice peers, the business is being impacted by COVID and labor shortages. For the third quarter, home health admissions grew low single digits year-over-year, while hospice experienced a low single-digit decline year-over-year. We will continue to closely monitor trends as we make targeted investments to sustainably improve the recruitment and retention of nurses. Now let me take a few moments to share an early outlook for 2022, starting with membership. As you're aware, the overall PDP market continues to decline as more and more beneficiaries, including those who are dual-eligible, switch to Medicare Advantage. In addition, as we have discussed previously, PDP plans are becoming commodities, with the low-price leader capturing disproportionate growth. Consistent with 2021, the Walmart value plan will offer competitive benefits that will not be the low premium leader in 2022. As a result, we expect a net decline in PDP memberships of a few hundred thousand members in 2022. We continue to focus on creating enterprise value for our PDP plans by driving increased mail-order penetration and conversions to Medicare Advantage. With respect to Group Medicare Advantage, we expect membership to be generally flat for 2022, as we do not anticipate any large accounts will be gained or lost as we continue to maintain pricing discipline in a highly competitive market. Moving to individual Medicare Advantage, as previously shared, we took a more conservative approach to our 2022 bids, reflecting the continued uncertainty associated with the pandemic. We expect to grow our individual Medicare Advantage membership in a range of 325,000 to 375,000 members in 2022, approximately 8% year-over-year, reflective of our prudent approach to pricing and the competitive nature of the market. It is early in the AEP selling season and the outlook we're providing today could change depending on how sales and voluntary disenrollment ultimately come in. Consistent with prior years, we have very little member disenrollment data at this point in the AEP cycle. I will now turn to our expected 2022 financial performance. As previously mentioned, I want to reiterate that the $21.50 midpoint of our original 2021 guidance continues to be the appropriate jumping-off point for 2022 adjusted EPS growth, given our approach to pricing. In addition, we feel comfortable that the risk adjustment assumptions in our 2022 pricing are appropriate, as providers have been actively engaging with our members to ensure their conditions are fully documented and that care plans are established to address their overall health needs. Provider interactions and the documentation of clinical diagnoses that we anticipate will impact 2022 revenue are approximately 92% complete to date, in line with both our expectations for 2021, as well as the estimated completion rate for the same time period in 2019. We also assume medical costs would return to baseline levels reflective of pre-COVID historical trending. From an earnings perspective, we believe the conservative approach we took to 2022 pricing strikes the appropriate balance between membership and earnings growth. Given the ongoing uncertainty surrounding the COVID-19 pandemic, we expect to enter the year with an appropriately conservative view of our initial 2022 financial outlook. Accordingly, we anticipate that our initial EPS guidance will target the low end of our long-term growth range of 11% to 15%. We expect COVID will be neutral to the Medicare business in 2022, as we do not anticipate risk-adjustment headwinds and expect COVID utilization to be offset by reductions in non-COVID utilization. However, our initial guidance will allow for an explicit COVID-related headwind that we can tolerate should it emerge, similar to the approach some of our peers took in 2021. We believe entering the year with this more conservative approach is prudent in the current environment and sets the company up for success in 2022. We look forward to providing more specific guidance 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 yourselves to one question. Operator, please introduce the first caller.

Alright, great. Thank you. I appreciate all the color on the 2022 guidance. I think a lot of people are just wondering. The Company had a hard time forecasting where costs are going to be on the upcoming quarter for the last few quarters, obviously to some degree understandable during the pandemic. But just wanted to see how you felt about your visibility into costs and how good of a handle you feel like that cost trend as you develop your pricing for next year.

Sure, Kevin. I'm happy to take that one. To your point, estimating the impact of COVID has proven to be more challenging, particularly given that the environment we were in 2020 is quite different from what we're experiencing obviously in 2021. In 2020, no one was vaccinated, various tastes of lockdowns throughout the year, and as we acknowledged in our Q2 call, anticipating how behavior might emerge in an environment where largely people were back to normal and a large percentage of our Medicare population are vaccinated, it was recognized that it was difficult to anticipate whether we would see the same level of offset through the surge. The good news is, as we saw the surge emerge in the third quarter, despite it being just as high as what we experienced the last time, we did continue to see a full offset. The hospitalization offsets have been pretty consistent throughout 2020 and 2021, but it's on the non-inpatient side where we tend to see more variation. Having said that, we've studied all of the historical patterns based on what we saw in the third quarter and our estimates of the continued decline in the COVID curve in the fourth quarter. We feel very comfortable with the assumptions underlying our revised guidance and feel like we have sufficient visibility to feel confident we can deliver against that. Your question about 2022 is a good one, as we've explained in all of our calls, given this late surge in 2021, getting visibility to where baseline trend is actually running will be more challenging. However, given how we approach the pricing for 2022, meaning that we've started with pre-COVID historical levels and assumed historical trending factors, not anticipating any ongoing depressed utilization into 2022, we feel confident that that's an appropriate baseline expectation. So, we'll continue to watch it. And certainly, if we see something different emerge, if any of the depression continues, that would be positive for us, but we are not contemplating it, which is what gives us confidence about our approach to 2022.

Okay. Thanks.

Yeah, so I was just hoping that you could maybe comment on the competition in Medicare Advantage. I know you said it's competitive but just relatively speaking, we've seen geographic expansions by really almost all of the major public companies over the last few years and a number of new entrants, and yet it doesn't seem like it's had a noticeable impact on profit margins. I guess I'm just wondering how you see the dynamic. Is the greater availability of products actually, in essence, expanding the Medicare advantage market more than it's necessarily leading to competition that would push down margins? Thank you.

Yeah, Matt, I think I'll take that. What we see is a few things, I mean, first, we do see more and more intensity in the local markets. And similar to in the past, we see some players being more aggressive to try to gain market share, while others are a little more aligned with the pricing that is leading to a little more stability in the market quest. So, we do see a bell curve in just how people are approaching it as their strategic plans push them to make those decisions. We are seeing more awareness in the marketplace as a result of the amount of education that's going on through marketing and through sales efforts that are going on. I think that is a positive for the industry because it really highlights all the benefits that members receive and creates more competitive major for those members while encouraging overall industry growth. For us, as an organization, we were one of the early adopters of the telemarket market in the tail of sales era and we have benefited from that in multiple different ways, particularly in terms of both our market growth and the ability to reach a population that we haven't been able to reach in the past. So I do think it's beneficial for us. But to answer your question, it is definitely competitive in the local market, and I feel that we have been a beneficiary of that.

One thing I would add to that is that our focus on increasing mentions in any comments or consumer segmentation efforts is designed to create products that more specifically address consumer needs. You've seen that in our duals offerings as well as our veteran offerings, that we can direct proportionate growth. If you think that's a differentiator, something you'll see us continue to focus on.

Thank you.

Yeah. Hi, thanks for the question. I was hoping to come back to the commentary on assuming baseline utilization in 2022. Just to clarify, it seems pretty clear that there will be some level of ongoing COVID costs into 2022, so does that mean you're continuing to assume non-COVID costs will be below baseline in 2022? And then just any color or context you can provide on the magnitude of this EPS hedge that you're talking about in relation to baseline would be appreciated. Thanks.

Sure. Great question. Just to be clear, what we're expecting is that to the degree we experience additional COVID costs in 2022, we would see an offsetting decrease in non-COVID utilization, but the net of that would be neutral. We're not expecting net favorability like we've seen this year. That 1% we're projecting for the fourth quarter is consistent with what we have seen in the other quarters. So, what we would say is we expect the non-COVID costs to be offset. Our initial guidance will explicitly allow for the emergence of any headwinds from COVID in that guidance. While not providing a specific amount today, when we offer guidance on our fourth-quarter call, we will be explicit about how much of a COVID headwind we can tolerate within the guide.

Yeah, Hi. Good morning. So, one follow-up and then a longer-term question. Just to understand, Susan, if we think about 80% of your MA members are vaccinated based on your estimate. I just feel like it's trying to reconcile what you're saying versus what some of your peers are saying. What do you think happened that drove COVID hospitalization to the levels experienced back in January? Was that sort of a specific geography or anything else that you can explain it? And then the longer-term question is really around sort of virtual. Many of your peers launched a virtual-first offering on the commercial side for 2022. Do you see room for some virtual-first type offering in the Medicare population, especially when you consider the Kindred capabilities?

Okay, great. So, to take your question, with respect to the high COVID levels, you are right, and honestly, this was something that was a bit surprising to us as well, and we did see levels on par with what we experienced in the last surge despite the high vaccination rates. What we learned, and to your point, some of that was a reflection of our geographic mix. States like Florida, Texas, and Louisiana did see higher levels than even the previous surge. It represents a new all-time high, and we have a disproportionate share there. So, that was part of it. But the main driver is that if we look at the hospitalization rate between vaccinated and unvaccinated, the unvaccinated consistently saw a hospitalization rate that was 10 or more times that of the vaccinated population. And so that, again, as I mentioned in my comments, was the overwhelming driver. Because of the spread of the Delta variant through that unvaccinated population and that much higher hospitalization rate, that is what drove the levels on par with what we saw historically. To your second question about virtual-first and Medicare, we were pleased with the COVID response and I could see that primary care providers and specialists really did adopt telemedicine at a higher rate to ensure that they could continue to support their patients and their permitted needs. I think, as a result of that, frankly, providers gained a better appreciation of the range of care and the quality of care that they can provide through virtual offerings, which frankly pre-pandemic they really had not been adopting. So, I think we will see some continued use of virtual technology to enhance the operating model and allow for more touch points with patients than we did pre-pandemic. Your question about home health is definitely a good one and something we are looking at, particularly with the challenges we have in terms of nursing labor shortages. Virtual is one strategy we're looking at to see how it can be leveraged so we can create more touch points with the patient and improve the efficiency of the operating model to just create more overall capacity. We will be testing with Kindred appropriate uses of that, and where we can implement it and still see the high-quality outcomes that we would expect. So, we'll be testing that and I hope you will see expansion of that in the future.

Just a few other comments to that. We did launch our virtual-first product with Doctor On Demand a few years ago and that was successful for us on the commercial side. But on the Medicare side, what we find is that there's a great opportunity to see the patient both to understand the patient in a physical setting and to treat them. Unlike a more episodic care for chronic care management, it is important to have physical interaction established. We see telehealth as an opportunity to have a complementary interaction. But I don't know if it would be a replacement, or if we would want to motivate our chronic members to have a virtual-first interaction for a whole host of reasons, both from a care point of view and our ability to establish the proper care plan.

Thank you, guys. Good morning. Wanted to ask about the short-term. So just the assumption that non-COVID utilization will be down in Q4. I'm just curious, are you seeing script trends, pure authorizations, or anything that would indicate that level of decline in light of what seems to be an abatement in COVID cases currently? And then specifically, are you seeing any different trends with members that are in your centers, or with other value-based providers? Are the underlying trends differing underneath that capitation?

Go out there and dial.

Hi, Josh. Are you there?

Yeah. Can you guys hear me okay?

We can hear you.

Your question must have been so insightful that it just dropped off the line.

I thought I was so scary that you ran for it. So, I'll ask my question again, sorry. Just in the very, very short term, my question is: Why are you assuming that non-COVID utilization will be down as much as 4% in Q4, especially in light of what we're seeing in terms of the big reduction in COVID costs and COVID cases in the fourth quarter? Are there script trends or pre-authorizations, or anything that would indicate that level of decline that you're seeing today? And then long or sort of adjacent to that, are you seeing different trends with members that are in your centers or even with other value-based providers, are the underlying trends different underneath the capitation?

We will focus on the fourth quarter. As previously stated, we have analyzed past surges to identify emerging patterns. You may remember from our earlier discussions that following a surge, we often see decreased utilization. When moving away from a peak, it allows us to recover the costs associated with the COVID fee. Interestingly, different states have experienced varying levels of utilization compared to previous surges. For instance, Texas and Florida had very high peaks followed by quick declines, while states like New York and Michigan have shown more moderate and gradual increases without a corresponding sharp drop. Overall, the national trend is less pronounced than in the past. We have examined each state and consistently see a direct offset despite differences in peak levels. We believe there is an overall constraint in capacity, particularly on the inpatient side, along with changes in provider and patient behavior. Based on observed patterns and predicting the third quarter with a 1% offset, we believe it is reasonable to expect a similar level of offset as we move away from the third-quarter peak. Regarding early indicators, we have reliable real-time data on inpatient activity, which remains stable. As COVID utilization decreases, we anticipate a corresponding increase in non-COVID hospitalizations, which has been consistently observed. We will keep monitoring non-inpatient metrics, but based on current evidence, we believe this assumption is valid.

They see COVID costs, but not be offset, you're saying?

Correct. Now, on the flip side of that, they tend to do better on a revenue basis than our non-risk spare than they performed there, which means they are much better at making sure they got their patients in 2020 and got their conditions documented. So on the revenue side, they will likely make some of that up. But on the utilization side, the typical way you are saying they are not seeing a benefit.

Thanks, and thanks for taking my call. In thinking about 2022, appreciate all the color, but I just wanted to know if there are any other sort of one-time things we should be thinking about, any other headwinds or tailwinds whether it comes to investments or benefits that you might be making that could impact the EPS growth for the year.

So, I would say, obviously as we mentioned, COVID is the main one that we continue to evaluate. We've been clear that based on history, we think it would be an offset, but we will take a more conservative initial approach and allow for a headwind, should it emerge. And that really reflects the fact that, again, the environment continues to shift the level of vaccination, which we expect will continue to increase. But there's also the introduction of the need for boosters, and so will people be as compliant with boosters as they were in the initial vaccine? We will be tracking variants and all of those things that we will continue to monitor.

Can I just maybe follow-up? Is the guidance inclusive or exclusive of the incremental headwind that you're discussing here? Meaning, like, is this sort of low-end or 11% net of the headwinds or not? I'm a little confused on how I should think about that.

Yes. With what we go out in our initial guide, it will explicitly contemplate a net headwind, should it emerge. There will be no net impact beyond our guide, so it is inclusive of that. If it does not emerge, then you would see that conservativeness release throughout the year, but it will contemplate a potential headwind within the guidance.

Got it. That's really helpful. Thanks so much.

You're welcome.

Hi. Good morning. Just wanted to ask another question just on the Medicare Advantage annual enrollment period. I know you already talked about the competitive dynamics. Just interested in terms of what you're seeing on the consumer behavior side, and in particular, just whether you're seeing any types of shifts in distribution channels in terms of where more of the sales are occurring or not. I just think about, obviously, 2021 was an unusual year for the AEP as it was playing out amidst COVID. So interesting whether you're seeing more of a continuation of that 2021 type dynamic, in terms of consumer buying practices or whether we're seeing more of a blended, post-pandemic and pre-pandemic dynamic for 2022.

Yeah, Scott, thanks for the question. We are continuing to see an increasing use of the telephonic channel external to our external partners. As Matt had asked about, just on the competitive side, their marketing and aggressiveness in the marketplace is driving more individuals toward that channel. As I mentioned, it is a benefit for the industry because it significantly raises awareness and education. I do feel that we are experiencing a continuation of that trend, just as we saw in the 2020 AEP.

Thank you. Next question please.

Thanks. Morning. Sorry to come back to this, but I guess what does the $21.50 baseline incorporate at this time? Is it what you would've earned with normal utilization and no COVID in it? Is it some level of COVID but lower than normal core? I guess, I'm really just trying to understand what the $21.50 represents.

Yeah, so $21.50 is the midpoint of our original guide. If you remember, we approached earnings for that, a bit differently than many of our peers in that we had not contemplated a net COVID headwind. So, that initial guide and midpoint were actually above our more typical long-term growth range, recognizing some of the tailwinds that supported our pricing towards 2021. So, by reaffirming that as the appropriate baseline reinforces, we continue to approach our 2022 pricing, acknowledging that despite whatever the results emerged in 2021 that our revenue instances would have seen that Medicare risk-adjustment return to more normalized levels for 2022, and that claims also returned to more normalized levels as if COVID had never occurred. And so again, for claims, we started with pre-pandemic levels in 2019 and using historical trend factors trended that forward. That's why we continue to reinforce, given that approach, $21.50 is the appropriate jumping-off point from which we would grow and expect to be in our long-term range for 2022, recognizing however, from an initial guide perspective, we do intend to take a more conservative approach to ensure we are set up for success and target the lower end of that range.

Okay. All right, fair enough. Thank you.

Thanks. First had a quick numbers question. We're going into next year; Medicare Advantage yields probably be in the high single digits in the individual business. Just given the strong rates in the bounce back and risk scores offset, I guess, by a bit of sequestration. Is that a reasonable number? And then Bruce, can you tell us how to think about where you think the growth opportunity is within your positioning management kind of center business? I know you said you're adding 30. I know also that your peers have had a sizable number in the end of 2022, and you have to think about how to finance those again going forward. So how many do you think you could add post-2022? And how do you think you've financed these things going forward?

Sure. So, I think the first question, I can't comment specifically on the premium yield in 2022 yet. So we haven't provided detailed guidance points. But certainly, as you think about the premium yield in 2022, there are some tailwinds, as you mentioned, favorable rate notice as well as the expectations that risk-adjusted returns will be normalized. The typical dynamics would suggest management growth should provide tailwinds. But at this point, we haven't given specific guidance on premium.

And in terms of the primary care out of the two questions on the growth side. I think first, obviously adding the number of organic units in the earlier years creates a drag as they mature. We're seeing some great maturations in the cohorts that have been opened a year or two, both in terms of membership and in terms of revenue, in addition to the cost side. So we feel very confident that that's one of the reasons why we increased the number of cohorts this year, as a result of our confidence in the business outcome. While we see over longer periods of time, as we call it the J-curve, we expect to see our earlier openings begin to become profitable, so if you were to shut off the development, we see a pretty quick growth rate within the existing business. We are extending that by two other opportunities for growth. One is the existing operations of the businesses that have been open for a while and the mature centers are continuing to improve that. This doesn't show up in profitability because of the J-curve, but we are seeing some great improvements there, both operationally and in terms of patient experience. The third area of growth for us as an organization is really in the acquisition area. As many of you know, we have relationships with a number of providers, especially in our more mature markets, that we have the right of first refusal, which offers us an advantage in being able to continue to densify markets that we’re in and add additional sites. We did that in 2021, and we anticipate doing that in 2022. These are very synergistic inorganic opportunities from the standpoint that we're able to evolve the management of it into our existing management team. We are able to, in addition, bring some of our operating capabilities to those centers. So, really three areas continue to advance our J-curve and what we see there. The more mature centers will continue to improve. And then third, the inorganic growth and being able to leverage in some of the markets we have. I think over a period of time, over a 5 to 7-year period, we're expecting to see a fairly sizable business come out of this as a result of the investments we're making today on both the organic and inorganic side. Really, today, we have the largest clinic-oriented senior business and anticipate maintaining that leadership long term. Regarding financing, we haven't come up with a structure yet, and I think that will be an active conversation with investors in probably the second quarter of 2022. We will come back to the investors and discuss how we will finance another cohort or number of clinics for the foreseeable future. We have enough capital to invest from our off-balance sheet financing to cover our 2022 openings, and this doesn't cause any slowdown to our openings. But we are looking at all the different alternatives for financing in the most cost-effective strategy for our shareholders as we think about the future.

Thank you. Good morning. There's been a lot of discussion about Medicare Advantage. I'd like to ask about the pace of your county expansion. You already operate in more counties than anyone else, and it seems some of your larger competitors are increasing their county presence by double digits for 2022. Our calculations suggest you are around mid-single digits. I’m interested in your perspective on the pace of county expansion for next year and your strategy related to that.

Sure. So, as you mentioned, Humana really was ahead of many of our peers in terms of the rate of expansion, we had a number of years ago, and so we see from an accounting perspective, the same level of growth for us as you might see for some of our peers. Particularly, there is a focus on Medicare Advantage annualizeds across several years. What you'll typically instead see from us is product expansion within our existing geographies. That could be additional dual-eligible SNP offerings as well as veteran offerings. These are great examples where we focus on product and consumer segmentation. When we do that well, it's an opportunity for disproportionate growth. So we'll continue to evaluate opportunities to do that, but again, I think you'll see more product expansion from Humana versus county exchange.

Thanks. Hi everybody. Two more, one on perspective and one more on just clarifying what you're saying about 2022. Again, I'm trying to understand, is it fair to say that the MA bids were due early in the summer? Obviously, from your perspective, at least the way it comes across, there's been a lot of developments in the back half of 2021 that may differ from what you would have said when the bids were due. Is it correct to interpret what you’re saying today that you were so conservative when you constructed those bids that even though the second half has turned out worse, you are still comfortable with the outlook? Is that the right way to interpret what you're saying? And then would you provide us some context for Kindred? I had assumed that was going to be an incremental tailwind for next year. Obviously, the home health business seems to have deteriorated a bit. Is that still a tailwind in your mind for next year and can you size how much that might help you?

Sure, I’ll take that. For your first question on the 2022 bids, let’s recall that in 2021, when we came out with our second-quarter commentary, we acknowledged the net COVID headwind that had emerged. As I mentioned a few minutes ago, we did not contemplate that explicitly in our original guidance for 2021, so while we found that emerge, we were able to mitigate some of that through other business performance measures. As we explained in the second quarter, achieving our guidance required that total utilization continued to run below baseline throughout the year. That is not what we're considering in our 2022 pricing. We assumed that we would bounce back, and so it’s really just a reflection that the challenges in 2021 are just recognizing that while we are seeing net utilization below baseline levels, it is running less than we had anticipated. Again, given how we approach the 2022 pricing, our pricing didn’t explicitly contemplate COVID costs beyond just vaccination and testing. We've consistently said we did take a more overall conservative approach to pricing, recognizing there will be uncertainty we would need to navigate through. Regarding Kindred, we’ve had questions about it a couple of times. That was one of the items that helped us address the net COVID headwind in 2021, with good integrations. We had stated so at the time of bids knowing we would be integrating Kindred, so that was accounted for in our pricing for 2022, meaning it will not represent an incremental tailwind for that year, but we certainly expect the value that we expect to create from that value-based model and continued growth from Kindred will contribute to our sustainable ability to deliver against our long-term target.

Okay. Thanks a lot.

Thanks, AJ. Next question please.

Susan, I just want to go back to your comment around PDP shift to MA. Can you talk about your ability to retain any of those members and bring them over to MA? I think you talked about losing a couple of hundred thousand lives. And then secondly, I know it's still fluid what's going on down in DC around transparency and direct negotiation on the drug pricing side. But just curious if that will have any impact or you anticipate any impact around your PBM business?

Sure. I think the first one on PDP M&A has been a priority for us for many years. What we see is our active work in keeping monitors in our new MA plans. In recent years, as we've expanded our dual-eligible SNP offerings, that increases our ability to drive those conversions because a large percentage of our PDP members are low-income dual-eligible. What we consistently see is that we generate a disproportionate share of our PDP members who ultimately choose Medicare Advantage. So, we will disproportionately capture within our Humana plans your members who ultimately determine that MA provides a better value proposition for them. As to your second question regarding the regional effectiveness, we're tracking that closely and have a framework in place. But at this point, it's still too early, so we'll have to see what final proposals come through, but any efforts toward reducing the cost of prescription drugs for our members will certainly be beneficial.

Just on that, from our standpoint, we continue to put the rebates back into pricing, so they directly go to the consumers without retaining any for ourselves. If there are opportunities to lower the cost of drugs, it will directly benefit our members and will not impact us, which is key since we pass it through.

Great, thanks. Could you provide a little more color on the Primary Care centers? And what I was interested in is looking at the centers and the patient surge. Can you describe a little bit about the composition of patients? What percent are MA versus Medicare fee-for-service? And then how many of them are employer or others? And what percent of those are in full risk contracts versus maybe stages of that? And how much of the membership or patient base is Humana membership as opposed to having other payers, thanks.

Okay. A few things. I heard that there's a lot in that question, so let me try to provide as much as I can here. The centers are built primarily for full-risk Medicare Advantage members. That's the design and recruitment structure, driven by the staffing model. As a result, the majority of them are going to be Medicare Advantage members. Now, we do have some Medicare fee-for-service members in there, and they are really oriented to how over time they can evolve to be longer-term members for us through our Medicare Advantage relationships. They are agnostic platforms, so there's a good composition of Humana members as well as those with other payers in the credit. That being said, it's really called CenterWell; it's to reinforce that agnostic nature, and we are very oriented to expanding that base among Medicare Advantage. In addition, in a few of the sites, we do have direct contracting members arising from that venture. In terms of the transition, over time, they will take full risk; it may take a bit for the initial openings to come to that end. As their panel size grows, seeing the ability to manage the risk becomes much easier through diversification. The breakeven period is between three to five years, and I'd say the earlier a year faces more challenges, while the fifth year would be more about obtaining a return on capital.

Good morning, guys. And thanks for squeezing me in. Susan, I was just wondering if you'd be willing to provide a little more color on how you're thinking about medical cost trend as it relates to 2022. To provide some granularity on how I'm thinking about the question is, is 2019 kind of the right baseline number from an MLR perspective? Then adjustments for mix because we've seen so much growth in virtual and retail care clinics. And if you've included some excess COVID headwind, but if we see a continued reversion of utilization, could we see a number that looks greater than 100% of that 2019 baseline from an MLR perspective? Are you thinking about utilization being higher offset by changing cost mix? I'm not asking for the hard number, but I would love how you're thinking about the moving pieces as it relates to medical costs.

Okay. Great. So, yes, in our '22 pricing, our approach to baseline trends was to go back to pre-COVID levels and use historical trend factors and roll that forward. Now certainly, our models have a lot of granularity, and so they will take into account any cited service adjustments we may be seeing and then our estimate of what those might be going forward. They will also look at what we've referred to as Healthcare pipeline technologies to anything else that we expect might come to market that would impact trends differently than what we've seen historically. So all of that work was done to support our 2022 pricing, and we have not changed our view of that currently. As you can imagine, there’s a lot of work being done across the enterprise to study the emergence of trends over the course of 2020 and 2021, and how we can decipher COVID impact in utilization versus reductions in baseline trend. Our historical pattern support lower core trends in forecasting may have conservatism built-in. We haven't seen that emerge in the future.

Okay. And if I could go with a quick follow-up.

Sure.

I guess my quick follow-up is just where do you feel like the flexibility is for your ability to pull levers on the cost side should medical costs run ahead so that you can deliver your earnings targets?

I think in general, we will continue to work on trend initiatives, various utilization management, and other strategies, just like any other year to work to reduce total cost of care. Some of the work we are doing with our value-based home health model, as well as using broader capabilities are examples of how we continue to work to see how we can use those capabilities to focus on patients who are disproportionately likely to see potentially avoidable hospitalization events. We will also continue to emphasize all of those themes in support of not only 2022 trend mitigation but for a long time, supporting our value proposition in Medicare Advantage at large.

Just a quick note on administrative management: we constantly monitor investments and our cost trends on the administrative side to ensure they provide the adequate cushions for us as we think about earnings.

Thanks for getting me on. And I hope I'm the last one. I had just a quick clarification question. Susan, I think you said that you would expect reserve development in the fourth quarter will come in less favorably than you experienced in the third quarter. I just wanted to make sure that I heard that right. And of the membership growth that you expect in 2022, I think 350 at the midpoint. How much of that is coming from special needs plans, duals, etc.?

Sure. To your first question on current period development, yes, you heard correctly that while we did see positive current period development in the third quarter, our guidance does not assume that the elevated levels will continue. Our forecast indicates it will reflect some level of normal quarters. In terms of the '22 growth, we haven't given detailed guidance, but I can tell you that while it's still early in the AEP, and Bruce mentioned we saw a 40% growth in 2020 and 2021. We continue to see strong growth in 2022.

Okay. I want to apologize for the technical glitches there; I think we have a problem with our leader line, and we will definitely work on that. I hope you take away from our conversation today that we have been very thoughtful and conservative as we look into the fourth quarter and as we enter into 2022. As you can see from all commentary, we reflect the uncertainty of COVID and all the aspects going into 2022. I want to thank the 90,000 associates that make this organization successful and their dedication to not only our customers but also providing our shareholders with adequate returns. Thank you for your long-term support, and have a great day.