Humana Inc (HUM) — Q4 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 fourth quarter 2021 results and our updated financial outlook for 2022. Following these prepared remarks, we will open up the line 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 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 2021 earnings press release. Before I turn the call over to Bruce Broussard.

Thank you, Lisa. Good morning and thank you for joining us. Today, Humana reported financial results for the fourth quarter of 2021 reflecting the strength of our core operations, which continued to perform well throughout 2021 despite the challenges the industry faced as a result of the pandemic. With that in mind, and as we enter a new fiscal year, I want to take a moment and speak not only to our 2021 results and our outlook for the current year, but more broadly about our strategy and the steps we're taking to position Humana for success. Susan will discuss our results and outlook in more detail in a moment. But at a high level, our 2021 results and our 2022 outlook are largely in line with recently provided guidance. Adjusted earnings per share for the full year were $20.64, which was above our previous estimate of approximately $20.50. This represents growth of 11.6% off of our 2020 baseline of $18.50 while covering a $1 unmitigated net COVID headwind. Looking forward, we provided full-year adjusted earnings per share guidance of at least $24. This represents 11.6% growth over our 2021 baseline of $21.50 and 16.3% growth from our actual adjusted EPS of $20.64. This guidance includes an embedded COVID headwind of $1. I want to emphasize that we are operating from a position of strength. I'm incredibly proud that Humana is the second largest Medicare Advantage plan provider supporting over 5 million beneficiaries with high-quality coverage. The quality of our product offering is the highest among our public peers, with over 97% of Medicare Advantage members in plans with a four-star rating or higher. We've also increased the number of contracts that received a five-star rating from one contract in 2021 to four contracts in 2022, which is the most in our history. We saw an improvement of 930 basis points in our Net Promoter Score this past year, reflecting our ongoing efforts to enhance the customer experience. We continue to advance our customer segmentation efforts, developing plans that are tailored to the unique needs of our specific member populations. This allows us to provide benefits that enhance and complement an individual's existing coverage through programs like Medicaid. We've seen great success through our initial segmentation efforts, growing D-SNP membership greater than 40% in both 2020 and 2021. In addition, our Humana Honor Plan designed for veterans that is also available to all Medicare eligibles grew membership by 80% last year. A key element of our plan is to return to industry-leading membership growth without negatively impacting earnings growth. We will achieve this by leaning into our successful history of reducing costs and improving operational efficiencies. We are committed to delivering sustainable cost reductions in order to create the needed capacity to improve our competitive positioning.

Thank you, Bruce, and good morning everyone. Today, we reported full year 2021 adjusted earnings per share of $20.64, slightly ahead of our expectations of approximately $20.50. Despite the challenges we faced in 2021 due to the pandemic, our fundamentals remain strong with the underlying core business delivering solid results for the full year. I will now take a few moments to discuss our fourth quarter results and underlying trends before turning to our expectations for 2022. We reported fourth quarter adjusted EPS of $1.24, slightly above internal expectations and consensus estimates. The fourth quarter results for the retail segment were largely in line with expectations. Total medical costs in our Medicare Advantage business ran approximately 1% below baseline during the fourth quarter, in line with the forecast we shared in early November. While COVID utilization remained higher than initially expected due to the Omicron variant surge, we continue to see a corresponding reduction in non-COVID utilization.

Hey, thank you. Maybe if you could talk about how the likelihood of earnings upside for this year just given the way that you're positioned with a very conservative MA bid for 2022? Don't you think that would make margin upside more likely as you move through the year? Thank you.

Certainly, as we've said repeatedly, we definitely are approaching our 2022 guidance with conservatism, which we think is prudent. We disclosed the explicit $1 COVID headwind, which is embedded in our guidance. While we consider that conservatism, we want to reinforce that there remains to be a lot to learn about COVID. There are certain dynamics that continue to emerge, such as whether Medicare will cover over-the-counter testing. We continue to watch the trends in terms of hospitalizations due to COVID. We expect that if the entirety of that $1 was not needed, then we would end up above the high end of our long-term targeted range. For your first question about the $1 billion cost cutting, how much is cost cutting, our expectation is that four categories will likely contribute equally to this goal. We continue to work on the detailed assessment of opportunities that will lead to various implementations throughout this year. Although we expect some benefit from these actions in 2022, the benefit would be meaningfully smaller than our overall 2023 target. As for the $1 billion goal, it is essential to understand that it is a net number. We are pushing the organization to be more efficient. This effort represents a more extensive initiative for us as an organization; we feel that we have significant opportunity to achieve this.

We will continue to work with our external partners on being able to ensure that our customers and, frankly, the industry customers have a proper understanding of what they’re buying. We are seeing increasing interest by CMS regarding this particular matter. We have always been sensitive to how we utilize our capital and sensitive to valuations because we do believe, over time, that the ability to drive value is greater in the organic side and just densification in the markets that we’re in.

Yes, hi, good morning. Staying on the primary care, you talked about the number of centers and expansion. What percent of Humana’s MA members overlap with your primary care centers? And what type of retention rate do you see with these members versus the rest of the book?

I’d have to get back to you on the exact technical coverage in terms of our CenterWell clinics overlay to our Medicare membership. For the moment, our clinics provide care agnostically, serving many health plans. Therefore, even if a Humana member chooses to enroll in another plan, they still have an opportunity to preserve that member. As for retention, we do focus on ensuring that we have industry-leading retention within those clinics, and they currently have high patient satisfaction stemming from the quality care they provide.

We have every reason to believe that our operating performance would look similar to others operating in the public space and delivering high-quality services. We expect to see further integration of our primary care and home health services, which will provide a significant impact in the markets we serve.

Regarding our 2022 outlook, we are providing adjusted EPS guidance for 2022 of at least $24. Our 2022 outlook reflects top line growth above 10%, with consolidated revenues projected to be north of $92 billion at the midpoint, driven by continued growth in our Medicare Advantage business. We are targeting the low end of our long-term earnings growth range of 11% to 15%, which includes an embedded COVID headwind. To the extent this COVID headwind is not ultimately realized, we will be conservative regarding timing and pace with which we adjust our full-year guidance.

Thank you for your continued interest in the company and for taking the time to engage with us today. I hope our comments have provided clarity that Humana is in a great position. We look forward to successfully driving membership growth while improving health outcomes for the people we serve. Thank you for your support.