Humana Inc (HUM) — Q1 2023 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 first quarter 2023 results and our financial outlook for 2023. 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 of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K and our other filings with the Securities and Exchange Commission and our first quarter 2023 earnings press release as they relate to forward-looking statements along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements and 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. 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 reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Finally, any reference 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. Good morning, and thank you for joining us. Today, Humana reported financial results for the first quarter of 2023, reflecting a strong start to the year. Adjusted earnings per share for the quarter of $9.38 was above our initial expectations, with outperformance seen to date underpinned by strong membership growth and favorable inpatient utilization trends in our individual Medicare Advantage business. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. Based on the strength of our performance to date, we've increased our full-year adjusted EPS guidance by $0.25 to at least $28.25. Susan will share additional detail on our first-quarter performance and full-year expectations in a moment. I'll now provide an update on our operations and outlook. Our unwavering commitment to the advancement of our strategy and growth in our core businesses is evident in our industry-leading Medicare Advantage growth, ongoing organic success in Medicaid, recent TRICARE contract award, and the continued expansion of our CenterWell assets. I'll touch on the recent progress made in each of these areas, starting with Medicare Advantage. The targeted investments we made in benefits, marketing, and distribution for 2023 have continued to drive success post the Annual Election Period, or AEP, leading to our current individual Medicare Advantage membership growth estimate of at least 775,000 for the full year, an impressive 17% growth year-over-year. The favorable trend seen in AEP have continued into the Open Enrollment Period, or OEP, with strong growth in the D-SNP space where we've added 113,000 members as of March 31, representing a growth of 17% year-over-year. Notably, we've continued to see impressive growth in the larger non-D-SNP space, adding 474,000 members as of March 31, reflecting a compelling 12% year-over-year growth in non-D-SNP membership. In addition, growth in states with robust or growing value-based provider penetration remained strong. We have grown membership nearly 13% year-to-date in Texas, Georgia, Florida, and Illinois, which are highly penetrated value-based markets. Importantly, the growth we're experiencing in 2023 continues to be high quality with better-than-expected retention, where we've now seen a 300 basis point improvement year-over-year compared to our initial expectation of 100 basis point improvement. We continue to see a higher percent of our new sales reflecting members switching from competitors than originally anticipated. We previously shared that 50% of our new sales in AEP reflected members switching from competitor plans. We've been pleased to see this trend continue in OEP. We are proud of the impressive membership growth achieved in 2023 and, with our strong fundamentals and best-in-class quality, we believe we are well positioned to grow at or above high single digits in the future. Turning to Medicaid. We have successfully implemented the Louisiana and Ohio contracts in the first quarter, adding 215,000 members as of March 31, and growing our total membership to greater than 1.3 million across seven states. Looking forward to 2024, our Medicaid business will add another state to our national portfolio. Indiana announced its intent to award Humana's statewide contract for its new pathways for aging Medicaid program, which is now expected to go live July 2024. Our Indiana health plan will serve elderly and disabled Medicaid enrollees, including integrated care for dual eligibles enrolled across Humana's Indiana Medicaid plan and our Medicare D-SNP. Humana led all bidders with the highest score in the Indiana RFP, leveraging our local Medicare performance and national dual program capabilities, including 28,000 Indiana D-SNP members in 4-star plans. We are proud of our success in Medicaid to date and anticipate continued investment to grow our platform organically and actively work towards procuring additional awards in priority states, with RFPs currently active in two states. Additionally, Humana's largest Medicaid contract is up for bid; Florida will begin procuring its statewide Medicaid program with awards expected by year-end. Humana has decades of strong Medicaid performance in Florida, and we believe we are well prepared for this highly competitive procurement. In our military business, we are pleased to be awarded the next managed care support contract for the TRICARE East Region by the Defense Health Agency of the U.S. Department of Defense, the sixth TRICARE contract Humana Military has secured since 1996. Under the terms of the award, Humana's military service area will cover approximately 4.6 million beneficiaries in a region consisting of 24 states and Washington DC. We are honored to have been selected to continue serving military service members, retirees, and their families. Our CenterWell portfolio, comprising primary care, home and pharmacy, continues to see strong growth. As the largest senior-focused value-based primary care platform in the U.S., we now operate a total of 249 centers, serving 266,000 patients, including 207,000 across our wholly owned and de novo portfolios, and nearly 59,000 patients served through our IPA relationships. This represents 16% growth in center count and 11% growth in patients served year-over-year. We remain on track to end the year at the high end of our previously communicated annual center growth of 30 to 50 through a combination of de novo build and programmatic M&A. With over 17,000 new patients year-to-date, patient growth for 2023 is trending ahead of previous expectations and significantly higher than the 3,900 patients added for the same period in 2022. Within home solutions, the rollout of our value-based care model continues as planned, now covering over 815,000 Medicare Advantage members with the full value-based model, inclusive of coordinating care and optimizing spend across home health, DME, and infusion. This represents an increase of greater than 200% year-over-year, driven by expansion in Virginia and North Carolina in the fourth quarter of last year. Under this model, our home health utilization management program drives appropriate levels of care without compromising clinical outcomes. In Virginia and North Carolina, we have experienced a 600 basis point reduction in recertification rates on episodic contracts across all home health providers. CenterWell Home Health represents more than 30% of home health episodes in these states, compared to a national average of approximately 20% across geographies where CenterWell Home Health and Humana Health Plans have geographic overlap. In North Carolina and Virginia, CenterWell Home Health emergency room and hospital readmission rates are approximately 60 basis points and more than 150 basis points lower than other providers, respectively. We are covering a total of 1.8 million of our Medicare managed members with the standalone home health utilization management and network management capabilities across multiple geographies. We are seeing early success with these standalone capabilities reducing our network utilization by 200 basis points, while improving the recertification rate on episodic contracts by nearly 1,000 basis points year-to-date. Finally, as recently announced, following a strategic review, we determined that our employer group commercial medical business was no longer positioned to sustainably meet the needs of our commercial members over the long term or support the company's long-term strategic plans. Our decision to exit this business augments Humana's ability to focus resources on our greatest opportunity for growth and where we can deliver industry-leading value for our members, customers, and shareholders. It is in line with our strategy to focus our health plan offerings on public-private partnerships and specialty businesses, while advancing our leadership position in integrated value-based care, including expanding our CenterWell healthcare service capabilities. Before turning it over to Susan, I'd like to briefly touch on 2024. We'd like to thank CMS for their thoughtful engagement throughout the rate-setting process, demonstrating their ongoing support for the Medicare Advantage program. We are pleased CMS adopted a three-year phase-in and the risk model changes in the 2024 rate notice, which serves to mitigate the impact of unintended consequences to beneficiaries resulting from these changes. The final rate notice for 2024 reflects a decrease of approximately 112 basis points for the industry. We expect the impact on Humana to be a decrease of approximately 23 basis points, with improvement versus the industry largely driven by our industry-leading Star's performance. Looking forward, we believe the industry will continue to see strong growth. Medicare Advantage products have seen a steady rise in their consumer value proposition, offering key benefits that are not covered by fee-for-service Medicare, including benefits focused on closing barriers to care, such as rides to the doctor and a deep focus on coordinating care for those with chronic illnesses. Medicare Advantage beneficiaries save more than $2,400 annually, and 95% of enrollees are satisfied with their healthcare quality. The strength of the program is reflected by the nearly 32 million seniors enrolled in Medicare Advantage, with penetration now at approximately 49%. In addition, we have observed the industry grow nicely through a negative rate environment in the past. Despite unfavorable rates in seven of eight years between 2010 and 2017, Medicare Advantage penetration increased from 25% to 35% over this period. We firmly believe the Medicare Advantage program will remain a compelling value proposition for seniors and expect Humana will be well positioned to remain an industry leader in 2024 and beyond. We will provide more specific thoughts on 2024 in the coming months following the completion of the competitive bidding process. In closing, we are pleased with the solid start to the year, which reflects high-quality fundamentals and execution across the enterprise and positions us well on our pathway towards our mid-term adjusted EPS target of $37.00 in 2025. We look forward to providing additional updates on our performance and progress towards our mid- and long-term targets throughout the year. With that, I'll turn the call over to Susan.

Thank you, Bruce, and good morning, everyone. We've continued our strong start to the year, today reporting first quarter 2023 adjusted earnings per share of $9.38, above our internal and consensus estimates. Our performance to date shows solid execution across the enterprise and, importantly, reflects better-than-anticipated membership growth and favorable inpatient utilization trends for both our new and existing membership in our individual Medicare Advantage business, allowing us to raise our full year adjusted EPS guidance by $0.25 to at least $28.25. I will now provide additional details on our first quarter performance and full year outlook, beginning with our Insurance segment. As a reminder, in late February, we increased our full year individual Medicare Advantage membership growth estimate by 150,000 members to at least 775,000, but did not adjust our other detailed guidance points prior to issuing updated guidance today. With that in mind, revenue for the quarter exceeded initial expectations, driven by the better-than-expected membership growth. Individual Medicare Advantage PMPMs were in line with expectations, increasing 3.4% year-over-year, which is lower than our expected mid-single-digit full year yield due to the 2% sequestration relief in effect during the first quarter of 2022. Turning to claims trend, first, I would remind you that we assume normalized trend for 2023 and expect the provider labor capacity to improve modestly throughout the year. In addition, our original guidance anticipated lower flu levels for the first quarter of 2023, given cases peaked in December, which was offset by assumed higher flu costs for the fourth quarter. During the first quarter, total medical costs in our Medicare Advantage business ran slightly favorable to expectations. We experienced lower-than-anticipated inpatient utilization for both new and existing members. While non-inpatient claims are less complete, early indicators suggest trends are in line with expectations. All in, we are pleased with the early performance of our Medicare Advantage business. Our Medicaid business performed in line with expectations in the first quarter. The Louisiana and Ohio contracts successfully went live on January 1 and February 1, respectively, adding approximately 215,000 Medicaid members as of March 31. Early indicators show performance tracking as anticipated in both markets. At this time, we continue to expect an increase of 25,000 to 100,000 Medicaid members for the full year, as the membership gains in Louisiana and Ohio will be largely offset by membership losses resulting from redetermination beginning in May. Finally, our standalone PDP and specialty benefits businesses are also tracking in line with expectations to date. For the full year, we have updated our consolidated adjusted revenue expectations to a range of $100.7 billion to $102.7 billion, while updating our Insurance segment adjusted revenue expectations to a range of $97.5 billion to $99 billion. These changes reflect the removal of the employer group commercial medical business results, which are being adjusted out for non-GAAP reporting purposes, partially offset by the impact of our previously announced increased individual Medicare Advantage membership growth estimates for the full year of at least 775,000 members. From a benefit ratio perspective, we reaffirmed our full-year Insurance segment guidance range of 86.3% to 87.3%. As previously shared, we expect the additional 150,000 member growth to impact the benefit ratio by approximately 10 basis points. As a result, we continue to be comfortable with our previous guidance range but now anticipate the full-year benefit expense ratio to be biased towards the upper half of the range, which is consistent with the majority of annual assessments today. As a reminder, the exit of the employer group commercial medical business is not expected to impact our full-year benefit ratio expectations. Finally, with respect to operating cost ratio, we have provided consolidated adjusted operating cost ratio guidance of 11.3% to 12.3%. The 30 basis point reduction from the GAAP ratio is reflective of the exit of the employer group commercial medical business, which carries a higher operating cost ratio. Before moving to CenterWell, I would like to take a moment to address the days in claims payable, or DCP, metric. While DCP is a metric that is often referenced as an indicator of reserve strength and earnings quality, it's important to keep in mind that DCPs can fluctuate in any given period due to items that are not reflective of claim reserve levels and may not have an impact on the current period income statement. As an example, the seasonality of net pharmacy expense, including reinsurance, is impacted by the phasing of coverage responsibility under Part D. Net pharmacy expense varies by quarter and does not have a corresponding reserve impact as pharmacy claims are largely paid in real-time, resulting in a disproportionate impact to the DCP metric. This dynamic is the primary driver of our sequential DCP change. Net pharmacy expense is increasing nearly $2 billion from the fourth quarter of 2022 to the first quarter of 2023 due to the coverage responsibility being more heavily weighted to the health plan at the start of the year without a corresponding increase in reserves. This is driving a 3.5-day decrease in our DCP sequentially. Normal course changes in provider capitation payables and the timing of inventory claims processing also caused fluctuations in DCPs without impacting the current period income statement and is the driver of the majority of the remaining 1.2 sequential decrease and the entirety of our 1.8-day year-over-year DCP decline. Our concentration in Medicare products and growing number of members and value-based care arrangements can cause these items to have a disproportionate impact on our DCP level at any point in time. We believe the trends in IBNR and membership serve as a better indicator of the consistency in our reserve methodology and relative strength of our claim reserves. As of March 31, sequential growth in IBNR trends closely to our growth in total Medicare Advantage membership over the same period at approximately 10.5%. Finally, I would reiterate that we are comfortable with the utilization patterns seen in our Insurance segment and more specifically our Medicare Advantage business to date, as reflected in our updated full-year adjusted EPS guidance. Now turning to CenterWell. The segment had a solid start to the year, performing modestly better than expected in the first quarter. Our primary care organization reported better-than-expected patient growth year-to-date, adding 7,300 patients or nearly 38% growth in our de novo centers and 8,800 patients in our more mature wholly-owned centers, representing 5% growth year-to-date. We now anticipate full-year patient panel growth of approximately 25,000, as compared to our previous estimate of 20,000 to 25,000 patients, representing a significant increase over patient growth of 13,000 in 2022. In addition, we added 14 centers in the quarter, including seven net centers added through acquisition, expanding our center count to 249. We are also pleased to share that 67% of new patients and 87% of our total patient panel have completed a first visit in the first quarter compared to 58% and 83%, respectively, in the first quarter of last year. Patient engagement is a key driver of retention and improving clinical outcomes. Financial performance continues to be on track, and we are pleased with the progress of our de novo centers as they mature through the J-curve. In the home, total new start of care admissions and our core fee-for-service home health business were up 7.1% year-over-year for the first quarter, in line with our expectations of mid-single-digit growth. However, we continue to experience pressure on recertifications due to the utilization management programs of Medicare Advantage payers. As anticipated, we have also seen a slight shift in payer mix, with a small decline in original Medicare admissions year-over-year, more than offset by strong growth in Medicare Advantage. And as expected, our cost per visit has increased more than 2% year-over-year with continued nursing labor pressure. Finally, we resumed tuck-in home health M&A activity in the quarter, completing an acquisition that added 11 branches with an average daily census of 4,700 and approximately 25,000 admissions per year. We are committed to continuing to grow our agnostic CenterWell Home Health business and expand market share through organic growth and strategic M&A activity. As Bruce shared, the expansion of our value-based home model is tracking in line with expectations and is demonstrating favorable outcomes. We continue to expect to cover approximately 1.8 million members by year-end, with further expansion to 40% of our Medicare Advantage membership by 2025. Finally, our pharmacy business performed well in the quarter, benefiting from higher-than-expected individual Medicare Advantage membership growth as well as favorable drug mix. As anticipated, we saw a 100 basis point reduction in mail order penetration for our retained members as a result of retail pharmacy copays now largely being on par with mail order benefits. We continue to invest to differentiate our order, delivery, and clinical experiences to encourage further use of mail order and maintain our industry-leading results. Further, we remain focused on providing awareness and education of the benefits of mail order for our large block of new members to drive increased penetration throughout the year. From a capital deployment perspective, we continue to expect share repurchases of approximately $1 billion in 2023. We will consider the use of accelerated share repurchase programs as well as open market repurchases, which we initiated in March under rule 10b5-1 to ensure we maximize value from these programs. Lastly, with respect to earnings seasonality, we expect the percentage of second quarter earnings to be in the low 30s. Before closing, I want to reiterate that we continue to be pleased with our operational and strategic progress and ability to raise our full-year guidance based on the positive fundamentals seen across our businesses to start the year. Our strong Medicare Advantage membership growth and updated 2023 outlook positions us positively on our trajectory to our mid-term EPS target of $37.00 in 2025. With that, we will open the lines up for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.

Hi, good morning. Quick clarification, and then my question, if I can get away with that. I appreciate the description of the days claims payable decline. And just wanted to see if there was any particular reason why the pharmacy impact that typical seasonality was larger than the typical impact? And then, the real question I wanted to ask was particularly given some of your comments about your home care plans, in the final notice, there were some rules that appear to create more restriction around how MA plans can steer patients to certain post-acute destination and sort of limit your ability to do that if a doctor has specifically prescribed a precise destination, your ability to substitute or manage that. I just wanted to see if you thought that would have any impact on either your costs or CenterWell in 2024?

Hi, Gary. Sure, I can take those for you. So, your first question in terms of the Rx impact and whether that's larger than typical, the impact that you see from fourth quarter to first quarter each year as it respects to the pharmacy responsibility is fairly consistent, and that's just a dynamic of how reinsurance works as members move through the coverage phase. So that is a consistent dynamic. And the $2 billion change fourth quarter to first quarter I would say is not atypical. If you look back at the first quarter last year, a similar dynamic would have taken place. But if you recall, we had an offsetting impact. It was largely attributable to the timing of provider payables, namely capitation, which was really a carryover impact from the larger surplus payments that accrued throughout COVID, and that were subsequently paid in that first quarter. So, I would say not atypical, but in any given year, you may have other changes that may offset some of those typical impacts. On the final rate notice, I would say I'm not aware of any meaningful impact that we would expect as a result of what was included. I would say, generally, we are always honoring whatever referral option was made by a provider as it submitted in the utilization management reviews. So that's something we commonly will honor and respect as part of that process. So, again, I don't expect any meaningful impact to our everyday processes.

Okay. Thank you.

Good morning. I appreciate the opportunity to ask a question. I'm interested in the CenterWell clinics and whether there are specific markets you consider mature in terms of patient panels, site numbers, or submarkets. Additionally, what percentage of your Medicare Advantage membership can you serve through this strategy? Ultimately, I'm curious about your goals for member involvement in your CenterWell strategy and if you could share specific examples.

Yes, David, thank you for your question. Our most developed area is in Florida with Conviva. The CenterWell sites that are newly established in various markets are quite small relative to the overall market. For instance, in Houston or Las Vegas, we haven't achieved significant penetration yet due to time constraints. In response to your question about coverage percentage, I would estimate it is in the low single digits, below 5% in any specific market. Of course, areas like Miami will have the highest penetration for us, but overall it remains at a low percentage.

Yeah, hi, thank you. I wanted to ask about CenterWell. I was hoping you could talk a little bit more about how you expect the rate environment in 2024 and the phase-in of the risk adjustment model to impact margins at CenterWell over the next couple of years. I guess, how much of the rate impact do you expect to get pushed down to CenterWell and how will the company work to manage through the potential impact there? Thank you.

Yeah. Hi, Stephen. So, one, we're not going to disclose the specific impact of CenterWell Primary Care. And honestly, to determine the ultimate impact, that is going to have to consider any benefit changes that our health plan partners make, as well as any potential changes to capitation arrangements and other things. Having said that, we do not expect the full impact to be mitigated by benefit changes. And so, the team is working on a multi-year mitigation plan that will look at the range of options across the operating model, the clinical model, productivity and efficiencies and other things, and have already identified a number of mitigations that we think can offset. So, again, we don't expect the impact to be fully mitigated by benefit changes. It will likely take some time to implement all of the improvements that will offset that. But having said all of that, we would not expect the impact to CenterWell Primary Care to be material to the overall enterprise.

Thanks. Just want to squeeze in a couple of quick follow-ups here. One on DCP, Susan, maybe you could give us an idea of the range, and is this kind of the normal seasonality? So should we expect DCP to increase for the rest of the year? And what is the kind of normal range you think we kind of settle out in given the mix of business you have now? And then, on the services business, just curious if you could tell us just a little bit more about how the quarter looked relative to your expectations, how the home health business looked, and maybe where you expect to be within that guidance range given it's pretty wide? Thanks.

Hey, Justin. Regarding your first question about DCP, it's important to note that DCP can be unpredictable due to variations in claims processing timelines and pharmacy seasonality. Because we have a predominately Medicare business, our impact may be greater than others. This isn't a metric we track or forecast internally, and it may not be wise to try to predict it since some changes are beyond our control, affecting the metric. We recommend that investors focus on the trend in IBNR and membership as they provide a more reliable and consistent measure of reserve methodology and reserve strength. One thing to keep in mind is that changes in pharmacy can significantly affect us because they usually do not correspond with IBNR changes. With upcoming developments in pharmacy phasing and coverage responsibilities, we anticipate increased volatility in that metric moving forward. As for this quarter, we saw results generally in line, if not slightly better, across the enterprise, especially with MA showing notable membership growth and lower inpatient utilization. Although non-inpatient areas are less mature, early January indicators are consistent with our expectations, which is encouraging. We had priced in significant utilization on our expanded healthy options card, and we remain positive about our plans regarding that enhanced benefit. In home health, we noted strong new admission growth, but that was mostly counterbalanced by a decrease in recertifications, which affected overall revenue trends. Revenue yield was nearly flat, which is lower than our expectations due to the unexpected recertification impact. However, we managed to mitigate much of that through administrative productivity efforts and aim to identify new growth opportunities throughout the year. The pharmacy business performed well, benefiting from higher membership growth and a favorable drug mix. The growth in our primary care patient panel was also encouraging, and overall, our financial performance aligned with our expectations.

Could you talk a little bit about your Medicaid business? Obviously, you've been making great progress on contract wins there. Can you talk about your priorities for enhancing the capabilities there? And I was particularly interested in three things. One, what you're doing to improve performance in the business just as it's an emerging business? Second would be if there are particular areas that you're looking at to improve your scoring and RFPs and winning new business? And the third would be just with respect to social determinants and health equity, if those are important priorities? Obviously, you're well positioned from the MA side, but what you're doing in that space? Thanks.

Thanks, Lance. I'll address those questions. In terms of performance, we are seeing strong results in the business, which depend on the maturation of state contracts. Early in the contract, profitability is lower, but as the contract progresses, we see improvements in both volume and in helping individuals manage their health, leading to reduced use of the healthcare system due to preventive measures. Overall, performance will vary by contract, but our more mature contracts are doing well. Additionally, one of our divisions is performing above expectations. Regarding the RFP process, I prefer not to disclose specifics on our improvements, but I'll address your point about social determinants. We have significantly invested in this area over the past few years, focusing on health equity and supporting disadvantaged populations, while also ensuring access to non-healthcare benefits that aid healthcare access. We’re especially concentrating on issues like food insecurity and social isolation. This effort involves collaboration between our plan and foundation in communities where we provide Medicaid. In summary, performance is strong and tied to contract maturation, and we are committed to addressing social determinants and health equity.

Hi, good morning. Thanks for the questions. I wanted to follow-up on the utilization commentary. And I'm just curious if inpatient utilization was favorable to your expectations if you exclude the decline in COVID admissions? And do you anticipate inpatient volumes to continue to pick up given you alluded to capacity increasing? And Susan, is there anything that we should kind of keep in mind in terms of cadence of MCR this year? Thank you.

Hi, Nate. That's a great question. In the first quarter, the lower utilization included some impact from COVID, which was less than we initially expected. It's important to remember that last year, in the first quarter, we experienced a very high level of COVID and a significant decline in non-COVID cases. As COVID numbers dropped more quickly than we had seen historically, non-COVID cases didn’t rebound at the same rate. When we developed our 2023 plan, we anticipated that the first quarter trends would be higher than the average for the full year because of this situation. Overall, we expected trends to normalize. Additionally, we forecasted a slight increase in healthcare capacity over the year. While COVID did positively influence admissions, non-COVID admissions were also somewhat favorable. Thus, it wasn't solely due to COVID. Given last year's COVID seasonality and our expectations for this year, we don't expect the first-quarter positivity to carry through at the same rate for the rest of the year. However, we are really pleased with the trends we've observed across both our new and existing data, which show similar patterns.

Thanks. Good morning. Just a quick clarification. I heard Bruce's comments on long-term industry growth well positioned. But was that supposed to mean 2024 also a year of industry growth? And then, my real question is just within CenterWell. It looks like the number of physicians is growing faster than both the center count and the patient count. I'm assuming that it's not patient panels are capped at 400 per physician. So what's causing that dynamic? Should we think about a ramp in patients relative to that capacity, especially in light of the stronger-than-expected MA membership?

Yes. Hey, Josh. So, to your first question on industry growth, we do continue to believe that we will see strong growth, including in 2024. We do recognize with the rate notice, there may be more disruption in 2024 than we've seen in the last couple of years, and also because of some of the Star pressure that some will see and have to address in their benefit design. But given the overall strength of the value proposition of MA, even in a less favorable rate environment, we would expect to see strong growth. And as Bruce mentioned in his previous commentary, even in historical years when we had multiple years in succession of a negative rate environment, the industry still grew quite nicely when benefit values were much lower than they are today. So, we do think the strength of the offering will continue to drive strong industry growth, and that Humana, in particular, will be well positioned to grow at a high single-digit rate or above, would be our hope. In terms of CenterWell, honestly, we'll have to probably look at that and maybe get back to you. What I would say is what logically comes to mind is just with the open planned openings of the centers, they certainly try to get ahead of that and add the physicians. They're ready to go. I know we did have some delays in center openings as a result of some supply chain and other issues. And so it may be that some of the clinical teams were on staff in advance of some of those delays. So it's likely due to that, but we will follow up with the team and get back to you on that.

Hi, thanks. I was interested just to get if your thinking has been evolving at all around the impact of Medicaid redeterminations on MLR? And just remind us how you're thinking about the impact of redeterminations on acuity mix in Medicaid and whether you're assuming there could be some timing mismatches around the states getting to fully factoring in changes in the acuity mix into the Medicaid rates? Thanks.

Hi, Scott. Yes, I think we have previously mentioned that we believe we've seen about 300,000 additional members as a result of the PHE and the waiver of those redeterminations. We've assumed that we will retain only about 20% of those as they go through the redetermination process this year. We are over-indexed, obviously, to Florida. And we do think Florida is probably a little bit better prepared than some other states in terms of how they're planning to go about the process. To your point and as we've stated, we have seen lower acuity for the members who are maintaining access through the PHE. And our assumption is that those will be the members who are largely lost as a result of the process. We know that Florida intends to focus on members with lower utilization at the start of their process. And so, within our plan, we have assumed that as those members roll off, that, particularly in the state of Florida, those lower acuity members will in fact be the ones that we see move off more quickly. So, we do feel confident in sort of how we've approached the planning for this year and the redeterminations, but obviously, as the process begins in May, particularly in the state of Florida, we'll be watching closely to see if the ultimate retention matches our assumption and then certainly over the next number of months watch the acuity. But our assumption is that the 20% that remain look more like a typical pre-COVID sort of block of Medicaid business.

Thanks. Hi, everyone. I have two quick questions related to what you've already discussed. In Bruce's comments about the differences between MA and traditional Medicare, I'm curious about the impact of a less than optimal rate update on people's preference for MA. In your research, considering what factors influence someone's decision to choose MA, you've mentioned before that out-of-pocket maximums were a priority, along with benefits like hearing, vision, dental, and now some supplemental benefits. Can you elaborate on why you believe that MA will still be a priority even in a year where we might not see additional supplemental benefits, as has been the case in recent years? Additionally, I appreciate Susan's insights regarding the strong inpatient utilization reported by three public hospital companies compared to recent quarters. How do you reconcile that with your observations? Is it simply that you anticipated a rise in utilization that hasn't met your expectations, or is there more to it? Many of those public companies operate mainly in Florida and Texas and are reporting strong volumes, while you suggest that your inpatient side has performed well.

I will address the first question, and then Susan will respond to the second. Regarding industry growth and customer preferences, we continue to observe a strong value proposition between Medicare Advantage and Medicare fee-for-service. Medicare Advantage beneficiaries are saving about $2,400 on average, and we have seen this trend increase over recent years due to industry innovations that help lower care costs through preventive measures. We believe this value is compelling enough that individuals are unlikely to abandon it, despite possible changes in benefits. As for your second question, we are actively working on determining priority benefits versus those that are less favored, though I can't share specifics due to competitive reasons. This may involve reducing or modifying some benefits rather than eliminating them altogether, depending on the specific type and segment involved. For instance, in the dual eligible segment, supplemental benefits play a significant role in decision-making and will likely remain a vital part of our offerings. In other segments, we see distinct needs, and while there may be some refinements, significant eliminations are not anticipated. After our bid process concludes, we can provide more details, especially in October when bids are released. In summary, the situation remains highly appealing. We plan to make adjustments to some benefits, but these changes will be manageable for beneficiaries and tailored to the specific segments.

A.J., I'll address your question about inpatient services. Before that, I want to add a couple of points to what Bruce mentioned. Regarding the population, especially the dual eligible beneficiaries, we have stated before that ideally, every dual should be in Medicare Advantage (MA). Some non-duals prefer traditional Medicare, but for duals, the value proposition is clear, and we believe we will see greater adoption compared to non-duals, which is why this remains a key focus. Additionally, agents are enrolling in MA at the time of eligibility much more quickly than in previous years. In the past, it took time to get new agents to reach the average industry penetration. We have observed faster adoption from the start, which has contributed to the increase in penetration. One more point for 2024 is that it’s essential to consider the impact of de-averaging and recalibration, especially in areas with significantly high benefit values. The ability to manage some adjustments may still present a strong value proposition to beneficiaries. Concerning your question about the strong inpatient trends reported by some hospital systems, as you mentioned, we anticipated this, particularly in the first quarter. Last year's medical costs were lower in the first quarter, so we expected trends to return to normal levels, leading to a higher first-quarter trend compared to what we planned for the year. This aligns with our observations, and even with this expectation based on hospital reports, we are still witnessing some net favorability in the quarter.

Maybe just follow-up on that point there for a second, because it does seem like hospital companies, med tech companies, broadly speaking, reporting good volumes. And so, we've been struggling to figure out why all of a sudden Q1 that would be so strong. So, I guess two questions then. The first one is from your perspective, that strength is to some degree just comps and something that you plan for? Just to make sure that I understand that correctly. And then, second, to the extent that utilization is rising higher, you don't have to price until June, so that gives you time to monitor these trends to put into your pricing. But if I hear it correctly, at this point, you don't necessarily see a reason to add additional cushion into pricing next year because you're not seeing a trend issue so far on this data. Is that the right way to think about it?

Yes. A few points to consider. First, we believe the first quarter of 2022 was more subdued compared to later quarters due to the COVID situation. Last year, COVID cases declined more rapidly than in previous surges, but non-COVID cases did not rebound at the same pace, leading to a lag. As a result, overall utilization was lower in the first quarter. We had expected first quarter trends to be higher than the annual average from a seasonal perspective. Additionally, in January of last year, we recorded 65 admissions per 1,000 for COVID, which included an extra 20% payment. With the number of COVID cases lower this year, we are seeing benefits in year-over-year trends related to unit costs because we are paying a lower average unit cost. This was considered in our annual outlook. Looking ahead to 2024, while we've seen some positive trends on the inpatient side, it is too early to conclude that the entire year will favorably include both inpatient and non-inpatient factors. We are proceeding with our pricing assumptions based on expectations for 2023, anticipating a normalization of trends in 2024 along with a modest increase in healthcare capacity, which we expect to take several years to return to pre-COVID levels. Therefore, we are not factoring in any favorability for 2023 as we approach pricing for 2024, assuming that the normalized trends will persist.

Thank you. Can you give us any color on the new members that are joining? So, what is the sales channel mix look like compared to past years? And are you able to identify in retrospect any particular products or geographies where you're showing strength?

Sure, Sarah. Regarding new members, as we mentioned in our fourth quarter call, we observed a significant decline in share within our call center partners throughout the Annual Enrollment Period. We had previously expressed a desire to gradually shift some of that share back to our proprietary channels over the years. Due to actions taken by the call center partners, such as reducing lower-quality lead marketing and improving their sales processes, they experienced a notable decrease in share year-over-year, approximately 700 basis points lower than the previous year. This volume primarily transitioned to the independent field agent channel, which functions similarly to our proprietary channel in that it relies more on face-to-face interactions through independent brokers. Historically, we have seen that when we present a strong value proposition, this channel tends to perform well, leading to good uptake within that community, which was reflected this year. We view positively that this channel aligns closely with our proprietary channel regarding retention rates and plan satisfaction among beneficiaries. On the products and geography front, as Bruce mentioned, we were pleased to witness growth in some of our mature, highly-penetrated risk markets, which aligns with our strategic focus for 2023. From a product standpoint, we're satisfied with the strong growth in dual plans, which remains a priority, alongside our veteran plan. Notably, the most significant year-over-year growth occurred in the non-dual segment, which represents a much larger population, marking it as another priority for us. We've also introduced new offerings aimed at specific segments, such as the Part B Giveback plan, designed for individuals likely to have less traditional utilization and drawn to supplemental benefits. We have observed robust growth in these plans, which are performing as expected in terms of the acuity they attract. Overall, we saw broad improvements across both geographies and products due to our investment strategies for 2023.

Thanks for the opportunity. Bruce, I have a broader question. Considering the 2024 rate environment and the current landscape, do you believe the company can continue to gain market share as it did in 2023? Specifically, should we view 2024 more as a chance for Humana to gain market share or as an opportunity for the company to showcase its margin capabilities in the individual Medicare Advantage market?

Yeah. It's obviously early in the bid cycle for us to give you the details that you want here. I would say, in general, we continue to remain committed to growing our membership growth in the high single digits there. And I would just use that as sort of a measurement for us as we think about whether it's share gain or not. As we enter 2024, obviously, our Star's position is a positive for the company.

Thank you very much. I wanted to delve further into the earlier discussion about distribution. You mentioned an increase in new MA members transitioning from competitor plans, which you have indicated before can be beneficial from a risk assessment standpoint. To what extent can you link these transitions specifically to the third-party broker channel? Are you concerned that these members might be frequent switchers who could affect the overall retention of your business? Additionally, what efforts or investments have you made to ensure that these switchers contribute positively to high LTV business? Thank you.

Hi, Ben. What I would say broadly is just given the outsized growth we've seen this year, our current estimate is about 17% versus the overall industry growth rate of closer to 7% to 8%, we predict for the year. I would say by definition you're going to see more switchers. The absolute number of agents and eligibles isn't materially different year-over-year. And so, a lot of that increase in outsized growth in market share gains is going to naturally come from switchers. So, I would say there is a portion that we believe is sort of that chronic switcher where you think it's probably about 7% of the population, which is just always going to be out there looking to see if they've got the best value. We do tend to see that that cohort traditionally over-indexes through the call center channel, and they've become comfortable with that channel in terms of initiating a plan change. I would say though as we've been talking really all year, we've been very focused on efforts to improve retention both internally through some of our onboarding experiences, particularly when we have a member enroll through one of our non-proprietary channels to make sure we engage with them, ensure they understand the plan design and their benefits and are able to access those benefits. But also working with the call center partners in particular where we commented that for 2022, that was where we saw the largest deterioration in retention rates year-over-year. We were really happy to see that, as a result of their efforts and ours, that channel in particular got back nearly to the retention rate that we saw in 2021 prior, so about a 380 basis point improvement in their attrition rate year-over-year. So, really we're able to make up much of the deterioration that we saw in 2022. And I would just say that we all continue to be very focused on retention and identify additional opportunities to engage with our members and ensure that they understand their benefits and are able to access them and that they're in the right plan to meet their needs in the hopes of seeing further improvement going forward.

We have noticed that many switchers have come to us due to frustration with their previous service, and we believe these clients tend to form stronger, more lasting relationships. Additionally, as we look towards the future with brokers, the quality ratings and the number of members in 4 Stars or greater plans are crucial. These ratings help predict the level of benefits. Therefore, brokers are increasingly focusing on maintaining a more stable client base and placing their members with companies that demonstrate both service stability and future predictability.

Hi, thank you. Maybe just another one on plan switchers. I understand you got roughly 50% this year for your new members. How does that compare to prior years? How should we think about that percentage going forward? Do you think it's sustainable or maybe there's a bit of a reversion back to the normalized level? The reason I bring it up is that, I believe, industry average for annual plan switchers is about 10% to 20%. So, if industry MA growth does slow a bit in '24, then certain plans with the higher percentage of new members that typically comes from plan switchers might be less impacted by the ebbs and flow the total industry growth, if that makes sense.

So, Michael, I think to your first question in terms of quantifying, so historically, we've commented that the switchers would represent more like 30% of our overall new enrollment. And this year, we've seen that closer to 50%. And if you wouldn't mind, would you repeat the second part of your question?

Do you believe that's sustainable going forward into next year, years after, 50%?

I would say that as you gain market share, you can expect a larger portion of your enrollment will come from switchers. If you were closer to the industry average, it would likely revert to something more akin to historical trends. Ultimately, it really depends on the level of growth compared to the industry, which I believe is the key factor in how this should develop.

We do believe next year there will be more shopping as a result of the change in the benefits.

That is true, yeah.

I believe it's important for both the predictability of your benefit plans after 2024 and for brokers to recognize that when they compare options, they will be content with the current plan once they understand its value. Therefore, we expect that there will be increased shopping in 2024.

Thanks. My question is around the growth in PPO versus HMO. And I'm just trying to think of any challenges that you may have with all this growth this year, and I guess, I mean this in the context of CenterWell. And should we expect that this could negatively impact them or any of your physician partners anyway around just attrition and what you're doing to maybe accelerate processes to minimize some disruption? Thanks.

Yes, no, it's a great question and one that we've debated with our CenterWell partners actually historically. But it's important to keep in mind that outside of certain markets, particularly South Florida and some of the other very highly penetrated risk markets, most of our HMO products operate more like a PPO where they're open access. And so the beneficiaries do have the option to go out of network and still receive services. So, we would argue that the benefit or the plans operate similarly. And certainly from a pricing perspective, we would take that into account in the way that we price those PPO products and the level of benefits that are offered, recognizing you may see more out of network utilization. I would say risk providers historically number of years ago typically only took risk on HMO, but they have generally started to become comfortable taking risks on PPO offerings as well, including our CenterWell. And so, I do think that's something we'll continue to watch and see does the performance look comparable across the two. I would say it's still fairly early in the penetration of PPO products and probably too early to declare, but my expectation would be that they are not materially different in terms of the ultimate performance for their risk providers based on the way that we would price them and then also given the strong capabilities the risk providers have and the relationships they develop that can allow them to see results that are comparable to what they see in the HMO in non-gated markets.

Thanks. Good morning. A couple of things here. First, the latest intra quarter individual MA membership guidance increased from 625,000 to 775,000. It wasn't totally clear the breakdown of that. Regarding the additional 150,000 members, how much of that was new members versus retained members, if you have any insight on that? And then, Bruce, your comment on switchers being frustrated with service levels at their previous plan, does that feedback surprise you, or is that typical from your perspective? Lastly, aside from members switching due to service issues at their old plan, was there a consistent pattern regarding the variables and benefit design at Humana that resonated the most among the new members, aside from those individuals switching because of problems at their previous plan? Thanks.

Yeah, I'll take the last one first. So on the breakdown, in terms of the driver of the additional growth, what I would say is in the D-SNP space, the improvement is more related to improved retention relative to what we had expected. And then, in the non-D-SNP space, I'd say it's more attributable to new sales. So a combination of the two, but more indexed to favorable retention on the duals and sales on the non-duals.

Regarding service, we experienced increased frustration in 2022 due to certain plans exceeding their coverage limits, which frustrated both brokers and members. This issue persisted and became more pronounced in 2022, affecting 2023 as well. However, as we have often mentioned, the strength of our brand and product helps us succeed in the market. When we are competitive, our brand typically propels us forward. Now, would you like to address the first point briefly? And to your question about the pattern, I think we've said it before, I think two things. What we saw in the Part B Giveback, that was one that was really where we saw a lot of non-dual members go to, and really it was in markets that, as Susan has mentioned and I have mentioned, in value-based markets that we've traditionally have not grown as fast in. And then the other one is just the healthy food card. I mean, that's the other one that stands out for the duals.

And to add that if you remember last year, while we had a comparable value benefit to others and United in particular on the dual side, United have more flexibility in the way that card can be used. So, we introduced a similar option for 2023 as well as expand in this service category. So, as Bruce said, we do think that was very attractive and stood out relative to other options for 2023.

Hi. Thanks very much. Susan, I just want to go back to your comments on the Rx side where you talked about a positive mix. Can you just give us a little more color on that? And then, secondly, can you talk about your commitment to Medicare Part D going forward? And as we think about the changes in Part D around DIR fees, how do we think about your bidding strategy for Part D? And again, how do you think about your commitment to that product line?

Sure. In the first quarter, when we mentioned favorability, it specifically referred to the mix between generic and brand drugs, as well as the detailed mix of drugs within those categories, each having different margin profiles. Regarding Part D, we remain dedicated to serving dual-eligible members and providing them with strong value. Moreover, we aim to capture a significant share of members enrolled in PDP who eventually transition to MA. Historically, we have seen a higher conversion rate within our own block compared to the overall market, and we expect around 80,000 conversions from this segment for 2023. There are complexities ahead due to upcoming changes in Part D, such as phasing adjustments, the introduction of maximum out-of-pocket limits, and changes in responsibilities. We need to be mindful of how these changes affect the risk pool and the margin profiles of various member types to maintain stability in our book. CMS has introduced mechanisms like premium stabilization, which will assist the industry in adapting to these changes. There is still much work to be done, but we are committed to supporting Part D beneficiaries and providing robust value, while acknowledging that there may be some additional volatility as these changes are enacted.

Hi, good morning. I would like to talk about operating cash flow, because excluding the Medicare prepayment, it looked a little light versus last year. So, anything you can provide on that would be very helpful. And secondly, can we have an update on RADV? I know the industry was waiting to talk to CMS to get more clarity on some things that were in the rules, so any update would be great. Thanks.

Sure. Hi, Ann. Regarding cash flow, the year-over-year change in reduction is primarily due to normal working capital items. The main factors driving this change are commission payables and the timing and amount of those, along with rebate collection. As for RADV, as we mentioned previously, we did not anticipate any additional updates following the final rate notice, which has turned out to be the case. Unfortunately, we don't have anything new to share at this time. We continue to be disappointed that there has been no acknowledgment of the need for an adjuster, and it will be crucial to collaborate with CMS to understand how they plan to implement the audit program, as details are still pending. We will keep working with them and hope to reach a reasonable solution that satisfies all parties. However, there are no new updates at this moment.

Well, thank you, operator. And in closing, we continue to be pleased with the solid start to the year, which as I mentioned before reflects our high-quality fundamentals and the execution across the enterprise and really demonstrates our commitment to the adjusted EPS target of $37.00 in 2025. I do want to thank our nearly 70,000 teammates for really contributing to the success and continuing to serve the customers in the best way. With that, I also want to thank each one of you for supporting the organization over the years, and we look forward to having similar results in the coming quarters.