Humana Inc (HUM) — Q2 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 second 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 second 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 refers 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, Humana reported financial results for the second quarter of 2023 with adjusted earnings per share of $8.94, in line with our expectations. Results for the quarter include the impact of higher than anticipated Medicare Advantage utilization recently disclosed, which has stabilized and is tracking in line with our updated expectations, and were supported by in line to slightly positive results from all other lines of business. We reaffirmed our full year 2023 adjusted EPS guidance of at least $28.25, which was an increase by $0.25 with our first quarter earnings release and reflects a 12% increase over 2022. In addition, we are pleased to raise our guidance for full year individual MA membership growth by an additional 50,000 members. We now anticipate adding approximately 825,000 members in 2023, reflecting an impressive 18% growth rate. Our ability to deliver on our targeted earnings growth rate in 2023, while also achieving significant membership growth, is supported by our continued focus on making disciplined investments, driving productivity and delivering consistent quality, including Stars and Net Promoter Score. In a moment, Susan will provide additional details on our second quarter performance and full year expectations, including a deeper dive into utilization trends. But first, I'd like to take a few minutes to reinforce the strength of Humana, including our differentiated capabilities that enable our leading platform, while highlighting the continued advancement of our integrated care delivery strategy. I will start with the strength of our MA platform. The industry-leading individual MA growth we've achieved in 2023 creates significant momentum as we move into 2024 and advance towards our 2025 adjusted EPS target of $37. The growth we've seen in 2023 far exceeds initial expectations and as previously shared, represents high-quality growth supported by better-than-expected retention and a greater proportion of our new sales coming from competitors than initially planned. We anticipate capturing 40% of the industry growth in 2023, increasing our overall market share by 170 basis points to just over 20% at year-end. As part of the growth, we've seen a substantial increase in agents as a percentage of total sales, while full year sales are anticipated to be 44% higher in 2023 than in 2022. Agent sales are expected to be 75% higher year-over-year, representing a significant contributor to our successful sales performance. The improvement in sales to agents further speaks to the quality of our growth, as retention for agent runs approximately 5% to 8% better compared to our overall new membership base at their first re-enrollment cycle. Further, agents initially run a higher benefit expense ratio than average new member as the MA program is structured such that a plan only receives demographic-related risk adjustment payments for these individuals for the initial 18 months, which does not align with their health status and related risk, resulting in a larger margin expansion opportunity on these members over time. Our leading membership growth achieved in 2023, strong fundamentals and best-in-class quality positions us for sustainable growth at or above the industry rate. As we look ahead to 2024, we believe the MA industry will continue to see strong growth, fueled by MA's compelling value proposition compared to original Medicare, providing incremental benefits valued at approximately $2,400 annually. Throughout the 2024 MA bid preparation process, we were conscious of the disruption in shopping that's likely to occur in the market due to the benefit reductions expected in the industry as a result of the negative rate environment and the Stars headwind for certain competitors. As a result of this disruption, we believe Humana has an opportunity for another robust year of membership growth. Our 2024 product strategy was informed by extensive consumer and broker research and in-depth analytics regarding what Medicare-eligible consumers prefer. We focused on preserving benefits identified as most important, continuing to provide differentiated offerings that focus on improving health outcomes, and selectively enhancing our products with improvements such as increasing the number of members in 2024 that will be on a zero premium plan. We are also prioritizing maintaining product value for duals, those eligible for Medicare and Medicaid, given the unique healthcare and social needs of this vulnerable population. Input from our clinical analytics and health equity teams helped inform product design choices that will continue to support the needs of our diverse customer population. Importantly, we will enter the 2024 selling season in a position of strength, supported by momentum from our compelling 2023 growth and our continued industry-leading quality. This strength is bolstered by strong relationships with our broker partners as well as ongoing efforts to diversify our channel mix. This diversification includes the growth of our internal payer-agnostic channel, which was reinforced by our acquisition of IFG last August. We leveraged our best-in-class sales process and technology to quickly and efficiently integrate IFG, leading to a significant year-over-year channel growth with selling agents increasing by 26% and MA application volume more than doubling. We also take pride in the consistent recognition we received from organizations such as US News & World Report and Forrester for our excellent customer experience and member-centric approach. All-in-all, we are excited about the opportunity ahead. Turning to Medicaid, our track record of organic success in this space continues, and we are pleased to recently announce that Humana has been recommended by the Oklahoma Healthcare Authority to deliver healthcare coverage to Medicaid beneficiaries across the state, which is anticipated to start in early to mid-2024. After successfully implementing the Ohio and Louisiana contracts in early 2023, we look forward to beginning to serve members in both Indiana and Oklahoma in 2024, bringing our total Medicaid footprint to nine states and approaching approximately 1.5 million members by year-end 2024. Now, moving to our CenterWell care delivery capabilities. We continue to expand our CenterWell Primary Care platform, now operating 250 centers serving 272,000 patients. Engaging and retaining patients is critical to driving improved health outcomes and advancing towards our $3 million contribution margin target in each center. We've seen improvement in both of these areas, with retention improving 220 basis points year-over-year, while the percentage of patients that have been seen at least once as of June 30th increased from 78% in 2022 to 87% in 2023. Further, 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. I’m pleased with our progress our primary care organization is making to advance our clinical capabilities, drive operational efficiency, and implement other actions that we believe will largely mitigate the ultimate impact of risk adjustment model changes that will be phased in over the next three years. In Home, we continue to accelerate our value-based strategy, now covering approximately 830,000 of our MA members under a value-based payment model covering home health, DME, and infusion services and expect to expand this in 2024 and beyond as we are on track towards our goal of covering 40% of our MA members with a value-based model by 2025. We are seeing solid results from this model. In North Carolina and Virginia, where the model was implemented in late 2022, CenterWell Home Health hospital admission rates are approximately 210 basis points lower than other providers. In addition, our Home business also now manages DME spend under a value-based payment model for an additional 4.5 million Humana MA members, delivering incremental value to our insurance segment. We expect positive enterprise value creation from the value-based home health model in 2023 and remain on target to drive $110 million to $150 million of annual enterprise value creation by 2025. Within CenterWell Pharmacy, we continue to advance our clinical capabilities and are seeing a year-over-year increase in adherence measures. We've seen an increase in adherence to hypertension, hyperlipidemia, and diabetes medications ranging from 20 to 30 basis points year-over-year, which helps Stars and clinical outcome measures. Across these three categories, we continue to see that Humana members who utilize CenterWell pharmacy have fewer inpatient admissions per 1,000 compared to non-CenterWell pharmacy users. In addition, our CenterWell Specialty Pharmacy demonstrates improved patient outcomes by driving longer therapy durations on higher adherence levels. As an example, patients in the oncology center of excellence have a 1.8 times longer duration and a 200 basis points better adherence than patients not engaged with the Center of Excellence. The expansion of our CenterWell assets complements the integration of our individual health service businesses in local markets, which will create further value for our shareholders and for our customers. Before turning it over to Susan, I'd like to give a brief update on the integration work we currently have underway. Our belief is we can deliver greater member and patient satisfaction, retention, and clinical outcomes for these members. This is based on our ability to further integrate clinical and operational workflows while delivering a more seamless experience for our common members and patients. As an example, we estimate drug costs, review planned benefits, and screen for patient assistance programs for members in our wholly-owned centers. In addition, our CenterWell Home Health and Primary Care teams review high-risk patients and collaborate on a more comprehensive care plan, prioritizing health-related concerns that go beyond the original home health orders, greatly reducing the risk of complications, unnecessary ER visits, and avoidable admissions. The primary care physician, the social worker, and home health nurse work in coordination with the health plan to take advantage of planned benefits to address health-related social needs like food, housing and security, transportation needs, and social isolation. We will continue to innovate and advance towards a more integrated clinical model that leverages our collective Humana and CenterWell capabilities to deliver improved experiences and health outcomes for our members. We are encouraged by the early results of our integration work and are actively expanding our focused markets from two in 2022 to more than 20 by year-end. We look forward to sharing more on this important work going forward. In closing, I'd reiterate that Humana's fundamentals are strong and we are confident in our ability to navigate through the near-term impacts of our higher-than-expected MA utilization while continuing to advance our strategy. And importantly, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% CAGR from 2022 to 2025. Our confidence in our ability to deliver on this compelling earnings growth target is supported by our impressive 2023 membership growth, strong MA positioning in 2024, consistent quality scores, and continued growth and integration in CenterWell, all of which is complemented by our continued focus on productivity and disciplined capital deployment. With that, I'll turn the call over to Susan.

Thank you, Bruce and good morning everyone. Today, we reported second quarter 2023 adjusted earnings per share of $8.94, consistent with internal expectations. Results for the quarter are inclusive of the higher-than-anticipated utilization in our Medicare Advantage business we discussed last month, which, as Bruce shared, has stabilized and is tracking in line with our updated estimates. I will provide additional detail on emerging trends in a moment. The higher-than-anticipated utilization in the quarter was offset by better-than-expected favorable prior year development, a more positive midyear Medicare risk adjustment payment, and slightly favorable investment income, as well as other business outperformance, particularly in our Medicaid business. Our performance to date reflects the strength of the enterprise, highlights our ability to successfully navigate near-term uncertainty, and importantly, includes better-than-anticipated individual Medicare Advantage membership growth. We now expect to add approximately 825,000 members in 2023, reflecting an impressive 18% growth rate, fueling our ability to continue to deliver compelling earnings growth in the future. Further, for the full year, we have reaffirmed our adjusted EPS guidance of at least $28.25, which was increased by $0.25 with our first quarter earnings release and reflects a 12% increase over 2022, putting us on a solid path to our 2025 adjusted EPS target of $37. I will now provide additional details on our second quarter performance and full year outlook, beginning with our Insurance segment. As highlighted in our 8-K filing last month, beginning in early May, we noted the emergence of higher-than-anticipated non-inpatient utilization trends in our Medicare Advantage business. At the same time, we began seeing higher-than-anticipated inpatient utilization diverging from historical seasonality patterns. These trends continued in early June. Based off of this intra-quarter information when we filed the 8-K on June 16th, we made the assumption that we would continue to experience moderately higher-than-expected trends for the remainder of the year. We were pleased to see that our June paid claims data received in July reflected positive restatements for the first quarter, as well as stabilizing outpatient utilization levels in April and May. While July claims data is not yet complete, early views support our year-to-date booking levels. With respect to inpatient activity, the higher-than-anticipated utilization has continued consistent with our June update. All in all, we view the utilization data received in recent weeks is incrementally positive as compared to the assumptions utilized in our June update. That said, we continue to point you to the top end of our full year Insurance segment benefit ratio guidance range of 86.3% to 87.3% and will continue to monitor emerging trends. This guidance also contemplates the individual Medicare Advantage membership growth post the annual election period, which has included a higher-than-expected proportion of agents. As Bruce discussed, agents initially run a higher benefit expense ratio than the average new member, which negatively impacts the current year benefit ratio but results in a larger margin expansion opportunity on these members over time. As previously noted, we anticipate that the higher than originally expected benefit ratio in 2023 will be offset by a variety of factors, including higher-than-expected favorable prior year development, additional administrative expense reductions, higher than previously anticipated investment income and other business outperformance. And while we would typically not comment on 2024 this early in the year, given the questions in the market regarding pricing resulting from the higher-than-expected utilization in 2023, I would reiterate that our Medicare Advantage pricing contemplated the rate environment, emerging utilization trends, related offsets, as well as the competitive landscape and resulting growth opportunity. As we sit here today, we remain confident that our 2024 pricing, combined with the strength, scale, and agility of the organization, will allow us to deliver earnings growth that keeps us on a reasonable trajectory to our 2025 adjusted EPS target of $37. As a result, our intent is to target adjusted EPS growth within our historical long-term target range of 11% to 15% in 2024. We look forward to sharing more on 2024 later this year. Turning to Medicaid, the business continues to outperform with second quarter results exceeding expectations, driven by favorable membership results, combined with disciplined medical cost management initiatives and lower-than-expected utilization. Redeterminations, which began in the second quarter, are tracking slightly favorable to our initial expectations. In addition, the Louisiana and Ohio contracts, which were both implemented in the first quarter, are performing as anticipated. 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. Membership in our stand-alone PDP business is tracking favorably to expectations, driven by better-than-anticipated retention. As a result, we've improved our full year guidance from down approximately 800,000 to down approximately 700,000. Now turning to CenterWell. The segment has continued to build on a solid start to the year, performing modestly better than expected in the second quarter. Our Primary Care organization continues to report better-than-expected patient growth year-to-date, adding 10,000 patients or nearly 52% growth in our de novo centers and 12,000 patients in our more mature wholly-owned centers, representing 7% growth year-to-date. We now anticipate full year patient panel growth of approximately 27,000 to 30,000 as compared to our original estimate of 20,000 to 25,000 patients, more than doubling the patient growth achieved in 2022. In addition, our Primary Care organization continues to improve the operating performance in our wholly-owned centers, and we're pleased to report that we estimate we will increase the number of centers that are contribution margin positive from 110 at the end of 2022 to approximately 125 at year-end 2023, a 14% increase year-over-year. In addition, we expect to increase the number of centers that have reached our $3 million contribution margin target from 31 in 2022 to approximately 40 at the end of 2023, a compelling 30% increase year-over-year. While we do expect the risk model revision to have an impact on our center contribution margin performance in 2024, as Bruce shared, we are focused on advancing our clinical capabilities, driving operational efficiencies, and implementing other actions that we believe will largely mitigate the ultimate impact of the risk adjustment model changes that will be phased in over the next three years. In the Home, total same-store new start of care admissions and our core fee-for-service home health business were up 5.8% year-over-year as of June 30th, in line with our expectations of mid-single-digit growth. In addition, in the quarter, we saw episodic admission growth of approximately 10% year-over-year, which is inclusive of the acquisition of Trilogy Health completed in April. While new start admission growth is strong, we continue to experience pressure on recertifications due to utilization management programs of Medicare Advantage payers. And as expected, our cost per visit continues to run approximately 2% higher year-over-year with continued nursing labor pressure. From a quality perspective, we have seen significant improvement in Star ratings for CenterWell Home Health over the last year, increasing the percentage of our branches with a 4.5 star or above rating from 18% in January 2022 to 50% today. Further, as Bruce highlighted, we're seeing positive results as we continue to expand our value-based home model, tracking towards our goal of covering 40% of our Medicare Advantage membership by 2025 while also expanding the stand-alone components in certain markets to accelerate value creation. 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, year-to-date mail order penetration for our Medicare membership is 40 basis points lower than prior year as a result of retail pharmacy co-pays now largely being on par with mail order benefit. We continue to provide awareness and education of the benefits of mail order for a large block of new members to drive increased penetration throughout the year. Investment income slightly outperformed expectations in the quarter and we now anticipate that investment income will increase by approximately $500 million year-over-year, up from our original expectation of a $450 million year-over-year increase. From a capital deployment perspective, we initiated open market repurchases in March and have completed approximately $800 million in repurchases to-date, taking advantage of the recent dislocation in the stock price relative to our comments in the long-term earnings outlook of our business, underpinned by our strong Medicare Advantage platform and the continued build-out and integration of our CenterWell assets. We now expect share repurchases of approximately $1.5 billion in 2023, up from our original expectations of $1 billion. With our strong cash flows and decreasing debt-to-cap ratio, we've accelerated the share repurchases while maintaining sufficient capital for normal course M&A activity. Lastly, with respect to earnings seasonality, we expect the percentage of third-quarter earnings to be approximately 25%. In addition, we expect the third-quarter Insurance segment benefit expense ratio to be 87%, consistent with current consensus estimates, before increasing in the fourth quarter consistent with historical seasonality patterns. Before closing, I want to echo Bruce's sentiment that Humana's fundamentals are strong, and we are pleased with our ability to grow individual MA membership by 18% in 2023 while guiding to a robust 12% year-over-year in adjusted EPS. We are confident in our ability to leverage the strength and scale of the enterprise to navigate through the near-term impacts of the higher-than-expected Medicare Advantage utilization while continuing to advance our strategy. And importantly, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% CAGR from 2022 to 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.

Yes. Hi, thanks. Appreciate all the color, a lot to digest there. So the commentary on 2024 bids was very helpful. It sounds like, at least to my hearing, that the higher trend that you see in MA persists for the balance of the year, you believe your bids would fully reflect that. Just making sure we have that point right. And then obviously in June, you did talk about some pretty significant operating cost offsets that you expected will allow you to deliver on EPS this year despite the higher MLR. I guess how do we think about these potential cost offsets into next year? Are those still largely an opportunity for you if you need them as an offset? Thanks.

Sure. Hi, Stephen. Regarding your first question, we expect the higher trend we've observed in 2023 to carry over into 2024. This assumption is reflected in our current statements. As we mentioned in June, when we noticed emerging trends, we didn’t fully integrate the higher trend we estimated at that time into our bids. There are several reasons for this. If the emerging trend persists, it would require a reassessment of other assumptions, such as risk adjustment offsets and whether our view on claim trends for 2024 is impacted by this higher trend. We were clear that we did not fully incorporate this into our 2024 projections. Nonetheless, we continue to see significant growth opportunities in 2024 and aim to be well-positioned to capitalize on them. As we have continued to analyze trends since June, we are now more confident in our estimates for 2024 and are able to evaluate our pricing strategies with the stabilizing trends we've observed. This is certainly a positive development. In recent weeks, we’ve conducted extensive assessments to understand the impact on 2024 and evaluate our options and assumptions. Based on what we know today, we feel confident that we can achieve the expected earnings and EPS growth in 2024, consistent with our historical targets.

Thanks, hi everybody. Thanks for the comments about the retention with the aging population. It seems like to me, a key factor in the next couple of years, hitting ultimately your 2025 target is the retention of all these members you've gotten this year and then whether the progression you normally see and profitability plays out. Can you just sort of remind us historically what the trend is, A, on retention? And B, on how the profits step up over time? And do you think there's any reason on this population you've added this year when either of those metrics might be different than normal?

Good morning, A.J. I'll address the first part, and perhaps Susan can discuss the profit trajectory. Regarding retention, we've dedicated significant effort to enhancing this aspect, focusing on several key areas. The first is in benefit design, which we've found to be crucial. This year has exemplified our commitment to designing benefits tailored for the segments we aim to grow and retain, and we plan to continue this focus going forward. We've expressed strong confidence in our positioning for 2024. The second area is our customer experience, including service and claims management. Our Net Promoter Score and consistent accolades from external parties indicate that we are leading the industry in these respects. Brokers have expressed their confidence in recommending us, driven by our benefits and the quality of our service. They have noted that their confidence in some competitors has waned due to issues with plan servicing. In summary, our benefit design is vital and is tailored to specific segments, along with our commitment to providing a positive and efficient service experience for customers.

Hi A.J. To build on what Bruce mentioned regarding retention, historically we have observed that disenrollment rates tend to be higher in the initial years of tenure, particularly in the first two years. Thus, the longer we retain those members, as you pointed out, we should see some incremental benefits. For the 2023 high growth, if we can achieve high growth again in 2024 as that group matures, we hope to start seeing some of that incremental improvement in the later years as we retain them longer. As Bruce noted regarding the agents, this is incrementally positive; we find that members from earlier tenure years tend to retain at a higher rate when we provide their initial eligibility compared to later on. This also represents an incremental positive trend compared to our past experiences. Regarding profit progression, we generally say it takes about three years for either an agent or a new member to reach a mature contribution margin. Agents typically start lower due to risk adjustment and reimbursement dynamics, which presents a greater opportunity for growth over that three-year window. In summary, we consider that a new member cohort takes about three years. Specifically for agents, the retention impact is usually most pronounced in the second year because they require about 18 months of Medicare claims activity to convert to full diagnosis-based risk adjustment. Therefore, we expect to see a positive impact from the higher number of agents we onboard in 2023 by 2025, with additional incremental benefits thereafter.

Thanks. Good morning. First, Bruce, I appreciate your insights on 2024 and the expectation of strong industry growth, which you anticipate outperforming. Could you provide more details about this, perhaps in relation to the 7% to 8% growth we expect for the industry this year? How do you see growth unfolding next year? Additionally, any early thoughts on the 2025 Stars would be helpful, given that you have gathered a significant amount of data. I understand it's not yet perfect, but how is the performance for your 2025 Stars looking as we approach October? Thank you.

Regarding the industry's growth rate, we remain confident that it will resemble past years. We observe demographic trends leaning towards an aging population and see a robust value proposition distinguishing Medicare Advantage from traditional Medicare fee-for-service. Additionally, we identify segments such as duals as being underutilized. As we deepen our penetration into the industry, we anticipate increased engagement in other segments as well. This year’s results indicate that agents are becoming more integral to this process. We foresee continued growth and are optimistic about sustaining this trend in the near future. Concerning our Stars ratings, although we haven't received complete results yet, we feel positive about our preliminary standing. While we await comparative metrics and industry benchmarking, our current analysis gives us a strong sense of confidence.

Hi, good morning. Thank you for the questions. I wanted to ask how you think your benefits will compare to the overall market. Clearly, you've significantly increased benefits for 2023. What does that look like for 2024? I understand it's early, but it would be helpful to get your thoughts on margins for the insurance segment in 2024, considering the various factors like utilization and the changes in your risk model and redeterminations. Any early insights would be appreciated. Thank you.

I'll focus on the benefits while Susan will address the margins. Regarding benefits, we've been careful in adjusting them based on the current funding situation in the market and the recent rate changes. We've conducted extensive research to understand the priorities and preferences of Medicare beneficiaries across different segments, including military members, dual-eligible individuals, and agents. We are confident that our findings will allow us to create a compelling value proposition for each of these segments, considering the funding constraints. As mentioned, we have raised our premium plans and expanded coverage this year, as we believe these are crucial benefits that people desire. Additionally, for the dual-eligible population, we are committed to providing significant support for supplemental benefits, as we recognize the importance of lifestyle in enhancing their health outcomes. In comparison to our competitors, we have an optimistic outlook. Historically, we haven't been the lowest-priced option in every market, but we leverage our strong brand, broker relationships, quality scores, and Star ratings to stay competitive. We don’t need to lead the market in every benefit but rather remain close enough to capture market share, thanks to the reliability of our platform. While benefits are essential, we don't focus on being the cheapest; instead, we aim to be competitively priced so that consumers have to weigh their options among several plans, where we believe our quality and service will ensure our success.

As you consider 2024, it's important to note that some competitors are facing additional pressure from Stars. We've consistently heard that certain competitors will likely focus on specific areas, with duals being a prime example where a few have indicated they will concentrate their efforts and possibly invest. Notably, throughout 2023, we lagged behind the industry in non-dual growth but excelled in duals, which kept us in line or performing better than the industry overall. Given that the non-dual segment is significantly larger, we are particularly enthusiastic about the progress made in 2023 and our ability to surpass the market in non-dual growth, which we aim to sustain into 2024. Based on current insights, we feel optimistic about our positioning and have received positive feedback from brokers regarding our 2024 changes. Regarding 2024 margins, it is premature to comment, but we plan to provide more details on our third-quarter call. We felt it was crucial to convey our confidence in meeting our historical performance range based on this year's emerging experience and commentary. There are several factors to consider as we plan for 2024, including detailed estimates and membership growth, particularly the potential for disproportionate growth. Understanding the composition of that growth—whether through agents, switchers, or retention—will be vital. Additionally, evaluating emerging trends and their sustainability is another key consideration. We look forward to sharing more updates while reinforcing our confidence in delivering growth in 2024 consistent with our historical targets.

Hi, thanks. Good morning. Would be interested if you could give us an update on how you're approaching coverage of the Alzheimer's drugs and the emerging therapies there for 2024? And then just some preliminary thoughts on sort of how you may be factoring that into your bids and into expected MA costs for 2024? Thanks.

Sure. So we will certainly follow sort of CMS coverage determinations in terms of what and when and for what label use that we have to cover. As we went into our thinking for 2024, we did have a point of view that we would have some costs related to the continued launch of Alzheimer's treatment, so we do have pricing in our bids. I would say, based on the team's latest assessments, we feel comfortable with what we've priced for 2024. There's been a lot of questions about whether the drugs would trip the significant cost policy. Based on our estimates, you have to hit about $1 PMPM of sort of expense discipline level to be able to trip that. And right now, we don't think we will get to that level across the industry in spend, but certainly something to continue to watch. So I'd say we have contemplated in 2024 pricing, and based on what we're seeing so far, we feel comfortable that that's not a material headwind.

Great. Thanks. Good morning. So I guess just regarding the elevated Medicare cost trend for the second quarter and then thinking about some of the potential moderation in the back half of 2023, can you just remind us whether or not there's any major levers you can and have proactively pulled midyear to just better contain the elevated Medicare cost for the back half of the year, either on prior authorization policies or just other coverage factors? Or are the 2023 trends really more just serendipitous at this stage? You just have to wait essentially until 2024 to make any material changes to either better control costs or adjust pricing benefit design, et cetera? Thanks.

Sure. Hi, Steve. I would say at this point, in terms of what we're thinking in the second half trends, we are assuming that those trends continue and do not moderate. There's some seasonality differences in just workday seasonality year-over-year that we certainly take into account, but from a normalized basis, we were anticipating that those trends continue and are not mitigated by any actions or levers we might take. I would say on the broader medical cost trend, I would say there's probably not a lot that, at least to date, that we would identify that we would be able to do in response that could mitigate that. On the dental side, which we have commented on, we think more Humana-specific, there are a few things we are looking at in terms of coverage to make sure that we've got the appropriate controls in place, but I would say that would not be a material factor, I'm thinking about how we're thinking about the trend for the year. The main lever that I would say that we're relying on internally to offset some of the elevated trend in the back half of the year is more administrative expense savings. We have asked the organization to find additional opportunities, and that's largely informed by some of the ongoing productivity work that we've been viewing that highlights that there are some additional opportunities. And I would say relative to what we considered in our original plan for the year, those extra admin savings will be disproportionately benefiting the back half of the year. Whereas the first half of the year, the elevated trend had the benefit of things like prior year development that we would say is going to disproportionately benefit the first half versus the back half.

Thank you for the insights regarding 2024 and 2025. First, did you mention that you expect to maintain the same non-dual growth rate in 2024 as you experienced in 2023? Also, regarding 2025, is it accurate to say that whatever happens with costs in 2024, even if they run slightly high, as long as you are able to account for that in next June's bids, then reaching $37 for 2025 is still on track? I would also think that it could be even stronger if you manage to capture more growth and market share in 2024 since you'll be starting from a larger base that will enhance profitability from year one to year two.

Yes, I mean your thinking is consistent with what we're thinking on a few things. I think first, as we look at how we've adjusted our benefits in 2024, we continue to orient the zero premium plan, and we've seen agents be oriented to that, so that is an area where we continue to see that agents, that percentage, and we're anticipating probably a good level of growth. Now, I won't get into the percentage between agents and non-agents there, but we do anticipate that. And as Susan articulated, we also see margin expansion happening in the book that's coming in 2023 to 2024 and continuing on to 2025. So, we do have this ability to have a step improvement in each of those areas. And then when you think about just the market in general and the growth of being able to do this, we're very optimistic about the growth, as I mentioned before, with Justin on the growth of it. Susan, do you have anything that you would like to add to that?

Yes, regarding the non-dual growth, I believe the progress we've made in 2023 will carry into 2024. Additionally, based on preliminary insights from competitors, the emphasis on duals may actually put us in a better position. This is encouraging. For pricing in 2025, as mentioned, we always have the option to adjust if needed, particularly if we can offset any residual trends in 2024 with non-recurring factors. Our aim is to identify sustainable offsets to avoid having to make further pricing adjustments, although that option remains available. Concerning progression, the increased growth is beneficial as we aim for our goals in 2025. However, we need to continuously assess the effects of the risk model recalibration and the 2025 rate book, which will be phased in over three years. Our objective is to mitigate as much impact as possible on beneficiaries, even though some impact is expected. This is a caveat we must consider as we navigate the factors influencing 2025 pricing, balancing robust membership growth with the necessary earnings progression to achieve the $37 target and maintain strong performance thereafter.

Hi, good morning. Most of my big-picture questions answered, so I'll just dive into a couple of the details. One, I wondered if you could just talk about the source of the stronger PYD, if that's been outpatient ambulatory or perhaps just kind of final inpatient acuity? And then secondly, Susan, you mentioned the sweep revenue at 2Q being higher than it usually is. I just wondered if you could speak to the materiality of that? I don't think I've ever heard you talk about that much before. Thanks.

Sure. Hi, Gary. Regarding the PYD, we haven't historically provided many detailed drivers, and I wouldn't pinpoint a single primary driver, so it's more broad-based. One aspect is that we mentioned last year we adopted a more conservative approach to year-end reserving, which will definitely unwind during the first half of the year as those claims mature. We've also acknowledged that our internal seasonality models have likely overstated our claims trend expectations for the fourth quarter, especially in December, and didn't fully account for workday and holiday differences. Therefore, it's evident that December 2022 turned out to be more conservative than we had anticipated at year-end, and we observed some of that emerge and release in the first half of the year. Concerning Q2 revenue, as I stated earlier, one reason the MLR was more favorable than we discussed throughout the quarter is that we received some positive mid-year risk adjustment payments booked in Q2. From an annual standpoint, it's not significant. Without this higher trend, we might not have mentioned it, but in light of previous comments on MLR, I wanted to clarify that there were various factors balancing out the higher pressure. We were happy to see slightly higher mid-year payments, which likely also reflect that higher trend, partially from last year.

Hi, thanks. Good morning. I guess I'm just trying to understand that build up to the 2024 EPS growth in line with your 11% to 15% long-term targets. I understand you're growing 18% membership this year, and that will mature a little bit next year. But I'd assume if your pricing for benefit changes to take market share when competitors are vulnerable, and I totally get the strategy plus the impact of the risk model changes that it would be hard to expand margins on the rest of the book. So what am I missing? What are the positive drivers to EPS for next year?

Our intention for 2024 has always been to achieve the necessary growth to reach the $37.25 target. Despite seeing some increased claims this year, we remain confident that we can deliver within that range. This has been our plan all along as we've assessed our enterprise performance and membership growth potential. We entered 2024 in a strong position based on our successful 2023 and without the headwinds we faced from the Stars program. We anticipated that, compared to others, we would have less adjustment to make while still being well-positioned to achieve our earnings and EPS goals. The rise in outpatient services and overall trends is a new aspect we've been analyzing recently, but we're confident in our ability to navigate these changes successfully.

Hey Josh, to add a few things, during the Investor Day, we detailed our earnings growth across several areas, including our core business growth and the contributions from productivity and capital deployment. Capital deployment and productivity contributed nearly 4% to our growth, while the growth from our core business accounted for about 10%. This year, we expect to see even more growth from productivity due to various initiatives that are yielding positive results, and we are also closely examining our spending to ensure it is appropriate. Additionally, regarding the rate notice, we have factored that into our pricing, which means the benefits will not be as substantial as before due to the impact of the rate notice. As Susan mentioned previously, we still have two more years to incorporate this factor. In summary, we expect the benefits of our growth this year to be evident in 2024, and we foresee similar benefits continuing into 2025 due to the growth from 2023 and 2024. We aim for productivity gains of over 2% along with effective capital deployment, and our other businesses are also performing well.

Good morning, and thank you for including me. I have a question regarding the trends you're observing. Firstly, is there a geographic aspect to the increased trend you've noticed? Secondly, is this trend primarily seen in the non-dual population, or is it also evident in the duals population? As you prepare for growth in 2024, do you have any preferences regarding the sources of that growth, whether by member type or by region? Thank you.

Hey David. To start with your question about the medical cost trend, I would say it's quite broad and not concentrated. However, we have noted that higher dental trends are more specific to Humana and a bit more concentrated, mainly due to our product offerings in dental allowance plans. These plans generally allow beneficiaries to use a set amount of funding for dental benefits, and they tend to be more prevalent in the Florida markets, leading to some concentration in that area. In terms of the broader medical cost trend, we haven't observed any significant concentrations. When looking at the performance of dual and non-dual populations, it seems that duals are generally performing better, although they still experience some pressure. The dynamics of risk adjustment and revenue help mitigate some of that pressure. That said, non-duals are performing somewhat worse than duals. Consistently with previous comments, we see that the broader medical cost pressure is more concentrated in non-risk providers compared to risk providers, who generally manage outpatient spending more effectively. Therefore, we observe more pressure on the non-risk side. In contrast, the dental aspect is more risk-based due to its specific location, and we see some offset from DIR fees related to that coverage.

Great, thanks. I just wanted to clarify something. When you initially mentioned the $37 target for 2025, it seemed like you expected to grow below average this year. Given your strong growth this year and the likelihood of another year of above-average growth next year, can you maintain your initial membership projections for 2025? This would mean you wouldn't necessarily need to increase membership in 2025 to reach that $37 target. Additionally, there has been concern regarding trends and the potential need to adjust pricing, which could affect growth in a given year. It sounds like you're suggesting that what you're experiencing is not specific to your company, and if there's a need to adjust pricing to align with industry trends, it wouldn't negatively impact your competitive position. I just want to confirm my understanding of this situation as you consider potential pricing adjustments over the next few years in response to higher trends. Thanks.

Hi, Kevin. Regarding membership, we are exceeding our expectations based on the $37 target. We had anticipated a slight lag behind industry growth in 2023, expecting it would take us two years to catch up to the industry growth rate. The strong growth we are experiencing this year is encouraging, and we hope to replicate that success in 2024. Overall, we aim to surpass our expected membership growth. We are committed to maintaining our momentum and positioning ourselves to meet or exceed industry growth rates consistently moving forward, which is crucial for long-term value and supports a strong, ongoing growth in earnings per share. As for trends, apart from dental—where we anticipate some specific adjustments in 2024 and possibly more in 2025 as we monitor developments—the overall medical cost trends align with what the industry reports. There may be differences in timing among companies regarding how they incorporate trends into their 2024 pricing. Any necessary price adjustments we consider for 2025 should not place us at a disadvantage compared to other companies, even if some have already adjusted their pricing more than we have. This appears to be an industry-wide issue, and addressing it would not create significant competitive advantages or disadvantages, as it’s relatively uniform across the sector.

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