Humana Inc (HUM) — Q1 2024 Earnings Call Transcript

Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, both of which are available on our website. We will begin this morning with brief remarks from Bruce Broussard, Humana's Chief Executive Officer; and Jim Rechtin, Humana's President and Chief Operating Officer. Followed by a Q&A session, where Bruce and Jim will be joined by Susan Diamond, Humana's Chief Financial Officer. 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, our other filings with the Securities and Exchange Commission and our first quarter 2024 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 also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP. Management's explanation for the use of these non-GAAP measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, 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. With that, I'll turn the call over to Bruce Broussard.

Thank you, Lisa, and good morning, everyone, and thank you for joining us. I hope you had the opportunity to review our prepared remarks, which we posted this morning along with our earnings release. We'll spend the majority of our time today on Q&A, but I'd first like to highlight a few key messages that we want you to take away from our discussion. First, we had a solid start to 2024 and we're pleased to reaffirm our full year adjusted EPS guidance of approximately $16 while increasing our individual MA membership growth outlook by 50,000 to 150,000 net growth. Early medical cost trend indicators in our individual MA business are largely in line to positive relative to expectations, and we have seen strong year-to-date patient growth in our primary care business with 20% growth in our de novo centers and 7% growth in our more mature wholly owned centers. In addition, we are incredibly proud of our continued organic success expanding our Medicaid platform with recent contract wins in Florida, Texas and Virginia. We are pleased that 2024 is trending in line with expectations. As we look ahead, we acknowledge that the industry is experiencing a dynamic and challenging time we must navigate. And while the current environment will create disruption for the industry in the near term, we continue to believe in the strong core fundamentals and growth outlook of the MA industry and our ability to effectively compete in the MA market remains intact. Specific to 2025, we expect benefit levels, planned stability and choice for seniors to be negatively impacted by the final MA rate notice, which is not sufficient to address their current medical cost trend environment and regulatory changes. Considering the significant difference between the final rate notice and our previous funding assumption, combined with the inherent pricing limitations imposed by the TBC change thresholds, we no longer believe $6 to $10 of adjusted EPS growth is the appropriate target range for 2025. Importantly, we believe that the industry will adjust to the current funding regulatory over time, continuing to deliver strong top line growth and normalizing at an appropriate margin of at least 3%. In that context, we remain committed to margin recovery and profitable growth through multiyear pricing actions, creating value for our shareholders over the long term. Our 2025 adjusted EPS growth outlook will be impacted by several variables to which we will not have clear visibility until later this year, including finalization of our MA bid pricing decisions, the continued evolution of industry cost trends, and the level of competitor pricing actions in 2025, which will impact our net membership growth. In addition, we continue to evaluate opportunities to drive growth and further productivity across all lines of business to support 2025 adjusted EPS growth. We appreciate your desire for more detail regarding our outlook for 2025, and we will provide an update on our bid strategy post bid finalization, with further update in the fall once we have visibility into our competitor plans and expected membership implications. Before turning it to Jim for a few remarks, I'd further emphasize that we continue to believe there is strong bipartisan support for the MA program and that the strong core fundamentals and growth outlook for MA and value-based care remain intact. In addition, Humana's platform, unique focus on MA, and expanding CenterWell capabilities will allow us to compete effectively and deliver compelling shareholder value over the long term. With that, I turn it over to Jim.

Thanks, Bruce. I just want to echo your comments that the outlook for Humana specifically and for the MA industry more broadly remains strong. The industry is navigating a challenging time, but it's important to recall that this is not the first time that we've had to navigate challenging times and that we've seen difficult periods in the past. Humana has navigated this period successfully, adjusting as needed and continuing to grow. While we anticipate disruption in the near term, the sector fundamentals are sound. This includes favorable demographics, a compelling value proposition relative to traditional Medicare. We believe the industry will continue to grow, and Humana will be well positioned to remain a leader in the market. I also want to reiterate that we are committed to pricing discipline and margin recovery in this bid cycle. We are actively evaluating plan level pricing decisions and the expected impact to membership. We are evaluating opportunities to drive productivity, we are focused on the levers to support adjusted EPS growth in 2025 and beyond. And as we have incremental data on 2025, we will share it. We appreciate everyone's ongoing support and look forward to providing additional updates on our performance and outlook throughout the year. With that, we will open the line 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.

I just want to focus on cost trends. Did you see any change in cost trends versus 4Q? Also in your prepared remarks, it sounds like the company believes they took a conservative approach to reserving just given the change healthcare situation. Can you suggest that early indicators suggest trends were in line or better. Can you just elaborate on that comment, that would be great.

Yes. This is Susan. So as we evaluate the first quarter cost trends, we do have good visibility to inpatient utilization from their more real-time authorization data. On unit cost and non-inpatient, we are more dependent on claims. And typically, in the first quarter, we have limited visibility and given the change healthcare disruption even more so this quarter. But as you might remember from our fourth quarter commentary, one of the things we did experience was an unexpected uptick in inpatient utilization, which we believed was related to the expected 2-midnight rule changes that went into effect in January. As we said in our fourth quarter, we anticipated that those higher utilization levels would continue into the first quarter and then be further impacted by the changes we had always anticipated in response to the changes to utilization management programs. So as we evaluated the first quarter inpatient utilization, I had provided some commentary a couple of weeks ago at a conference and acknowledged it. For January and February, we did see slightly higher inpatient utilization, where the ultimate impact of some of those program changes was a little bit different than we had expected, but we had commented that the results were improving week to week. We continue to see that, such that, while we were exiting February, we would say that the last week of February results were much more in line and we saw that continue into March and even some slight positive favorability such that for the full first quarter, as we said in our posted commentary, inpatient utilization overall is in line with expectations. So that's positive. We'll have to see how the non-inpatient trends and inpatient unit costs develop as we get more visibility into the claim maturation. The other early indicator is how prior year development matures. In the first quarter, we feel like we have better visibility for incurred claims through the third quarter of 2023. We think that the change healthcare disruption was more impactful to incurred periods of the fourth quarter and more recent. So we felt comfortable relying on what we saw through the third quarter. And as we said in our commentary, we did see positive prior year development, particularly for the third quarter across both inpatient and non-inpatient. So we view that as positive. As the claims further mature, our hope is that we'll see some further progress into the fourth quarter. But for purposes, our quarter-end reserving, we did not contemplate that just because we recognized we have limited visibility. As you said, as we did our analysis for the first quarter, we made an explicit adjustment for what claims we believe were missing due to the changed health care disruption. And based on those results, we would have seen some net positivity in the quarter all in. Because we did recognize that we didn't have full visibility, we did go ahead and book additional claim reserves that ultimately reported our MLRs in line with expectations. Our hope is that we will see that, that proves to have some conservatism. We will see how that continues to develop as all of those claims are received and processed, and we'll keep you guys updated on any intra-year development. But otherwise, hopefully, that's helpful in understanding what's reflected in the first quarter.

I wanted to focus on the discussion regarding the 3% plus margin, which seems to be leaning towards the lower end of the 3% to 5% margin that many of your peers are discussing and possibly lower than what you previously mentioned. If that's accurate, why would that be the case for your company? Additionally, over the past couple of years, you've been working on shifting this towards an enterprise margin. I would like to hear how you perceive a 3% MA margin could relate to the expected enterprise margin.

Kevin, yes. So yes, we continue to be oriented to enterprise margin and maximizing that across the health plan and CenterWell capabilities. And so don't intend on a recurring basis to speak specifically to the health plan. But given the magnitude of the impact we're anticipating for 2023 and 2024 and our acknowledgment that the margins currently are sitting closer to breakeven, we felt it was important to reiterate our view of what the long-term margin potential should be minimally for individual MA, not only for Humana but the sector more broadly. And we do believe that 3% plus is a reasonable margin longer term. Now to the degree the industry ultimately normalizes to something higher than that, we're not trying to suggest we would intentionally suppress it. We would expect to have a margin on par with the industry and competitive, and we think that would be minimally 3%. I would say, as we think about the CenterWell opportunity, as we've said before, there's literal incremental opportunity from just further penetrating our CenterWell capabilities by health plan members, which we continue to focus on. And then in addition to that, we do believe over time, if we can create differentiated experiences for our members who use those services, then we can increase claim satisfaction, and patient satisfaction, increase engagement, which should ultimately lead to better service results, improved loyalty and retention and overall improved total cost of care health outcomes, which can be driving further incremental margin and also reinvest it back in the business to support further growth. So we remain as optimistic as ever about the long-term potential and do just acknowledge in light of the final rate notice our progression back to that minimum 3% health plan margin will take a little bit longer than we had initially expected.

Two quick things I just want to make sure I understand. Back on the first quarter call, we asked about TBC and you felt it wasn't a constraint to margin recovery for '25. And I think what's changed is that might have been true with the 0% funding assumption, but at a negative you're just more underwater, so to speak, from an underwriting perspective. And so now TBC is more relevant to '25. So I just want to confirm that. And then secondly, that $6 to $10 bridge, in our view, the final notice, on paper, wipes out most of that bridge. But at our conference in March, you had suggested you had still expected to see some earnings growth for '25. So I just wanted to see if you could affirm that expectation today?

Yes. Gary, and you are correct. With where the final rate notice came in, it will require larger benefit reductions to achieve stable margins and approach the TBC thresholds in some cases. And so that's where, as we said all along, we will be evaluating plan and county exits where the TBC limits impede our ability to price products at a reasonable margin. And then also look for opportunities within the bids to optimize benefit changes to support further margin improvement. Given the competitive bidding process, we're going to avoid sharing any specific details today on what that might look like. But certainly, as Jim suggested, post-bid, we'll be able to share a little bit more detail on how we approach the strategy for '25 plan designs. We do recognize that in light of the final rate notice, sort of net membership will be more impactful to what we can ultimately deliver for '25 earnings than it might have been in the previous thinking. And so that's where we just feel like we need to have more visibility into competitor reactions to the final rate notice before we can really evaluate that. The final thing I'll say is, technically, as we sit here today, we do not have the TBC threshold for 2025. And to the degree that moves even a couple of dollars positively or negatively, can impact ultimately what we think we can deliver for margin progression given where we are. So for all of those reasons, we're just going to need some additional time. But as we said, as we know more, we will make sure to update you and provide you with information as we become more confident in the information that we have access to.

Hello, can you hear me?

Yes.

I wanted to follow up on Kevin's question and ask one of my own. Regarding the 3% margin target, I recall that when I calculated for 2025 with the $37 figure, I estimated about a 3.5% individual MA margin within that $37. Is that in line with what you previously assumed for comparison? Can you also confirm that this doesn't include investment income, as that complicates comparability? On the topic of 2025, while we know rates, the key variable seems to be Medicare Advantage membership. I understand there's less visibility here, but could you walk us through this? I often receive questions regarding the P&L impact from lost membership, specifically looking beyond just margin loss to consider issues like SG&A deleveraging and whether efficiency gains can offset that. Additionally, I'm interested in any downstream impacts from CenterWell. It would be helpful if you could provide a framework to understand the negative P&L impact from a 1% decline in membership, excluding margin loss.

Okay. Yes. So I think that was six questions in one, but I will do my best to hit them all. To your first comment about the $37, you are correct. And here in that initial modeling, you can think of it between 3% and 3.5% over that period. And we had always said that our belief was that any margin progression and improvement would largely come from productivity and efficiency, not MLR gains and then any sort of revenue and claim trend vendors would be sort of support the product to remain competitive and continue to grow. But, yes, you were correct in terms of where we would have been thinking in the previous guidance. And you are correct, the 3% plus that we referenced does not include investment income. And so that can sometimes vary in terms of how peers report their margin targets. But for us, that would exclude investment income. In terms of '25, as you said, TBC is going to be a huge factor, just given where we think we are in terms of expected benefit changes and the net membership growth, as you said. The other thing I'll mention before coming back to membership is just trend. Depending on how the trend develops in, well, frankly, how '23 ultimately restates, how '24 develops, that could be impactful to '25 as well. We are not pricing for any favorability to emerge in 2024. And so to the degree it does, that would be incrementally positive going into next year as well. When you think about the membership, I would say the absolute membership is certainly important. And in light of the final rate notice and the expected changes that we expect, we think our ultimate result will be more sensitive to the net membership than it might otherwise have been. And then in addition to that, I would say, plan mix underneath. There are varying margin profiles across a deal versus non, certain geographies and other factors. And so that mix ultimately will be important and how our plans are ultimately positioned relative to others. I would say right now, as we've said all along, we are anticipating that membership will decline for 2025, largely because we do intend to exit certain plans in counties whether that is incrementally larger or smaller based on the other plans will be very dependent on what we see across the competitive landscape. And as we know more, we'll certainly keep you apprised of our thinking. Depending on the level of membership change, we certainly will be mindful of driving the appropriate admin cost adjustments in light of that. We are currently, as I said, planning for membership losses, so we would be proactively anticipating that. The variable is certainly much easier to address than normal course. We would just have to be very mindful of the targets we set across some of the non-variable items, but certainly are anticipating that and we'll have strategies in place, should you see differences in the membership that we're currently thinking. And then finally, I would say, generally speaking, the largest CenterWell business that's impacted by any net member change is the pharmacy just given the penetration within the Humana pharmacy. That also is fairly sensitive to mix, less sensitive to dual changes who use mail order at a lower rate and be more highly sensitive to consumers who are shopping on value in terms of those co-pays. So that's something we'll continue to monitor. But I would say mostly, we would be looking at the impact of pharmacy. But impact will be much smaller across primary care and home and primary care, in particular, because they continue to have work on contracts with other providers such that even if we see a member just on a health plan side, hopefully, they're positioned to retain them on the clinic side through their other payer contracts.

Just to clarify the TBC commentary, our understanding is there are a lot of benefits that are not governed by TBC like flex cards. And it seems like you're suggesting that you're not comfortable making up the incremental rate headwind by cutting benefits that are outside of TBC. I was hoping you could elaborate a little bit on this dynamic and how you're thinking about the sensitivity of benefits that are outside of TBC thresholds.

Yes. Sure, Stephen. So I would say on the non-D-SNP side, as we talk about the benefits, most of the benefits are submitted to TBC. So even things that are technically supplemental, things like dental, Part B givebacks and those are for purposes of TBC accounting tools. There are some items that fall outside of TBC, some things like transportation, OTC, fitness and a few other things, but are relatively small versus those things due to product TBC. We will be considering changes across both categories. Certainly, and in some cases, we will be going above TBC. In other cases, not. And that will be as we evaluate just the current financial performance of the plan. Even post some of these impacts and whether we believe it's situated in a way that can drive profitable growth in a sustainable way. For those plans, as we said, that are not, we will go to the maximum that we can in order to ensure that the products are properly positioned. On the D-SNP side, technically, they don't apply TBC to the D-SNPs and most of those benefits are going to be the supplements, right? You've got the healthy options card because it covers food, OTC, transportation. So technically, there is no limitation on that side. And so that is more thinking through how are those plans financially performing, what's the opportunity for further growth in those markets. Those are all things we will be considering. We do expect benefit changes on the D-SNP side. And the dual plans will see more impact from the IRA as well. So those are all things we'll consider, but technically don't have the same literal TBC limitation.

I was wondering if you could provide a little bit more information on a previous utilization question. You mentioned earlier some measures you took to address the higher mix of short-stay inpatient volume versus observation stays. You saw earlier in the year, and I believe you've noted some training and other measures to bring those inpatient avoidance rates back in line. But just curious to what degree those measures impacted your APT performance for the quarter. And if there could be, that could be a source of some outperformance through the balance of the year versus your 90% guidance.

Yes, Ben. So you are correct. As we said on our fourth quarter call, we were anticipating in light of the 2-midnight rule changes that we would see an increase in short stays and things that under the old rules were billed as observation, they would now flip to inpatient stays. We saw that in the fourth quarter start to emerge and did continue to see that in the first quarter incrementally. As we said at the Cowen Conference, initially, we did see the avoidance rates fall short, a bit short of what we had expected. But as we said, as the providers and our staff were trained and became accustomed to the new rules, we did see those rates improve week over week, such that by the time we exited February, they were much more in line with what we expected. So as I said earlier, we did see some unfavorability in APT's January to lesser degree in February, but then March, as we saw those rates come in line, we're actually slightly positive such that for the full first quarter, largely in line on a utilization basis. One thing we want to continue to evaluate is what the resulting unit cost is on those higher incremental APTs. In theory, they should be lower. That could provide a tailwind for the year. But as we said before, we're relying on the claims coming in and being paid to fully assess that. So we did not take that into our first quarter results and something that we'll continue to evaluate over the second quarter. But I do think potentially could be a tailwind relative to our expectations. The only thing I'll say is that, if you think about the 90%, if you remember earlier this year, we did acknowledge that the changes to the physician payments that were implemented in February did present a headwind to our internal plan. And that was worth about $150 million for the year. We did not change our MLR guidance this morning. And so you can assume that here now we're assuming that we will cover the impact of that physician fee schedule change. Some of this positivity would certainly help do that. But if for some reason, we didn't see that emerge, obviously, with the admin cost favorability that we delivered in the first quarter, we certainly have confidence that in any event, we'd be able to cover it through admin savings. But as we said in the commentary, we are cautiously optimistic about what we're seeing on the individual MA side. We'll just need to be able to further evaluate paid claims from both the unit cost perspective and the non-inpatient trends.

Can you hear me?

Yes, A.J.

I apologize for the brief interruption. I want to quickly address two points. You mentioned that for the fourth quarter and year-end commentary, you believe that the market can handle an annual improvement of 100 to 150 basis points in margins over the next few years. You also indicated that projecting further might present competitive challenges for seniors. I'm trying to understand if your perspective on achieving this annual improvement over the next few years has changed. Are you suggesting that the starting point for 2025 may be lower, but you still anticipate a gradual recovery in margins over time? Any insight on that would be helpful. Additionally, although it hasn't been asked, I noticed in the press release that you mentioned operating expenses having some timing impact this quarter that could be favorable. Could you elaborate on that and how it influences the outlook for the remainder of the year?

Certainly. In terms of our plans to achieve the long-term goal of 3% margin recovery, we recognize that this will take several years. The timeline for recovery will be influenced by the funding, regulatory, and competitive environments. Compared to our earlier expectations, we now believe that margin recovery in 2025 will be less than previously guided, due to factors related to the TBC threshold and the recent final rate notice. Additionally, for 2025, we are facing the phase-in of V28 as well as significant changes to Part D from the IRA and an unexpected rise in medical costs that developed after submitting the 2024 bids. These factors will limit margin recovery in 2025. Looking ahead to 2026, while we will still have the final phase of V28 to contend with, we won't face the same Part D changes or trends that are currently affecting us. This should allow for more pricing flexibility aimed at margin recovery. After 2026, once V28 is fully phased in and assuming a favorable rate environment, we expect further opportunities for margin improvement, which is why we anticipate a longer timeline than we initially hoped for. It’s also important to note that if trends develop differently than what CMS expected in their 2025 rate notice, which predicted a moderation in trends, this could positively impact future CMS rates. Overall, we believe that 2026 and beyond will present better opportunities for margin recovery compared to 2025. Regarding operating expenses, we saw significant positive results for the quarter. While some of these results may persist through the year, part of the favorable outcome is likely one-time in nature and will not repeat. Additionally, some benefits were timing-related, where expenses came in differently than we anticipated in our budget, such as marketing and hiring, which may not recur and could reverse throughout the year. Overall, we still expect a positive outlook for the year, but it would not be accurate to fully project the first quarter's results across the entire year.

I am interested in understanding how you view the value proposition for seniors, particularly in comparing Medicare Advantage and traditional Medicare in 2025. We are all aware of the challenges facing the Medicare Advantage value proposition due to the difficult reimbursement outlook. However, it seems that seniors in traditional Medicare will also encounter significant challenges, especially regarding the impacts of the IRA on Part D. Additionally, I am curious about what you have observed in the Medicare Supplement bookings and whether this might lead to higher rate increases. Furthermore, CMS has indicated that they are not seeing a rise in utilization in Medicare fee-for-service, which appears to contradict the trends we observe in the market. Ultimately, I am trying to determine whether Medicare Advantage enrollment growth compared to traditional Medicare might not decline as much as anticipated due to these challenges, or if the difficulties in Medicare Advantage are so severe that we should expect a slowdown.

Scott, thank you. I'm sure Susan appreciates the chance to take a break from the financial questions. Regarding the value proposition for Medicare Advantage, we still believe it is substantial for several reasons. Firstly, the economics are strong; currently, we see around $2,400 a year. While there may be minor changes for 2025 due to benefit adjustments, we do not anticipate this will significantly affect the appeal of Medicare Advantage compared to Medicare fee-for-service. Secondly, the additional benefits that come with care coordination, such as transportation and dental services, are not available in traditional Medicare fee-for-service. Thus, we perceive both the monetary value from an actuarial perspective and the extra benefits offered to Medicare Advantage beneficiaries. Our analysis indicates that the current value proposition remains higher than it was three or four years ago, although slightly lower than today. We are optimistic about growth in this area. With that, Susan, would you like to address the Medicare supplement question?

Yes. The recent healthcare disruptions had a significant impact on our Medicare Supplement business. I'm not certain if this is due to the Centers for Medicare & Medicaid Services not coordinating with providers regarding redirection to Medicare Advantage plans, but we noticed a larger effect on Medicare Supplement than expected. Currently, our visibility into the situation is somewhat reduced. Regarding the impacts of the Inflation Reduction Act for 2025, they will affect Part D, as noted before. The extent of the impact will vary among the stand-alone Part D plans, given that each has a different underlying structure. Moreover, those enrolled in Medicare Supplement plans will also need to purchase a stand-alone Part D plan, which could influence their perspective on the value of Medicare Advantage plans and may help mitigate the effects on our Medicare Advantage offerings.

And Scott, I think your other question was just relative to the growth of Medicare Advantage and just how that looks. And we continue to see and believe over the coming years that it will be a mid-single-digit growth, and that will be a combination of demographic growth, maybe slowing a little bit in the latter years of this decade, but we continue to see that along with the penetration of more beneficiaries using Medicare Advantage. Kaiser put out an estimate over the next few years that there will be about a 60% penetration with MA and we continue to believe that's very achievable going forward. So we feel the value proposition is going to continue to be strong as a result of not only the actuarial value but also the additional benefits. We continue to believe that that's going to drive more penetration of Medicare Advantage for Medicare beneficiaries overall. And so we look at continuing to maintain mid- to single-digit growth.

Just getting back to the 3%, I guess, how did you come to this long-term industry margin of 3% plus? What does that mean for Humana relative to the industry? And what do you think that translates into in some form of like return on invested capital? And then just a follow-up on the exits. I'm just curious what percentage of your membership is in areas that are even being considered for market exits. I'm not looking for a specific estimate of how many members you'll lose, but just a sense of how many markets are even in that bucket of consideration?

As we consider the 3% margin, which Justin mentioned earlier, that has historically reflected our business performance and our expectation is to maintain this level. We believe the industry will require at least that margin, taking into account the inherent risks in the insurance sector and the necessary regulatory capital. This margin seems appropriate for sustainable operations while still offering strong value to consumers. When looking at long-term targets discussed by many national peers, they fall within the 3% to 5% range. There may be variations in how those figures are calculated among peers, but we believe the long-term margin is lower. We face some environmental challenges in the near to midterm before returning to that level, which will be affected by funding conditions and the recent trends we've observed. Regarding return on invested capital, our view remains consistent with our historical performance, and we do not foresee any significant changes in expected returns for the business. Concerning market exits, we haven’t disclosed specifics about the number of plans or the percentage of covered members. We prefer to provide more details after the bid filing, as we've successfully managed larger-scale plan exits in the past. However, we don't want to share this information before submitting bids due to competitive reasons.

And just on the return on capital, Josh, as you look at the math, we put about 10% statutory capital in the business, and this is a 3% margin kind of activity, which creates a significant amount of incremental return on capital for us. And since all this is organic growth and not any kind of acquisition growth. I mean it's highly accretive to the overall cost of capital to the company.

I have a few follow-ups. I guess, first on utilization, there's some thought that some of the March trend could be related to calendar dynamics around Easter versus more sustained change in the trend. I guess, could you maybe just give us your view here? And then also be curious if you're seeing any changes in the level of acuity of patients that are showing up for care. And then Susan, could you maybe talk about what's driving the EPS seasonality this year? I think you've guided for over 80% of earnings in the first half of the year. Is it mainly the result of that expense timing that you mentioned in response to A.J.'s question? Or is there any other dynamic that we should consider?

Yes, Nathan, in terms of the first quarter and utilization seasonality, I would say, common, this is a leap year. So all things being equal, you would have had a higher trend in February because of leap year. But then there was other workday seasonality over the quarter such that we would say, in total, there's really not a seasonality impact and relatively consistent with the prior year. And those are all things we would have anticipated in our initial plan and then the guidance we gave for the first quarter. In terms of acuity, I would say aside from just again, the impact of the utilization management changes, where we always anticipated that effectively lower severity short-stay events would end up moving into the inpatient cost category versus the previous observation, which we reported ER. So that, we certainly are seeing, as I said, we need some additional time to see how the unit cost ultimately develops. Some of the early indicators do suggest those are on average lower unit costs, which makes sense, but we need, again, because of the change disruption, just some more time to fully evaluate that. But aside from that, I would say, again, limited visibility because of some of the disruption to the more recent periods in terms of claims submissions. But with what we do have, I'd say nothing that has caused us any concern from an acuity standpoint. In terms of EPS seasonality, I would say the biggest driver of the differences you see every year and the disproportionate first half proportion is going to be just, in general, the lower proportionate contribution of the MA insurance business to the total than prior years. And so you're going to have PPD, which is disproportionately first half of the year, obviously impacting the first quarter, investment income and all those other things that are developing as they would in normal course, are just going to result in more earnings in the first half of the year just because MA proportionally is much lower, obviously, given the overall EPS and earnings expectation for the year. Admin certainly has some seasonality to it, but I would say nothing unusual as we think about the year. The only thing that we did see because of the lower enrollment this year, you do see some positive impact in commissions. That is partly what we're seeing in the first quarter. And so that, based on the level of growth we would expect could develop a little bit differently. Again, those are things we will plan for. But aside from that, I see nothing in particular to call out in terms of admin seasonality relative to typical.

You revised your individual MA membership growth target up 50,000 versus your initial expectations of growth for 100,000. Hoping you could elaborate on the drivers of that. Was that just conservatism on your end? Or did you see any unexpected changes in the distribution channel during the open enrollment period that resulted in higher membership?

I would say the main difference is just how we performed in OEP. And I think that's a combination of a few things. I think it's some of our competitors having challenges in servicing their growth has been a benefit to us, and we've seen some recovery from that. And the second thing is the actual performance that we've had in the non-duals area and the ability for us to continue to grow in markets that are both competitive. The third thing I would say is that what we've seen even in times that we are less competitive in the marketplace that our brand stands out and the stability of our brand, both from our service point of view and from our quality point of view, overcome a lot of the benefit differences that we have in the marketplace. And I think in the OEP side, we saw that.

Yes. And just to add to what Bruce said, the increase was largely attributable to non-D-SNP sales, retention in total was largely in line. We saw in the OEP higher volume than we had expected, both in agents and switchers from other MA. And so as we think about the rest of the year, some of that agent favorability drove the increase. The switchers obviously less so once the OEP ends. And then as we've said, the progression from current to year-end is also impacted by the redeterminations that will continue throughout the rest of the year. There's a little bit of less visibility into that because of the changed health care issue where we rely on them for dual eligible status verification. So we'll continue to see how that develops. But that's why you can see the full OEP not fully run rating through the end of your estimate.

Could you talk a little bit with the CEO transition as to Jim, what your impressions of the opportunities are? Are there any value creation opportunities that maybe are more structural or larger in scale, like outsourcing PBM or things like that? And have you guys made any sorts of operational changes in leadership or structure, again, contemplating both the market dynamics and the CEO transition?

Thanks for the question. This is Jim. No, there are not any changes to the team. So let me hit that one real quick. Second, are there opportunities? We're still in the process of evaluating opportunities. We certainly believe that there will be a continued need to drive efficiency. That's both on the operating side as well as continuing to get stronger in how we do medical cost management over time. We're still evaluating those opportunities. And the expectation is that by the end of the year, we would have more to say about where exactly the opportunities are and how we intend to go after them over time.

Susan, I want to go back to your comments around the PDP and the IRA for 2025. Can you talk about what you've seen for conversion over to MA in '24? And then how are you thinking about stand-alone PDP in 2025? Will that become unprofitable on a stand-alone basis? And then just secondly, I just want to understand, when you talk about the update for the bid strategy, will it be a separate press release? Or are we waiting for Q2 to get that update?

In terms of the IRA impacts and our thoughts on stand-alone Part D, regarding your question about PDP conversions, we continue to see a significant opportunity to transition Humana PDP members to Humana MA. For those members who decide to convert to MA, we have good visibility on the MA offerings they select. We generally capture a larger market share of those individuals making that choice compared to the overall individual MA space, which is encouraging. Although the absolute volume is somewhat lower due to the overall slower membership growth we're experiencing this year, this advantage remains consistent as seen in the past. As we look at our stand-alone Part D strategy for 2025, we are particularly focused on risk mitigation, given the substantial changes and the sensitivity regarding the profitability of underlying membership based on utilization levels, especially among specialty utilizers. Considering the current positioning of our plans and the restriction of having only three plans in the market, our objective will be to minimize any risks associated with our offerings and adopt a more cautious stance while we observe how the industry reacts to the IRA changes, how the health plan performs in light of those changes, and then reassess for 2026. As noted, we will likely see larger premium increases for some Part D plans, while others might experience smaller increases depending on their composition. This could present opportunities for MA, which we will continue to analyze. That sums up our outlook for 2025, considering the range of changes, and there is certainly much for the industry to learn as we navigate this landscape. I can't recall if there was one last question I missed addressing. Did I cover everything?

Just, will it be a separate press release around your bid strategy? Or is that something that you'll update on Q2?

Yes. I would imagine we will likely do that on the second quarter call. I don't know if we're scheduled at any conferences in between. My guess is, no. But my guess is it would be the second quarter call.

Well, thank you for your time and interest today. In closing, I would reiterate that Humana had a solid start to 2024. And while we acknowledge that the entire MA industry is navigating a difficult near-term environment, we continue to believe the strong fundamentals and growth outlook of MA and value-based care remain intact, and the strength and scale of our platform and differentiated capabilities will allow us to effectively manage through the uncertainty, compete effectively and deliver compelling shareholder returns over the long term. We appreciate your continued support and look forward to providing updates on our performance and outlook throughout the year. Have a great day.