Humana Inc (HUM) — Q3 2025 Earnings Call Transcript

Thank you, and good morning. I hope everyone had a chance to review our press release and posted remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, Humana's President and Chief Executive Officer; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session, where Jim and Celeste will be joined by George Renaudin, Humana's President of the Insurance segment; and David Dintenfass, President of Enterprise Growth. 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 third quarter 2025 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 in future filings or communications regarding our business or results. Today's press release, our historical financial news releases and our filings with the SEC are all also available on our Investor Relations 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, the call is being recorded for replay purposes. That replay will be available on the Investor Relations page of our website, humana.com, later today. With that, I will turn the call over to Jim.

Thanks, Lisa, and good morning, everyone, and thank you for joining us today. Before we get started, I just want to take a second to acknowledge the tragedy that occurred here in Louisville last night, it's had quite an impact on the community, and our thoughts go out to the community and all the families who are impacted. With that, let me turn to the quarter, and let me hit the headlines. As you have already seen, we delivered a solid third quarter in line with our expectations. Our third quarter medical cost trends continue to be in line with expectations, and we also continue to anticipate our full year 2025 EPS outlook of approximately $17. We remain committed to achieving individual MA pretax margin of at least 3% over time, and the external environment continues to evolve largely in line with expectations, and we are executing against our plan. I'll now briefly describe the progress we are making operationally. And as usual, I will frame my comments today around the 4 drivers of our business. The first of those is product and experience, which drive customer retention and growth. Second is clinical excellence, which delivers clinical outcomes and medical margin. Third is highly efficient operations. And fourth is our capital allocation and growth in CenterWell and Medicaid. I'm going to spend most of my time today on product and experience as well as clinical excellence. Let me start with our Medicare product and experience. So first, I want to emphasize that it's very early in AEP. We have roughly 2 weeks of incomplete data. And while we will provide a sense of what we are seeing, this is very much subject to change. Second, I want to reinforce how we think about growth. Our focus is on maximizing customer lifetime value and customer NPV. That's our focus. The way we do that is delivering an exceptional experience that fuels member retention. Other key growth levers like benefit design and member and product mix and channel mix are all tightly aligned with our operational capacity so that we can absorb, onboard and serve members in a way that maximizes lifetime value in NPV. Third, I want to reinforce again that we are confident in our pricing, and we're pleased that we expect to return to growth. We will take as much growth as possible from improved retention. This is unquestionably desirable growth, and we welcome new sales. However, we are prepared to take targeted actions to slow new sales if we reach the point where the volume risk is negatively impacting member experience. We do recognize that you want us to provide a specific growth target. We do not think that focusing on a net growth target is the right metric because as I just shared, growth through retention is desirable, and we will take as much of it as we can. We also will not give a specific number around new sales targets because the amount that we can absorb is dependent upon member product and channel mix. So now as to what we are seeing new sales are at the high end of the anticipated range of outcomes that we expected in AEP. Channel mix has meaningfully improved relative to prior years. We have greater volume in our own distribution channel with select high-performing partners and in digital distribution. This channel mix tends to be correlated with customer segments that have a higher lifetime value and are more engaged. We are also seeing favorable product mix, including higher than initially expected sales in plans with 4 stars and greater. We are not seeing outsized sales in areas where competitors have exited plans. We are experiencing significantly reduced Humana plan-to-plan mix with plan-to-plan sales down year-over-year. We believe that this is likely an early indicator that our stable benefit strategy and changes to our customer service approach are working to reduce voluntary attrition, though we need more time to validate this assumption. So while it's early, we feel good about what we are seeing so far in AEP. And as we have said previously, we will continue to monitor new sales volume and manage it dynamically. We are prepared to take further mitigating actions as we did heading into AEP if it appears that new sales will put member experience at risk. We do recognize that there's a lot of interest in our overall growth strategy and the ongoing AEP. So I'm pleased that David Dintenfass will join Celeste, George and I for Q&A today. David joined the company nearly 2 years ago as President of Enterprise Growth. He came to Humana with 30 years of experience across a range of industries, including financial services, where he was focused on customer segmentation, acquisition, driving an experience that fuels retention to ultimately drive sustainable and profitable growth. David's consumer-focused experience and perspective has been and is instrumental to our journey to become a consumer health care company. Now to turn to clinical excellence, I will focus on Stars performance. Just to recap the key messages from our 8-K and audio file released in early October, we are disappointed, but we are not surprised by our bonus year '27 Stars results. The results are consistent with our baseline planning scenario and our outlook remains the same as we previously communicated at our investor conference in June. We have – we did see operational gains in Q4 of 2024 that have continued into 2025, and we feel good about our operational progress this year. More specifically, in our current measurement year, bonus year '28, we are seeing meaningful year-over-year improvement across the vast majority of metrics. We also continue to see week-over-week improvement as recently as October, and we are showing 600,000 more gaps closed year-over-year as our momentum continues to remain steady. Given the Stars program is measured on a curve, it would not be prudent to share additional results at this time. However, once the hybrid season is complete in the second quarter of next year, we will provide some additional visibility into our final operating results. However, we will not speculate on thresholds. All in, the takeaway remains that we continue to be confident that we are on the right track to return to Top Quartile Stars results in bonus year '28. Now I'm going to turn to our highly efficient operations we are making – where we are making meaningful progress. I'm going to share a couple of examples. We recently partnered with Genpact to outsource elements of our finance capabilities. This will both improve our capabilities and it will reduce cost. We also have a newly introduced agentic AI platform, which is helping deliver capabilities like Agent Assist that help our call center advocates and agents focus on supporting our members. This is helping to improve call accuracy and deliver faster response times, which drive better outcomes and experience. Collectively, we expect these items to generate greater than $100 million of savings over a few years while also improving the quality of our operations. These changes are a small sample of our multiyear transformation, which will include near-term tactical cost programs, but also longer-term efforts that change how we operate. Now turning to capital allocation. We have freed up capital by selling a non-core asset, the Enclara Pharmacia business and are working to sell additional non-core assets. We also agreed to deploy capital to a deal that is expected to close this month in Florida, the Villages Health, which provides primary and specialty care services at the fastest-growing retirement community in the country. We also continue to feel good about our CenterWell Pharmacy strategies. We continue to develop our direct-to-consumer capability, and we are also moving into direct-to-employer opportunities. So in conclusion, we are pleased with our solid performance year-to-date, and we continue to have confidence in the full year 2025 outlook. We feel good about our pricing and the outlook for AEP 2026. Bonus Year '27 Stars results were disappointing but consistent with our expectations, and the outlook for Bonus Year '28 Stars continues to trend in the right direction, and we remain confident in a return to top quartile results.

Thank you, Jim. Our third quarter results reflect solid execution and underlying fundamentals, including membership and patient growth, revenue and medical cost trends that continue to develop consistent with our expectations. In addition, we experienced some favorability in the quarter, which enabled higher than previously anticipated investments. These investments were focused in areas that both accelerate our transformation and where we have seen strong returns to date, such as Stars and clinical excellence as well as in areas such as network management, which position us well for the future. We are pleased that our year-to-date performance and outlook support reaffirmation of our full year adjusted EPS outlook of approximately $17, while also making an additional approximately $150 million in incremental investments, including the higher investments in the third quarter. As a reminder, we included the Doc Fix in our guidance for '25. If it is not implemented for '25, we may invest all or a portion of the onetime savings into items that position the company for long-term success. Now turning to the balance sheet and capital deployment. I would first like to comment briefly on the days in claims payable or DCP metric. Our DCP changes, both sequentially and year-over-year were largely driven by items that are generally timing in nature and not related to claim reserve levels, including changes in process claims inventory and provider payables. And as previously discussed, the year-over-year comparison was further impacted by changes related to the Inflation Reduction Act. Importantly, the estimate for claims Incurred But Not Reported, or IBNR, remain largely consistent in these periods, even with our year-over-year decline in individual MA membership. As we have previously shared, we believe this serves as a better indicator of the consistency in our reserve methodology and the relative strength of our claims reserves. Now moving to our ongoing efforts to increase the efficiency of our balance sheet. As Jim mentioned, we completed an asset sale during the third quarter and are continuing to pursue the sale of additional non-core assets while also making significant progress on capital optimization, the details of which we will share when we complete the execution. With respect to capital deployment, we will remain prudent in our near-term approach, taking a balanced view to evaluating capital investments and returns. Accordingly, our '25 outlook does not contemplate additional share repurchase activity beyond the buybacks in the second quarter, which offset dilution from stock-based compensation. From an M&A perspective, we see significant opportunities to take advantage of the current market dislocation and acquire attractive small to midsized provider businesses, such as our pending acquisition of the Villages Health, while remaining focused on managing our debt-to-cap ratio. Our debt-to-cap ratio at the end of the quarter was 40.3%, down from 40.7% as of June 30, and we continue to target a ratio of approximately 40% over the longer term. Looking ahead, I echo Jim's message that we feel good about our '26 pricing and the outlook for AEP. In addition, we are executing on the plan that we laid out at our Investor Day in June, managing the levers within our control with a focus on delivering best-in-class clinical excellence, transforming the company to enable scalable growth and driving enhanced operating leverage. We believe that these efforts will allow us to return the business to its full earnings power while driving better outcomes and experiences for our members, patients and associates.

Thanks, Celeste. Before starting the Q&A, just a quick reminder that fairness in those waiting in the queue we ask that you please limit yourself to one question. Operator, please introduce the first caller.

I understand that it's too early to share any membership growth projections, but I was hoping you'd be able to offer a framework for the level of new growth that you're comfortable with before it starts to impact your operational capacity. And based on your prepared remarks, are you already starting to pull some of those levers you mentioned?

Andrew, thanks for the call. So this is David Dintenfass. First of all, it's good to be on my first Humana earnings call, I'm really glad to be part of this team. So Andrew, let me just take a step back and I'll answer your question, but let me just make sure the approach to growth is really clear, and Jim touched on this. Our focus is increasingly on the lifetime value and NPV of our membership. And so growth is an outcome of that, but also our current membership and retaining them is a primary objective. How do we do that? How do we drive lifetime value and our margin objectives that we shared at Investor Day? So number one, we have to have appropriate pricing. We have to price for risk, and that is a very collaborative process working with underwriting. It goes to number two, which is that there's been a bit of a cycle, right, which is why there's all this question about is growth good or is growth not good. And that really comes from an approach that says, we're going to grow on plans that, frankly, don't have a very attractive margin. They're attractive for the customer. We bring them in and then those plans can degrade over time. The problem is if you overgrow in those low-margin plans, you say growth might not be good. We don't think that's the right long-term strategy. We know that our customers don't want their plans to be changing constantly. So instead, what we've done is try to stabilize the margin across all of our plans. So that matter where growth might come from, that growth is attractive for the long term. That goes to number three, which is a focus on the customer. So increasingly, we're saying, how do we design our plans, and we're saying, let's start with what the customers most want, which is stability, especially on their core medical benefits, and we've tried to provide that this year. Now this is in the context that we've had 2 years where we've been cutting benefits, and we've also exited markets where we didn't think the margin profile is where we needed to be. That's put us in a really good position this year to follow the customer and have more stability. And that goes to number four, the final part, which is what we talked about at Investor Day and Jim touched on as well, which is we need to differentiate the experience in the long term. Product is important, but it's only part of the equation. If we have products that have appropriate pricing for risk, then it's about attracting members, retaining them, getting to do all the things clinically and on Stars that drive true lifetime value. So with that approach, you asked how much growth can we handle from an operations perspective. We are working through that very dynamically. We're not sharing a number in part because we are working on operations. The principle we have is that, first of all, let's make sure that all of our members have a great outcome, and we're retaining them at a better rate. We committed to much better retention at Investor Day, and we are fully committed to make progress on that next year. But as far as new membership, we want to make sure that every new member comes in has a great experience as well and that we're able to retain them. And we're working very dynamically across all parts of the operation to make sure that we're balancing the new member growth through our ability to consume the volume.

I know you don't want to give a growth number for MA membership, but can you give an update on your diversification strategy? I know you're trying to shift some members out of H5216. Can you give us an update how that strategy is going?

Yes, I’d like to address that. To clarify, our primary objective with the diversification strategy is to reduce our reliance on 5216. As many of you know, about 43% to 45% of our membership has been concentrated in 5216 over the past few years, which poses too much risk tied to a single contract. We should adopt a portfolio approach, ensuring a more balanced membership across various contracts. This way, if any one contract underperforms in a particular year, the overall business is less exposed to risk. Achieving this is our top priority, and while it’s not something that can be fully realized in just one year, we believe we’ve made progress toward this goal. You can expect to see us take incremental steps over the next two or three product cycles. As we reduce our focus on 5216, we will also explore contracts rated at 4 and 4.5 stars to help establish this balance. This year, we have identified some contracts with those ratings to achieve that balance, and we feel positive about the progress we’re making. However, after just two weeks of data, we’re not ready to discuss specific numbers. This has always been part of our plan, and we are encouraged by the initial results. We will provide more details as we gain a better understanding of where this will take us by January.

Just a quick follow-up first. You talked about membership growth at the high end of expectations. Can you share with us what that expectation range is on new membership? And then my question is, can you give us an update on your percentage of MA individual membership in fully capitated agreements this year? And what do you expect it to be next year? And are you seeing any pushback from providers in terms of giving you these lives back because they're having economic issues making a margin on these benefits?

Yes. Justin, let me hit the first half of that, and then I'm going to hand it to George for the second half of that. On the first half, and I know you expect this answer, but we're not going to give a number. I will just go back to why we're not going to give a number. We are truly looking at multiple things. We are looking at member mix. We are looking at product mix. We are looking at channel mix because each of those impact our operations in slightly different ways. We are also ramping up operations because that's what you do when you're headed into a solid growth year. And so we are looking at all of those dynamics, and we will make adjustments along the way based on the collective set of things that we're looking at. And when we say that we will make adjustments, we made adjustments going into AEP. I think people recognize that. There have been reports out on that fact. And we will continue to monitor in AEP, but we'll also be looking at, hey, do we want to think about OEP differently? Do we want to think about the rest of the year differently? So all those factors are in play, and it just makes it really hard to say, "Hey, here's a number at this point in time." With that, I'll hand it off to George.

Thanks, Jim. We have taken measures like reclaiming Part D risk due to the significant cost shifts from the IRA. As David mentioned, we've been reducing benefits for two years to realign the product so that it remains attractive for us and our value-based partners. In addition to these two main actions, we are also implementing Stars mitigation programs to lessen the impact of revenue declines based on performance in the Stars program. We are actively employing specific mitigation strategies, collaborating with our value-based partners to address any challenges they encounter, and engaging with them daily regarding necessary contract changes. We are pleased with the progress we are making. I want to emphasize that we have taken significant actions over the past couple of years, and we are currently executing a Stars mitigation program. When we consider these elements together, we feel confident about our relationship with our value-based partners.

And I know you're not providing 2026 guidance today clearly, but would love if you could give some initial thoughts on the type of margin that you'll assume for the new to Humana sales growth. Is it reasonable to think that, that would be comparable to the 2% roughly you're targeting ex the Stars headwind for the overall book? And then obviously, I'm sure it's dependent on mix, but just based on what you know today.

Yes. Thanks for your question. So as Jim said in the opening remarks, most importantly, we're on track for the plan we laid out at our Investor Day for 2028. And it is too early to provide guidance for 2026, particularly given where we are in AEP. As we think about the margin of the new members to some extent, it will be driven by which contracts they are sold on. So obviously, those that sell on to the 4, 4.5 star contracts will come in at a higher margin. But in aggregate, we continue to expect that our margin for individual MA, excluding Stars World double in 2026 over 2025, and then we'll continue to make progress in 2026. So it's going to be really, again, like how it comes in is a question of what contracts they're sitting on. But based on all the work we did going into AEP in terms of our product design and our channel mix, we are happy with the margin we're seeing and expect it to be relatively consistent with our overall margin, although some will be above and some will be below.

I was hoping to hear a little bit more about some of your Stars recovery efforts. You noted last month that the latest round of scores did not fully reflect some of the improvements that you've implemented. And now that we've seen how 5216 has performed across the member experience and chronic conditions measures. Can you talk a little bit about the measures or general categories where you feel like you've made the most tangible progress versus the latest data?

Yes. So the operations in this current year are obviously focused on HEDIS and patient safety metrics. And as I kind of referred to in my opening remarks, we're actually seeing strong progress pretty much across the board in those metrics. And look, again, we remain confident, optimistic, positive about the operating progress that we've made across those range of metrics and the position that will put us in next year as we obviously have another set of metrics that we have to work through in the first and second quarter of next year around CAHPS and HOS and the TTY metrics. So right now, based on the things that we can control this year, it's been broad improved performance that makes us feel good about our overall trajectory. Yes, George, do you want to add?

Yes. Jim, the only thing I would add to that is part of the strategy that David laid out is including the stability. Stability will also help us as we continue to make progress in our termination rates and as well as how our members perceive us through the experience we're delivering through stable benefits. So those are also positive factors to contribute to not just the administrative measures and the health outcome measures that Jim mentioned, but overall to the CAHPS as well.

I guess you mentioned 3 things, I guess, that were giving you comfort in the, I guess, quality of the membership growth that you're seeing so far. I think better channel mix, fewer plan-to-plan sales and then, I guess, lower voluntary disenrollment. Can you just kind of remind us what the MLR or margin differential is between good channel, bad channel, plan to plan, new to plan and then retention versus new membership so we can kind of better think about what it means to have those buckets growing faster? And then just on the disenrollment comment, you talked about better enrollment. Is it back to normal? Is it better than normal that you're thinking about?

Yes. Let me address two things. David, feel free to add anything if you’d like. We aren’t going to provide specific margin information, but I can share some insights about the dynamics across the channels that give us more confidence. The most significant factor relates to net present value and long-term value. We observe varying attrition rates, or retention, across different channels. Additionally, our cost of acquisition varies by channel as well. We’ve also noticed differing engagement rates, especially in aspects like Stars, accurate diagnosis, and individuals managing their medical care, which vary across channels. We consider all of these factors when assessing the economic impact of each channel. One more point I want to mention is that we currently do not have definitive data showing improved retention since the relevant information isn’t available at this time of year. However, reduced plan-to-plan sales are typically associated with better retention, and we have been observing a decline in plan-to-plan sales year-over-year. Those are the key components. Did I miss anything, David, do you want to add something?

Yes. I think you got it exactly. I don't know if you mentioned, I think there's also different complaint to Medicare Stars outcomes we see by channel. This has been a big factor, especially if you look at the broker channels, and you've seen us take some actions. That's largely based on the quality of how those customers are experiencing that relative to how the Stars outcomes are going to look.

I guess I wanted to focus on this LTV and NPV focus that you're talking about. I guess, is this long-term value member as the North Star a strategic shift for the organization? Meaning, are you willing to accept different margin levels in, say, your insurance segment because you can create more margin through CenterWell? I just want to understand how this impacts long-term margins and if this is, in your view, a shift in how you've thought about things in the past as an organization.

Yes, Josh, thanks for the question. I think it's an evolution. I think this has always been part of how the company has thought about this. But as I said, part of this question about is growth good, is it not? It comes down to the margin of that growth. And what drives lifetime value? You need to have margin to drive lifetime value. You need to have retention to drive lifetime value. And we are trying to get to a place where all of our products on the insurance side have a reasonable margin, trying to get out of the cycle of having low-margin products that are high growth and then you worry about overgrowing in them and then having to drive margin in the out years. We don't think that's great for our sustainability. We don't think it's great for the customers. You also brought up the enterprise value. That's absolutely part of the play here. We know that integrated health is a big part of what we think differentiates Humana and looking at the lifetime value of a customer across the entire enterprise is becoming how we look at all of our activities.

Josh, if I could just add one other thing to that is as the long term are here, I can just tell you that what I've seen over the past couple of years, and we've actually talked about this directly during the investor conference, which is we're taking a multiyear view towards lifetime value. And that longer-term view is having us approach products in a different way in this way that leads to better stability and I think better long-term value for the company.

Can I just add to that? While we are focused on LTV and NPV, we recognize we can't have a long term without the short term. So we are balancing the long-term value, the long-term value creation with delivering on the next year or the next quarter. So we are balancing those things. We're not just looking 3 and 5 years out.

There were some data released by CMS prior to open enrollment indicating that the overall MA market may not grow this year. Although you're not able to comment on your specific situation, do you have any insights on the overall market? You mentioned that in areas with planned exits, you are not seeing disproportionate numbers being affected. Are we at a point where the market is so disrupted that some individuals are opting for fee-for-service again? Additionally, could you share your mitigation efforts during this open enrollment? I understand there are some notification periods regarding commission adjustments that might make it challenging to implement changes during this time. I'm trying to grasp what mitigation factors you might pursue if you observe excessive growth in a certain area.

Yes. Let me hit the first of those, and then I'll hand it over to David for the question around plan exits and commission growth. On the market growth, I would just point out a few things. One, the forecasts are never right, right? Like they're never right. You can go back and you can look at the 5, 6, 7 years historically, they're never right. Second, we don't see a reason that the market should grow materially different than the way it did last year or the way it has historically. And so our expectation is it's going to be somewhere in the mid-single digits growth. And again, this is forecasting. So CMS is not going to be right. We're not going to be exactly right. But we don't see what the big difference is from last year in terms of where the market is at as a whole when you look across all plans. And so our expectation is growth is going to look somewhat like last year at the end of the day. And we will obviously know come January, February, but that's kind of what our expectation is at the moment.

Yes. And A.J., the second part of your question about commissions, you've all seen we've already decommissioned a number of plans. That is a potential lever, but there are other levers. Keep in mind that we own a big part of our own distribution, including our own marketing. So we're able to do other levers beyond commissions if we want to have volume match our operational capacity in the back half of the year.

And actually, I'm going to go back to the market point real quick. The bottom line on the market, we don't know if people are going to fee-for-service or if they're going to other plans. But what I would just point out, and we've said this a few times, we are at parity or below the richest plan in the market in many, many geographies. And it just so happens that in a lot of the geographies, we tend to be below or behind other plans in terms of benefit structure. And so that could be playing into it. But again, we don't have enough data to know that for sure.

Could you provide some insights on this year's Medicare Advantage enrollment? It seems that the decline in membership is not as significant as you initially expected. Considering the short-term changes in membership this year, I am interested in your perspective on this. Additionally, with your comments regarding retention for next year, how does this factor into your strategy to double the margin by 2026?

Can I just ask you to repeat the first part of that? What are we not seeing?

In terms of our better-than-expected or lower-than-expected declines in membership this year, the pickup has been driven by 2 things. One, the retention is better; and two, sales have been on the margin better as well. But in particular, as we've gotten later in the year, the increase in the numbers has been driven by better retention. As it relates to MLR, we don't see an impact to our prior expectations based on what we picked up at the end of this year.

Knowing that there is still a lot more to unfold in the AEP, could you provide some insights regarding the sales tracking for the high end of the scenarios, specifically related to the product mix of new sales among PPO, HMO, and D-SNP products? Additionally, regarding the LIS PDP commentary, where the majority of the growth is coming from LIS, could you share any observations on the sources of that growth, such as competitor exits or other existing plans in the market?

Yes. I'll take the first part. I think it's really early to be able to project at that level of detail on the growth. We're just a few weeks into AEP. And what we're seeing is that across the board, we're seeing healthy growth on all segments, but not disproportionate in any one segment. We're also not seeing disproportion in any geography at the moment, including the markets from our competitors. So it's too early to parse it apart, but it looks like it's much more even than it is choppy.

Thanks, Scott. So on the PDP side, we are noticing strong growth so far. We anticipate that most of this growth will come from our basic and value plans. Regarding the basic plans, particularly for low-income individuals, we have observed that we are below the benchmark in roughly twice as many states as we were in 2025. This is expected to result in a significant increase in auto enrollees, which will also include competitor reassignments. Generally, we have found that this is a positive aspect of the PDP business, and we view this development favorably.

Great. I'm sorry if I missed this, but what drove the decision to not crosswalk the group MA members from H5216? Is that just you're thinking you're going to get that back to an appropriate star rating for 2028 or other logistical reasons you didn't make that move?

I'll address that. It comes down to three main factors. First, our focus on maintaining a balanced portfolio of contracts. Second, our commitment to providing stability for our members to enhance retention. Third, our perspective on Stars. These three aspects together influenced that decision. George?

Yes, I would just say that another part of that because it's multifactorial, as Jim said, and we've been saying since we've been talking about the group business. So we remain focused on improving the group MA margins through the various renewal cycles to reflect the reimbursement environment as well as the cost environment. And our business so far, we've renewed 91% of our current group members along that line of recovering margin. So we are making good progress there in the recontracting to improve the margin. We expect fairly solid growth in 2026 with some key new business, including a major airline, a large group in Kentucky as well as Alabama. So as far as Stars go, our plan is to move the group members away from 5216 is not to move our members away at this time because we're making good progress both on the Stars side as well as the margin recovery through the renewal cycles.

And if I can pile on again, this is again an example of not crosswalking these. It's balancing the short term and the long term. We could get a bump in the short term, but risk the longer term on Stars, and we're not willing to do that. So it's a balance of what we deliver in '26 versus what we deliver in '28 on that front.

Just it sounds like medical and pharmacy trends coming in line with your expectations for 2025. I think looking back at the Investor Day, you previously assumed trend would remain elevated for '26. There's obviously the mix elements you've talked about, but any early thoughts on how 2026 cost trend development coming in relative to 2025? And then any way to help quantify how you're thinking about the trend vendor opportunity specifically for next year?

Yes, we have previously mentioned that we anticipate growth levels in medical and prescription drug cost trends to continue into 2026. We expect medical costs to be in the higher end of the mid-range and prescription costs to reflect low double-digit growth. Currently, there is nothing indicating a change to this outlook. Could you please remind me of the second part of your question?

Can you help quantify your perspective on the trend vendor opportunity and clinical excellence opportunity for next year?

Yes. Reflecting on our Investor Day, we discussed the transformation levers, and the clinical excellence trend vendor opportunity is one of our significant ones. We anticipate progress compared to our achievements this year, though I am not ready to quantify that yet. Some of it will depend on the size and mix of our membership, with further advancements expected in 2027 and 2028. However, it's too early to determine specific outcomes due to the various dynamics that still need to stabilize.

Great. Could you talk to some of the margin characteristics and long-term margin targets you've got? In particular, in Medicaid, if you could talk to the differences between traditional and duals where you see long-term margins and how you perceive year 1 margins in that sort of business? And then over in the group MA business, what sort of J curve do you expect as you get new business in there? And maybe just a quick clarification. You'd mentioned a direct-to-employer opportunity, I think, in CenterWell Pharmacy. So if you could just clarify that as well.

Do you want to kick off, George?

Yes, I'll start. Regarding the dual opportunity, we view our Medicaid business through the lens of duals, particularly as we consider the changes planned for dual integration states. We have seen a leading success rate in Medicaid procurements by focusing on areas with strong connections to the dual opportunity. The rationale for this is that duals generally provide higher margins compared to traditional or Medicare Advantage businesses. We have observed that these dual products perform well financially right from the first year, in contrast to some core products that take longer to yield benefits. We're actively experiencing this trend and have secured several Medicaid contracts, which will enhance our dual market presence in key areas. Notably, in 2026, we plan to participate in the Michigan HIDE program in Illinois, which represents a novel dual marketplace. Additionally, we're set to expand our presence in Illinois this year and are exploring opportunities in South Carolina by integrating dual eligibles. Overall, we are optimistic about the potential in the dual Medicaid market.

Yes. And let me just quickly hit the direct-to-employer. I think people are familiar with the direct-to-consumer work that we've been doing in CenterWell Pharmacy, the partnerships, particularly around some of the GLP-1s. We have also seen some interest in similar programs, but through employers and we've been exploring that space. It's too early to know exactly what that's going to look like, but it is potentially another interesting opportunity for us to take advantage of the capability that we have in our pharmacy business.

I know it's a bit early to think about the '27 advanced rate notice, but yesterday we received an important data point. It's perhaps not surprising, but if your fee-for-service cost trend for '25 is 8.5%, that typically indicates a strong rate notice and is significantly higher than what was projected for the '26 final notice, by over 300 basis points. When you combine that with CMS' estimate on '27 trends, it suggests that we could see an advanced notice starting point that exceeds 9% in effective growth rate alone. This is clearly very strong for Medicare Advantage and for Humana. I understand it's still early to discuss this, but does this align with your internal expectations? Also, are there any other key factors you think we should take into account as we prepare for the rate notice?

Yes. I think that speculating on where the rate notice will land has become much less precise than we would prefer. Therefore, we won't comment on their current position, the challenges and advantages they face. We'll have a clearer understanding when we get our first look at this at the beginning of next year.

All right. I was just wondering if you guys had any views on the changes to the reward factor to EHO for all, whatever it's being called next year and implications on your Stars or more broadly, what you think this means for the industry? I don't think you have any challenges with your duals mix low income or disabled population, but just not sure yet what this actually means.

Yes. With regard to the social risk factors that go into that, we're seeing great progress. We're tracking that on a weekly basis as we're tracking all of our Stars progress. And we know that we are making very good progress there. We're seeing week-over-week improvement. So we feel that we're on track for where we need to be to have that factor be positive. We have a good mix of low income within our product mix, including our dual and even products that don't have as large of a specifically dual population with our group being on 5216, as we've talked about before, we're seeing progress there and having a good mix of membership on 5216, even with the deconsolidation, we should still be in good shape with the social risk factor members.

Yes. I'd just say, operationally, we feel good. And obviously, it's hard to tell where the thresholds are going to come in exactly. So this is just one of these things that will be difficult to forecast. With that, I just want to thank everybody for joining us this morning and for your interest in Humana. And I will say again that we're extremely appreciative of our 65,000 associates who are driving the performance that we talk about on these calls and who are serving our members and our patients every day. And so we appreciate your support, and we hope you have a great day. Thanks.