Humana Inc.

Ladies and gentlemen, good day and thank you for standing by. My name is Lire and I'll be your conference operator today. At this time, I would like to welcome everyone to the Humana Incorporated 4th Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. It is now my pleasure to turn today's call over to your host, Ms. Amy Smith, Vice President of Investor Relations in the Virginia Conference.

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer, and Brian Kane, Chief Financial Officer, will discuss our fourth quarter 2018 results and our financial outlook for 2019. Following these prepared remarks, we will open up the lines for a question and answer session with industry analysts. I would like to welcome our new Chief Legal Officer, Joe Ventura. Joe will be joining Bruce and Brian 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. Additionally, we have posted supporting materials to our investor relations page for reference during Brian's prepared remarks. 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 fourth quarter 2018 earnings press release, as well as in our filings with the Securities and Exchange Commission. 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. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Bruce Broussard Good morning, and thank you for joining us. Today, we reported adjusted earnings per share of $2.65 for the fourth quarter of 2018 and $14.55 for the full year, above our previous guidance of approximately $14.40, primarily due to favorable Medicare Advantage results. We are pleased with the consistency of an ongoing improvement in our performance, which can be attributed to our focus on optimizing our core operations. Our desire to drive effective clinical outcomes is leading us to integrate healthcare with lifestyle. To that end, we are focused on five areas of influence. Primary care, the home, pharmacy, behavioral health, and social determinants. In 2018, we continued to make advancements at each of these five areas, and I'd like to briefly touch on each. In primary care, Conviva continues to make operational improvements, and as expected, our 233 owned, joint ventured, and alliance clinics, the majority of which are payer agnostic, including our two partners in primary care clinics inside Walgreens stores, experienced positive results in the annual election period, or AEP. Humana MA membership grew over 9% in these clinics in the AEP, excluding the more mature Conviva clinics. Regarding the home, we established an independent home health company, joining Kindred at Home and Kiro, that provides significant overlap with our Medicare Advantage business. We are now implementing care and payment models oriented to patients with multiple chronic conditions in five pilot markets. We've optimized our ability to exchange key medical history with kindred at home. We use this information during the home health admission process to inform the patient's treatment plan as we deploy evidence-based, disease-specific care plans to identify and prioritize the most impactful clinical interventions. Additionally, Kindred at Home has selected Home Care Homebase as the electronic medical record and practice management system for both home health and hospice, and will begin implementing this system in 2019. This will accelerate our ability to proactively identify key clinical interventions while improving revenue capture and business and quality reporting. Turning to pharmacy, the integration of pharmacy and healthcare is an important part of managing chronic conditions as medication adherence and education result in a reduction in inpatient admissions, ER visits, and how members engage with their primary care physicians. This is especially important given Medicare members have four times the number of prescriptions as commercial members. We continue to see industry-leading mail order penetration rates in both our Medicare Advantage and Medicare Standalone Part D, or PDP, products. However, we acknowledge that PDP plans have become a commodity as evidenced by Humana and others experienced significant declines in PDP enrollment during the recently completed AEP with price leaders taking share. You will recall that we pioneered the PDP market with the introduction of our low price co-branded plan with Walmart. Others in the industry have now imitated this plan. While it will take time, we intend to stay competitive and are working through alternatives to change the value proposition and impact the market. Transitioning to behavioral health, we recognize the significant impact mental health has on individuals' physical health and well-being. To drive better clinical outcomes, we expanded our internal behavioral health model to our nearly 6 million TRICARE members in 2018. and we are now beginning to insource our Medicare Advantage behavioral health offerings, beginning with Florida. Lastly, regarding social determinants, we continue the work of our bold goal to improve the health of the communities we serve 20% by 2020 and beyond. By partnering with local community agencies and programs to expand access to critical support systems that address food insecurity, and social isolation, among other endeavors. Seniors living in bold goal communities continue to outperform other communities we measure in terms of having fewer unhealthy days. For perspective, each additional unhealthy day a patient has is associated with approximately $16 higher medical costs per person per month. In the spirit of our bold goal, our associates are empowered to speak up and help our members when they need it the most. As I've said before, associates in our call centers and at our primary care clinics learn far too frequently that a member has a lack of access to food and other critical resources. In response, these Humana associates proactively seek out our bold goal team and the local connect the member with local community resources to help them with food and other access issues. Taking this extra step has a positive and transformative effect on our relationship with the member. It not only drives better member experience, but also leads to better health outcomes. For instance, recently a member who had just returned home after a week in the hospital due to a fall was surprised when one of our team members, on her own, showed up at her door with an assortment of fresh foods so she could stay healthy and out of the hospital. These actions aren't written in our company's policies and procedures. Rather, they're ingrained in the culture where our purpose goes beyond formal job descriptions. Importantly, we also continued to advance our core operations in 2018. We returned to strong Medicare Advantage membership growth. We expanded our Medicaid operations as one of only two companies awarded a statewide Florida contract, and we exited our individual commercial business and the closed-block long-term care insurance policies. As we celebrate our success as a company in 2018, we also celebrate our employees, without whom our financial and operational achievements would not have been possible. We are pleased that our strong performance will result in an increased incentive compensation for our employees at all levels across the organization, participating in our expanded Associate Incentive Program, which closely aligns compensation to the interest of our shareholders. Turning now to 2019, we experienced meaningful tailwinds coming into the year, including, among others, the strong Medicare Advantage rate notice and health insurance industry fee, or HIF, moratorium, which allowed us to make significant investments in our products to benefit our members and drive improved health outcomes. These benefit enhancements combined with our deepened broker relationships led to the strong results in the recently completed annual election period, outpacing industry growth. We are projecting individual Medicare Advantage membership growth of 375,000 to 400,000 members, or 12 to 13 percent for the full year. While the individual MA growth exceeded our initial expectations, the growth was still within the bounds of our operational capacity. As a result of previous investments, we are confident we have the appropriate infrastructure, risk management programs, and predictive capabilities in place to manage this level of growth. Preliminary data suggests that approximately 44% of our individual gross sales during the AEP came from competitor Medicare Advantage offerings. From a geographic perspective, we generally experienced widespread growth, but did grow disproportionately in key markets with higher than average industry or humana penetration, including Florida, where we have a five-star plan, and Texas. While it is evident the industry as a whole invested in benefits for the members in 2019, in great part due to the HIF moratorium, we believe that the return of the HIF in 2020 will negatively impact seniors across the nation in the form of reduced benefits and or higher premiums. Accordingly, we are working with partners to urge Congress to take legislative action to repeal the HIF for 2020 and beyond, recognizing that there is a sense of urgency given the rapidly approaching deadline for submitting bids for 2020 Medicare Advantage offerings. As we move forward in 2019, the evolution of healthcare and technology is progressing rapidly, as evident by the government's implementation of Blue Button 2.0 and the large entrance of large companies like Google and Amazon in the healthcare space. Blue Button 2.0 puts the entire health record of a Medicare patient at their fingertips, giving them the power to determine who accesses to their information. This advancement facilitates the ability to integrate healthcare information and require companies like Humana to take action. We will continue our momentum by executing and proving out the investments we made in our consumer-focused health strategy. and expanding those investments to create a health ecosystem. Deepening our health relationships in the five areas of focus I discussed previously. In that context, we are placing additional effort and resources in the following areas. Building the infrastructure to facilitate internal and external interoperability, including systems that create a longitudinal health record of a member or patient. developing an enterprise clinical operating model to integrate clinical interventions across healthcare channels, expanding the computing power of our data infrastructure, enabling us to increase our use of AI and machine learning, including partnering with leading external organizations, and developing more agile consumer experience development tools to create a simpler experience for our members and provider partners. These efforts will accelerate our ability to identify the most important clinical interventions while also enabling us to personalize the experience. Combined, we believe these actions will drive higher clinical engagement. In addition, as technology becomes more sophisticated and the use of it expands, this will allow for more convenient access to care. like telehealth and home care. This will reduce the need for members to receive care in traditional settings, like doctors' offices. We are also refining our products to offer a more personalized experience based on customer segmentations to address members' functional and emotional needs. Although we have work to do, we are proud that Humana was recognized by Newsweek. as best in customer service among health insurance companies in the magazine's America's Best Customer Service 2019 rankings. In closing, we are excited about our opportunity to improve the lives of millions of people we serve while helping lead the way in transforming the future of our industry. Our success in 2018 coupled with our strong MA growth and the recently completed AEP, provided momentum into 2019. And today, we announced initial guidance of $17 to $17.50 EPS on an adjusted basis for the full year. This represents an increase of 17 to 20 percent over adjusted EPS of $14.55 for 2018. In addition, our Board of Directors has voted to raise our cash dividend to $0.55 per share, an increase of 10% from the company's previous dividend of $0.50 per share. Brian will go into more detail in his remarks. With that, I'll turn the call over to Brian. Thank you, Bruce, and good morning, everyone.