Humana Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Humana fourth quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session, and to ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please note that today's conference is being recorded. Thank you. I would now like to hand the call over to your first speaker, Amy Smith, Vice President of Investor Relations. Ma'am, please go ahead.

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 2019 results and our updated financial outlook for 2020. Following these prepared remarks, we will open up the lines for a question and answer session with industry analysts. Our chief legal officer, Joe Ventura, will also 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. 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 2019 earnings press release, as well as in our filings with the Securities and Exchange Commission. Today's press release are 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 may during this conference call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Thank you, Amy. Good morning and thank you for joining us. Today we reported adjusted earnings per share of $2.28 for the fourth quarter of 2019 and $17.80 for the full year, above our previous estimate of $17.75. We are pleased with our 2019 performance, particularly our success in balancing and executing on multiple priorities as we grew membership, improved the quality and productivity of our operations, and continued to invest in the long term. During 2019, we experienced significant membership growth in both Medicare Advantage and Medicaid, where we were able to serve our country's sickest and most vulnerable population in need of quality care and better health outcomes. For individual Medicare Advantage, we saw the highest growth we've seen in a decade, with over half a million seniors choosing Humana MA plans. In addition, we have a record number of MA members in four-star and higher plans. Our Medicaid membership grew nearly 38% with our statewide Florida win for 2019, and we added approximately 140,000 members on January 1, 2020, under our Kentucky Medicaid contract that was previously fully ceded to CareSource. We also demonstrated the strength of our Medicaid capabilities through procurements, expanded our senior-focused, payer-agnostic primary care centers, significantly advanced our home health capabilities, expanded our pharmacy operations, and took significant initial steps towards creating an interoperable health ecosystem via technology partnerships. As we begin to scale our clinical solutions in 2020, we are continuing to balance our strategic initiatives across five key areas of influence on a member's health journey. Primary care, home, pharmacy, social determinants of health, and behavioral. Let me give you an update on the recent progression in some of these areas. In 2019, we opened 29 senior-focused primary care centers under our wholly-owned Alliance and JV model, bringing our center total to 262. And we continued to see the maturity of our value-based care platform resulting in more providers in surplus and improve the operating performance of our legacy Conviva operations. We are now evolving from proof of concept to scaling these senior-focused, value-based primary care assets. And just this week, we announced an exciting strategic partnership with Welsh, Carson, Anderson, and Stowe that will accelerate our payer-agnostic center expansion giving more seniors access to quality primary care built around their unique health needs, especially in geographies that lack the access today. WCAS is an important strategic partner in Humana's journey of building an omnichannel senior-focused consumer platform, and this new arrangement is a capital-efficient approach to rapid expansion. WCAS, together with Humana, has committed approximately $600 million to create a joint venture that is expected to open a minimum of 50 payer agnostic senior focused primary care centers over three years, beginning in 2020. WCAS will maintain majority ownership and partners in primary care will manage the centers for a management fee. Similar to our innovative deal to acquire Kindred at home, put-in call options provide partners in primary care with a path to full ownership of the centers in five to 10 years. We are excited to be able to work with WCAS to facilitate faster entry into additional communities in need of senior-focused primary care. We're also expanding our JV and Alliance model and expect to add 35 centers in 2020 with these important partners. Today we serve over a quarter of a million of our individual MA members in our owned JV and Alliance model. Our goal is to double the number of members served in this model over the next several years. Our pharmacy operations just completed the acquisition of Inclara Health Care. one of the nation's largest hospital pharmacy and benefit management organizations. This acquisition provides Humana Pharmacy the opportunity to expand our comprehensive care continuum strategy to cover the pharmacy-related needs associated with hospice care, simplify the mail-order pharmacy experience, and advance the technology stack for in-home pharmacy through areas such as enhanced mobile medication management and improved electronic medical record connectivity. In the home, we advanced our transformational home health initiative with Kindred at Home and Curo through the implementation of a company-wide EMR and the extrapolation of best practices for our pilots to over 20,000 home health episodes. The next phase, beginning in 2020, is to provide more care services in the home, including acute care and primary care in the home, so that we may begin to generate meaningful trend benders for our health plans in the future while improving clinical outcomes for our seniors. We remain committed to improving the life of those we serve through our social determinants capabilities. which positions us strongly to serve the vulnerable populations, Medicare and Medicaid, and provide us with the experience needed to meaningfully participate in the MA value-based insurance design program and Medicaid procurements. In 2019, we scaled social determinants of health screenings to over one million, more than doubled the number of screenings in 2018, and connected those in need to community resources. We will continue to expand our outreach and services around social determinants of health in 2020 and beyond. Lastly, recognizing that healthcare continues to evolve and technology will be at the forefront of the evolution, we announced two key strategic partnerships in 2019 with Microsoft and Epic to leverage technology to develop a health ecosystem that enables a seamless and integrated experience. Our focus in 2020 will be migration to the cloud to enable interoperability and agility. In addition, we are seeing NICE uptick in provider engagement on Compass, our population health delivery platform, and a higher direct-to-consumer sales completion in our digital virtual intelligent plan recommendation tool as compared to our standard online enrollment tool. We've also seen that members use the virtual recommendation tool are significantly more likely to share their health information with us in ways that could improve their decision making and help us better onboard and engage clinically once they are enrolled. As a company, we continue to emphasize the enduring need to drive efficiency and productivity across the organization while not losing focus on the key themes of providing a simpler experience for our customers and delivering better health outcomes. As we discussed last quarter, the return of the health insurance industry fee in 2020 posed a significant headwind for the industry, reinforcing this need to drive productivity. As Brian will describe, we worked diligently to identify ways to improve our cost structure by leveraging technology to streamline processes and executing a reduction in our workforce, including redeployment of individuals to open positions, which impacted approximately 2,000 jobs. While we were able to drive meaningful savings, it was not an easy task, and there are still members who experience an increase in premium or reduction in benefits for 2020, given the magnitude of the HIF. Given the significance of the headwind, particularly the $2.10 headwind from the non-deductibility of the HIF, we are pleased to provide the initial adjusted EPS guidance in the range of $18.25 to $18.75, representing reasonable growth while also delivering solid expected MA membership growth. We expect to add 270,000 to 330,000 individual MA members in 2020, representing growth of approximately 7.5% to 9.2%, which we believe at a minimum will be in line with the industry growth. These expected results reflect balanced growth across all segments, with each segment projected to deliver meaningful pre-tax or EBITDA growth in 2020. Brian will provide more detailed segment level guidance in his remarks. As we have discussed previously, given the HIF is a premium-based fee, beneficiaries of Medicare Advantage and Medicaid, the sicker and most vulnerable populations, are disproportionately taxed. Despite that, seniors continue to increasingly choose Medicare Advantage over Original Medicare, with compelling individual MA industry growth of 8.7% in 2019, excluding the impact of cost plans, compared to 7.2% in 2018 and 6.1% in 2017. MA penetration continues to increase, reaching 34% in 2019, and 2020 industry growth is expected to keep pace with 2019. even with the return of the HIF, a testament to the value the MA program provides and a model for other potential public-private partnerships for additional populations needing affordable health care. Accordingly, we are pleased that Congress waived the fee beginning in 2021, recognizing that the imposition of the HIF falls disproportionately on Medicare beneficiaries and reduces affordability. The permanent repeal of the HIF is a significant win for consumers, and we are appreciative of the strong bipartisan support to repeal it. Looking ahead, we are committed to delivering strong short-term performance while investing in transformative capabilities for the long-term sustainability of the company. To that end, we will continue to stay focused on three key priorities. Expanding our local presence with primary care centers, the home, and value-based partnership models. Modernizing our digital and analytics infrastructure, including cloud migration, interoperability, and the creation of a longitudinal health record. And developing an enterprise clinical operating model built on technology and analytics to integrate our clinical assets focused on patient-centered care and disease-specific best practices. In closing, I want to personally thank our associates for their dedication to our strategy and operational excellence. We are pleased that because of their exemplary efforts and our success in 2019, including improved net promoter score, significantly individual MA membership growth, and adjusted EPS growth in excess of our long-term target, We are able to reward our associates with higher incentive-based compensation. Our associates continue to demonstrate world-class engagement, which manifests in a better experience for our customers, leading to a long-term sustainability for the company. Over the next year, we expect political discussion to continue to focus on healthcare and results in market volatility. However, we are confident in the Medicare Advantage program, which has significant bipartisan support and our opportunity to be part of the solution to both addressing the rising cost of healthcare and the need for quality outcomes. With that, I'll turn the call over to Brian.