Humana Inc.

Good day and thank you for standing by. Welcome to the Humana fourth quarter earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star, then one on your telephone. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star, then zero. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. In a moment, Bruce Broussard, Humanities President and Chief Executive Officer, and Susan Diamond, Chief Financial Officer, will discuss our fourth quarter 2021 results and our updated financial outlook for 2022. Following these prepared remarks, we will open up the lines for a question and answer session with industry analysts. Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan for the Q&A session. We encourage the investing public and media to listen to both management's prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the investor relations page of Humana's website, Humana.com, later today. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission, and our fourth quarter 2021 earnings press release as they relate to forward-looking statements and to note in particular that these forward-looking statements could be impacted by risks related to the spread of in response to the COVID-19 pandemic. Our forward-looking statements should therefore be considered in light of these additional uncertainties and risks, 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 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. 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 Versard.

Thank you, Lisa. Good morning, and thank you for joining us. Today, Humana reported financial results for the fourth quarter of 2021, reflecting the strength of our core operations, which continue to perform well throughout 2021, despite the challenges the industry faced as a result of the pandemic. With that in mind, and as we enter a new fiscal year, I want to take a moment and speak not only to our 2021 results and our outlook for the current year, but more broadly about our strategy and the steps we're taking to position Humana for success. Susan will discuss our results and outlook in more detail in a moment, but at a high level, our 2021 results and our 2020 outlook are largely in line with recently provided guidance. Adjusted earnings per share for the full year were $20.64, which was above our previous estimate of approximately $20.50. This represents growth of 11.6% off of our 2020 baseline of $18.50, all covering a $1 unmitigated net COVID headwind. Looking forward, we provided full-year adjusted earnings per share guidance of at least $24. This represents 11.6% growth over our 2021 baseline of $21.50 and 16.3% growth over our actual adjusted EPS of $20.64. This guidance includes an embedded COVID headwind of $1. Before I highlight some of the actions we're taking to deliver an improved individual Medicare Advantage membership and how we're applying learnings from the most recent annual enrollment season, I want to emphasize that we are operating from a position of strength. I'm incredibly proud that Humana is the second largest Medicare Advantage plan provider, supporting over 5 million beneficiaries with high-quality coverage. The quality of our product offering is the highest among our public peers, with over 97 percent of Medicare Advantage members in plans with a four-star rating or higher. We've also increased the number of contracts that received a five-star rating from one contract in 2021 to four contracts in 2022, which is the most in our history. Finally, we saw an improvement of 930 basis points in our net promoter score this past year, reflecting our ongoing efforts to enhance the customer experience. We continue to advance our customer segmentation efforts, developing plans that are tailored to the unique needs of our specific member populations. This allows us to provide benefits that enhance and complement an individual's existing coverage through programs like Medicaid or entities such as Veterans Affairs. We've seen great success through our initial segmentation efforts, growing DSNP membership greater than 40 percent in both 2020 and 2021. In addition, our Humana Honor Plan designed for veterans that is also available to all Medicare-eligible grew membership 80 percent last year. We have a strong brand, and our expertise caring for people as they age is highly recognized by consumers. As a result, we've increased market share over time, achieving annualized enrollment growth of 11 percent since 2017. which is well above market growth. Moreover, we have a proven track record of balancing membership and margin growth, with our long-term earnings growth target range of 11 to 15 percent continuing to be the ultimate goal. With that in mind, a key element of our plans to return to industry-leading membership growth without negatively impacting earnings growth. We will achieve this by leaning into our successful history of reducing costs, and improving operational efficiencies. We are committed to delivering sustainable cost reductions in order to create the needed capacity to improve our competitive positioning. We are committing to drive a billion dollars of additional value for the enterprise through cost savings, productivity initiatives, and value acceleration from previous investments. This will create the capacity to fund growth and investment in our Medicare Advantage business and further expansion of our healthcare service capabilities. These efforts span several areas. First, we have already begun a critical review of our ongoing strategic initiatives across the company. We intend to further focus our investments on those priorities where we have the greatest conviction of significant value potential. We will slow or pause further investment in some areas in order to focus on accelerating value creation from investments we've already made. Next, we will drive further organizational efficiencies by optimizing our workforce in order to increase the speed, agility, and pace we must work at as a large integrated healthcare organization. We see the opportunity to streamline our operating structure, standardize work, and simplify certain processes to eliminate low-value work. Third, we will reduce and optimize third-party spend. In some areas of our business, this will translate to decrease in vendor use, while in others we will outsource work to best-in-class suppliers. In addition, with the ongoing reality of COVID and the way it has changed the way everyone works, we will be significantly rationalizing our real estate portfolio. And finally, We are driving greater operational efficiencies across the organization by modernizing, streamlining, and improving our processes through automation and digital advancement. This includes the use of technology to replace manual efforts in our core operations and to increase productivity of our workforce. Beyond creating capacity to invest in our Medicare Advantage products, we are also focused on optimizing our marketing spend and sales channels to maximize growth. As we've discussed previously, we have undertaken significant work each year to determine the optimal level of marketing investment and how these dollars are put to work. Applying our learnings from the most recent selling season, we expect to further optimize our investment in marketing to ensure our messages are heard by more prospective customers. We also plan to accelerate digital capabilities to increase our effectiveness and efficiency in member acquisition and focus on experience of our existing members to improve retention. We will continue to focus on ensuring we have a clear, differentiated, and omnipresent brand with a strong call to action that supports industry-leading customer acquisition. And as we improve the value proposition of our plans, we believe we will see even greater returns from our marketing spend. Regarding our sales channel, We will look to optimize the use of our internal channels as well as external partners. Our 2,400 employed sales agents work to create long-term relationships with our members, ensuring they are educated on their plan choices and the benefits and additional support services each plan offers. This leads to better engagement, greater plan satisfaction, and ultimately better health outcomes and longer tenure with Humanae. We do not expect significant shifts in channel mix this year. We will continue our efforts to improve retention of our members broadly. This will include a particular focus on those enrolled in third-party call centers, where we've seen term rates approximately 400 basis points higher than our internal call sales channel. We'll be working with our call center partners to more closely replicate the experience delivered by our employed agents through enhanced training and service level agreements, and we'll also look for opportunities to create greater retention and quality incentives for sales partners. As I mentioned a few moments ago, Humana offers superior quality to its members, has a strong brand, and a long history of expertise in caring for people as they age. Additionally, our clinical focus and suite of healthcare service capabilities allow us to take a holistic approach to supporting members, ensuring they receive high-quality, proactive, and comprehensive care which improves health outcomes. We will leverage the strength of these core fundamentals as we work with our internal and external partners to improve retention. As we look ahead and focus on our core operations, we are committed to continuing the track record of being capital-efficient as we consider strategic advancement and return of capital to shareholders. To that end, we are committed to advancing our plans to divest a majority interest in our hospice business, as we are confident we can deliver the desired experiences and outcomes for patients transitioning from restorative care to hospice through partnership models. We have continued to explore various alternatives for the long-term ownership of the structure of the business and have initiated steps to reorganize the hospice business for standalone operations, while also making investments to improve clinician recruiting and retention to position the business for further growth. While we're not able to share details today on a specific transaction structure or timing, we expect that we will be in a position to provide a meaningful update by our first quarter call. Our ability to drive innovation and improved clinical outcomes is enabled by our strong integrated care delivery platform. And in recent years, we have significantly expanded our health care service capabilities in order to better serve our members and strengthen our payer agnostic care offerings. Our health care service businesses are an important component of our strategy and will contribute considerably to Humana's long-term growth. Combining our leading Medicare Advantage platform and growing pharmacy, primary care, and home services increases our total addressable market and creates the opportunity for improved clinical outcomes, lower cost of care, and increased enterprise margin from our health plan members. Our PBM, which is the fourth largest in the country, processed 515 million 30-day equivalent scripts in 2021, an 8% increase year over year. In addition, our pharmacy dispensing business continues to deliver industry-leading mail order penetration, and we've successfully implemented tools to enhance our e-commerce experience while expanding our mail order footprint as we get closer to the customer. Our success is not only expanding volume, but improving health outcomes, evident by our four-star level performance and medication adherence metrics, which are three times weighted. In our primary care business, we are in the early stages of growth and continue to expand our geographic presence. We are committed to funding the organic growth of our primary care organization in 2023 and beyond through a combination of on and off balance sheet, such that we expect no dilution to earnings growth from the organic growth expansion. To provide more insight into our primary care organization, we ended last year with 206 centers, representing a 32 percent increase over the prior year. We are accelerating the build-out of our platform through a combination of de novo expansion and an organic growth. We completed nine acquisitions last year, bringing 40 newly wholly-owned centers to our portfolio. We also opened 15 new de novo centers and consolidated five clinics into other locations. We plan to continue prioritizing tuck-in acquisitions focused on the markets where we have established presence to provide more access and high-quality care to patients. In addition, we recently announced our intent to build an additional 26 centers this year under our existing joint venture with Welsh Carson. When combined with planned acquisitions, this is expected to increase our center count by approximately 20 percent and bringing our total center count to approximately 250 centers by the end of this year. As we look to 2023 and beyond, we plan to build and acquire an additional 30 to 50 centers per year, again, financed in a way that is not expected to be dilutive to earnings. I would remind you that each mature center is projected to drive annual EBITDA of $2 to $4 million, highlighting the meaningful opportunity to increase contribution to enterprise earnings going forward. Turning to the home, we recently announced the appointment of our new home leader, Dr. Andy Agawabe. Andy comes to Humana from the University of Connecticut, where he serves as interim university president, and as CEO of the UConn Health System. He will join Humana and serve as a member of our management team starting later this month. He has been responsible for many home health organizations as part of an integrated health system. He has extensive operational experience with for-profit and non-profit organizations. And as a doctor, he understands the value of care in the home, why seniors want more of it, and our vision at Humana for making it easier for people to get the care they need at home. Kindred at Home has a strong fee-for-service business that we are committed to continuing to grow. In addition, as I shared last quarter, we have made substantial progress towards our goal of scaling and maturing a risk-bearing, value-based model that manages the provision of home health, durable medical equipment, and home infusion services. We believe the model has significant value creation potential, both within Humana as well as payer agnostically. We have a goal of covering nearly 50 percent of Humana Medicare Advantage members under this model within the next five years. The home model is active in South Florida and Texas, and today will begin the rollout of additional markets of Virginia and North Carolina in the second quarter. subsequent rollout to additional geographies this year and early next year. After completing these first two phases of expansion, our value-based home health model will provide coverage to approximately 15 percent of Humana Medicare Advantage members. In addition to the expansion of the full value-based model, we have the opportunity to accelerate our return on investment by introducing select components of the full-based home health model, such as standalone DME or utilization management services, in less dense markets. We believe approximately 60 to 70 percent of human members will be served by the comprehensive value-based model over time, while the remaining will be supported by select components based on the needs of the market. Before I turn it over to Susan, I want to once again emphasize that Humana's core operations are strong. And we continue to create significant value by driving growth in our top-tier Medicare Advantage business, expanding our Medicaid footprint and increasing contribution from our health care service businesses, and delivering ongoing cost efficiencies and productivity improvements across the company. Indeed, we have great confidence both in the fundamentals of the Medicare Advantage industry and the long-term growth prospects for Humana. And as we look Our improved membership growth, combined with further penetration in our growing and maturing health care service businesses, position Humana favorably to deliver on a long-term earnings target in 2023 and beyond. We have a proven track record of not only balancing membership and margin to deliver our long-term 11% to 15% earnings growth target, but also improving health outcomes and lowering the total cost of care for our members, and optimizing our operation through productivity and efficiency initiatives. And we look forward to delivering on our latest targets. With that, I'll turn the call over to Susan.