Humana Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Humana Incorporated First Quarter 2022 Earnings Conference 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. To ask a question during the session, you will need to press star then 1 on your telephone keypad. As a reminder, this conference call is being recorded. If you require any further assistance, please press star then 0. At this time, I would like to turn the conference over to Ms. Lisa Stoner, Vice President of Investor Relations. Ma'am, please begin.

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 first quarter 2022 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 first quarter 2022 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 and 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 or results. Today's press release, our historical financial news releases, and our filings with the SEC are also available on our investor relations sites. 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 earnings call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Thank you, Lisa. And good morning and thank you for joining us. Today, Humana reported financial results for the first quarter of 2022, reflecting a solid start to the year. I'll speak briefly about our first quarter results and outlook for the rest of the year before providing an update on our strategy and the steps we're taking to position Humana for continued long-term success. Adjusted earnings per share for the first quarter were $8.04, which was above our initial expectations. This outperformance was primarily driven by favorable pharmacy results combined with lower than planned administrative expenses, some of which is due to timing. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. We raised our full year 2022 adjusted EPS guidance by 50 cents to approximately $24.50, representing 19% growth over our 2021 results. Importantly, our updated financial guidance continues to include an explicit $1 COVID headwind. Our update guide also includes the dilutive impact related to the pending divestiture of the company's 60% ownership of Kindred at Homes Hospice and Personal Care Division. Susan will provide additional detail on our first quarter performance and our full year outlook in a moment. Turning to our previously announced billion dollar value creation initiative, you recall we committed to delivering this value for the enterprise through cost productivity initiatives and value acceleration from our previous investments. This will create capacity to fund growth and investment in our Medicare Advantage business, driving more robust benefits and lower costs for our members, which we believe will lead to improved membership growth. In addition to enables further investment in our healthcare service capabilities, including expansion of our value-based home health model, and transformation of the consumer experience and home delivery service model in Humana Pharmacy. I'm pleased to report with the work completed to date, we remain confident in our ability to realize this value for investment in 2023. As shared in February, we are focused on four key areas that will drive the value creation, strategic initiatives, organizational efficiencies, third-party spend, and automation and digital advancement. We indicated the value would be largely split evenly across the four categories. Through work completed in recent months, we've established goals throughout the business within the four key areas. We now expect strategic initiatives to account for about a quarter of our goal, while organizational efficiencies and third-party spend will each compromise about a third. The remaining 10% of value realized in 2023 will come from automation, which given the nature of the work, will drive some incremental impact in 2024. Susan will provide additional details on the progress made to date. We are pleased with the quick pivot of our teams to support the value creation initiative. It is important to maintain our focus on one of Humana's core differentiators, our strong culture. Currently, we are seeing a slight decrease in engagement, but remain in the top 20% of industry leaders. Engagement scores are impacted in part by the internal uncertainty around our value creation initiative, as well as the strong external market pull, economic disruption, and the inflationary environment. Importantly, we are seeing strong engagement with our nursing population, which is currently at 89%, and we are proud that 86% of our physicians would advocate for Humana as a great place to work. While challenging choices remain to fully realize our goal, I am confident our team is equal to the task and understands the purposeful approach we are taking to make Humana even better. an even stronger company. In addition to creating capacity to invest in our Medicare Advantage product for 2023, we are also focused on working closely with our distribution partners to improve the retention of our members. We continue to work with our call center partners to more closely replicate the experience delivered by our employed agents through enhanced training. We are also focused on service level agreements aimed at improving the quality of the sales experience and ultimately the customer satisfaction and retention. As part of this work, we have developed new computer-based training modules for our call center agents that focus on behaviors linked to customer complaints. While still early, we are pleased to have seen a decrease in complaints to CMS year over year. With respect to compensation for external brokerage, we have introduced new compensation structures designed to improve overall quality by more closely tying administrative service fees to specific quality assurance activities and service levels, as well as addressing agent-level compensation to promote individual quality performance. Within our proprietary sales channel, we are looking at opportunities to advance our payer agnostic capabilities to improve our ability to support consumers who desire more choice. In addition, we are making investments to better link digital first shoppers to our internal sales agents. Digital shoppers are now able to not only complete an application online, but also request that one of our internal sales agents visit their home to discuss Medicare Advantage plan options. The digital shopper is also able to directly connect to one of our internal sales call center agents from Humana.com to assist them in their shopping experience. Finally, we are working with brokers across our distribution channels, both internal and external, to engage the customers in activities that are positively correlated to retention. This includes onboarding activities designed to promote engagement prior to plan effective date, as well as efforts to help members understand and fully utilize their plan's benefits, such as assisting in the activation of their healthy food card. With respect to 2022 Medicare Advantage membership trends, results of the open enrollment period trended slightly better than our initial expectations, driven by higher sales and improved voluntary termination rates, both of which we view favorably. The outperformance was partially offset by higher deaths related to the pandemic in the first couple months of the year. Turning to our health care service businesses, as you know, we introduced CenterWell as the new brand to describe and connect our payer-agnostic health care service offerings. We have significantly expanded our health care service capabilities, including our senior-focused primary care, pharmacy, and home care offerings to better serve our medical members while also increasing our total addressable market. We've been developing our health care services capabilities in three phases. The first is building the capabilities. We are accomplishing this through a combination of organic builds as we've done with our pharmacy business, in organic growth as a result of our acquisition of Kindred at Home, as well as through partnerships, such as those we have with HEAL and Dispatch, which are site of care innovators in the home. The second phase includes enhancements to align with the value-based principles to improve health outcomes, as well as expanding the capabilities to achieve the desired scales. Our primary care business is in this phase today as we are expanding our geographic presence through a mix of building de novo centers as well as tuck-in acquisitions. The third phase is integrating these capabilities in select local markets. We believe the integration of CenterWell primary care, home health, and pharmacy in a local market will lead to improved health outcomes, increased customer satisfaction, and decrease in the total cost of care while also building additional profit pools for the enterprise. Recall that a health plan member who utilizes the full suite of our healthcare service assets can drive two to four times the direct margin contribution for the enterprise as compared to the health plan margin alone. This is what we refer to as the flywheel effect. Let me highlight some of the progress we've made moving our various capabilities through these three phases, starting with home. We started our journey with Kindred at Home in 2018, acquiring 40% minority interest with the belief that a key component of the next generation of integrated care delivery model was the ability to provide care to consumers in their home. Meeting them where they want to be, in a preferred lower cost setting, also recognizing that the traditional volume-based fee-for-service model limits innovation in home health. We then completed the full acquisition of Kindred at Home in August 2021, reflecting our continued commitment to investing in home-based clinical solutions that drive improved patient outcomes, increased satisfaction for patients and providers, and value for health plan partners. We took another step on this journey last week with the announcement of the divestiture of our majority interest in Kindred at Home's hospice and personal care divisions to Clayton, DeLier, and Rice, or CD&R. We explored a broad range of alternatives for the hospice and personal care businesses and believe this transaction best allows us to accomplish our previously stated intent, a divesting majority ownership of these nine core businesses. while maintaining a strategic minority interest through our remaining stake. With CDNR's established physician relationships, value-based care expertise, and record of supporting providers to deliver high-quality care for patients, we are certain these divisions are well-positioned for success under the joint ownership of Humana and CDNR. Importantly, we are pleased that when viewing this transaction in conjunction with our purchase of the broader Kindred at Home platform, we have been able to achieve our objective of substantially increasing our footprint in home care by acquiring one of the leading home health platforms in the country at an attractive valuation for our shareholders. Our home capabilities were further expanded with the acquisition of One Home last year. One Home's management service organization capabilities and experience providing home health, infusion, and durable medical equipment services establishes the platform for our value-based home care model. We remain on track to begin the launch of the value-based model in North Carolina and Virginia in June, with the expansion in additional geographies planned for late this year and early 2023. Beyond shifting to value and integrating DME and infusion, One Home will also have the ability to help members navigate the broader care ecosystem. For example, if a member lacks a primary care provider, One Home could connect the member with a high-value local option, including Humana's primary care organization. In addition, if a member would benefit from home delivery of chronic medications, One home can help the members set up the home delivery through our Humana Pharmacy. We believe these efforts can lead to both improved member experience and better health outcome, demonstrating the power of integrating our health service capabilities in the local market. Turning to primary care, we are actively scaling our platform through a combination of de novo expansion and inorganic growth. We are the largest senior-focused value-based primary care provider in the nation with 214 centers today. This includes 37 centers in the Welsh Carson Joint Venture, which began in 2020. We expect to have approximately 250 centers by year-end and intend to add 30 to 50 centers per year going forward. As shared in February, 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 financing, such that we expect no dilution to earnings growth from the organic expansion. As of March 31st, the 2020 cohort of 20 centers opened within Welsh Carson Joint Venture had an average of 520 Medicare risk patients per center, approximately 60 patients per center higher than planned. In addition, our cumulative EBITDA results were in line with the plan. We are pleased with the results to date, which have demonstrated the performance consistent with the expected J curve. We continue work to establish off-balance sheet structure that will be leveraged beginning in 2023. We are applying the proof points, in learnings from our joint venture with Welsh Carson to optimize the go-forward financing structure, considering enhancements, such as limiting the financing to only the operating expenses. We look forward to sharing additional details when finalized in the coming weeks. Our pharmacy business is the most mature of our healthcare service businesses, driving significant value to the enterprise, with industry-leading mail-order penetration resulting in improved medication adherence and better health outcomes for our health plan members. Thirty-eight percent of our individual Medicare Advantage members utilized our mail order services in the first quarter, a hundred basis points increase year over year. This increase is due in part to the fact that Medicare Advantage members retained in 2022 used Humana Pharmacy home delivery services nearly 9 percent more frequently than members who disenrolled. This is another demonstration that members who engage with our healthcare service businesses not only create incremental enterprise profit, but are more loyal to our health plans. This result demonstrates the impact of investments we're making to transform the consumer experience and home delivery service model through improved e-commerce, and logistic capabilities and additional distribution sites, allowing us to deliver prescriptions to our members within one to two days. As you know, we committed to providing additional transparency into our healthcare service businesses in 2022, which began with the new disclosures we provided on the home and primary care in our first quarter earnings release. Susan will also provide further 2022 performance details during her commentary. In addition, we look forward to hosting a virtual investor update on September 15, 2022, where we will discuss the operational model and the long-term growth and earnings potential for the primary care and home businesses, the benefits of integrating our healthcare service capabilities in local markets, and driving penetration by our health plan members as well. A progress update on our $1 billion value creation initiative and current thoughts on improving our Medicare Advantage membership growth for 2023 and the long-term outlook for the company considering future earnings growth opportunities balanced against the ongoing estimates investments necessary to advance our strategy. In closing today, I want to reiterate that we are pleased with our strong start to the year, with all our business lines performing well. In addition, we remain confident in our ability to deliver on our $1 billion value creation plan. This will allow us to create the needed capacity to fund growth and investments in our Medicare Advantage business, which we believe will further drive significant improvement in our membership growth, as well as further expansion of our healthcare service capabilities while still delivering on our long-term earnings growth target in 2023. With that, I'll turn the call over to Susan. Ms.