Humana Inc.

Humana's President and Chief Executive Officer and Susan Diamond, Chief Financial Officer, will discuss our second quarter 2022 results and our updated financial outlook for 2022. Following these prepared remarks, we will open up the line 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 and other filings with the Securities and Exchange Commission in our second 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 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 the 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 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 reference 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.

Thank you, Lisa, and good morning, and thank you for joining us. Today, Humana reported financial results for the second quarter of 2022 that reflected our solid fundamentals and strong execution across the enterprise. In the second quarter, our adjusted earnings per share was $8.67, which was above our initial expectations. Our outperformance in the quarter was driven by broad-based strength across the organization. Our updated full year guidance of approximately $24.75 represents compelling earnings growth of over 20% over our 2021 results. Susan will share additional detail on our second quarter performance and our full year outlook in a moment. As we look ahead, we are confident that we continue to deliver strong results as a leader in Medicare Advantage and value-based care delivery. Over the last several months, we've taken deliberate steps to meaningfully advance our strategy. In our Medicare Advantage business, we finalized our 2023 product strategy as reflected in our bids and are confident the investments we've made will significantly enhance the value proposition of our offerings. These investments were supported by the enterprise commitment to delivering on our billion-dollar value creation initiative, which we expect to significantly improve membership growth in 2023, while still delivering compelling earnings growth consistent with our long-term target. Beyond our product investments, we worked with our external sales partners to enhance recruiting, training, and incentive programs, which we believe will lead to improved member retention. We've enhanced the way we work with over all of our 40 external care partners, creating increased alignment by linking incentives to quality and retention metrics. And many of our partners have also revised agent-level incentives to emphasize retention. We continue to see an increase in member satisfaction year over year, demonstrating the positive impact of our efforts. We held our annual external sales partner conference last week and are encouraged by the optimism and excitement expressed by our distribution partners on our commitment to return to market-leading growth and in the specific investments we've made. We are also making significant progress in advancing our Medicaid strategy. We received notification of a contract award from Louisiana in June. We are very proud of the team's success articulating Humana's unique Medicaid capabilities and our ability to organically grow our Medicaid footprint. We are actively preparing for the Ohio contract implementation later this year, as well as the implementation in Louisiana, which is expected in early 2023. In addition, we continue to actively work towards procuring additional awards, and our priority states. Within our healthcare services segment, we continue to expand our CenterWell assets. We established a second joint venture with Welsh Carson that will deploy up to $1.2 billion of capital to develop up to 100 new CenterWell senior primary care clinics between 2023 and 2025. In the home business, we began expansion of the value-based model in June with the implementation in Virginia, increasing the number of MA members covered by the model to 331,000, a 22% increase. These actions are building significant momentum within the organization and position us for continued strong growth and leadership in the delivery of integrated value-based care. Turning to our billion-dollar value creation initiative, we've made strong progress towards our target and now have line of sight into initiatives valued at over $900 million in 2023 in design, execute, or full realization stages. This is up from $575 million when we last provided an update in April. We are confident in our ability to fully deliver against the important commitment and ultimately realize $1 billion of value in 2023. As I've just highlighted, we've made meaningful progress advancing our strategy in recent months, resulting in significant expansion of our healthcare service businesses and further strengthening our Medicare Advantage and Medicaid platform. In addition to our strategy advancement, the work completed on our value creation initiative has led to an organizational simplification that enables us to accelerate our previously planned organizational streamline. Beginning in 2023, we will realign the company into two distinct units, insurance services and center wealth. Insurance services will be made up of the businesses that currently sit in the retail and group and specialty segments, while CenterWell represent the current healthcare service segment. We believe this simpler structure will create greater collaboration across our insurance and CenterWell business and will accelerate work that is underway to centralize and integrate operations within the organization. The realignment also expands the scope of authority for leaders and allows us to operate with greater agility and focus and increasing capture synergies across our portfolio. Importantly, we are committed to providing the transparency you are accustomed to receiving from Humana when we transition to the new segments to ensure you have the information needed to follow our progress and understand the economics of our material businesses. To lead this new segment, we've launched an external search for a president of insurance and enterprise services. We are targeting candidates who can look across insurance business and key centralized platforms and services driving enterprise-level strategic execution. We also look for this individual to bring deep experience in running complex organizations. A key focus of this role will be to help us continue to simplify our structure. to make us more agile and to further improve our ability to increase synergies between our businesses and improve outcomes for our customers. We anticipate naming this individual by the end of the year. As announced in our 8K this morning, after a long, successful career at Humana, Alan Wheatley will transition from his role at the end of the year. Alan has had a distinguished 31-year career at Humana and I'm grateful for his significant contribution to the organization. We are confident that the momentum Alan and team have created throughout 2022 in the Medicare business will drive a successful 2023 AEP. I appreciate Alan's commitment to Humana and am pleased that he has agreed to serve as a strategic advisor until next year to ensure a seamless transition. Alan has developed a strong leadership team with in the retail organization, and we are fortunate to have the opportunity for these talented and experienced leaders to expand their responsibilities. Effective August 5th, George Renadin will take on the new role of President of Medicare, and Susan Smith, Senior VP, will take on the expanded role of leading our enterprise services, which includes our clinical, consumer experience, STARS, and Medicare risk adjustment teams. John Barger will continue leading our Medicaid organization in his role as president of Medicaid. George, Susan, and John, who have 55 years plus of combined experience across different functions at Humana, will report to Alan until the new role of president is filled. In addition, Sue Schick will continue to lead our group and specialty segment business. also ultimately reporting to the new president of insurance and enterprise services when the segment of realignment is finalized in 2023. In conclusion, I would leave you with the following. First, we are pleased with the momentum we have executing our strategy, our strong year-to-date results, positive outlook for the remainder of the year, and in the significant progress we've made in our billion-dollar value creation initiative to improve membership growth for 2023. Second, we are confident that the evolution of our organizational structure will accelerate the advancement of our strategy and result in a more efficient and integrated organization. And finally, we remain confident in our ability to drive compelling returns for our shareholders. We invite you to join us at our virtual investor update on September 15th. where we plan to give you more insight into our go-forward strategy and our positioning for continued success. We will provide you with a deeper view into our attractive financial outlook and appropriate KPIs, our leadership position in the industry, and our long-term strategy, including additional detail into our home and primary care businesses. With that, I'll turn the call over to Susan.

Thank you, Bruce, and good morning, everyone. I will start by echoing Bruce's confidence in our current year performance, the steps we have taken to improve membership growth in 2023, and our ability to drive compelling returns for our shareholders. Our second quarter 2022 adjusted earnings per share of $8.67 represents 26% growth over second quarter 2021, and is approximately $1 higher than our previous expectations. The favorable results in the quarter were supported by strong performance across many of our lines of business and were driven primarily by lower than anticipated medical cost trends in our individual Medicare Advantage and Medicaid businesses, partially offset by higher than expected non-inpatient costs in group Medicare Advantage. We also experienced lower than anticipated administrative costs some of which was timing in nature. Importantly, I want to reiterate that utilization in our core individual Medicare Advantage business is running favorable to expectations. The lower utilization trends and lack of COVID headwinds seen to date give us confidence in raising our full year adjusted EPS guide by 25 cents to approximately $24.75 while still maintaining a 50-cent EPS COVID headwind for the back half of the year. In addition, the revised guide contemplates an investment of approximately 75 cents EPS in additional marketing and distribution in the back half of the year to further support our improved 2023 Medicare Advantage product offerings. Finally, the revised guide covers 65 cents EPS dilution related to the pending hospice divestiture versus the $0.50 contemplated in our previous guide, which is expected to close in the third quarter. Our updated full-year guidance reflects a compelling 20% growth in adjusted earnings for 2022 while funding additional investments to support our long-term growth. If we see additional favorability emerge in the back half of the year, including the remaining $0.50 in embedded COVID headwind, we will be prudent in balancing further investments in support of long-term growth and additional shareholder returns in 2022. We are focused on maximizing long-term value and will be transparent in our approach. With respect to quarterly earnings seasonality, at this time, we expect third quarter earnings to be approximately 25% of our full year estimate. Finally, as Bruce shared, we have made significant progress toward our $1 billion value creation plan. actions during the quarter resulted in certain one-time costs of $203 million, which have been adjusted for non-GAAP purposes. These expenses were primarily driven by consolidation and retirement of technology assets during the quarter, resulting in more efficient operations and lower investment requirements going forward. As we continue to advance the value creation plan, we expect to incur additional one-time costs in the back half of the year, which will also be adjusted for non-GAAP purposes. With that, I will now provide additional details on our second quarter performance by segment, beginning with retail. Medicare Advantage membership growth and revenue are trending in line with expectations. As previously mentioned, total medical costs in our individual Medicare Advantage business ran favorable to expectations in the second quarter. We continue to see lower than anticipated inpatient utilization partially offset by higher inpatient unit costs, while non-inpatient costs were slightly favorable to expectations. With respect to entry year development, you will recall that our first quarter estimates considered the higher unit costs experienced in the fourth quarter of 2021. We were encouraged to see the first quarter restate favorably and have seen some moderation in inpatient unit costs relative to our previous estimates, while non-inpatient costs also restated slightly lower. With respect to COVID, we have seen an uptick in cases in recent weeks, but hospitalization rates remain lower than we have seen in previous surges. While we are not concerned with the utilization patterns observed to date, we acknowledge the continued uncertainty related to the pandemic and therefore maintained 50 cents of COVID contingency in our revised EPS guidance. We are pleased with the performance of our individual Medicare Advantage business to date, and remain on track to deliver at least 50 basis points of improvement in pre-tax margin in 2022. Group Medicare Advantage non-inpatient costs were higher in the quarter than our initial expectations, in part due to higher surgical volumes, which we have assumed will continue for the remainder of the year. In 2021, we saw more significant depressed utilization in group Medicare than individual Medicare and expected some normalization in 2022. While group Medicare inpatient costs are consistent with our expectations year to date, non-inpatient costs have been higher in recent months, some of which may be reflective of pent-up demand post the Omicron surge. We will continue to monitor emerging group Medicare trends to determine if the higher than initially expected utilization continues as currently contemplated in our full year guide, or if we ultimately see the trends moderate. Our Medicaid business performed well in the quarter, experiencing lower than expected medical costs. We updated our full-year Medicaid membership guidance from a range of down $25,000 to $50,000 to a range of up $75,000 to $100,000 to reflect the extension of the public health emergency to mid-October. We increased our retail segment revenue guidance by $350 million at the midpoint from a range of $81.2 to $82.2 billion to a range of $81.7 billion to $82.4 billion, primarily reflecting the increase in Medicaid membership expectations for the year. Despite the increase in expected Medicaid membership for the year, which carries a higher benefit ratio, as well as the higher than anticipated non-inpatient cost in group Medicare, we have maintained our original full-year retail benefit ratio guidance as outperformance in our individual Medicare Advantage business is providing an offset in the segment. Group and specialty segment results were slightly favorable for the quarter, largely driven by the specialty business and lower dental utilization trends in particular. As previously shared, we are focused on margin stability in the employer group medical business near term, and as a result of rating actions taken in the back half of 2021 to incorporate expected ongoing COVID costs we are experiencing higher attrition in our fully insured group medical business than originally anticipated. We are updating our full-year commercial medical membership guidance from down $125,000 to $165,000 to down approximately $200,000. In addition, we are reducing our revenue guidance for this segment by $200 million at the midpoint, reflective of the lower membership expectations. Full year pre-tax earnings for this segment remain on track, aided by this specialty outperformance. I will now discuss our healthcare services businesses. Recall that this segment had a strong start to the year, with pharmacy meaningfully outperforming in the first quarter, which we expected to persist throughout the year, although with some moderation. Pharmacy results in the second quarter tracked in line with our increased expectations. Mail order penetration was 38.5% year to date for our individual Medicare Advantage members, a 90 basis point increase year over year. Primary care organization results were slightly favorable to expectations for the quarter, driven by ongoing operational improvements combined with administrative expense favorability. We added four de novo centers and 10 wholly owned centers through acquisition in the second quarter, bringing our total center count to 222 after center consolidations. We are on pace with our targets for the year and continue to expect to operate approximately 250 centers by year end. Turning to the home, home health episodic admissions are up 3.1% year over year, while total admissions are up 4.9% year over year, consistent with expectations. For the full year, we continue to expect total home health admissions to be up mid-single digits. The hospice business performed well in the quarter, with total admissions up approximately 5% year over year, driven by increased access to facility-based referral sources and incremental investments in the business to expand clinical capacity. The Kindred Hospice Investiture is on pace to close in the third quarter. We have updated our full-year guidance ranges to reflect this anticipated transaction, resulting in a reduction in healthcare services segment revenue of approximately $400 million at the midpoint, which reflects the hospice divestiture partially offset by the increased pharmacy expectations discussed in the first quarter. In addition, we have reduced our full-year consolidated adjusted operating cost ratio guidance from a range of 13.2% to 14.2%. to a range of 13% to 13.5% as the hospice business carries a higher operating cost ratio than the company's consolidated operating cost ratio. From a capital deployment perspective, we anticipate a customary level of share repurchases in 2022 and expect our debt to capitalization ratio to be in the low 40s at the end of the year as we utilize proceeds from the kindred hospice divestiture to deleverage. Before closing, I would again reiterate that we are pleased with our performance to date, fueled by broad-based strength across the enterprise, supporting our full-year guidance raise and providing capacity to make additional investments in marketing and distribution in the back half of 2022 to further support our improved 2023 Medicare Advantage product offerings. We are well-positioned to achieve our $1 billion value creation goal, which has allowed further investment in our Medicare Advantage offerings for 2023, and expansion of our healthcare services capabilities while remaining on track to generate earnings growth in 2023 within our long-term target range. With that, we will open the lines up for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.