Humana Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2022 Humana, Inc. earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your touchtone telephone. I would now like to turn the call over to your host, Lisa Stoner, Vice President of Investor Relations. You may begin.

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer, and Susan Diamond, Chief Financial Officer, We'll discuss our third 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 in our third 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 other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements and 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 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 gaps. 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.

Thank you, Lisa. Good morning, everyone. We appreciate you joining us. Our third quarter 2022 results reflect the continuation of solid fundamentals and strong execution across the enterprise as seen throughout the year. We reported adjusted earnings per share of $6.88 for the quarter above our initial expectations. The strength of the quarter allowed us to raise our full year 2022 adjusted EPS guidance by 25 cents to $25 at our September investor day. We are pleased to affirm this recently raised outlook representing a compelling 21% growth over 2021. Susan will share additional detail on our third quarter performance and our full year expectation in a moment. We appreciate the opportunity to share our value creation framework at our recent investor day, as well as the subsequent engagement with investors over the last several weeks. We are excited about the company's future and our focus on executing against our strategy to deliver on the commitments communicated. As previously discussed, achievement of our mid-term earnings target of $37 in adjusted EPS in 2025 is underpinned by a return to at or above industry Medicare Advantage membership growth by 2024. Now that we've seen competitor plans for 2023 and the annual enrollment period is underway, we are happy to provide initial expectations for 2023 membership growth today. Based on our understanding of the competitive landscape, we are anticipating individual Medicare Advantage full-year growth of 325,000 to 400,000 members. This represents an expected growth rate of 7.1% to 8.7% in line with our expectation of high single-digit industry growth. As we've spoken about previously, we've made substantial investments in our MA product offering and are confident in our strong competitive position. Through targeted surveys and deep analytics, we've designed products to meet better meet our members' needs. For example, 100% of our dual eligible plans will offer the healthy option allowance, which allows our members the flexibility to direct funds to pay for healthy food, over-the-counter items, transportation, health supplies, rent, and utilities. We are differentiated in this benefit through the wide breadth and flexibility of spending categories, as well as the rollover feature we offer in many geographies. Outside our specific consumer segment strategies, we also improve plan offerings for our broader membership. For example, for our zero premium HMO and LPPO products, We believe we're at parity or above the key competitor plan value in approximately 80% of our markets. We also expanded the footprint of our zero premium LPPO product now offered in over 2,400 counties, a 34% increase year over year to better serve members looking for low cost options with network flexibility. All combined, we believe our plans are providing unique solutions to seniors' most urgent needs, providing both affordability and value, which is especially important given current economic conditions and knowing many seniors are on fixed incomes. Beyond our product investments, evolving our distribution capabilities remain a focus, and we are continuing to advance our omnichannel strategy. As we've previously discussed, we've been working closely with our external partners to improve sales quality through a variety of initiatives. We are confident that we'll continue to maintain strong partnerships and drive better quality through this channel, such as improved retention and better customer satisfaction. Meanwhile, we continue to enhance the capabilities in our internal channels, which tend to provide higher quality sales. We are leveraging improved analytics and artificial intelligence for all inbound calls to drive improved experiences for both our agents and our customers. We believe this, in combination with our refreshed marketing strategy, will result in an increase in internal sales of approximately 20% year over year. Our ability to maintain our leadership position in the MA industry is supported by our excellence in quality and customer experience. Our success demonstrated in areas such as our star ratings, where 96% of our MA members enrolled in plans rated four stars and above for bonus year 2024. Humana has now achieved the highest percentage of members in four plus star contracts across all our national competitors for five consecutive years. Our commitment to quality is also evidence in our CMS audit results, where we once again saw significant improvement in our overall results for CMS's recently completed triennial audit when compared to our 2019 program audit. And finally, we are proud that Humana has been named the best overall Medicare Advantage insurance company by U.S. News and World Report, which created an honor roll based on the Centers for Medicare and Medicaid Services newly released star ratings for Medicare Advantage plans. Additionally, Humana ranked as the best company for member experience and was declared the best company for low premium availability. The durability of our success in these areas reflect our differentiating capabilities, including highly diversified value-based care solutions and locally oriented provider relationship models, use of deep analytics and digital capabilities, first mover deployment of interoperability, as well as customer-centric products and solutions. The entire organization is focused on efforts to continuously raise the bar on quality and member experience so that our members can receive better outcomes and we will continue our relentless pursuit of maintaining our industry leading results. Turning to our billion dollar value creation initiative, I'm pleased to share that we have line of sight to fully realize the $1 billion goal in 2023. which will support the investments for MA growth in 2023 that I just described. The effort has required difficult choices, focused execution, and changes in the company which we have already started to show positive results that we expect to continue over the near and long term. While the formal $1 billion goal has been achieved, we are committed to ongoing improvement and operating leverage with a target of approximately 20 basis points annually on a business mix adjusted. Going forward, we intend to continue our historical focus on productivity, utilizing a framework that has been enhanced with the best practices learned through our value creation efforts. We are focused on running our business in a way that will create sustainability, driving operating leverage, while creating a culture that promotes continuous improvement workflow efficiency, and technology adoption to automate and assist our work wherever possible. We are encouraged by the early indications of this sustainable productivity framework. As an example, I'd like to highlight productivity efforts in our pre-authorization process where we're leveraging an in-house artificial intelligence solution to automatically match incoming faxes to the correct authorization request. This solution creates administrative efficiencies across millions of inbound images. We're also scaling this solution to multiple business units such as pharmacy and are also expanding the application of this type of AI to provide decision support to clinicians, which will result in improvements to authorization turnaround times, reduction friction for providers, and creating a better member experience. Before turning it over to Susan, I'd like to say thank you to our 63,000 employees that bring their best selves to work every day and make our success possible. I appreciate all they do for our members and patients. I would also like to thank our shareholders for their continued support. We are excited about the strong fundamentals of the industry we operate within, our competitive positioning in the MA market for 2023 and beyond, the scaling of our healthcare services offerings, and opportunities to compound our growth through local market integration and continued cost discipline and capital deployment. We look forward to delivering against the commitments we shared with you at Investor Day. With that, I'll turn the call over to Susan.

Thank you, Bruce, and good morning, everyone. Today we reported adjusted EPS of $6.88 for the third quarter, representing 42% growth over third quarter 2021. Results in the quarter came in above initial expectations, driven primarily by lower than anticipated medical cost trends in our individual Medicare Advantage and Medicaid businesses. Recall that we raised our full year adjusted EPS guidance by 25 cents to $25 at our investor day in September, which we affirm today. Our revised full-year guidance anticipated the strength of the quarter and reflects a compelling 21% growth in adjusted earnings for 2022, while funding incremental marketing to support the 2023 AEP selling season and the dilution related to the hospice divestiture. I will now provide additional details on our third quarter performance by segment beginning with retail. Medicare Advantage membership growth and revenue remain in line with expectations. Total medical costs in our individual Medicare Advantage business were lower than initial expectations for the quarter with the favorable inpatient trends seen throughout the year continuing with some moderation. With respect to Group MA, we shared last quarter that we were seeing higher than expected non-inpatient utilization. As I mentioned in September, we have been pleased to see positive current year restatements and moderating trends during the third quarter, suggesting that some of the higher trend we described previously was likely due to pent-up demand. Finally, I would note that while it is early in the season, flu levels are running as anticipated. All in, Our Medicare Advantage business is strong and tracking consistent with the updated expectations shared at Investor Day. Our Medicaid business also performed well in the quarter, experiencing lower than anticipated medical costs. We updated our full-year Medicaid membership guidance from a range of up $75,000 to $100,000 to our current guide of up approximately $175,000 to reflect the extension of the public health emergency to January 2023. We are prepared for the Ohio contract to go live on December 1st, adding approximately 60,000 members at implementation, which is included in our guidance. Group and specialty segment results were in line with expectations for the quarter, with our specialty business continuing to benefit from lower than expected dental utilization. We continue to anticipate a reduction of approximately 200,000 employer group medical members in 2022 driven by our discipline pricing and focus on margin stability. I will now discuss our healthcare services businesses. Pharmacy results for the quarter were in line with the increased expectations we communicated in April as a result of the outperformance seen earlier in the year. The primary care organization continues to perform well with results in line with expectations for the quarter. The team is focused on executing on the expansion strategy we shared at Investor Day, and we continue to expect to add approximately 30 to 35 centers to our portfolio through the first quarter of 2023, bringing our total center count to greater than 250. Patients served also continues to grow as expected, and we anticipate serving nearly 250,000 value-based patients by the end of 2022. Turning to the home. In our core fee-for-service business, home health episodic admissions for the third quarter are up 5.1% year-over-year, while total admissions are up 6.4% year-over-year. Year-to-date, episodic admissions are up 3.9%, while total admissions are up 5.4%, tracking in line with our full-year expectations of a mid-single-digit year-over-year increase. In addition, we plan to expand our value-based home health model to cover an additional 450,000 Medicare Advantage members in the fourth quarter, bringing our total covered lives to approximately 15% as of the end of the year. From a capital deployment perspective, our debt to capitalization ratio decreased by 590 basis points in the third quarter to 39.4% as we retired $2 billion of debt following the divestiture of our majority interest in Kindred Hospice, which closed in August. We continue to anticipate a customary level of share repurchase in 2022, and as a result, expect our debt to capitalization ratio to be in the low 40s at the end of the year. I will now take a few moments to provide additional color on our early outlook for 2023, starting with membership. As Bruce shared, while it's still early in the AEP, we remain confident that the investments we made to support 2023 growth have positioned us well and we are pleased to share our individual MA membership growth expectations today of 325,000 to 400,000 members, which is in line with our expectation of high single-digit market growth. As we always caution this time of year, it is early in the AEP selling season, so the outlook we provide today could change depending on how sales and voluntary disenrollments ultimately come in. Initial sales lines are strong and favorable to our expectations. Recall that we have limited visibility into member disenrollment data this early in the AEP season as those results take longer to complete. But we do expect modestly lower attrition in 2023 as a result of our improved benefit offerings, enhanced onboarding support for all new members, and increased focus on sales quality and retention by our call center partners. We also advanced our analytic models, incorporating additional granular inputs and machine learning techniques, improving our sales and retention forecasting ability. Taken all together, these improvements and early results support our confidence in the guidance shared today. With respect to group Medicare Advantage, as we previously stated, growth can vary year to year based on the pipeline of opportunities, particularly large accounts going out to bid. We expect a net reduction in group MA membership of approximately 60,000 in 2023. This reduction is primarily driven by the loss of a large account, partially offset by expected growth in small group account membership. We remain committed to disciplined pricing in a competitive group Medicare Advantage market. With respect to standalone PDP, the overall PDP market is declining as more beneficiaries choose Medicare Advantage. In addition, we remain disciplined in our pricing, and as a result, our Walmart value plan will not be as competitively positioned, and our basic plan will exceed the low-income benchmark in three regions in 2023, driving an expected net decline of approximately 1 million PDP members. As we look beyond 2023, we will evaluate the impact of the various regulatory changes proposed, which are likely to result in higher PDP plan premiums broadly and could lead to further industry-wide movement from PDP to MAPD plans given the strong MAPD value proposition. Our focus remains on creating enterprise value from our PDP plans by driving increased mail order penetration and conversions to Medicare Advantage. Finally, in our Medicaid business, we expect 2023 membership to be flat to slightly up as the new state awards in Louisiana and Ohio will largely offset the impact of redeterminations, which will begin following the end of the public health emergency. Louisiana has indicated that we will begin the program with 150,000 members while Ohio will ramp to 200,000 members over the course of 18 months. Turning now to our expected 2023 financial performance. I would reiterate our commitment to grow 2023 adjusted EPS within our targeted long-term range of 11 to 15% off of our expected 2022 adjusted EPS of $25. We will continue with our practice of conservative planning, and at this time, expect the current consensus estimate of approximately $27.90 to be in line with our initial adjusted EPS guidance. The earnings growth anticipated for 2023 will put us on a solid path to achieve our $37 adjusted EPS target in 2025. We look forward to providing more specific 2023 guidance on our fourth quarter earnings call in early February. Before closing, I would echo Bruce's appreciation to our employees for their contribution to our success and to our shareholders for their continued support. We are pleased to report another strong quarter and are excited about our outlook for 2023 and beyond. We look forward to delivering against the commitments we shared with you at Investor Day, providing better experiences and outcomes for our members and patients, and creating significant value for our shareholders. With that, we will open the line 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.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. And as advised before, please limit yourself to one caller.

One moment for our first question. Our first question comes from Stephen Baxter of Wells Fargo. Your line is open.

Hi, thank you. I wanted to ask about the individual Medicare Advantage outlook that you provided for 2023. Appreciate the commentary on expecting retention to be a little bit better. Could you maybe tell us or quantify how much that contributes to your growth outlook? Maybe what would your growth outlook be if you had the same result on retention that you did last year? And then more broadly, any early insight you have on competitive dynamics in 2023, either on plan benefits or for sales channels? Thank you very much.

We won't provide the detail on just how it affects the overall. First thing, it's just early in the process. But we do want to continue this practice of being transparent with our investors just on where we are in just two weeks into the AEP. What we are seeing is that new sales volume has been strong and higher than expected. Our close ratios are higher year over year than versus what our expectations are. And in addition, our field sales volumes are particularly strong. The call center channel volumes are slightly down over year over year, which we expected. As I mentioned, our term data is nowhere close to being complete, so we have limited visibility into that. But what we do see is that we're seeing improvement in our non-DSNP plans, And in addition, we are incorporating about 100 basis point improvement in our term rate this year. And that's really a result of what we're seeing in our relationships with our broker, along with the product that we've put in place, and then just our workflow improvement in both the enrollment area and on the onboarding with our members. So what we see early on is just a really exciting aspect of where we're seeing good growth, and that good growth is coming across all parts of the organization with continued improvement in our relationships with the channels.

Thank you. One moment for our next question. Our next question comes from Kevin Fishbeck with the Bank of America. Your line is open.

Great, thanks. I just want to go back to your commentary about cost trend. It sounds like, just because you didn't beat MLR by as much as period, it sounds like what you're saying is that cost trend is largely as expected and it's more a function of you kind of lowering the MLR guidance with your September outlook. Is that kind of how you would frame it? And I guess just based upon how you've reported so far in Q3 is obviously implications for Q4 MLR versus where consensus is. I just want to make sure that I'm understanding how you thought about Q3 and then how to think about the implications for Q4 MLR. Thanks.

Sure, Kevin. So as you mentioned, we are seeing lower than anticipated cost trend. With the mid-quarter raise in guidance, it's a little bit confusing, I appreciate, but so the beats in terms of cost trend was relative to our initial expectations for the quarter, which were considered in the 25 cent raise that we announced at our investor day in mid-September. So the commentary this morning was relative to our initial expectations, but then again, once we account for the increased guidance, then we're in line with what we expected. In terms of Q3 versus Q4, as we look at current fourth quarter MLR consensus, the estimates currently are 87.6 for retail and 86.7 for consolidated. I would say that right now they're a little bit light, and that given the announcement of the 3Q results today, which were higher than the street estimates and reaffirmation of our full-year EPS guide, we would expect that analysts will adjust their models accordingly, and then we would see then an increase in the fourth quarter and full-year MLR as a result, which then should be more in line with our current expectations.

Thank you. One moment for our next question. Our next question comes from Justin Lake with Wolf Research. Your line is open.

Thanks. Good morning. I assume that was me. A few numbers questions. First, just a follow-up to Steve's question. You said the churn number is down 100 basis points. Is it just as simple as saying you have 4.5 million members, an individual, 1% improvement adds 45,000 members to growth versus last year? you know, the math that simple. And then what drove the 4% decline in Medicare Advantage PMPM in the quarter? And lastly, a lot of questions on RAD-D. I was wondering if you could help us understand what a reasonable, like, fee-for-service adjuster that the industry is looking for out of CMS. You know, so when we see that final rate or that final notice in February, What would be a reasonable number for fee-for-service adjuster that you've been lobbying for? Thanks.

I'll take the first question, and then I'll let Susan take the next two. On the 100 basis points, your math is correct. Pretty simple there, Justin. So, like always, you amaze me on your ability to back into the number.

And then just in terms of the revenue PMPM, there's a few things impacting it. There's always that decline over the course of the year from the seasonality perspective as new members continue to enroll at typically lower risk scores and members pass away. And those members passing away tend to have higher risk scores. The other item that's unique for this year is just sequestration, which, as you know, sort of ended as of the second quarter but was in place last year. And so that will have an impact on the year-over-year comparisons as well. In terms of your question on the fee-for-service adjuster, I mean, honestly, we just aren't in a position to comment and wouldn't want to speculate on what the fee-for-service adjuster would be as it would ultimately be based on fee-for-service data to which we just don't have access.

Thank you. One moment for our next question. Our next question comes from Nathan Rich with Goldman Sachs.

Your line is open.

Thank you. Good morning. I wanted to follow up on the outlook for MLR. I think for 23, consensus is roughly flat. I guess, could you maybe talk about how you're thinking about the puts and takes to MLR next year? And I guess specifically, are you expecting a normalization of inpatient procedures over the course of the year? And any change to your expectations around utilization, just given the economic pressures you highlighted and maybe utilization of some of the investments that you made in your plans for next year? Thank you.

Sure, Nathan. As we think about 2023, there's always a variety of puts and takes that we'll consider. I would say in terms of utilization, and I think we commented on this last quarter, As it respects our initial expectations, we did not contemplate the better medical cost trend that we have seen develop in 2022. And so that certainly should be something that does continue into 2023, although we would expect some offsets in terms of risk adjustment given the lower utilization. So that's certainly something that we'll take into account as we estimate MLR for next year, which obviously we're not prepared to give guidance on that today, but would certainly provide guidance on our fourth quarter call. In terms of inpatient procedures, I think we've also commented, you know, with CMS moving to remove certain items from the inpatient only list, we frankly expected that to be more flat this year and frankly have been pleased to see continued inpatient to outpatient movement, particularly with orthopedic procedures. The rates of outpatient sort of service is pretty high for some of those procedures, so in theory, we should start to see some moderation in that continued shift. Just last night, CMS did release the outpatient reimbursement, and within there, there are also some additional changes to the inpatient-only list. That's something we'll have to review in greater detail and consider what, if any, implications we think it will have on further shifting trends for 2023. But otherwise, for utilization, I would say we are counting on sort of, you know, normal course baseline utilization trends. As we've commented before, there are two items we want to continue to watch. One is flu. I mentioned in my commentary that so far that is in line with expectations, which, you know, it is early in the season, but we are anticipating lower than historical levels given what we've seen the last two years. We will want to monitor that and see if that, you know, does continue or if we start to see an uptick, which we'd have to consider for 2023. And then finally, I would just mention that we know that healthcare capacity is constrained. That's something we continue to watch, the labor trends and other factors, and it's something we will continue to be mindful of as we evaluate our go-forward medical cost trend estimates, if we in fact start to see some of that return to higher levels. And if the capacity does, we would anticipate seeing some additional utilization as well. So again, not prepared to share guidance today on the MLR, but certainly we'll do that on our fourth quarter call, as we normally do.

Thank you. One moment for our next question. Our next question comes from Gary Taylor with CalWIN. Your line is open.

Hi, good morning. I guess kind of my key questions were answered, so I just want to go to PDP for a minute, where enrollment's been declining since 2017, but coming down a million members would be coming down almost a third, which is, I think, the largest decline you've seen. Clearly, this doesn't generate a lot of earnings. I guess I have two questions. One is, I think it was Bruce who had made the comment about 20 basis points, G&A improvement, business mix adjusted. This is a business with lower G&A, so if you're going to lose a couple billion dollars of revenue here, how do we think about that impacting sort of that G&A improvement next year? And then the second piece would just be, is the whole thesis behind PDP, which is kind of originally it would really set up to be a nice feeder into MA, is that thesis kind of debunked? Is it less important? Clearly you've grown very nicely in the last six years, five years, despite the fact that PDP has been coming down. So I just wanted to get caught up on your thinking around that.

Yeah, maybe I'll take the latter point and then let Susan take the question around the operating leverage. You know, Gary, we do still see and we see conversions from PDP to Medicare Advantage on an ongoing basis, and we see that initial relationship we have with them as an opportunity to expand that relationship. One, two things are happening in PDP. First, there is a, you know, a few plans that are really at the lower end, and we sort of question how they can get there at the price that they're offering. And then there's a group of plans that are sort of in the same area we're in. So there's a bifurcation that's happening in the industry, which is really causing people, I think, to go to the lower end pricing there as a result of just the aggressiveness in the marketplace. And we're not going to follow that direction. But what we do see is also because of the value proposition that's happened in MA, that there's a much larger conversion just overall between PDP to MA and then result. It's really PDP is a declining business, not only in our company, but as you look at the industry side. But to answer your question, we do see it as a, still as a very valuable opportunity for us to expand our MA platform through the PDP conversion. as a result of just our relationship with the member, and that is a specific strategy within our company.

Yeah, and then, Gary, to your question on operating leverage, if you recall, you know, we were clear that the 20 basis point commitment was on a business mix adjusted basis, just recognizing across all of our lines of business we have varying degrees of admin loads. So we remain committed to that target, you know, and with respect to the PDP decline in particular, As you mentioned, the admin rate does run lower than, say, Medicare for sure, and so that will be accounted for in our ultimate operating expense ratio. I would just say with this level of reduction, as you said, we will work hard across the enterprise to ensure we get the appropriate amount of variable costs out, but then also take some ground on the indirect costs as well to make sure that the rest of the organization isn't pressured as a result.

Thank you. One moment for our next question. Our next question comes from Scott Fidel with Stevens. Your line is open.

Hi, thanks. Good morning. Question just around the home. And first, just interested now that the final home health rates just came out, how that plus 0.7%, you know, how you think about that sort of influencing your thoughts on home health margins for 2023? And then, Interested from the contracting perspective for your MA business, there's been a lot of focus amongst the home health industry and recontracting to some different type of models, for example, moving to case rates with some value-based care components to that. And interested just in Humana's sort of interest and activity levels, I guess, in terms of engaging in some of these types of recontracting considerations from the MA side as compared to from the home health side. Thanks.

Sure. Hi, Scott. So your first question on the final rule impact, and I know we got some questions previously about the proposed 4.2% reduction and gave some commentary that from an enterprise perspective, that would have been about a $30 million hit relative to our sort of expectations at the time of bids. And that's a larger hit on the home health business, but mitigated by what would have been a benefit to the health plan. With the final rule coming out at 0.7%, obviously that headwind is no longer an issue, and it would be slightly positive relative to what we thought at the time of this, but I would say relatively immaterial, but certainly positive to what it would have been at 4.2%, which we had not contemplated earlier in the year. In terms of your question about how we think about the MA space in home health, Andy mentioned at Investor Day the work that his team is doing both on implementing a full value-based model, which is inclusive of utilization management, network management, clinical advancement to take full capitated risk on Medicare patients. And as we've mentioned in my commentary, we expect to have 15% of our members covered by that model by the end of the year. In addition, they're also working on value-based reimbursement. models for the remainder of our Medicare population initially and then would expect that we would offer, Kindred would offer those arrangements to other payers, MA payers as well. And so there, you know, we are very focused on the same things, making sure that we're driving appropriate utilization of home health services but then also making advancement on the clinical side such that we can improve outcomes and would look to structure that contractually where, you know, there's some component of a fee-for-service payment but then also participate in the savings that Kindred can help drive in terms of total cost of care going forward under a value-based payment model. So we would expect to continue to keep you apprised of our progress there, but we do intend to start with the Humana membership, and then once we can demonstrate success, then look to take that to our agnostic payers as well.

Thank you. One moment for our next question. Our next question comes from Georgia with Deutsche Bank.

Your line is open.

Yeah, good morning, guys, and thanks for taking the questions. I guess first I'd ask kind of a big-picture question on the recent star ratings performance. I suspect that you guys had a window into your star ratings performance before you held the investor day and provided the initial guidance, but I'd be interested if you guys had a sense for what the landscape was going to be like as it relates to stars performance, and I guess does that kind of increase your optimism or your confidence in kind of outperforming the 2025 targets?

We did have an insight into our ratings, but we did not have the ability to understand how the industry was going to perform during the Investor Day meeting. You know, we continue to remain confident in the capabilities of the company. It gives us more confidence in what we can achieve and our commitment, but I wouldn't say it's going to overly impact that commitment. But I do... We're very proud of those ratings and very proud of what it means to deliver better health outcomes as well as a better financial performance.

Thank you. One moment for our next question. Our next question comes from Josh Raskin with Nefron Research. Your line is open.

Hi. Thanks. Good morning. I'm wondering if you could speak to expectations around growth in the number of lives where you're taking delegated risk in 2023, sort of compared to that 250,000 you'll end the year with. And maybe if you're growing MA faster in areas that are supported by your own or other value-based care providers. And then if you could just update us your views on potential M&A specifically around primary care clinic operators.

Why don't I take the latter and then Susan can take the former. On the M&A side, we continue to find the best value for use of our capital is really doing in-market acquisitions and being able to roll those into existing primary care clinics that we have in the marketplace. There's not only the ability to leverage the size and scale in the marketplace, but also the administrative productivity we get and just the ability to continue to offer broader value to the payers we serve. So I think that will be the most likely scenario. Of course, we've looked at some of the larger transactions that are out there and have been reviewing that. I think at this time, we're not really convinced that's the right direction for us and we'll continue to do in-market. That might change, but based on where the values are trading and what we can do and inside our marketplace, we'll probably do medium to smaller acquisitions at this time.

And then just to your second question, we didn't provide specific guidance this morning in terms of the increase in patients expected in our primary care business for 23, but you can expect that we will provide some commentary on our fourth quarter call. But what I will say more generally is that we certainly expect an increase in patient panel growth in 2023 relative to what we'll deliver in 2022. And as you said, that's due to the additional centers that we've opened and then the continuing maturation of those centers. Some of that increased growth is also, as you sort of alluded to, predicated on the improved Humana value proposition, which should then allow us to drive greater panel growth as a result of that. One thing we'll watch pretty closely is Florida in particular. We've made some nice advancements there in the value proposition. We have a large number of our wholly owned centers there, and so we're anticipating improved growth within those wholly owned centers, and that is something in particular we'll be watching closely. But we'll certainly provide more commentary on our fourth quarter call in terms of full year expectations for the provider organization patient panel growth.

Thank you. One moment for our next question. Our next question comes from AJ Rice with Credit Suisse. Your line is open.

Yes. Hi, everybody. Just wondering, we talk a lot about, obviously, what you're doing in the primary care arena and what you're doing with home health. The PBM continues to be a big part of your services offering as well. Any thoughts or updated comments on strategically – doing more with that. I know its primary focus over the years has been just to service your internal MA population and your overall membership, but any thoughts on making any moves in that respect to the PBM?

Yeah, a few things there, AJ. One is just continuing to grow our penetration and mail order And what we see is the opportunity to continue to make that convenient for our customers as a result of being able to have home delivery. And what we're really working hard on both the digital experience but also shortening the time of delivery through having more warehouses closer to where a large number of our members are. So we are working hard on the opportunity to continue to improve the mail order rate overall. We do have a few customers, I would say small customers, that are utilizing our platform under more of a private label. We've seen that. I think that is an area of opportunity but not an area of focus for us. We've done a lot of work on the specialty side, and we see the opportunity to continue to grow our specialty business, which is more of a provider-oriented and agnostic provider orientation, and the ability to continue to have stronger relationships with with the pharmaceutical side and being able to utilize, you know, patient compliant programs. So I would say, you know, continue to grow our mail order as top through continuing to improve our experience and then secondarily our specialty area. We will look at opportunities to private label or do white label for our delivery, but that probably will be less of the focus.

Thank you. One moment for our next question. Our next question comes from Michael Ha with Morgan Stanley. Your line is open.

Hey, thank you, guys. Just want to dive a little deeper into next year's MA growth. So based on analysis we've done on planned value and benefit richness, it shows Humana increasing benefit richness significantly more than your peers and almost double the national average. So stronger benefits, coupled with leading star ratings performance and the surprising decline in stars from some of your peers, it seemingly looks like you're positioning into 23 might be the strongest it's been in recent history. So I know you're expecting roughly in line with industry growth next year, but I'm curious, one, how's your MA growth expectations developed, evolved since early October? And I understand and appreciate, you know, the multi-year earnings power that more membership growth can provide, but for 23 specifically, just given the slightly dilutive impact of year one MA members, in the event you are able to exceed your growth, applications, how does that impact your ability to reach your target 23 EPS, which gets the low end of your long-term range? Is there a specific membership growth number that you think could be, end up being potentially diluted to earnings? Thank you.

Hi, Michael. So in terms of your first questions, in terms of how our thinking has developed since sort of before all the data was released, I would say, you know, as the data came out and we commented in mentoring, we are pleased to see that our positioning is, you know, relatively speaking and generally where we expected it to be going into 2023 and that the, you know, certainly the positive rate notice and then in addition the additional value that our value creation initiative opened up for us in terms of capacity to reinvest into our Medicare product was sufficient to get us back to a really strong value proposition. We've been able to also validate through discussions with brokers during that time that they are in agreement with our view that we are very well positioned in 23. And I think a number of analysts have also had independent calls where they heard the same thing. So that was further validation. We do recognize that we expect more change within the call center channel this year, given some of the changes those partners are making, some comments they've made about reducing marketing, et cetera. And so that's one of the reasons we continue to remain a little bit cautious in terms of our range, recognizing that we'll need to see how that develops. But I would say as Bruce mentioned in his commentary, all the early signals are positive while we recognize it is still early. In terms of your second question about is there any level of growth that would compromise our EPS contribution for the year, I would say from a growth perspective, no. I think we've commented a number of times that new members typically have little to no contribution, but they wouldn't be negative. They just wouldn't add incremental earnings accretion in the first year. The more relevant metric is retention. Those members obviously are positive in terms of contribution, and so that's why we always watch that closely. And to the degree we see outperformance in retention, then we would, you know, that could be a tailwind for 23. And to the degree it comes in lower, it could be a headwind. But again, based on everything we're seeing and the strength of our product, we think our retention estimates and the improvement we're expecting is quite reasonable.

Thank you. One moment for our next question. Our next question comes from Lisa Gill with JPMorgan. Your line is open.

Thanks very much for taking my questions. Just a couple of really quick follow-up ones. One, Susan, you said that flu was kind of trending in line, but just given what we're seeing in the southern hemisphere, I'm just curious as to what your expectations are for Q4 and maybe even the first part of 23. And then just secondly, to the thoughts around the PBM, Bruce, you highlighted the specialty business. clearly there's a number of biosimilars that are coming to the market. I'm just curious as to how you think about that. Is Humira a big drug when we think about your specialty business, and is there an opportunity there as we think about late 23, early 24?

Hey, Lisa. So in terms of your first question about flu, so as I mentioned, we are seeing relatively low flu levels. It's very early in the flu season for the fourth quarter, and so we'll certainly continue to watch that. In terms of our expectations, we did anticipate in our guide that we would see flu levels higher in the fourth quarter than we've seen the last two years, but not as high as we would have seen pre-COVID. And so far, again, while it's early, the early trends are consistent with our expectations, but we'll certainly continue to watch that. For 2023, we then assumed some further incremental increase in flu going into next year, assuming that it won't permanently stay at the lower levels we've experienced to date. So we'll certainly keep you guys informed. But so far, we are seeing it run in line with expectations, which are slightly higher than what we experienced previously.

Dan, as you talk about Humira, as we look at both the 23 and 24, we continue to see that our existing contracting and the rebates that we receive, and when we compare that to what's in the marketplace today, we don't see a a significant benefit coming from that. Now, maybe as the competition increases and it becomes more oriented to driving down price, we'll see some benefits. But in the short term, we just don't see the benefits.

Thank you. One moment for our next question. Our next question comes from Stephen Valchitti with Barclays. Your line is open.

Thanks. Hello, everybody. Just a quick question here following up on the RAD-V situation. You mentioned that you can't really comment on what the adjustment might be for RAD-V with the new rule that has a new effect on Feb 1 following that 90-day extension. But investors seem to have just a pretty wide view on the potential impact of the company around the situation just based on some of the inbounds coming into us this week. So I'm thinking to maybe just take a second, just remind investors of the framework of the situation and And just more color on how heavily you guys are focused on this internally just for context. Is this a potential material risk factor? Is it not expected to really be material relative to your preliminary EPS growth guidance you've already provided? Just want to get more sense for that just to help out the investment community around this dynamic. Thanks.

Hi, Steve. Yeah, happy to answer that. So as we've disclosed previously, our view is that the proposed rule failed to adequately address the statutory requirement of actuarial equivalence by not applying a fee-for-service adjuster to the RADV overpayment calculations. We've been very proactive in communicating our position and have provided substantive comments to CMS and actively engaged, hoping that CMS will address these concerns in the final rule. In addition, you know, we've commented a number of times on our internal programs around risk adjustment, and we feel very good about what we feel are industry-leading processes as it respects Medicare risk adjustment compliance and our sophisticated mechanisms for correcting risk adjustment data if we determine there to be errors in that data. This has included internal contract level audits that we perform, which we have reported the results of which to CMS, including any identified overpayments. And then as you pointed out, we do have a material risk factor that's included in our disclosures related to this item, so definitely would encourage investors to review that language. as it does represent, you know, a material item depending on how the final rule comes out.

Thank you. One moment for our next question. Our next question comes from with Cleveland Research. Your line is open.

Hi, good morning. Thanks for taking my question. Just a couple follow-ups. First, appreciate the commentary on stronger than expected applications so far in AEP. But can you remind us of typical pacing of applications throughout AAP? You know, how much is back-end weighted? How many applications come through after Thanksgiving in those last 10 days? And then secondly, you know, interested if you can comment on expected utilization rates of some of the more cash-like benefits that you're all offering next year in the healthy option allowance. You know, does that utilization increase given its you know, more of a cash payment to the beneficiary, and does that have any MLR implication? Thank you.

Hi, Rob. Yes, in terms of your first question, in terms of sort of completion over the course of AEP, I would say you definitely see it a little bit more backloaded, particularly say the last two weeks of the AEP selling cycle represents a disproportionate percentage of the sales. And so that's why, unfortunately, it generally takes until you get pretty late in the AEP cycle to fully predict what the outcome will be. Even as you can imagine, the 2% movement in either retention or sales rates can have a meaningful impact. And so I would say it is back-loaded. Terms are even more back-loaded, and that's a function of if a member were to disenroll, they have to enroll another plan. That plan has to communicate it to CMS, and then CMS communicates it to us, which is why that takes longer for us to be able to see the full completion. In terms of the cash-like benefits and expected utilization, we do expect a very high utilization rate for those benefits. We've seen that for the OTC benefit and food card that we've offered the last number of years, and we expect that to be the case with some of the new services that are included in our offering for 2023. We also included an enhanced rollover benefit. We expect that to also generate some additional utilization as it provides more flexibility to members. We've contemplated all of that, obviously, in our pricing for 2023 and our estimates. And given the high rate of utilization we anticipate, I don't expect that to create any pressure in terms of our guidance for 2023.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Bruce Broussard for any closing remarks.

As I stated at the end of my comments, I'll just continue to reiterate. I want to say thank you to our 63,000 employees. that really make our success every day and what they do. I also want to thank our investors for continuing to support us. And as you can tell from the call and from our comments, we're excited about the strong fundamentals of the industry and of the company and look forward to continuing to provide you updated progress on us meeting the commitment. I thank you for your time today, and we look forward to continuing to have the dialogue on our progression.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.