Humana Inc.

Good day, and thank you for standing by. Welcome to the Humana fourth quarter 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Stoner, VP 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 2022 results and our initial financial outlook for 2023. 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 2022 earnings press release as they relate to forward-looking statements 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 businesses 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. All participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAP. 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, and good morning, everyone. We appreciate you joining us. Today, Humana continued the momentum seen throughout 2022 and reported another quarter of strong operating and financial results. Adjusted earnings per share for the full year were $25.24, which was above our previous estimate of approximately $25, and represents an annual growth of 22%. We achieved this compelling earnings growth while also making meaningful progress in advancing our strategy, which I will touch on more in a moment. Looking forward, we provided full-year adjusted EPS guidance for 2023 of at least $28, representing growth of 11% over 2022, consistent with our previous commentary. We anticipate this strong growth despite the headwind we face from the divestiture of 60% interest in Kindred Hospice. We also reaffirmed our expectations for a full year individual Medicare Advantage membership growth of at least 625,000 members, a 13.7% increase year over year. Recall that our 2025 adjusted EPS target of $37 is underpinned by an assumption of return to individual MA membership growth at or above the industry rate by 2024. We are very pleased to have accomplished this goal ahead of expectations. Before providing additional detail on our operations and outlook, I'd like to take a moment to address the RADV final rule released Monday. I want to start by emphasizing the strength of the Medicare Advantage program, supported by a value proposition that is superior to fee-for-service Medicare. 30 million seniors have chosen to enroll in MA, of which nearly 34% identify as racial and ethnic minorities. The MA program delivers high quality and improved health outcomes, resulting in a 94% satisfaction rate and lower total cost of care through improved care coordination, providing savings to the Medicare program while helping seniors achieve their best health. The strength and support of MA is an important backdrop as we talk about the long-awaited final RAD-V rule. I'd like to reiterate Humana's core belief when it comes to RAD-V. Namely, we believe risk adjustment is an important element of the program and incentivizes plans to cover all individuals regardless of health status. We have long supported CMS's desire for greater transparency through auditing and will continue to partner with CMS to promote program integrity. We strive to have a fair, compliant, and transparent system. While we're still reviewing the final rule and considering its impact, I will share some of our initial observations. First, we support CMS's decision not to extrapolate the results of any audit payments for the years prior to 2018. As CMS acknowledged, auditing such age time periods represent a unique challenge that may produce results that are not truly reflective of the plan's compliance or coding accuracy. An important part of RADV ruling is the audit methodology. Therefore, we look forward to working with CMS to learn more about the methodology, including contract selection, sampling, and extrapolation, as the rule did not provide the details needed to fully understand the potential impact of the future audits. And finally, we are disappointed CMS's final rule did not include a fee-for-service adjuster in the process, which we believe is necessary to determine appropriate payment amounts to MA organizations. We are considering all our options to address or challenge this admission and obtain clarity about our compliance obligations. With that said, we are committed to working productively with CMS to ensure the integrity of the program is maintained and beneficiaries do not face higher costs and reduced benefits as a result of this rule. For years, MA has been an example of a successful public-private partnership that works for Medicare beneficiaries, providers, and taxpayers. We're committed to working with CMS on a path forward to ensure that MA continues to be an option that millions of seniors have come to depend on. Now turning to an update on our operations and outlook, we entered 2023 in a position of strength. Industry leader in the delivery of senior-focused, integrated, value-based care, delivering high-quality outcomes at a lower cost. Our deep focus on value-based care, both through our center well platform and our highly diversified value-based care solutions and locally-oriented provider relationships. is one of the differentiated capabilities that gives Humana a durable competitive advantage. We closed 2022 with 70% of our individual MA members engaged in value-based arrangements, which incentivizes providers to comprehensively manage patient needs and reduce total cost of care. Our extensive experience in value-based care, combined with our use of deep analytics and digital capabilities, first-mover deployment of interoperable solutions, as well as our customer-centric products and solutions sets Humana apart from peers. We believe these differentiated capabilities have contributed to our durable success and quality in customer experience, as demonstrated by five consecutive years of leading STARS results and individual MA membership growth of 10.4% on a four-year compounded annual growth rate from 2018 to 2022, as compared to industry growth of 9.7%. We complemented our differentiated capabilities with targeted investments and benefits, marketing, and distribution for 2023, which has accelerated the strong momentum in our MA franchise. The improved plan designs have resonated with consumers and brokers, resulting in our above industry growth expectations of at least 625,000 members for the full year. Our 2023 growth outlook includes strong growth in the DSNP space, where we have grown 72,000 members as of January, a 50% increase over 48,000 members added in the 2022 AEP. And importantly, the majority of our growth for 2023 is coming from the larger non-DSNP space. We added approximately 422,000 non-DSNP members through the 2023 AEP, a significant increase from the 90,000 added in 2022 AEP, and representing an impressive 10% year-over-year growth in non-DSNP membership. We achieved our strongest growth in states with robust or growing value-based provider penetration. For example, our top states by absolute growth were Texas, Georgia, Florida, and Illinois, which are highly penetrated value-based markets. Together, they grew 163,000 members in 2023 AEP, a 450% increase over the 29,000 members achieved in those states last year. The robust membership outlook reflects high-quality growth, with retention improving over 200 basis points year over year, better than our initial assumption of 100 basis points improvement. We are pleased to see our external call center partners improve retention by 380 basis points year over year, reflecting their enhanced focus on quality and customer satisfaction. In addition, approximately 50% of our new sales reflect members switching from competitor MA plans, which was higher than anticipated and significantly improved from the 30% experienced in 2022. We also saw a shift in our overall sales channel mixed to higher quality channels. Our internal sales channel and our external field broker partners represented 53% of total sales in the 2023 AEP. compared to 44% last year. As shared before, these channels drive better engagement with members, leading to greater plan satisfaction, retention, and lifetime value. Our strong 2023 membership growth was broad-based across our geographic footprint and benefits not only our MA business, but also our growing and maturing payer agnostic center well platform. enhancing our ability to drive more penetration and integration of our center well assets. Our primary care organization also experienced strong growth during AEP and is expected to add 8,000 to 10,000 new patients across our de novo and wholly owned centers. And we are happy to share that nearly 60% of these new patients had appointments scheduled as of December 31st. This is a key metric for us to measure the engagement level of new members, and engagement is a key driver of retention. For the full year, we expect to grow patient panels by 20,000 to 20,000 through organic growth and programmatic M&A, meaningfully higher than the approximately 13,500 patient growth experienced in 2022. Center expansion remains on track as we ended 2022 with 235 centers and are scheduled to open an additional 10 to 15 in the first quarter alone. We expect to come in in the near to high end of our previously communicated annual center growth of 30 to 50 in 2023 through a combination of de novo build and programmatic M&A. In the home, we have continued to expand our value-based model, which coordinates care and optimizes spend across home health, DME, and infusion services. We are now supporting approximately 15% of our MA members with the model, expanding coverage to an additional 433,000 members during the fourth quarter. We remain on track to cover approximately 40% of our MA members with the fully-based value-based model by 2025. In addition, as previously shared, we are implementing some of these capabilities on a standalone basis to accelerate value creation. We rolled out the home health utilization and network management capabilities to 1.4 million members, bringing the total of covered members to 1.9 million, creating incremental enterprise value in advance of the fully value-based market rollout. Finally, in our pharmacy business, we once again increased our industry-leading mail order penetration levels in 2022, driving 38.6% penetration in our individual MA business, a 40 basis point increase over 2021. We anticipate maintaining this industry-leading position in 2023 as we further invest and the consumer experience and encourage the continued use of mail order, despite comparable co-pays in the retail setting beginning this year. Before turning it over to Susan, I am excited to be able to speak to the senior leadership appointments we announced this morning. Dr. Sanjay Shetty is joining Humana as the president of CenterWell effective April 1st. This newly created role comes as we continue to meaningfully expand our center wall capabilities, strengthening our payer agnostic platform, and integrating the clinical experiences for patients across the center wall platform. Sanjay comes to Humana from Stewart Healthcare Systems, where he currently serves as the president. He will draw on his extensive experience leading a large healthcare system, as well as his deep understanding of technology and application of data and analytics and modernizing workflows. to accelerate the integration of our CenterWell assets. Sanjay's addition to the management team, he brings new and differentiated skills with extensive healthcare experience across a broad spectrum, including Medicare, Medicaid, physician groups, and value-based care. And we are excited to have him on board as the President of CenterWell. In addition, we are thrilled to announce that George Renadin has been promoted to President of Medicare and Medicaid. and added to the management team effective immediately. George has been an integral to our success as a company, and having joined the company team in 1996, spending the last 26 years dedicated to core operations of our Medicare business. Bringing Medicaid under his leadership complements his current responsibilities for the operation, supporting more than 5 million Medicare Advantage and Medicare Supplement members. With the addition of Sanjay and George to the management team, we have closed our search for the president of insurance. We are confident that the depth of talent we now have on both the management team and across the broader leadership within the organization positions as well to continue to execute against our enterprise strategy. As with any company of our size and caliber, we will continue to evaluate strategic additions to and the evolution of our leadership team as we advance our strategy to develop strong synergistic growth across the enterprise. In closing, I would again reiterate that we are entering 2023 in a position of strength. The strength is bolstered by Humana's differentiated capabilities and grower payer agnostic platform and underpinned by the strong fundamentals in the Medicare Advantage industry. Importantly, the robust Membership growth and financial outlook for 2023 puts us on a solid path towards our mid-term EPS target of $37 in 2025. We look forward to providing additional updates on our progress towards our mid- and long-term targets throughout the year. With that, I'll turn the call over to Susan.