Humana Inc.

Good day and thank you for standing by. Welcome to Humana's first quarter earnings 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'll 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, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer, and Susan Diamond, Chief Financial Officer, will discuss our first quarter 2023 results and our 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 and our other filings with the Securities and Exchange Commission in our first quarter 2023 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 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. All 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. Good morning and thank you for joining us. Today, Humana reported financial results for the first quarter of 2023. reflecting a strong start to the year. Adjusted earnings per share for the quarter of $9.38 was above our initial expectations, with the outperformance seen to date underpinned by strong membership growth and favorable inpatient utilization trends in our individual Medicare Advantage business. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. Based off the strength of our performance to date, we've increased our full year adjusted EPS guidance by 25 cents to at least $28.25. Susan will share additional detail on our first quarter performance and full year expectations in a moment. I'll now provide an update on our operations and outlook. Our unwavering commitment to the advancement of our strategy and growth in our core business is evident in our industry-leading Medicare Advantage growth, ongoing organic success in Medicaid, recent TRICARE contract award, and continued expansion of our center well assets. I'll touch on the recent progress made in each of these areas, starting with Medicare Advantage. The targeted investments we made in benefits marketing, and distribution for 2023 have continued to drive success post the annual election period, or AEP, leading to our current individual Medicare Advantage membership growth estimate of at least 775,000 for the full year, an impressive 17% growth year over year. The favorable trends seen in AEP have continued into the open enrollment period, or OEP, with strong growth in the DSNP space, where we've added 113,000 members as of March 31st, representing a growth of 17% year over year. And notably, we've continued to see impressive growth in the larger non-DSNP space, adding 474,000 members as of March 31st, reflecting a compelling 12% year over year growth in non-DSNP membership. In addition, growth in states with robust or growing value-based provider penetration remains strong. We have grown membership nearly 13% year-to-date in Texas, Georgia, Florida, and Illinois, which are highly penetrated value-based markets. Importantly, the growth we're experiencing in 2023 continues to be high quality. with better than expected retention, where we've now seen a 300 basis point improvement year over year compared to our initial expectation of 100 basis point improvement. In addition, we continue to see a higher percent of our new sales reflecting members switching from competitors than originally anticipated. We previously shared that 50% of our new sales in AEP reflected members switching from competitor points. We've been pleased to see this trend continue in OEP. We are proud of the impressive membership growth achieved in 2023 and with our strong fundamentals and best in class quality, we believe we are well positioned to grow at or above high single digits in the future. Turning to Medicaid, we have successfully implemented the Louisiana and Ohio contracts in the first quarter adding 215,000 members as of March 31st, and growing our total membership to greater than 1.3 million members across seven states. Looking forward to 2024, our Medicaid business will add another state to our national portfolio. In March, Indiana announced its intent to award Humana a statewide contract for its new Pathways for Aging Medicaid program. which is now expected to go live July 2024. Our Indiana health plan will serve elderly and disabled Medicaid enrollees, including integrated care for dual eligibles enrolled across Humana's Indiana Medicaid plan and our Medicare DSNIP. Humana led all bidders with the highest score in the Indiana RFP, leveraging our local Medicare performance, and national dual program capabilities, including 28,000 Indiana DSNP members in four-star plans. We are proud of our success in Medicaid to date and anticipate continued investment to grow our platform organically and actively work towards procuring additional awards in priority states, with RFPs currently active in two states. In addition, Humana's largest Medicaid contract is up for bid as Florida began re-procuring its statewide Medicaid program, with awards expected by year end. Humana has decades of strong Medicaid performance in Florida, and we believe we are well prepared for this highly competitive procurement. In our military business, we are pleased to be awarded the next managed care support contract for the TRICARE East Region by the Defense Health Agency of the U.S. Department of Defense, the sixth TRICARE contract Humana Military has secured since 1996. Under the terms of the award, Humana's military service area will cover approximately 4.6 million beneficiaries in a region consisting of 24 states and Washington, D.C. We are honored to have been selected to continue serving military service members, retirees, and their families. Our center will portfolio comprising primary care, home, and pharmacy continues to see strong growth. As the largest senior-focused value-based primary care platform in the U.S., we now operate a total of 249 centers, serving 266,000 patients, including 207,000 across our wholly-owned and de novo portfolios. and nearly 59,000 patients served through our IPA relationships. This represents 16% growth in center count and 11% growth in patients served year over year. We remain on track to end the year at the high end of our previously communicated annual center growth of 30 to 50 through a combination of de novo build and programmatic M&A. And with over 17,000 new patients year to date, patient growth for 2023 is trending ahead of previous expectations and significantly higher than the 3,900 patients added for the same period in 2022. Within home solutions, the rollout of our value-based care model continues as planned, now covering over 815,000 Medicare Advantage members with full value-based model inclusive of coordinating care and optimizing spend across home health, DME, and infusion. This represents an increase of greater than 200% year over year, driven by expansion in Virginia and North Carolina in the fourth quarter of last year. Under this model, our home health utilization management program drives appropriate levels of care without compromising clinical outcomes. As a result, in Virginia and North Carolina, we have experienced a 600 basis point reduction in recertification rates on episodic contracts across all home health providers. CenterWell Home Health represents more than 30% of home health episodes in these states, compared to a national average of approximately 20% across geographies where CenterWell Home Health and Humana Health Plans have geographic overlap. In North Carolina and Virginia, CenterWell home health emergency room and hospital readmission rates are approximately 60 basis points and more than 150 basis points lower than other providers, respectively. In addition, we are covering a total of 1.8 million of our Medicare managed members with the standalone home health utilization management and network management capabilities across multiple geographies. We are seeing early success with these standalone capabilities, reducing our network utilization by 200 basis points, while improving recertification rate on episodic contracts by nearly 1,000 basis points year-to-date. Finally, as recently announced, following a strategic review, we determined that our employer group commercial medical business was no longer positioned to sustainably meet the needs of our commercial members over the long term. or support the company's long-term strategic plans. Our decision to exit this business augments Humana's ability to focus resources on our greatest opportunity for growth and where we can deliver industry-leading value for our members, customers, and shareholders. It is in line with our strategy to focus our health plan offerings on public-private partnerships and specialty businesses, while advancing our leadership position in integrated value-based care including expanding our center well healthcare service capabilities. Before turning it over to Susan, I'd like to briefly touch on 2024. We'd like to thank CMS for their thoughtful engagement throughout the rate-setting process, demonstrating their ongoing support for the Medicare Advantage Program. We are pleased CMS adopted a three-year phase-in in the risk model changes in the 2024 rate notice. which serves to mitigate the impact of unintended consequences to beneficiaries resulting from these changes. The final rate notice for 2024 reflects a decrease of approximately 112 basis points for the industry. We expect the impact on Humana to be a decrease of approximately 23 basis points, with improvement versus the industry largely driven by our industry-leading STARS performance. Looking forward, we believe the industry will continue to see strong growth. Medicare Advantage products have seen a steady rise in their consumer value proposition, offering key benefits that are not covered by fee-for-service Medicare, including benefits focused on closing barriers to care such as rides to the doctor and deep focus on coordinating care for those with chronic illnesses. Medicare Advantage beneficiaries save more than $2,400 annually and 95% of enrollees are satisfied with their healthcare quality. The strength of the program is reflected by the nearly 32 million seniors enrolled in Medicare Advantage, with the penetration now at approximately 49%. In addition, we have seen the industry grow nicely through a negative rate environment in the past. Despite unfavorable rates in seven of eight years between 2010 and 2017, Medicare Advantage penetration increased from 25% to 35% over this period. We firmly believe the Medicare Advantage program will remain a compelling value proposition for seniors and expect Humana will be well positioned to remain an industry leader in 2024 and beyond. We will provide more specific thoughts on 2024 in the coming months post completion of the competitive bidding process. In closing, we are pleased with the solid start to the year, which reflects high quality fundamentals and execution across the enterprise and positions as well on our pathway towards our mid-term adjusted EPS target of $37 in 2025. We look forward to providing additional updates on our performance and progress towards our mid- and long-term targets throughout the year. With that, I'll turn the call over to Susan.