Humana Inc.

Good day and thank you for standing by. Welcome to the Humana second quarter 2024 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 Lisa Stoner, Vice President, Investor Relations. Please go ahead.

Thank you and good morning. I hope everyone had a chance to review our press release and prepared remarks as well as the letter from the CEO, all of which are available on our website. We will begin this morning with brief remarks from Jim Recton, Humana's President and Chief Executive Officer followed by a Q&A session with Jim and Susan Diamond, Humana's Chief Financial Officer. 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 second quarter 2024 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 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 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. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, 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. With that, I'll turn the call over to Jim Recton.

Thanks, Lisa, and good morning, everyone. Thank you for joining us. Let me start by just saying that it's a privilege to be able to serve as Humana's President and Chief Executive Officer. And I want to say thanks to the Humana Board of Directors for providing me this opportunity I also just want to say thanks to Bruce for the last six months of his mentorship and partnership. It's been really, really great. And I actually look forward to continue to work with him over the next year. So Bruce and our 65,000 teammates have built a great company here, and it's pretty exciting to be a part of it. I shared some thoughts on Humana and the industry and the opportunity ahead in the letter that I posted on our investor relations website this morning. I encourage everyone to take a moment to read the letter. That goes along with our second quarter prepared remarks and the earnings release. I'm not going to repeat what is in the letter, but I do want to hit a couple of themes. So let me start by just reinforcing what I think is basic truth about the business. It's a good business. It's good for our members, and it's good for our patients. This is well documented, in my opinion. CMS and the federal government, state government, and by extension, even taxpayers are also our customers. I think we need to constantly remind ourselves of that. What we do creates value for those customers as well. We need a regulatory environment that allows that value to be fully realized, and that requires constant collaboration and adjustment. We need to be a proactive partner with CMS in that process, and we need to do this to make sure that we've got a long-term stable Medicare and Medicaid program. This is also good for investors, for all of you. And I think you guys know that the sector fundamentals have not meaningfully changed. They're still attractive and we still have differentiated capabilities to compete in that space. We understand that there's frustration with the volatility that we've been experiencing. I want you to know that we also acknowledge that right now we are not achieving our full potential. The external environment has certainly been difficult. However, the message I want to keep driving home is that we need to see the external environment for what it is. It's context. We need to shape it to the degree that we can, and we otherwise need to be focused on the things that we control within that context. That's our product. It's our pricing. It's our clinical capabilities. It's admin costs, and it's growing our business. To execute well against the things that we do control, we need to be incredibly focused on operating disciplines. We're good at operating discipline, but we need to be reminding ourselves of that day in and day out as the external environment changes. We also can do a better job with multi-year planning in order to deliver consistency and performance over time. We've got great teams. We know how to do this. It's simply about maintaining focus on the things that we control, even when the environment around us is shifting. Now, let me turn to second quarter performance. I'm going to give a quick headline. I'm going to give some examples to support that headline, and then I'm going to come back with some implications on our outlook. The headline today is that our second quarter results exceeded expectations. We feel good about where we are at mid-year, but we did experience some medical cost pressure in the quarter. So let me expand on that a little bit. Much of the good news comes from our Medicare business, which is outperforming the expectations that we had at the beginning of the year. Our member growth is better than we expected. We raised our forecast by 75,000 members. That means that we should grow at just over 4% for the year. Our benefit ratio for the quarter was lower than we anticipated. That was driven by claims development and higher than expected revenue. And that was also offset by the higher inpatient costs that I referenced earlier. More specifically, inpatient admissions were higher than we expected in the back half of the second quarter. That pressure has continued into July. For now, we believe that planning for continued pressure within our guidance is the right approach. We also feel good that this pressure ultimately can be mitigated. We've taken several measures to mitigate that pressure. So, for example, we're continuing to ensure clinical appropriateness of admissions, especially in light of the two midnight rule. We are enhancing claims audits, and we are negotiating with provider partners to achieve better clinical and contractual alignment. In Medicaid, we're excited about our continued growth through both contract wins and member growth, and we continue to wait for additional RFPs. We have some modest claims pressure in Medicaid, but we do not expect it to impact our full year results. In CenterWell, primary care is delivering strong clinic and patient growth, and we're confident that we're on track to mitigate V28 as it phases in. Overall, our pharmacy volumes are in line with plan, and we continue to drive lower cost to fill, particularly in our less mature specialty pharmacy business. The home business has generated high single-digit admission growth, and the team continues to improve their cost structure, anticipating continued rate pressure in that space. We continue to make progress managing our admin costs, and we're ahead of plan for these. Broadly, we are focused on automation. This is in reducing our cost to fill in our pharmacy business, and it's also in lowering member service costs within our insurance segment. I'll give just a few examples of the type of work, actually really good work, that our teams are doing. We're seeing an increased Medicare claims auto adjudication rate by about 70 basis points. This does improve the provider experience, and it does also reduce claim processing costs. We've optimized logistics across our specialty pharmacy facility in a way that reduces transit times and also lowers average delivery costs. We've improved our digital enrollment experience. This is leading to higher conversion rates. And again, it's lowering our distribution costs. Finally, we're making good progress on multi-year initiatives. We recently announced a partnership with Google This will help accelerate our AI efforts. That will, in turn, help reduce costs and improve the consumer experience. We're excited about a recent investment that we made in HealthPilot. HealthPilot uses AI to make the consumer purchasing experience better when shopping for Medicare Advantage. And we just entered into a lease agreement with Walmart that should help accelerate our primary care clinics. The implication as we look forward is that we're reaffirming our full year 2024 adjusted EPS and benefit ratio guidance. This prudently assumes that the higher inpatient costs will continue even as we work to mitigate that pressure. We're looking ahead to 2025. We continue expansion and adjusted EPS growth as a first step on what will be a multi-year path to a normalized margin. We continue to feel good about our bid assumptions and our product portfolio as we head into AEP. I'm excited about all of the momentum and the opportunity ahead. And so with that, I'll just remind you that we posted the prepared remarks to our investor relations website so that we can spend most of our time on Q&A today. And we will now open up the lines for your questions. Operator, please introduce the first caller.