Humana Inc.

Good day, and thank you for standing by. Welcome to the Humana third 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 touchtone telephone. 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, 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 where Jim will be joined by Susan Diamond, Humana's chief financial officer, and George Renenden, president of Humana's insurance segment. 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 third 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 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. And 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 Rexton.

Thanks, Lisa, and good morning, everyone. Thank you for joining us. In the last quarter, I outlined four basic drivers of our business that we need to be able to deliver against over and over again. Those are, first, providing a Medicare product and experience that delivers against consumer needs and is priced with discipline. Second, it is operating with clinical excellence. This really is the foundation of industry leading margins. It is, third, managing a highly efficient back office in its fourth, deploying growth capital in a way that complements our Medicare Advantage core business, but really focused around Centerwell and Medicaid. I'd like to review the quarter's results with a little bit of a lens towards those four drivers. Before I do that, let me just start with a few headlines. First of all, as we noted, we exceeded expectations for the quarter. We're also confident that we will achieve at least $16 of EPS for the full year. and we are comfortable with where 2024 EPS consensus sits today. Exactly where we're going to land is largely dependent on the number of investment decisions in AEP and in STARS that we continue to evaluate. We also feel good that we priced our MA product for margin expansion 2025. However, similar to our strategy for the rest of 2024, we will be balancing near-term earnings progression with investment in the business. And when we say investment in the business, Certainly that is STARS, but it's also looking at investment opportunities and growth, admin cost efficiency, and medical cost management. We understand that investors would like more clarity on the multi-year outlook of the business. And to address this, we are targeting an investor day in May of 2025. So let me turn to the four basic drivers for a moment. So right now, if I start with product and experience that we are delivering through our Medicare product, we're filling pretty good about what we're delivering. And let me point out a couple of things. Our individual MA membership growth continues to outpace our expectations for the year. We anticipate at this point, full year growth, year over year growth of around 5%. The year started slowly in AP last autumn, but we've made pretty significant gains over the course of 2024. When we look at it, we believe that this is a reflection of disciplined product pricing that has allowed us to continue to emphasize growth at a time when others in the market have pulled back. And we also attribute some of the growth to incremental marketing investments that we've made in our internal sales channel. This is a channel that we believe is increasingly important for us, and those investments have been paying off. We continue to deliver best-in-class service. Recently, we were ranked the number one health insurer for customer experience by Forrester. This is now four years in a row of being ranked number one by Forrester. And finally, while it's early in this year's AEP cycle, from what we can tell, sales appear to be generally on track with expectations. Turning to the second driver, clinical excellence, let me start with STARS. We've acknowledged now that we've got work to do to get back to the results that we expect of ourselves and that we expect for our members and our patients and our investors. We've been moving quickly to make investments and to align incentives in our provider and pharmacy networks to close more gaps in care. We've also redirected care management and call center capacity to increase member outreach, and that is also related to gaps in care. Just last week, those efforts resulted in about 5,000 incremental primary care appointments. And I learned last night that we've got about another 3,000 to start this week, 3,000 primary care appointments scheduled. We're also making technology investments. This includes improvements to our plan finder capability. And really the way I'd characterize it, we're on a sprint to take ground to impact 2027. And I simultaneously feel good about the team's focus and the effort and the impact that we're making. And frankly, frustrated that we have allowed ourselves a shorter runway than we would like to make up that ground. Clinical excellence also translates to lower cost when we deliver better care. And so in Q3, medical costs are largely in line with our expectations. There's obviously some give and take across categories. The environment is still dynamic, and we will be careful with our expectations around medical cost trends. However, right now we are seeing some success in a number of our cost control efforts. The example I'll give is we've been extending value-based care contracts beyond primary care into areas like kidney disease and oncology care management, and we're seeing good results from that effort. Shifting to the third driver, highly efficient back office, We do continue to make progress in this area. We're expecting a 30 basis point decrease in our adjusted operating cost ratio for the year. And just to give one example of the type of work that is helping to drive this, we're implementing more and more uses, use cases for AI. We recently launched a generative AI solution that allows our care management team to spend about half as much time on post-call documentation. They are still doing all the same human oversight for any clinical decision-making, but they're spending less time on documentation. That brings us to our final driver, deploying growth capital to drive efficient growth. I would argue that we're quietly building the leading senior-oriented primary care organization in the nation. Our primary care clinics are hitting their clinical and their financial targets. They're on track to mitigate V28. We recently released a study in collaboration with a leading researcher and professor from Harvard that demonstrates both the clinical and economic value the clinics create. It found that our members have a better experience when they are part of a senior-focused primary care clinic. We expect to add another roughly 40 clinics this year. Often this is through acquisition of underperforming clinics that we've demonstrated we can pretty rapidly turn around. And our patient growth continues to outpace expectations. I'm encouraged by our recent performance trajectory and growth, absent our stars performance in BY26. And at the same time, recognize that these continue to be dynamic times for the industry, and I believe it's critical that we continue to strengthen the organization by making investments to drive long-term shareholder value. This is obviously a balance with how we think about short-term earnings progression. We look forward to providing formal 2025 guidance on our fourth quarter call. And we will also look forward to providing a more fulsome update on our strategic initiatives and their expected impact at investor day, which again, we're targeting in May of 2025. Finally, I just say, look, our conviction remains high regarding the positive outlook for MA and for value-based care. And with that, we will turn to Q&A.