Humana Inc. (HUM) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Medicare Business Outperformance: Medicare business exceeded expectations with member growth better than anticipated, raising forecast by 75,000 members for over 4% growth for the year.
• Medicaid Growth and Contract Wins: Continued growth in Medicaid through contract wins and member growth, with modest claims pressure not expected to impact full-year results.
• CenterWell Primary Care Growth: Strong clinic and patient growth in CenterWell Primary Care, on track to mitigate v28 phase-in impacts.
• Pharmacy and Home Business Performance: Pharmacy volumes in line with plan, driving lower cost to fill, especially in specialty pharmacy. Home business generated high single-digit admission growth with improved cost structure.
• Admin Cost Management: Progress in managing admin costs, focusing on automation and efficiency improvements across various operations.

Pessimistic Highlights

• Medical Cost Pressure: Experienced some medical cost pressure in the quarter, particularly from higher inpatient admissions in the latter half of Q2, continuing into July.
• Inpatient Admissions Pressure: Higher than expected inpatient admissions, attributed in part to the 2-midnight rule implementation, contributing to cost pressures.

Company Outlook

• Full Year 2024 Guidance Reaffirmed: Despite medical cost pressures, the company reaffirms its full-year 2024 adjusted EPS and benefit ratio guidance, anticipating continued inpatient cost pressures while working on mitigation strategies.
• 2025 Outlook: Expansion in adjusted EPS growth expected as a first step on a multiyear path to normalized margin, feeling good about bid assumptions and product portfolio heading into the Annual Enrollment Period (AEP).

Q & A Highlights

• Q: Can you elaborate on the inpatient trends and pressures beyond the 2-midnight rule? (Ann Hynes, Mizuho)

  A: The inpatient volume variation, particularly higher in the second quarter's latter half, is largely attributed to the 2-midnight rule implementation. This is consistent with hospital system reports, suggesting alignment with broader industry trends. (Susan Diamond)

• Q: How does the guidance account for the second half MLR and the impact of increased inpatient in July on 2Q MLR? (Sarah James, Cantor Fitzgerald)

  A: The second half MLR anticipates continued higher inpatient volumes, offset by lower average unit costs and reduced observation stays. The third quarter specifically includes about 80 basis points from workday seasonality. July's activity impacts third quarter results, not the second quarter. (Susan Diamond)

• Q: Could you provide more color on MLR progression and assumptions for the second half of the year? (Andrew Mok, Barclays)

  A: Higher MLRs expected in the third quarter, with the fourth quarter seeing some offset from favorable workday seasonality. The back half of the year includes assumptions of continued higher inpatient volumes. (Susan Diamond)

• Q: Can you quantify the impact of higher inpatient costs and discuss how 2025 bids account for this pressure? (Justin Lake, Wolfe Research)

  A: The bids for 2025 did not explicitly contemplate the higher inpatient costs observed. However, other favorable factors not included in the bids, such as higher risk scores, are expected to offset this pressure. (Susan Diamond)

• Q: Could you clarify the impact of the 2-midnight rule on MLR and discuss if cost-cutting has impacted the company's ability to manage elevated cost activity? (David Windley, Jefferies)

  A: The 2-midnight rule's impact was greater than initially expected, but offset by favorable developments not anticipated in the bids. There's no evidence that cost-cutting has cut into the company's ability to manage costs effectively. (Susan Diamond, James Rechtin)

• Q: What are the expectations for margin recovery and the approach to multiyear planning? (A.J. Rice, UBS)

  A: Margin recovery is expected to be a multiyear process, with a focus on improving operating discipline and multiyear planning to optimize shareholder value over time. (James Rechtin)

• Q: How does the provider business MLR trend compare, and are there any specific pressures? (Kevin Fischbeck, Bank of America)

  A: The provider business saw similar results to the health plan, with slightly less inpatient pressure. The focus is on better alignment with hospital systems and managing authorization requests effectively. (Susan Diamond)

• Q: Can you discuss expectations for the PDP segment in 2025 and the impact of industry bids? (Josh Raskin, Nephron Research)

  A: The industry's approach to 2025 bids in the PDP segment varied, with a focus on mitigating increased exposure and liability. Participation in the demonstration project is still under consideration pending further guidance from CMS. (Susan Diamond)

• Q: What are you seeing in Medicaid, particularly in Florida and newer markets? (Ben Hendrix, RBC Capital Markets)

  A: Florida's Medicaid performance is slightly better than expected, with discrete pressures in newer states being managed. Discussions with state partners are ongoing to adjust rates based on observed trends. (Susan Diamond)

• Q: How does the $3 billion raise in revenue guidance break down, and what are the drivers? (Scott Fidel, Stephens)

  A: The majority of the revenue guidance increase is driven by membership growth, with favorable outperformance on '23 final year MRA and intra-year positivity on revenue risk score estimates also contributing. (Susan Diamond)

• Q: Can you describe management process changes and priorities for operating expense reduction? (Lance Wilkes, Bernstein)

  A: The focus is on multiyear planning and discipline, optimizing investments for long-term shareholder value, and driving cost management through automation and technology. (James Rechtin)

• Q: How are you approaching capital deployment and prioritizing growth opportunities? (Erin Wright, Morgan Stanley)

  A: Growth opportunities in CenterWell and Medicaid are prioritized, with capital deployment focused on aligning with lower total cost of care, quality improvement, and attractive return on capital. (James Rechtin)

• Q: Can you discuss potential revisions on inpatient claims for medical necessity and provider negotiations for closer alignment? (Ryan Langston, TD Cowen)

  A: Ongoing utilization management programs are in place for both frontend and postpay review of inpatient claims. Negotiations with providers aim to better align incentives around appropriate utilization and care. (Susan Diamond, James Rechtin)