Humana Inc. (NYSE:HUM) Q4 2022 Earnings Call Transcript

Humana Inc. (NYSE:HUM) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: 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 speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Lisa Stoner, VP of Investor Relations. Please go ahead.

Lisa Stoner: 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 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 and 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. 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.

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 faced 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 talent. The strength and support of MA is an important backdrop as we talk about a long-awaited final RADV rule. I’d like to reiterate Humana’s core belief when it comes to RADV. 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’ desire for greater transparency through auditing, and we’ll 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’ decision not to extrapolate the result 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 plans compliance or coding accuracy . The 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 a rule did not provide the details needed to fully understand the potential impact of the future audits. And finally, we are disappointed CMS’ 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 has 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. And 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 CenterWell 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. That’s Humana apart from peers. We believe these differentiated capabilities have contributed to our durable success in quality and 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 D-SNP 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-D-SNP space. We added approximately 422,000 non-D-SNP members through 2023 AEP, a significant increase from the 90,000 added in 2022 AEP, and representing an impressive 10% year-over-year growth in non-D-SNP 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 a 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 mix 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 planned 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 CenterWell platform, enhancing our ability to drive more penetration and integration of our CenterWell 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 31. 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 25,000 through organic growth and programmatic M&A, meaningfully higher than the approximately 13,500 patient growth experienced in 2022. Our center expansion remains on track, as we ended 2022 with 235 centers and are scheduled to open an additional 10 centers to 15 centers in the first quarter alone. We expect to come in the near €“ the high end of our previously communicated annual center growth of 30 centers to 50 centers 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 a fully based, value-based model by 2025. In addition, as previously shared, we are implementing some of these capabilities on a stand-alone 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 for the full 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 in 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 1. This newly created role comes as we continue to meaningfully expand our CenterWell capabilities, strengthening our payer-agnostic platform and integrating the clinical experiences for patients across the CenterWell platform.

Sanjay comes to Humana from Steward Health Care System, where he currently serves as the President. He will draw on his extensive experience leading a large health care 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 health care 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 Renaudin has been promoted to President of Medicare and Medicaid and added to the management team effective immediately.

George has been integral to our success of the company joined 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 operations supporting more than five 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 in both the management team and across the broader leadership within the organization, positions us 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 grow our 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.

Susan Diamond: Thank you, Bruce, and good morning, everyone. Today, we reported full year 2022 adjusted earnings per share of $25.24, ahead of our expectations of approximately $25 and representing a compelling 22% growth year-over-year. As Bruce shared we delivered as impressive earnings growth while making significant advancements in our strategy, including a quicker-than-anticipated return to above-market individual Medicare Advantage membership growth for 2023 and further advancement of our CenterWell platform. Before discussing details of our performance and outlook, I would note that we realigned our reportable segments in December, moving to two distinct segments, Insurance and CenterWell. I will speak to our 2022 results and 2023 outlook in terms of the new segment structure with references to the old segments to provide clarity as needed.

I will start by discussing our fourth quarter results and underlying trends before turning to our 2023 expectations. We reported fourth quarter adjusted EPS of $1.62, above internal expectations and consensus estimates. Results for our Insurance segment were modestly favorable to expectations. As recently shared, total medical costs in our Medicare Advantage business ranged slightly above previous expectations during the fourth quarter, driven by higher-than-anticipated flu and COVID costs, as well as higher reimbursement rates implemented for 340B eligible drugs. Collectively, these items had an impact of approximately 80 basis points on the fourth quarter benefit ratio for both the Insurance segment as well as the previous retail segment.

Importantly, these are discrete items in the quarter and do not have a carryover impact into 2023. Excluding these items, total medical costs in our Medicare Advantage business were modestly below our previous expectation. Our Medicaid business continued to perform well in the quarter with lower-than-anticipated medical costs. In addition, the favorable utilization seen throughout the year in our commercial group medical and specialty businesses persisted in the fourth quarter. All in, excluding the discrete impacts related to flu, COVID and 340B, I just described, medical cost experienced in our Insurance segment were favorable to expectations in the quarter, continuing the trends experienced throughout the year. This segment also benefited from administrative cost favorability driven by our ongoing cost discipline and productivity efforts while also covering incremental marketing spend.

Within our CenterWell segment, each business performed largely in line with expectations in the fourth quarter. Our primary care organization continues to improve the operating performance in our wholly owned centers and we’re pleased to report that we increased the number of centers that are contribution margin positive from 88 at the end of 2021 to 110 at year-end 2022, a 25% increase year-over-year. In addition, we increased the number of centers that have reached our $3 million contribution margin target from 18 in 2021 to 31 at the end of 2022. In our de novo centers, we grew over 9,000 patients in 2022 or 91%, while our de novo center count increased by 18% or 56%. As Bruce shared, we expect both center and patient growth to further accelerate in 2023.

In the home, total admissions in our core fee-for-service home health business were up 9.1% year-over-year for the fourth quarter and up 6.3% for the full year in line with our expectations of mid-single-digit growth. In addition, we continue to expand our value-based model at the expected pace. We implemented the full value-based model in both Virginia and North Carolina in 2022 and ending the year covering just over 760,000 members or 15% of our Humana MA members, up from 5% coverage in 2021. Finally, our pharmacy results remain strong, reflecting industry-leading mail order penetration at 38.6% for our individual Medicare Advantage members. The benefits of mail order extend beyond our pharmacy operations, leading to better medication adherence and health outcomes, benefiting our members and health plan.

As an example, members who utilize CenterWell pharmacy demonstrate medication adherence rates ranging from 650 basis points to 840 basis points higher than we see in traditional retail pharmacies for cholesterol, blood pressure and diabetes treatments. Now turning to our 2023 expectations and related assumptions. Today, we provided adjusted EPS guidance for 2023 of at least $28. This represents a 11% growth over 2022, which is in line with our previous commentary and overcomes a headwind of approximately $0.92 or 3.6% related to the divestiture of a 60% interest in Kindred Hospice in August 2022. Our 2023 outlook reflects top-line growth above 11%, with consolidated revenues projected to be north of $103 billion at the midpoint driven by growth in our individual Medicare Advantage, Medicaid and CenterWell businesses.

These increases were partially offset by the divestiture of a 60% interest in Kindred Hospice, and expected declines in our Group Medicare Advantage, commercial group medical and PDP membership. At this time, we expect first quarter earnings to represent approximately 35% of full year 2023 adjusted EPS. I will now provide additional detail on the 2023 outlook for both of our business segments, starting with Insurance. As Bruce discussed, we anticipate individual Medicare Advantage membership growth of at least $625,000 in 2023, a 13.7% increase year-over-year. We added approximately 495,000 members during the annual election period and anticipate continued strong growth for the remainder of the year. Touching on Group MA, we continue to expect a net reduction of approximately 60,000 members in 2023.

This reduction is primarily driven by the loss of a large group account partially offset by expected growth in small account membership. We remain committed to disciplined pricing in a competitive group Medicare Advantage market. For our PDP business, we now expect a membership decline of approximately 800,000 members for 2023, an improvement from our pre-AEP estimate of a one million member reduction. This improvement was driven by better-than-expected sales and retention in our Walmart Value plan. We are committed to providing affordable coverage for beneficiaries while also improving the contribution from our PDP business and remain focused on creating enterprise value by driving mail order penetration and conversion to Medicare Advantage.

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We are projecting approximately 80,000 of our PDP members to convert to a Humana Medicare Advantage plan in 2023, which represents a disproportionate share of all Humana PDP members who are expected to switch to a Medicare Advantage plan in 2023. In our Medicaid business, we anticipate that our membership will increase 25,000 members to 100,000 members in 2023. This change reflects membership additions associated with the start of the Louisiana contract, which went live January 1, as well as the Ohio contract, which began today. We expect to add approximately 140,000 members in Louisiana and 65,000 members in Ohio at implementation with Ohio membership ramping to 130,000 by year-end and to a total of 225,000 in 2024. The 2023 membership gains in Louisiana and Ohio will ultimately be offset by membership losses resulting from redeterminations beginning April 1, which will continue for 12 months.

We are proud that our Medicaid footprint will now span seven states and cover over one million members, a strong platform that we have established largely through organic growth. We intend to continue to invest to grow our platform organically and actively work towards procuring additional awards and priority states. Finally, we anticipate the total commercial medical membership including both fully insured and ASO products will decline approximately 300,000 members in 2023 as we remain focused on optimizing our cost structure and margin in this line of business. The Insurance segment revenue is expected to be in a range of $99.5 billion to $101 billion, reflecting an increase of nearly 13% year-over-year at the midpoint. The year-over-year change includes the impact of the phase-out of sequestration relief beginning in the second quarter of 2022 as well as the impact of changing member mix within our Medicare Advantage business.

This segment benefit ratio guidance of 86.3% to 87.3% is 20 basis points higher than the 2022 benefit ratio of 86.6% at the midpoint, driven by the targeted investments made in our Medicare Advantage plan designs in 2023 as well as Medicaid growth, which carries a higher benefit expense ratio. Importantly, we have assumed a normalized trend into 2023 including the expectation that provider labor capacity will improve modestly throughout the year. In addition, we have assumed the flu favorability seen to date in the first quarter is offset by higher flu costs in the fourth quarter. In summary, we are guiding to Insurance segment income from operations in the range of $3.2 billion to $3.5 billion for 2023, an increase of more than 12% over 2022 at the midpoint of the range.

For our CenterWell segment, we expect EBITDA in the range of $1.3 billion to $1.45 billion for 2023, a slight decrease from 2022. The 2023 outlook reflects the impact of the divestiture of a 60% interest in Kindred Hospice in August 2022, which created a $150 million year-over-year headwind, largely offset by continued growth in our primary care, home and pharmacy businesses. In our core fee-for-service home business, home health admissions are expected to be up mid-single digits. While we have strategies in place to continue to take share in fee-for-service Medicare, we do acknowledge it is a shrinking market with the increasing penetration of Medicare Advantage. Accordingly, our projected admission growth for 2023 reflects a slight decline in fee-for-service Medicare admissions year-over-year, more than offset by strong growth in Medicare Advantage.

In addition, CenterWell home health is focused on increasing nursing capacity through recruiting and retention initiatives. Our voluntary nursing turnover improved from 31.9% in 2021 to 30.6% in 2022. We continue to invest in clinical orientation and mentors and technology focused on reducing administrative tasks and drive time for clinicians, which we expect to drive further improvement in nurse recruitment and retention. With respect to our value-based home model, we expect to expand coverage to approximately one million additional members by year-end 2023, 800,000 of which are currently served under the utilization and network management model. In our primary care business, as Bruce shared, we expect significant center expansion throughout the year through a combination of de novo bills under our joint venture with Welsh, Carson as well as programmatic M&A.

All in, we anticipate adding nearly 50 centers in 2023, an increase of approximately 20%. In addition, we expect to add 20,000 patients to 25,000 patients during the year in our de novo and wholly owned centers, representing nearly 12% growth year-over-year. Finally, our pharmacy business will benefit from the significant growth in individual Medicare Advantage membership in 2023, as we anticipate maintaining our industry-leading mail order penetration rate. From an operating cost ratio perspective, we are guiding to a consolidated operating cost ratio in the range of 11.6% to 12.6% for 2023, a decrease of 100 basis points at the midpoint from the adjusted ratio of 13.1% in 2022. This decrease reflects the divestiture of a 60% interest in Kindred Hospice in August of 2022, which has a higher operating cost ratio than the company’s historical consolidated operating cost ratio as well as the incremental run rate impact of our value creation initiatives.

Touching now on investment income and interest expense. We anticipate investment income will increase approximately $450 million in 2023, resulting from the higher interest rate environment, coupled with the impact of approximately $100 million in realized losses experienced in 2022 that are not expected to recur. From an interest expense perspective, while the majority of our debt is fixed rate, we do expect interest expense to increase approximately $110 million year-over-year. I will now briefly discuss capital deployment for 2023. We will continue to prioritize investments to drive organic growth. From an M&A perspective, we remain focused on opportunities to enhance our CenterWell capabilities with a particular focus on growing our primary care and home businesses.

And finally, we recognize the importance of returning capital to shareholders and expect to maintain our strong track record of share repurchases. We will consider the use of accelerated share repurchase programs as well as open market repurchases to ensure we maximize value for our shareholders. We also recognize that dividends are important to our shareholders, and we are committed to growing our dividend. In closing, I would like to echo Bruce’s sentiment that we enter 2023 in a position of strength. The strong earnings growth delivered in 2022 combined with the robust membership growth and financial outlook for 2023 increases our confidence in the midterm target of $37 in 2025. We look forward to providing continued updates on our progress towards our mid- and longer-term targets throughout the year.

With that, we will open the lines up for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.

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Q&A Session

Operator: Certainly. And our first question will come from Josh Raskin of Nephron Research. Josh, your line is open.

Josh Raskin: Hi, thanks. Good morning. I want to focus on CenterWell, and I understand the decline from the hospice sale. But maybe if you could give us some color on what’s the organic growth rate around both the revenues and EBITDA. And then if you could talk about your recruiting initiatives and how you’re trying to bring physicians into the centers? Thanks.

Bruce Broussard: Yes. Hey Josh, thanks for the questions. On the recruiting side, we do it both nationally and locally. And what we’re finding in the €“ we have a dedicated team also to the recruiting area. What we’re finding in the recruiting is that we are really the younger population we’re able to recruit to, and then also the older population, the more the experienced ones that are really looking to change their approach and clinical area and specifically around moving from an E&M code driven, primary care billing to more of a value based. And what we’re finding is once we €“ they are experienced with the value base, the retention side is much greater because it’s a better quality of life for them. But more importantly, it’s also much aligned with what they went to school for around proactive care and care that is more oriented to prevention as opposed to just the treatment side.

So through a centralized approach and also oriented to locally, but really oriented to people that are looking for value-based payment options.

Susan Diamond: And Josh to address your other question related to just the organic growth that we anticipate for the CenterWell segment. So in total, the segment is expected to grow revenues about 6% year-over-year with pharmacy slightly above that number based on the strong individual MA growth, although they’re also impacted by the decline in the PDP membership. The home is slightly down, and that’s again reflective of the growth that I had mentioned in my commentary about the core fee-for-service expansion as growth as well as the expansion of the value-based model, but obviously offset by the disposition of the 60% interest in hospice and the movement of that line of business to below the line is a minority investment. For CenterWell primary care, that business continues to grow.

But as you know, the majority of the de novo growth is off balance sheet as part of the Welsh, Carson deal. So also isn’t reflected in our actual revenue growth and EBITDA it’s going to be reflected in that minority investment as well. But specifically, the segment in total is expected to grow 6% for the on-balance sheet portion.

Josh Raskin: Okay, Thanks.

Operator: One moment. And our next question will come from A.J. Rice of Credit Suisse. And A.J. your line is open.

A.J. Rice: Okay. Hi, everybody. I think she’s calling on me, it was a little jumbled there. Thanks for the comments on the RADV rule, and I know that’s still under review by you guys and the industry. One of the things in some of the data that was released by Kaiser and others running up to the rule release was some data suggesting various error rates on audits done on results from the 2011 to 2013 time period. And one thing that got some play was the fact that Humana seem to have a little higher audit error rate or somewhat higher error rates than some of the peers. I know that was years ago. I’m sure the entire industry has invested in making sure that they do better in future audits. But I’m wondering if you guys could give us your perspective on that and any initiatives you’ve done to try to make sure that going forward, that won’t be an issue.

Susan Diamond: Hi, A.J. Thanks for the question. In terms of the variation that was reflected in the report that came out, I would say first, we don’t have access to the data, obviously, to be able to really evaluate or assess those differences, so I really can’t comment on the variation. More generally, I would just say that we don’t have any reason to think that the inherent error rate within the Humana population would be meaningfully different from others. And so maybe just reflective of the audit selection and process that they’ve used historically. In terms of the question of what we might expect going forward, I would say, that is also impossible to really assess. Even in the periods they have audited, they have used different methodologies over that period.

And as you saw in the final rule that came out earlier this week, they did not provide specificity on what the audit methodology will be going forward. And so the error rate that you might expect is going to be highly dependent on the audit methodology and extrapolation that they ultimately define. And so that is one of the things that we look forward to working with CMS on to better understand to fully assess, what might be expected going forward.

A.J. Rice: Okay, thanks a lot.

Operator: One moment.

Bruce Broussard: Operator, are you there?

Operator: Yes, I’m sorry. Justin Lake of Wolfe Research. Your line is open.

Justin Lake: Thanks. Good morning. I guess, first, I’ll just follow-up on A.J.’s question and then ask my own. Maybe the €“ I assume €“ I know CMS methodology changing and they didn’t give a lot of specificity, but I kind of would assume an error rate is an error rates. So maybe you can just tell us, I mean, even CMS has said errors rates for the industry have improved. So one, are you doing your own audit to see how this has trended over the last 10 years? Maybe you can give us some color on how the error rate, forget about extrapolation and all that, but just how the error rate in these in your own audits might have been trending over that period of time? And then my question would just be, as a follow-up. The €“ as you think about CMS in 2018 will be the first time they use extrapolation on an audit.

Whatever that error rate is, can you give us some color in terms of how you share that with investors. And more importantly, kind of how you would think about it from a bidding perspective? Would you kind of take a onetime charge on something that was from 2018, whatever that repayment might be? Would you build it into the bids going forward as kind of a reserve and just assume it’s a lower revenue number, a premium number like a rate cut? Can you give us some color on that as well? Thanks.

Susan Diamond: Sure. Hi, Justin. To your first question about just broadly how to think about how error rates may have trended over time. What I would say is that generally, the growth in value-based provider penetration as well as the increased activity within in-home assessments over that timeframe as well as just the normal course activities that all health plans undertake to €“ as part of Medicare risk adjustment, frankly, all work to improve accuracy. And so I would expect that some of those programs have grown, particularly value-based care and home assessments that we would see hopefully some improvement relative to those initiatives. But in terms of what might be happening in the broader sort of and much larger organic base of provider claims, it that’s difficult to say because again, we don’t have that information.

And it will ultimately depend on how the audit methodology is defined in order to fully assess the impact of that. In terms of how we might think about the impact of this from 2018 and forward, I would say that from a 2024 bidding perspective, based on what we know today and given that the 2024 bids are due in just a few months, I would say it’s unlikely that there would be any impact to 2024 bids. But we’ll certainly need to look to see if CMS provides any guidance in the advanced notice and bid instructions given just the uncertainty that exists regarding how the contract selection and audit methodologies will be defined in the future. But our focus will continue to be on delivering value and strong value within our MA claims to members, including the goal of stable premiums and benefits in 2024.

So we look forward again to working with CMS to better understand the planned audit methodology going forward and assessing any future impact, but unlikely that will be finalized in time for the 2024 bids.