Humana Inc. (NYSE:HUM) Q4 2023 Earnings Call Transcript

Humana Inc. (NYSE:HUM) Q4 2023 Earnings Call Transcript January 25, 2024

Humana Inc. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $-0.07. Humana Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Humana’s Fourth Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Lisa Stoner: Thank you and good morning. I hope everyone had a chance to review our press release and prepared remarks this morning, both of which are available on our website. We will begin today with brief remarks from Bruce Broussard, Humana’s President and Chief Executive Officer; and Jim Rechtin, Humana’s President and Chief Operating 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 fourth 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 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 financial 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 Bruce Broussard.

Bruce Broussard: Thank you, Lisa and good morning everyone and thank you for joining us. We are going to dedicate the majority of our time today to Q&A, but I wanted to first highlight a few key messages that we hope you’ll take away from our discussion today. As shared in our prepared remarks which we posted this morning along with our earnings release, I’d like to start by stating the obvious. We are disappointed in the update provided today. The Medicare Advantage sector is navigating a complex and dynamic period of change as we are all working through significant regulatory changes, while also absorbing unprecedented increases in medical cost trends. The increase in utilization that emerged late in the fourth quarter was a significant deviation from an already elevated level impacting the industry.

We take our commitments seriously and are disappointed with where we are, unable to fully offset these higher cost trends despite our best efforts to identify mitigation opportunities throughout the year. While the near-term impacts of the higher utilization are disappointing, our confidence in the long-term attractiveness of this sector and our position within has not changed. We provided you with our initial outlook for 2024 of approximately $16 in adjusted EPS. Given the recency and magnitude of the uptick in the utilization trend, we have prudently assumed that the higher costs seen in the fourth quarter persists throughout 2024. As based on our review of our initial claims data, we believe that the seasonal factors are not driving the increase.

We are committed to updating you on our progress in understanding and addressing this change throughout the year. Importantly, the MA program was designed to be dynamic and respond to changes in medical trends. Looking to 2025, we are evaluating MA pricing actions and expect earnings growth in other lines of business, as well as our ongoing productivity and trend mitigation initiatives to quickly restore our margins and resume a path of compelling earnings growth. Our current expectation is to deliver $6 to $10 of adjusted EPS growth in 2025. Notably, any outperformance we achieve in 2024 will be additive to this initial outlook. Before turning to Q&A, I’d like to provide Jim Rechtin, our president and COO, an opportunity to provide a few comments on our update this morning.

Jim?

James Rechtin: Thanks Bruce. I am stepping into this role here at Humana at a time that is clearly challenging both for Humana and for the industry. Despite those challenges, it’s been a very positive first few weeks. I’ve had the opportunity to work with a team that’s quite focused, that has clarity of thought and objectives and no shortage of effort trying to address these challenges. Despite the pressures we’re facing right now, I remain as optimistic about this opportunity today as I was three months ago when I agreed to step into this role. It’s early in my tenure, but I do want to share just a few thoughts with the investment community. I have been impressed by the leadership demonstrated by this team. There’s a clear sense of urgency in responding to the utilization trends impacting the industry.

The entire management team has been working tirelessly to understand the underlying issues that we’ve discussed today, and I’m confident in the approach that the team has taken with respect to assumptions around the utilization pressures we are facing. I also share the conviction of the rest of the management team regarding the need to prioritize margin recovery in 2025 and the significant multiyear opportunity that is in front of us. We operate in one of the fastest growing sectors in healthcare. Humana is uniquely positioned to bring significant value to our members, and I’m confident in our ability to drive long-term value for the healthcare system and for our shareholders. I look forward to meeting many of the participants on this call over the coming months, as well as many of our talented employees and associates across the organization.

Thanks.

Lisa Stoner: Thank you, Jim. We will now turn to our question-and-answer session where Bruce will be joined by Susan Diamond, our Chief Financial Officer. In fairness to those waiting in the queue, we do ask that you limit yourself to one question. Operator, please introduce the first caller.

See also Best Drug and Alcohol Rehab Centers in Each of 30 Biggest Cities in the US and Top 25 Hawaii Retirement Alternatives in the World.

Q&A Session

Operator: Our first question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck: All right, great, thanks. I guess I wanted to understand the thought process around the 2025 EPS improvement. It sounds like from Jim’s comments that you’re going to be prioritizing margin that year. Do you think that this is an industry problem and therefore the industry will be prioritizing margin similarly, so that you will actually be growing in 2025 or is this a view that you’re going to be growing below average in 2025 to get to that? And because you’re talking about feeling confident about the business, should we be thinking about similar growth in 2026 and 2027 until you get to that $37 EPS number, maybe on a two-year lag? Is that the right way of thinking about it or is there a reason to believe that that margin target you had for $37 is no longer the right margin target in the medium term? Thanks.

Bruce Broussard: Kevin, why don’t I take the industry side and then I’ll turn to Susan on the margin question you had. I looked at next year as a year that I think the whole industry will possibly reprice. I don’t know how the industry can take this kind of increase in utilization along with regulatory changes that will continue to persist in 2025 and 2026. And therefore, I look to the industry to have disciplined pricing as a result of this. Obviously, for us as an organization, over the last few years, we have tried to maintain that discipline. You can see that in just our rankings and pricing. We’ve usually been in the third to fourth ranking, and so we’ve tried to maintain that. But I do believe the industry will need to price appropriately.

Susan Diamond: Yes, and Kevin, as we thought about the commitment for 2025, certainly there are inherent dependencies within that. One is the rate notice, which we obviously don’t have visibility to and so that will be one significant input, which is why we felt the need to give a wider range at this stage. The other big dependency is going to be, just as you said, the level of competitor action and need to take pricing as well. And so that we will continue to watch peer commentary in terms of their results and signals that they send, but that is something that we will have to consider based on the pricing action we ultimately take of what impact might that have to near-term membership growth. As we’ve said a couple of times over the course of the year, we do intend to be very targeted in some of our pricing action.

There are some plans and geographies that are seeing more underperformance than others and so you may see disproportionate impact in those areas to both the recovery, but then also the membership, which we feel are no regret moves to make sure that the financial performance is as we would expect. So 2025 may be a repositioning year, where we may see lower than industry average growth depending on the level of competitor pricing actions, but we would feel that we would be repositioning for sustainable growth on a go forward basis in terms of membership at a more sustainable margin over the long-term. As it reflects 2026 and 2027, obviously we can’t comment on that at this point. We wanted to be clear, given the significance of the impact of 2024, what you can expect for 2025.

We’ve committed to coming out later this year once you have the benefit of going through all of our pricing work and providing you with an update on that, as well as certainly we’ll keep you informed of the emerging trends, but we’ll certainly need to navigate through that. And as we learn more over the course of the year, we’ll certainly begin thinking about the longer term and we’ll keep you informed for sure.

Operator: Our next question comes from the line of Justin Lake with Wolfe Research.

Justin Lake: Thanks. Good morning. So, to Kevin’s point and kind of your answer, it’s clear whatever you do from a membership perspective is going to be kind of dependent on what your peers do. I’m more interested in trying to understand, I mean, by my estimation, give or take, you’re probably slightly better than breakeven. They call it 0% to 1% margins in Medicare Advantage is implied in your guidance for 2024. Correct me if I’m wrong, but from there it looks like that $6 to $10 would be an additional 1%, maybe 1.5%, which then comes down to cutting benefits about $10 to $15. Again, correct me if my math is wrong here. I guess the question is, how do we arrive at that number? I look back over the last six or seven years when things were good and senior soar benefits increased by $20 a year, it looks like.

And then when we see what feels like 100-year storm, why is $13 to $15 the most we can put through? Why not try to get back to a target margin or closer to a target margin and assume your — if it’s not company specific, assume that the industry is going to follow, and if they don’t, so be it?

Susan Diamond: Hey Justin, yes and those are all fair questions. And I would say directionally numbers, mathematically you’re right. So 2024, what you’re estimating for the margin is, is certainly directionally correct. As for the $6 to $10, one thing that’s important to keep in mind, that is what we’re committing to in terms of earnings and EPS improvement next year. That would be on top of whatever rating action might need to be taken for the rate book itself. And right now we are assuming that the 2025 rate notice will look similar to 2024 in that it will be negative given we have another one third of the v28 model implementation. So our assumption in all of this is that we will have some further pricing action to take to address just the 2025 rates and the fact that they will be insufficient to cover normal course trend, so that would be additive.