Lisa Stoner:

Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, as well as a letter from the CEO, all of which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, 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 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 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 Rechtin.

Operator:

Our first question comes from the line of Ann Hynes with Mizuho.

Susan Diamond:

Yes. Good morning, Ann.

Susan Diamond:

Yeah. Hi, Ann. Happy to take that. So, yes, and as we described in our previous commentary, both in the first quarter and then at conferences in the second quarter, we have seen some variation in our month-to-month inpatient results for, and then also the avoidance rates as we implemented the 2-midnight rule requirements, which, if you remember, that was a meaningful change and we need to make some assumptions around how it impact our historical patterns. As we described in the first quarter, our avoidance rates initially were lower, but then ultimately did come in line with our expectations by the end of the first quarter. Those have remained stable and continue to be in line with what we would have expected. The inpatient absolute level, however, has seen some more variation and was higher in the back half of the second quarter, in particular. As Jim mentioned, that has continued into July at relatively similar levels. Based on everything that we are seeing, including the fact that these continue to be lower acuity and lower average cost, as well as the fact that we continue to see corresponding reductions in non-inpatient on observation side, it does all point to a belief that it is likely largely due to further impacts from the 2-midnight rule implementation. We would say this is also consistent with what we've seen reported from the hospital systems with their results in terms of volume and revenue per patient. So we do believe it's all consistent. With respect to July, it is relatively consistent. We are seeing just a slight amount of COVID as well on top of that, but otherwise consistent. So as far as everything we have visibility to right now, it does seem to have stabilized, but is higher than we had anticipated entering the second quarter.

Sarah James:

Thank you. The guidance implies a good step up in second half MLR. Can you speak to how much of that is seasonality versus assumed continuation of the July trend? And is there a way to break out the impact of the increase inpatient in July on the 2Q MLR?

Sarah James:

Right. Sorry. Is there a way to quantify the July impact on MLR? Thank you.

Operator:

Our next question comes from the line of Andrew Mok with Barclays.

Susan Diamond:

Yeah. When you think about the back half of the year, we do anticipate higher MLRs for the third quarter relative to last year. Relatively consistent, which again includes that workday impact I just mentioned. For fourth quarter, we obviously saw that very high utilization in the fourth quarter last year. Obviously, we jumped off of that in terms of expectations for this year, we see some slightly higher incremental pressure just because of the expectation of abnormal trend on top of last year's jumping off point. But because of that favorable workday seasonality that I just mentioned, it will positively impact the fourth quarter MLR, which is going to offset some of that.

Justin Lake:

Thanks. Good morning. First, the higher inpatient cost, if I just run some simple math, your typical seasonality first half, the second half on MLR, typically pretty flat to up slightly. Let's call it zero to 50 basis points. So it looks like you're up closer to 125. So am I right in thinking that this impatience pressure is about 100 basis points to MLR in general? If not, can you quantify it somehow for us in terms of the level of pressure that this is specifically putting on MLR? And then, what's embedded in the second half relative to what you expected previously. And then you talked in the prepared remarks about being comfortable with your 2025 bids. You said this came in the back half of the quarter, so that's second half of May. Those bids are due in the beginning of June. How do you get investors comfortable with the fact that your bids would be able to absorb this type of pressure given that you didn't see it until right when bids were being submitted?

Operator:

Our next question comes from the line of David Windley with Jefferies.

Susan Diamond:

Yeah, David. So I'll take the first question on the 2-midnight rule and then hand it off to Jim for your second question. So yes, I think the impact that you referenced was what we anticipated going into the year relative to the 2-midnight rule. Obviously what we've seen, if the higher inpatient costs are in fact attributable to the 2-midnight rule, which again the information we have would seem to suggest that it generally is, then that would obviously have a higher impact than we had expected. All told, when you consider the positive prior year development as it respects claims and the unit cost and the observation stays, when you take all of that in total, we are able to mitigate a significant portion of that, but not all of it. And so intra year, the remaining offset is coming from that favorable MRA, which again we expect to continue, which is why we continue to feel good about the $16 for this year and $25 for next year. But we haven't sized the incremental impact for the 2-midnight rule, and I don't have that information sitting here today that I'd be prepared to do that on this call.

Operator:

Our next question comes from A.J. Rice with UBS.

James Rechtin:

Yeah. Let me hit a couple of things in there. So, first of all, I want to separate two concepts. We have talked about the multiyear margin recovery that is really driven by the regulatory environment, what you can do in any one year with TBC, et cetera. And we really don't have any change to the commentary that we have made on that previously. The second thing that I referenced is multiyear planning. And when you think about multiyear planning, I'm going to go back, actually in a way to the comment that I just made. If there's a place that we're going to have to be more disciplined over the coming years, it's really in how we're measuring and evaluating the return on the expenses, whether it's capital or whether it's operating expense that we have in any given year. So that we're optimizing those decisions and then making sure that we've got the processes, that we're not just operating with discipline in one year period of time, but we're driving the accountability over years two, three, four and five that go back to that investment you made in year one. That's the place where I think that there's more opportunity and the benefit of that is just getting to more consistent performance year-over-year-over-year-over-year. That is kind of really grounded in how do you optimize shareholder value over multiple years. So that's a different concept or a different thing that I am commenting on in the letter from the margin recovery that we need to make sure that we're building into our benefits and our pricing.

Kevin Fischbeck:

Great. Thanks. Maybe two quick questions, maybe just to wrap up that last point, Jim. Would you say that this is a change for Humana that you're bringing to this, that maybe this was a shortfall, multiyear planning with a shortfall relative to historical? Or are you just saying this is something you always have to do and you're just going to continue to do it? And then, I guess, second, on the provider business, can you comment a little bit more about the MLR trend there? Are you seeing the same inpatient pressures there, or is there anything else that you would spike out on that side of the business? Thanks.

Susan Diamond:

Yeah. And Kevin, on your second question, with our provider business, I would say the highest level similar results to the health plan, although on the claims side, I would say not quite as much inpatient pressure as we've seen. And we -- that's consistent, I think, with what we talked about earlier in the year where we weren't seeing as much pressure in the risk book from some of that inpatient activity when it started to emerge. They've also, as I've said before, consistently demonstrated a better impact to work with the hospital systems on those authorization requests and determining the appropriate level of care, which oftentimes results in not needing an inpatient stay. And again, just better than what we see on average within the health plan. They've also seen some favorable MRA in their '23 final payment. But then we also acknowledge that CenterWell, because they do have an agnostic platform, they don't get the same level of real time information as we do. And so we are taking a little bit of a cautious approach as we think about their performance. It's harder to estimate the impact of change that's still running through the system. So I would say generally not inconsistent with the health plan, but not quite at the same level.

Josh Raskin:

Hi. Maybe just shifting gears, can you speak about your expectations for the PDP segment in 2025, including expectations for membership and then profit and margin. And then maybe based on that benchmark data that we saw this week, what should we take away from the industry bids? And maybe lastly, any commentary on expectations of participation in that demonstration project?

Operator:

Our next question comes from the line of Ben Hendrix with RBC Capital Markets.

Susan Diamond:

Yeah. Ben, so as you pointed out, we do think our results are probably a little bit different than some others have reported. And that is because I think we've always said we tried to take a conservative approach to how we thought about the impact of redetermination. Assuming that ultimately we would only retain 20% of the members who gained access through the PHE, and made the assumption that the acuity of those members that were retained would look like more like the historical Medicaid performance versus the lower acuity we saw through the PHE. I would say that has all largely proven to be true. So -- and we called out Florida specifically because it's the best representation of that. We're obviously the largest membership and would be impacted most significantly from redeterminations. And Florida is performing slightly better than our expectations. So that is positive. We did call out in our remarks we are seeing in our newer states, discrete pressure. It's a little bit different in each one. Oklahoma, as an example, is pharmacy related. We understand everybody's seeing that there are risk corridors in place that mitigate the exposure on that, which is good. In Kentucky, it's behavioral related, which, again, I think others have called out as well. The team's working hard and has mitigation opportunities across each of those states that they're working on. And then ultimately, we do feel good about our discussions with our state partners, and that ultimately that they will adjust the rates to be reflective of those trends. So all things being considered, we still feel good about the Medicaid performance in '24 relative to our expectations, and then also on a go forward basis, given all the items I just mentioned.

Stephen Baxter:

Hi. Thanks. Just a quick clarification first and then an actual question. Susan, I think in an earlier response, you said you feel good about the $16 of EPS this year, and then feel good about 2025. I think some misheard the comment on 2025 is a specific value you are offering as an EPS expectation. Can you just confirm first if you were offering any kind of comment on 2025? And then my actual question is, as we think about the MLRs and the incremental margins on the few hundred thousand members in plan and county exits, any sense you can give us on that? Just trying to wonder if that's actually an EPS driver for you year-on-year, or is this something that incrementally could be -- something you just have to manage through in context of everything else you're trying to achieve with bids and profitability next year. Thanks.

Operator:

Our next question comes from the line of Scott Fidel with Stephens.

Susan Diamond:

Yeah. Hey, Scott. So, yes, the change to the revenue guidance is the largest driver, is by far the membership. When you consider the magnitude of the increase in expected membership for the year, that'll drive both revenue and claims. Right? And we've said before, new members on average, you can think of as having little contribution, particularly, added membership in the back half of the year where the commission costs run higher for that first year. So the main driver is membership. But as we said, we did see some favorable outperformance on our '23 final year MRA and some intra year positivity on our revenue risk or estimates as well. That's included, but I would say the majority by far is membership related.

Lance Wilkes:

Yes. Jim, could you describe a little bit of how you're morphing the management process of a company and any sort of Oregon talent changes you're making there and any sort of timing related to a strategic review? And then maybe as part of that, what are your top priorities for taking operating expenses out, both in light of the member reductions and then just obviously as part of trying to recover your margin? Thanks.

Susan Diamond:

Margin recovery.

Susan Diamond:

Margin recovery

Operator:

Our next question comes from the line of Michael Ha with Baird.

Susan Diamond:

Yeah. Michael, so on the OpEx, yes, we did mention both in the first quarter and then second, that some of the favorability we've seen in administrative cost is timing in nature. And that's just a difference in when we projected, we would have certain spend and when it's now expected to be incurred. Some of the areas where it's natural that you might say is marketing and just the timing and the opportunity they see in the AEP versus OEP versus ROY and then going into next year. IT is also one that can be difficult to predict the exact progression of when projects will be completed. So there are a number of things where while it's favorable in the quarter, we would expect that it's still going to be spent for the full year, and so then we'll flip out in the third or fourth quarter. On the bids, what we want to try to convey is, we did not anticipate this higher utilization in our bids given when it developed relative to the deadlines for filing those bids. So that will be incremental pressure relative to our discrete medical cost assumptions and bids. However, we also did not incorporate the lower unit costs, the lower observation stays, nor the higher risk scores that we've seen develop in the first half of the year either. And because those have largely offset, those are also expected to be durable into '25. All considered, we still feel good about the MLR expectations that we have within the collective assumptions in our 2025 bids. So we are at this point, much like we're assuming it'll continue in the back half of the year. We've looked at our '25 assumptions and if that continues through the big duration of '25 with those other offsets, again, we should be back to a similar position as it respects the MLR that we had planned for within our '25 bids.

Jessica Tassan:

Hi, thanks very much for taking my question. So I wanted to follow up on that. How are the higher than anticipated risk scores that you referred to in the prepared remarks impacting your view of the v28 headwinds in '24 and '25? And is the favorability related to any kind of specific efforts like IHEs and any reason why it wouldn't compound or effectively double year-over-year in 2025? Thanks.

Operator:

Our next question comes from the line of John Ransom with Raymond James.

James Rechtin:

Yeah. So DC policy advocacy, how do we make the elevator pitch and then comment on G&A? Let me just hit the G&A one real quick. That one's a little bit easier. We are working through that question, among others right now, through the strategic review that we're doing, et cetera. We'll have more to say about that next year, early to mid-next year. And so I'm going to defer on that question for the moment. On the DC policy, so we've had a lot of conversation about that internally. And what I would keep going back to is, number one, we know that we deliver value to our members and our patients. That is very well documented. We get better outcomes. We deliver better health security by lowering the cost to members for the care that they receive and giving them access to more benefits. We also know, and it's pretty well documented, that we deliver like for like benefits at a lower cost than what original Medicare does. Those two things mean that there's a value proposition for members and for taxpayers. What we can do a better job of, and part of what I think the entire industry needs to be focused on is building the case for the second of those two things even more tightly and then better explaining and understanding what of that value does accrue back today to taxpayers. What doesn't and how do we actually collaborate with CMS to make sure that the regulatory environment allows that value to accrue back or some of that value to accrue back? None of that should be harmful to the MA sector. In fact, I would argue that it helps the MA sector, are getting tighter and better and understanding the impact on taxpayers, how the regulatory environment shapes that, what we can do to create a long-term value proposition for taxpayers that creates real stability for the Medicare and Medicaid program over time. That's good for everybody. It's good for the MA sector, it's good for the member, it's good for taxpayers, and that's what we've got to focus on getting back to.

George Hill:

Yeah. Good morning, guys. Thanks for taking the question. I guess the question, as it relates to the 2025 bid strategy, I guess, first of all, is there a way to characterize the approach to, like, how much -- for how many beneficiaries did you guys kind of want to remove the plan or exit a plan as a way to preserve margin or pursue margin, and to what degree? I guess on the other side, are you guys just looking to restructure plan benefits? And I think even at a higher level, the question I want to ask is, like, are you guys willing to quantify, like, how many individual MA members you provide plans for now that will not have that plan offered in 2025?

Susan Diamond:

Yeah. And I think, George, just to add to what Jim said, we've given you the overall expectation that we'll reduce membership a few hundred thousand members, primarily related to plan exit. So you can assume, right, it's not a small number, within that there is an assumption that obviously we will retain some of those members because as Jim said, in almost -- virtually all of the counties where we're having plan changes, there is another plan option available to our beneficiaries. So there's an inherent assumption. As Jim said, we don't want to give details right now because again, there are still changes being made to bid submissions through the normal process. As we get later into the quarter, there may be an opportunity at another public forum once bids are filed where we can provide some more detail.

Erin Wright:

Great. Thanks for taking my question. In light of the disciplined approach that you're talking about in the ongoing strategic review, how are you thinking now about capital deployment from here, whether it's prioritizing the alignment with the Medicaid book and ability to service duals, or is it more on the care delivery assets, and what is your level of focus or thinking even on the organic opportunities, I guess, generally speaking at this point. Thanks.

Operator:

Our last question will come from the line of Ryan Langston with TD Cowen.

Susan Diamond:

Hey, Ryan. Yeah. I'll take the first part of that and then hand it over to Jim for the second. On the inpatient, I think as you guys are, we do within our utilization management programs, have what we call a frontend review process. So we are reviewing those authorizations in real time as they come in for things like medical necessity and site of service effectively. And as I said, those -- we did have some changes to our expectations and how those programs would impact under the new 2-midnight rule. So that is operating as intended and as we said, largely having the results we expected. There is also activity that we do after the claim comes in, which we call a postpay review, where there are some incremental opportunities to just review, again the more specificity on that claim to make sure it's appropriate and we get value from both sides of that. But I would say we have really good information and tracking of the impact those programs are having. And I would not expect a material change to happen relative to our current expectations as a result of some of those longstanding programs.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Lisa Stoner:

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

Operator:

[Operator Instructions] Our first question will come from the line of Ann Hynes with Mizuho.

Susan Diamond:

Yes. This is Susan. So as we evaluate the first quarter cost trends, as you guys understand, we do have good visibility to inpatient utilization from their more real-time authorization data. On unit cost and non inpatient, we are more dependent on claims. And so typically, in the first quarter, have limited visibility and given the change healthcare disruption even more so this quarter. .

Operator:

Our next question will come from the line of Kevin Fischbeck with Bank of America.

Susan Diamond:

Kevin, yes. So yes, we continue to be oriented to enterprise margin and maximizing that across the health plan and CenterWell capabilities. And so don't intend on a recurring basis to speak specifically to the health plan. But given the magnitude of the impact we're anticipating for 2023 and 2024 and our acknowledgment that the margins currently are sitting closer to breakeven, we felt it was important to reiterate our view of what the long-term margin potential should be minimally for individual MA, not only for Humana, but the sector more broadly. And we do believe that 3% plus is a reasonable margin longer term.

Gary Taylor:

Two quick things I just want to make sure I understand. Back on the first quarter call, we asked about TBC and you felt it wasn't a constraint to margin recovery for '25. And I think what's changed is that might have been true with the 0% funding assumption, but at a negative [ 1 6 ] you're just more underwater, so to speak, from an underwriting perspective. And so now TBC is more relevant to '25. So I just want to confirm that.

Susan Diamond:

Yes. Gary, and you are correct. With where the final rate notice came in, it will require larger benefit reductions to achieve stable margins and approach the TBC thresholds in some cases. And so that's where, as we said all along, we will be evaluating plan and county exits where the TBC limits impede our ability to price products at a reasonable margin.

Operator:

Our next question will come from the line of Justin Lake with Wolfe Research.

Susan Diamond:

Yes.

Stephen Baxter:

Just to clarify the TBC commentary, our understanding is there are a lot of benefits that are not governed by TBC like flex cards. And it seems like you're suggesting that you're not comfortable making up the incremental rate headwind by cutting benefits that are outside of TBC. I was hoping you could elaborate a little bit on this dynamic and how you're thinking about the sensitivity of benefits that are outside of TBC thresholds.

Operator:

Our next question will come from the line of Ben Hendrix with RBC Capital Markets.

Susan Diamond:

Yes, Ben. So you are correct. So as we said on our fourth quarter call, we were anticipating in light of the 2-midnight rule changes that we would see an increase in short stays and things that under the old rules were built as an observation, they would now flip to an inpatient's stay. And we saw that in the fourth quarter start to emerge and did continue to see that in the [ first ] quarter incrementally. .

Operator:

Our next question will come from the line of A.J. Rice with UBS.

Susan Diamond:

Yes, A.J.

Scott Fidel:

Can you hear me?

Scott Fidel:

I was interested if you can maybe talk about how you would think about the value prop for seniors, potentially comparing between MA and traditional Medicare in 2025. Obviously, we're all very focused on the headwinds to the MA value prop as it relates to the challenging reimbursement outlook. But it also feels like seniors in traditional Medicare are going to be facing some meaningful headwinds as well when we think about the IRA impacts on Part D.

Bruce Broussard:

Scott, thanks. I'm sure Susan is saying thank you, too, to give her the break of all the questions that have been asked relative to the financial side. Relative to the value proposition for Medicare Advantage to MA, we continue to believe we will have a significant value proposition. And really for a number of reasons. First, just the economics itself, I mean, today, we see about $2,400 a year. You see that stepping back a little bit for 2025 as a result of the benefit changes, but not material to make it something that we feel shopping to the Medicare fee-for-service side will increase. .

Joshua Raskin:

Just getting back to the 3%, I guess, how did you come to this long-term industry margin of 3% plus? What does that mean for Humana relative to the industry? And what do you think that translates into in some form of like return on invested capital?

Susan Diamond:

Josh, so as we think about the 3%, and as Justin had asked earlier, that even historically had been -- how the business has been performing and expectation that we would be able to continue to maintain that level of performance and believe that the industry will minimally require that level of margin, just recognizing the inherent sort of risk in the insurance business the regulatory capital that has to be established. But that just feels like an appropriate margin on a sustainable basis and certainly reasonable and still be able to provide a very strong value proposition to consumers. .

Bruce Broussard:

And just on the return on capital, Josh, as you look at the math, we put about 10% statutory capital in the business, and this is a 3% margin kind of activity, which creates a significant amount of incremental return on capital for us. And since all this is organic growth and not any kind of acquisition growth. I mean it's highly accretive to the overall cost of capital to the company.

Nathan Rich:

I have a few follow-ups. I guess, first on utilization, there's some thought that some of the March trend could be related to calendar dynamics around Easter versus more sustained change in the trend. I guess, could you maybe just give us your view here?

Susan Diamond:

Yes, Nathan, in terms of the first quarter and utilization seasonality, I would say, common, this is leap year. So all of things being equal, you would have had a higher trend in February because of leap year. But then there was other workday seasonality over the quarter such that we would say, in total, there's really not a seasonality impact and relatively consistent with the prior year. And those are all things we would have anticipated in our initial plan and then the guidance we gave for the first quarter. .

Andrew Mok:

You revised your individual MA membership growth target up 50,000 versus your initial expectations of growth for 100,000. Hoping you could elaborate on the drivers of that. Was that just conservatism on your end? Or did you see any unexpected changes in the distribution channel during the open enrollment period that resulted in higher membership.

Susan Diamond:

Yes. And just to add to what Bruce said, the increase was largely attributable to non-D-SNP sales, retention in total was largely in line. We saw in the OEP higher volume than we had expected, both in agents and switchers from other MA. And so as we think about the rest of the year, some of that agent favorability drove the increase. The switcher is obviously less so once the OEP ends. .

Operator:

Our next question will come from the line of Lance Wilkes with Bernstein.

James Rechtin:

Thanks for the question. This is Jim. No, there are not any changes to the team. So let me hit that one real quick. Second, are there opportunities? We're still in the process of evaluating opportunities. We certainly believe that there will be a continued need to drive efficiency. That's both on the operating side as well as continuing to get stronger in how we do medical cost management over time. We're still evaluating those opportunities. And the expectation is that by the end of the year, we would have more to say about where exactly the opportunities are and how we intend to go after them over time.

Lisa Gill:

Susan, I want to go back to your comments around the PDP and the IRA for 2025. Can you talk about what you've seen for conversion over to MA in '24? And then how are you thinking about stand-alone PDP in 2025? Will that become unprofitable on a stand-alone basis? And then just secondly, I just want to understand, when you talk about the update for the bid strategy, will it be a separate press release? Or are we waiting for Q2 to get that update?

Lisa Gill:

Just, will it be a separate press release around your bid strategy? Or is that something that you'll update on Q2?

Bruce Broussard:

Well, thank you for your time and interest today. In closing, I would reiterate that Humana had a solid start to 2024. And while we acknowledge that the entire MA industry is navigating a difficult near-term environment, we continue to believe the strong fundamentals and growth outlook of MA and value-based care remain intact and the strength and scale of our platform and differentiated capabilities will allow us to effectively manage through the uncertainty, compete effectively and deliver compelling shareholder returns over the long term.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

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.

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.

Operator:

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

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.

Operator:

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

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. To the degree the rate notice is different and positive, then that could change our ability to extract more. But as we said, we need the benefit of the rate notice to fully assess that and are making what we think are reasonable assumptions at this stage. The other thing to keep in mind is with a third of our book risk provider supported, while we will certainly take benefit actions across that book as well, it leads to minimal impact to our earnings. And so the $6 to $10 you can think of is really having to be realized over roughly two thirds of the book. So it does translate into a higher benefit reduction than your math would suggest. And then I do think it's important to just remind everyone about our commentary this morning that to the degree 2024 does in fact get better, we would expect that to be additive to that $6 to $10 going into next year, because we do intend to price assuming this trend persists. And so if we see positive development over the course of the year, that would be additive and you would see further appreciation. And just given again, as Bruce said, the recency of these trends, we just are going to need some more time to fully assess that and the likelihood that they will persist for that period of time. But our intention is to be very diligent about restoring margin, and this is our best estimate at this time based on what we know with what we think are reasonable assumptions.

Justin Lake:

Thanks.

Stephen Baxter:

Yes, hi. Thank you. So, just another quick one on the magnitude of improvement in 2025 and I think when we looked at what your earnings trajectory was, maybe stepping back a couple of months ago, we would have already thought that you were going to improve earnings around $6 in 2025. So it's a little hard to feel like the incremental actions you're taking related to pricing, honestly are really all that material. So we'd love to just get a little bit more color on that? And then just also, your approach to operating expenses in 2024 and 2025, it does look like you have SG&A up $700 million in 2024. I guess I thought there might have been maybe more actions you could take to try to protect earnings in the short-term as you work to reprice. I'd love to just understand that a little better. Thank you.

Stephen Baxter:

Yes, like I would have thought you would have two or three months ago been going from $31 of earnings to $37 of earnings, so already kind of delivering $6 of incremental earnings. So comparing that trajectory to the trajectory now, you're talking about kind of an incremental 0 to 4. That perspective is kind of what I'm trying to get at is why couldn't you do more quickly to kind of accelerate the trajectory?

Operator:

Our next question comes from the line of Ann Hynes with Mizuho.

Bruce Broussard:

Yes, well, I think it's a big assumption that competitive environment doesn't change and I'll answer your question specifically. But I do want to just reemphasize that what we have seen over the years, and we saw it in 2022, we saw it this year, that there is one, or usually one, maybe two that gets really aggressive and then they fall away the following year. And we've that over a long period of time. And as you look at our growth over an extended period of time, you will see these volatilities year-to-year. But that's really not a result of our pricing. It's more a result of the industry pricing. We usually have been fairly considerate in our pricing in the industry and have not been as aggressive as competitors and there will be one or another one that comes there. We don't think that is sustainable. We just don't. We see the business as being much tougher as a result of regulatory environment. We see that things like what we saw this year relative to utilization, getting back to above COVID levels, we just see it not being as easy to price to membership growth. I will say that from our vantage point is that as similar to what we did in Part D, is that we'll continue to focus on what is the sustainable, profitable and the appropriate profitability within the industry and we will price towards that. And use our brand and our relationships with our value based providers, our quality scores and other mechanisms to compete. But we do not feel that pricing is how you compete. You price to be economically solid and you price to provide value to your customer, but at the end of the day, we don't look at that as a competitive advantage. We look at our capabilities as a competitive advantage and we'll continue to focus on the capability and the differentiation in our capabilities.

Bruce Broussard:

Welcome.

AJ Rice:

Hi everyone. Just trying to get at two things here. Your comment about inpatient utilization, I think up to this point in the commentary you attributed a lot of the higher inpatient utilization you were seeing to that cohort, the growth cohort of 2023. It sounds like maybe that's broadened on what are you just seeing late in the fourth quarter? What are you seeing seasonally that makes you think that continues? And by the way, did you keep a lot of those 2023 cohorts, or is that where we're seeing some of the growth, at least in one of the competitors, that those people transitioned away from you? And if I could just ask, in a normal environment where an MA carrier has priced below trends, the natural result has tended to be that you get very strong enrollment. We're not seeing it this time, and I wonder conceptually how you put that in context, the fact that you're saying you're underpriced for the 2024 trend you're dealing with, whereas that usually results in big enrollment growth, your enrollment expectations for 2024 are quite modest. How do we put that in perspective?

AJ Rice:

Okay, thanks.

Ben Hendrix:

Hey, thank you very much. I just want to get back to one more question on the $6 to $10 for 2025. I appreciate your comments on the overly competitive environment and difficulty in forecasting how actors scale that down in the future. But if you could comment on, is there a level or a range of kind of headwind attrition that you are assuming in that $6 to $10? And if so, what are you expecting kind of margin versus attrition to kind of offset by attrition to kind of get you to that range?

Ben Hendrix:

Thank you.

Nathan Rich:

Hi, good morning. Can you hear me okay?

Nathan Rich:

Oh, great. Thanks for the questions. I think following up on AJ's question, Susan you kind of talked about still evaluating some of the drivers of utilization as it relates to 2024. Just maybe could you talk about what you're looking at specifically? I guess, do you expect those dynamics you mentioned around the nature of hospital stays to continue? And are there any early data points on January that would suggest the higher trend that you saw kind of emerge late in for Q isn't seasonal? And then just as a clarification, you talked about restoring margins longer term, I guess is your view of long-term margins for the individual MA business changed just given the backdrop that the industry faces? Thank you.

Operator:

Our next question will come from the line of David Windley with Jefferies.

Susan Diamond:

Hey David, yes, I’ll take that. So on the utilization, as we thought about 2024, as we said, we have assumed that these higher costs will continue throughout 2024. So think of it as your new baseline. We have then applied what you consider normal course trend on top of that in our estimates. And so this late in the year, we obviously have visibility to CMS rate changes on unit cost and a variety of other specific inputs that are specifically accounted for. You have things like leap year. So all of those things are accounted for, and then embedded in what we consider that normalized trend is an assumption that we will see incremental utilization trend in 2024 on top of this higher baseline. I would say internally that has been the biggest source of debate. And to what degree you will see continued utilization trend on an outlier level of utilization trend in 2023. But again, we wanted to be as prudent as possible in terms of the assumptions we made and the guidance we provided today. And so that has been included in our estimates and something we will continue to watch, but I would say it’s probably the biggest source of variability. I can’t sit here today and say there’s no way it can be higher, right? I’ll just jinx us if we do so. We’ll just continue to watch it. But I will say, given the level of utilization we’ve planned for, it would be, I think, surprising to see something of that magnitude on top of what we saw in 2023. But we’ll have to continue to watch it. As respect to our 2024 pricing, we did obviously have the knowledge about the v28 changes. There’s certainly some estimation you have to make as part of that, because you’re having to predict sort of the progression of diagnosis codes into the future. But that was all baked into our 2024 pricing assumptions. And one of the reasons you saw us make actual benefit reductions in 2024, because with that adjustment, the reimbursement was going to be insufficient to cover the annual trend. And so that is one of the reasons you saw that. In terms of duals versus non duals, with the pressure we’ve seen this year, I would say the more recent pressure – earlier in the year, I would say less on the duals D-SNPs than non. But I would say some of this inpatient pressure we are seeing more broadly and maybe even a little bit more on the D-SNPs versus non- D-SNPs. But again, there’s a lot more run-out we’ll need to see, particularly on the non-inpatient side, to ultimately do some of those both plan level and member level cohorts to understand exactly how the plans and cohorts are being impacted.

Operator:

Our next question will come from the line of Scott Fidel with Stephens.

Bruce Broussard:

Scott, I’ll take the competitor side and then let Susan take your other question. Obviously, this year it’s one large competitor. As you look at our sales and where we are compared to all the competitors, we’ve finished second behind the larger competitor, but a very distant second. And as I mentioned before, Scott, and you’ve seen it over the years, we do see this behavior that there’s one that sort of stands out and takes share for the inappropriate reasons around price. There are smaller players in the marketplace that maybe impact us in one market or another. But I wouldn’t get overly upset about those. We see those come and go. We just see one this year. And we suspect that for all the reasons that we’ve discussed this morning, that player will readjust in 2025.

Scott Fidel:

Okay, thank you.

George Hill:

Yes, good morning. Can you guys hear me okay?

George Hill:

Okay. I guess, Bruce, I kind of want to step back and ask you a couple of questions around margin. And I guess I don’t know if you guys are able to comment to the margin profile that you guys expect to price to for 2025. And then I would also ask kind of from here going forward, what do you think is the weight margin profile for the MA plan business? And how is this impacted by whether or not your competitors, you think, want to subsidize the other parts of their business where they monetize beneficiaries either in care delivery or in pharmacy versus monetizing the members at the plan level? Just to kind of be very interested in kind of how you’re thinking about plan margin versus what I would call the total value of the beneficiaries?

George Hill:

Bruce, maybe just a real quick…

George Hill:

Susan, just maybe then the really quick follow up would be just, how do you guys think about enterprise margin? And how should investors think about enterprise margin versus plan level margin?

George Hill:

Thank you.

Joshua Raskin:

Hi, thanks. Good morning. I just want to get back to the 2025 range of $22 to $26 per share, and if you view that as a reasonable baseline for what Humana can earn on the current book of business with your current assets, or are you suggesting that there are additional years of growth in EPS above your long-term target behind that? And then I guess more importantly, if that is the baseline that you guys are working on, has the management team and the board thought more about the benefits of even larger scale, of being part of a larger, more diversified entity, and maybe you could talk about what you think the benefits of that would be?

Operator:

Our next question comes from the line of Lance Wilkes with Bernstein.

Susan Diamond:

Hi. Yes, sure. So in terms of the MLR increase in 2024, I would say given the recency and the magnitude of the inpatient trends, which were really – more unexpected in the fourth quarter, if you think about the revision to our forward outlook, I would say it's probably disproportionately inpatient driven, and Lisa and I can certainly follow up and if we will go verify that and then get back to you if there's anything different. But I would say probably more disproportionately inpatient driven, given it was really the last two months of the year, and then have to carry that forward through the entirety, versus the non-inpatient, which we were seeing upticks over the course of the year anyway. And anyway so that's my thinking there. On the November and December, I would say on the inpatient side, again, seeing it more broadly, as we said in the commentary, we are seeing less of that, though, in our Florida HMO market in particular, and we are seeing some differences in the results of our utilization management against this higher trend in different geographies. So that's something we are certainly looking at to see what we can learn from and if there's any additional opportunity more broadly, based on the outcomes we're seeing in the Florida market. In terms of your question of why maybe could we have predicted it, I would say on the inpatient side, as Bruce said earlier, these are really unprecedented levels of trend increase, and I would say the pace at which they changed as well. We do leverage authorization data on the inpatient side. We are actually using that to actually book reserves. Each month we get authorization data for over 99% of the inpatient events that occur. So it is very accurate in predicting and we do receive it in more real time. The non-inpatient is where we are relying on claims and generally relying on at least a 60 day lag to view those claims as credible. So with the December paid claims, much greater visibility to October and prior dates of service. And based on that, I have to make some estimation for November and December, which again, we've assumed those higher trends that we've seen will continue for the duration of the fourth quarter. But we do leverage all the information you can get in real time. It is something we continue to look at, and we've been asked about over the course of the year, whether there's more we -- patient, say surgical as an example. And we do continue to take ground to improve the level of authorization data we get for some of those things as well. It's just not sufficiently high to be credible for purposes of booking claims and estimating that at this time. But I think certainly in light of what we've experienced this year, we're doing a lot of work to assess where there might be opportunities to improve analytic and forecasting models, whether we can leverage interoperability to get some greater visibility into provider utilization, and a number of other things that we will continue to prioritize to make sure that we can continue to improve all of our forecasting work, recognizing it's inherently difficult given the nature of the program.

Whit Mayo:

Hey, can you hear me?

Whit Mayo:

Yes sorry, it went blank for a second. Thanks for the time, Bruce. I'm just curious, looking at your partnerships with the various capitated medical groups that I think you said cover a third of your book know. Obviously we're seeing a lot of challenges in that market. They're feeling this utilization pain. What are the conversations like that you're having there? Any desire that they have in trying to carve out some of the risks they're taking on certain benefits. OTC, Flex cards. Is there any risk that you see that maybe you bring more of that back on your P&L at some point? That could be a headwind. And my other question is I'm just wondering, now that you've shut down the commercial business, is it possible that that's having any impact on your network or rates that could impact your unit costs going forward? Thanks.

Susan Diamond:

And what I would say as well, and I had been saying this early in the year and more so now. I do think that as risk providers fully absorb the impact of v28 as well as this higher trend, I imagine that there will be increased discussions and pressure for the industry to appropriately reflect those trends in the benefits. As we said, we cut benefits more than anyone. So I think there may be some other payers having discussions with providers around some frustration over the level of benefit investment. Our primary care organization is having some of those very same conversations and I do think there'll be a push from the provider community as well for discipline and balance given that we have further implementation yet to go with respect to v28. And so I think that will be a positive and hopefully bring the pricing discipline that we're all looking for.

Whit Mayo:

Okay, thanks.

Gary Taylor:

Hi, good morning. I wanted to go back to 2025 just for a moment, to make sure I'm understanding, it looks like the earnings pickup is implying insurance segment margins would improve 100 basis points, maybe a little bit more. And I know the street simplistically assumes you can always just cut benefits to hit your target margin, but the CMS, TBC change thresholds do handcuff you to some degree. So is the right way to think about 2025 is right now you're assuming a negative rate update. I'm sure you're probably assuming some positive cost trend growth in 2025. You'll need to use a portion of your TBC threshold just to solve for that math. And then the 100 basis points implied margin improvement, earnings improvement is really what's left to be recovered after that math. Is that a good way to think about, with due respect for your capitated arrangements as well, is that a right way to think about kind of how much you're delivering to shareholders in terms of margin EPS for 2025?

Bruce Broussard:

And Gary, I just want to reemphasize something here that we also are very active in looking at a trend offset and we have a lot of activity going in the organization around that and we are oriented to how can we set a number of these things through both clinical actions and then also just the proper insurance that people are using the healthcare system most efficiently.

Gary Taylor:

Got it, makes sense. Thank you.

Sarah James:

Thank you. I was hoping you could give us more color on your claims clarity. So you made some comments earlier about waiting for more November claims clarity, and that sounds a little bit slower than I typically think of the industry getting 60% of the 30 day claims and 80% of the 60 day claims. So how much clarity do you guys have on November and December? Was there any kind of slowdown this year? And as you think about that going forward, there's some regulatory changes coming around, having to do prior authorization in 72-hours or make decisions in 72-hours. Is there a potential that that could have an impact on your claims clarity when that goes into effect in 2026?

Sarah James:

Thank you.

Bruce Broussard:

Okay, well, I'll close out the call here. And as I started the call, we are disappointed in the update provided today. And as I said many times, we take our commitment serious and -- will continue to work hard on behalf of our investors. I do want to first just continue to reemphasize that although the near term impacts of the higher utilization are disappointing, our confidence in the long-term attractiveness of this sector and our position with it has not changed one bit. I do want to say thank you for both your time today and our 65,000 employees for their dedication and support for our business and individuals we serve. So thank you and have a wonderful day.

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 third quarter 2023 results and our financial outlook for 2023. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. 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 third quarter 2023 earnings press release as they relate to the 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. 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.

Susan Diamond:

Thank you, Bruce and good morning, everyone. Today we recorded adjusted EPS of $7.78 for the third quarter. Results in the quarter were slightly positive -- slightly above initial expectations driven by outperformance in our Medicaid and primary care businesses and continued focus on driving sustainable productivity gains, offset by modestly higher-than-anticipated utilization in our Medicare Advantage business. I will provide additional detail on recent utilization trends in a moment. Our performance to date continues to reflect the strength and agility of the enterprise, demonstrating our ability to successfully navigate the higher-than-anticipated utilization while delivering on our earnings commitment and driving individual Medicare Advantage membership growth that significantly outpaces the industry. We now expect to add approximately 850,000 members in 2023 and reflecting a 19% growth rate. Further, for the full year, we have reaffirmed our adjusted EPS guidance of at least $28.25 which reflects a 12% increase over 2022. We I will now provide additional details on our third quarter performance and full year outlook by segment, beginning with insurance. This morning, we reported that our insurance segment benefit ratio exceeded expectations by 40 basis points due to higher medical costs in our Medicare Advantage business. We continue to experience an increase in COVID admissions in the third quarter, whereas our forecast previously assumed that this would occur in the fourth quarter. To date, we have not seen an offset in non-COVID utilization which diverges from the consistent patterns seen previously. As it respects non-inpatient trends, we previously communicated that we expected the higher PMPMs [ph] reported in the second quarter to continue throughout the back half of the year, reflecting a moderating year-over-year trend percentage. The most recent paid claims data suggested a modest uptick in TTMs [ph] for the third quarter versus the stable levels we anticipate. Considering the most recent trends, we are planning for the higher level of utilization seen in the third quarter to continue for the remainder of the year. As a result, we are increasing our full year insurance segment benefit ratio guidance to approximately 87.5% which implies a fourth quarter ratio of 89.5%. This guidance also reflects the increased individual MA membership growth which continues to include a higher-than-expected proportion of agents. As we have previously discussed, agents initially run a higher benefit expense ratio than the average new member which negatively impacts the current year benefit ratio but result in a larger margin expansion opportunity on these members over time. We anticipate that the higher 2023 insurance segment benefit ratio will be offset by additional administrative expense reductions, driven in part by the sustainable productivity initiatives group discussed, improved net investment income and other business outperformance. Turning to Medicaid; the business exceeded expectations in the quarter, primarily driven by favorable membership due to redetermination timing which continue to track slightly favorable to our expectations, combined with disciplined medical cost management initiatives and lower-than-expected utilization. Moving now to CenterWell; the segment continued its solid performance seen throughout the year, outperforming expectations in the quarter. Our primary care organization results exceeded expectations, driven by better-than-expected patient volume and revenue combined with lower-than-anticipated utilization, resulting in improved medical margin in our fully own centers. We continue to see better-than-expected patient growth, adding over 17,000 patients or nearly 89% growth in our de novo centers since December 31, plus 15,000 patients in our wholly owned centers, representing 9% growth year-to-date. We now anticipate full year patient annual growth of approximately 34,000 to 36,000 as compared to our original estimate of 20,000 to 25,000 patients more than doubling the patient growth achieved in 2022. Our primary care organization also continues to improve the operating information performance of our wholly owned centers. We continue to positively impact patient outcomes with hospitalization levels trending down year-over-year. In addition, due to our continued efforts to engage our patients Retention has now improved 270 basis points year-over-year, up from a 220 basis point improvement as of the second quarter. Patient satisfaction scores continue to reflect the quality of care delivered with Net Promoter Scores averaging 82 nationally. And we are proud of our quality scores which are tracking ahead of last year's trajectory with a 4.5 star performance year-to-date on provider influence measures for engaged patients. We now expect to increase the number of centers that are contribution margin positive from 110 at the end of 2022 and to approximately 130 at year-end 2023, an increase from our previous expectation of 125 and representing an 18% increase year-over-year. In addition, we expect to increase the number of centers that have reached our $3 million contribution margin target from 31 in 2022 to approximately 44 at the end of 2023, an increase from our previous expectation of 40 -- and representing a compelling 42% increase year-over-year. The better-than-expected primary care earnings in the quarter in our consolidated benefit expense ratio being 100 basis points lower than our insurance segment benefit expense ratio as compared to our previous expectation of a 40 to 50 basis point reduction. As a reminder, on a consolidated basis, we report from the perspective of the health plan and as such, intercompany earnings from these services are eliminated against benefit expense. At this time, we do not anticipate that the primary care outperformance will run rate into the fourth quarter. Therefore, we continue to point you to a 40 to 50 basis point reduction between our insurance and consolidated benefit expense ratios for the fourth quarter with a reduction of approximately 60 basis points for the full year. Turning to the home. In our core fee-for-service business, year-to-date episodic admissions are up 8.6%, while total admissions are up 5.1% and tracking in line with our full year expectations of a mid-single-digit year-over-year increase. As Bruce discussed, we are working diligently to identify clinical and operating efficiencies to offset industry headwinds, including rate reductions, declining original Medicare admissions due to increasing MA penetration and ongoing labor pressures. From a capital deployment perspective, we have completed approximately $1 billion in repurchases to date and continue to anticipate share repurchases of approximately $1.5 billion in 2023. Before commenting on 2024, I would like to take a moment to highlight the significant progress we have made towards the midterm targets we shared at our Investor Day 1 year ago. As a reminder, our 2025 adjusted EPS target of $37 represents a 40% CAGR from 2022 and is expected to be comprised of 10% enterprise earnings growth largely driven by the contribution from our Medicare membership, 20 basis points of improved operating leverage and a 2% contribution from capital deployment on an annual basis. While allowing for continued growth and investment in our Medicaid and CenterWell businesses as these high-quality assets are expected to meaningfully contribute to our long-term earnings growth as it continues to scale and mature. Over the last year, we have outperformed virtually all of the goals, including above-industry average membership growth in our Medicare managed business, significant outperformance of our productivity goals and increased share buybacks as we saw stock price dislocation earlier this year. We continue to invest in and grow our Medicaid and CenterWell businesses, performing top line growth goals across these businesses as well. At the same time, we've experienced higher-than-expected medical cost trend within our Medicare managed business and have worked hard to mitigate the impact of these trends in order to deliver on our enterprise earnings and EPS commitments. All in, we are proud of the significant progress we have made and remain committed to the targets we shared last year, including our 2025 adjusted EPS target of $37 I'll now take a few moments to provide additional color on our early outlook for 2024, starting with membership. As Bruce shared, while it's still early in '18 [ph], we expect that our balanced approach to our 2024 bids positions us to grow individual Medicare Advantage membership at or above the overall industry growth rate while planning for a modestly higher attrition rate, given the benefit design changes we implemented in response to the rate environment. As we always caution this time of year, it is early in the AEP selling season, the atlas we provide today could change depending on how sales and voluntary disenrollment ultimately come in. Broadly speaking, 2024 competitor plan design reflect less benefit degradation than anticipated which will likely lead to fewer consumers shopping and therefore, less opportunity for Humana to meaningfully outpace the industry growth rate. Specifically Humana's performance relative to the market, initial feedback from brokers is positive, supporting our expectation of at or above industry average growth. Finally, recall that we have limited visibility into member disenrollment data this early in the AEP season as those results take longer to complete and we look forward to providing further commentary on our fourth quarter call. In our Group Medicare Advantage business, we expect membership growth of approximately 45,000 in 2024, driven by small and midsized account wins and remain committed to disciplined pricing and a competitive group Medicare Advantage market. With respect to seeing along PDP, the overall PDP market continues to decline as Medicare beneficiaries select Medicare Advantage over original Medicare and PDP -- in addition, we remain disciplined in the pricing of our PDP products as cost trends continue to rise. As a result, our Walmart Value plan will not be as competitively priced as it has been historically and our basic plan will exceed the low income benchmark in 16 regions in 2024. We currently expect a net decline of approximately 750,000 TEP members in 2024, including a loss of approximately 220,000 members as a result of exceeding the low income benchmark. As we look beyond 2024, we will evaluate the impact of the various proposed regulatory changes which are likely to result in higher PDP claim premiums broadly and could lead to further industry-wide movement from stand-alone Part D claims to Medicare Advantage plans given the strong Medicare Advantage value proposition. Our focus remains on creating enterprise value from our PDP plan by driving increased mail order penetration and conversions to make your advantage. Finally, in our Medicaid business, Humana continues to demonstrate the ability to deliver unique value to communities by building on a strong operating model that integrates physical and behavioral health and develop meaningful partnerships and innovations to address health and equities and social deterrence to health. After successfully implementing the Ohio and releasing our contract in early '23, we look forward to beginning to serve members in both Indiana and Oklahoma in 2024 and continue to expect to bring our total Medicaid footprint to United States and approximately 1.5 million members by year-end 2024. Turning now to our expected 2024 financial performance. I reiterate expected to grow 2024 adjusted EPS within our targeted long-term range of 11% to 15%. We Recognizing the increased utilization we have now seen in 2023 and prudently assuming this level of utilization continues into 2024, we currently anticipate growth at the low end of this range. We look forward to providing a more specific 2024 guidance on our fourth quarter earnings call in February. Looking ahead to 2025, as previously mentioned, we remain admitted to our 2025 adjusted EPS target of $37, reflecting a 14% CAGR from 2022 to 2025. It is important to note that our 2025 adjusted earnings growth will benefit from the maturation of our robust individual MA membership growth expected in 2023 and 2024. Advancement of the mitigation activities, our primary care and home organizations are implementing to offset the impact of their revenue headwind. Capital deployment activity as well as the sustainable productivity and value creation initiatives discussed today. In addition, we anticipate certain discrete pricing actions to be taken across our individual and group Medicare books in response to the higher utilization and trends experienced. In closing, I want to say thank you to our over 65,000 teammates. Our success is enabled by a dedication to putting our members and patients at the center of everything we do. I would also like to thank our shareholders for their continued support. Finally, I'll reiterate that Humana fundamentals are strong and we remain well positioned to drive compelling earnings growth in the mid and longer term. With that, we will open the line 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.

Kevin Fischbeck:

Great. I guess maybe my question would be on the outperformance in the physician business which is just a little bit counter to, I guess, what some of your competitors have done in a higher MA trend environment. It's surprising that the physicians are seeing better medical performance. So can you talk a little bit about why there's that disconnect there wise not flowing more through that side of the equation. And I guess the fact that you keep growing membership faster on the clinics, why isn't that the same kind of MLR pressure there that you see in the MA business when that grows faster than expected?

Operator:

Our next question will come from the line of Stephen Baxter with Wells Fargo.

Susan Diamond:

Sure. Steve, yes, so as to rates we called out the momentary and we disclosed this in some of our public commentary during the quarter. We have seen an uptick in COVID within the quarter. As we mentioned, our internal forecast for the year initially anticipated an uptick in the fourth quarter versus third. So initially, we said, well, that sold be just the timing of a pull-forward of that. We have started to see COVID start to decline is coming down. But as we mentioned, we have to date not seen an offset. And so it resulted in just net incremental utilization within the quarter versus what we might have otherwise expected based on historical trends. As we thought about the year, what we decided to do and an attempt to just be somewhat conservative to assume that the cover that we anticipate in the fourth quarter from an addition standpoint would remain. So we did not take that out of the forecast. And may eventually show up as non-COVID ultimately. But we did keep that in the forecast such that our ATT expectations are consistent with what we would have expected previously and didn't take that out. On the non-inpatient side, I would say the drivers of that are consistent with what we've been saying since the term developed on our second quarter call in the discretionary sort of orthopedic and surgical procedures some of the ER and observations that we've seen those have continued. And I would say the drivers remain consistent. There wasn't any new that came up that's driving that sequential increase.

Scott Fidel:

Would be interested if you could give us some of your initial observations on the 2024 AEP as it relates to your marketing and distribution strategies and where you feel that things may be resonating the most definitely seeing the Humana guide, for example, on plenty of ads recently. But more broadly, just in your distribution strategies, what you think seems to be working the best in. And then any areas where you may even be making some adjustments to the strategy here sort of inside of the AEP as you continue to look to drive new sales.

Operator:

Our next question will come from the line of A.J. Rice with UBS.

Susan Diamond:

Yes, let's take great questions in there. I'll try to get all of them. I would say, in terms of this incremental trend that we are announcing in the third quarter and then stepping up to for the full year. Obviously, this would not have been done at the time of pricing, it'll be incremental negation that we need to do to offset that in '24. If you recall, on the second quarter call, we did reaffirm that we intended to be within our long-term historical range, 11% to 15% and we reaffirm that today, although knowledge is a result of this higher trend that we would expect to be in the low end of that is our initial thinking. I would say, as we saw the trend develop, we certainly recognize that we would need to identify some additional mitigation. I would say our ongoing efforts around productivity have continued since the work we kicked off in '22. And as we've said before, have continued to identify more opportunities than we might have initially anticipated which is built unlike pipeline of opportunity that will certainly mitigate the end this year and we'll continue to do so next year. To your point, the higher enrollment growth, particularly the Asian component of that which we have seen a nice uptick in market share there. does put some pressure on MLRs. And in going to get this pretax because as we said, they run about 100% MLR typically in the first 2 years before flipping to full diagnostic space is adjustment typically more so in the third year. We've said before, you can think about with the level of enrollment higher for agents this year, you can think about it on a full year basis that, that would impact the MLRs about 20 basis points. And so that is contemplated in our '24 thinking. Obviously, one of the things we'll still have to assess as we refine the thinking for '24 will be this year's membership growth and the composition of that, the new name versus retention and those are all things we'll continue to assess and comment on further when we provide our updated guidance on '24 -- or fourth quarter call.

Justin Lake:

I wanted to ask about Center well. Just given the PDP losses, some of the pressures that we're hearing about both in the home health and the physician business. Can you talk about the trajectory from '23 to '24 and then '24 to '25 versus kind of what you had previously laid out at the Investor Day in terms of those improvements that were before some of these headwinds set in.

Operator:

Our next question will come from the line of Joshua Raskin with Nephron Research.

Susan Diamond:

Josh, for your first question, we are seeing that new members are running higher MLRs than you would expected that we would say that is attributable to the overall trend that we're seeing. We have looked at new members versus concurrent members to see what variation we're seeing at various types, plan level, geographic. And what we say is relatively consistent. So we continue to believe that the impact that we're seeing are broadly industry-related trends versus Humana specific. With the exception of some of the things you pointed out previously which we continue to see like some of the down investments we've made, we are seeing some higher utilization. But beyond that, I would say that the other impacts are relatively consistent across the new and concurrent but obviously driving higher and more than we would have expected across the board. In terms of the progression of members in the risk rides, we can follow up on any specific question. But I would say, in general, I would say the trends haven't changed significantly over the last few years, at least nothing that we've seen or called out.

Bruce Broussard:

Thanks, Josh.

Gary Taylor:

Just a couple -- maybe one question, one clarification. I know last year, at this time, you gave very precise enrollment growth guidance and perhaps that was because of the shortfall in the '22 enrollment. But I guess, maybe in absence of that, are you still generally anticipating when you say you would grow at industry or better that the industry would grow high single digit. Is that still your general expectation? And then just a slight clarification, I guess, to the back half of Josh's question. You do talk about benefit design change as impacting MLR and certainly, some of that was intentional and we knew that coming into the year or benefit investments. made. CVS this morning was talking about more OTC benefits, etcetera. I just wondered if year-to-date, given the pretty substantial investment you made in OTC and Flex and that sort of thing. If you're learning anything about how members are using those benefits over the course of the year? Is the monthly utilization of those allowances accelerating as the year has gone by, etcetera?

Susan Diamond:

And as respect to your same question, so as you think about the benefit of investments we made, there was obviously living contemplated in our pricing in our initial guidance and one toward our initial MLR guidance. As we've seen the higher utilization, particularly in sort of benefits you mentioned like that are more relatives like we've done in the flex as we spoke to. I would say we are seeing a higher utilization on some of those benefit investments than we would have expected. But again, we're seeing it across the existing membership base as well as in the new members. So it's, again, not a selection issue where we're just attracting people that or attracting that we're seeing existing members who now have access to those riches also utilizing them in the higher rate as well. Particularly on the dental side, I would say with optimization, we're seeing [indiscernible] just more dollars being utilized versus more utilizes overall. So sort of the cost per visit, as you can see about it going up where I'm sure the with Dennis in the optometric and when they got a patient in there, they're trying to maximize that sort of revenue per patient. So we're seeing some higher cost procedures or services like dentures and some other things routinely within that utilization. With the way some of those benefits are designed continue to flex, we do have less opportunities intra year to try to mitigate some of that and it does require adjustments to the benefit of that. And so some of that, particularly in the Flex benefits early in the year, we did make some adjustments in our '24 plan designs to account for that and implement some additional restrictions and benefit reductions. So that is one thing you'll see. So we'll continue to monitor, as I would say, broader utilization just relative to what we had expected off of that benefit investment that we implemented in a few of those specific categories.

George Hill:

Was that George Hill? If so, I'll talk.

George Hill:

Sorry, Susan. And the end of the operator cut off of mind. I just want to make sure I heard you right. When you said were you seeing higher MLR pressure PPO [ph] versus HMO plans? And I guess my question, I want to make sure I heard that right and then my question would be, is there a meaningful MLR difference typically between the HMO and the PPO plans. And kind of how should we think about that going forward as you're kind of seeing broader demand for the PPO plans and kind of that share is expected to increase in mix going forward?

Operator:

Our next question comes from the line of Sarah James with Cantor Fitzgerald.

Susan Diamond:

Take on post memory. Would you mind repeating that question? We didn't get I'm sorry.

Susan Diamond:

Thank you, Sarah. So yes, I think you're referring to some of the utilization management practices and those are typically done on the front end. We do that wherever possible where we will have the opportunity to review for medical necessity and appropriate setting. So whether that's a full inpatient admission or an observation stay. We've had those programs in place for many, many years. There are some changes coming in 2024 based on some new CMS regulations. And those do change the way some of those programs will work. Those don't take effect until January 24. So I would say no meaningful changes experienced in '23 but we are anticipating those changes in '24. Those did represent a headwind to us, recognizing that we won't be able to have as much impact as we have historically from those efforts and we did account for that in the bid. But that is one of those things we'll certainly want to watch next year. How that develops relative to our expectations, recognizing there may be some behavior change that we see within the provider community, they adapt to those changes. So that's something we'll continue to watch but it's something we anticipated and included in our '24 pricing.

Lance Wilkes:

Yes. hopefully, you're going to hear me here, operator, cut out on me too. Just a quick question. You made a comment about modestly higher attrition you're expecting in '24. I was wondering if you could maybe just give a little more color on the drivers of that, if it has to do with distribution channels or maybe the greater proportion of nonduals or something like that? And then also, if you could just remind us for the $37 target in '25, what's the kind of implicit a rate increase that you're expecting that we ought to be starting to see in February that's kind of baked into that?

Susan Diamond:

Yes. And Lisa, as respect to the $37, I would say, in general, as we've commented, we have been anticipating that the rate environment would not continue to be as favorable as we've seen in the last number of years. obviously, for 2024, the industry is absorbing the more negative rate environment. And with the phase-in of the risk adjustment model changes, we anticipate that, that will be implemented over the next -- the remaining over the next two years. That will certainly have an impact to our primary care business which we've talked about. While the business has a mitigation plan and they believe they can fully mitigate the impact, they do think it will take time. So we are anticipating a headwind in '24. That will be somewhat lessened in '25 as they continue to mature and scale some of their mitigation plan initiatives and then fully offset by '26. Within the health plan, I would say, we obviously know what the impact of the risk adjustment model change phasing will be but we'll have to obviously see what the core adjustment looks like in light of some of these higher trend, in theory, you would see some positive restatement embedded in there. So we'll have to see what that looks like and whether it's sufficient to cover normal horse trend. The way we generally think about it though is that is we go to impact the industry broadly. And so in theory, we should be on par with everyone else and assuming everyone react rationally, then it wouldn't put you in an advantage or disadvantage. We are very pleased, though, again, have the really strong Stars results that were published recently. And that, again, is a durable advantage for us where we do know some others will have some challenges to deal with there while others may have some improvement. And so those are all things that we consider as we plan for '25. I just reiterate, we remain committed to delivering the $37 committing to continue to grow at or above the industry rate for MA membership growth. and wanted to highlight recognizing it requires an accelerated growth rate for earnings in '25. I wanted to make sure we highlighted some of those more unique tailwinds that we will benefit from in '25 that allow us to achieve that higher than typical rate in order to deliver to $37. And we'll certainly share more on our fourth quarter call.

Nathan Rich:

Can you hear me?

Nathan Rich:

Great. Susan, maybe just building off of that last comment there on the 2025 target. How should we think about the margin progression for the Medicare Advantage business between '24 and '25. Seems like maybe a bit of a bigger step up than what you had anticipated previously. And you also made reference to some additional earnings levers like pricing actions. Could you just go into a little bit more detail on what you're considering there?

Operator:

Last question will come from the line of Mayo with Leerink Partners.

Susan Diamond:

Yes. [Indiscernible].

Susan Diamond:

Okay. I got the first one. Would you mind repeating the second question? So the first question was about agents. What was the second question?

Susan Diamond:

Sure. As far as the agents, I think with some of the information we shared about the increased penetration that we've seen. You can think of that as about $250,000 an additional sales for agents for the full year. And then we see the incremental benefit of the margin progression on that. Like I said, it's disproportionately weighted to year 3 by the time those members ultimately convert. In terms of one home, it's about 15% of MA membership. I think in answer to your question.

Susan Diamond:

Yes. Why don't we -- we can get back to you with a specific answer on that. Let us look at that. And when we talk late tomorrow, we can have that answer for you.

Bruce Broussard:

Thank you, operator. In closing, I echo seasons, thanks to our 65,000 employees. We truly appreciate their hard work and dedication to bring each day to serve our members and patients. I'd also reiterate the thanks to our shareholders for their continued support. Managed fundamentals are strong and we remain committed to leveraging the strength and scale of our enterprise navigate near-term challenges while continuing to advance our strategy. And importantly, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% compounded annual growth rate from 2022 to 2025. I hope everyone has a great day.

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 second quarter 2023 results and our 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 and our other filings with the Securities and Exchange Commission, and our second 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 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. All 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 reference 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.

Susan Diamond:

Thank you, Bruce and good morning everyone. Today, we reported second quarter 2023 adjusted earnings per share of $8.94, consistent with internal expectations. Results for the quarter are inclusive of the higher-than-anticipated utilization in our Medicare Advantage business we discussed last month, which as Bruce shared, has stabilized and is tracking in line with our updated estimates. I will provide additional detail on emerging trends in a moment. The higher-than-anticipated utilization in the quarter was offset by better-than-expected favorable prior year development, a more positive midyear Medicare risk adjustment payment and slightly favorable investment income, as well as other business outperformance, particularly in our Medicaid business. Our performance to date reflects the strength of the enterprise, highlights our ability to successfully navigate near-term uncertainty, and importantly, includes better-than-anticipated individual Medicare Advantage membership growth. We now expect to add approximately 825,000 members in 2023, reflecting an impressive 18% growth rate, fueling our ability to continue to deliver compelling earnings growth in the future. Further, for the full year, we have reaffirmed our adjusted EPS guidance of at least $28.25 which was increased by $0.25 with our first quarter earnings release and reflects a 12% increase over 2022, putting us on a solid path to our 2025 adjusted EPS target of $37. I will now provide additional details on our second quarter performance and full year outlook, beginning with our Insurance segment. As highlighted in our 8-K filing last month, beginning in early May, we noted the emergence of higher-than-anticipated non-inpatient utilization trends in our Medicare Advantage business. At the same time, we began seeing higher-than-anticipated inpatient utilization diverging from historical seasonality patterns. These trends continued in early June. Based off of this intra-quarter information when we filed the 8-K on June 16th, we made the assumption that we would continue to experience moderately higher-than-expected trend for the remainder of the year. We were pleased to see that our June paid claims data received in July reflected positive restatements for the first quarter, as well as stabilizing outpatient utilization levels in April and May. While July claims data is not yet complete, early views support our year-to-date booking levels. With respect to inpatient activity, the higher than initially anticipated utilization has continued, consistent with our June update. All in, we view the utilization data received in recent weeks is incrementally positive as compared to the assumptions utilized in our June update. That said, we continue to point you to the top end of our full year Insurance segment benefit ratio guidance range of 86.3% to 87.3%, and will continue to monitor emerging trends. This guidance also contemplates the individual Medicare Advantage membership growth post the annual election period, which has included a higher-than-expected proportion of agents. As Bruce discussed, agents initially run a higher benefit expense ratio than the average new member, which negatively impacts the current year benefit ratio but results in a larger margin expansion opportunity on these members over time. As previously noted, we anticipate that the higher than originally expected benefit ratio in 2023 will be offset by a variety of factors, including higher-than-expected favorable prior year development, additional administrative expense reductions, higher than previously anticipated investment income and other business outperformance. And while we would typically not comment on 2024 this early in the year, given the questions in the market regarding pricing resulting from the higher-than-expected utilization in 2023, I would reiterate that our Medicare Advantage pricing contemplated the rate environment, emerging utilization trends and related offsets, as well as the competitive landscape and resulting growth opportunity. As we sit here today, we remain confident that our 2024 pricing, combined with the strength, scale and agility of the organization, will allow us to deliver earnings growth that keeps us on a reasonable trajectory to our 2025 adjusted EPS target of $37. As a result, our intent is to target adjusted EPS growth within our historical long-term target range of 11% to 15% in 2024. We look forward to sharing more on 2024 later this year. Turning to Medicaid, the business continues to outperform with second quarter results exceeding expectations, driven by favorable membership results, combined with disciplined medical cost management initiatives and lower-than-expected utilization. Redeterminations, which began in the second quarter, are tracking slightly favorable to our initial expectations. In addition, the Louisiana and Ohio contracts, which were both implemented in the first quarter, are performing as anticipated. At this time, we continue to expect an increase of 25,000 to 100,000 Medicaid members for the full year as the membership gains in Louisiana and Ohio will be largely offset by membership losses resulting from redetermination. Membership in our stand-alone PDP business is tracking favorable to expectations, driven by better-than-anticipated retention. As a result, we've improved our full year guidance from down approximately 800, 000 to down approximately 700,000. Now turning to CenterWell. The segment has continued to build on a solid start to the year, performing modestly better than expected in the second quarter. Our Primary Care organization continues to report better-than-expected patient growth year-to-date, adding 10,000 patients or nearly 52% growth in our de novo centers and 12,000 patients in our more mature wholly-owned centers, representing 7% growth year-to-date. We now anticipate full year patient panel growth of approximately 27,000 to 30,000 as compared to our original estimate of 20,000 to 25,000 patients, more than doubling the patient growth achieved in 2022. In addition, our Primary Care organization continues to improve the operating performance in our wholly-owned centers, and we're pleased to report that we estimate we will increase the number of centers that are contribution margin positive from 110 at the end of 2022 to approximately 125 at year-end 2023, a 14% increase year-over-year. In addition, we expect to increase the number of centers that have reached our $3 million contribution margin target from 31 in 2022 to approximately 40 at the end of 2023, a compelling 30% increase year-over-year. While we do expect the risk model revision to have an impact on our center contribution margin performance in 2024, as Bruce shared, we are focused on advancing our clinical capabilities, driving operational efficiencies and implementing other actions that we believe will largely mitigate the ultimate impact of the risk adjustment model changes that will be phased in over the next three years. In the Home, total same-store new start of care admissions and our core fee-for-service home health business were up 5.8% year-over-year as of June 30th, in line with our expectations of mid-single-digit growth. In addition, in the quarter, we saw episodic admission growth of approximately 10% year-over-year, which is inclusive of the acquisition of Trilogy Health completed in April. While new start admission growth is strong, we continue to experience pressure on recertifications due to utilization management programs of Medicare Advantage payers. And as expected, our cost per visit continues to run approximately 2% higher year-over-year with continued nursing labor pressure. From a quality perspective, we have seen significant improvement in Star ratings for CenterWell Home Health over the last year, increasing the percent of our branches with a 4.5 star or above rating from 18% in January 2022 to 50% today. Further, as Bruce highlighted, we're seeing positive results as we continue expansion of our value-based home model, tracking towards our goal of covering 40% of our Medicare Advantage membership by 2025 while also expanding the stand-alone components in certain markets to accelerate value creation. Finally, our Pharmacy business performed well in the quarter, benefiting from higher-than-expected individual Medicare Advantage membership growth as well as favorable drug mix. As anticipated, year-to-date mail order penetration for our Medicare membership is 40 basis points lower than prior year as a result of retail pharmacy co-pays now largely being on par with mail order benefit. We continue to provide awareness and education of the benefits of mail order for a large block of new members to drive increased penetration throughout the year. Investment income slightly outperformed expectations in the quarter and we now anticipate that investment income will increase by approximately $500 million year-over-year, up from our original expectation of a $450 million year-over-year increase. From a capital deployment perspective, we initiated open market repurchases in March and have completed approximately $800 million in repurchases to-date, taking advantage of the recent dislocation in the stock price relative to our comments in the long-term earnings outlook of our business, underpinned by our strong Medicare Advantage platform and the continued build-out and integration of our CenterWell assets. We now expect share repurchases of approximately $1.5 billion in 2023, up from our original expectations of $1 billion. With our strong cash flows and decreasing debt-to-cap ratio, we've accelerated the share repurchase while maintaining sufficient capital for normal course M&A activity. Lastly, with respect to earnings seasonality, we expect the percentage of third quarter earnings to be approximately 25%. In addition, we expect the third quarter Insurance segment benefit expense ratio to be 87%, consistent with current consensus estimates, before increasing in the fourth quarter consistent with historical seasonality patterns. Before closing, I want to echo Bruce's sentiment that Humana's fundamentals are strong, and we are pleased with our ability to grow individual MA membership by 18% in 2023 while guiding to a robust 12% year-over-year in adjusted EPS. We are confident in our ability to leverage the strength and scale of the enterprise to navigate through the near-term impacts of the higher-than-expected Medicare Advantage utilization while continuing to advance our strategy. And importantly, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% CAGR from 2022 to 2025. 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.

Stephen Baxter:

Yes. Hi, thanks. Appreciate all the color, a lot to digest there. So the commentary on 2024 bids was very helpful. It sounds like, at least to my hearing, that the higher trend that you see in MA persists for the balance of the year, you believe your bids would fully reflect that. Just making sure we have that point right. And then obviously in June, you did talk about some pretty significant operating cost offsets that you expected will allow you to deliver on EPS this year despite the higher MLR. I guess how do we think about these potential cost offsets into next year? Are those still largely an opportunity for you if you need them as an offset? Thanks.

Operator:

Thank you. Our next question will come from A.J. Rice with Credit Suisse. Your line is open.

Bruce Broussard:

Good morning A.J. I'll take the first part, maybe Susan can take the profit trajectory. On the retention area, I think as we've talked on a number of calls over the last few years, we've spent a lot of effort in improving the retention and we really look at it in a few areas. First is just in the benefit design. It's an important area where people will focus on and as -- both this year is a demonstration of that. But I think, I'm pretty sure, it's where we've really been able to design our benefits for the segments that we want to continue to grow and retain. And that, I think, is an important area where we'll continue going forward. And as we've mentioned on a number of occasions, we feel very confident about our positioning for 2024. The second is in the area of our experience and our customer experience, both in the service area and then, obviously, in the claims management area that we have. And as you can see from our Net Promoter Score and the continued accolades we get from third-parties that we have -- are leading the industry in all those areas. And that we've seen also, referring back to the brokers where they feel confident in both recommending us as a result of our benefits, but also recommending us as a result of our service side. Because they have told us on a few occasions that their confidence is less in some of our competitors as a result of recommending a plan and then ultimately, not being able to service that plan. And so I would just end by saying our benefit design is really important and that's more segment-specific. And then secondarily, the service experience that we provide and the ability to continue to do that both in a positive way from the customer point of view, but also from an efficient way.

A.J. Rice:

Okay. Thanks a lot.

Justin Lake:

Thanks. Good morning. First, just, Bruce, I appreciate your commentary on 2024 in expecting a strong industry growth, and you outperform it. Can you give us a little more color there in terms of the -- maybe relative to the, let's say, 7% to 8% we think the industry is going to grow this year? How do you think it grows next year? And then any early commentary on 2025 Stars? I know you've gotten a bunch of data there. I know it's still not perfect, but any thoughts on how your 2025 Star performance is shaping up going into October? It would be helpful, too. Thanks.

Justin Lake:

Thanks for the color.

Nathan Rich:

Hi, good morning. Thanks a lot for the questions. I wanted to ask about how you believe your kind of benefits will compare to the market overall? Obviously, you're coming off of a year where you significantly increased benefits for 2023. What does that look like for 2024? And I know it's early, but it would be helpful if -- to get your sense of how you're thinking about margins for the insurance segment in 2024, given the moving pieces with utilization, the risk and risk model change of your redeterminations? Any kind of early view would be great. Thank you.

Susan Diamond:

And one thing I would add to that too as you think about 2024, as Bruce mentioned, some of the competitors do have incremental pressure from Stars. And so what we've consistently heard is there will likely be some area of focus for certain competitors. Duals is a great example where a few have indicated that they will put their focus and potentially make some investment there. What's interesting about that is, as we commented in 2023, we, for a number of years, have lagged the industry in non-dual growth but outperformed on duals, which allowed us on the overall average to be in line or better than the industry. The non-dual population is the much larger population, and so the ground we made up in 2023 and our ability to outpace the market in non-dual growth, we were particularly excited about and want to make sure that we maintained into 2024. And I think based on what we're hearing and seeing, we feel very optimistic about how we're positioned. And we've also seen and heard positive feedback from the brokers, which we've previewed some of our 2024 changes with as well. So that -- all of that speaks to some optimism for 2024. On your question about 2024 margins, it's really too early to give that type of commentary. Typically, we will give you a little bit more commentary on our third quarter call. As I said in my comments, we did think it was important though, in light of the emerging experience and commentary this year, to give confidence over where we thought we would be from an overall perspective and our confidence that we will deliver against our historical range to make sure that that wasn't in question. But there are a number of things that we'll have to evaluate as we think about 2024. Detailed estimates, the level of membership growth certainly in 2024 is a big one. As we've said, we do think there is an opportunity for potential disproportionate growth, and so the composition of that between agents, switchers as well as retention will be an important consideration. And then obviously, as we continue to evaluate these emerging trends and whether they sustain or further moderate will be an important input as well. So, certainly look forward to sharing more, but wanted to reinforce our confidence in our ability to deliver progression in 2024 consistent with our historic targeted growth rate.

Scott Fidel:

Hi, thanks. Good morning. Would be interested if you could give us an update on how you're approaching coverage of the Alzheimer's drugs and the emerging therapies, there for 2024? And then just some preliminary thoughts on sort of how you may be factoring that into your bids and into expected MA costs for 2024? Thanks.

Operator:

Thank you. Our next question comes from Steve Valiquette with Barclays. Your line is open.

Susan Diamond:

Sure. Hi, Steve. I would say at this point, in terms of what we're thinking in the second half trends, we are assuming that those trends continue and do not moderate. There's some seasonality differences in just workday seasonality year-over-year that we certainly take into account, but from a normalized basis, we were anticipating that those trends continue and are not mitigated by any actions or levers we might take. I would say on the broader medical cost trend, I would say there's probably not a lot that, at least to date, that we would identify that we would be able to do in response that could mitigate that. On the dental side, which we have commented on, which is we think more Humana-specific, there are a few things we are looking at in terms of coverage to make sure that we've got the appropriate controls in place, but I would say that would not be a material factor, I'm thinking about how we're thinking about the trend for the year. The main lever that I would say that we're relying on internally to offset some of the elevated trend in the back half of the year is more administrative expense savings. We have asked the organization to find additional opportunities, and that's largely informed by some of the ongoing productivity work that we've been viewing that highlights that there are some additional opportunities. And I would say relative to what we considered in our original plan for the year, those extra admin savings will be disproportionately benefiting the back half of the year. Whereas the first half of the year, the elevated trend had the benefit of things like prior year development that we would say is going to disproportionately benefit the first half versus the back half.

Michael Ha:

Thank you. Appreciate all the commentary and talking from 2024 and 2025. Just quickly, first, did you mention you expect to maintain the same level of non-dual growth rate in 2024 as you saw in 2023? And then quickly on 2025, is it fair to say basically whatever happens in 2024 in costs from -- even if it does run slightly high, that as long as you're able to capture that in next June's bids, then $37 is still well on track for 2025? And I'd imagine maybe even stronger if you're able to capture more growth, market share in 2024 because you're carrying a larger base of that main line that will see that year one to year two profitability ramp?

Susan Diamond:

Yes, I would say on the question about the non-dual growth, I do think the ground we made in 2023 that we will continue into 2024. And frankly, based on some of the preliminary information we are hearing from competitors and the focus on duals, maybe we'll be even a little bit better positioned if that wasn't as much of a focus for some others. So, I do think that's positive. On the pricing for 2025, as you said, we always -- if there's some residual trend where we are able to offset that in 2024 with something that's non-recurring, we would always have the pricing lever if we should need it. But our hope and plan would be to find durable offsets that would continue and prevent us from having to take further pricing action. But that is certainly always an option. In terms of the progression, and to your point, the higher growth certainly is positive in supporting our trajectory to 2025. I will say the one thing we'll have to continue to evaluate, though, is the impact of the risk model recalibration and then obviously, the rate book in 2025. And we know that we'll have those cuts phased in over three years, and so our goal would be to try to offset as much of that as we can and minimize further beneficiary impacts, although there's likely to be some. So, that's the one, I would say, caveat is we'll have to evaluate that as it comes out and then the overall puts and takes that we always have to consider in 2025 pricing and balancing continued strong membership growth, but also delivering the EPS progression that's needed to hit the $37 and then continue to perform at a strong durable rate beyond that.

Gary Taylor:

Hi, good morning. Most of my big-picture questions answered, so I'll just dive into a couple of the details. One, I wondered if you could just talk about the source of the stronger PYD, if that's been outpatient ambulatory or perhaps just kind of final inpatient acuity? And then secondly, Susan, you mentioned the sweep revenue at 2Q being higher than it usually is. I just wondered if you could speak to the materiality of that? I don't think I've ever heard you talk about that much before. Thanks.

Operator:

Thank you. We have a question from Joshua Raskin with Nephron Research. Your line is open.

Susan Diamond:

Well, certainly, Josh, as we thought about 2024 intent all along, would have been to deliver against that needed progression to get to a reasonable trajectory to deliver on the $37.25. So that would have always been the intent. I think as we've seen some of the higher claims emerge this year, and we've further evaluated that as well as how the estimates are developing for next year, today, I thought it was important to convey confidence that we will -- we still continue to believe that we can deliver in that range. So, I would say that was the intent all along and as the enterprise book is performed and we thought about the membership growth opportunity. Because you were already advantaged coming into 2024 in terms of obviously how well we were positioned in 2023 and the lack of the Stars headwind for us going into next year, we always had a point of view that relative to others, we would have less benefaction to take and still be really well-positioned and also still deliver on the needed earnings and EPS progression. So, that's always been the plan, and we felt really good about that going into our planning. The higher outpatient and overall trend is the new development that we've spent a lot of time working through the last number of weeks to make sure that we continue to be confident that we're in a similar position and have the ability to navigate through that, which we do believe.

Operator:

Thank you. We have a question from David Windley with Jefferies. Your line is open.

Susan Diamond:

Hey David. Start with your first question on the medical cost trend, I would say it is not concentrated, it's pretty broad-based. The one thing we have commented on though, which again, we think is more Humana-specific, the dental -- higher dental trends, those are a bit more concentrated, and that's more reflective of just where the product offerings, we call it the allowance plans where there's just an overall dollar of funding that the beneficiaries can use towards those dental benefits. That tended to be more of an offering inside the Florida markets, and so you do see some concentration on just that one dental element. But the broader medical cost trend, I would say we haven't seen any real concentrations. On the more population-based dual, non-dual, I would take in generally broad-based. Although I would say in general, the deals are performing better relative to non-duals. They're still seeing some pressure, but the risk adjustment and the revenue dynamics offset some of that. And so I'd say, the non-duals are performing a little bit worse than the duals. I would say, consistent to what we've said before, we continue to see, though, is the broader medical cost pressure is more non-risk-based concentrated versus risk providers. The risk providers are not seeing as much of it, which -- and our minds makes a bit more sense because in general, they do a better job managing some of that outpatient spend just by definition. And so we are seeing on the broader medical cost more in the non-risk space. The dental, again, because of where it's located, that actually is disproportionately risk based, and so we do get some offset there because of DIR fees that we're typically offering that coverage.

Kevin Fischbeck:

Great, thanks. Just wanted to kind of clarify. I mean, I guess when you guys provided that initial $37 number for 2025, you were thinking you're going to grow below average this year. And given just how strong you're growing this year and I guess it looks like another year of above-average growth for next year, are you going to be at your membership -- your initial membership thoughts for 2025 next year so that you don't really need to grow membership in 2025 at all to kind of puts you on track for that $37 number? And then I guess, to think about there's been a lot of concern about trend and whether you need to reprice and what that could mean for growth in a given year. It sounds to me like what you're saying, and based upon I guess we've seen over two-thirds of the industry report and talk about higher trend too, it doesn't sound like you think anything you're seeing here is company-specific. That if there is a need to reprice to elevated trend at the industry need, not a Humana-specific need that would impact your competitive positioning at all? I just want to make sure I understand that dynamic as you think about how you might need to reprice or think about repricing over the next couple of years to higher trend. Thanks.

Operator:

Thank you. And there are no other questions. I'd like to turn the call back to Mr. Bruce Broussard for any closing comments.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

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 first quarter 223 results and our financial outlook for 2023. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analyst. 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 and our other filings with the Securities and Exchange Commission and our first 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 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. All 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 reference 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.

Susan Diamond:

Thank you, Bruce, and good morning, everyone. We've continued our strong start to the year, today reporting first quarter 2023 adjusted earnings per share of $9.38, above our internal and consensus estimates. Our performance to-date shows solid execution across the enterprise and, importantly, reflects better-than-anticipated membership growth and favorable inpatient utilization trends for both our new and existing membership in our individual Medicare Advantage business, allowing us to raise our full year adjusted EPS guidance by $0.25 to at least $28.25. I will now provide additional details on our first quarter performance and full year outlook, beginning with our Insurance segment. As a reminder, in late February, we increased our full year individual Medicare Advantage membership growth estimate by 150,000 members to at least 775,000, but did not adjust our other detailed guidance points prior to issuing updated guidance today. With that in mind, revenue for the quarter exceeded initial expectations, driven by the better-than-expected membership growth. Individual Medicare Advantage PMPMs were in line with expectations, increasing 3.4% year-over-year, which is lower than our expected mid-single digit full year yield due to the 2% sequestration relief in effect during the first quarter of 2022. Turning to claims trend. First, I would remind you that we assume normalized trend for 2023 and expect the provider labor capacity to improve modestly throughout the year. In addition, our original guidance anticipated lower flu levels for the first quarter of 2023, given cases peaked in December, which was offset by assumed higher flu costs for the fourth quarter. During the first quarter, total medical costs in our Medicare Advantage business ran slightly favorable to expectations. We experienced lower-than-anticipated inpatient utilization for both new and existing members. While non-inpatient claims are less complete, early indicators suggest trends are in line with expectations. All in, we are pleased with the early performance of our Medicare Advantage business. Our Medicaid business performed in line with expectations in the first quarter. The Louisiana and Ohio contracts successfully went live on January 1 and February 1, respectively, adding approximately 215,000 Medicaid members as of March 31. Early indicators show performance tracking as anticipated in both markets. At this time, we continue to expect an increase of 25,000 to 100,000 Medicaid members for the full year, as the membership gains in Louisiana and Ohio will be largely offset by membership losses resulting from redetermination beginning in May. Finally, our stand-alone PDP and specialty benefits businesses are also tracking in line with expectations to-date. For the full year, we have updated our consolidated adjusted revenue expectations to a range of $100.7 billion to $102.7 billion, while updating our Insurance segment adjusted revenue expectations to a range of $97.5 billion to $99 billion. These changes reflect the removal of the employer group commercial medical business results, which are being adjusted out for non-GAAP reporting purposes, partially offset by the impact of our previously announced increased individual Medicare Advantage membership growth estimates for the full year of at least 775,000 members. From a benefit ratio perspective, we reaffirmed our full year Insurance segment guidance range of 86.3% to 87.3%. As previously shared, we expect the additional 150,000 member growth to impact the benefit ratio by approximately 10 basis points. As a result, we continue to be comfortable with our previous guidance range, but now anticipate the full year benefit expense ratio to be biased towards the upper half of the range, which is consistent with the majority of annual assessments today. As a reminder, the exit of the employer group commercial medical business is not expected to impact our full year benefit ratio expectations. Finally, with respect to operating cost ratio, we have provided consolidated adjusted operating cost ratio guidance of 11.3% to 12.3%. The 30 basis point reduction from the GAAP ratio is reflective of the exit of the employer group commercial medical business which carries a higher operating cost ratio. Before moving to CenterWell, I would like to take a moment to address the days in claims payable, or DCP, metric. While DCP is a metric that is often referenced as an indicator of reserve strength and earnings quality, it's important to keep in mind that DCPs can fluctuate in any given period due to items that are not reflective of claim reserve levels and may not have an impact on the current period income statement. As an example, the seasonality of net pharmacy expense, including reinsurance, is impacted by the phasing of coverage responsibility under Part D. Net pharmacy expense varies by quarter and does not have a corresponding reserve impact as pharmacy claims are largely paid in real time, resulting in a disproportionate impact to the DCP metric. This dynamic is the primary driver of our sequential DCP change. Net pharmacy expense is increasing nearly $2 billion from the fourth quarter of 2022 to the first quarter of 2023 due to the coverage responsibility being more heavily weighted to the health plan at the start of the year without a corresponding increase in reserves. This is driving a 3.5 day decrease in our DCP sequentially. Normal course changes in provider capitation payables and the timing of inventory claims processing also caused fluctuations in DCPs without impacting the current period income statement and is the driver of the majority of the remaining 1.2 sequential decrease and the entirety of our 1.8 day year-over-year DCP decline. Our concentration in Medicare products and growing number of members and value-based care arrangements can cause these items to have a disproportionate impact on our DCP level at any point in time. We believe the trends in IBNR and membership serve as a better indicator of the consistency in our reserve methodology and relative strength of our claim reserves. As of March 31, sequential growth in IBNR trends closely to our growth in total Medicare Advantage membership over the same period at approximately 10.5%. Finally, I would reiterate that we are comfortable with the utilization patterns seen in our Insurance segment and more specifically our Medicare Advantage business to-date as reflected in our updated full year adjusted EPS guidance. Now turning to CenterWell. The segment had a solid start to the year, performing modestly better than expected in the first quarter. Our primary care organization reported better-than-expected patient growth year-to-date, adding 7,300 patients or nearly 38% growth in our de novo centers and 8,800 patients and our more mature wholly-owned centers, representing 5% growth year-to-date. We now anticipate full year patient panel growth of approximately 25,000 as compared to our previous estimate of 20,000 to 25,000 patients, representing a significant increase over patient growth of 13,000 in 2022. In addition, we added 14 centers in the quarter, including seven net centers added through acquisition, expanding our center count to 249. We are also pleased to share that 67% of new patients and 87% of our total patient panel have completed a first -- a visit in the first quarter compared to 58% and 83%, respectively, in the first quarter of last year. Patient engagement is a key driver of retention and improving clinical outcomes. Financial performance continues to be on track and we are pleased with the progress of our de novo centers as they mature through the J-curve. In the home, total new start of care admissions and our core fee-for-service home health business were up 7.1% year-over-year for the first quarter, in line with our expectations of mid-single digit growth. However, we continue to experience pressure on recertifications due to utilization management programs of Medicare Advantage payers. As anticipated, we have also seen a slight shift in payer mix -- patient mix with a small decline in original Medicare admissions year-over-year, more than offset by strong growth in Medicare Advantage. And as expected, our cost per visit has increased more than 2% year-over-year with continued nursing labor pressure. Finally, we resumed tuck-in home health M&A activity in the quarter, completing an acquisition that added 11 branches with average daily census of 4,700 and approximately 25,000 admissions per year. We are committed to continuing to grow our agnostic CenterWell Home Health business and expand market share through organic growth and strategic M&A activity. As Bruce shared, expansion of our value-based home model is tracking in line with expectations and is demonstrating favorable outcomes. We continue to expect to cover approximately 1.8 million members by year-end with further expansion to 40% of our Medicare Advantage membership by 2025. Finally, our pharmacy business performed well in the quarter, benefiting from higher-than-expected individual Medicare Advantage membership growth as well as favorable drug mix. As anticipated, we saw a 100 basis point reduction in mail order penetration for our retained members as a result of retail pharmacy co pays now largely being on par with mail order benefit. We continue to invest to differentiate our order, delivery and clinical experiences to encourage further use of mail order and maintain our industry-leading results. Further, we remain focused on providing awareness and education of the benefits of mail order for our large block of new members to drive increased penetration throughout the year. From a capital deployment perspective, we continue to expect share repurchases of approximately 1 million in 2023. We will consider the use of accelerated share repurchase programs as well as open market repurchases, which we initiated in March under rule 10b5-1 to ensure we maximize value from these programs. Lastly, with respect to earnings seasonality, we expect the percentage of second quarter earnings to be in the low 30s. Before closing, I want to reiterate that we continue to be pleased with our operational and strategic progress and ability to raise our full year guidance based on the positive fundamentals seen across our businesses to start the year. Our strong Medicare Advantage membership growth and updated 2023 outlook positions us positively on our trajectory to our mid-term EPS target of $37.00 in 2025. 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.

Gary Taylor:

Hi, good morning. Quick clarification, and then my question, if I can get away with that -- with it that way. Appreciate the description of the days claims payable decline. And just wanted to see if there was any particular reason why the pharmacy impact that typical seasonality was sort of larger than the typical impact? And then, the real question I wanted to ask was particularly given some of your comments about your home care plans, in the final notice, there were -- in MA final notice, there were some rules that appear to create more restriction around how MA plans can steer patients to certain post-acute destination and sort of limit your ability to do that if a doctor has specifically prescribed a precise destination, your ability to substitute or manage that. I just wanted to see if you thought that would have any impact on either your costs or CenterWell in 2024?

Gary Taylor:

Okay. Thank you.

David Windley:

Hi, good morning. Thanks for taking my question. I wanted to ask a question around CenterWell. I'm wondering if you have any markets where your CenterWell clinic strategy you would view as mature -- patient panels mature, number of sites at the number that you want them or even submarkets? And what percentage of your MA membership are you able to serve in that regard? I guess it ultimately is getting that your aspirations for percentage of members in your CenterWell strategy, but wondering if there are specific examples that you could elucidate?

David Windley:

Thank you.

Stephen Baxter:

Yeah, hi, thank you. I wanted to ask about CenterWell. I was hoping you could talk a little bit more about how you expect the rate environment in 2024 and the phase-in of the risk adjustment model to impact margins at CenterWell over the next couple of years. I guess, how much of the rate impact do you expect to get pushed down to CenterWell and how will the company work to manage through the potential impact there? Thank you.

Operator:

Our next question comes from Justin Lake with Wolfe Research.

Susan Diamond:

Hey, Justin. In terms of your first question about DCP, what I would say, and I think as we've commented before, DCP can be difficult to predict just because of the changes in claims processing timelines, the pharmacy seasonality, et cetera, can occur at any given time, and given our disproportionate mix of Medicare business, we would be impacted more so than maybe some others. I would say this is not a metric that we track or forecast internally as well. And so -- and I don't think it would be prudent to try to predict it given some of the changes are outside of our control in terms of how they would impact the metric. And that's why I think again, we would suggest that investors also look at the trend in IBNR and membership. It's probably a better and more consistent indicator of reserve methodology, consistency and strength of reserves. One thing though I would point out to keep in mind is just, as I described in my comments, pharmacy changes can have a significant impact because they don't typically have corresponding IBNR changes. And with the changes that are coming in future years with the pharmacy phasing and coverage responsibility, we're likely to see more volatility rather than less in that metric going forward. In terms of the quarter, as we said, really saw results in line, if not slightly better across the board within the enterprise, certainly the most significant, as we said, on MA with the outpaced membership growth as well as the lower inpatient utilization in particular. While non-inpatient is less mature, as we always say, at least the early indicators in January results in particular, do appear to be in line with expectations. So, we feel good about that. As we said before, we had priced and anticipated significant utilization on our expanded healthy options card. So, we continue to feel good about what we've planned for with respect to that significantly enhanced benefit. Across the rest of the business, as we said, home health, we did mention strong new admission growth, although that was largely offset by reductions in recertification, which did have an impact in terms of overall revenue trends. So, revenue yield was closer to flat where we would have anticipated slightly higher, not anticipating the full level of recertification impact that we did see. They were able to mitigate much of that with some admin productivity efforts and are going to continue to work over the course of the year to try to identify new opportunities for additional growth and other mitigating options for -- through productivity. And then, as we said, the pharmacy business had a nice quarter. They again benefited from the higher membership growth as well as some favorable drug mix. And so that's reflected in our thinking as well. The primary care business, the outperformance on the patient panel growth was nice to see. But I would say overall financial performance relatively in line with what we expected.

Lance Wilkes:

Could you talk a little bit about your Medicaid business? Obviously, you've been making great progress on contract wins there. Can you talk about your priorities for enhancing the capabilities there? And I was particularly interested in three things. One, what you're doing to improve performance in the business just as it's an emerging business? Second would be, if there are particular areas that you're looking at to improve your scoring and RFPs and winning new business? And the third would be just with respect to social determinants and health equity, if those are important priorities? Obviously, you're well positioned from the MA side, but what you're doing in that space? Thanks.

Operator:

Our next question comes from Nate Rich with Goldman Sachs.

Susan Diamond:

Hi, Nate. Yeah, no, it's a great question. So, in the first quarter, as part of that lower utilization, some of that was COVID, which was lower than we had initially expected. I would say one thing to keep in mind, too, is the first quarter of last year, we did see a very high level of COVID last year and very significant depression in non-COVID. And then as the COVID dropped more quickly than we historically seen, we didn't see non-COVID bounce back at the same rate and pace. So, as we thought about our 2023 plan, we did anticipate the first quarter trends, in particular, would be higher than the full year average because of that dynamic. But all in, we expected trends to be normalized. And as you said, we also incrementally then anticipated some increase -- modest increase in healthcare capacity over the course of the year. I would say that while we had some COVID favorability on admissions, non-COVID was also slightly favorable. So, it was not all attributable to COVID. But certainly, given the seasonality of the COVID last year and what we're expecting this year, we would expect the first quarter favorability not to trend at a full run rate into the rest of the year because of that dynamic. But so far, really pleased with what we've seen again across both our new and existing numbers, similar trends across both.

Joshua Raskin:

Thanks. Good morning. Just a quick clarification. I heard Bruce's comments on long-term industry growth well positioned. But was that supposed to mean 2024 also a year of industry growth? And then, my real question is just within CenterWell. It looks like the number of physicians is growing faster than both the center count and the patient count. I'm assuming that it's not patient panels are capped 400 per physician. So what's causing that dynamic? Should we think about a ramp in patients relative to that capacity, especially in light of the stronger-than-expected MA membership.

Operator:

Our next question comes from Scott Fidel with Stephens.

Susan Diamond:

Hi, Scott. Yes, I think we have previously mentioned that we believe we've seen about 300,000 additional members as a result of the PHE and the waiver of those redeterminations. We've assumed that we will retain only about 20% of those as they go through the redetermination process this year. We are over indexed, obviously, to Florida. And we do think Florida is probably a little bit better prepared than some other states in terms of how they're planning to go about the process. To your point and as we've stated, we have seen lower acuity for the members who are maintaining access through the PHE. And our assumption is that those will be the members who are largely lost as a result of the process. We know that Florida intends to focus on members with lower utilization at the start of their process. And so, within our plan, we have assumed that as those members roll off, that, particularly in the state of Florida, those lower acuity members will in fact be the ones that we see move off more quickly. So, we do feel confident in sort of how we've approached the planning for this year and the redeterminations, but obviously, as the process begins in May, particularly in the state of Florida, we'll be watching closely to see if the ultimate retention matches our assumption and then certainly over the next number of months watch the acuity. But our assumption is that the 20% that remain look more like a typical pre-COVID sort of block of Medicaid business.

A.J. Rice:

Thanks. Hi, everybody. Just two quick questions touching on stuff you've already talked about. But in Bruce's comments talking about the differentiation between MA and traditional Medicare. I wonder as we're often asked when there's a rate update that's less than optimal, whether that's going to slow down people's preference for MA. I wonder in your research, and I know you guys keep up with this, when you think about what prioritizes someone to choose MA over, and I know you used to say that at least out of pocket maximums was the number one, and then some of the standard benefits hearing, vision and dental, and the supplemental now has been added. I wonder would -- anyway to expand on your view about why MA will continue to be a priority even in a year where maybe there won't be any additional supplemental benefits that they've been able to see in the last few years, there won't be a new benefit added as much? And then, the other thing I guess is -- and I appreciate Susan's comments here on -- we've been asked a lot about -- we've had three public hospital companies talk about how strong their inpatient utilization has been at least relative to recent quarters. I'm wondering is the rationalizing that versus what you guys are saying, is that just that you plan for a step up in utilization and it hasn't happened to the amount that you thought, or is there any other way? Because a lot of those public companies focus particularly in Florida and Texas and are seeing seemingly strong volumes, but you're saying your inpatient side has been one of the areas of outperformance.

Susan Diamond:

And A.J., I'll touch on your inpatient question. Before I do that, just a couple of things I'd add to what Bruce mentioned. Within the population, the duals in particular, as we said before, arguably, every duals should be in MA. The non-duals, certainly some have preference for [meds up] (ph). But within duals, it's a very clear value proposition and we think ultimately we'll see higher penetration than the non-duals, which is why it continues to be a focus. The other thing is -- which is interesting is agents are electing MA at the time of eligibility at a faster rate than they did years ago. Years ago, it would take a number of years to get these sort of new cohort of agents up to the average industry penetration. We have seen adoption out of the gate more quickly, which has helped support some of the continued penetration increases as well. And the last thing for '24, it's important to remember, as we said before, de-averaging that recalibration impact in particular is important in the places where you see higher impact are those places that have disproportionately high benefit values. And so the ability to absorb some level of adjustment may still have a very compelling value proposition to beneficiaries. In terms of your question about the strong inpatient trends that some of the hospital systems have reported, just as you said, we expected that, particularly in the first quarter. Because if you look at the medical costs last year over the quarters, it was depressed in the first quarter. And with our expectation that we would see trends return to normal levels, we would expect a higher first quarter trend relative to the average we would have planned for, for the year. So again, I do think that's very consistent with what we've seen, and even with that expectation and what the hospitals are reporting, we are still seeing some net favorability in the quarter.

Kevin Fischbeck:

Maybe just follow-up on that point there for a second, because it does seem like hospital companies, med tech companies, broadly speaking, reporting good volumes. And so, we've been struggling to figure out why all of a sudden Q1 that would be so strong. So, I guess two questions then. The first one is from your perspective, that strength is to some degree just comps and something that you plan for? Just to make sure that I understand that correctly. And then, second, to be extent that utilization is rising higher, you don't have to price until June, so that gives you time to monitor these trends to put into your pricing. But if I hear it correctly, at this point, you don't necessarily see a reason to add additional cushion into pricing next year because you're not seeing a trend issue so far on this data. Is that the right way to think about it?

Operator:

Our next question comes from Sarah James with Cantor.

Susan Diamond:

Sure, Sarah. So, in terms of new members, as we commented I think on our fourth quarter call, we did see an all throughout AEP. We did see a meaningful decline in share within the call center partners. We had talked about the desire to incrementally shift some of that share back to our proprietary channels over a number of years. And because of some of the actions that the call center partners themselves took to pull back on some of the lower sort of quality lead marketing that they had done, as well as in the improvements we think in just the quality of their sales processes, they did see meaningfully lower share year-over-year. I think it was about 700 basis points lower than the prior year. That volume largely shifted to the independent field agent channel, which you can think of is more typical -- more like our proprietary channel in the sense that more of that's going to be through a face-to-face interaction through an independent broker. And what we've seen historically is that when you have a really strong value proposition, that channel -- the product will sort of do the work and you'll see nice strong uptake within that community, which is what we saw this year. And one thing that we view very positively is that channel tends to perform much more similar to our proprietary channel in terms of ultimate retention and plan satisfaction by the beneficiaries enrolled through that channel. So that's very positive. In terms of products and geographies, as Bruce mentioned in his comments, we were pleased to see some nice growth in some of our more mature highly-penetrated risk markets, which we view as quite positive. And that was intentional in terms of our strategy going into 2023 of where we want to make investments to grow. From a product perspective, certainly pleased with the strong dual growth that we continue to see, that remains to be a priority as well as our veteran plan. As we said before, broadly, we saw a meaningful -- the biggest increase year-over-year was seen in the non-dual space, which is by far the larger population, so again, was a priority for us. From a product perspective, we did introduce some new offerings that were intended to attract specific segment of the population, the Part B Giveback plan is one example where that really is designed for someone who is likely to have less sort of traditional utilization and is attracted to other -- some of the supplemental benefits that Bruce described as well as that Part B Giveback. And we have seen strong growth there, and those plans are tracking in line with what we had expected in terms of the acuity that they would attract. But really, we saw broad improvement across geographies and products given the way in which we deploy the investment dollars for 2023.

George Hill:

Yeah. Thanks for sneaking in. Bruce, kind of a big picture question. As you now know kind of the 2024 rate environment and the Star's environment, do you think the company will have the ability to continue to take share like it has in calendar '23? Or should we think of -- my short question is should we think of '24 as more of a share gain opportunity for Humana or more chance for the company to kind of flex its margin capability in the individual MA market?

George Hill:

Thank you.

Ben Hendrix:

Thank you very much. I just wanted to dig a little deeper on the earlier distribution question. You noted higher mix of new MA members switching from competitor plans, which you've said in the past can be favorable from a risk assessment perspective. But to what degree can you attribute those switching directly to that third-party channel -- broker channel? Any worry that these members may represent frequent switchers who could impair the overall persistency of the book? And then, any efforts or investments you've made to ensure that switchers do translate to accretive high LTV business? Thank you.

Bruce Broussard:

We do see just on that -- in the switchers that there were a number of switchers that came to us as a result of frustration with service, and we feel those to have much more stickier relationships. And then in addition, as we see the brokers and how they look out to the future, the quality ratings and the number of members that you have in Stars, 4 Stars or greater plans becomes an important because they can predict sort of the benefit level as a result of that. And so, we do see brokers really oriented to a much more stable book and putting their members in -- with companies that have that stability both from a service point of view and then also predictability of the future.

Michael Ha:

Hi, thank you. Maybe just another one on plan switchers. I understand you got roughly 50% this year for your new members. How does that compare to prior years? How should we think about that percentage going forward? Do you think it's sustainable or maybe there's a bit of a reversion back to the normalized level? The reason I bring it up is that, I believe, industry average for annual plan switchers is about 10% to 20%. So, if industry MA growth does slow a bit in '24, then certain plans with the higher percentage of new members that typically comes from plan switchers might be less impacted by the ebbs and flow the total industry growth, if that makes sense.

Michael Ha:

Do you believe that's sustainable going forward into next year, years after, 50%?

Bruce Broussard:

We do believe next year there will be more shopping as a result of the change in the benefits.

Bruce Broussard:

And so, there -- I think it's going to be important both in your ability to have a predictable benefit plans after 2024 and the brokers can see that, along with the fact that when they do shop that they will be satisfied with the existing plan once they realize that the value that's provided there. So, we do -- in essence, we do believe there will be more shopping in 2024.

Whit Mayo:

Thanks. My question is around the growth in PPO versus HMO. And I'm just trying to think of any challenges that you may have with all this growth this year, and I guess, I mean this in the context of CenterWell. And should we expect that this could negatively impact them or any of your physician partners anyway around just attrition and what you're doing to maybe accelerate processes to minimize some disruption? Thanks.

Operator:

Our next question comes from Steven Valiquette with Barclays.

Bruce Broussard:

I'll take the second and the third one maybe and then Susan can take the first one. Just on the second one, relative to service, we did see in 2022 more frustration as a result of some plans growing -- really outgrowing their plan coverage there and frustrating the brokers and the members. And so that was a carryover and probably a little more extreme in 2022 that impacted '23 more. But as we've said many times, the strength of the brand and the strength of the product really carries us in the marketplace. And when we are competitive in the marketplace, our brand usually carries us forward. And do you want to take the first one real quick?

Bruce Broussard:

And Steven, what was your third question again?

Bruce Broussard:

Yeah, I think we've said it before, I think two things. What we saw in the Part B Giveback, that was one that was really where we saw a lot of non-dual members go to, and really it was in markets that, as Susan has mentioned and I've mentioned, in value-based markets that we've traditionally have not grown as fast in. And then the other one is just the healthy food card. I mean, that's the other one that stands out for the duals.

Operator:

Our next question comes from Lisa Gill with J.P. Morgan.

Susan Diamond:

Sure. Hi, Lisa. So, in terms of the favorability we mentioned in the first quarter, specifically the drug mix, okay, that's just going to be generic versus brand. And then within each of those categories just the literal sort of line-by-line mix of drugs underneath, recognizing each one would have different sort of margin profiles, so mostly related to that. In terms of Part D, I mean, we remain committed to Part D in serving those duals and offering a strong value prop to them as well. Although we also, as we said before, really look to that product too to try to take disproportionate share of members enrolled in PDP who ultimately then make the decision to move to MA. And as we've said before, we do anticipate -- we do see that we get a disproportionate share of those conversions within our own block relative to the share we get in the open market. And we do expect about 80,000 conversions out of that book for 2023. I would say there is a lot of complexity going forward in terms of some of the Part D changes, the phasing changes, the introduction of a maximum out of pocket and the responsibility changes. And as I've said before, the thing that we're very mindful of is just understanding the implications in terms of the risk pool underneath how the margin profile looks for different types of utilizing members and ensuring that we can maintain stability in that book. CMS has introduced some mechanics that will help the industry navigate through that like the premium stabilization, which is certainly helpful and we appreciate. So, I would say still a lot of work to do, but I would say we remain committed to continuing to support the Part D beneficiaries and provide a strong value prop, but do you recognize there'll be probably some additional volatility in the coming year to some of these changes are implemented.

Ann Hynes:

Hi. Good morning. I would like to talk about operating cash flow, because excluding the Medicare prepayment, it looked a little light versus last year. So, anything you can provide on that would be very helpful. And secondly, can we have an update on RADV? I know the industry was waiting to talk to CMS to get more clarity on some things that were in the rules, so any update would be great. Thanks.

Ann Hynes:

Okay. Great. Thanks.

Bruce Broussard:

Well, thank you, operator. And in closing, we continue to be pleased with the solid start to the year, which as I mentioned before, reflects our high-quality fundamentals and the execution across the enterprise, and really demonstrates our commitment to the adjusted EPS target of $37.00 in 2025. I do want to thank our nearly 70,000 teammates and really contributing to the success and continuing to serve the customers in the best way. With that, I also want to thank each one of you for supporting the organization over the years and we look forward to having similar results in the coming quarters.

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.

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% [ph] 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. 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 [ph] 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.

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.

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.

Operator:

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

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.

Operator:

One moment.

Operator:

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

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.

Kevin Fischbeck:

A little more color on your insurance MLR guidance. I think in your comments, you mentioned that it’s up in part due to and they benefit design improvements. I guess, I was under the impression that you guys were trying to target stable margins on the MA business. So just want to understand that nuance. And then you mentioned Medicaid pressure due to new contracts. So, I was wondering if there’s anything in there about redeterminations? And then finally, any color on commercial would be great. Thanks.

Operator:

Thank you. And our next question will come from Stephen Baxter of Wells Fargo. One moment. Stephen, your line is open.

Bruce Broussard:

Thanks for the question. Yes, as you articulated, we’re very happy about the 200 basis point improvement in the retention this year. It is a combination of both internal work and the combination of our partnership with the channel, they increased 350 basis points. As we look forward, it’s probably going to be more stabilized as we think about it with some improvement, we’ll continue to work on it. But with the large increase in improvement in the channel outside that really contributed to the 200 basis points. And I don’t know if you’re going to see that, is that large of an improvement in 2023 and 2024. [Technical Difficulty]

Scott Fidel:

Thanks. Can you hear either of those first introduction Scott, can you hear me okay?

Scott Fidel:

Okay, good. Just wanted to follow-up on just the home, the home outlook and appreciate the details you did give. Just interested give, just given some of the moving pieces with the hospice divestiture. When just looking at the home health business, can you give us your view on what you’re expecting the revenue growth trends to be there when considering some of the volume indicators that you gave us? And then also just interested in your expectations for home health margins in 2023. Just when considering both the final fee-for-service rates and the shift that’s playing out to value-based care? Thanks.

Scott Fidel:

Okay, thanks.

Stephen Baxter:

Hi. Yes, I’ve had my questions, so I’m happy to give you the floor back and move to the next person.

Operator:

Our next question will come from Gary Taylor of Cowen. Your line is open.

Susan Diamond:

Hi Gary, great question. So there are a number of things that will impact the MLR as a result of the membership mix. As you said, the higher than typical rate of members – new members coming from competitor MA plans would generally be viewed as positive. Those numbers do tend to be contribution margin positive even in the first year. We’ve many times commented on, in general, when you think of the full new cohort of new members as being breakeven from a contribution margin basis, but that’s based on that historically lower switching rate. So the fact that we saw more switchers, incrementally that would be viewed as positive. As you said, relative to our previous expectations, at least, the higher retention is certainly positive from a contribution margin perspective as those are going to be the most impactful from a current year contribution standpoint. The other two things I would say, work negatively against MLR. One is, one plan in particular, the plan where we offered a meaningful Part B giveback. We do expect that plan will attract an overall lower acuity membership given the plan design and the way it’s structured, and we did see stronger growth in that plan than we had originally expected. So again, that relative to all other members would likely be a negative to MLR. And then finally, I would say the plan-to-plan switching that we saw this year, and we commented on this at JPMorgan as well. For the existing members that we do have, we did see more members switch to another Humana offering than we had initially anticipated. Typically, that’s where they will see a richer plan in market and select that plan. So while still positive and more so than an otherwise new member, year-over-year, they would see less contribution given the planned change that they initiated. And the last thing I’ll just point out that is a bit unique this year is in order to make the level of investment that we did in our Medicare offerings, the way the bid dynamics work, we have to create savings for relative to A&B cost to fund those additional benefits and recall that CMS shares in those savings through the rebate. And so in order to invest $1 billion in benefits, you have to actually save more than that and then share some of that with CMS. And so the implication of that is and otherwise increased to MLR relative to what it would have been at a lower investment level. So all of those things are contemplated in our current year guide as well as, as I said a moment ago, just our continued approach of taking a conservative view of the guidance at the beginning of the year.

Operator:

Thank you. And our next question will come from Nathan Rich of Goldman Sachs. Your line is open.

Susan Diamond:

Sure, Nathan. So, I would say, as we think about the ruling, as Bruce mentioned, the fact that they will not be extrapolating to periods of 2017 and prior, we certainly view as positive and we would consider the exposure for the audits that have been completed for those periods to be immaterial. So that was definitely positive. As we think about what CMS has shared for 2018 and forward, and as we said in our commentary, it will be – we will need to evaluate obviously, the audit selection methodology and extrapolation methodology. And also understand our compliance concerns as part of our normal course MRI activities. And as we do that, we continue to evaluate all of our options to ensure that the omission of a fee-for-service adjuster and the resulting impact is addressed. And so again, at this time, that’s really all we can say. There’s going to have to be additional collaboration with CMS to better understand some of the go-forward activity, but we just continue to – and we’ll continue to evaluate all of our options to address the primary issue of the lack of acknowledgment of the need for a fee-for-service adjuster.

Operator:

Our next question will come from Lisa Gill, JPMorgan. Your line is open.

Susan Diamond:

Sure. Hi, Lisa. I would say that – we would probably expect relatively stable percentages and as we’ve disclosed historically, you consider about a third of our membership in full capitated arrangements another third in some form of value-based arrangement, and then the final third in more fee-for-service type arrangements. And just given the strong growth, our goal every year is to a minimum maintain that penetration and ensure that the new members who are enrolling with us get to that penetration level. So given the strong growth this year, you’ll certainly have to evaluate that. But as Bruce said, we saw very strong growth in highly penetrated markets. So hopefully, that may be a bit of a tailwind as respect to those ratios. But generally, you can – given the high penetration already, the goal is to maintain that as we continue to grow at or above the market rate.

Susan Diamond:

I would say, we’ve evaluated the 2023 membership growth and the quality of that. And as we’ve said earlier in the commentary, net-net, you can think of that all in as net positive relative to what we would have previously expected, but immaterial really to our overall estimates for 2023. And certainly, we’ll evaluate the claims trend as we do every year. And if we do see some positivity, we’ll certainly keep you apprised. But I would say from the growth itself, while positive, would not be considered material to our overall estimate.

Susan Diamond:

Next question.

Michael Ha:

Hi, thank you. Just a quick follow-up on Susan’s response to Gary’s question and then the quick one value creation plan. So at least Susan mentioned existing MA members switching to a plan with a higher Part B rebate had a meaningful impact MLR. Just wondering how many approximate members is related to larger impact MLR? And then quickly on the value creation plan. I understand it’s tracking very well. I think on track to exceed $1 billion in savings. So that’s great. And just a couple of questions, like how much in excess of $1 billion are you now targeting to save for 2023? And then now the AEP is over, you think about that $1 billion in relation to strong membership growth, increased planned investments and sales margin? And how does it compare to your original expectation? Are the investments tracking in line with the $1 billion? Thank you.

Operator:

Thank you. And our next question will come from Steven Valiquette of Barclays. Steven, your line is open.

Susan Diamond:

Hi Steven, so as we thought about the MLR and specifically the mention of provider labor capacity, I would say that is more a broad belief that over time, we will see improved clinician labor capacity which, as we all know, has been impacted throughout COVID, and we believe still at lower levels than we would have exchanged in the absence of COVID. So our belief is that over time, it won’t be an immediate correction, but over time that we will see clinician labor capacity increase and that when we do additional utilization will also follow. And I think as we’ve commented before, one of the spaces that we continue to see lower than historical utilization is in the observation space within the hospital systems. Today, what we’ve seen throughout COVID is ER utilization in inpatient stays, observation stays, which you can think of as the sort of shorter duration stays are materially lower, which makes sense as the hospitals would certainly look to maximize sort of the revenue within their beds for any given patient. So we would expect as labor capacity increases. That will be one area where I imagine we will start to see some return to pre-COVID levels as there is sufficient capacity to support those additional patients in the facilities. So I would say it’s not explicitly pent-up demand. And based on all the analysis we’ve done, we don’t believe there’s a large amount of pent-up demand sort of that needs to work its way through the system. Historically, we have seen some evidence of that, but it’s typically after a very large COVID spike where there’s significant depressed non-COVID utilization, which fortunately we haven’t seen for some time, and we are not forecasting that type of event to occur again in 2023. So our guide does not have an explicit assumption around pent-up demand, but rather just taking the resulting sort of baseline trend we experienced in 2022. Increasing that for normal course trend as well as the expectation of some higher utilization is labor capacity returns. And as I mentioned in the commentary and expectation that flu will also see higher costs than we saw in 2022 as well.

Operator:

Thank you. Our next question will come from George Hill of Deutsche Bank. Your line is open.

Susan Diamond:

Sure, George. So the impact that we saw in the fourth quarter of 2022 was a result of an increase in the ASPC schedule. That was defined as for claims paid on or after September 28, 2022. And there was no ability for CMS to provide any budget neutrality offset in 2022. And so the lack of a neutrality offset is what caused the higher cost that we incurred in the fourth quarter that we had not previously anticipated. As you think about going forward in 2023, we will have that same higher ASPC schedule in effect. However, CMS did implement a change in the outpatient conversion factor, which reduces the cost for other services and drive something much closer to budget neutrality, which is why you haven’t seen ongoing run rate impact into 2023.

Operator:

One moment. And our next question will come from Ben Hendrix of RBC. Your line is open.

Bruce Broussard:

Well, we actively pursue and engage other payers on this. We do believe that’s an important part of our growth strategy and in addition, continuing to provide value back to the MA industry overall. But it is highly dependent on the growth of the plan. So this year, you saw significant growth as a result of our MA – the insurance side doing quite well. And so I would say our engagement is very broad and very oriented to continuing to be payer-agnostic, but it’s highly dependent on the insurance plans ability to grow.

Operator:

No further questions. I would now like to turn the conference back to Bruce Broussard for closing remarks.

Operator:

I would now like to conclude today’s conference. Thank you for participating. You may now disconnect.

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 third quarter 2022 results and our updated financial outlook for 2022. 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 third quarter 2022 earnings press release as they relate to forward-looking statements and to note in particular that these forward-looking statements could be impacted by risks related to the spread of in response to the COVID-19 pandemic. Our forward-looking statements should therefore be considered in light of these additional uncertainties and risks, 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.

Susan Diamond:

Thank you, Bruce. And good morning everyone. Today we reported adjusted EPS of $6.88 for the third quarter, representing 42% growth over third quarter 2021. Results in the quarter came in above initial expectations driven primarily by lower than anticipated medical cost trends and our individual Medicare Advantage and Medicaid businesses. Recall that we raised our full year adjusted EPS guidance by $0.25 to $25 at our Investor Day in September, which we affirm today. Our revised full year guidance anticipated the strength of the quarter and reflects a compelling 21% growth in adjusted earnings for 2022, while funding incremental marketing to support the 2023 AEP selling season and the dilution related to the hospice divestiture. I will now provide additional details on our third quarter performance by segment, beginning with Retail. Medicare Advantage membership growth and revenue remain in line with expectations, total medical costs and our individual Medicare advantage business were lower than initial expectations for the quarter with the favorable inpatient trends seen throughout the year continuing with some moderation. With respect to group MA, we shared last quarter that we were seeing higher than expected non-inpatient utilization. As I mentioned in September, we have been pleased to see positive current ERE [ph] statements and moderating trends during the third quarter, suggesting that some of the higher trend we described previously was likely due to pent-up demand. Finally, I would note that while it is early in the season, flu levels are running as anticipated. All in our Medicare Advantage business is strong and tracking consistent with the updated expectations shared at Investor Day. Our Medicaid business also performed well in the quarter experiencing lower than anticipated medical costs. We updated our full year Medicaid membership guidance from a range of up 75,000 to a 100,000 to our current guide of up approximately 175,000 to reflect the extension of the public health emergency to January, 2023. We are prepared for the Ohio contract to go live on December 1, adding approximately 60,000 members at implementation, which is included in our guidance. Group and Specialty segment results were in line with expectations for the quarter with our Specialty business continuing to benefit from lower than expected dental utilization. We continue to anticipate a reduction of approximately 200,000 employer group medical members in 2022, driven by our discipline pricing and focus on margin stability. I will now discuss our Healthcare Services businesses. Pharmacy results for the quarter were in line with the increased expectations we communicated in April as a result of the outperformance scene earlier in the year. The Primary Care Organization continues to perform well with results in line with expectations for the quarter. The team is focused on executing on the expansion strategy we shared at Investor Day, and we continue to expect to add approximately 30 to 35 centers to our portfolio through the first quarter of 2023, bringing our total center count to greater than 250. Patient served also continues to grow as expected and we anticipate serving nearly 250,000 value-based patients by the end of 2022. Turning to the Home in our core fee-for-service business, home health episodic admissions for the third quarter are up 5.1% year-over-year, while total admissions are up 6.4% year-over-year. Year-to-date episodic admissions are up 3.9% while total admissions are up 5.4% tracking in line with our full year expectations of a mid-single-digit year-over-year increase. In addition, we plan to expand our value-based home health model to cover an additional 450,000 Medicare Advantage members in the fourth quarter, bringing our total covered lives to approximately 15% as of the end of the year. From a capital deployment perspective, our debt to capitalization ratio decreased by 590 basis points in the third quarter to 39.4% as we retired $2 billion of debt following the divestiture of our majority interest in Kindred Hospice, which closed in August. We continue to anticipate a customary level of share repurchase in 2022 and as a result, expect our debt to capitalization ratio to be in the low 40s at the end of the year. I will now take a few moments to provide additional color on our early outlook for 2023 starting with membership. As Bruce shared, while it's still early in the AEP, we remain confident that the investments we made to support 2023 growth have positioned us well and we are pleased to share our individual MA membership growth expectations today of 325,000 to 400,000 members, which is in line with our expectation of high-single digit market growth. As we always caution this time of year, it is early in the AEP selling season, so the outlook we provide today could change depending on how sales and voluntary dis-enrollments ultimately come in. Initial sales volumes are strong and favorable to our expectations. Recall that we have limited visibility into member disenrollment data this early in the AEP season as those results take longer to complete, but we do expect modestly lower attrition in 2023 as a result of our improved benefit offerings, enhanced onboarding support for all new members and increased focus on sales quality and retention by our call center partners. We also advanced our analytic models incorporating additional granular inputs and machine learning techniques, improving our sales and retention forecasting ability. Taken all together, these improvements and early results support our confidence in the guidance shared today. With respect to group Medicare Advantage, as we previously stated, growth can vary year-to-year based on the pipeline of opportunities, particularly large accounts going out to bid. We expect a net reduction in group MA membership of approximately 60,000 in 2023. This reduction is primarily driven by the loss of a large account partially offset by expected growth in small group account membership. We remain committed to discipline pricing in a competitive group Medicare Advantage market. With respect to standalone PDP, the overall PDP market is declining as more beneficiaries choose Medicare Advantage. In addition, we remain disciplined in our pricing and as a result, our Walmart Value plan will not be as competitively positioned and our basic plan will exceed the low income benchmark in three regions in 2023, driving an expected net decline of approximately one million PDP members. As we look beyond 2023, we will evaluate the impact of the various regulatory changes proposed, which are likely to result in higher PDP plan premiums broadly and could lead to further industrywide movement from PDP to MAPD plans, given the strong MAPD value proposition. Our focus remains on creating enterprise value from our PDP plans by driving increased mail order penetration and convergence to Medicare Advantage. Finally, in our Medicaid business, we expect 2023 membership to be flat to slightly up as the new state awards in Louisiana and Ohio will largely offset the impact of redeterminations, which will begin following the end of the public health emergency. Louisiana has indicated that we will begin the program with 150,000 members while Ohio will ramp to 200,000 members over the course of 18 months. Turning now to our expected 2023 financial performance, I would reiterate our commitment to grow 2023 adjusted EPS within our targeted long-term range of 11% to 15% off of our expected 2022 adjusted EPS of $25. We will continue with our practice of conservative planning and at this time expect the current consensus estimate of approximately $27.90 to be in line with our initial adjusted EPS guidance. The earnings growth anticipated for 2023 will put us on a solid path to achieve our $37 adjusted EPS target in 2025. We look forward to providing more specific 2023 guidance on our fourth quarter earnings call in early February. Before closing, I would echo Bruce's appreciation to our employees for their contribution to our success and to our shareholders for their continued support. We are pleased to report another strong quarter and are excited about our outlook for 2023 and beyond. We look forward to delivering against the commitments we shared with you at Investor Day, providing better experiences and outcomes for our members, and patients and creating significant value for our shareholders. With that, we will open the line 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.

Stephen Baxter:

Hi. Thank you. I wanted to ask about the individual Medicare Advantage outlook that you provided for 2023. Appreciate the commentary on expecting retention to be a little bit better. Could you maybe tell us or quantify how much that contributes to your growth outlook? Maybe what would your growth outlook be if you had the same result on retention that you did last year? And then more broadly, any early insight you have on competitive dynamics in 2023, either on plan benefits or for sales channels? Thank you very much.

Operator:

Thank you. One moment for our next question. Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.

Susan Diamond:

Sure, Kevin. So, as you mentioned, we are seeing a lower-than-anticipated cost trend with the mid-quarter raise in guidance, it’s a little bit confusing, I appreciate. But so the beat in terms of cost trend was relative to our initial expectations for the quarter, which were considered in the $0.25 raise that we announced at our Investor Day in mid-September. So the commentary this morning was relative to our initial expectations. But then again, once we account for the increased guidance, then more in line with what we expected. In terms of Q3 versus Q4, as we look at current fourth quarter MLR consensus, the estimates currently are 87.6% [ph] for retail and 86.7% [ph] for consolidated. I would say that right now, they’re a little bit light and that given the announcement of the 3Q results today, which were higher than The Street estimates and reaffirmation of our full year EPS guide. We would expect that analysts will adjust their models accordingly. And then we would see then an increase in the fourth quarter and full year MLR as a result, which then should be more in line with our current expectations.

Justin Lake:

Thanks, good morning. The – two numbers questions. First, just a follow-up to Steve’s question. You said the churn number is down 100 basis points. So is it just as simple as saying you have 4.5 million members in individual, 1% improvement at 45,000 members to growth versus last year. The math that’s simple. And then what drove the 4% decline in Medicare Advantage PMPM in the quarter? And lastly, a lot of questions on RADV. I was wondering if you could help us understand what a reasonable like fee-for-service adjuster that the industry is looking for at a CMS. So when we see that final rate or that final notice in February, what would be a reasonable number for fee-for-service adjuster that you’ve been lobbying for? Thanks.

Susan Diamond:

And then, Justin, in terms of the revenue PMPM, there’s a few things impacting it. There’s always that decline over the course of the year from the seasonality perspective as new members continue to enroll at low – typically lower risk scores and members passed away and those members passing late in to have higher risk scores. The other item that you need for this year is just sequestration, which as you know, sort of ended as of the second quarter, but was in place last year. And so that will have an impact on the year-over-year compare as well. In terms of your question on the fee-for-service adjuster, I mean, honestly, we just aren’t in a position to comment and wouldn’t want to speculate on what the fee-for-service adjuster would be, is it would ultimately be based on fee-for-service data to which we just don’t have access.

Nathan Rich:

Thank you. Good morning. I wanted to follow up on the outlook for MLR. I think for 2023, consensus is roughly flat. I guess could you maybe talk about how you’re thinking about the puts and takes to MLR next year? And I guess specifically, are you expecting a normalization of inpatient procedures over the course of the year? And any change to your expectations around utilization, just given the economic pressures you highlighted and maybe utilization of some of the investments that you made in your plans for next year? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from Gary Taylor with Cowen. Your line is open.

Bruce Broussard:

Yes. Maybe I’ll take the latter point and then let Susan take the around the operating leverage. Gary, we do still see and we see conversions from PDP to Medicare Advantage on an ongoing basis. And we see that initial relationship we have with them as an opportunity to expand that relationship. One – two things are happening in PDP. First, there is a few plans that are really at the lower end, and we sort of question how they can get there at the price that they’re offering. And then there’s a group of plans that are sort of in the same area we’re in. So there’s a bifurcation that’s happening in the industry, which is really causing people to, I think, to go to the lower end pricing there as a result of just the aggressiveness in the marketplace. And we’re not going to follow that direction. But what we do see is also because of the value proposition that’s happened in MA that there’s a much larger conversion just overall between PDP to MA and results. It’s really that PDP is a declining business, not only in our company, but as you look at the industry side. But to answer your question, we do see it as a – still as a very viable opportunity for us to expand our MA platform through the PDP conversion as a result of just our relationship with the member and that is a specific strategy within our company.

Operator:

Thank you. [Operator Instructions] Our next question comes from Scott Fidel with Stephens. Your line is open.

Susan Diamond:

Sure. Hi Scott. So your first question on the final rule impact and I know we got some questions previously about the proposed 4.2% reduction and gave some commentary that from an enterprise perspective, that would've been about a $30 million hit relative to our sort of expectations at the time of bid. And that's a larger Home and Home Health business but mitigated by what would've been a benefit to the health plan. With the final rule coming out at 0.7%, obviously that headwind is no longer an issue and it would be slightly positive relative to what we thought at the time of bids, but I would say relatively immaterial, but certainly positive to what it would've been at 4.2%, which we had not contemplated earlier in the year. In terms of your question about how we think about the MA space in Home Health, Andy mentioned at Investor Day the work that his team is doing, both on implementing a full value-based model, which is inclusive of utilization management, network management, clinical advancement to take full capitated risk on Medicare patients and as we've mentioned in my commentary, we expect to have 15% of our members covered by that model by the end of the year. In addition, they're also working on value-based reimbursement models for the remainder of our Medicare population initially, and then would expect that we would offer – Kindred would offer those arrangements to other payer – MA payers as well. And so there, we are very focused on the same things making sure that we're driving appropriate utilization of Home Health services, but then also making advancement on the clinical side such that we can improve outcomes and would look to structure that contractually where there's some component of a fee-for-service payment, but then also participate in the savings that Kindred can help drive in terms of total cost of care going forward under a value-based payment model. So we would expect to continue to keep you apprised of our progress there. But we do intend to start with the Humana membership and then once we can demonstrate success, then look to take that to our agnostic payers as well.

George Hill:

Yes. Good morning guys, and thanks for taking the questions. I guess first I'd ask kind of a big picture question on the recent star ratings performance. I suspect that you guys had a window into your star ratings performance before you held the Investor Day and provided the initial guidance. But I'd be interested if you guys had a sense for what the landscape was going to be like as it relates to Star's performance. And I guess does that kind of increase your optimism, your confidence in kind of outperforming the 2025 targets?

Operator:

Thank you. [Operator Instructions] Our next question comes from Josh Raskin with Nephron Research. Your line is open.

Bruce Broussard:

Why don't I – why don't I take the latter and then Susan can take the former. On the M&A side we continue to find the best – best value for use of our capital is really doing in-market acquisitions, and being able to roll those into existing primary care clinics that we have in the marketplace. There's not only the ability to leverage the size and scale in the marketplace, but also the administrative productivity we get and just the ability to continue to offer broader value to the payers we serve. So I think that will be the most likely scenario. Of course we've looked at some of the larger transactions that are out there and have been reviewing that. I think at this time we're not really convinced that's the right direction for us and we'll continue to do in-market. That might change, but based on where the – where the values are trading and what we can do and inside our marketplace, we'll probably do medium-to-smaller acquisitions at this time.

Operator:

Thank you. [Operator Instructions] Our next question comes from A.J. Rice with Credit Suisse. Your line is open.

Bruce Broussard:

Yes. A few things there A.J., one is just continuing to grow our penetration in mail order and what we see is the opportunity to continue to make that convenient for our customers as a result of being able to have home delivery and what we're really working hard on both of the digital experience, but also shortening the time of delivery through having more warehouses closer to where a large number of our members are. So we are working hard on the opportunity to continue to improve the mail order rate overall. We do have a few customers; I would say small customers that are utilizing our platform under more of a private label. We've seen that. I think that is an area of opportunity but not an area of focus for us. We've done a lot of work on the specialty side and we see the opportunity to continue to grow our specialty business, which is in a more of a provider oriented and an agnostic provider orientation, and the ability to continue to have stronger relationships with the pharmaceutical side and being able to utilize patient compliant programs. So I would say continue to grow our mail order is top through continuing to improve our experience. And then secondarily, our specialty area, we will look at opportunities to private label or do white label for our delivery, but that probably will be less of the focus.

Michael Ha:

Hey, thank you guys. Just wanted to dive a little deeper into next year’s MA growth. So based on analysis we’ve done on planned value and benefit richness that shows Humana increasing benefit which is significantly more than your peers and almost double the national average. So stronger benefit coupled with leading star ratings performance and a surprising decline and starts from some of your peers, seemingly it looks like you’re positioning into 2023 might be the strongest it’s been in recent history. I know you’re expecting roughly in line with industry growth next year. But I’m curious one, how is your MA growth application developed evolved since early October? And I understand and appreciate the multiyear earnings power that more membership growth can provide. But for 2023 specifically, just given the slightly dilutive impact of year one MA members, in the event you are able to exceed your growth expectations, how does that impact your ability to reach your target 2023 EPS, which gets to the low end of your long-term range. Is there a specific membership growth number that you think could be – end up being potentially diluted to earnings. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from Lisa Gill with JPMorgan. Your line is open.

Susan Diamond:

Hey, Lisa. So in terms of your first question about flu, so as I mentioned, we are seeing relatively low flu levels. It’s very early in the flu season for the fourth quarter, and so we’ll certainly continue to watch that. In terms of our expectations, we did anticipate in our guide that we would see flu levels higher in the fourth quarter than we’ve seen in the last two years, but not as high as we would have seen pre-COVID. And so far, again, while it’s early, the early trends are consistent with our expectations that we’ll certainly continue to watch that. For 2023, we then assume some further incremental increase in flu going into next year, assuming that it won’t permanently stay at the lower levels we’ve experienced to date. So we’ll certainly keep you guys informed. But so far, we are seeing it run in line with expectations, which are slightly higher than what we experienced previously.

Operator:

Thank you. [Operator Instructions] Our next question comes from Steven Valiquette with Barclays. Your line is open.

Susan Diamond:

Hi Steve, yes, happy to answer that. So as we’ve disclosed previously, our view is that the proposed rule failed to adequately address the statutory requirement of actuarial equivalents by not applying a fee-for-service adjuster to the RADV overpayment calculations. We’ve been very proactive in communicating our position and have provided substantive comments to CMS. And actively engaged, hoping that CMS will address these concerns in the final rule. In addition, we’ve commented a number of times on our internal programs around risk adjustment, and we feel very good about what we feel are industry-leading processes as respect to Medicare Risk adjustment compliance. And our sophisticated mechanisms for correcting risk adjustment data if we determine there to be errors in that data. This has included internal contract level audits that we perform, which we have reported the results of which to CMS, including any identified over payments. And then as you pointed out, we do have a material risk factor. It’s included in our disclosures related to this item. So definitely would encourage investors to review that language as it does represent a material item depending on how the final rule comes out.

Rob Cottrell:

Hi, good morning. Thanks for taking my question. Just a couple of follow-ups. First, I appreciate the commentary on stronger-than-expected applications so far in AEP. But can you remind us the typical pacing of applications throughout AEP? How much is back-end weighted? How many applications come through after Thanksgiving in those last 10 days? And then secondly, interested if you can comment on expected utilization rates of some of the more cash-like benefits that you’re all offering next year in the healthy option allowance. Does that utilization increase given it’s more of a cash payment to the beneficiary? And does that have any MLR implication? Thank you.

Operator:

Thank you. I’m not showing any further questions at this time. I’d like to turn the call back over to Bruce Broussard for any closing remarks.

Operator:

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.

Bruce Broussard:

Thank you, Lisa and good morning and thank you for joining us. Today, Humana reported financial results for the second quarter of 2022 that reflected our solid fundamentals and strong execution across the enterprise. In the second quarter, our adjusted earnings per share, was $8.67, which was above our initial expectations. Our outperformance in the quarter was driven by broad-based strength across the organization. Our updated full year guidance of approximately $24.75 represents compelling earnings growth of over 20% over our 2021 results. Susan will share additional detail on our second quarter performance and our full year outlook in a moment. As we look ahead, we are confident that we continue to deliver strong results as a leader in Medicare Advantage and value-based care delivery. Over the last several months, we have taken deliberate steps to meaningfully advance our strategy. In our Medicare Advantage business, we finalized our 2023 product strategy as reflected in our bids and are confident the investments we have made will significantly enhance the value proposition of our offerings. These investments were supported by the enterprise commitment to delivering on our $1 billion value creation initiative, which we expect to significantly improve membership growth in 2023, while still delivering compelling earnings growth consistent with our long-term target. Beyond our product investments, we have worked with our external sales partners to enhance recruiting, training and incentive programs, which we believe will lead to improved member retention. We have enhanced the way we work with over all of our 40 external care partner centers – partners, creating increased alignment by linking incentives to quality and retention metrics and many of our partners have also revised agent level incentives to emphasize retention. We continue to see an increase in member satisfaction year-over-year, demonstrating the positive impact of our efforts. We held our annual external sales partner conference last week and are encouraged by the optimism and excitement expressed by our distribution partners on our commitment to return to market leading growth and in the specific investments we have made. We are also making significant progress in advancing our Medicaid strategy. We received notification of a contract award from Louisiana in June. We are very proud of the team’s success articulating Humana’s unique Medicaid capabilities and our ability to organically grow our Medicaid footprint. We are actively preparing for the Ohio contract implementation later this year as well as the implementation in Louisiana, which is expected in early 2023. In addition, we continue to actively work towards procuring additional awards in our priority states. Within our Healthcare Services segment, we continue to expand our CenterWell assets. We established a second joint venture with Welsh Carson that will deploy up to $1.2 billion of capital to develop up to 100 new CenterWell senior primary care clinics between 2023 and 2025. In the Home business, we began expansion of the value-based model in June with the implementation in Virginia, increasing the number of MA members covered by the model to 331,000, a 22% increase. These actions are building significant momentum within the organization and position us for continued strong growth and leadership in the delivery of integrated value-based care. Turning to our $1 billion value creation initiative, we have made strong progress towards our target and now have line of sight into initiatives valued at over $900 million in 2023 in design, execute or full realization stages. This is up from $575 million when we last provided an update in April. We are confident in our ability to fully deliver against the important commitment and ultimately realize $1 billion of value in 2023. As I have just highlighted, we have made meaningful progress advancing our strategy in recent months, resulting in significant expansion of our healthcare service businesses and further strengthening our Medicare Advantage and Medicaid platforms. In addition to our strategy advancement, the work completed on our value creation initiative has led to an organizational simplification that enables us to accelerate our previously planned organizational streamline. Beginning in 2023, we will realign the company into two distinct units

Operator:

Certainly. Our first question comes [Technical Difficulty] BMO Capital Markets. Pardon me, Matt. Please check your mute button. Matt Borsch, please check your mute button, your line is now open. And our next question comes from the line of Justin Lake with Wolfe Research.

Bruce Broussard:

I can.

Justin Lake:

Hi, good morning. So I’m going to try to squeeze in a couple of numbers questions. First on MLR in the quarter. It sounded like the MLR had some moving parts, but was in line-ish, give or take, with your own expectations. Obviously, consensus is a little bit lower than this. So I was hoping, you gave us some EPS seasonality. Given your retail business still has 100 basis points of a range, maybe you could tell us where you think you’re going to be in that range for the back half of the year and to think about 3Q versus 4Q? So people like me don’t mismodel it again for the back half. And then on the divestiture, Susan, can you walk us through the numbers a little bit more? I mean the $0.65 is a little bit bigger than I had expected. And just trying to understand how much revenue are you selling annualized, how much profit was there. What are you doing with the divestiture proceeds in terms of just like mapping out because if you’re a $0.65 for, let’s just say, third of the year of dilution, that would indicate to me that you have another $1.30 on next year of dilution? So that’s a pretty decent headwind to next year. And just how do you offset that? Because it sounds like you reiterated the 11% to 15% growth next year. Thanks.

Justin Lake:

Thanks.

Operator:

Thank you. And our next question comes from the line of Matt Borsch with BMO Capital Markets.

Susan Diamond:

Hi, Matt. We can hear you.

Susan Diamond:

Yes, Matt. Good question. And we spoke to some of this in the first quarter as we were seeing this and accounted for in our first quarter estimates. So if you recall, some of it is, as you said, just a reflection of when you see lower inpatient utilization, typically some of the lower-cost admissions are the ones that are no longer occurring and so you tend to see a little bit higher unit cost than what’s left over. So we did see some of that. But we did see some higher just unit cost for certain underlying procedures, and we continue to evaluate that. And as I mentioned in our second quarter intra-year development, we were pleased to see some of that moderate relative to what we had seen and booked as of the first quarter. So we will continue to watch that. The one other thing I would point out, and we mentioned this in the first quarter, some of the reasons we’re seeing lower inpatient volumes is a continued shift of procedures from the inpatient to the outpatient setting. And when that occurs, that typically results in activity that is lower than average unit cost with an inpatient setting shifting to that outpatient setting, also putting pressure on the unit cost. That was something that we had not fully anticipated as we entered the year. CMS, if you recall, reinstated the inpatient-only list. And so we did not expect to see continued shifting both in our utilization and unit cost estimates. And so as we’ve seen that continue to transition despite CMS’ actions, we saw the benefits of that on utilization, but then some increase to the unit cost. The unit costs are still higher than all of that said, then we would have expected still continue to watch that and see if in the coming months that doesn’t continue to moderate. We have great visibility in real-time to inpatient utilization, but to fully evaluate the unit cost, we’re dependent on those claims coming in over time. And so we will continue to watch that and keep you apprised of what we’re seeing.

Susan Diamond:

It’s primarily orthopedic, which we saw in 2021 as well. And so we saw a significant shift in ‘21 and continue to see additional shifts, and it is primarily in the orthopedic space.

Operator:

Thank you. And our next question comes from the line of Kevin Fischbeck with Bank of America.

Susan Diamond:

Sure, Kevin. Let me take that. In terms of 2023 growth, we are very pleased with the progress we’ve made on the $1 billion value creation goal. And as we’ve been saying, the intent is to use the benefit of that work to primarily support investment in our Medicare business, but also support some acceleration within our healthcare services capabilities. And within the Medicare business, we’ve commented that the majority of the dollars that will be directed to Medicare will support improved value proposition in our Medicare Advantage offerings, but also support increased investment in marketing and distribution to support that. As we completed all of the planning work by the Medicare organization, as they thought through their product strategy, I would say the Medicare team was really pleased with the capacity that, that $1 billion value creation effort created for them, and they feel really good about the investments it allowed them to make and are feeling confident that we will be able to demonstrate significant improvement in our Medicare growth in 2023. As Bruce mentioned in his comments, we had a chance to meet with our external distribution partners recently and share some of those details and we’re really pleased with the reaction and positive sentiment and optimism expressed and commitment to returning to growth that our investment is demonstrated. In our commentary this morning, we were pleased to announce that given the outperformance we’ve seen in 2022 and the second quarter in particular that did give us some capacity to invest some of that outperformance into additional marketing and distribution that’s anticipated to support the 2023 AEP. And we felt really strongly that given the amount of investment we made in our Medicare products for ‘23, we’re going to certainly make sure we appropriately support it with marketing and distribution investments to ensure that we maximize the return off of those investments. So the team is really thrilled with what we’ve been able to do, and we’re feeling confident. We will obviously have to see how the landscape data comes out just exactly how we’re positioned and refine our estimates and we typically give you some sense in our third quarter call. I’m not prepared to do that today. But you want to express that we feel very optimistic and confident that we will see significantly higher growth relative to 2022 off the strength of the investments that we’ve made. In terms of the lower utilization, I would say, we’ve certainly talked in our first quarter commentary of some of the utilization, depression that we saw. I would say that generally, we attributed that to COVID at that that. As you recall, we were seeing a much faster decline in COVID hospitalizations with this latest surge than we’ve seen previously. And so we attributed the lower non-COVID utilization to simply a slower bounce back because that was not anticipated generally. So when you think about our bids, we would not have anticipated any of the favorability we’ve seen this year to signal sort of sustained below baseline utilization or medical costs and would have assumed in 2023 a more steady state sort of normal course level of medical cost trend. So to the degree we see further improvement that we think is reflective of just lower core trend then that would be favorable to what we would have anticipated at the time of bids.

Susan Diamond:

Welcome.

A.J. Rice:

Hi, everybody. Thanks. Maybe just to clean up quickly, some of the questions have been already asked. I know you’re saying hospice is a headwind for next year and value creation is a positive. I wonder if I could broaden it out and get you to talk about at this early day without giving guidance, what your headwinds and tailwinds are in a major buckets for next year and maybe also with the 11% to 15% growth target, what’s the jumping off point in your mind for 2022 to get to that? And then Bruce, you’ve mentioned the reorganization insurance business and services business. It sounds like that’s mostly to facilitate better coordination internally. Can you tell us where some of those opportunities are. And then second, is this a prelude to the services business is beginning to focus on external clients. I want know home health does that already. But I wondered the PBM and some of those other areas that have historically just supported Humana. Are you thinking about opening that up?

Susan Diamond:

Yes, A.J., I’ll take the first one then transition to Bruce. As it reflects 2023, our first quarter commentary did confirm that you can think about the baseline for ‘23 as the $24.50 that we adjusted to you then. I would say that for right now, we’re not going to comment on any further adjustment to the 2023 baseline or 2022 baseline rather for ‘23. And that’s just because we’ve got our Investor Day conference scheduled for September 15, where we do intend to talk about or expect long-term growth expectations. And so I don’t want to get in front of any of that. But I will say that broadly speaking, as we think have thought about our bid planning and our planning for 2023, we were mindful of our stated long-term growth target. There is always a variety of puts and takes that go into every – the planning every year. I would say some of the known headwinds would have been obviously the anticipated hospice divestiture that has always been contemplated in our thinking for ‘23. So that’s not a surprise. More recently, we have seen the proposed rate – negative rate adjustment for home health that would not have been something we previously contemplated. And we will have to see ultimately where the final proposal comes out and whether that sees some improvement relative to the current proposal. But that would be something that we hadn’t contemplated and one of those puts and takes we have to manage. From a positive perspective, certainly, membership growth in 2023, we’re expecting to see improvement. We will have to see as AEP plays out, whether that is more favorable than we might have expected, which could be a positive. And also the medical cost trends, obviously, that we’re seeing this year, as I mentioned in my commentary, we will continue to evaluate those and see whether some of that continues to be positive through 2023. We always have to think about then any risk adjustment implications of any utilization variation that we see and we will certainly be mindful of that. And I would say the one other thing we continue to watch is flu. We’ve seen very low flu the last few years. Some of the early indicators from Australia in particular do suggest a higher flu season for the fourth – potentially for the fourth quarter. So we continue to watch that. But again, that would be one of those puts and takes that we continue to watch. So a variety of things, but I would say nothing that’s such an outlier that is giving us concern at this point, but rather normal course things that we would manage through for 2023. And then Bruce, do you want to...

A.J. Rice:

Okay. Great. Thanks a lot.

Operator:

Thank you. And our next question comes from the line of Nathan Rich with Goldman Sachs.

Susan Diamond:

Sure, Nathan. Happy to answer that. So as you mentioned, we are seeing lower inpatient utilization, which we have seen all year. The first quarter, we did see certainly a faster decline in COVID that’s obviously now subsided. As we’ve gotten further away from that last surge, we’ve continued to see lower inpatient utilization. As we’ve analyzed it, there are a few things that are primarily driving that. One is lower flu. As I mentioned, we have seen lower levels than historical that impacted the first half of the year. That will certainly moderate in the third quarter because you see low flu activity in general. And as I mentioned, we will have to watch and see how flu develops in the fourth quarter. So right now, we are assuming that we don’t return fully to sort of pre-COVID levels, but rather it’s some moderation from that, but we are assuming it doesn’t run quite as low as we have seen through the pandemic. We have to watch and see how flu develops in the fourth quarter. Right now, we are assuming that we don’t return fully to sort of pre-COVID levels, but rather it’s some moderation from that, but we are assuming it doesn’t run quite as low as we have seen through the pandemic. We also saw, as I mentioned, continued inpatient-to-outpatient shifts. That was something, as I said, we did not contemplate in our initial guide. And so that’s positively impacting the inpatient utilization. We are seeing some higher unit costs as a result in utilization. We are seeing some higher unit costs as a result. But as I mentioned, on the non-inpatient side, while we’re seeing that higher utilization, we are seeing in total, though, slightly positive overall non-inpatient costs relative to expectations. So we’ve been able to absorb that higher volume shift within the non-inpatient estimates as well. And then we are seeing some improved impact from some of our utilization management programs. They are also positively impacting inpatient activity. So other than the flu that we will moderate some, we don’t have any reason to think that inpatient to outpatient or the positive utilization management impacts won’t continue for the rest of the year, and so that is contemplated in our full year guide. In terms of DCP, as you said, it is up 3 days sequentially, and that was primarily driven as you can see in some of our disclosures by additional provider accruals as well as fee-for-service days and claims payable. And so is reflective of a stronger reserve positioning as of the end of the second quarter versus what you saw first quarter. You can also see that reflected in the higher IBNR trends relative to premium. I think our IBNR trends were up 2.9% versus premium trends of about 1.9%. So we think reflective of an appropriately conservative posture with respect to reserves at the end of the second quarter.

Operator:

Thank you. And our next question comes from the line of Joshua Raskin with Nephron Research.

Bruce Broussard:

Yes. That’s a constant work for us, and we are up a little bit this quarter as a result of our efforts. A few things there. We continue to look at our partners that are – wanting to move to value base. And we’ve seen some really great opportunities there, especially over the last year or so as we’ve exited out of COVID, the ability for us to then provide resources for them in the – both the technology area and the human resource area to allow them to make that transition and then provide them a contract that allows them to appropriately manage that risk. Sometimes I want to take just upside risk, sometimes I want to take up and down risk with some kind of color or full risk. So we really want to walk with them as they evolve into their risk tolerance. But what we see the most is really building on the partnerships that we have in growing our membership base in those partnerships. And what we’ve seen in a number of markets where we’ve had once a fairly antagonistic relationship with both hospital systems and physician groups that they have evolved to be very positive. And as they evolve are positive, we see much more membership growth in that relationship, which has been very positive for us. What we also measured there, Josh, is not only what – how many members we have in value based, but also their surplus because we could get them into value based, but if they are not really performing both in the STARS risk adjustment and in addition, the health outcomes it’s really for not. And so a lot of the work we’re doing, not only is about getting more members in there but also making it more effective for our members to be – I mean our value-based relationships to be more effective. We’ve been averaging in the 60s, the mid-60s. We’ve increased a little bit this year, I would suspect that we will continue to see more members, but also as our membership growth grows that percentage doesn’t move as much. And so we are getting more and more members in there. But on a percentage basis, it might not look like we’re moving as much. But we are actually both effectively getting more members in there but as importantly, being much more effective in the way that we’re performing as value-based providers are getting more into the surplus.

Joshua Raskin:

Got it. And then if I could just sneak in. I just want to confirm, Susan, did you say that the baseline for ‘22 is still the $24.50 and has not changed, or were you just saying we will update it on September 15th?

Joshua Raskin:

Perfect. Thank you.

Ricky Goldwasser:

Yes. Hi. Good morning and thank you for all the details. So, Bruce, a question for you. I mean clearly, there is a lot of moving parts in core utilization. But just as we think kind of like big picture, 2.5 years into the pandemic, you are seeing that move to sort of lower cost in-patient. You talk a lot about home, telehealth. What are you seeing in the market? As you think about things, how do you think about sort of just kind of like structurally sort of core utilization because I am assuming that that’s something that will be part of how you are thinking about those long-term targets that you are going to provide us in September?

Susan Diamond:

Next question. Sorry Ricky.

Susan Diamond:

Sure. I will take that. So, I would say, as you mentioned, while MLR was different and didn’t meet consensus, that’s again reflective of how I mentioned earlier. There is a wide range in the consensus estimate. Those are not necessarily reflective of internal estimates. And so relative to our internal estimates, we did see outperformance particularly in our individual MA business. And so it’s important to keep that in mind. I would say that we are seeing so far, certainly in ER use observations. They are continuing to run lower than we saw pre-COVID. Some of that, I do think it’s probably reflective of people seeking out other sites of care that are more appropriate, whether that’s physician and urgent care that they became accustomed to during the pandemic and has continued. We do acknowledge, however, that we know there is capacity constraints within the healthcare system today. How much impact that’s having on some of the lower utilization, it’s hard to know for sure. And that is something, I think on the longer term trajectory we are going to have to continue to monitor and see ultimately where the utilization levels come in. The other thing to keep in mind is the higher mortality as a result of COVID, as we have said, has an impact on medical cost trend and overall utilization and a negative trend because those that passed way due to COVID tended to be higher utilizers, they had multiple comorbidities. And so that’s also reflected in our estimates and we will see continued impacts from that going forward. But otherwise, I would say a lot still to be learned. We are seeing some favorability and we will have to continue to assess the team’s thinking on how much of that will continue into 2023, but might see some moderation as capacity hopefully starts to return within the clinical community.

Stephen Baxter:

Yes. Hi. Thanks. I just wanted to ask about the guidance to make sure I can follow what you are doing there. It sounds like the quarter was $1 better and then I think you also removed $0.50 of the conservatism. So, that sounds like $1.50 is favorability, although maybe there is some double counting between those items. And then you are reinvesting $0.75. And I think I heard you say there is an extra $0.15 of dilution from the hospice divestiture. It seems like those items in aggregate would result in the guidance increase above the $0.25. So, I am clearly missing something. Can you understand – help us understand how you see the moving parts there and how we should be thinking about that? Thank you.

Operator:

Thank you. And our next question comes from the line of Scott Fidel with Stephens.

Susan Diamond:

Hi Scott, yes, happy to take that. So, as you said, this is a 4% rate reduction is proposed. We certainly are – will continue to advocate and educate in terms of just some – while it’s predicated on the behavioral adjustment is the driver of that. We certainly want to make sure that people also consider the inflationary environment, the challenges with clinician labor. I think there is broad support for continued shift of care to the home and the benefits of home healthcare. And so we do hope to see some moderation that’s more reflective of the current cost trends within the space. But if it were to move forward as proposed at about the 4% cut for the enterprise, you can think of that as about a $30 million impact. It’s slightly higher for the Kindred business specifically. But within our Medicare business, we did not contemplate that level of rate reduction in our thinking for the health plan for ‘23. And so there is some mitigation within the year relative to that. So, that net impact at the proposed rate is about $30 million. As you said, given that rate cut, certainly, there is more emphasis on value-based payment models. We have seen that from other providers as well, which we are pleased to see. As respect to our plans, we were already well down the path of working on a value-based payment model. And as we – Bruce said in his commentary, we were pleased to see that we were able to expand our value-based – broader value-based home health, DME and infusion model in the State of Virginia this quarter as we had initially planned and remain committed to expanding that model to about 50% of our MA members within the next 5 years. So, we are I think ahead of that curve, but we are encouraged by some of the discussions we are having with some other home health providers who I think are becoming more focused on value-based payment models, which we do think is important and will provide an opportunity to get after some of the adverse implications in terms of hospitalizations and avoidable admissions that we think home health has an opportunity to impact if they become more focused on it. So, we are pleased with that.

Operator:

Thank you. And our next question comes from Steve Valiquette with Barclays.

Susan Diamond:

Hi, Stephen. Happy to answer that. So, in terms of annual wellness visits, I would say our experience this year is in line with expectations, so no significant outperformance or underperformance, but generally in line and haven’t heard anything in terms of any concerns in terms of the ability to get into patient time. So, I think that’s tracking as expected. In terms of MRA for 2023, certainly, as I mentioned, to the degree we continue to see lower utilization in 2022 relative to the expectations, we will certainly do the assessment to understand whether there would be any implications to ‘23 risk adjustment, but I would expect net-net for that still to be positive even after considering MRA. On the group MA side, where we are seeing higher utilization as you think about 2023, we would expect to see some mitigation as a result of that with increased MRA expectations as well. So, it works both ways. In terms of 2022, we did receive the midyear payment. And I would say it’s generally in line with expectations, maybe just slightly positive, but broadly in line with expectations, so no meaningful variance there.

Operator:

And our next question comes from the line of David Windley with Jefferies.

Susan Diamond:

Hi David, yes, happy to address that. So, as we think about it, as you said, the higher ‘23 membership growth, as you mentioned, does tend to bring members who have lower margins until they are appropriately coded over time. We get their STAR scores up, etcetera. So, that is true. But keep in mind that we are also anticipating as a result of our product investments that we will also see higher retention. And so the higher retention that we will see those are going to be members who will positively contribute. So, ultimately, we will just have to see what the ultimate mix is from a combination of sales and retention in terms of any year-over-year change that, that might imply in terms of the margin. In terms of the investment that we have made, as you mentioned, the $1 billion value creation goal, that is going to generate savings across the enterprise. So, it will not obviously be fully generated within the Medicare organization but we intend to disproportionately invest those savings into the Medicare organization. So, all-in, you would think of that from just a pure individual MA perspective as being somewhat dilutive to the margin because we will be investing more dollars in that product than the savings that that line of business alone will generate. Within retail, we will get some further offset, obviously, from the savings that the rest of the retail organization will contribute. But then some will obviously be outside of that retail segment. So, we will certainly give you some more visibility to that as we talk in September about how we are thinking about our margin progression and EPS growth over time. But for right now, those are some of the bigger things that you can think about impacting 2023.

Susan Diamond:

Sure.

George Hill:

Yes. Good morning guys and thanks for taking the question. I think a lot of my topics have been covered. Just two quick numbers ones. I guess, Susan, on the $0.75 in marketing spend, I guess can you talk about where that’s going more specifically? How much do you think that is going to brokers versus maybe member outreach given that retention was an issue in ‘22?

George Hill:

Okay. It’s helpful. Thank you.

Gary Taylor:

Hey, good morning. Just a quick two-parter just one numbers question, and then my real question. It looked like the proprietary shared risk providers went down $200 million sequentially, and I presume most of those were like employed in your own centers. So, just wondering why that went down. And then the broader question I wanted to ask about ‘23, glad to hear you are still optimistic and confident about higher growth in ‘23. But just wondering, conceptually, is there an enrollment growth number that’s too high, that’s too much. I mean I think there is over under on a growth number where the Street would be worried about adverse selection and your benefit offering and impact on margin and that trade-off. But wondering if you really change, that’s the case, or do you just look at the net present value of an incremental member and your ability to retain them in the earnings contribution over time and you are not really thinking about higher bound as being an issue for ‘23?

Lisa Stoner:

Yes. Hey Gary. So, I think all that is, it’s just difference in the way we are kind of showing our PCPs related to some IPAs. This is really to ensure we are aligned with the new disclosures we are giving around our primary care business back in the pages [ph]. So, no big shift there. It’s just a little reporting difference that you are seeing there.

Operator:

Thank you. And our next question comes from the line of Rob Cottrell with Cleveland Research.

Susan Diamond:

Sure, Rob, happy to take that. So, as I mentioned in my commentary, in 2021, we did see different utilization patterns across individual MA and group. And as I mentioned, in group MA, we saw significantly more depressed utilization relative to individual. Some of that we attribute to the fact that we did see lower overall COVID hospitalizations in the group MA population, and we attribute that to the fact that they tend to have a higher vaccination rate than the individual. So, we had lower COVID utilization, but similar levels of sort of depression in non-COVID utilization resulting in overall lower utilization in group MA. As we assess that going into 2022, we also had assessed the impact of mortality as a result of COVID and what the resulting impact was to morbidity. And as we have been able to review the trends that we are seeing, as we entered the year, we believe that some of that lower utilization was reflective of lower morbidity. And I think based on the trends we have seen, what we would say is some of what we thought was lower morbidity has turned out to be more reflective of just deferred utilization and pent-up demand that’s working its way through now. We are seeing higher surgical volumes, in particular, in group MA relative to individual. The volumes are about 600 basis points higher year-to-date in the group MA side than individual. That’s one of the reasons we have some reason to believe that this may be, to some degree, reflective of a pent-up demand that may still moderate in the back half of the year, and we will certainly continue to monitor it. But as I have said, it is trending a little bit differently. Some of that was probably just a reflection of sort of what we anticipated and allocated and attributed to morbidity versus pent-up demand. We will continue to watch it. As I have said, as you think about ‘23, if this does persist, we would expect to mitigate some portion of it through higher risk adjustments than we previously contemplated, and we view it as on a net basis, manageable within our 2023, but it is particularly reflective in the non-inpatient side. And like I said, we are seeing, in particular, some higher surgical volumes.

Operator:

Thank you. And I am showing no further questions at this time. So, with that, I will hand the call back over to CEO, Bruce Broussard, for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.

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 first quarter 2022 results and our updated financial outlook for 2022. Following these prepared remarks, we will open up the line 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 first quarter 2022 earnings press release as they relate to forward-looking statements. And to note in particular that these forward-looking statements could be impacted by risks related to the spread of and response to the COVID-19 pandemic. Our forward-looking statements should therefore be considered in light of these additional uncertainties and risks, 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 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 earnings call refer to diluted earnings per common share. With that, I will turn the call over to Bruce Broussard.

Susan Diamond:

Thank you, Bruce and good morning everyone. I will provide an update on our first quarter results, including line of business performance details, our outlook for the full year and progress made to date on our $1 billion value creation plan. Finally, I will provide an update on capital deployment, including the planned use of proceeds from the pending divestiture of our majority interest in Kindred’s, hospice and personal care businesses. Today, we reported first quarter 2022 adjusted earnings per share of $8.04 driven primarily by lower-than-anticipated administrative costs, some of which is timing in nature and outperformance in our pharmacy business. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. Inpatient utilization was favorable across our Medicare and commercial businesses due to a faster decline in COVID admissions and slower rebound in non-COVID admissions than we’ve seen during previous surges and we will need to continue to monitor how utilization further rebounds in the coming weeks. Typically, we would not raise guidance at this stage as it is too early to fully evaluate results and medical cost trends in particular. However, given the main drivers of our first quarter outperformance, we are raising our full year guidance by $0.50 to approximately $24.50, representing nearly 19% growth over our actual 2021 results. Importantly, this revised guide continues to anticipate $1 of conservatism to cover a net COVID headwind should it emerge and also anticipates the estimated impact to earnings of divesting 60% of our interest in the Kindred hospice and personal care businesses later this year. With respect to quarterly earnings seasonality, at this time, we expect the percentage of second quarter earnings to be in the low 30s. We want to reiterate, however, that investors should continue to focus on the full year estimates as quarterly development will continue to be impacted by ongoing COVID-related timing dynamics. With that, I will now provide additional details on our first quarter performance by segment, beginning with our Retail segment. As Bruce discussed, results of our open enrollment period trended slightly better than previous estimates. If these trends continue for the remainder of the year, we expect our individual Medicare Advantage growth to be slightly above the midpoint of our current guidance range of 150,000 to 200,000 members. Revenue for the quarter was in line with expectations with individual Medicare Advantage PMPMs up 8% year-over-year. We continue to expect our PMPM yield to be in the high single-digit range for the full year. Turning to claims trend, total medical costs in our Medicare Advantage business ran largely in line with expectations in the first quarter. We experienced lower-than-anticipated inpatient utilization offset by higher inpatient unit costs and lower than projected favorable prior period development. As it respects prior period development, we saw inpatient unit cost for the fourth quarter of 2021 and restate higher than anticipated. As claims were received, the average cost of non-COVID hospitalizations restated higher and hospitalizations occurring in December 2021 and restated as a COVID admission, whereas the initial authorization request reflected a non-COVID admitting condition. Recall that we incur an additional 20% payment on any Medicare admission with a COVID diagnosis under the public health emergency even when it is not the reason for the admission. These incidental COVID admissions represented 10% to 15% of total COVID admissions during the Delta wave, increasing to 25% to 30% with the Omicron wave resulting in a meaningful increase in average unit costs. We will need to continue to monitor inpatient unit cost trends and COVID positivity rates throughout the year. With respect to current year utilization, COVID admissions peaked in January at 65 admissions per thousand, and then began reducing more quickly than we’ve seen historically, ending the quarter at approximately 2.5 admissions per thousand the lowest level we have seen since June of 2021 just before the rise of the Delta variant. Non-COVID admissions did not rebound as quickly as COVID declined resulting in net inpatient utilization favorability for the first quarter, although it continues to rebound towards expected levels. We considered the higher fourth quarter 2021 inpatient unit costs in our first quarter estimates, resulting in overall inpatient costs running generally consistent with expectations. As previously shared, we have limited visibility into non-inpatient trends until claims are received. And so as is customary, our first quarter results assume non-inpatient utilization is in line with previous expectations. All in, we are pleased with the early performance of our Medicare Advantage business and continue to expect a 50 basis point improvement in our individual MA pretax margin in 2022. However, as previously shared, much remains to be learned about the long-term impacts of COVID, including the impact of higher mortality on the morbidity of our Medicare members. Provided COVID levels remain low, we will have an opportunity to further evaluate baseline trends relative to our estimates. Moving to PDP, membership trends are tracking favorable due to higher sales in the Walmart Value plan and lower voluntary terminations in the premier plan. As a result, we have updated our full year guidance to down 100,000 members versus our previous projection of down 125,000 members. In addition, we continue to expect approximately 80,000 PDP members to move to a Humana Medicare Advantage product this year. Our Medicaid business performed well in the first quarter, experiencing lower-than-expected COVID costs. The Medicaid team is actively preparing for the Ohio contract implementation, which we expect to occur later this year. We updated our full year Medicaid membership guidance from a range of down 50,000 to 100,000 to a range of down 25,000 to 50,000 to reflect the extension of the public health emergency to mid-July. In addition, we were pleased to receive notification in the first quarter that the Louisiana Health Department announced its intent to award Humana a contract to serve Medicaid beneficiaries. We now expect the state to rescore the previously submitted RFPs with a decision anticipated in late May, and we are optimistic that we will once again score well given the strength of our offering. We continue to be very proud of our Medicaid program and success growing our footprint organically. Group and Specialty segment results were slightly favorable with growth our group medical and specialty businesses contributing to the positive results. The fully insured group medical business experienced favorable inpatient utilization due to fewer COVID admissions, similar to what we experienced in the Medicare business, partially offset by slightly higher-than-expected membership losses. The rating actions taken in the back half of 2021 to incorporate expected ongoing COVID costs resulted in slightly higher attrition than originally anticipated. Our specialty business also outperformed as utilization, particularly for dental services continues to run lower than expected. To the extent this lower dental utilization continues, we plan to reduce pricing to our Medicare Advantage business in 2023 accordingly. Our Healthcare Services segment had a strong start to the year. As previously mentioned, our pharmacy business meaningfully outperformed expectations, driven by higher-than-expected increases in mail order penetration, lower unit costs due to favorable underlying drug mix and lower cost to fill. We currently expect the favorability to persist throughout the year, although with some moderation as our previous estimates contemplated increasing mail order penetration rates over the course of the year. Our efforts to drive increased mail order penetration are demonstrating success with 38% of our individual Medicare Advantage members utilizing our home delivery services in the first quarter, a 100 basis point increase year-over-year. As Bruce mentioned, Medicare Advantage members retained in 2022 used Humana Pharmacy’s home delivery services, nearly 9% more frequently than members who disenrolled, also contributing to the strong start to the year. As a result of the outperformance seen in the pharmacy business, we have increased our full year healthcare services adjusted EBITDA guidance by $50 million to $1.725 billion to $1.875 billion from the previous range of $1.675 billion to $1.825 billion. This adjustment also contemplates the estimated impact to EBITDA of divesting 60% of our interest in the Kindred hospice and personal care businesses later this year. At this time, we have not updated revenue or operating expense guidance points as the impact could vary depending on the timing of the transaction close. Turning to the home. Beginning with our first quarter release issued this morning, we disclosed episodic and total admissions for our home health business. Episodic admissions are up 3.5% year-over-year, while total admissions are up 4.9% year-over-year, largely consistent with expectations. For the full year, we continue to expect home health admissions to be up mid-single digits. We also provided detail regarding members covered by our proprietary value-based home health model. We continue to expect approximately 15% of our Medicare Advantage members to be supported by this model as of year-end 2022 as we expand to additional markets, including Virginia and North Carolina beginning at the end of June. Within 5 years, we expect to support 50% of our Medicare Advantage membership with our value-based home health model and believe it will deliver mid-single-digit reductions in overall home health DME and infusion spend within 12 to 18 months of implementation and mid-double-digit reductions at maturity while improving patient outcomes. The nursing labor shortage continues to be a concern for the home health industry broadly, and we continue to closely monitor clinical staffing levels, capacity and admission trends making targeted investments to sustainably improve the recruitment and retention of nurses to position the business for further growth. We are particularly focused on markets where growth has been negatively impacted by insufficient nursing capacity. We are seeing positive results from our efforts, including a 5% reduction in full-time nurse voluntary turnover in the first quarter as well as improved recruiting in March attributed to the return to face-to-face recruiting. We are encouraged by the improvement we are seeing in recruiting and voluntary nursing turnover, but acknowledge there is much more work to be done. The hospice business performed well in the quarter with total admissions up 9% year-over-year, fueled by a general improvement in referrals led by increased access to facility-based sources, investments in the business to expand clinical capacity, mainly in the form of dedicated on-call nursing staff and winter storms that negatively impacted missions in the prior year. Turning to our primary care organization. Results remain in line with expectations for the quarter. We enhanced our primary care disclosures to include a breakout of clinics by de novo, which includes all new centers opened since 2020 under our Welsh Carson joint venture, wholly owned, representing all centers, not in the Welsh Carson joint venture and IPA, which reflects patients served by our Conviva MSO. We also updated our patient SERD metrics to only include Medicare patients covered by a value-based payment model as this is our focus and represents the primary growth driver for the business. As of March 31, we operate a total of 214 centers, serving 180,000 patients in Medicare value-based arrangements while also supporting 58,000 patients under IPA arrangements. We operate 37 de novo centers, which are focused on driving panel growth and patient engagement to ensure our patients’ needs are identified and we can begin our care planning. This early engagement supports our ability to identify and slow disease progression. We opened five new de novo centers in the first quarter and 14 since March 2021, representing a 61% increase year-over-year. These centers grew paneled membership by 4,500 in the first quarter and 9,100 year-over-year, a 163% increase in patients served. We operate an additional 177 wholly owned centers, serving 166,000 patients in Medicare value-based arrangements, primarily in Florida and Texas. We are focused on continuing to grow these centers organically and inorganically while also focusing on improving clinical and financial outcomes by leveraging our senior-focused, multi-disciplined care model supported by proprietary workflow technology and analytics. Since March 2021, we have increased our wholly owned center count by 30 and Medicare patients served by 37,000 or 29% with approximately two-thirds of this patient growth attributed to acquisitions of Florida and Texas-based primary care practices and approximately one-third due to organic growth, including patients served under DCE contracts. As we monitor the continued performance improvement of our wholly owned centers, we are pleased to report that 15 are producing our targeted EBITDA contribution of $2 million or greater and have an average panel size of 1,500 Medicare Advantage risk patients. Additionally, 69 of our wholly owned centers are EBITDA positive compared to 51% at this time last year. Finally, I would like to add to Bruce’s commentary on our $1 billion value creation plan, highlighting some of our recent progress. We are tracking various initiatives across discrete stages of development starting with ideation, followed by sizing, design and execution; and finally, realization of savings. We gained confidence as each initiative moves through the stages, and we’re pleased that initiatives valued at approximately $575 million are now in the design and execute phase. We continue to believe that the majority of initiatives will be implemented in the back half of 2022, which was contemplated in our initial guidance. Our lower-than-expected administrative expenses in the first quarter in part reflect management actions that accelerated savings we otherwise expected later this year as well as some timing-related variances. We remain confident in our ability to achieve our goal, creating capacity to fund additional investment in 2023, and we will continue to share updates on our progress throughout the year. From a capital deployment perspective, we expect to receive approximately $2.8 billion in cash proceeds upon closing of the pending Kindred hospice transaction. As shared last week, the enterprise value of Kindred hospice is $3.4 billion. The $2.8 billion in proceeds is made up of approximately $2 billion related to the repayment of debt from Kindred hospice to Humana and $800 million, reflective of 60% of the $1.4 billion equity value. We intend to use the majority of the proceeds for debt repayment as we look to deleverage back towards our target of approximately 35%. In addition, as previously disclosed, we continue to plan for a customary level of share repurchase in 2022. We expect our debt to capitalization ratio to be approximately 40% at the end of the year. Before closing, I would again reiterate that we had a strong quarter with all businesses demonstrating positive fundamentals supporting our full year guidance raise. There are a number of items we will need to continue to monitor to fully assess ‘22 performance, including non-coding utilization trends, the rate of COVID positivity and inpatient unit cost trends which is why we believe it is prudent to continue to allow for COVID conservatism in our guidance. Finally, we are pleased with the progress made to date on the value creation plan and remain confident in our ability to achieve our goal creating capacity for further investment in our Medicare Advantage business and expansion of our Healthcare Services capabilities, while still delivering on our long-term earnings growth target in 2023. 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.

Kevin Fischbeck:

Okay, great. Thanks. I guess I just wanted to dig in a little bit more to the guidance raise, if I understood it correctly. It seems like a little over half from the services business being higher and the rest is G&A, so you didn’t – should we read that into that you feel a bit at the lower end of your G&A guidance is the to change the range there? And I just want to make sure that I understand the MLR guidance is unchanged. There seems to be getting some questions about how MLR looks given the decline in BCP. Thanks.

Operator:

Thank you. Our next question or comment comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Bruce Broussard:

Relative to the rate notice and our investment, I would say we feel very confident that we are going to have the ability to be competitive in 2023. So even though we might have a little bit some – because of our STARS scores, we see higher STAR scores in absolute, but on a relative change, it’s lower than the industry there. So we still have the same amount of dollars going into the program. The second part of your question, just about the allocation among the various different components, the bucket, so to speak, between plan design and the distribution and marketing. We just don’t feel comfortable today to give you that disclosure. As we enter the latter part of the year, and we’re in the AEP cycle, we will probably give you more details there. But I think today, it would be best that we don’t do that.

Operator:

Thank you. Our next question or comment comes from the line of Justin Lake from Wolfe Research. Your line is open.

Bruce Broussard:

Yes. As I mentioned, we are shipping for September. And the reason for the move between June to September is we just felt that the information more relevant as we entered the latter part of the year for a few reasons. First, we will be closer to AEP and provide more thoughts around our go-to-market strategy since we’re getting close to that. Second, we will have more progress on the $1 billion program, and I know that’s important in the short run. So those are really why we just felt that getting later in the year would be important to allow more timely information for the investors. Relative to the subject matters, I mean, we do look as an important part of our strategy of the Healthcare Service business being important, I think giving more disclosure around what that looks like and the strength of that over a longer period of time will be an important discussion. In addition, we will discuss just our earnings potential and the growth in our earnings potential, including how that affects margin and our view on the margin side. So we will discuss that as you articulated. It is an area of particular interest by our investors, and we will be prepared to discuss both the individual MA margin and then also just how healthcare services impacts the enterprise side. And then lastly, we will also just be able to give the investors much more update just on how we see the healthcare service business growing and the impact it has in the integration within the market itself because as I articulated, we’re building the capabilities, we’re leveraging and scaling the capabilities. And then in addition, an important part of that value is the integration in the local market as referred to in the commentary around the flywheel effect. And so that will be an important discussion that we will have.