All right. Good morning. My name is Justin Lake. I cover healthcare services here at Wolfe Research. Appreciate everyone joining us for our next presentation. Very excited to have the Humana team here. Celeste Mellet, the company's CFO, the Queen of IR, Lisa Stoner, sitting up there in the audience. Before I kick off, kind of my question list here, I thought I'd give Celeste a second to give us a little bit of a State of the Union coming out of 3Q, how the company views kind of the momentum in the year end in 2026, and then we'll get into it.
Thanks, Justin.
Can you hear me?
Yes.
Thank you.
Thanks for everyone for coming in the rain. This is for every company, big time, and then MA in particular, bigger, given that we're in their big sales season. We're in our budget, working through our budget processes, thinking about where we're going to invest. We have been deep into a transformation all year, some of which you're seeing in the way that we're approaching AEP. We're working through everything from org design to tech to generally employee benefits. A lot going on right now, trying to balance, as I talked about on the earnings call, the short term and the long term. There is no long term without a short term. Excited about the future, really seeing some great things coming out of the work we've been doing this year.
For those of you who get deep into the product, we have a new tool. It's called, it's a weird name, it's like Reliant something. It's the digital tool for our IFG, which is our internal agnostic broker, where you can go in and really shop a product. One of the investments we made actually this year. A lot of momentum, a lot of excitement about the change in the company and the change we think that we can bring more broadly to MA and to healthcare in general.
That's exciting. Wanted to obviously a lot of focus on the open enrollment season, right? You gave us some color on the call, declined to give an up in terms of a specific target. I know we've already talked offline. We're not going to press for a number. I know there's not an update here. You did talk about being towards the higher end of expectations. We are a little more than halfway through open enrollment. I know that you can't cut commissions on a dime, but there are other levers that you can pull. I think you said on the call you hadn't pulled those levers. Two weeks in, we're now four, four and a half weeks in.
Any update there that you can share with us in terms of are you still kind of letting the kind of machine turn, or have you pulled any of those levers that are at your disposal?
Yeah, just if I can just take a step back and talk about how we're thinking about this season and just how we're thinking about our approach to membership and new members in general. As you know, last year and the year before, we took pretty significant action to right-size, reprice our product, ensure that we didn't have unprofitable plans anymore. A lot of the actions you're seeing this year from our peers, we took last year and the year before. That from our perspective was really important. David Diamond talked about on our earnings call, we don't want to have a loss leader product where we go out and we sell a bunch of product that doesn't make money, and the only way you're going to make money is then to cut benefits later.
Of course, there are, it's not to say we'll never cut benefits if you don't have the funding. If something goes a little sideways on a product, you're going to have to make adjustments. We're not religious about that, but we believe that stability of benefits makes a lot of sense to the extent you can do it financially. I just want to be clear on that. One of the big changes we also made this year, and this is something you will continue to see us do, is really think a lot more strategically about our distribution. We have a lot of distribution, we have a good brand, people want to sell our product, but we've been really focusing on the distribution that is high value.
We're looking, of course, David talked about at lifetime value or MPV, but we're also looking at STARS, we're looking at how they're onboarded separate from our process, we're looking at complaints to Medicare, we're looking at accretion in year in terms of earnings. There are a number of things that we've looked at, and we took a bunch of action on distribution, including parting ways with our biggest call center with thousands of brokers. I think you should expect us to continue to refine that. As we improve the averages, you should expect us to continue to raise the bar. You see hotel chains do that from a franchise perspective, right? The average keeps going up.
I think those levers, regardless of what's happening with the broader environment, we're going to continue to pull those because we want to make sure that it's not just the product we sell, but how we're selling it. Because those things matter to the financials, CTMs, STARS, et cetera. Those things matter to the financials, right? They drive revenue, they drive profitability. In terms of pulling levers, we have pulled back and optimized marketing in a couple of different areas, co-op marketing and regular way marketing. We are looking at pulling levers like that into next year and then really focusing on the distribution some more. To the extent that we believe we need to do something in a particular region or a particular product, there are other levers that we can pull and would pull. We are monitoring this very closely.
We are monitoring what we are selling, where we are selling it, how the onboarding is going, what it means for the call centers, what it means for day one, right? If you think about what it means day one, what are the expectations on January 1 from our members? Very dynamic. We will continue to be dynamic, always. We should not just sit on our hands and not be making changes to product, to distribution, to the way that we're thinking about our members.
Got it. Just to be clear, the pulling back in some of the co-op marketing and the marketing in general, right? Television, web marketing. Is that incremental versus what you talked about doing in the third quarter call?
It is incremental.
Okay. In that, those are a couple of things. It kind of gets to my next question, which is the levers that you have. I think about it as twofold, right? Commissions being the kind of more blunt object. My understanding is that you need to give 30 days notice there. Effectively, the way to think about commissions then is you're kind of locked in during open enrollment at this point, but you do have a decision to make, and you'll share that, I assume, with what you want to do for AEP that starts on January 1. You decide that by December 1, effectively. Would that be the right way to think about it?
Generally, yes. There are a lot more levers other than commissions that you are allowed to change, and some of which you can do on your own. If we continue to refine our distribution channels, we can do that on our own. If you decide you want to do something with a product in a region or a specific product or market, you can do that. You need to be careful about what you do on commissions because you do not want to have inadvertently direct members to product that they should not be in, which has happened historically, not on purpose, but there are a lot of levers that you can pull. In fact, you have seen others do it. You can suppress in a region or a market or a product that is separate from pulling commissions. Yes, we understand all of our options.
We're looking at all of our options. If we need to take action, we will do so.
That's helpful to know. Just in terms of those, let's call it intermediate types of levers you have versus commissions, we know from looking, for instance, at one of your peers last year that was growing pretty well, and then they pulled that lever pretty hard and the growth stopped. We know what you can do with commissions. When you think about these other levers, how impactful can you be there? Is it somewhat similar where you can really almost halt growth with some of these other levers, or is it kind of somewhere in between there?
Yeah, I mean, not to, I don't want to front-run things that we'd be doing or not, but if you think about commissions, if you just stop paying, people can still get the product, right? Do you not make the product available? If you look historically at other levers that competitors have pulled, there are a number of things beyond commissions. There is a lot of scrutiny about commissions right now. As I said, you potentially have a selection issue where you're inadvertently directing people into the wrong plan. There are levers that are more effective than commissions because the product would not necessarily be available. I'm not saying we would necessarily pull those, but commissions isn't the only way.
I think people have, there are very visible things that people see and like, oh, they stop paying commissions because brokers complain, but there are a lot of other things that you can do that may or may not be visible to the street. I would expect that if we were to pull levers, there'll be some that won't be understood and seen, right? People don't really know what we're doing with our marketing. And then there are things that would bubble out and people would have a sense for what we're doing.
Got it. That's all helpful. I appreciate it. Maybe just in terms of the communication timeline from here, right? My recollection is typically when the company would go to JPMorgan, for instance, there would be an update on membership there. My understanding is you're not going to be at JPMorgan this year?
We may be at JPMorgan for, there's a lot of other things that happen besides equity investors there. We may be there for that, but we have no intention of presenting. It's a weird time of year for corporates given it is a quiet period and there's a lot going on at year-end. We don't intend to present at JPMorgan. At this point, our intention is to give an update on our fourth quarter call, but as you saw from us with Stars, if we think it makes sense to do something different, we will and we'll be thoughtful about that. As we approach Stars, we thought it was really important for people to hear from Jim, not just on a piece of paper.
We will be really thoughtful about what we think makes the most sense for us to get the information out in a way that helps the street understand what we're doing.
Got it. If I read between the lines there, the stars came out and instead of waiting for the quarter, you came out and gave a little bit of an update in terms of how you viewed it. The update on membership would come kind of with that January enrollment file that typically comes kind of in the middle of January. A lot of times it is very incomplete. A lot of times there is an incorrect read if you try to interpret that and extrapolate it. That would be an interesting probably the next data point that you might look at and see if it makes sense or not. Is that the way to read it?
Maybe.
Okay.
The latest we will give an update is on our fourth quarter earnings call, but we will look. We know the questions that are being asked. Lisa is an excellent advocate for investors and questions. As you know, I was an IR person for a while and I have dealt with the street for my entire career. We have a sense for what we think makes sense and we'll make decisions on the floor. We're not absolutely wed to waiting till our earnings call. If we think it makes sense to do something before that, we will do that.
I appreciate it. Thanks for that detail. Getting into a little bit of the fundamentals of membership growth, right? We're all trying to kind of parse through what if there is significant growth, what it means, right? Retention you've talked about is good growth. You want as much retention as you can get, right? You did exit a bunch of product, right? Like everybody else did less, but whatever, but similar in terms of the structure there. You stepped away from the products that you didn't think didn't make sense. Retention's good retention. Typically, we've been seeing retention increase, or I should say churn increase pretty significantly over the last three to five years. You hear numbers and see numbers up in the 15%-20% range.
Just curious, you've started getting, I think, those files, or at least give us the update on kind of the timing of when you see those files and when you feel like you understand retention from a business perspective and maybe what you think retention could be this year versus historical.
Yeah. Not recently, but at a point in time, we were on average keeping a member for seven years, which is a pretty good length of time. You really get to know them. They're appropriately diagnosed and cared for. That would be great. The industry, I don't think is anywhere close to that. No, we're close to that. We are nowhere close to that. The product changes we made over the last two years in particular aggravated the attrition, right? If you cut benefits, even some of the ways we did historically where you didn't actually reduce that much, you're just moving things around, like you lose members.
I don't think that in one year you can get back to that sort of having a member for seven years, but we think we'll make a lot more progress this year just based on, we talked about on the call, the plan to plan, there's much lower this year. Usually, if you have Humana plan to plan, it's because people are unhappy with what they have and they're looking for another plan. We are starting to get some detail on retention. The numbers look good, but you really don't know until the end. About a third of activity for AEP happens in the last two weeks. What we're seeing so far is good. We're very, very happy with it. You don't really know. You don't know what your growth's going to look like.
You don't know what your retention's going to look like till you get through those last two weeks.
Got it. The company talked about on the last call, and I think you've talked about even at the investor day, trying to narrow down the breadth of margins between your highest margin product and your lowest margin product. I think that makes a lot of sense in terms of obviously mixed changes being less dynamic to earnings. Maybe you can give us a little bit of history there. What was that number a few years ago in terms of the breadth and how close do you think that the margins are across products here such that we don't need to worry about as much that mixed change?
Yeah. Maybe I'll answer this in two ways. We did previously have product that was losing money. Your lowest was negative. I think we've all had very good margin products. In general, our distribution has tightened. I don't know about others where your lowest is profitable to your lows are higher and your highs are higher as well. You don't move your highs up quite as much, but it is tighter and we're averaging up just like we're averaging up the quality of the distribution. In terms of bringing on new to us in this period, I guess. There are really three categories and then I'll go in decreasing profitability. The highest profitability typically are switchers from another plan. They're accurately diagnosed. You're assuming that they've been engaged at their prior plan. Those typically are by far the most profitable.
The second is switching over from fee-for-service to MA. They are less profitable, but because they were in fee-for-service, you need to get them diagnosed and coded and everything else. The least profitable, but a lot more profitable than they've been historically as we went from V24 to V28, is new agents. The agents are profitable. They are not as profitable as others, but typically they are also healthier. You do not have some of the same issues. Over time, they obviously increase. You cannot just get the switchers from others.
That new to Medicare member, new to agent member used to be, even pre-V28, was fairly significantly negative margin. That now at least is less of a risk going forward as you're growing because of that V28 and the risk score that they get coming in.
That's right. That's right. Yeah. That was one of the positive things that came out of V28 in terms of the impact to our financials.
Got it. Got it. In terms of one of the things I thought Jim mentioned that was interesting is myself and I'm sure everybody that follows your stock has done a fair amount of work trying to understand competitive dynamics, right? Even actuaries have a hard time looking at a set of benefits and seeing who's better and who's worse. Jim talked about seeing there are markets where, yes, your benefits are a little bit above. There are plenty of markets where they're still below in line. I wanted to see if you could share with us your view since it's so hard for us to interpret. If you just looked at your kind of TAM out there, how would you kind of bucket that? Do you feel like you're in line to below in the vast majority?
Would you kind of think it's a third, a third, a third? How would you encourage us to think about your product positioning here?
Yeah, we are, I'd say in line to below in the vast majority. We were last year as well. We're in a handful of markets we're above, we were last year as well. I really concentrate on the top 25 markets and we are not ahead. I don't think we're ahead in any more markets than we were last year. They might be different. The vast majority, we are in line to below.
Got it. Got it. When you talked about the growth coming in the right places, are you seeing a lot of your growth in those markets where you're above or do you feel like it's pretty well distributed?
It's pretty well distributed across non-DSNP. DSNP growth has been on the lower end versus the rest of the growth. It hasn't been, I mean, it's still strong, but it's not nearly as high as the non-DSNP growth, but it's pretty well distributed across markets and products.
Got it. Got it. Just to kind of wrap this up before we start talking about some of the other fundamentals of the business, the company obviously respects the dynamic market out there, but feels good about its product growth, right? Its product positioning and the growth potential out there. We've seen companies that have had outsized growth have some margin pressure, right? It's a big chicken and egg discussion, right? Why did you grow so much? Was it because the other guy pulled back, which is kind of what we're seeing this year? Or is it because you mispriced overall?
Maybe you can give us a minute or two on kind of take us from 2025 to 2026 and why you feel good about, regardless of what everybody else is doing, why you feel good about how you position your products and the level of confidence going into 2026 around that margin expansion that you talked about pre-Stars.
Right. A lot in that. As we talked about, as I talked about upfront, we repositioned the product in 2024 and in 2025. We have been watching 2025 all year. We feel good about what we are seeing. By and large, our product looks fairly similar going into 2025, obviously adjusting for the rate notice and all of that, which we did not invest. The product looks pretty similar. We priced it. We know generally how it fares, right? A lot of changes flow through. If you ever have an opportunity to do a focus group with members, which maybe is a good thing for you to do from various plans.
Is that an invitation?
No, but you can organize one yourself. That feels like something that your clients would really like. Everybody is a little annoyed with their health plan. I mean, who isn't a little annoyed with their health plan? When you affect their benefits a lot, it's super disruptive and they're going to go and shop. There are some people who always look. They're not the shoppers who are looking for the biggest, just like making sure they are in good shape. When you pull a lot of benefits away, you really disrupt the market and people are going to go out there and look and look at the product. That is what's happening this year. A lot of disruption in the product, a lot of disruption in the distribution, and people are shopping. We have a good brand. We have a good relationship with our distribution.
We treat our distribution with kindness and respect. There is stability. Because of that, they are selling our product. It's not because our product is materially richer. We didn't go and invest while everybody was pulling back. People know what they're getting with us. They know that stable means sometimes we will have to adjust. This year, a little bit of a port in the storm in terms of product out there.
Got it. If I had to think about when I talk to investors, what one of their concerns is less around how you priced and more just what kind of new membership are you going to get? Like if United's walking away from 500,000 members, they must be the worst members. They must be high utilizers. I hate to throw United's name around, but there are 2 million members out there that are getting walked away from. Are they coded correctly, for instance? I'm curious. If we have the unknowns of coding, right? Are they coded correctly and what kind of utilizers they are? Maybe we could think about just a timeline here of that. When would you know relative to kind of that risk score that the member would have relative to what you think they should have? How early would you know that?
First, to be clear, number one, there was the same amount of PLEX this year as last year, right? Just from different players. People always forget about the smaller players out there, both in terms of investing and coming out, right? The amount of PLEX is about the same, maybe a tiny bit higher this year. That is the same. Going into AEP, we knew where people were PLEXing. We took actions to ensure, while we do not believe there are bad members, they are just mispriced members, mispriced risk. We did take action in a number of markets. We decommissioned a third of our plans. We turned off product in certain markets.
One area in particular where we turned off product is in med-sup because if you are a member in a med-sup plan, in an MA plan, and you get Plexed, you can go to any med-sup plan in your market and not be underwritten. You can end up upside down from a med-sup perspective, and it would take a couple of years to get back. We took action to ensure what we believe our pricing is appropriate, but we also took action to protect ourselves given the most dynamic, I believe, market in MA in a very, very long time, if not ever. We do know generally in various markets where folks will be coming from, we have capacity to ensure that we can get them onboarded and coded.
Generally, we are going to make assumptions with newer members, period, as to where they come on and build that into our forecast. We don't know for sure until we get the last of the member files in January, February, but we generally would take that into account in the way that we do our build-up.
As I think about these new members coming in, if you do end up at the higher end of expectations, right? Yes, it probably widens the range of outcomes for numbers. There are some benefits to new members in terms of operating leverage in the insurance business. There is the flow through to CenterWell, especially the PBM. Can you walk us through a little bit of that in terms of how much cushion do you get from fixed cost leverage there that would, again, add some cushion and then the CenterWell benefits?
Yeah. So just a reminder, we do have a $3 billion revenue, $3 + billion revenue headwind going into next year. We are working through a transformation. We are going through our budget process right now to figure out where we want to invest, how much we want to invest. As we have talked about in the past, there are a lot of things that we can step up and lean into as we get deeper into the year if we have outperformance. We are working through that right now. There, of course, would be some fixed cost leverage, but we have this pretty big headwind that we are taking a number of steps to offset in terms of your typical, you normally would have a cap offset with the STARS revenue.
Because we're providing STARS relief to a bunch of our providers, this was contemplated in June, we don't get that same cap offset. In addition, we call out a couple of other headwinds that are sort of non-operating, including NAI, as it relates to the yield curve and then the villages' acquisition that long-term would be very positive. We're working through all of that now. We will be as transparent as we can be with what's in our numbers, but we also don't want to be in a position where we're going to miss right out of the box too. I'd rather underpromise than overdeliver. That's not saying we're going to land anywhere in particular, but we're balancing all of those things right now.
In terms of benefits to CenterWell, certain members, there is a nice, what I would call, intercompany pickup, in particular on the pharmacy side of things. You have more members. Our non-specialty businesses are all Humana members. You typically get a pickup there. Generally, you would get a pickup on the specialty side of things. It depends on the plan that comes in. There is a wide range of outcomes in terms of what the benefit is to us.
You talked about plan-to-plan changes, which are typically negative, right? Someone's going from a lower benefit plan to a higher benefit plan, so the margins will contract a bit. You talked about those being down fairly materially year over year. Is that any kind of quantification there in terms of they down in half or?
I don't, actually, I should have looked at this through yesterday. I don't, off the top of my head, have that. I don't think it's meaningful until we actually get through the end of AEP. They are down very significantly, which correlates with the so far the data we're seeing from CMS in terms of the better retention.
Got it. Maybe just a quick comment on CMS rolled out this new demo on GLP-1s. How do you think that affects you? I know there's still probably a little bit to be determined here, but any kind of early, are you going to have an early impact? Do you feel like you're going to have to cover these drugs in 2026?
I mean, we only know there's going to be a, there's going to be something. The date isn't clear. I've seen two dates. How they're going to do it is not clear, but typically they would have to cover it in the first year. Really, the devil is going to be in the details on the second year. I would say they ask good questions about understanding, because all of this is very well intended, but understanding the unintended consequences generally in terms of understanding what it means for members, what it means for premiums, etc. It is still way too early to say, but they would cover the 2026 benefits if they're provided and depending on when they come in.
Perfect. That's helpful. Last, Lisa, I appreciate you guys being here today, everyone. Appreciate your time. We'll move on to the next presentation. Thanks again.
Thank you.