All right, well, let's go ahead and get started. It's my pleasure to have the team from Humana with us. We've got Jim Rechtin, our Chief Executive Officer, and Celeste Mellet, the Chief Financial Officer. Thanks guys for being here. I think Jim, you wanted to make some comments before we get into some Q&A.
Yeah. I just wanted to hit a handful of themes, which are really kind of the themes that we've been hearing since the first quarter earnings call. I'm gonna take us back to our Investor Day last June. We essentially made, you know, two commitments at the time. One is getting Medicare back to a stable and compelling margin of at least 3%. Second is getting the earnings power of the business back in place by 2028. We just wanna reinforce that those things have not changed. We are still committed to the things that we said last June. What that means, of course, is that we have to make adjustments to the environment that we're in.
You know what I mean by that is medical cost trend, rate environment. We will have to adjust benefits to accommodate the environment that we're in, both from a funding and from a medical cost standpoint. You know, that has led a number of people to basically say, "Okay, so clarify what you mean when you talk about lifetime value of a member in that context." You know, first of all, I wanna be very clear that when we talk about lifetime value, it's not a theoretical concept, it is rooted in math. The economic value of a member in year two is substantially better than year one. Year three is better than year two. Year four is better than year three.
The jump from year one to year two in particular is driven by both acquisition costs, which are higher than retention cost, and it's driven by the fact that MER matures from year one to year two. It matures as we get to know a member better, we understand what their conditions are, and we help them manage those more effectively. When we talk about lifetime value, what we're talking about is the economic incentive to make sure that we are minimizing attrition or maximizing retention of our members from year to year. For that to work, for that lifetime value calculation to work, we still need a compelling MA margin over time. All right. I think there are some questions, do we believe that CenterWell margin can replace or substitute the Medicare margin? The answer is no.
The Medicare business has to stand on its own. The CenterWell business has to stand on its own. Combined, it makes the economics more attractive. We, you know, we need a stable and compelling MA margin. We need to continue to run a good CenterWell business, and combined, it creates a lot of incentive to keep our members around.
Okay. All right. I think the theme there is you can balance your lifetime value strategy, adjust benefits, and still achieve the desired outcome.
That's exactly right. We have to do that.
Right.
That is the nature of the business at the end of the day.
Okay.
Obviously as we adjust benefits, we wanna do it in a way that protects our customers, our consumers the best we can. It has to be fiscally prudent at the end of the day.
Right.
Yeah. Whit, if I can just add to that. The acquisition costs I think are. I think people generally understand they're higher in the first year, but the difference between the first and the second year is massive. We're talking over $1,000 on average per new member in the first year, and that's halved in the second. That's a huge difference. You have to have the medical margin to follow up on it too, so you'd have to adjust your benefits. This constant churn within the industry just generates, you know, a ton of money that's going to the broker pockets, not going to the enterprises, the shareholders , or, you know, the members.
I would think game theory, if the entire market is responding by adjusting benefits, that further enables you to achieve the desired outcome, and still focus on lifetime value.
Yes. That is exactly right. In periods of time where the funding, the industry funding is not keeping up with medical cost trend, you would presume that the entire industry is making an adjustment. The question is not, are we making an adjustment? The answer is yes, we are. The question is, are we a little bit better at making those adjustments in a way that are less abrasive for our members? Are we doing a better job of communicating and interacting and engaging with our members so that they are better able to absorb those adjustments?
Okay. Strong AEP this year, over 1 million members. Maybe just refresh us on some of the numbers around switchers, retention, growth in D-SNP, how many are returning, members?
Yeah. These are the metrics that we're looking at during AEP in many cases, and then in some cases in early January to basically ask ourselves, are we seeing the type of growth that we wanna see? We have felt good about where those metrics have come in, what they're telling us about the membership that has onboarded in January. For example, about 70% of our new members are switchers as opposed to new to MA. On average, switchers are economically better in year one than a new to MA member. Now you look at that and you then say, okay, well, are you concerned that a bunch of those switchers are coming from plan exits? The answer is we actually feel pretty good about the mix of plan exits versus non-plan exits.
We absorbed about 12% of the plan exits, so that's less than our market share. That's less than, if you think about it, our kind of fair share of the market. Which means that we essentially have brought on board a lot of very positive switchers who are coming from other types of plans, not from plan exits. In addition to that, about 70% of our new members are in four-star or better contracts, and so that also makes this a good mix of membership coming in. We also have about 75% of these members coming through channels that are more attractive sales channels. We're looking at our sales channels. Some tend to have higher retention, some tend to have more engaged members.
We are seeing about 75% of our members coming in through channels that we consider to be higher quality channels. Each of those looks gives us a snapshot into the membership mix in a way that right now presents very positive.
Okay.
I would just add, it's not an accident that we're seeing an improvement in the sales channel mix. We have taken very deliberate action to, you know, as you think about some of the actions we took in AEP is to trim the lower performing call centers and broker partners. We looked at stars, we looked at retention, we looked at all of the things that drive the economics for the business. We weren't just, you know, cutting for cutting's sake, but we're really focused on the quality of the membership that we were gonna acquire through whatever channels we had open.
Yeah. For all those are the reasons that you feel confident in your ability to double the margins before the Stars headwind still?
That is correct.
Yeah.
Yeah.
Mix of HMO, PPO, it was largely unchanged versus the mix last year, correct?
That's exactly right. It looks very similar to our historical mix over the course of the past few years.
I believe, I know you've got your January premium payments from CMS, your February payments from CMS. That gives you a look with the MOR stuff, and any observations, things you'd care to share, any changes in RAF versus expectations?
Yeah. You know, there's obviously the things that we see during AEP that we will then adjust to over time, and then there's the things that we don't really see until January. We have the MRA tape that comes in in January. Now February, we've got a pretty early look on medication utilization, and you get early data on APTs, admits per thousand. You get some pretty early look at prior authorizations and how that's trending. On the whole, all of these metrics are kind of pointing to the same story, which is the mix of members coming in looks very consistent with what we were expecting, again, as we were making all of our adjustments in AEP.
Like, again, to Celeste's point, we made a whole bunch of deliberate decisions to try to shape the type of growth that was coming in, and the data that we're seeing across all those different metrics reinforces that what we ultimately absorbed is pretty consistent with where we expect it to be at this point in time.
Knowing what you know now about the competitor benefit design action that was taken, would you have changed your bids at all?
Yeah, you're saying if you went all the way back to last June, would you have done something different?
Totally unfair question.
Look, I will tell you, every year you see what your competitors have done, and you would have done something different. Like that is just a given. When we were submitting our bids, did we expect to have the type of growth that we had this year? No. The answer is, at that point in time, no, we did not. As data began to come into the market, even over the summer, you begin to see some of the actions that your competitors take, even before the product is out there.
You begin to realize kind of the direction that things are headed, and that's when you're stepping back and you're saying, "Okay, now on a forward-looking basis, what do we need to do differently to shape this environment in the direction that we want to shape it?" Again, that goes back to what Celeste was pointing to. We made very deliberate decisions, both geographically, product type, how we commission the channels that we were using from a sales standpoint to, you know, to take advantage of the situation that we're in and shape it in a direction that made sense for the company. To go back to your original question, you know, yes, you would go back and you would do some things differently if you had full visibility into what your competitors are doing.
Having said all of that, we actually feel good about where we landed. A little bit different place than where we expected to be, but we feel good about where we landed.
Yeah. I get asked a lot of questions about just the various margin profiles on different members, and you had members in, you know, a 4-star plan last year that was 1%, and as though those new members go to, you know, a new 4-star plan, is it 1%? Is it 2%? You know, maybe it'd just be helpful to rank some of the margins, Celeste, on old members, the switchers, the new lives from fee for service, et cetera.
Yeah. The bulk of our concurrent members, old members, are on plans with less than four stars. 70% of our new members are on plans with four stars or greater, but you have the acquisition costs. Would the acquisition cost pulls them down closer to the overall pool? We've talked about sort of being break even in insurance and slightly negative in MA, but the profile is different. Now, typically, switchers do have higher margins. If you just strip out stars and everything, and let's just like UM, utilization margin, you would, you know, your switchers would be the highest then your, you know, your new to Medicare would be the lowest because they tend to be, you know, they're not coded yet.
You know, you get paid more over time as they age in. It's, you know, there's a lot going on beneath the surface with the margins. If you strip away the noise of stars and acquisitions, you get, your switchers are still gonna be your best.
Right. Maybe growth in D-SNP this year, and maybe just update us on kind of what the margins look like on those members now last year versus this year.
The margins on D-SNP?
Yeah.
The last year versus this year, I don't know that I actually know that off the top of my head. I think they're gonna be.
It's gonna be better. Yeah.
A little bit better.
Well, I mean, if you think about it, we're doubling X stars. If we're doubling for the book-
Yep
The margin improvement would be across all of the membership. If you think about the drivers, we have the rate notice plus trend benders, plus operational efficiency is greater than trend, which is what gets you the margin improvement, and that would be across the whole book.
The D-SNP remain on average higher margin than the non D-SNP last year and this year.
Yeah.
Yeah. I don't think the differential is any different than it was last year, though.
Yeah. Some of your competitors, I hate doing that. Sorry. They tend to say that they don't feel like they can make money on PPO. Why is it that Humana feels like they can make money on PPO lives?
Yeah. I don't understand where the notion that you can't make money on PPO product comes from, to be perfectly honest. Like, at the end of the day, you have a risk pool, you have the ability to price product to that risk pool. The profitability of the product has everything to do with how are you structuring the product, how are you structuring your network within the product. Yes, it has to be appropriate to the risk pool of the members who use that product. The product itself is not inherently profitable or unprofitable.
You know, what we have, you know, we took two years of pulling back on benefits across the board, but in particular, much of that was in the PPO market because we did recognize that that market over a number of years had kind of gotten out ahead of itself, in essence, that it was being priced too aggressively. We took two years, we pulled that back. We in essence walked away from, you know, kind of where the industry had been, which is pricing for a thin margin in year one, and then trying to deliberately ratchet back benefits in year two and three, driving a lot of churn, but then making money on the members you retained. That was part of what was going on in the industry. We walked away from that two years ago.
When you walk away from that and you're pricing appropriately, the product should do fine. You just have to recognize what the risk pool is that you're serving and how to adjust the benefits to it.
I'd be curious to get an update on some of the engagement initiatives, early engagement with new members, either on the MA business and also maybe CenterWell, how that compares to prior years.
Let me start.
Yeah, sure.
I'm happy to jump in. We have been much more proactive this year in engaging our members, really starting at the point of sale. If you think about the pre-effective period between point of sale and the policy going into effect in January, you essentially have a window of engagement where you can get, you know, ahead on closing Star gaps, on, scheduling primary care appointments, on, getting your Annual Wellness Visits, scheduled and moving. We've had a higher level of engagement than we've really ever had, largely driven by deliberate actions that we've taken in and post the sales period, to onboard our members more effectively. It has helped with, you know, taking that approach, has helped with call center volume, call center service levels. It has helped us get a head start on Stars performance.
It's had a lot of benefits. Frankly, we're excited to be managing that process in this way going forward.
I'd say generally because we had a lot more switchers this year, 70%, they're gonna be more engaged. Even the ones who come in under coded, they know how to use the program, they know how to use their benefits. They, you know, they're much more familiar with it. F rom that perspective, in addition to the actions we're taking to engage them faster and sooner, we're not seeing any cause for concern at the moment.
About 25% of our switchers we have actually had as customers in the past.
30%, yeah.
Is it 30%?
Yeah.
Yeah. We can look back at how those members performed and engaged historically and again, it's good membership mix. It is highly engaged members who are active in their care, which again is positive for Stars. It's positive for MER.
Right. That's where I was gonna go next. All that aligns with the investments and things you're doing with Stars. Maybe just elaborate a little bit more on the Stars investments, how you feel like you're tracking beyond some of those member engagement initiatives.
Yeah. The Star Ratings, operationally, the Star Ratings' performance continues to perform well. We have made very positive strides year-over-year. We hope to share more about that, a little bit more color around that as soon as the hybrid season is over here in another couple months. Yeah, the headline is operationally, we're doing the things that we felt like we needed to do. You've got the inherent uncertainty of not knowing what your competitors are doing in a program that is graded on a curve. Operationally, we feel good about the place that we're at, and that's both looking at the HEDIS and patient safety metrics that we were working on last calendar year.
That is also true in the metrics that are kind of in play right now, which is, you know, call centers and [CAHPS] and HOS metrics. Look, we're optimistic about where we're headed in the Star Ratings, and like every year, we need to see where competitors land to understand the final outcome.
Yeah. Well, there's some positive, I guess, near term developments with Stars. The preservation of the reward factor was certainly, I think, a welcomed development.
Yep.
In the technical notice, CMS is now proposing some changes within Stars, maybe eliminating 12 measures. You can run it through a model and see that it's a modest headwind to your raw score.
What do you think the outcome of this is gonna be just from a policy perspective at this point in time, and feedback maybe that you're providing to CMS? I know it's a busy week for you, so.
Yeah. Well, look, on the Stars front, what it feels like CMS is trying to do is put more emphasis on health outcomes at the end of the day, moving away from some of the administrative metrics that, you know, while meaningful to an extent, would also tend to drive, you know, costs up, cost burden up in excess of the actual benefit that members are seeing. We came out in support of the changes. We recognize that when you look at historical performance, it would appear to be a modest headwind, but a lot of our effort over the course of the last, roughly 18 months now has been in those very metrics that CMS is emphasizing. We've been putting a lot of effort into the quality, and the patient outcome-oriented metrics.
We feel good about where we're actually positioned at this point in time relative to the changes.
I could ask the question on Part D, where PDP margins are today and what's sort of incorporated within the outlook and framework this year?
Yeah. We again, like last year, priced for margin, but we're guiding to effectively break even, just given the continued evolution of that program. I think this, you know, the changes this year then will sort of be more settled based on what we know today. They can continue to make changes. Just given the pipeline, you know, we have a good view into the pipeline, but exactly when they hit and what the utilization looks like is the risk we're sort of looking out for there. We don't have heroic assumptions in terms of what we would earn in that business this year. Over time, we would expect as the program settles, that you begin to generate more consistent profitability.
Yeah. How strategic do you think about PDP now? I mean, I don't wanna call it a commodity, but you've seen other competitor exits out of the market. It's helpful for the PBM in some ways, but long term, how's the thinking evolving around that business?
Yeah. There's a couple of components. One, it is a good starter product. We have a few products that are starter products for folks who may just start.
In
In one, and then eventually switch. Right? You have much lower acquisition costs, you have a relationship, you know, you have a sense-ish for their health. Too, you know, you do have, as you think about PD, you know, the PD and then MAPD, the leverage and the insights and the risk pool across a broader set of individuals, which is beneficial. We have, as you know, our PBM and that business is structured very differently. It's I mean, we get paid, it's more of a like transaction fee than we don't have like the massive markups. It's beneficial to us, but we've structured that business very differently. Obviously, we're gonna continue to reevaluate it every year, just as the regulatory environment changes and the rules for the program change to ensure that it makes sense.
Yeah. Maybe just we'll hit on the rate notice. Obviously some disappointing results and outcome of the preliminary rule. I don't know if there's much to share, Jim, but I'll just throw it out as an open-ended question with no answer.
Yeah. I think you just summarized it in many ways. There is no answer at this point in time. Yeah. Obviously, the industry's been very active and frankly, advocates for seniors have been very active in communicating to Washington the potential implications of this rate notice. I think those implications are well understood. Y ou can't have mid- to high-single-digit cost trend and flat funding and expect benefits to remain the same. It's just the math doesn't work. A gain, I think policymakers understand that, where things will land, you know, it's hard to know. Obviously, now, CMS, for all the right reasons, does not advertise where they're headed with a final rate notice.
Our hope is that we see some amount of relief, really for the benefit of our members, right? Like, it is less about the impact it's gonna have on us as a company, and it's much more the impact that it's gonna have on our members. You know, we'll know here in another couple months.
If I could just add that hope is not a strategy, so we understand what needs to be done to deliver on the targets and the margins that we laid out at our Investor Day. What's better would be the reductions or the adjustments in the industry will be less, but we understand what needs to be done.
I like that message. One of the I've been studying a little bit this unlinked chart review thing, and there were some really interesting studies that have been able to show the wide variation and the potential impact of what this could be for participants within the industry. I've seen studies showing upwards of north of a 6% headwind, not 1.5%, and you guys don't feel like you're gonna see as large of a headwind as that 1.5%. I'm asking more specifically around just like the industry and the wide variation and maybe the notion and idea that something like that could be phased in over a period of time.
Yeah, I think while we do believe that there will be some variation, the variation is not gonna be the same magnitude that it was with V28. I also think some of the variation that you see even today can get managed over time. You've got companies that have kind of been that have, you know, essentially invested more in having the capabilities to link encounter data to chart reviews, and then you've got companies who have lagged in doing that. The whole industry is gonna move there over time, and that will narrow the variation and the impact over a year or two.
Having said that, when you look at just the totality of the changes that have been introduced, the recalibration combined with the chart review and then the skin substitute adjustments, when you look at all the magnitude of all of those adjustments and what it's had on the industry, what it will have on the industry, it's pretty significant. I think you know the question is, do you phase some of these changes in over time more to allow the industry to have time to adapt to them?
Right.
I think that's a real question that CMS is gonna have to wrestle with.
Yeah.
I think from the chart review perspective, from a policy perspective, they've been pretty clear about that.
Yeah.
That is, you know, they wanna make sure that whatever is being paid for happened.
On CenterWell, you've got the relationship with Welsh, Carson, Anderson & Stowe, and in any given year there's the put call, and there was some, I mean, you've seen it, there were some press reports out there suggesting that perhaps that a put or call might be acted. I don't know if that's true or not true.
Yeah.
Just what's the latest update on the put call? Yeah.
In 2025 and 2026, the ball is in our court, so we could call. Starting in 2027, they could put, and there's a lag, so there are a number of cohorts. The 2025, the first year, the first cohort we could call in 2025 or 2026, and if we don't, they could put it in 2027, and then 2026 would be 2028, so it's a two-year period.
Okay.
You know, we'll take a look at where we are. You know, we do a bunch of analysis. That decision would need to be made by June.
Okay.
As you saw last year, we did not call it.
Correct. Maybe last one here is you've announced a couple acquisitions of some risk-based, risk-bearing groups down in Florida. I'd like to just hear a little bit more on the strategic thinking about how those complement the business down in Florida.
Yeah, in both cases these acquisitions kind of filled essentially geographic gaps in our CenterWell portfolio in a broader geography, meaning the state of Florida and the Southeast. That's very important to us. We looked at these opportunities and, you know, said, "Hey, one, they're very good geographic fit." They are also unique in that in both cases there's a limited number of other options in those geographies. It's, you know, if you're gonna build out your footprint and your network in those geographies, this was the opportunity to do it. In both cases they were operationally good fit. In particular with Max Healthe this is a very high performing group.
I actually think we CenterWell will learn some things from what Max Health is doing that we can apply to the rest of the portfolio, in a very positive way. They're good assets. They're geographically an important fit. You know, I think the last thing I would just emphasize is as we grow CenterWell, one of the primary questions that we are asking ourselves is. What does the primary care supply chain look like in any given geography? Are we exposed, or do we have risk because it's too concentrated, or it's concentrated in either competitors or less strong partners of ours? In those types of situations, it is very important for us to be building out a primary care footprint of our own.
Strategically, these made sense not just short term, but long term to protect and preserve the business.
To be clear, they have to stand alone as investments, right?
Right.
They have to stand alone on the CenterWell, just like MA needs to stand alone, and we need to be able to make the math work without the sort of plan element and network element.
Okay. Well, great. Well, maybe we can do a field trip to the villages. I wanna see.
Yeah.
What that place is all about.
I'm supposed to go in a couple weeks on a field trip .
All right. Lisa, set it up.
Yeah.
All right. Jim, Celeste, thanks so much for joining us today.
Yeah. Thank you.
Yeah. Thanks, Whit.
Appreciate it.