Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to you that you might not fourth quarter earnings calls at this time all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session. At you asked a question during recession you want me to press Star one on your child. The fell one if you require any for ADESA since please press star zero.
Please note that the base kind of friends is being recorded.
Thank you I'd now like to hand, the call overseer first speaker Amy Smith.
Vice President of Investor Relations Ma'am. Please go ahead.
Thank you and good morning, and a moment, Bruce Broussard, Humana's, President and Chief Executive Officer, and Brian Kane, Chief Financial Officer will discuss our fourth quarter 2019 results in our updated financial outlook for 2020.
Following these prepared remark, we will open up the line for a question and answer session with industry analysts are.
Our chief legal officer, Jobin, Terra lots will be joining breeze and Brian for acuity session.
We encourage the investing public and media to listen to both management's prepared remarks.
And the related to my name with analysts.
This call is being recorded for replay purposes that replay will be available on the Investor Relations page.
I've Humana's website Humana Dot 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 our 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 fourth quarter 2019 earnings press release.
Well within our filings with the Securities and Exchange Commission.
Today's press release, our historical financial news releases and our filings with the FCC are all also available on our Investor Relations site.
Call participants to note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or gap.
Management's explanation for the use of these non-GAAP measures.
Reconciliations of GAAP to non-GAAP financial measures.
Are included in today's press release.
Finally, any references to earnings per share 40 P. S made during this conference call refer to diluted earnings per common share.
That I'll turn the call over to Bruce Broussard. Thank you Amy.
Good morning, and thank you for joining US today, we reported adjusted earnings per share of $2 in 28 cents for the fourth quarter of 2019, and 17 hours in 80 cents for the full year.
Above our previous estimate of 17 hours and 75 cents.
We're pleased with <unk>, the 19 performance, particularly our success in balancing executing a multiple priorities as we grew membership.
Improved the quality and productivity of our operations and continue to invest in the long term.
During 2019, we experienced significant membership growth in both Medicare advantage in Medicaid.
Where we were able to serve our country's sikhism, most vulnerable population in need of quality care and better health outcomes.
For individual Medicare advantage, we saw the highest growth we've seen in a decade with over half a million seniors choosing humana and May plan.
In addition, we have a record number of M.A. members in four star and higher plans.
Our Medicaid membership grew nearly 38% with our state wide, Florida win for 2019, and we added approximately a 140000 members on January 1st Twentytwenty under our Kentucky Medicaid contract that was previously fully ceded to.
Care source.
We also demonstrated the strength of our Medicaid capabilities through procurement.
Expanded our senior focused payer agnostic primary care centers significantly advanced our home health capabilities expanded our pharmacy operations and took significant initial steps towards creating interoperable hello ecosystem via technology partnerships.
As we begin to scale, our clinical solutions and Twentytwenty, we are continuing to balance or strategic initiatives across five key areas of influence on a members health journey.
Primary care.
Pharmacy, social determinants of health and behavior.
Let me give you an update on the recent progression in some of these areas.
In 2019, we opened 29 senior focused primary care centers under our wholly owned alliance and JV model, bringing our center total to 262.
We continued to see the maturity of our value based care platform, resulting in more providers in surplus.
And improve the operating performance of our legacy can veeva operations.
We're now evolving from proof of concept to scaling these senior focused value based primary care assets and just this week, we announced an exciting strategic partnership with Welsh Carson Anderson, and so that will accelerate our payer agnostic center expansion, giving more seniors.
Access to quality primary care built around their unique health needs, especially in geography that lack they access today.
Have you see a asked is an important strategic partner and Humana's journey of building, an omni channel senior focused consumer platform and this new arrangement as a capital efficient approach to rapid expansion.
Have you see I guess together with Humana has committed approximately $600 million.
Create a joint venture that is expected to open a minimum of 50 payer agnostic senior focus primary care centers over three years beginning in Twentytwenty.
Maybe you see a ask will maintain majority ownership and partners in primary care will manage the centers for a management fee.
Similar to our innovative deal to acquire kindred at home puts him call option provide partners in primary care with a path to full ownership of the centers in five to 10 years.
We're excited to be able to work with WCS to facilitate fast reentry into additional the community in need of senior focus primary care.
We're also expanding our JV in alliance model and expect to add 35 centers and Twentytwenty with these important partners.
Today, we serve over a quarter of a million of our individual and family members and our own JV and alliance model.
Our goal is to double the number of members served and this model over the next several years.
Our pharmacy operations, just completed the acquisition of inquire a health care one of the nations largest hospital benefit pharmacy benefit management organizations.
This acquisition provides humana pharmacy, the opportunity to expand our comprehensive care continuum strategy to cover the pharmacy related needs associated with hospice care.
Simplify the mail order pharmacy experience and advanced the technology stack for in home pharmacy through areas, such as enhanced mobile medication management and improved electronic medical record connectivity.
In the home, we advanced our transformational home health initiative with Kindred at home and cure through the implementation of a companywide anymore.
And the extrapolation of best practices for.
Oh, it's to over 20000 home health episodes.
The next phase beginning in Twentytwenty is to provide more care services and the home, including acute care and primary care in the home.
So that we may begin to generate meaningful trend benders for health plans in the future, while improving clinical outcomes for our senior.
We remain committed to improving the life of those we served through our social determines capabilities, which positions us strong way to serve the vulnerable populations, Medicare and Medicaid and provide us with the experience needed to meaningfully participate in the M. A value based insurance design.
One program.
Medicaid procurements.
In 2019, we scaled social determinants of health screenings to over 1 million more than doubled the number of screenings in 2018 and connected those and need to community resources.
We will continue to expand our outreach and services around social determines of health and Twentytwenty and beyond.
Lastly, recognizing that health care continues to evolve and technology will be at the forefront of the evolution, We announced two kids key strategic partnerships and 2019 with Microsoft and epic to leverage technology to develop a health eco system that enables a seamless and <unk>.
Integrated experience.
Our focus in Twentytwenty will be migration to the cloud to an enable interoperability and agility.
In addition, we are seeing nice uptick in provider engagement encompass our population health deliberately platform and a higher direct to consumer sales completions in our digital virtual intelligent plan recommendation tool, that's compared to our standard online enrollment tool.
We've also seen that members use the virtual recommendation to our significantly more likely to share their health information with us and ways that could improve their decision making.
And help us better onboard and engage clinically once they are enrolled.
As a company we continue to emphasize the enduring need to drive efficiency and productivity across the organization for not losing focus on the key themes are providing a simpler experience for customers and delivering better health outcomes.
As we discussed last quarter, the return of the health insurance industry fee and Twentytwenty Whos this significant headwind for the industry.
Reinforcing this need to drive productivity.
As Brian will describe we worked diligently to identify ways to improve our cost structure by leveraging technology to streamline processes and executing a reduction in our workforce, including redeployment of individuals to open positions, which impacted approximately 2000 jobs.
Well, we're able to drive meaningful savings it was not an easy task and there are still members, who enhance who experienced an increase in premium or reduction in benefit for twentytwenty.
Given the magnitude of the Hep.
Given the significance of the headwind, particularly the two dollar in 10 dollar to dollar and 10 cents headwind from the non deductibility of the hip we're pleased to be provide the ability. The initial <unk> adjusted EPS guidance in the range of $18 in 25 cents <unk> $18 in seven.
The five cents.
Presenting reasonable growth, while also delivering solid expected M. A membership growth.
We expect to add 270000 to 330000 individual and family members and Twentytwenty representing growth of approximately 7.5% to 9.2%, which we believe at a minimum well be in line with the industry growth.
These expected results reflect balanced growth across all segments with each segment delivered projected doesn't deliver meaningful pretax or EBITDA growth and twentytwenty.
Brian will provide more detailed segment level guidance in his remarks.
As Weve discussed previously given the hip as a premium based see beneficiaries of Medicare advantage and Medicaid the sicker and most vulnerable populations are disproportionately tax.
Bite that seniors continued to increasingly cheese Medicare advantage over original Medicare.
With compelling individual m- industry growth of 8.7% in 2019, excluding the impact of cost plans compared to 7.2% and 2018 and 6.1% and 27 team.
And they penetration continues to increase reaching 34% in 2019 and Twentytwenty industry growth is expected to keep pace with 2019.
Even with the return of the Hep.
Testament to the value the M. A program provides and he model for other potential public private partnerships.
For additional populations needing affordable health care.
Accordingly, we are pleased that Congress waived the fee beginning in Twentytwenty, one recognizing that the imposition of the hip falls disproportionately Medicare beneficiaries and reduces affordability.
Permanent repeal of the him as a significant win for consumers and we appreciate our appreciative of the strong bipartisan support to repeal it.
Looking ahead, we are committed to delivering strong short term performance, while investing and transformative capabilities for the long term sustainability of the company.
To that end, we will continue to stay focused on three key priorities.
Expanding our local presence with primary care centers.
And value based partnership models.
Mater, rising, our digital and analytics infrastructure, including cloud migration interoperability and the creation of a longitudinal health record.
And developing an enterprise clinical operating model built on technology and analytics to integrate our clinical assets focused on patient centered care and disease specific best practices.
In closing I want to thing to personally thank our associates for their dedication to our strategy and operational excellence.
We're pleased that because of their exemplary efforts and our success in 29 team, including improved net promoter score.
Significantly individual and they membership growth.
And adjusted EPS growth in excess of our long term target, we are able to reward our associates with higher incentive based compensation.
Our associates continued to demonstrate world class engagement, which manifest in a better experience for our customers leading to a long term sustainability for the company.
Over the next year, we expect political discussion to continue to focus on health care.
The results in market volatility.
However, we're confident in the Medicare advantage program, which has significant bipartisan support and our opportunity to be part of the solution to both addressing the rising cost of health care and the need for quality outcomes.
With that I'll turn the call over to Brian.
Thank you burst and good morning, everyone.
Today, we reported adjusted EPS of $2 in 28 cents for the fourth quarter of 2019 and $17.87 for the full year ahead of our previous expectations.
This represents a 23% increase in adjusted EPS year over year.
These 2019 results led by industry, leading individual Medicare advantage membership growth and better than expected and may utilization provide positive momentum going into 2020.
We expect 2020 to be another strong year for the company with solid top and bottom line growth notwithstanding the return or the health insurance fee or if which is not deductible for tax purposes.
As I discussed our 2019 results and our expectations for 2020. This morning, I encourage you to reference the waterfall slide provided on our Investor Relations website with the webcast materials.
As outlined in the waterfall, we expect a 2020 adjusted EPS range of 18, 25 to 875, which is consistent with our commentary last quarter.
We believe we struck the appropriate balance between top and bottom line growth, while investing for long term sustainability as we contemplated our 2020 pricing.
Recognizing the significant impact of the return of the non deductible health insurance fee of which the after tax portion alone is worth $2.10 for the year.
Our strong Medicare advantage growth in both individual and group and May is driving our 2020 consolidated revenue growth of approximately 14% at the midpoint of our revenue guidance of 73.9 billion $74.5 billion.
We are forecasting strong and balanced pre tax and EBITDA growth across our three reporting segments.
Additionally, as we contemplate the quarterly progression of earnings in 2020.
We expect the first quarter to contribute a bit more than 24% of the annual total.
Contemplates unusually high workday seasonality in the quarter.
Primarily due to 2020 being a leap here.
Before discussing the segment results I'd like to Echo what Bruce said in his remarks regarding the exemplary performance of our associates this past year.
We're pleased that we were able to reward our associates with higher incentive based compensation given the outperformance in 2019, aligning our associates compensation with the exceptional value they provide for our customers providers and shareholders.
An important part of the work our team accomplished during 2019, what's the drive significant productivity savings, which took a great deal of effort and necessitated difficult decisions.
These important initiatives are part of our longer journey to drive cost efficiency over the last number of years.
In fact, when you exclude approximately 170 basis points for the impact of the hip and 2020, the midpoint of our guidance range for the operating cost ratio is 10.3% down 110 basis points versus last year.
Even when you exclude the incremental investments made in 2019 that increased our operating cost ratio. The 2020 midpoint adjusted to exclude the have still demonstrates 70 basis points of improvement over the 11% midpoint of our initial guidance for 2019.
This improvement continues the compelling efficiency gains driven over the last five years, freeing up resources to help mitigate the impact on premiums and benefits for our members due to the return of the Hes, while also driving solid earnings growth and enabling us to invest in critical strategic areas.
I will now turn to segment results and as I do I will touch briefly on 29 gene and then transition to how we are improving operating results in 2020.
Ill begin with the retail segment.
In 2019, we saw industry, leading individual Medicare advantage growth of approximately 525000 members the highest growth we've seen in a decade.
We also experienced considerably lower utilization in Medicare advantage than our expectations, which allowed us to end 2019 with a benefit ratio for the retail segment 70 basis points below the midpoint of our initial guidance for the year.
We have now experienced multiple years of the of declining inpatient admissions per thousand members for apc's in Medicare advantage.
Given primarily by better health outcomes from our clinical programs, coupled with well controlled outpatient physician and pharmacy trends.
The 2019 improvement allowed us to invest this outperformance into our 2020 bids.
Which when coupled with our productivity efforts will enable us to grow our individual may book at the market growth rate at a minimum.
This is something we're quite proud of given the material headwinds we faced in 2020 and after coming off an exceptional growth here in 2019.
Our group May business continues to perform well and we expect to grow group M- membership by approximately 90000 members were 17% in 2020, primarily driven by the addition of a large group account from a competitor.
As you know group I may membership growth can vary widely from year to year based on the pipeline of opportunities, particularly large accounts going out to bid.
We believe we are well positioned to capture these opportunities as they arise.
For our Standalone PDP business in 2019, we experienced a second consecutive year of significant declines in membership as we no longer with the low price plan in any market.
As we've discussed previously this business is exceedingly price competitive with a winner take all dynamic.
Accordingly, as Youre aware, we made important changes in 2020 repositioning our PDP products to allow us to once again have a low price offering in most markets.
Our new low price Humana, Wal Mart value Rx plan.
Seeing nice growth in 2020 inline with expectations.
However, this growth is not enough to overcome the significant losses, we are seeing in our Premier Rx plan, where most members experienced a significant increase in premium is 2020.
Because of our plan design changes caused by the three plan limit imposed by CMS and an aging population with more chronic conditions at higher pharmacy costs.
Based on the final results of ATP, our expectations for 2020, PDP membership losses have improved relative to our prior guidance and we now expect to lose approximately 550000 members compared to our previous estimate of approximately 600000.
While these losses are modestly higher than initially expected at the time of bids. The plan changes, we made in 2020, where necessary to attract a balanced risk pool and stem the membership losses in our book going forward.
Lastly, our Medicaid business continues to perform well and we're excited about the opportunities ahead for this business.
Effective one 120 20, we added approximately 140000 members under the existing cuts, Kentucky Medicaid contract previously ceded to care source.
We're pleased to be serving Medicaid members in Kentucky, Florida, and Illinois in 2020.
We look forward to the final resolution of both the Kentucky, and Louisiana Procurements, where the award of both contracts demonstrated our strong Medicaid capabilities.
All in the retail segment is expected to show strong operating permit as demonstrated in the waterfall contributing an incremental dollar 66 to adjusted EPS. When you adjust for the reinvestment of approximately 70 cents a retail outperformance from the first half of 2019 in the bids for 2020 to help offset.
The impact of the Hess.
While our our retail segment outperformed in 2019, our group and specialty segment did not perform well and we're taking the opportunity to significantly reposition the segment in 2020 and beyond.
The segment faced a number of pressures, including membership migration out of our community rated product until level funded asked so which drove unexpected adverse selection in our community rated buck, resulting in significant negative prior period development.
Note that this negative prior period development also adversely impacted the starting cost baseline for 2020.
Given the unanticipated morbidity mix.
Using our consistent historical reserving practices for the group and specialty segment, we acknowledged the negative prior your claims development, we experienced in 2019 as we contemplated the adequacy of reserves as of December 31st 2019th.
The segment also experienced large numbers of provider settlements I see system upgrades for the insurance and specialty businesses and investments in market infrastructure.
Our core trim remain stable and we believe the investments, we're making systems and people will position the segment for growth in 2020 and beyond.
Accordingly, we expect the segment to contribute approximately 55 cents of incremental adjusted EPS for the enterprise for 2020.
For health care services, we had a strong here as we saw growth in our pharmacy business solid performance of Kindred at home and continued improvement in our can veeva operations, partially offset by the cost incurred.
Can you to expand our owned JV and alliance senior focused primary care centers.
Notwithstanding the significant PDP membership losses, our pharmacy script volume grew year over year, primarily due to higher Medicare advantage and state based contract membership.
For 2020, despite the expected PDP membership decline, we anticipate strong EBITDA growth in the pharmacy business.
As Bruce mentioned, we recently closed the in Claro transaction, expanding our hospice pharmacy capabilities.
Our whole businesses also anticipated to perform well led by kindred at home in which the conversion to homecare homebase across home health in hospice in 2019 weighed on results due to the significant required one time investment, but will drive EBITDA in 2020.
Notwithstanding the adoption of the new payment methodology PDGF.
And then our provider businesses as Bruce described we are working to meaningfully scale. This opportunity and are very excited about the recently announced innovative venture with Welsh Carson open a minimum of 50 additional payer agnostic senior focus primary care centers over the next three years, which we managed by our partners in primary care team.
Under the partners and primary care brand.
Finally, our can Veeva primary care business is expected to continue improving its core operating performance.
As a result of all these efforts, we expect meaningful year over year health care services, adjusted EBITDA growth to contribute incremental Bauer over three to adjusted EPS.
Turning to cash flow on capital deployment.
Our operating cash flow was a record 5.3 billion in 2019, reflecting strong earnings and the benefit of a significant membership growth we experienced for individual Medicare advantage.
In periods of increasing enrollment operating cash flows are positively impacted because premiums are collected in advance of claims by a period of up to several months.
While we expect solid Emmy membership growth in 2020 due to the significant membership increase we experienced in 2019.
And timing of the related premium collections and claim payments as well as other working capital items, we expect our operating cash flows for 2020 to be in the range of 3.2 to 3.6 billion.
Additionally, as we've demonstrated through the various transactions we have pursued we will continue to deploy our capital and inefficient matter.
Manner with a target debt to capitalization ratio of 35% in order to maintain our investment grade credit rating with the ability to move higher than that for strategic M&A.
Finally, our initial guidance for 2020 include includes an assumption of some share repurchased in the back half of 2020, and our strategic M&A priorities remain the same including the continued build out of our health care services capabilities to drive our integrated care model as well as tactical health plan acquisitions.
They become actionable.
With that we will open the lines up 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.
As a reminder to ask a question you will need to press star one on your telephone and to withdraw your question Chris to calendar hash key.
Please standby won't be compiled the company a roster.
Your first question comes from the line of Charles Rhyee.
From Cowen Your line is open.
Oh, Yeah, hey, thanks for taking the questions.
As we think further out maybe it obviously, you've given us the outlook here for 20.
You know growth remained strong here.
We continue to if you look further to invest.
Maybe two questions real quick first in.
In retail as we think about investing the money into future. How do you think how much do you think that that should we consider.
Either.
And really driven for growth versus maybe some of their coming back into earnings and then secondly.
You're talking about extending your primary chair footprint here can you give us a little more.
Color on how your partners in primary care efforts are going to say sort of not going to be really impactful to 2020, but.
When would you expect a really started at a more meaningful impact to the bottom line. Thanks.
Well good morning, Charles So let me, let me take them in order first with regard to hit in 2021.
As we've said in prior settings, it's obviously early to be commenting on 2021.
We do believe that the health insurance fee repeal will be a significant benefit to our customers and we would expect them to see increased benefits on account of that.
But we will balance as we always do membership growth within with S. as well as making sure we invest for long term sustainability and so you'll see us continue to invest in our integrated care model as we balance top and bottom line growth. I'd also say is we think about 2021 and I know this has been.
Station will make sure we understand the impact of VSR D.
We need to obviously see where the rate notice ultimately comes out and that's something that we're obviously eagerly anticipating and also will need to game theory out what we think our competitors do with respect to the hit for people in 2021, but overall, we obviously are are bullish on 2021, but it's really too early to provide specifics.
On the on the second question with regard to the primary care, we feel very good about our primary care capabilities. In fact, both our can veeva operations, which are performing nicely and we're seeing good operational turnaround, but also the business were expanding partners and primary care, we believe hasn't operating them.
Model that can be replicable and scalable across multiple markets in the U.S. and.
And so it's really a function of how do you fund this expansion.
There is a significant J curve indeed in these clinics, meaning that for the first few years they lose EBITDA. They lose money and then over time, they begin to make money and actually earn a nice return on investment and so how do we bridge that gap and so partnering with Welsh Carson Who's an expert in healthcare and we're very very good at what they do we.
Believed that we'll be able to scale. This model very efficiently and really gets the capital we need to tie us over between where the J curve period, what we're losing money so where we can brings back on balance sheet. If we decide to do that when they're more profitable.
Steve This is.
Just said to Brian's comment, we do see benefits from.
The.
The clinics early on on the insurance sides have you think about the contribution to the company Theres really two parts.
Actual centers themselves and then the second part is enhancing I'm moving members more and more to value based payment models, which we see better star score we see lower.
EMR and we also see better satisfaction, there, so and as Brian articulated in the J curve side.
You will see it more on the insurance side as it grows it continues to be on the insurance side, but then it becomes more on the clinic side. So in Twentytwenty, we will see benefits from these clinics on we and the 200, some we have weve, saying Thats all along the Chelsea at more on the insurance side and more in the as we.
Referencing a trend vendors as opposed to say it and the actual profitability of the centers themselves.
So basically you are able to direct your members to the to the primary care centers that you haven't and is that.
New recruiting physicians for these centers is it.
Are you bring.
Physicians that already have full patient panels themselves or are you kind of recruiting doctors, who are interested in in changing the way they.
Practice and general and.
Most of these on exceptions, we will bring some physicians that have.
Patients, but the majority of them, we'll we'll be starting from scratch and that's really the the reason for the J curve as what Brian was talking about in reference to.
Staring the patients there we really are.
Our design plans to make it a affordable for people to choose the clinics, but obviously as their choice and and there you know from a.
To choose our physician, but we do find in areas, where we located.
And where they don't have primary care or hospital that we are the the started that community choice. There. So I would just emphasize both from plan and where are we locate them as an important part of how our members to them.
And Charles with a Great example of getting a lot of questions and that please remember to limit yourself to to one question introduced the next question. Please.
Your next question comes from the line of AJ Rice from Credit Suisse.
And is open.
Hi, everybody I might just.
Good day to just trying to flush out the strategy around these partners in primary care with this deal.
Well the growth.
Albeit this joint venture or can you continue to do.
One is on your own or with other third parties and is there any restriction around the risk sharing I know thats been a a big part of the long term targeted savings for the health plan is to de risk sharing with these is there any restrictions given its payer agnostic.
Would you can do there and then maybe another thing you didn't mention is once you get to 50 up and running how much of your humana.
And May book will be covered by one of the or have access to one of these.
Clinics.
Yes, let me try to go in in reverse order it'll still be are relatively small portion of our I'm a book, which is the reason why for what Bruce said, we want to scale. These up as as quickly as we can but still be a relatively small portion of our book remember from a from a risk perspective each ER.
Remember perspective, each clinic has about 2200 or so risk members kind of varies depending on the size could be as low as 1500 could go to 2500 members and so you can do the math, it's still relatively small which is why it's important that we take a balanced approach to our growth really getting to your first question we have a part.
No ships with a number of players they're very valuable partners.
That that we will continue to expand with some some some we have equity investments in some we do not but we'll look to continue to expand those those joint venture and alliance models, but we have.
I would say the ability to to expand as we as we see fit to to continue to grow this footprint, which we will do we're obviously very mindful of the impacts on on the income statement. When we do this so we're trying to be created with use of our capital, but I would tell you that we have flexibility to execute our business plan and then on the on the risk sharing side being paid ignostic.
It is really important.
It's important so that we can actually fill up these clinics its importance we can track physicians.
It's important to be able to really create the the best in class experience for our members and to give them. The ultimate show the patients to give them the optimal choice ultimate choice what they need in there in their lives.
But there is no restrictions with respect to risk sharing or the like obviously each risk contract is different and sometimes there are path to risk contracts. So for may not go full risk. They won but generally we signed a lease path to risk deals with the various payers, but we're encouraged by the reception that weve that we've seen from other payors and we're committed to making this payer cost.
Okay.
Thank you next question.
Your next question comes from the line of Peter Costa from Wells Fargo. Your line is open.
Good morning, everybody.
So on the same line focusing on the partnership and.
Primary care.
Transaction.
Yes, one of your competitors many large competitors buys washer practices physician practice is another your larger competitors doesn't doesnt buy practices at all or run them and then use contracts.
And as a smattering of that across the board you guys seem to be the ones trying to grow practices and you had you struggled with that whether it be conviva has gone through turnaround.
Center, we haven't really grew the way you wanted to.
And now with partners and primary care it seems like you're pushing that off your books.
From an earnings perspective.
During the short term while gross can you explain why you still think this is the right strategy versus what your competitors are doing.
I would I would maybe.
Got it doesn't boxes I, let me start weakened and center I think in central as an urgent care.
Not all of that had a small primary care part to it or ended on do and actually the Genesis of partners and primary care is out of concentric.
And so we we did as we.
But but the company.
Then pulled the.
Primary care out of it and then began to the partners in primary care. So.
That transaction and we didn't want to be in the urgent care business going forward.
Convenience actually is interesting because convenient today is probably one of the larger.
Organizations in the country that has.
Pure clinics with senior focused.
Scott 200, some thousand Medicare advantage lives and antenna then is performing well and when we talk about turnaround is really more bringing in.
The various different brands that were in south, Florida, and creating a brand of one of which that brands. Some of those brands have been within the organization since 2008 2009 in that arena.
So what you see as more making at a better brand holistic, Brandon and growing and and continuing to serve the organization while on the insurance side as it could scar star scores as good and they are as good good satisfaction and growth and so I wouldn't make you either one of those as the organization has.
As sort of shutting or in and out of this I wouldn't say there is a philosophy difference between us and and others in the in the country that you're referencing and our philosophy is buying primary care and trying to convert them to Medicare advantage of value based.
Care model as a highly risky.
Opposition and we've seen over the years that organizations that I've tried to do that have not been totally successful now if you're going to keep from fee for service you're going to keep on commercial if you're going to keep them.
In that vein I think you're going to be quite quite successful on and not having to deal with the change management. What you do see the organization doing is going through sort of stages with that I think the first stage was around does this work for partners and primary care and we've been testing and learning that for the last few years and we've come to the conclusion seeing the reason.
Is that we've had in the markets. We've opened that that this has really working we're seeing great.
Great Star scores as I mentioned, we're seeing great satisfaction scores stores were scores were being able to recruit doctors into it we are able to to fill them up and the and the time that we thought so the real question is how do we scale and so we've we've tried to scale it over the years through joint venture partnerships and you've seen today.
We have 260, some clinics and and serving about 10% of or so about ARPU of our members and now it's just a question of scaling.
So what we Joe is is to scale it in a way that we can.
Utilize a capital efficient way to be able to do it.
What I said it as an independent entity, but still have control over it over a period of time and be able to use that as a growth vehicle for us but at the same time continued to scale through our joint venture in Alliance partners that we've done in the past. So I think what you'll see ASM, there's more of a scale question as far as anything else and as a question of how do we.
Build a great base for this and I feel that the company has matured in a way that is very bullish on this but at the same time matured in a way to test and learn because of view articulating in different ways owning and operating physicians is a very very difficult task at times and it is also.
Risky task and we've tried to navigate through this to ensure that the organization is able to both succeed but more importantly scale. This because at the end results.
Next question please.
Your next question comes from the line of Justin Lake.
Your line is open.
Thanks, Good morning.
Couple of questions on margins just first can you give us an idea where Medicare advantage kind of settles out I know you don't want to give specifics, but just relative to the four and a half the five how close are we there and also kind of how should we think about it in 2021, if youre going to reinvest some of the half is the next move downward and those margins.
Then just in terms of a into healthcare services business same thing margins are really strong they're all looking like in the guide is that all just.
Improvement knows ancillary businesses that you kind of outlined and if so.
Do you kind of see the trajectory of those going forward from here. Thanks.
Good morning, Justin on the M&A side I would say for 2019, we finished a little bit below our foreign app, the 5% margin.
So you really strong year.
Given where we started the year.
For 2020 as I mentioned in my remarks, and we've discussed in the past we invested.
Some of that outperformance.
Into in 2019 into our 2020 bids and so obviously that's going to impact margins, but then we obviously have improved the operations as well. So all in I would say the margins are relatively relatively flat year over year 2020 versus 2019, and so we're still bit below the four and half the 5%.
With respect to 2021 again.
Really would too early to give 2021, but it's fair to say whenever theres that tax impact on the after tax line you can see the geography of worthy the earning shows up changes a little bit. So it's conceivable that that we do have a decrease in margins for 2021, well, obviously still growing EPS very nicely. So that's something we would have to work.
Through but typically that is a dynamic that's a play when we've seen tax rates change dramatically, whether either because of the hit where because of tax reform that occurred in 2018.
On the health care services side, I would I would describe it as balanced growth I think we feel very good about really all segments. The pharmacy side is showing a really nice improvement year over year. They continue to drive penetration on the mail order side on the specialty side as well as we think this and claro upsell opportunity on hospice side, we'll give them.
Some runway as well.
Can you kindred at home is also performing well, we hope to continue to see strong EBITDA growth notwithstanding the change in the payment model as you know we've embraced this payment model because it gets us closer to chronic nursing versus solely focused on therapy, but I think the team is doing a really nice job of mitigating any impacts there and also lever.
During the benefits of implementing homecare homebase and as Bruce discussed on our primary care business, both can Viva and partners and primary care, we see a nice turnaround there, particularly in can veeva, which is entirely on balance sheet, we're seeing real.
Improvement in the.
The EBITDA performance, so really I think it's a real positive story on health care services and we hope that continues in the in the years ahead.
Thank you next question please.
Your next question comes from the line of Dave Windley from Jefferies.
Your line is open.
Thanks, Good morning, it's Dave Styblo and for Dave Windley I wanted to ask a question about the group and specialty business and just kind of looking at the bridge here. It looks like there's about a 55 fantail. One for 2020, you called out I'm curious how much of that it's from the absence of onetime costs that happened in 2019 or settlements versus improvements in the core business and then more broad.
The related to that business, how how does commercial fit into the broader portfolio, just given that the fits and challenges, but that business has gone through.
Yes.
I I would say, it's a it's a it's a on their first question. It's really a balanced clearly we don't have the repetition of onetime items.
Some of it is also improving in the core business some of the pricing actions that that we've taken I think it's important.
And we expect the hopes we've gotten the baseline right as I mentioned in my remarks, the adverse selection we saw in our book really hurt the the 2019 performance because 2018 backed up you sort of a double whammy an area of the 18 hit and then you've yes, you're trending off the wrong baseline for 2019, So I think weve I'm hopeful we've gotten that right.
Well, obviously see what happens in the coming months here. So I think it's really a combination of core core improvement as well as.
The other one timers not repeating really to your second question. We continue to invest in this business Thats also weighing on the results for 2020. Other words the results would have been higher weren't not for that we believe that there is a real opportunity to grow this business I've become more more of a player a significant player in particular markets, where we are strong.
And Medicare and where we think really number one there is an opportunity to drive more relevance with our providers and we think when we havent commercial presence, particularly moving up market away solely from the small group moving into the mid group and and sort of larger group side, not the jumbo side, but more large group gives us the attention of the providers.
And the local markets. We also think there's a significant cross sell opportunity as members age into Medicare and also on the group. It may side, it's an area, where our competitors have done a very nice job leveraging their commercial business because we don't have that seeing commercial business, it's hard for us to get those synergies and so we think there are opportunities there and then the file.
One thing I would say is our specialty business is something that we don't talk a lot about but we're bullish on it and we really hope to grow at both on the group side and also on the individual side. It's a business that is low capital requirements and good margins and so we think we continue to grow that and cross sell that product. So for those reasons we're coming.
Each of the business and we're hopeful for a better year. This year in 2020, just add to Brian I think to just emphasize we realize that having a national strategy and commercial.
Just as isn't there is not there not the.
Right direction here and so we are picking markets, where today, we are strong and and utilizing those markets to continue to build our local presence and commercial is one of those along with the other assets that we haven't so you see a much more concentrated effort, obviously as what Brian talked about in 2019 was a rough year for the commercial business for a whole host to reasons.
But we do believe in certain markets that makes sense to have a commercial product and thats. What you see the the the team oriented too, but we need to make sure our infrastructure as has prepared for that and Thats. What you see a lot of that the investments and the work going on in 2009.
Thank you next question.
Your next question comes from the line of Sarah James from Piper Sandler.
Your line is open thank you.
Thank you.
So just wanted to.
Little bit better understanding of some of the nonrepeat items that are going on here can you guys talked about.
Negative prior period development.
To the group business that you can't tell on the press release it looks like for total college that positive so how much negative development.
Was there and what would analyze them without it and then as we think about other nonrepeating items that are occurring in 20 is there any carrying costs related to Louisiana, and then is there any startup costs related to what you guys are doing on the.
Provider JV side that wouldn't continue as we think about run rate.
Good morning, Sarah So so I would it's it's in that you can see in our press releases or break opportune group PPD and retail So group group has gotten hit.
Hit for the reasons I talked about retail.
Modestly positive I think it was good good year for for PPD for retail obviously less so for group so.
That that is a.
I would call that a onetime item on the although I hope, it's a onetime item on the negative PPD side for group. So I think Thats. That's 111 example, there are some modest startup cost in Louisiana, we have to plan for that so that is in our in our numbers in our costs. So weve, obviously scaled up to be ready for that again, it's something we're very proud of them.
Medicaid team has done just a fabulous job winning that contract and we'll see work goes, but but we feel good about that and so it's important that we make sure we are ready to implement that contract.
When and if we get we get that finalized and officially awarded.
There are a few other things on the JV side, but a lot of those costs are going to come off our our 2020 income statement because of the partnership that we announced theres still some of that does not not all of its coming off and we still have some assets on balance sheet, some assets off balance sheet, but the really the API.
Jeremy here is to be able to scale is brewers versus said bill to scale that business I'd be able to grow more quickly. So that we don't have.
Additional losses going forward the idea is to remove those losses, so hopefully that answers your question.
Next question please.
Next question comes from the line of George Hill from Deutsche Bank.
Your line is open.
Good morning, guys and I appreciate you taking the questions maybe switching gears for second talk a little bit about pharmacy.
You've seen some of your competitors kind of pursue some interesting partnership strategies and you guys have had the decline in med D. Enrollment I guess do you feel like you need to partner with somebody either on the repeat aggregation side or the pharmacy network side to get better economics out of your pharmacy business and do you feel like the current partnerships that you have right now are delivering the rates that you need in that book.
I would I would per se, we are always looking for ways to bring lower cost to our members so whether its and and we do have some generic partnerships today that we buy buy with and through.
So I would I would say the then the recent announcement that you're referring to is this something that others do but I wouldn't say, we're not we're not exempt from that but we just don't broadcast it but we do oriented to how how do we have a cost of goods and we constantly are jacketing that and what we find is that we are very very competitive in the marketplace. The.
Part D decline is not so much of a cost to goods conversation is more around just the pricing of the product itself and as Brian articulated with the unique aspect of part D. Is you can't started playing without removing a plan and it gets complicated to do that and that's what you see happening. So I would say is more on the plan design side.
For part D and it is on the side of.
Of the cost of goods and related to the pharmacy I know, we're constantly looking for ways to expand our capabilities whether that's.
From a delivery point of view to carry and clinical point of view I can say specialty pharmacy and in addition in areas that are more oriented to rebates.
I would I would just say that we're content today, but I wouldn't say that content is is something that we are.
Going to continue will continue as we did with inquire and other other things that we've done this past year to elect to advanced but again I think the emphasis to that question as I would not connect the part D declined to capabilities within our pharmacy as a whole.
Thank you next question.
Next question comes from the line of Kevin Fischbeck from Bank of America.
Your line is open.
Great I wanted to go back to the commercial conversation I don't remember if you're actually gave it but what was commercial trend.
In 2019, just I understand the concept of.
Yes, converting into it so but you raise your emel our guidance multiple times through the year in and the fact that you experienced negative development almost every quarter through the year implies that.
Trend is rising and just just trying to understand.
Why that's not the case and I heard your comments about why you feel better about next year, but.
Given that consistent similar guidance, increasing given that consistent negative development.
How much confidence I guess, the really have in your visibility into that book right now.
Hi, Good morning, Kevin So again, I would distinguish between core trend and sort of the net trend that we're seeing as it on account of sort of the morbidity mix in our book our core trends are relatively stable I would say just like last year, 6%.
Plus or minus the 50 is 50 basis point, just sort of a reasonable place to be we ended up in that range for 2019, it's really the net trend once it sort of filters through the membership that we have normal morbidity mix. That's that's driving that obviously, our commercial book is small and as a consequence.
It's it's hard to extrapolate broader.
For.
For those with larger books, whatever it may be answers ours is very focused it's almost entirely small group based well north of 50% of our premium it comes from lives under 100 or groups under 100 and so we're in this interesting part of the marketplace that I think is just going through a lot of change with respect to the.
The AC a community rated block that you'd 50 block the migration to LLP grandmother grandfather products. It's just there's just been a lot of churn in that in that market and so.
That's that's really been been where we've been focused as Bruce said, we want we want to move up market a little bit into the into the more mid group larger groups space to be more relevant certain key markets and.
We're it is a strategic objective of ours to do that I would say, we're always mindful of trend and where it's going but we are less focused on the on the core trend side than we are in the business mix that we're attracting.
Hopefully that that distinction makes sense.
Thank you next question.
Next question comes from the line up Josh Raskin from that front research.
Line is open.
Hi, Thanks, Good morning, Thanks for taking the question.
Why don't you get back to the primary care conversation and maybe just take a step back you've got a whole bunch of different assets and strategies around this broad strategy of physician enablement and I guess I want to understand what's the ultimate goal is this about.
Growing your market share in Medicare advantage is this about improving the you know.
Core profitability, if your heavier M- book or is this about controlling medical cost spend and sort of creating a new sort of business segment business line. Then over time can kind of augment the overall humana I'm just curious about sort of where this while starts in terms of and what the endgame is I want me.
We try to take that and put it in a few few elements it.
It originates out of we feel that this is a very effective care model on I think as Peter I asked a while back we've been doing this for some time and we have a lot of.
Proven results from this and then when you look at our our members and these and these programs as I as all the results. There. The one thing I didn't mention is also retention is higher and so we see wonderful performance out of there and if we could wave a magic wand, we would want to 100% of our members in these programs.
For all the reasons, we've talked about the challenge we find in today's World is is that the fee for service reum payment model and the and the model. The operating model within that is sort of what dominates the health care system and our ability to put seniors in these type of clinics.
It is very.
There isn't a lot of supply and as you all know Davita was probably the one and only that had mall scale there and so over the last few years, we've tried to find a way to scale it.
With through joint ventures, and alliances as what Brian was talking about and in addition to have our per proprietary product because what we want to make sure of is over time, we have a product that when we're in a market that we have.
Stability in our network and that we're able to fulfill that and these particular products allow us to both of we'd have ownership and other contractual rights as allows us to control our destiny in markets that we want to ensure our members have the proper providers to that so the first is great performance second does.
The ability to have a.
In the markets protection around the the.
The we call it the supply chain and then the third is once you begin to go those two routes then there's a question how do you optimize that that the performance of that business than what you see us doing is saying that needs to be agnostic and needs to be a business upon itself it needs to be able to grow and serve the community there, which then.
If it's us as on both a as an owner of the product, but also benefits our plan because of our plan that is also being able to have a lower cost serving there on a more effective and so and then it turns into how do we maximize the business on itself, but as originates from what's best for our member and then goes to how do we control and then.
Sure that we have stability in the marketplace for supply chain and in the third thing. It moves to is now to how do we maximize the business there where it ultimately ends up as I think you're going to Sig as Brian said, we want to double our.
Our membership in this particular area.
Over the next few years and you're seeing.
The Welsh Carson as one of along with our affiliates are another way to do that but overtime I think the investors will see that this would be up another part of our business no different than when we started pharmacy years ago and it became part of that no no different than what you will see with the home that it will be a business that will be profitable it will be value a valuable from Sharon.
Other point of view, but it also will be valuable for our members point of view.
Thank you next question.
Next question comes from the line have Ricky Goldwasser from Morgan Stanley.
Your line is open.
Yeah, Hi, Good morning, My question focuses on that partnership with Microsoft and epic.
Well it sounds like a bit timelines on deploying uptake in.
Patients.
Our really captures data the member data across the Amena enterprise and then as we think about longer term does this really become [laughter] prerequisites for clinic partnerships.
Side could affect the you may know homegrown.
Okay.
Base.
Yeah, I'll I'll take that interoperability is that a core what we see enables value based payment models and the ability for us to manage complex patients just because of the complexity of the of the system and the complexity of People's conditions.
So to answer your first question and just where are we in that journey, Microsoft and epic I really two different journeys, but both are well along the way and the Microsoft approach, we really have three three different horizons, one as cloud and moving everything to cloud and allowing a much more agile environment and at the same time.
Hi building a longitude no health record that allows to use fire and and interoperability inside the organization and outside the organization and both of those things are well on their way, we have thinking we announced last year last quarter.
Some partners that we've already rolled out part of the longitudinal record and so that is now in structurally there. We just have to continue that our partners to it this year, we'll be bringing on all of kindred and that relationship as a result of them completing their E. Amar.
Install there's a number of providers through the compass product that we have that are using the longitudinal record along with some of our pharmacy areas, including and Clara that we just acquired so we have a a really good progress going on in both the cloud conversion I think cloud conversion over there is going to take about five years, but but what.
Did you see and most of that as the traditional.
Technology, that's been around for a long period of time, taking the longest.
On the epic side, what you see is we are in we just really we we have a number of hospitals today that we are now passing information back and forth through in the epic conversion I mean, the epic connection that isn't use case, only we're not really announcing what those use cases are but we are.
In market with a number of.
Hospitals. These are integrated systems that we're passing information back.
Back and forth with but the epic area.
But these are these are the beginning of a long process no different than what we're talking with the clinics about the ability to have interoperability, which leads me to the third.
It it is a standard we will imply M M and boy and with our clinics of having interoperability most of our clinics today already have had that interoperability. We you'll just see us continue to do it more but more importantly through any kind of the partnership we are looking for interoperability to be part of that.
Ownership no different than the value that based payment models and other mechanisms that we use an inter operability will be an important part of that.
Thank you next question please.
Next question comes from the line of Steve panel from Goldman Sachs.
Your line is open.
Good morning, guys. Thanks for the question wanted to go back to the if repeal and 21, obviously, it's fair to all in worth over $9 Cps before any offsets and kind of a uniform magnitude impact.
It is across the industry, which tends to be concentrated at the local level. So I guess is there any reason to think that M&A plans won't act rationally to use a portion of the pretax tailwind to absorb any headwind the rule change on 30 patients creates and related Lee if you could maybe comment on any advocacy efforts with CMS on this front, whether the agencies intercepted against the issue in your ex.
Dictation for what we'll see there whether they'll provide actuarially sound rate for yesterday patients a 21 on the advance notice it tomorrow.
Just curious if this risk factor could actually turn into an earnings opportunity.
Hi, good morning, C. so.
So I think it's fair to say, obviously the hit a tailwind would certainly help offset any certainty headwind and I think what we're trying to just to understand is the magnitude of that headwind and over the coming months were doing lots of modeling and various scenarios that would drive different levels of penetration any uncertainty, which was it would obviously impact.
The 20 2021 earnings.
Profile.
I wouldn't be crazy to think that that.
So the penetration could get to Medicare advantage levels, we'll see.
We're modeling that there's been a bunch of commentary on the street about that by various analysts and so we are working through that I think it's important to really break the population into two buckets, one being duals, one being non tools to really understand the impact on the dual side.
I mean could have some appeal to them just because of the supplementary benefits, particularly around transportation and some over the counter benefits and so thats one of the things were looking at and on the non dual side, particularly the under 65 yesterday population.
You really need to look at were med sup is.
And I understand what the med Supp availability is for these for these various folks and in some states. It's not available our it's not required to be available or there are significant premiums and so.
It's certainly a premium for someone to buy it and so thats what were really trying to understand what the impact will be again, we feel good about where we offer 2021, obviously the health insurance fee is a big positive and on the advocacy side clearly in a rates is one factor and we'll see where were CMS comes out I think it's just.
And for people understand why the benchmark, maybe understated and that's a function of the fact that there is not a maximum out of pocket in fee for service. While there is an M&A and so that impacts the cost and also typically people.
Each of those pay higher rates than original Medicare.
To the to the large dialysis providers and so that also impacts the call. So obviously rates one one element, making sure that there's a competition in the marketplace is another in terms of the provision of dialysis care and so we're working with CMS on that both in terms of some of the COO and states UN requirements around.
What what.
People can build in terms of getting getting to see a win loss getting getting getting through those as well as basic conditions for coverage and what sort of innovative capabilities can we bring to bear in he is are these space, whether it's around the whole whether it's around micro clinics at various alternative sites of care to provide dialysis, but.
Yes, regardless, we're working very hard on it we're standing up clinical teams they'll do.
Ill take these members and new over the long term, we understand why it makes sense to bring yesterday into this population, we just need to manage the short term transition. So long winded answer to your question, we're taking it from multiple angles modeling it appropriately doing appropriate advocacy and then preparing to the clinical side and working with.
Our our dialysis partners to come up with creative Irish sharing mechanisms to help drive outcomes.
So hopefully that's helpful.
Thank you next question please.
Your next question comes from the line of Ralph Jacoby from Citi. Your.
Your line is open.
Thanks, Good morning, I just wanted to ask on the individual M&A membership you added almost 230000 members during a peak when I look at last year, you had an almost 10% total enrollment in OE pay and then saw further growth in sort of the agent in decent shape. So I guess when I look at that to 70.
At least 30 range, how it seems like you're trending closer to the higher end if not even above that is that fair or help us with other considerations sort of this year versus last year that may not make that'd be the case. Thanks.
Well, obviously, we hope you're right, but theres a lot lot of game up the play I would say that we feel good about the to 70 to 330 that we put out there we finished a p. at around 229000.
For for the January.
January lives.
And I think this year is different than last year in that are on a relative basis were not as strong from a benefit design as we were on a relative basis in 2019, and so you have to see what what are the sales are going to be and what are the terms going to be obviously the sales opportunities are.
Well, a little bit little bit less in the.
Opposed to repeat in the pre it didn't than during ATP any solve the terminations in your book and we have a larger book and so if you have a similar term rate you actually lose more more lives right and so I'm. So those types of things. We're working we're working through I worked closely monitoring OEE p. It it seems to be going well, we'll see where it ultimately shakes out but I.
Would you say, we feel good about the to 70 to Threethirty that we put out.
Thank you next question please.
Next question comes from the line to Frank Morgan from RBC Capital markets. Your line is open.
Good morning, I wanted to go back to the health care side of the business. I think you said I want to confirm you said you had completed the home care home base conversion. So that is I'm, assuming that needs to drag from that conversion should be completed and then what are sort of your early reads on PDG I'm in the on the home health care side are you seeing your rates.
Higher or lower flat and then finally, just what's what's the.
What kind of financial drag would you be removing from your income statement balance sheet with.
Moving those assets into this partnership in primary care. Thanks.
Okay. So on the on Homecare Homebase. It is completed it was a herculean effort I think the team.
Did it faster than than any conversion that's happened before just the magnitude of any of our conversion on both the home in hospice side is very significant the team did an extraordinary job.
So we're very excited about that and so that drag is no longer there a four for 2020, although it was meaningful for 2019 and that's part of the increase in EBITDA that you're seeing in the healthcare services side I think it's still too early to comment on Pdgm I think things are going as as we as we planted as expect.
There are adjusting.
The change in the payment model.
The impacts of that are reflected in our in our 2020 numbers, but I think the team feels good about mitigating.
The EBITDA impact of that the important side for us in particular is the clinical side and we're excited about that the.
Movement of the model to much more as I said earlier too much more of a chronic nursing model and so thats positive, but it does change the operating model.
When you're when you have a payment model like this that is focused on these chronic conditions and so there are working through that and I think doing a very nice job.
We haven't called out the specific financial drag on on a on the clinics.
Broadly depending on the size of the clinic to get the profitability.
You're talking sort of high single digits million EBITDA to get to profitability over over several year period, including the Capex. So you can you can you can multiply through and see some of the impact I mean ultimately the size of the facility. The 600 million dollar facility is effectively over a period of Alberta network, we're taking off.
Our income statement that the the purpose of the facility is to fund those losses and so I think that gives you the order of magnitude over this over the lifecycle of the investment.
What the impact isn't it typically by year for your five these things are really starting to breakeven and drive profitability. So I think that gives you a broad sense of the impact which is why it's so important that we did this so we could scale scale, the opportunity and Frank and I know.
A question wasn't Lynn.
During this but I'd just like the emphasizing the main reason why we're doing this with.
With that we see I asked this is to scale the business and that's really what Brian as articulating because we feel it as a that's a that's a great addition to the to the organization and with the organization is ready to scale at some other things that Brian was talking about where some barriers to do it.
Today, we want to scale listen and begin to start getting more and more members in our proprietary product.
Oh, just that will more points, we get this question all the time wanted to make sure investors have this some you know theres theres, a very in terms of where the EBITDA per clinic and go because we get asked that all the time and it really can vary so some of the smart clinics could be 234 million some of the better better clinics can be 678 million. So it really depends on the size of the clinic in terms of EBITDA, but when you look at the.
Economics, just a return on capital on individual clinic when these get the profitability, it's a really good ball.
Thank you next question please.
Next question comes from July and have Steven Valiquette from Barclays. Your line is open.
Great. Thanks, Good morning, everyone, Brian So two questions around the first quarter of 2021st for the group in specialty segment, you're targeting 84 at 84.5% benefit ratio for the full year.
Given that the jump off point in Fourq 19 is in a 95% range I guess I'm curious will they gradually trend back down throughout 2020 or will you.
Your improvement show up immediately such that when Q 20 for the segment my maybe in line with the full year range somewhere in that mid 80% range. That's question. One they question to answer on one Q. I mean, the stocks up 20 Bucks for now say to focus on a slight negative but the I.
The adjusted tax rate in Fourq, you 19, I think came somewhere in the mid single digits, probably due to the group and specialty segment results, but just given your comment around one Q 20 earnings being 24% of the full year you should we assume the overall tax rate normalizes back to call it 30% or so in one Q 20. Thanks.
Oh Fair question, we don't give quarterly MTR guys by segment as you know, but I think it's fair to say the group. The weather Group segment works is the EMEA as low in the first first part of the year than it increases as people get through their deductibles. So.
I think in terms of where you think about that sort of quarterly progression of any ours. You can look at historical patterns and see what are these for the group business and just use our our annual number and frac. It out accordingly, but just the way the benefit design works its lower and we are at the beginning in the that ramps up through the year as people.
Go through there did their deductibles and we start covering a covering the Paul.
On the tax rate side really two drivers one is what's I guess that was the windfall tax which is.
We have stopped Vestings in December.
It's where when our stocks stock and we've asked and we had.
Big run up in our stock and so the tax deduction is larger and.
And that drives that drives the the C improve tax rate.
You know the tax stop moved a lot in the last last few months and has been volatile, but when when it when it occurred when the best incurred we had that we have the windfall benefit. We also saw profitability shop in different states little somewhere lower lower.
Lower tax states than we expected so small moves in that can impact the tax rate a bit and so that was also also driving so it was really for those reasons that we the lower lower tax rate, but in general when you look at the tax rate on annual basis remained relatively the same I mean theres a.
50 basis points change so when you look at an annual side its than minimum impact on it.
Alright. Thank you next question.
Your next question comes from me to line of Gary Taylor from JP Morgan.
Line is open.
Hi, Good morning, most of my question to answer I'll, just be real quick when we go to you all the health care services EBITDA growth I think 17% at the midpoint I know you've you've covered some of the.
One time investments, you're laughing et cetera is it is it possible to help us think about organic versus.
Acquisition is that contemplated that any of the trailing acquisitions or any.
Hi, good acquisitions are in that number or is that a purity pretty pure.
Organic growth for 2020.
Good morning, Gary There there are some acquisition in there from from the acquired the although it's I would say, it's relatively small that will be acquisition I do think there were some as you said lapping investments on homecare, Homebase, which which helps I would seem most is organic improvement, but but if you're sort of trying to model.
Beyond 2020, I Wouldnt expect that kind of EBITDA growth beyond 2020, I think it will more normalize to a lower level.
So I think Thats a fair question there are some good guys in there.
But the business organically is growing very nicely I mean really all all elements pharmacy home and primary care are growing nicely organically. So it's a well take a balanced EBITDA growth, but there are some some good guys in there for 2020 right. Okay. Thanks.
Thank you next question.
Your next question comes from the line of Mayer from you'd be S.
Your line is open.
Hey, Thanks, just a quick one on a decent up the performance it's been pretty impressive Brian maybe just any color around benefits design plans strategy anything Thats you know contributed to the recent performance and any expectations for the rest of the year as this one time boost through open enrollment or do you see the momentum continuing throughout the year.
Sure.
Good morning, wet so we're certainly hopeful that these that growth continues we'll see where it goes we are proud of the decent growth that we've achieved I think at the benefit side. We continue to emphasize some of the over counter over the counter benefits and a few other things I would say there was anything dramatically different this year I think it's really a focus of the organization.
Leveraging some of our distribution channels to make sure we.
You are appealing to the dish that population. It's also frankly offering just give some more counties as well and so expanding that as well as its really combination of things, but I was just say that it's certainly an organizational focus of ours and in driving the distribution and sales of that of that product.
Thank you next question.
Next question comes from the line of Scott Fidel.
From Stephens Your line is open.
Hi, Good morning, I, just wanted to toggle back over to group in specialty and definitely sounds like you're still committed to the business in terms of the investments that you're making and hoping for brighter days ahead. When we look at the 2020 guide it still is implying pre tax margin still sub 2% and topline growth.
Sub 2% as well so if we think that somebody's bets that you're making around the investments do ultimately pay off.
What type of growth rates do you think and pre tax margins are reasonable to think about being sustainable the longer term.
Yeah. It's it's a fair question, Scott I really not prepared today to give details on on margin in growth I do think <unk>. The margins are clearly not nearly where they need to be.
We haven't given a margin target on on group and I'm not prepared to do that today, but but I would tell you that we do expect margins to improve.
The asked so level funded margins are much better and we'll continue to to get better as we as we mature in that in that product.
And hopefully as we move up market. We'll also see some some margin improvement as we leverage some of the unit cost benefits, we can get by.
Being a bigger presence in the marketplace.
Again, I, we hope we can get you to grow.
This level funded product, but also grow up market as well in terms of the topline and so the goal would be to just to start growing that topline. In addition to getting the PMPM benefits that you get in the group space. So we do think there's an opportunity there, but I wouldn't expect significant growth I. Just we're hopeful that we can really turn it around and start gaining.
Measured growth as we as we move forward here, but frankly topline and bottom line.
And also importantly, just to cross sell benefit that that I mentioned on the specialty side and on the Medicare side Thats, an important part of this as well.
I won't show up directly in the segment results.
Thank you next question.
Next question comes from the line of my call you show from Evercore. Your line is open.
Thanks, Let me just going back to hit for people and I appreciate your not committing anything in 2021.
I just wanted to come from that long term since you're still targeting that foreign after five pre tax margin. That's it that's ultimately a higher net margin. Once it has gone. So is it just fair to say that the nondeductible headwind will still drop back to Martin's eventually, but maybe just not all immediately if you fever enrollment growth more instead for a period of time is that the right way the frame. It I think thats fair, we're committed four and have to 5%.
Similarly on the tax reform, we did the same thing.
We are went below and then then it came back up and and so yes, we're committed for not the 5%.
Thank you I think that was our last question Joe I'll, just close it out again, thanks for our investors and specialty today, considering it lasted for an hour and a half so a lot of a lot of engaged investors. So we appreciate that and as soon as importantly, thanks to the 50000 people they get up everyday and help our our members achieved their best best.
Well there so everyone have a great weekend.
The next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you I'll for participating.
Right now disconnect.
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