Q4 2022 Humana Inc Earnings Call
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Good day and thank you for standing by welcome to the Humana fourth quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an audit.
Message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Lisa Stoner VP of Investor Relations. Please go ahead.
Thank you and good morning in a moment, Bruce Broussard, Humana's, President and Chief Executive Officer, and Susan Diamond Chief Financial Officer will discuss our fourth quarter 2022 results and our initial financial outlook for 2023.
Following these prepared remarks, we will open up the lines for a question and answer session with industry analysts Jove insurer, our chief legal officer will also be joining Bruce and Susan for the Q&A session.
Encourage the investing public and media to listen to both management's prepared remarks, and the related Q&A with analysts. This call is being recorded for replay purposes that replay will be available on the Investor Relations page of Humana's website Humana Com later today.
Before we begin our discussion I need to advise call participants of our cautionary statement certain of the matters discussed in this conference call are forward looking and involve a number of risks and uncertainties actual results could differ materially.
<unk> are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2022 earnings press release as they relate to forward looking statements along with other risks discussed in our SEC filings, we undertake no obligation to publicly address.
Or update any forward looking statements in future filings or communications regarding our business or results.
Today's press release, our historical financial news releases and our filings with the SEC are also available on our Investor Relations site.
All participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP management's explanation for the use of these non-GAAP measures and reconciliation of GAAP to non-GAAP financial measures are included in today's press release finally any references.
The earnings per share or EPS made during this conference call refer to diluted earnings per common share with that ill turn the call over to Bruce Broussard.
Thank you Lisa and good morning, everyone. We appreciate you joining us.
Today Humana continue the momentum seen throughout 2022 and reported another quarter of strong operating and financial results.
Adjusted earnings per share for the full year were $25 24.
Which was above our previous estimate of approximately $25 and represents an annual growth of 22%.
We achieved this compelling earnings growth, while also making meaningful progress in advancing our strategy, which I will touch on in more in a moment.
Looking forward, we provided full year adjusted EPS guidance for 2023 of at least $28 representing growth of 11% over 2022, consistent with our previous commentary.
We anticipate the strong growth despite the headwinds we faced from the divestiture of 60% interest in kindred hospice.
We also reaffirmed our expectations for our full year individual Medicare advantage membership growth of at least 625000 members a 13, 7% increase year over year.
Recall that our 2025 adjusted EPS target of $37 is underpinned by an assumption of returned in individual MA membership growth at or above the industry rate by 2024.
Very pleased to accomplish this goal ahead of expectations.
Before providing additional detail on our operations and outlook I'd like to take a moment to address the rather the final rule released Monday.
I want to start by emphasizing the strength of the Medicare advantage program supported by a value proposition that is superior to fee for service Medicare.
30 million seniors have chosen to enroll in Ma of which nearly 34% identify as racial and ethnic minorities.
The MMA program delivers high quality and improved health outcomes, resulting in a 94% satisfaction rate and lower total cost of care through improved care coordination, providing savings to the Medicare program, while helping seniors achieve their best health.
The strength in support of MAA is an important black backdrop as we talk about the long awaited final Razvi rule.
I'd like to reiterate humana's core belief when it comes to Ramsey.
Namely we believe risk adjustment is an important element of the program and incentivizes plans to cover all individuals regardless of health status.
We have long supported cms's desire for greater transparency through auditing and we will continue to partner with CMS to program to promote program integrity.
We strive to have a fair compliant and transparent system.
We're still reviewing the final rule and considering its impact I will share some of our initial observations.
First we support Cms's decision not to extrapolate the results of any audit payments for the years prior to 2018.
As CMS acknowledged auditing such as time periods represent a unique challenge that may produce results that are not truly reflective of the plans compliance our coding accuracy.
An important part of Abbvie ruling is the audit methodology. Therefore, we look forward to working with CMS to learn more about the methodology, including contract selection standpoint, an extrapolation as Earl did not provide the details needed.
Totally understand the potential impact of the future audits.
And finally, we are disappointed Cms's final rule did not include a fee for service suggests they're in the process, which we believe is necessary to determine appropriate payment amounts to MAA organizations. We.
We are considering all our options to address our challenge this admission and obtained clarity about our compliance obligations.
With that said, we are committed to working productively with CMS to ensure the integrity of the program is maintained and beneficiaries do not face higher costs and reduced benefits as a result of this rule.
For years MAA hasn't been an example of a successful public private partnership that works for Medicare beneficiaries providers and taxpayers.
We're committed to working with CMS on a path forward to ensure that MA continues to be an option that millions of seniors have come to depend on.
Now turning to an update on our operations and outlook, we entered 2023 and a position of strength.
Industry leader in the delivery of senior focused integrated value based care delivering high quality outcomes at a lower cost.
<unk> focus on value based care, both through our center well platform and our highly diverse.
<unk> based care solutions and locally oriented provider relationships.
As one of the differentiated capabilities that gives humana a durable competitive advantage.
We closed 2022 with 70% of our individual MA members engaged in value based arrangements, which incentivizes providers to comprehensively manage patient needs and reduce total cost of care.
Our extensive experience in value based care combined with our use of deep analytics and digital capabilities first mover deployment of interoperable solutions as well as our customer centric products and solutions.
Humana apart from peers.
We believe these differentiated capabilities have contributed to our durable success and quality and customer experience.
As demonstrated by five consecutive years of leading stars results in individual MA membership growth of 10, 4% on a four year compounded annual growth rate from 2018 to 2022 as compared to industry growth of nine 7%.
We complemented our differentiated capabilities with targeted investments and benefits marketing and distribution for 2023, which is has accelerated the strong momentum in our MA franchise.
The improved plan designs have resonated with consumers and brokers, resulting in our above industry growth expectations of at least 625000 members for the full year.
For 2023 growth outlook includes strong growth in the D. SNP space, where we have grown 72000 members as of January a 50% increase over 48000 members added in the 2020 to AEP.
And importantly, the majority of our growth for 2023 is coming from the larger non D SNP space.
We added approximately 422090 staff members through 2023, AEP a significant increase from the 90000 added in 2020 to ATP and representing an impressive 10% year over year growth in non D. SNP membership.
We achieved our strongest growth in states with robust we're growing value based provider penetration for example, our top states by absolute growth for Texas, Georgia, Florida, and Illinois, which are highly penetrated value based markets together.
Together. They grew 163000 members in 2023, AEP, a 450% increase over the 29000 members achieved in those states last year.
The robust membership outlook reflects high quality growth with retention improving over 200 basis points year over year better than our initial assumption of 100 basis points improvement.
Pleased to see our external call center partners improve retention by 380 basis points year over year, reflecting their enhanced focus on quality and customer satisfaction.
In addition, approximately 50% of our new sales reflect members' switching from competitor MA plans, which was higher than anticipated and significantly improved from the 30% experienced in 2022.
We also saw a shift in our overall sales channel mix to higher quality channels, our internal sales channel and our external field broker partners represented 53% of total sales in the 2023 AEP compared to 44% last year.
As shared before these channels drive better engagement with members leading to greater planned satisfaction retention and lifetime value.
Our strong 2023 membership growth was broad based across our geographic footprint and benefits not only our business, but also our growing and maturing payer agnostic center, well platform enhancing our ability to drive more penetration and integration of our center while asset.
Our primary care organization also experienced strong growth during AEP and is expected to add 8000 to 10000, new patients across our de novo and wholly owned centers.
And we are happy to share that nearly 60% of these patients had appointments scheduled as of December 31.
This is a key metric for us to measure the engagement level of new members and engagement is a key driver retention.
For the full year, we expect to grow patient panels by 20000 to 20000.
Through organic growth and programmatic M&A, meaning.
Meaningful meaningfully higher than the approximately 13500 patient growth experienced in 2022.
Our center expansion remain on remains on track as we ended 2022 with 235 centers and are scheduled to open an additional 10 to 15 in the first quarter alone we.
We expect to come in in the near the high end of our previously communicated annual center growth of 30% to 50 in 2023 through a combination of de Novo build in programmatic M&A.
And the home we have continued to expand our value based model, which coordinates care and optimize spend across home health.
And in infusion services.
Now supporting approximately 15% of our MA members with the model expanding coverage to an additional 433000 members during the fourth quarter.
We remain on track to cover approximately 40% of our MA members with a fully base.
<unk> based model by 2025.
In addition, as previously shared we are implementing some of these capabilities on a standalone basis to accelerate value creation.
You rolled out the home health utilization and network management capabilities to one 4 million members.
Bringing the total of covered members to $1 9 million.
Creating incremental enterprise value in advance of this call it will be value based market rollout.
Finally in our pharmacy business, we once again increased our industry, leading mail order penetration levels in 2022, driving 38, 6% penetration and our individual MA business, a 40 basis point increase over 2021.
We anticipate maintaining this industry leading position in 2023 as we further invest in the consumer experience and encourage the continued use of mail order despite comparable co pays and the retail setting beginning this year.
Before turning it over to Susan I am excited to be able to speak to the senior leadership appointments, we announced this morning.
Dr. Sanjay shut his joining humana as the President of center, while effective April one.
This newly created role comes as we continue to meaningfully expand our center well capabilities strengthening our payer agnostic platform and integrating the clinical experiences for patients across the center while platform.
Jay comes to Humana from Stuart Healthcare systems, where he currently serves as the president he.
He will draw and has extensive experience leading a large healthcare system as well as his deep understanding of technology and application of data and analytics and modernizing workflows to accelerate the integration of our center while assets.
Sanjay as addition to the management team he brings a new and differentiated scales with extensive health care experience across a broad spectrum, including Medicare Medicaid physician groups and value based care and we are excited to have him on board as the President of Center World.
In addition, we are thrilled to announce the Georgia <unk> has been promoted to president of Medicare and Medicaid and added to the management team effective immediately.
George has been integral to our success as a company joined and having joined the company team in 1996 spending.
Spending the last 26 years dedicated the core operations of our Medicare business.
Bringing Medicaid under his leadership complements his current responsibilities for the operations supporting our ore than 5 million Medicare advantage and Medicare supplement members.
With the addition of Sanjay and George to the management team, we have closed our search for the president of insurance.
We are confident that the depth of talent, we now have both the management team and across the broader leadership within the organization positions us well to continue to execute against our enterprise strategy.
As with any company of our size and caliber we will continue to evaluate strategic additions to the evolution of our leadership team as we advance our strategy to develop strong synergistic growth across the enterprise.
In closing with <unk>.
Again to reiterate that we are entering 2023 and a position of strength.
The strength is bolstered by Humana has differentiated capabilities and grow our payor payor agnostic platform and underpinned by the strong fundamentals in the Medicare advantage industry.
Importantly, the robust.
Membership growth and financial outlook for 2023 puts us on a solid path towards our mid term EPS target of $37 in 2025.
We look forward to providing additional updates on our progress towards our mid and long term targets throughout the year.
With that I'll turn the call over to Susan.
Thank you Bruce and good morning, everyone. Today, we reported full year 2022, adjusted earnings per share of $25 and 24.
Ahead of our expectations of approximately $25 and representing a compelling 22% growth year over year.
Bruce shared we delivered this impressive earnings growth, while making significant advancements in our strategy, including a quicker than anticipated return to above market individual Medicare advantage membership growth for 2023, and further advancement of our center while platform.
Before discussing details of our performance and outlook.
Note that we realigned our reportable segments in December moving to two distinct segments insurance and center while.
I will speak to our 2022 results and 2023 outlook in terms of the new segment structure with references to the old segments to provide clarity as needed.
I will start by discussing our fourth quarter results and underlying trends before turning to our 2023 expectations.
We reported fourth quarter adjusted EPS of $1 62.
Above internal expectations and consensus estimates.
For insurance segment were modestly favorable to expectations as.
As recently shared total medical costs in our Medicare advantage business range slightly above previous expectations during the fourth quarter, driven by higher than anticipated flu and COVID-19 costs as well as higher reimbursement rates implemented for $3 40 be eligible drugs.
Collectively these items had an impact of approximately 80 basis points on the fourth quarter benefit ratio for both the insurance segment as well as the previous retail segment.
Importantly, these are discrete items in the quarter and do not have a carryover impact into 2023.
Excluding these items total medical costs in our Medicare advantage business were modestly below our previous expectation.
Our Medicaid business continued to perform well in the quarter with lower than anticipated medical costs. In addition, the favorable utilization seen throughout the year and our commercial group medical and specialty businesses persisted in the fourth quarter.
All in excluding the discrete impacts related to flu Covid and $3 40, B I just described medical cost experienced in our insurance segment were favorable to expectations in the quarter continuing the trends experienced throughout the year.
The segment also benefited from administrative cost favorability driven by our ongoing cost discipline and productivity efforts, while also covering incremental marketing spend.
Within our center while segment each business performed largely in line with expectations in the fourth quarter our.
Our primary care organization continues to improve the operating performance and our wholly owned centers and we're pleased to report that we increased the number of centers that are contribution margin positive from 88 at the end of 2021 to 110 at year end, 2020% to 25% increase year over year.
In addition, we increased the number of centers that have reached our $3 million contribution margin target from 18% in 2021 to 31 at the end of 2022.
And our de Novo centers, we grew over 9000 patients in 2022 or 91%, while our de Novo Center count increased by 18 or 56% as.
As Bruce shared we expect both centre in patient growth to further accelerate in 2023.
In the home total admissions and our core fee for service home health business were up nine 1% year over year for the fourth quarter and up six 3% for the full year in line with our expectations of mid single digit growth.
In addition, we continue to expand our value based model at the expected pace, we implemented the full value based model in both Virginia, and North Carolina in 2022, ending the year covering just over 760000 members or 15% of our Humana MA members up from 5% coverage in 2012.
Anyone.
Finally, our pharmacy results remained strong reflecting industry, leading mail order penetration at 38, 6% for our individual Medicare advantage members.
Benefits of mail order extend beyond our pharmacy operations, leading to better medication adherence and health outcomes benefiting our members and health plan.
As an example members who utilize central pharmacy demonstrate medication adherence rates ranging from 650 to 840 basis points higher than we see in traditional retail pharmacies for cholesterol blood pressure and diabetes treatments.
Now turning to our 2023 expectations and related assumptions today.
Today, we provided adjusted EPS guidance for 2023 of at least $28. This represents 11% growth over 2022, which is in line with our previous commentary and overcomes a headwind of approximately <unk> 92.
Or three 6% related to the divestiture of a 60% interest in kindred hospice in August 2022.
Our 2023 outlook reflects topline growth above 11% with consolidated revenues projected to be north of 103 billion at the midpoint driven by growth in our individual Medicare advantage, Medicaid and center well businesses.
These increases were partially offset by the divestiture of a 60% interest in kindred hospice and expected declines in our group Medicare advantage <unk>.
<unk> group medical and PDP membership.
At this time, we expect first quarter earnings to represent approximately 35% of full year 2023 adjusted EPS.
I will now provide additional detail on the 2023 outlook for both of our business segments, starting with insurance.
As Bruce discussed, we anticipate individual Medicare advantage membership growth of at least 625000 in 2023 a 13.
Percent increase year over year.
We added approximately 495000 members during the annual election period, and anticipate continued strong growth for the remainder of the year.
Touching on group MA we continue to expect a net reduction of approximately 60000 members. In 2023. This reduction is primarily driven by the loss of a large group account, partially offset by expected growth in small account membership.
We remain committed to disciplined pricing in a competitive group Medicare advantage market.
For our PDP business, we now expect our membership decline of approximately 800000 members for 2023, an improvement from our pre AEP estimate of a 1 million member reduction.
This improvement was driven by better than expected sales and retention in our Walmart value plan.
We're committed to providing affordable coverage for beneficiaries, while also improving the contribution from our PDP business and remain focused on creating enterprise value by driving mail order penetration and conversions to Medicare advantage.
We're projecting approximately 80000 of our PDP members to convert to a humana Medicare advantage plan in 2023, which represents a disproportionate share of all Humana PDP members, who are expected to switch to a Medicare advantage plan in 2023.
In our Medicaid business, we anticipate that our membership will increase 25000 to 100000 members in 2023.
This change reflects membership additions associated with the startup of the Louisiana contract, which went live January one as well as the Ohio contract, which began today.
We expect to add approximately 140000 members in Louisiana, and 65000 members in Ohio at implementation with Ohio membership ramping to 130000 by yearend and to a total of 225000 in 2024.
The 2023 membership gains in Louisiana in Ohio will ultimately be offset by membership losses, resulting from Redetermination beginning April one which will continue for 12 months.
We are proud that our Medicaid footprint will now spend seven states and cover over 1 million members a strong platform that we have established largely through organic growth.
We intend to continue to invest to grow our platform organically and actively work towards procuring additional awards in priority States.
Finally, we anticipate the total commercial medical membership, including both fully insured and ASO products will decline approximately 300000 members in 2023 as we remained focused on optimizing our cost structure and margin in this line of business.
The insurance segment revenue is expected to be in a range of 99, five to 101 billion, reflecting an increase of nearly 13% year over year at the midpoint.
The year over year change includes the impact of the phase out of sequestration relief beginning in the second quarter of 2022 as well as the impact of changing member mix within our Medicare advantage business.
The segment benefit ratio guidance of $86 three to 87, 3% is 20 basis points higher than the 2022 benefit ratio of 86, 6% at the midpoint driven by the targeted investments made in our Medicare advantage plan designs in 2023 as well as Medicaid growth.
Which carries a higher benefit expense ratio importantly.
Importantly, we haven't we have assumed normalized trend into 2023, including the expectation that provider labor capacity will improve modestly throughout the year.
In addition, we have assumed the flu favorability seen to date in the first quarter is offset by higher flu cost in the fourth quarter.
In summary, we are guiding to insurance segment income from operations in the range of $3 2 billion to $3 5 billion for 2023, an increase of more than 12% over 2022 at the midpoint of the range.
<unk> segment, we expect EBITDA in the range of $1 3 billion to $1 45 billion for 2023, a slight decrease from 2022.
The 2023 outlook reflects the impact of the divestiture of a 60% interest in kindred hospice in August 2022, which created a $150 million year over year headwind largely offset by continued growth in our primary care home pharmacy businesses.
And our core fee for service home business home health admissions are expected to be up mid single digits.
While we have strategies in place to continue to take share in fee for service Medicare We do acknowledge it is a shrinking market with the increasing penetration of Medicare advantage. Accordingly, our projected admission growth for 2023 reflects a slight decline in fee for service Medicare admissions year over year more than offset by strong growth in Medicare advantage.
In addition center, while home health is focused on increasing nursing capacity through recruiting and retention initiatives.
Our voluntary nursing turnover improved from 31, 9% in 2021% to 36% in 2022.
We continued to invest in clinical orientation, and mentors and technology focused on reducing administrative tasks and drivetime for clinicians, which we expect to drive further improvement and nurse recruitment and retention.
With respect to our value based home model, we expect to expand coverage to approximately 1 million additional members by year end 2023, 800000 of which are currently served under the utilization and network management model.
And our primary care business as Bruce shared we expect significant center expansion throughout the year through a combination of de Novo builds under our joint venture with Welsh Carson as well as programmatic M&A.
All in we anticipate adding nearly 50 centers in 2023, an increase of approximately 20%.
In addition, we expect to add 20% to 25000 patients during the year and our de Novo and wholly owned centers, representing nearly 12% growth year over year.
Finally, our pharmacy business will benefit from the significant growth in individual Medicare advantage membership in 2023, as we anticipate maintaining our industry, leading mail order penetration rates.
From an operating cost ratio perspective, we are guiding to a consolidated operating cost ratio in the range of 11 six to 12, 6% for 2023, a decrease of 100 basis points at the midpoint from the adjusted ratio of 13, 1% in 2022.
This decrease reflects the divestiture of a 60% interest in kindred hospice in August of 2022, which has a higher operating cost ratio than the Companys historical consolidated operating cost ratio as well as the incremental run rate impact of our value creation initiatives.
Touching now on investment income and interest expense, we anticipate investment income will increase approximately $450 million in 2023, resulting from the higher interest rate environment, coupled with the impact of approximately 100 million and realized losses experienced in 2022 that are not expected to recur.
Interest expense perspective, while the majority of our debt is fixed rate, we do expect interest expense to increase approximately $110 million year over year.
I will now briefly discuss capital deployment for 2023, we will continue to prioritize investments to drive organic growth from an M&A perspective, we remain focused on opportunities to enhance our center well capabilities with a particular focus on growing our primary care and home businesses.
And finally, we recognize the importance of returning capital to shareholders and expect to maintain our strong track record of share repurchases.
Consider the use of accelerated share repurchase programs as well as open market repurchases to ensure we maximize value for our shareholders.
We also recognize that dividends are important to our shareholders and we are committed to growing our dividend.
In closing I would like to Echo Bruce's sentiment that we enter 2023 and a position of strength. The strong earnings growth delivered in 2022 combined with the robust membership growth and financial outlook for 2023 increases our confidence in the mid term target of $37 in 2025.
We look forward to providing continued updates on our progress towards our mid and longer term targets throughout the year.
With that we will open the lines up for your questions in fairness to those waiting in the queue. We ask that you limit yourself to one question operator, please introduce the first caller.
Certainly.
And our first question will come from Josh Raskin of Nephron Research Josh Your line is open.
Hi, Thanks, good morning.
Focused on center, while and I understand the decline from the hospice sale, but maybe if you could give us some color on what's the organic growth rate.
Round about the revenues and the EBITDA and then if you could talk about your recruiting initiatives and how youre trying to bring physicians into the centers.
Yeah, Hey, Josh Thanks for the questions and the recruiting side, we'd do it both nationally and locally and what we're finding in the.
We have a dedicated team also too to the recruiting area, what we're finding in the recruiting as is.
We are really the younger population, we're able to recruit to and then also the older population and the more experienced ones that are really looking to change their their approach and clinical.
The clinical area and specifically around moving from an A&M code driven.
Primary care billing to more of a value based and what we're finding is once we they are experiencing.
<unk> with the value based on the retention side is much greater because it's a better quality of life for them, but more importantly, it's also a much.
Aligned with what they went to school for around proactive care and care that is more oriented to prevention as opposed to just the treatment side.
So through a centralized approach and also oriented to locally are really oriented to people that are looking for value based payment.
Payment options.
And just to address your other question related to just the organic growth that we anticipate for the center while segment. So in total the segment is expected to grow revenues about 6% year over year with pharmacy slightly above that number based on the strong individual MA growth. Although they are also impacted by the decline in the PDP membership.
Ed.
<unk> is slightly down and Thats again reflective of the growth that I had mentioned in my commentary about the core fee for service expansion.
Growth as well as the expansion of the value based model, but obviously offset by the disposition of the 60% interest in hospice and the movement of that line of business to below the line, it's a minority investment.
Our center, while primary care and that business continues to grow but as you know the majority of the growth is off balance sheet as part of the Welsh Carson deal. So also isn't reflected in our our actual revenue growth and EBITDA.
<unk> in that minority investment as well, but specifically the segment in total is expected to grow 6% for the on balance sheet portion.
Okay. Thanks.
One moment.
And our next question will come from a J rice of credit Suisse.
A J your line is open.
Okay.
Hi, everybody I think calling on me it was a little bit jumbled there.
Thanks for the comments on the <unk> rule, and I know Thats still under.
Review by you guys in the industry.
One of the things and some of the data that was released by Kaiser and others running up to the release.
It was some data suggest and various error rates on audits done on.
Results from the <unk> 11 to 2013 time period.
One thing they got some play was the fact that hey.
Hey, Matt seem to have a little higher audit.
Error rate.
It was somewhat higher error rate.
Some of the peers I know that was years ago I'm sure. The entire industry has invested in making sure that they do better future audits, but I'm wondering if you guys.
Could give us your perspective on that.
Any initiatives you've done to try to make sure that going forward that won't be an issue.
Hi, a J thanks for the question.
In terms of the variation that was reflected in their report that came out I would say well first we don't have access to the data obviously to be able to really evaluate assess those differences I really can't comment on the variation more generally I would just say that we don't have any reason to think that the inherent error rate within the humana population would be meeting.
Different from others, and so maybe just reflective of the audit selection and process that they have used historically.
In terms of the question of what we might expect going forward I would say that that is also impossible to really assess even in the periods. They have audited they have used different methodologies over that period and as you saw in the final rule that came out earlier. This week. They did not provide specificity on what the audit methodology will be going forward and so the error rate that you might.
Expect it to be highly dependent on the audit methodology and extrapolation that they ultimately define and so that is one of the things that we look forward to working with CMS on to better understand to fully assess what might be expected going forward.
Okay. Thanks, a lot.
One moment.
Okay.
Operator are you there.
Yes, I'm sorry.
Justin Lake of Wolfe Research your line is open.
Thanks, Good morning, I guess first of all just follow up on <unk> question, and then ask my own maybe.
Assume.
The methodologies changing.
And maybe you can give a lot of specificity, but I.
Got it would assume an error rate is the narrow rate. So maybe you can just call up on the CMS said error rates for the industry have improved so what are you doing your own audits to see how this has trended over the last 10 years, maybe you can give us some color on.
How.
<unk> already forget about extrapolation, and all that but too early to be your own audits might have been trending over the top it up you're at a time and then my question would just be as a follow up.
As you think about 2018 it'll be the.
First time, they use extrapolation audit audit.
Whatever that error rate is could you give us some color in terms of how you would share that with investors and more importantly, kind of how you would think about it from a bidding perspective, we do we just kind of take a one time charge on something that was from 2018, whatever that repayment might be would you build into the bids going forward.
Got a reserve and just assume a lower a lower revenue number.
A number like a right got you.
Color on that as well thanks.
Sure Hi, Jason.
To your first question about just broadly how to think about how are rates may have turned it over time, what I would say is that generally the growth in value based provider penetration.
As well as the increased activity within in home assessments over that timeframe as well as just the normal course activities that all health plans undertake too as part of Medicare risk adjustment frankly, all work to improve accuracy and so I would expect that some of those programs have grown particularly value based care and home assessments that we were.
See hopefully some improvement relative to those initiatives, but in terms of what might be happening in the broader sort of and much larger organic base of provider claims that's difficult to say because again, we don't have that information and it will ultimately depend on how the audit methodology is defined in order to fully assess the impact of that in <unk>.
Of how we might think about the impact of this from 2018 and forward I would say that from a 2020 for bidding perspective based on what we know today and given that the 24 bids are due in just a few months I would say, it's unlikely that they would be any impact to 'twenty four bids, but we will certainly need to look to see if CMS provides any.
<unk> and the advanced notice in bid instructions given just the uncertainty that exists regarding how the contract selection and audit methodologies will be defined in the future, but our focus will continue to be on delivering value and.
Strong value within our MA plans the members, including the goal of stable premiums and benefits in 2024. So we look forward again to working with CMS to better understand the planed audit methodology going forward and assessing any future impact, but unlikely that that will be finalized in time for the 24 bps.
Thank you.
And our next question will come from Kevin Fischbeck of Bank of America.
Okay.
A little more color on your <unk>.
Sharon MLR.
MLR guidance I think in your comments you mentioned that it's up in part due to.
And may benefit design improvements I guess I was under the impression that you guys were trying to target stable.
Margins on the MA business. So just wanted to understand that nuance and then you mentioned Medicaid pressure due to new contract starts wondering if there's anything.
And there are about Redetermination and then finally any color on commercial would be great. Thanks.
Hey, Kevin This is Susan yes, so in terms of the MLR guide for 2023. The way you should think about it is that we did through our value creation initiatives create capacity with the enterprise to fund those targeted investments without impact to overall earnings and EPS, but keep in mind that.
The enterprise savings that were generated where across the entirety of the enterprise. They wouldn't have all been generated by the Medicare line of business and so given all of that investment was redirected to Medicare you would see some impact to the MLR all other things being equal for Medicare and then as always we have to consider given the growth that we saw and some of the dynamics that Bruce mentioned about new Mems.
<unk> switching members and retention all of those would go into our estimate for MLR for the year as well.
Outside of just the Medicare trend as you pointed out the Medicaid growth.
We will also impact the MLR Medicaid in general has a higher MLR and given the growth that will happen at the beginning of the year, Louisiana, Ohio that will certainly impact it and be mitigated over the course of the year through Redetermination and as we've commented previously the members who had access Medicaid through the.
Deferral of the Redetermination as did tend to be lower acuity and higher cost contributing.
Contributing so as they roll off that would have an impact on the Medicaid MLR as well. So those I would say are the two main drivers as well as just more generally our continued.
<unk> approach a more conservative initial guide as we set expectations with the they intend to use certainly mean and have we seen those expectations.
Thank you.
And our next question will come from Stephen Baxter of Wells Fargo.
Mama.
Wow.
<unk> advantage I think you said you are more than double Dan Your line is open.
Hi, Thanks, I wanted to ask about retention in Medicare advantage.
Thank you said you've more than doubled the improvement that you targeted for 2023, so it sounds like you've gotten the attention back to where you would have initially planned heading into open enrollment for 2022 I was hoping you could talk about whats your outlook is for retention as you continue to evolve your channel strategy do you think retention is stable from here or do you think you can improve and if it can improve any sense of what the <unk>.
I think look what it would be great. Thank you.
Yes.
Thanks for the question.
Yes.
We're very happy about 200 basis point improvement in the retention this year.
It is a combination of both internal work in and the combination of our partnership with <unk>.
From channel per Se have increased.
350 basis points.
As we look forward, it's probably going to be more stabilized as we as we think about it.
Some improvement will continue to work on it but it was the large increase in improvement in the channel outside.
Really contributed to the 200 basis points I don't know if were going to see that is that large of a improvement.
Three in 2020.
Sure.
And yesterday.
Please.
Yes.
Okay.
Okay.
Thanks.
Okay.
Hello, operator.
Sure.
Okay.
Okay.
Okay.
This is your operator, Unfortunately, you could not hear me speaking I have introduced Scott Fidel twice Scott Your line is open.
Okay. Thanks.
Same here either first introduction Scott can you hear me okay, yes.
Yes, yes, okay, okay guys.
Wanted to follow up on just the home the home outlook I. Appreciate the details you did get.
Just interested just given some of the moving pieces with the hospice divestiture.
Just looking at the home health business.
Can you give us your view on what you are expecting the revenue.
Growth trends to be there.
When considering some of the.
The volume indicators that you gave US and then also just interested in your expectations for margins in 2023, just when considering both the final fee for service rates and the shift that's playing out to value based care.
Sure Hi, Sam this is Susan <unk>.
In terms of revenue trend because of the hospice divestiture, you will see a decline year over year.
It's just over $100 million decline.
We have a meaningful offset in the growth of the value based model in particular, which is a risk based capital arrangement with the health plan and so as we significantly expand the coverage of that to 1 million members that does drive meaningful revenue appreciation consider that close to $1 billion for 2023, that's offsetting what otherwise would have been <unk>.
Sure from the 60% divestiture of the hospice asset.
EBITDA contribution you can think of this segment as being down year over year, and that's primarily a function of that higher margin hospice divestiture being replaced with the.
The less mature value based model contribution we expect increasing contribution in markets over time, they don't start immediately it for them.
The full impact and so the value based model expansion you can think of is closer to breakeven in 2023, and then that being offset by the loss of the hospice earnings in our reporting and I would say on the core home health services, we do expect to I would say relative margin stability, we will certainly continue to watch labor trends.
And make some further investments in nursing recruiting and retention as I mentioned in my commentary, but I'd say relatively stable margins in our home health business.
Okay. Thanks.
And our next question will come from Stephen Baxter of Wells Fargo.
Steven Your line is open.
Hi, my questions. So I'm happy to give you the floor back and move to the next person.
Yeah.
Certainly.
Our next question will come from Gary Taylor of Cowen Your line is open.
Hi, good morning.
Wanted to ask about the 23.
<unk> guidance, but maybe come at it from the.
Other side of the.
Angle from what Kevin as well.
To look back at you.
Years in the last decade, where you had really above trend enrollment growth like 2014 15.
In 19, and generally MLR was.
Up in those years, although 2019 was probably mostly the hip holiday, but I'm just trying to think through your commentary about retention being higher which should imply.
Keeping more comprehensively coded patients and 50% of of enrollment from plant switching which would also imply more comprehensively coded patients. So I'm. Just wondering is inherent in the MLR guidance, an assumption that your new class of 23.
Is better profitability than typically you would ascribe to a new class of patients in any implications on kind of that margin improvement progress and we would expect in the 'twenty four.
Hi, Gary.
Rate question. So there are a number of things that will impact the MLR as a result of the membership mix as you said the higher than typical rate of members new members coming from competitor MA plans would generally be viewed as positive those members do tend to be contribution margin positive even in the first year.
We have many times commented on in general when you think of the full newco word of new members as being breakeven from a contribution margin basis, but that's based on that historically lower switching rate. So the fact that we saw more switchers incrementally that would be viewed as positive.
As you said relative to our previous expectations, we see higher retention is certainly positive from a contribution margin perspective as if those are going to be the most impactful from a current year contribution standpoint.
The other two things I would say work negatively against MLR. One is one plant in particular the plan, where we offered a meaningful part me give back we do expect that that plan will attract and an overall lower acuity membership given the plan design and the way, it's structured and we did see stronger growth in that plan than we had originally expected.
Again that relative to all other members would likely be a negative to MLR and then finally I would say the plan to plan switching that we saw this year and we commented on this at Jpmorgan as well for the existing members that we do have we did see more members switched to another humana offering than we had initially anticipated typically that's where they will see a richer plan in marketing.
Select that plan, so while still positive and more so than in an otherwise new member year over year. They would see less contribution given the plan change that they initiated and the last thing I'll just point out that is a bit unique. This year is in order to make the level of investment that we did in our Medicare offerings the way to <unk>.
<unk> work we.
We have to create savings for relative to A&D cost to fund those additional benefits and recall that CMS shares in those savings through the rebate and so in order to invest $1 billion in benefits USA actually save more than that and then share some of that with CMS and to the implications of that is in an otherwise increased to MLR relative to what it would have.
Been at a lower investment level. So all of those things are contemplated in our current year guide as well as as I said, a moment ago. Just our continued approach of taking a conservative view of the guidance at the beginning of the year.
Thank you.
Thank you.
And our next question will come from Nathan Rich of Goldman Sachs. Your line is open.
Hi, Good morning. Thanks for the question I wanted to go back to Ravi if I could.
It looks like the elimination of the fee for service Adjuster is set to go into effect I guess, how significant of an impact could that element have.
Relative to some of the other factors you mentioned, where there seems to be a bit more uncertainty around contracts selection and sampling methodology and then Susan I think you had previously talked about potential for the industry to litigate the outcome of the final rule to try to resolve some of these uncertainties.
It'd be great to get your kind of updated thoughts on how you think that process could play out.
Sure Nathan.
So I would say as we think about the roaming as Bruce mentioned, the fact that they will not be extrapolating to periods of 2017 and prior we certainly view as positive and we would consider the exposure for the audits that have been completed for those periods to be immaterial. So that was definitely positive as we think about what CMS is shared for 2018 and forward and is it.
And our commentary it will be we will need to evaluate obviously the audit selection methodology and extrapolation methodology and also understand our compliance concerns as part of our normal course eminent MRA activities and as we do that we continue to evaluate all of our options to ensure that the omission.
Of a fee for service adjuster, and the resulting impact is addressed and so again at this time, that's really all we can say there is going to have to be additional collaborations with CMS to better understand some of the go forward activity, but we just continue to and will continue to evaluate all of our options to address the primary issue of the lack of acknowledgement of the need for.
For a fee for service adjusted.
Thank you.
Hello.
Our next question will come from Lisa Gill.
J P. Morgan your line is open.
Thanks, very much good morning, Susan.
Susan I was wondering if you could just maybe discuss your expectations around the number of patients that will be in capitation relationships for 2023.
And maybe just overall the number that will be in any type of risk relationships as we think about 2023.
Sure Hi, Lisa I would say that we would probably expect relatively stable percentages and as we've disclosed historically you consider consider about a third of our membership in full capitation arrangements. Another third in some form of value based arrangement and then the final third.
More fee for service type arrangements and just given the strong growth our goal every year is to at.
Minimum maintain that penetration and ensure that the new members, who are enrolling with us get to that penetration level. So given the strong growth. This year, you will certainly have to evaluate that but as Bruce said, we saw very strong growth in highly penetrated market. So hopefully that maybe a bit of a tailwind as it respects to those ratios, but generally you can given the high penetration all ready to go.
Is to maintain that as we continue to grow at or above the market rate.
And if you see better penetration can you just remind us.
That helped improve that the initial guidance that you've given here around medical cost trend for 2023.
I would say we've evaluated the 2023 membership growth and the quality of that and as we've said earlier in the commentary net now you can think of that all in as net positive relative to what we would have previously expected, but immaterial really to our overall estimates for 2023 and certainly.
We will evaluate the claims trend as we do every year and if we do see some positivity, we'll certainly keep you apprised, but I would say from the growth itself, while positive would not be considered material to our overall estimates.
Great. Thank you.
Thank you.
Okay.
One moment.
Question certainly.
And our next question.
Will come from Michael Hall of Morgan Stanley . Your line is open.
Hi, Thank you just a quick follow up on Jason's respond to Gary's question and then a quick one on our value creation plan.
You mentioned, an existing and a member switching to plan with a higher part D. Rebates had a meaningful impact on MLR just wondering how many approximate member mix related to our larger than in past MLR and then quickly on the value creation plan and I understand it's tracking very well on.
On track to exceed $1 billion in savings.
And just a couple of questions like how much in excess of $1 billion now targeting to save for 'twenty. Three and then now that can go over when you think about that 1 billion in relation to strong membership growth increased planned investments in sales marketing and how does that compare to your original expectations or the investment tracking in line with the $1 billion. Thank you.
Hi, Mike Yeah, and just to clarify the enrollment in part B plans within a broad comment and we saw strong sort of choice within that product from new members and I am sure some of our.
Existing members May have switched to those claims as well, but I would say the majority of the outperformance in that product was more related to new members been switching but certainly provides a different alternative in terms of the way the benefits the guaranteed part b give back on the premium side and Theres, a tradeoff for the relative richness of the benefits relative to others.
So again, just based on I would say more of the acuity of the membership that we expect those plans to attract being lower.
I would say that that would sort of all other things being equal negatively impact the MLR that you would expect.
The plan to plan change broadly is just recognizing that typically when a member changes plans, it's usually because they've identified a plan that as Richard benefits.
They will move to you and so year over year their contribution while positive will just be less than it was in the previous plan.
The value creation plan, yes, as you said, we did outperform our initial goal of $1 billion. I would say you can think of that is sort of a 10% to 15% outperformance.
As we mentioned, though in 2023, we did plan for deep intend to reinvest some of those savings into other admin categories of investments, particularly marketing and distribution with the intent of continuing to take progress on shifting some of our external call center market share back through our proprietary channels, which we've just.
<unk> historically is requiring some upfront investment given that we fully fund the marketing for our proprietary channels will see lower commissions over time, but relative to the external channel, but those costs are a little bit more front loaded and so our 2023 planned does continue to contemplate that increased investment in 2023. So that we can make further progress having said.
That we will certainly evaluate the stronger than expected results that we've seen so far in 2023 overall, but also by channel and the team is currently evaluating all of the marketing metrics and developing sort of a point of view of how we will think about our go forward plan, particularly for 2020 for AEP and whether Theres.
<unk> to optimize what we might have initially expected so more to come on that but our plan does contemplate the same level of increased investment that we planned for at the time of our bids last year and the planned use of some of those value creation savings to fund that investment.
Thank you.
And our next question will come from Steven Valiquette of Barclays.
And Steven.
Great. Thanks, good morning, everybody. Thanks.
Maybe you talked about the MLR guidance for 'twenty three.
A lot in this call. So far just one other question around that sort of a clarification, which you mentioned that you expect the provider labor capacity to improve modestly throughout the year just wanted to get some quick clarification around that in terms of would you consider that to be.
Pent up demand when you're referring to that.
Maybe just the other question would just be at the mid point of the MLR guidance are you, assuming any sort of pent up demand related to electric procedures or any other pent up non COVID-19 care coming out of 'twenty two that may have to be absorbed in 'twenty three at the guidance midpoint.
Hi, Steven.
So as we thought about the MLR and specifically the mention of provider labor capacity I would say that is more a broad belief that over time, we will see improved clinician labor capacity, which as we all know has been impacted throughout COVID-19 and we believe still at lower levels than we would have extremes in the absence of COVID-19.
So our belief is that over time, it wont be an immediate correction, but overtime that we will see clinician labor capacity increase and that when we do additional utilization will also follow.
And I think as we've commented before one of the spaces that we continue to see lower than historical utilization is in the.
The observation stays within the hospital systems today, what we've seen throughout Covid is ER utilization in inpatient stays observations days, which you can think of as sort of shorter duration stays are materially lower which makes sense as the hospitals would certainly look to maximize the revenue within their beds for any given patient. So we would.
Does labor capacity increases that will be one area, where I imagine you will start to see some return to pre COVID-19 levels is there sufficient capacity to support those additional patients in the facilities. So I would say, it's not explicitly pent up demand and based on all of the analysis. We've done we don't believe there's a large amount of pent up demand that needs to work its way through the system.
Historically, we have seen some evidence of that but it's typically after a very large COVID-19 spike where theres significant depressed non COVID-19 utilization, which fortunately we haven't seen for some time and we are not forecasting that type of event to occur again in 2023. So.
Our guide does not have an explicit assumption around pent up demand, but rather just taking the resulting sort of baseline trend we experienced in 2022, increasing that for normal course trend as well as the expectation of some higher utilization as labor capacity returns and as I mentioned in the commentary and expectation that we will also see higher costs than we saw in 2002.
<unk> as well.
Okay, Alright thats helpful. Thanks, Thank you.
Our next question will come from George Hill of Deutsche Bank. Your line is open.
Hey, good morning, guys and thanks for taking the question.
Susan I hopped on a couple of minutes late I was wondering if you could just spend another minute talking about what drove the increased costs and 340, b and the duration of that for this year I guess I would just I'm sure you guys saw there was a court ruling on Monday, it looks like it's going to give the manufacturers more flexibility with which participate with pharmacies, they want to participate with in which folks the customer.
Discounts around so just kind of would love more color on kind of what happened in 340 being what you guys see going forward.
Sure.
So the impact that we saw in the fourth quarter of 2022 was the result of an increase in the ASC fee schedule that was defined as for claims paid on or after September 28 of 2022, and there was no ability for CMS to provide any budget neutrality offset in 2022 and so the lack of.
Neutrality offset is what caused the higher costs that we incurred in the fourth quarter that we had not previously anticipated.
Think about going forward in 2023, we will have that same higher ASC fee schedule in effect. However, CMS did implement a change in the outpatient conversion factor, which reduces the cost for other services and drive something much closer to budget neutrality, which is why you don't see an ongoing run rate impact into 2023.
Thank you.
One moment.
And our next question will come from Ben Hendrix of RBC. Your line is open.
Yes, hi, thank you very much.
Regard to center well, you've noticed focus on payer agnostic platform, but you've also noted strong margin contribution from integration with your EMEA, but can you remind us how your how you are prioritizing engagement with your MA plans versus carrier carrier agnostic development as you planned de Novo Center development going forward. Thank you.
Okay.
We actively pursue and engage other payers on this we do believe Thats a important part of our growth strategy and in addition to continuing to provide value back to the M&A industry overall.
But it is highly dependent on the growth of the plan. So this year you saw significant growth as a result of R. R.
The insurance side doing quite well and so I would say our engagement is very broad and very oriented to continuing b pair agnostic, but it is highly dependent on the insurance plans.
<unk> ability to grow.
Thank you.
And I'm showing no I think that ends our question.
Further questions I would now like to turn the conference back to Bruce Broussard for closing remarks.
Thank you operator.
Thanks for your continued support and most importantly, thanks to our 65000 teammates that allow us to to really.
Report these wonderful results.
Susan and I have reiterated we are entering 2023 with a in a position of strength and look forward to continuing to provide you updates throughout the year on based on this strength.
So thank you and everyone have a wonderful day.
I would now like to conclude today's conference. Thank you for participating you may now disconnect.
Goodbye.
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