HUM
#Thanks, <UNK>, and good morning, everyone
My remarks today will also be relatively brief given our Investor Day last week allowing more time for analyst questions
As <UNK> mentioned, the first quarter of 2017 produced solid results ahead of our prior expectations, and consequently, we raised our adjusted EPS guidance to at least $11.10 and our full year Retail pre-tax target by $50 million
We also expect our quarterly EPS progression to reflect just under 30% of the full year number in each of the second and third quarters, with the fourth quarter expected to reflect the usual cost increases associated with the open enrollment season
I will now provide more details about each of our segment's operating performance
Led by individual Medicare Advantage, our Retail segment outperformed our initial estimates, largely due to better-than-anticipated prior-period development
Early indicators also suggest that medical cost utilization trends, including hospital admissions and pharmacy spend, are running well relative to our pricing expectations
Initial indications of Medicare premium levels are also encouraging
Finally, we have lowered our expectations around 2017 individual MA membership growth to 15,000 to 25,000 from 30,000 to 40,000 while we are increasing Group MA membership by 10,000 members to 80,000 to 90,000. We do not expect these changes to impact overall Medicare profitability
With regard to our Medicare Advantage bids for the 2018 plan year, our organization is working diligently on our bid submissions which are due in early June
With the overhang associated with the terminated transaction now behind us, we believe we'll be positioned for stronger growth next year while we maintain pricing discipline
We continue to receive a number of questions about the assumptions that will be reflected in our bids
For competitive reasons, we won't be specific on these, but I will reiterate three of the key points we shared at our Investor Day last week
First, we are incorporating our recent 2017 outperformance into our pricing and will reflect any new information as it becomes available in advance of the bid submissions
Second, we are assuming the nondeductible health insurance fee, also known as the HIF, resumes in 2018 as is scheduled under current law
This will result in a reduction of benefits and/or increases in premiums for our members, which could create some member dislocation given the importance of stable premiums and benefits to member retention and new sales
And third, our bids will reflect the outcome of our ongoing Stars bonus efforts with CMS, and we will update the Street on our progress in this regard during our second quarter conference call
Turning to our other businesses, our Group and Specialty segment is having another good year
Our performance is running in line with expectations, with a focus on smaller employers paying dividends as it gives the organization focus as well as the opportunity to add meaningful value for our customers
Our Healthcare Services segment also continues to deliver profits, steady cash flow to the parent, and importantly, clinical excellence and trend benders for our insurance lines
You will note that we have taken down intersegment revenue guidance by approximately $1 billion for the year
Our Humana At Home optimization continues apace and is proceeding a little faster than we had expected
We expect this optimization to continue into 2018. Additionally, we are seeing lower-than-expected pharmacy volumes, which reflect lower health plan drug utilization than we had previously anticipated
This of course is a positive development for overall Humana, though it is still too early to draw definitive conclusions
If these trends continue, we expect that the increase in health plan pre-tax income would more than offset any reduction in pharmacy profits, though it is also important to note that any utilization reductions in the health plan would be meaningfully offset by lower member cost share and CMS reinsurance payments
I will now make some comments regarding our long-term EPS targets that we discussed during our Investor Day last week
There have been some questions as to how we define low to mid-teens EPS growth
To provide more clarity around regarding our intentions, our long-term annual EPS target is 11% to 15%, reflecting our conviction around our strategy and the results it can deliver
As we discussed last week, our annual results will vary, sometimes performing above this range as in 2016, other times falling within the range and depending on the funding environment, competitive landscape and any prior year over-performance, there may be years in which EPS growth is below that range
Given our integrated model, we have multiple levers we can pull to achieve these long-term results which will also vary year-to-year
These levers include, among others, membership and PMPM premium growth, MA margin changes, depending where the prior year finished in terms of our 4.5% to 5% individual MA pre-tax margin target, Healthcare Services pre-tax growth in excess of insurance membership growth to drive additional margin, and of course, capital return and M&A
Enhancing organizational productivity will also be a prime focus of the company to achieve these results while also increasing operational consistency
Finally, before opening the call up for questions, I would like to share with you the news that <UNK> <UNK>, our Vice President of Investor Relations, has decided to retire at the end of this month after nearly 22 years with Humana
It is impossible to overstate <UNK>'s contributions to Humana over her career
She has not only been consistently recognized as the Investor Relations leader in our industry, but she has also been a critical partner to <UNK> and me, as well as to our predecessors, helping all of us navigate the tremendous change both Humana and the industry have undergone over her distinguished career
Her wise counsel and impeccable market judgment have guided us through both good times and bad, demonstrating exemplary leadership and representing the very best of Humana
We can't thank her enough for all that she has done for the company
<UNK>, you will be greatly missed and we wish you the very best
With <UNK>'s retirement, Amy Smith will lead Investor Relations
Amy is a CPA, who has been at Humana for nearly 14 years, serving most of that time in progressively expanding leadership roles on the Financial Reporting team, driving SEC reporting and development of external messaging on key financial measurements for our earnings releases
With this expertise, she joined the Investor Relations team in February 2017 and met many of you at our Investor Day last week
<UNK> and I look forward to partnering with Amy in her new capacity and she's very excited about the opportunity of working with all of you
With that, we will open up the lines 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
Question-and-Answer Session
Well, <UNK>, as you know, we typically don't provide even as much commentary as we've provided to this point on the following year and I think what we've provided at this point is really all we're going to say
Obviously, the HIF is something that we're very focused on and it is a headwind that frankly all the industry will have to contend with, but we are very mindful of all the elements that are going to go into our bids and you should expect more commentary as we get to later in the year
So, that's really all we can say at this point
Hi, Josh
It is in line and you pointed to the reason why the MER is so low
It's really seasonality
There's a very steep claims curve in the Individual business as the year progresses given the benefit design of the product and so the MER and the profitability in the first quarter is within our expectations
We do still expect to lose approximately $45 million overall for our ACA and our non-ACA combined individual products
If you compare versus last year, which you may be looking at, the losses were significantly higher than what we expect this year and as you know, we exited all of our off-exchange products and meaningfully pared back our on-exchange products particularly those areas where we were losing a great deal of money
And so that really explains the difference year-over-year, but the seasonality is real in this product and that's what's explaining that low MER this quarter
Well, true, but remember that we are excluding the Individual business from our adjusted earnings, so it will help the GAAP earnings, but we've taken it out of our adjusted earnings
We are, too
Well, again, the PYD, I think the $50 million is really reflective of sort of the excess PPD that we didn't expect is the way I would describe it, and that's what's been built in to the guidance
It's broadly in that range
Remember that we don't – we expect some PPD beyond the traditional reversal of the margin that happens naturally every year and that's – we expect that in our Medicare business
What we said on the last quarter call is that what we achieved in 2016 we didn't expect to recur again in 2017, and so while the PPD is down year-over-year, it's still higher than we had expected, and that's really the $50 million number that we called out
And remember, for 2017, just we're not talking big numbers here and on a 3-million-member base, you have small levels of dis-enrollments or small differences in sales, that can easily swing numbers 10,000, 15,000, 20,000 members one way or the other
So I wouldn't make too much of the 2017 change
I would say that we are selectively looking at Group MA opportunities
There is a pipeline there
We have a team out there that is, I think, doing a really great job looking for those opportunities and we're going to pick our spots, as we've said in prior context, to make sure that we're able to earn an adequate return of capital
There's no real additional investment in 2017 for the Group MA product that's not already built into the plan
But we are looking at a number of opportunities, as I think a number of folks are, but we're going to continue to be disciplined
But we think we have a very good product that we can offer and, again, it's really going to depend on the competitive landscape, our relative market position, depending where the members are and how aggressive we want to be
But, again, I think we're going to be quite disciplined in this product
I mean, you can look at our premiums and they're sort of north of $3 billion and, call it, 10% to 12% of premium over time that we can ultimately get out of our statutory subsidiaries
There is a tail there and I would imagine in 2018 we'll start pulling out some of that capital from some of the prior reductions, but ultimately it's going to probably, likely, take into 2019 before we can get all of our capital out
I think it's fair to say, we feel very good about our risk adjustment processes
We take this very seriously
We look for outliers
We've a lot of analytics around this
We do self-audits
Again, we feel very good about our risk-adjustment practices
Yes, the retail MER is disclosed in the financials because it's been pulled out
So it's in our press release
The reported MER for retail was 88.1% for the quarter
The 88.1% excludes individual
Well, again, the full-year guidance is out there in 86% range
Remember the PDP product, in particular, drives the seasonality of that business, so over time the PDP MER as you move forward through the quarter given the product design, that MER goes down and so that's what's driving the, sort of, the high MER in the first quarter relative to our full-year guidance
Well, remember, a couple of things are going on
First from a pre-tax perspective as we indicated at Investor Day, given where our guidance is right now with the $50 million, we're at the low end of our individual MA number
But remember with the HIF coming back in 2018, that's going to impact the MER
While the MER was slightly up, there were a number of things driving the MER that ultimately pulled it down, but the HIF offset that because you put more back into benefits
With the HIF coming back, you'll have to reduce the MER and increase the admin ratio to reflect that HIF
So the components are going to change between the admin ratio and medical cost ratio, but as it relates to specific pre-tax margin guidance, again, we're not providing 2018 guidance at this point
Yes
Well, so remember that we've exited the individual exchanges as of the end of 2017. So we're not going to have any members for 2018. For 2017, we exited the off-exchange in total
So of our call it 200,000 members today, we have about 155,000 on exchange and about 45,000 legacy members, or grandfathered members
From a state perspective, Tennessee now is our largest state, followed by Louisiana and Florida
But Tennessee by far is our largest state with over, call it, 65,000 members
So it's <UNK>
At our Investor Day, we suggested working with other outside independent groups that, call it, 6% plus or minus growth rate year-over-year was something that we could expect
The variance, I would agree that the HIF had probably less of an impact this year than perhaps one would have thought on overall market growth
And that might suggest that next year it also, by coming back, may not have as much of an impact on market growth, but it's too early to tell
I mean the thing that worries us about the HIF a little bit is that it's a big number and when you go the other way and reduce benefits, that could have an impact on that overall growth rate
But it's really frankly hard to tell and hard to model human behavior and how they respond to the reduction of benefits and increased premiums
There are also a number of demographics that vary year-to-year just in terms of the number of people who are aging in to Medicare, and so that's going to vary
It's geographically based as well
And so again it's very hard to say whether that 6% is going to hold next year and what the variance around that may be, but that's broadly the number that we're thinking about
I think there are two elements there
The first is, you mentioned around the MA side
As I said, we are at the low end of our margin range at this point, but remember, this is a long-term target, so every year is going to be different
There will be years where we'll be below our long term individual MA range, and sometimes we'll be above that pre-tax range
And so that's where that lever comes in depending on where you are exiting the prior year
The second element relates to our Healthcare Services franchise
We believe that over time – and there are going to be, again, years where it's faster and years where it's slower, but there are opportunities to further engage with our members and drive pre-tax Healthcare Services growth faster than revenue growth
And that ultimately leads to more margin for the enterprise
And so I think those are the two elements of margin and how they play into the long-term EPS growth
