Humana Inc (HUM)

Inpatient Trends Impact
Q: Is the 2-Midnight Rule causing pressure on inpatient trends?
A: Management acknowledges that higher inpatient volumes are partly due to the 2-Midnight Rule implementation, leading to increased utilization particularly in the back half of the second quarter, continuing into July. They note that although inpatient volumes are higher than anticipated, the admissions are of lower acuity and lower average costs, and there are corresponding reductions in observation stays. They believe the situation has stabilized but is higher than initially expected. - - -

MLR Progression and Guidance
Q: How is the MLR expected to progress in the second half?
A: Management expects the Medical Loss Ratio (MLR) to increase in the third quarter due to higher inpatient volumes, with workday seasonality contributing about 80 basis points to the MLR. They anticipate higher MLRs in the second half, with the third quarter impacted more than the fourth due to favorable workday seasonality in Q4. The higher inpatient activity is fully accounted for in their guidance. - - -

Margin Recovery and 2025 Bids
Q: Will higher inpatient costs affect 2025 margin recovery plans?
A: Although the higher inpatient utilization was not fully anticipated in the 2025 bids, management feels confident in their ability to deliver margin and earnings expansion as planned. This confidence is based on offsetting factors such as higher risk scores, lower inpatient unit costs, and lower observation days not previously contemplated in the bids. They believe these factors will mitigate the impact of higher utilization. - - -

Management Changes and Strategic Review
Q: Are there changes in management processes or strategic reviews underway?
A: CEO Jim Rechtin discusses enhancing the company's multiyear planning and increasing discipline in measuring returns on expenses and investments over multiple years. This approach aims to ensure consistent performance and optimize shareholder value over time. The company is conducting a strategic review, going deeper than usual to implement these management processes, with more details to be shared early to mid next year. - -

Medicaid Trends and Favorability
Q: How is Medicaid performing compared to peers?
A: Management notes that their Medicaid performance is slightly better than peers, particularly in Florida, due to conservative assumptions about redeterminations and member acuity. They are seeing favorability relative to expectations in Florida, while acknowledging discrete pressures in newer states like Oklahoma (pharmacy-related) and Kentucky (behavioral-related). They feel good about Medicaid performance relative to expectations. -

PDP Segment Expectations
Q: What are expectations for the PDP segment in 2025?
A: There is significant activity in the Part D space due to program changes for 2025. Management believes industry participants are focused on mitigating increased exposure and liability risks. They acknowledge that the recently released benchmarks suggest the direct subsidy may be higher than analysts expected, reflecting higher costs the industry will face in 2025. They await additional guidance on the demonstration project before commenting further. -

Impact of Higher Risk Scores
Q: How are higher-than-anticipated risk scores affecting V-28 headwinds?
A: Favorability in the 2023 final Membership Risk Adjustment (MRA) is primarily related to new members where full claims history was not available. This outperformance was not contemplated in the 2025 bids but is expected to recur into 2025, potentially mitigating higher inpatient utilization if it persists. The impact on V-28 is proportional but does not change previous assumptions. - -

Operating Expenses Timing
Q: Are lower-than-planned admin expenses timing-related?
A: Management confirms that some favorability in administrative costs is timing-related, with expenses expected to occur later in the year. Areas like marketing and IT may see spend shift into the third or fourth quarters. -

Capital Deployment and Growth Opportunities
Q: How are you thinking about capital deployment and growth?
A: Management sees growth opportunities in CenterWell, Medicaid, and their Medicare book, emphasizing synergies between these areas. They evaluate capital deployment based on strategic alignment with reducing total cost of care and improving quality, focusing on investments that offer attractive returns over time. -

Revenue Guidance Increase
Q: What's driving the $3 billion increase in revenue guidance?
A: The largest driver of the increased revenue guidance is higher-than-expected membership growth, which impacts both revenue and plan costs. Favorable performance in the 2023 final MRA and intra-year positive adjustments to revenue risk scores also contribute, but membership is the primary factor. -

Provider Business Trends
Q: Are you seeing the same inpatient pressures in the provider business?
A: The provider business is experiencing similar results to the health plan but with less inpatient pressure. They have been effective in working with hospital systems on authorization requests and determining appropriate levels of care, often avoiding unnecessary inpatient stays. They are cautious due to less real-time information but generally see consistent performance. -

2025 Bid Strategy and Plan Exits
Q: How are plan exits affecting 2025 membership and margins?
A: Management plans to exit plans that are unprofitable with no path to breakeven, impacting a number of members. In most cases, affected members will have access to another Humana plan. These exits allow for margin expansion as they remove loss-making plans, but overall earnings growth will depend on membership changes, and there's a wider range of potential outcomes for next year. - -

Cost Management Efforts
Q: Have cost cuts affected ability to react to cost activity?
A: Management does not see evidence that cost-cutting efforts have cut into muscle. They acknowledge that initial quick hits are easy, but ongoing cost management requires planning and investment over multiple years. They've planted seeds for multiyear cost management and see more opportunity ahead. - -

Inpatient Claims and Provider Negotiations
Q: Will there be revisions on inpatient claims or provider negotiations?
A: They have robust utilization management programs in place, including front-end reviews and post-pay reviews for medical necessity and site of service. They do not expect material changes from these programs. Contracting efforts focus on aligning incentives around appropriate utilization and care, working towards better alignment with providers. -