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Humana Q3 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Lisa Stoner
    Vice President of Investor Relations
  • Bruce D. Broussard
    President and Chief Executive Officer
  • Susan M. Diamond
    Chief Financial Officer

Analysts

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Humana Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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, Vice President of Investor Relations. Please go ahead.

Lisa Stoner
Vice President of Investor Relations at Humana

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 third quarter 2023 results and our financial outlook for 2023.

Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. We 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 at 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 to differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K or other filings with the Securities and Exchange Commission and our third quarter 2023 earnings press release as they relate to the 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 all also available on our Investor Relations site. Call 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 reconciliations of GAAP to non-GAAP financial measures are included in today's press release. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share.

With that, I'll turn the call over to Bruce Broussard.

Bruce D. Broussard
President and Chief Executive Officer at Humana

Thank you, Lisa, and good morning, everyone. Today, Humana reported financial results for the third quarter of 2023, with adjusted earnings per share of $7.78, slightly above our expectations. Results for the quarter include outperformance in our Medicaid and primary care businesses and a continued focus on driving sustainable operating efficiencies, offset by the impact of a modest higher-than-anticipated utilization in our Medicare Advantage business.

We reaffirmed our full year 2023 adjusted EPS guidance of $28.25, reflecting a 12% increase over 2022. In addition, we are pleased to raise our guidance for full year individual MA membership growth by an additional 35,000 members to 860,000 driven by continued higher-than-expected new sales. Our full year membership growth rate estimate now reflects a 19% growth rate, significantly outpacing the industry.

As we've shared previously, our ability to deliver on our targeted earnings growth rate in 2023, while also achieving this impressive membership growth is supported by the strength and scale of our organization, underpinned by continued focus on disciplined investments, driving sustainable productivity improvements and delivering consistent fundamentals, including industry-leading Stars results and higher customer satisfaction as reflected in our Net Promoter Scores. Further, our strong membership growth creates significant momentum as we advance towards our 2025 adjusted EPS target of $37. Susan will provide additional details on our third quarter performance and our full year expectations in a moment.

I'll now provide an update on our operations and outlook, including a view of the 2024 Medicare Advantage landscape and exciting growth we've seen in our Primary Care business, before turning to an update on our ongoing productivity initiatives.

Beginning with Medicare Advantage, we took a thoughtful approach to 2024 bids, recognizing the need to balance the rate environment with our commitment to achieve industry average or better membership growth. Our 2024 strategy was informed by extensive consumer and broker research and in-depth analytics regarding what Medicare eligible consumers prefer. We preserved or enhanced key benefits across our portfolio that were identified as most important to consumers and continue to provide differentiating offers -- offerings that focus on improving health outcomes and member experience.

More specifically, we continued to prioritize zero premium offerings, low-cost share for highly-utilized services, including Primary Care and Part D, maintained a highly value supplemental methods like dental and Part B Givebacks. From a Dual Eligible Special Needs plan or D-SNP perspective, our plans include zero co-pays and covered Part D prescriptions and offer healthy options allowance with a rollover feature, a key differentiator in the marketplace.

Our product enhancements are coupled with Humana's leading position in quality and experience. Humana continues to deliver exceptional quality to our members as measured by our CMS Star ratings. For six consecutive years, Humana has maintained the highest percentage of members in 4 Star or higher-rated contracts among national health plans. In 2024, 94% of our members will be enrolled in plans rated 4 Stars or higher and 61% in plans rated 4.5 Stars or higher. More Humana's contracts covering approximately 790,000 members nationwide received a perfect 5-star rating, more than doubling our 5-Star membership from 2023 enabling year-round enrollment in these plans.

In addition, for the third year in a row, Humana has been ranked the Number1 amongst health insurers for customer quality in Forrester's Proprietary 2023 US Customer Experience Benchmark Survey. Humana is also ranked the Number 1 in customer satisfaction with MA plans in Florida based on a comprehensive 2023 study by J.D. Power. And we're proud of that Humana once again has been named the best overall Medicare Advantage Insurance company by US News and World Report, which created an honor role based on CMS's newly released star ratings short MA plans. Additionally, Humana ranked as The Best Company for Member Experience and was declared The Best Company for Low Premium Plan Availability. Collectively, these results are testament to our commitment to putting the health and wellness of our customer's firms.

From distribution and sales perspective, we are building upon our omni-channel strategy in 2023, where we've seen a 60% increase in our internal sales year-to-date, which is our highest lifetime value channel. Our goal is to deliver best-in-class agent and customer experience and have made investments in AI-powered tools and Telephonic infrastructure to reduce consumer call times and transfers. Finally, we are excited about the strong growth of our internal payer agnostic channel, which is expected to double up the sales production year-over-year this AEP. All in, we expect our balanced approach to our 2024 product strategy positions us well. And we anticipate 2024 individual MA membership growth to be at or above the overall industry growth rate. We look forward to sharing more in the coming months.

Within our CenterWell segment our primary care platform experienced significant growth in the quarter, now operating 296 centers, serving nearly 285,000 patients, representing a year-over-year growth of 33% and 17% respectively. This includes the impact of the 24 centers we recently acquired from Cano Health, approximately 12 of which are expected to be consolidated into existing centers or closed as we integrate the business by year-end. As a result of the 2023 de novo bills and M&A activity, we expect to end the year with net growth of 60 to 65 above our previously communicated annual center growth target of 30 to 50. Susan will provide additional detail on our CenterWell primary care performance in a moment.

Turning to our ongoing productivity efforts which span the organization, our focus on productivity continues to drive sustainable value for the enterprise for creating more streamline processes, better experiences for our members, patients and provider partners and driving best-in-class quality and customer service representatives. Let me share a few examples of this important work. Our primary care organization is executing on a multipronged plan to mitigate the ultimate impact of the risk-model changes that will be phased-in over the next three years, including numerous operational efficiencies such as centralizing and streamlining administrative functions, standardizing the clinic operating model and improving clinician productivity.

As an example, we are enhancing our use of perspective risk stratification of our patient base, offering new and enhanced clinical programs and care team interventions to our highest-risk patients, which we expect to further reduce avoidable hospitalizations and readmissions, while we optimize our preventative touchpoints with lower-risk patients and increased connection capacity. In the home as a complement to developing value-based home health payments, we've launched a comprehensive initiatives to reimagine our scale of Home Health operations. These efforts will be deployed across our more than 350 branches, and will include automation, consolidation and implementation technology and AI solutions. This will minimize administrative tasks, while improving clinician productivity, including optimizing their schedule. We believe these initiatives, some of which require incremental investment will ultimately streamline our operations and lead to increased clinical -- clinician productivity and satisfaction.

As an example, CenterWell Home Health has introduced an innovative AI-enabled Digital wound management solution, which allows our clinicians to effectively capture vital wound details with a simple picture. We are pleased to report a notable 18% improvement in -- in the efficiency, thus enhancing the experience of both clinicians and patients. This has been instrumental in clinical decision making, contributing to an accelerated wound healing time by 35%. Finally, within CenterWell Pharmacy, we've been focused on investments in digital channels and have seen greater than 800 basis points driven in scripts received through our digital channels year-to-date, now representing approximately 38% of our total scripts.

Increased use of digital channels provides an efficient and user-friendly experience for patients, allowing for real-time formulary and adjunction of the ability to cost -- of our cost-saving alternatives in real time. In addition to our ongoing productivity initiatives, we remain committed to identifying additional sources of value for the enterprise, the cost saving and value acceleration from previous investments. Earlier drivers include areas such as streamlining our real estate portfolio, as we continue to refine new ways of working post-COVID. We've also identified operations to rationalize our IT portfolio as we focus on building and leveraging enterprise capabilities providing the opportunity to move away from and/or consolidate certain standalone business-specific systems and applications that will meet the business needs of the future.

In addition, there are certain initiatives kicked off as a part of our $1 billion value creation plan in 2022 that required implementation of technology to improve processes and drive efficiencies. And therefore, it takes time to realize the full benefit. As we've continued to focus on and advance these initiatives we've identified additional value to be extracted. We anticipate activities related to the additional value creation initiatives to continue throughout 2024 and result in certain one-time charges that will be adjusted for non-GAAP purposes.

Collectively, our ongoing productivity and value creation initiatives are driving sustainable value for the enterprise. We expect this work will create value beyond the 20 basis points of annual operating leverage business mix at adjusted basis that we committed to our -- at our 2022 Investor Day, aiding in our efforts to offset the near-term utilization and reimbursement headwinds currently impacting the industry.

Before turning it over to Susan, I'd like to touch on our recently announced leadership transition plan. We are pleased to announce that the healthcare industry veteran, Jim Rechtin, will join Humana as the President and Chief Operating Officer on January 8, 2024, as part of a long-planned CEO transition. Jim will report to me until the latter half of 2024 at which time after leading Humana for over a decade, I'll step down and Jim will assume the CEO role. As we work to make this seamless transition in the coming months, I look forward to partnering with Jim. He brings a collaborative, thoughtful and innovative leadership style for our organization, making him a natural fit for the culture of today and in the future. Jim brings a strong combination of operational industry and CEO expertise. His firsthand experience of leading through challenges and opportunities of changing healthcare services continue, while helping to accelerate our integrated care strategies. We look forward to introducing Jim to our stakeholders when he joins the team in early 2024.

With that, I will turn the call over to Susan.

Susan M. Diamond
Chief Financial Officer at Humana

Thank you, Bruce, and good morning, everyone. Today, we reported adjusted EPS of $7.78 for the third quarter. Results in the quarter were slightly positive -- slightly above initial expectations, driven by outperformance in our Medicaid and primary care businesses and continued focus on driving sustainable productivity gains, offset by modestly higher-than-anticipated utilization in our Medicare Advantage business. I will provide additional detail on recent utilization trends in a moment.

Our performance to date continues to reflect the strength and agility of the enterprise, demonstrating our ability to successfully navigate the higher-than-anticipated utilization, while delivering on our earnings commitments and driving individual Medicare Advantage membership growth that significantly outpaces the industry. We now expect to add approximately 850,000 members in 2023, reflecting a 19% growth rate. Further, for the full year, we have reaffirmed our adjusted EPS guidance of at least $28.25, which reflects a 12% increase over 2022.

I will now provide additional details on our third quarter performance and full year outlook by segment beginning with Insurance. This morning, we reported that our Insurance segment benefit ratio exceeded expectations by 40 basis points due to higher medical costs in our Medicare Advantage business. We continued to experience an increase in COVID admissions in the third quarter, whereas our forecast previously assume that this would occur in the fourth quarter.

To date, we have not seen an offset in non-COVID utilizations, which diverged from the consistent patterns seen previously. With respect to non-inpatient trends, we previously communicated that we expected the higher PMPMs reported in the second quarter to continue throughout the back half of the year, reflecting a moderating year-over-year trends percentage. The most recent paid claims data suggested a modest uptick in PMPMs for the third quarter versus the stable levels we anticipated.

Considering the most recent trends, we are planning for the higher level of utilization seen in the third quarter to continue for the remainder of the year. As a result, we are increasing our full year Insurance segment benefit ratio guidance to approximately 87.5%, which implies a fourth quarter ratio of 89.5%. This guidance also reflects the increased individual MA membership growth, which continues to include a higher-than-expected proportion of agents. As we've previously discussed agents initially run a higher benefit expense ratio in the average new member, which negatively impacts the current year benefit ratio, but results in a larger margin expansion opportunity on these members over time.

We anticipate that the higher 2023 Insurance segment benefit ratio will be offset by additional administrative expense reductions, driven in part by the sustainable productivity initiatives Bruce discussed, improved net investment income and other business outperformance. Turning to Medicaid, the business exceeded expectations in the quarter, primarily driven by favorable membership due to redeterminations timing, which continues to track slightly favorable to our expectations, combined with disciplined medical costs management initiatives and lower-than-expected utilization.

Moving now to CenterWell. This segment continued its solid performance seen throughout the year, outperforming expectations in the quarter. Our primary care organization results exceeded expectations, driven by better-than-expected patient volume revenue, combined with lower-than-anticipated utilization resulting in improved medical margin in our fully-owned centers. We continue to see better-than-expected patient growth, adding over 17,000 patients or nearly 89% growth in our de novo centers since December 31, plus 15,000 patients in our wholly-owned centers, representing 9% growth year-to-date. We now anticipate full year patient panel growth of approximately 34,000 to 36,000 as compared to our original estimate of 20,000 to 25,000 patients, more than doubling the patient growth achieved in 2022.

Our primary care organization also continued to improve the operating and financial performance of our wholly-owned centers. We continue to positively impact patient outcomes with hospitalization levels trending down year-over-year. In addition, in part due to our -- due to our continued efforts to engage our patients, retention has now improved 270 basis points year-over-year, up from a 220 basis-point improvement as of the second quarter. Patient satisfaction scores continue to reflect the quality of care delivered with net promoter scores averaging 82 nationally. And we are proud of our quality scores, which are tracking ahead of last year's trajectory, with a 4.5 star performance year-to-date on provider influence measures for engaged patients.

We now expect to increase the number of wholly-owned centers that are contribution margin positive from 110 at the end of 2022 to approximately 130 at year-end 2023, an increase from our previous expectation of 125 and representing an 18% increase year-over-year. In addition, we expect to increase the number of centers that have reached our $3 million contribution margin target from 31 in 2022 to approximately 44 at the end of 2023, an increase from our previous expectation of 40 and representing a compelling 42% increase year-over-year.

The better-than-expected primary care earnings in the quarter resulted in our consolidated benefit expense ratio in 100 basis points lower than our Insurance segment benefit expense ratio as compared to our previous expectation of 40 basis point to 60 basis point reduction. As a reminder, on a consolidated basis, we report from the perspective of the health plan and as such intercompany earnings from these services are eliminated against benefit expense. At this time, we do not anticipate that the primary care outperformance will run right into the fourth quarter. Therefore, we continue to point you to our 40 basis point to 50 basis point reduction between our Insurance and consolidated benefit expense ratios for the fourth quarter with the reduction of approximately 50 basis points for the full year.

Turning to the Home, in our core fee-for-service business year-to-date episodic admissions are up 8.6%, while total admissions are up 5.1%, tracking in-line with our full year expectations of a mid-single digit year-over-year increase. As Bruce discussed, we are working diligently to identify clinical and operating efficiencies to offset industry headwinds, including rate reductions, declining original Medicare admissions, the increasing MA penetration, and ongoing labor pressures. From a capital deployment perspective, we have completed approximately $1 billion dollars in repurchases to date and continue to anticipate share repurchases of approximately $1.5 billion in 2023.

Before commenting and 2024, I would like to take a moment to highlight the significant progress we have made towards the near-term targets we shared in our Investor Day, one year ago. As a reminder, our 2025 adjusted EPS target of $37 represents a 14% CAGR from 2022 and is expected to be comprised of 10% on enterprise earnings growth, largely driven by the contribution from our Medicare membership, 20 basis points of improved operating leverage and a 2% contribution from capital deployment on an annual basis. While allowing for continued growth and investment in our Medicaid and CenterWell businesses as these high-quality assets are expected to meaningfully contribute to our long-term earnings growth as they continue to scale and mature.

Over the last year, we have outperformed in virtually all of these goals, including above industry average membership growth in our Medicare Advantage business, significant outperformance of our productivity goals, and increased share buybacks, as you saw, stock price dislocation earlier this year. We continued to invest in and grow our Medicaid and CenterWell businesses outperforming -- outperforming top line growth goals across these businesses as well.

At the same time, we've experienced higher-than-expected medical cost trend within our Medicare Advantage business and have worked hard to mitigate the impact of these trends in order to deliver on our enterprise earnings and EPS commitments. All in, we are proud of the significant progress we have made and remain committed to the targets we shared last year, including our 2025 adjusted EPS target of $37.

I'll now take a few moments to provide additional color on our early outlook for 2024 starting with membership. As Bruce shared, while it's still early in AEP, we expect that our balanced approach to our 2024 bids positions us to grow individual Medicare Advantage membership at or above the overall industry growth rate, while planning for a modestly higher attrition rate, given the benefit design changes we implemented in response to the rate environment. As we always caution this time of year, it's early in the AEP selling season. So the outlook we provide today could change depending on how sales and voluntary disenrollment ultimately come in.

Broadly speaking, 2024 competitor plan designs reflects less benefit degradation than anticipated, which will likely lead to fewer consumer shopping, and therefore, less opportunity for Humana to meaningfully outpace the industry growth rate. Specifically, Humana's performance relative to the market, initial feedback from brokers is positive, supporting our expectation of at or above industry average growth. Finally, recall that we have limited visibility into membership enrollment data this early in the AEP season, as those results take longer to complete and we look forward to providing further commentary on our fourth quarter call.

In our Group Medicare Advantage business, we expect a membership growth of approximately 45,000 in 2024, driven by small and mid-sized account wins and remain committed to disciplined pricing and a competitive group Medicare Advantage market. With respect to standalone PDP, the overall PDP market continues to decline as Medicare beneficiaries select Medicare Advantage over original Medicare and PDP. In addition, we remain disciplined in the pricing of our PDP products as cost trends continued to rise. As a result, our Walmart Value plan will not be as competitively priced as it has been historically, and our basic claim will exceed the low-income benchmark in 16 regions in 2024.

We currently expect a net decline of approximately 750,000 PDP members in 2024, including the loss of approximately 220,000 members as a result of exceeding the low-income benchmarks. As we look beyond 2024, we will evaluate the impact of the various proposed regulatory changes, which are likely to resolve in higher PDP planned premiums broadly and could lead to further industry-wide movement from standalone Part D plans to Medicare Advantage plans, given the strong Medicare Advantage value proposition. Our focus remains on creating enterprise value from our PDP plans by driving increased mail-order penetration and conversions to Medicare Advantage.

Finally, in our Medicaid business, Humana continues to demonstrate the ability to deliver unique value per communities by building on a strong operating model that integrates physical and behavioral health and develops meaningful partnerships and innovations to address health and equities and social determinants of health. After successfully implementing the Ohio and Louisiana contract in early 2023, we look forward to beginning to serve members in both Indiana and Oklahoma in 2024 and continue to expect to bring our total Medicaid footprint to United States and approximately 1.5 million members by year-end 2024.

Turning now to our expected 2024 financial performance. I would reiterate that we expect grow 2024 adjusted EPS within our targeted long term range of 11% to 15%. Recognizing the increased utilization we're now seeing in 2023, and prudently assuming this level of utilization continues into 2024, we currently anticipate growth at the low-end of this range. We look forward to providing more specific 2024 guidance on our fourth quarter earnings call in February. Looking ahead to 2025, as previously mentioned, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% CAGR from 2022 to 2025.

It is important to note that our 2025 adjusted earnings growth will benefit from the maturation of our robust individual MA membership growth expected in 2023 and 2024 advancing of the mitigation activities, our primary care and home organizations are implementing to offset the impact of their revenue headwinds, capital deployment activity, as well as the sustainable productivity and value creation initiatives discussed today.

In addition, we anticipate certain industry pricing actions to be taken across our individual and group Medicare growth in response to the higher utilization and trends experienced. In closing, I want to say thank you to our over 65,000 teammates. Our success is enabled by your dedication to putting our members and patients at the center of everything we do. I would also like to thank our shareholders for their continued support. Finally, I'd reiterate that Humana's fundamentals are strong and we remain well-positioned to drive compelling earnings growth in the mid and longer term.

With that, we will open the line 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.

Questions and Answers

Operator

Our first question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck
Analyst at Bank of America Securities

Hello. Great. Thanks. I guess, maybe my question would be on the outperformance in the physician business, which is just a little bit counter to, I guess, what some of your competitors have done. I mean, a higher MA trend environment. It's surprising that the physicians are seeing better medical membership, medical performance. So can you talk a little bit about why there is that disconnect there? Why it's not flowing more through that side of the equation? And I guess, the fact that you keep growing membership faster on the clinics, why isn't that the same kind of MLR pressure there that you see in the -- in the MA business when that grows faster than expected? Thanks.

Susan M. Diamond
Chief Financial Officer at Humana

Sure. Hi, Kevin. So yes, you're correct. We did see outperformance in the primary care business. The first thing I'd point out is we've been consistently saying all year that some of the higher trends we are seeing on the health plan side has been disproportionately impacting our non-risk plans versus risk providers. And some of that is a reflection of some of the product mix. We're seeing more pressure in our LPPO offerings versus our HMO and our CenterWell primary care business, particularly the wholly-owned centers are very disproportionately indexed to HMO plans and then geographically, obviously, in Florida and some of our higher performing markets as well.

And with respect to the specific outperformance we were seeing in primary care this year, there's a variety of factors contributing to that. We're seeing positive prior-year development, as well as positive current year development in the quarter and both seeing outperformance across revenue and medical costs. So really a variety of factors.

And so the last thing I would say is some of the information that they rely on comes from the agnostic providers, and they do get some of that information on a bit of a lag. And so you tend to see a little bit more later in the year. as they receive updated information, and I would say from the agnostic book, it's mostly, I would say revenue related, where they've seen some positive pickups in risk towards an MRI reimbursement relative to our internal expectation.

Operator

Our next question will come from the line of Stephen Baxter with Wells Fargo.

Stephen Baxter
Analyst at Wells Fargo Securities

Yeah. Hi. Thanks. And so in terms of the higher insurance company guidance of nearly 20 basis points higher than the high end of the range you previously pointed to. Is any of that increase related to COVID or is COVID just indeed purely a timing shift from Q4 into Q3? And then just in terms of the modest step up in non-COVID cost PMPM that you talked about in Q2 to Q3. Could you just splice that out a little bit in terms of what categories are driving that? If any categories are moving in the other direction as well? That would be helpful to know. Thank you.

Susan M. Diamond
Chief Financial Officer at Humana

Sure. Hi, Steve. Yes. So as respect to COVID as we called out in the commentary and we disclosed this in some of our public commentary during the quarter, we have seen an uptick in COVID within the quarter. As we mentioned, our internal forecast for the year initially anticipated an uptick in the fourth quarter versus third. And so initially, we said that could be just a timing and a pull forward of that. We have started to see COVID start to decline. So it is coming down. But as we mentioned we have today not seen an offset. And so it's resulted in just net incremental utilization within the quarter versus what we might have otherwise expected based on historical trends.

As we thought about the year, what we decided to do in an attempt to just be somewhat conservative to assume that the COVID that we anticipate in the fourth quarter, from an initial standpoint would remain. So we did not take that out of the forecast and may eventually show up as non-COVID ultimately. But we did keep that in the forecast such that our ATT expectations are consistent with what we would have expected previously and didn't pick that up.

On the non-inpatient side, I would say the drivers of that are consistent with what we've been saying since the churn developed on our second quarter call, since the discretionary sort of orthopedic and surgical procedures, some of the ER and observations that we've seen, those have continued and I'd say the drivers remain consistent. There wasn't anything new that came up that's just driving that sequential increase.

Operator

Our next question comes from the line of Scott Fidel with Stephens.

Scott Fidel
Analyst at Stephens

Hi, thanks, good morning. I would be interested if you could give us some of your initial observations on the 2024 AEP as it relates to your marketing and distribution strategies and where you feel that things may be resonating the most, definitely seeing the Humana guide, for example, on plenty of ads recently but more broadly, just in your distribution strategies, what do you think, you know, seems to be working the best, and then any areas where you may even be making some adjustments to the strategy here, you know, sort of inside of the AEP as you continue to look to drive new sales. Thanks.

Bruce D. Broussard
President and Chief Executive Officer at Humana

Yeah, few things there. And one is we are getting, as Susan said, positive feedback to just where our positioning is in the channels and the various broker channels. So both the call center and in addition the field. So, I would just say, in general people seem to be very content with our position both from a benefit point of view, but also from our quality scores that we obviously received both in Stars but also our customer service side.

The second thing is we did have -- continue to have a balanced approach in how we are going to market with our distribution from continuing to support and build our relationships with our call centers, our external call centers, and in addition to our field, our representatives that are external field representatives. So we do continue to see good engagement with them. We continue to see working with them, not only from a sales point of view, but also from a retention point of you, which is consistent from last year, as we continued to make proper investments with our partners there.

But we do see good results coming out of our field, external field channel, and we continue to see really strong results there and probably they're overachieving from our budget. And in addition, we continue to see good results from our agnostic channel, as I mentioned, we're projecting to double our sales there. And we're not making much adjustment today. I mean, we continue we're only 2.5 weeks into the -- into AEP and we feel like we're consistent with what our expectations are, and so we're going to continue to execute, but maybe in a few weeks we might adjust accordingly, but today, I think it's what we set out to do last year.

Scott Fidel
Analyst at Stephens

Okay, thank you.

Operator

Our next question will come from the line of A.J. Rice with UBS.

A.J. Rice
Analyst at UBS Group

Hi, everybody. Maybe just following up on some of the MLR-related questions. I think last quarter you said with what you're seeing on the utilization front, you were comfortable that you had sort of incorporated that in your expectations around 2024 pricing. Given the incremental commentary today, are you still comfortable or do you need to have some level of offsetting efficiencies to -- to mitigate a sequential uptick in utilization that you're assuming will continue next year, and I guess, just part of that as well is obviously part of what's impacting your medical loss ratio this year is all of the enrollment growth you've got. So you've got utilization being a little higher, but you've also got the drag of all these new members. Can you -- is there any way to parse out how much of the variance that you're seeing as utilization versus the drag of the new members and give us some flavor on that so assuming that the one might start to ease next year?

Susan M. Diamond
Chief Financial Officer at Humana

Hi, A.J. Yeah, a lot of great questions in there. I'll try to get all of them. And I would say in terms of this incremental trend we are acknowledging the third quarter and then stepping up to for the full year. Obviously, this would not have been known at the time of pricing. So the incremental mitigation that we need to do to offset that in 2024. And if you recall, in the second quarter call, we did reaffirm that we intend to be within our long-term historical range of 11% to 15% and we are reaffirming that today although acknowledge that as a result of this higher trend that we would expect to be in the low end of that, is our initial thinking.

And I would say, as we saw the trend develop, we certainly recognized that we would need to identify some additional mitigation, I would say, our ongoing efforts around productivity has continued since the work we kicked off in 2022, and as we said before, have continued to identify more opportunity than we might have initially anticipated, which has built a nice pipeline of opportunity that will have certainly mitigated some of the trend this year and will continue to do so next year.

And to your point, the higher enrollment growth, particularly the agents component of that, as we have seen a nice uptick in market share there, does put some pressure on MLRs and even in some cases, pretax, because we said, they run about a 100% MLR, typically in the first few years before flipping to full diagnosis-based risk adjustment, typically more so in the third year. We've said before, and you can think about with the level of enrollment, higher enrollment from agents this year, you can think about on a full year basis that that would impact the MLRs about 20 basis points. And so that is contemplated in our 2024 thinking, obviously one of the things will start to assess as we refine our thinking for 2024 will be this year's membership growth and the composition of that, the new enrollment versus retention and those are all things we'll continue to assess and comment on further when we provide our updated guidance on our 2024 -- our fourth quarter call.

A.J. Rice
Analyst at UBS Group

Okay, thanks a lot.

Operator

Our next question will come from the line of Justin Lake with Wolfe Research.

Justin Lake
Analyst at Wolfe Research

Thanks. Good morning. I wanted to ask about CenterWell, just given the PDP losses, some of the pressures that we're hearing about both in the home health and the physician business, can you talk about the trajectory from 2023 to 2024 and then 2024 to 2025 versus kind of what you had previously laid out at the Investor Day in terms of those improvement that were before some of these headwinds set in.

Susan M. Diamond
Chief Financial Officer at Humana

Yeah. Hey, Justin. So yes, you're correct. The CenterWell Pharmacy is going to be impacted by the MA growth, as well as the decline in PDP growth. And we shared previously that mail order penetration rates for those populations and the PDP does run significantly lower than the MA book. And part of that is the disproportionate percentage of duals in the PDP book which tends to use mail order at significantly lower rate.

And so some of the losses in 2024 will be disproportionately low income because of exceeding the benchmark, and so that would have less impact than average certainly. But those are certainly things we're contemplating in our thinking for 2024. And I would say, in addition to that, you are going to -- you just got a lot of movement between health plan and the pharmacy, both in 2024 and certainly in 2025 too as we continue to see the pharmacy changes implemented. So for 2024, you are going to have things like the DIR changes going to point of sales. So that will have some impact between the two.

And there are going to be more changes in 2025 that frankly we're still working through, and we would anticipate, we're looking at formularies, which might impact your mix in the pharmacy, and how you think about pricing between a health plan and the pharmacy will also have to be considered in light of some of the shifting liability in the changes planned for 2025. So we'll certainly plan to provide more commentary as we work through some of those and a more detailed guidance, but there are a lot of changes to your point, but we are contemplating a membership shift, which we've seen over the last number of years.

Operator

Our next question will come from the line of Joshua Raskin with Nephron Research.

Joshua Raskin
Analyst at Nephron Research

Hi. Thanks. Good morning. And first question is just, are the new members coming in at higher-than-expected MLRs even for first-year members or is it just the mix because they're mostly agent? And then, if you could just refresh the MLR trends for members that are in fully capitated arrangements versus those that are in sort of fee-for-service providers and has that delta changed much in the last year?

Susan M. Diamond
Chief Financial Officer at Humana

Hey, Josh. And for your first question, we are seeing that new members are running higher MLRs than you would have expected, but we would say that is attributable to the overall trend that we're seeing. We have looked at new members versus concurrent members to see what variation we're seeing at various cuts, plain level geographic and what we say it's relatively consistent. So we continue to believe that the impact that we're seeing are broadly industry-related trends versus -- versus Humana specific.

And with the exception of some of the things you pointed out previously, which we continue to see like some of the dental investments we've made, we are seeing some higher utilization. But beyond that, I would say the -- the other impacts are relatively consistent across new and concurrent, but obviously, driving higher MLRs than what we would have expected across the board. In terms of the progression of members in the risk providers, we can follow up on any specific question you have, but I would say in general, I would say the trends haven't changed significantly over the last number of years, at least nothing that we've seen or called out.

Joshua Raskin
Analyst at Nephron Research

Okay, thanks. And I'd be remiss without congratulating Bruce on the pending change and welcoming Jim as well.

Bruce D. Broussard
President and Chief Executive Officer at Humana

Thanks, Josh.

Operator

Our next question will come from the line of Gary Taylor with Cowen.

Gary Taylor
Analyst at TD Cowen

Hi. Good morning. And just a couple maybe one question and one clarification. I know last year at this time, you gave a very precise enrollment growth guidance and perhaps -- perhaps, that was because of the shortfall in the 2022 enrollment, but I guess maybe in absence of that, are you still generally anticipating when you say you would grow at industry or better that the industry would grow high-single digit? Is that still your general expectation?

And then just a slight clarification, I guess, to the -- to the back half of Josh's question. You do talk about benefit design change as impacting the MLR and certainly some of that was intentional. We knew that coming into the year or benefit investments made, you know, CBS this morning was talking about more OTC benefits et cetera. I just wondered if year-to-date given the pretty substantial investment you've made in OTC and Flex and that sort of thing, if you're learning anything about how members are using those benefits over the course of the year is the -- is the monthly utilization of those allowances accelerating as the years gone by, et cetera? Thanks.

Bruce D. Broussard
President and Chief Executive Officer at Humana

I'll take the first question just on the growth guidance, and I'll let Susan take the second question. On the growth guidance, we continued, as we mentioned, believe that will grow at or equal to the industry. I think there's ranges of what the industry estimate will be. It ranges from a 6% to the 8% or so, but we feel really comfortable with that. And that comfort, Gary, is coming from our continued feedback from our brokers and just where we are positioning in the marketplace. We continue to see both the brand and -- and the benefits continuing to be competitive, never the cheapest, but to be competitive in the marketplace. So we're getting really good feedback there.

And so I would just say, we just feel that today we will follow the growth of the industry. We do feel we're not as competitive as we were last year and the way we've positioned our product, and therefore, that's why we've backed a little bit off from being disproportional to being -- being right at the industry or greater growth.

Susan M. Diamond
Chief Financial Officer at Humana

And Gary, with respect to your second question, so as we -- as you think about the benefit investments we've made those obviously would have been contemplated in our pricing and our initial guidance and accounted for in our initial MLR guide. And as we've seen in the higher utilization, particularly in some of the benefits you mentioned like that are more related to the investments like dental and the flex as we've spoken to you. I would say we're seeing this higher utilization on some of those benefit investments than we would have expected, but again if we're seeing across the existing membership base, as well as in the new members, so again, not a selection issue where we're just attracting people that are attracted to that benefit we're seeing existing members who now have access to those richer benefits also utilizing them at a higher rate as well.

And particularly, in the dental side, I'd say, but also the vision, we're seeing across both, just more dollars being utilized versus more utilizers overall. So sort of the cost per visit, as you can think about it, going up where I'm sure the -- the dentists and the optometrists, when they've got a patient in there, they're trying to maximize that sort of revenue per patient. So we're seeing some higher cost procedures or services like dentures and some other things routinely within that utilization.

And with the way some of those benefits are designed, particularly the flex, we do have less opportunities intrayear to try to mitigate some of that. And it does require adjustments to the benefit design. And so as we saw some of that, particularly on the flex benefits early in the year, we did make some adjustments in our 2024 plan designs to account for that and implement some additional restrictions and benefit reduction. That is one thing you'll see. And so we'll continue to monitor it, but I would say broad -- broader utilization just relative to what we had expected off of that benefit enrichment that we implemented in a few of those specific categories.

Gary Taylor
Analyst at TD Cowen

Thank you.

Operator

Our next question will come from the line of George Hill with Deutsche Bank.

George Hill
Analyst at Deutsche Bank Aktiengesellschaft

Was that -- was that George Hill? If so, I'll talk.

Susan M. Diamond
Chief Financial Officer at Humana

Yeah. Hi, George.

George Hill
Analyst at Deutsche Bank Aktiengesellschaft

Sorry, Susan. The end of the operator cut off at my end. I just want to make sure I heard you right where you said were you seeing higher MLR pressure in PPO versus HMO plans? And I guess, my question I want to make sure I heard that right. And then my question would be, is there a meaningful MLR difference typically between the HMO and the PPO plans? And kind of how should we think about that going forward? As you know you're kind of seeing broader demand for the PPO plans and kind of that share is expected to increase in mix going forward?

Susan M. Diamond
Chief Financial Officer at Humana

Hi, George. Yes. You did hear me correctly that we are seeing more pressure in our PPOs versus our HMOs. Some of that's a reflection of a lot of the newer plan designs we've implemented over the last couple of years, there have been more PPO. And you saw the introduction across the industry of the zero-dollar LPPO as an example, and we do tend to have a lower margin profile than our legacy HMO products. Some of that's also a reflection of this geographic mix differences. Obviously, we have strong and deep penetration in HMO products in some of our legacy [Technical Difficulties] Florida and highly risk-penetrated markets. And today, [Technical Difficulties] shortly, although we're seeing more and more of our more sophisticated risk providers take risk on keeping [Technical Difficulties] MLR [Technical Difficulties] see better financial results including lower MLRs and higher contribution to PMPM.

Operator

Our next question comes from the line of Sarah James with Cantor Fitzgerald.

Sarah James
Analyst at Cantor Fitzgerald

Thank you. And so the hospitals this quarter have pretty consistently been talking about pressure on the claims review process for physician fees, especially in the [Indecipherable] and the difference between inpatient versus monitoring. And I'm wondering if you're seeing any savings on those -- on your claims review process for those in 2023 or what you expect in 2024? And if there are some areas that you're looking to improve or sort of enhance your claims review process on in 2024.

Susan M. Diamond
Chief Financial Officer at Humana

[Technical Difficulties] Would you mind repeating that question? We didn't get most of it, I'm sorry.

Sarah James
Analyst at Cantor Fitzgerald

Sure. And so the hospitals have pretty consistently been talking about some pushback on the claims review process for physicians, physician fees, physicians in ED, as well as the inpatient versus monitoring classification. And I'm wondering if that's an area that you're seeing any savings in, in 2023 or expect to in 2024, if not those areas, if there are some areas that you're focused on for claims review as you approach 2024 and managing MLR.

Susan M. Diamond
Chief Financial Officer at Humana

Got you. Thank you, Sarah. And see, I think you're referring to some of the utilization management practices, and those are typically done on the front end. And we do that wherever possible where we will have the opportunity to review some medical necessity and appropriate settings. So whether that's a full inpatient admission or an observation stay. And we've had those programs in place for many, many years. And there are some changes coming in 2024 based on some new CMS regulations, and those do change the way some of those programs will work, but those don't take effect until January of 2024.

So I would say no meaningful changes experienced in 2023, but we are anticipating those changes in 2024. Those did represent a headwind to us recognizing that we won't be able to have as much impact as we have historically from those efforts. And we did account for that in the bids. But that is one of those things we'll certainly want to watch next year, and how that develops relative to our expectations, recognizing there may be some behavior change that we see within the provider community as they adapt to those changes. So that's something we'll continue to watch, but it's something we had anticipated and included in our 2024 pricing.

Operator

Our next question will come from the line of Lance Wilkes with Bernstein.

Lance Wilkes
Analyst at Sanford C. Bernstein

Yeah. Hopefully, you can hear me here. Operator, cut out on me too. Just a quick question, you made a comment about modestly higher attrition that you're expecting in 2024. I was just wondering if you could maybe just give a little more color on the drivers of that if it has to do with distribution channels or maybe the greater proportion of non-duals or something like that. And then also if you could just remind us for the $37 targets in 2025, what's the kind of implicit MA rate increase that you're expecting that we ought to be starting to see in February, that's just kind of baked into that? Thanks a lot.

Bruce D. Broussard
President and Chief Executive Officer at Humana

Okay, I'll take the first one, and Susan can take the second one. On the modestly higher attrition, really is just coming from our history, when there are changes -- significant changes in benefits, what we do see is people shopping more, and in result, when they are shopping more though we've seen an increased attrition. So it's really more the environment we're in as opposed to dramatic changes in the -- in our distribution channel or benefits.

Susan M. Diamond
Chief Financial Officer at Humana

Yeah, and then Lance, with respect to the $37, I would say in general, as we've commented, we have been anticipating that the rate environment would not continue to be as favorable as we had seen the last number of years. Obviously, for 2024 the industry is absorbing the more negative rate environment and with the phase-in of the risk adjustment model changes we anticipate that will be implemented over the next -- the remaining over the next two years.

That will certainly have an impact to our primary care business, which we've talked about. While the business has a mitigation plan and they believe they can fully mitigate the impact, they do think it will take time. So we are anticipating a headwind in 2024 that will be somewhat lessened in 2025 as they continue to mature and scale some of their mitigation plan initiatives and then fully offset by 2026. Within the health plan, I would say we obviously know what the impact of the risk adjustment model change phase-in will be, but we'll have to obviously see what the core rate adjustment looks like in light of some of these higher trends, in theory, you would see some positive restatement embedded in there.

So we'll have to see what that looks like and whether it's sufficient to cover normal course trend. The way we generally think about it though is that is going to impact the industry broadly and so in theory we should be on par with everyone else and assuming everyone reacts rationally then it wouldn't put you in an advantage or disadvantage. We are very pleased though again just to have the really strong Stars results that were published recently and that again is a nice durable advantage for us where we do know some others will have some challenges to deal with there, while others may have some improvement. And so those are all things that we consider as we plan for 2025.

I would just reiterate we remain committed to delivering the $37, committing to continue to grow at or above the industry rate for MA membership growth and wanted to highlight recognizing it, it requires an accelerated growth rate for earnings in 2025. Wanted to make sure we highlighted some of those more unique tailwinds that we will benefit from in 2025 that allow us to achieve that higher-than-typical rate in order to deliver the $37. And we'll certainly share more on our fourth quarter call.

Lance Wilkes
Analyst at Sanford C. Bernstein

Great, thanks.

Operator

Our next question will come from the line of Nathan Rich with Goldman Sachs.

Nathan Rich
Analyst at The Goldman Sachs Group

Hi. Good morning. Can you hear me?

Susan M. Diamond
Chief Financial Officer at Humana

Yeah.

Nathan Rich
Analyst at The Goldman Sachs Group

Great. Susan maybe just building off of that last comment there on the 2025 target, how should we think about the margin progression for the Medicare Advantage business between 2024 and 2025? It seems like, you know, maybe a bit of a bigger step-up than what you had anticipated previously. And you also made reference to some additional earnings levers like pricing actions. Could you just go into a little bit more detail on what you're considering there?

Susan M. Diamond
Chief Financial Officer at Humana

Yeah, absolutely. And so as I called out in my prepared remarks, there are some tailwinds that we'll benefit from in 2025. You know, as we've said, the outsized membership growth and the progression you will typically see in the margin profile of those new member cohorts improves over time. The higher agents in particular, as I mentioned, they typically don't see the real step up in performance until year three when they fully convert to risk adjustment. So the member - the new agents we've got in our 2023 book will then see disproportionate improvement in 2025, that will help contribute to that higher earnings growth that would be required to get to the $37.

And we have continued to see favorable net investment income as you've seen in our results. And so some of those things are improving relative to what we would have thought going into 2024 and will continue into 2025. And then certainly our continued focus on productivity is something that has continued to prove to be a mitigant for the near-term pressure. And then we expect to continue to see more than the 20 basis points of operating leverage that we committed to, and then some of the capital deployment will benefit as well.

So the way I think about it, you know, when you try to isolate some of those things sort of, then what's left is what you say is more normal progression within our historical targeted range. And we do acknowledge, though, given what we're seeing in the trends and also in some of the discrete utilization we've seen and some of the benefits we've discussed, we do expect that we will take some discrete pricing action for 2025. We will certainly be targeted in the way we do that, so that we're addressing some of those spots that are driving less earnings progression than we would have expected at the time of pricing.

And so while they might have some impact to membership, we would say, we would plan to target in a way where that's okay, that it's the appropriate thing to do to balance the membership and the earnings progression that we'd be looking for and still feel confident that more broadly, we should be well positioned such that we should be able to continue to generate membership growth at or above the industry rate.

Operator

Our last question will come from the line of Whit Mayo with Leerink Partners.

Whit Mayo
Analyst at Leerink Partners

Did you say, Whit Mayo?

Susan M. Diamond
Chief Financial Officer at Humana

Yes. Hey, Whit.

Whit Mayo
Analyst at Leerink Partners

[Technical Difficulties] That's a consistent theme today. Just one -- one clarification just on that last topic of the agents. Can you quantify, Susan, the growth that you're seeing this year inside of 19% growth and what you're thinking for next year. And then, I'm just wondering where you are on sort of the evolution of the delegation of risk on, One Home, how much of the medical spend, you've transitioned, and maybe how much of that is driving the growth on your Home Solutions business? Thanks.

Susan M. Diamond
Chief Financial Officer at Humana

Okay, I got the first one. Would you mind repeating the second question? So the first question was about agents. What was the second question?

Whit Mayo
Analyst at Leerink Partners

Just One Home. And how much you've delegated the risk on that business today in terms of like the post-acute or the DME, and how much of that is driving growth on your home solutions business?

Susan M. Diamond
Chief Financial Officer at Humana

Sure. And as far as the agents, I think with some of the information we shared about the increased penetration that we've seen, you can think of that as about 250,000 additional sales for agents for the full year. And then we see the incremental benefit of the margin progression on that. Like I said, it's disproportionately weighted to year three by the time those members ultimately convert. In terms of One Home, it's about 15% of MA membership. I think it's an answer to your question.

Whit Mayo
Analyst at Leerink Partners

Okay, but how much of like the, if I take all of your post-acute spend, how much of that have you fully rolled out in terms of the full delegation of risk?

Susan M. Diamond
Chief Financial Officer at Humana

Yeah, why don't we -- we can get back to you with the specific answer on that. Let us look at that and when we talk late tomorrow, we can have an answer for you.

Whit Mayo
Analyst at Leerink Partners

That's fine. Thanks.

Susan M. Diamond
Chief Financial Officer at Humana

Okay.

Operator

That concludes our question-and-answer session, I'd like to turn the call back to Bruce Broussard for closing remarks.

Bruce D. Broussard
President and Chief Executive Officer at Humana

Thank you, operator. In closing, I'd echo Susan's thanks to our 65,000 employees. We truly appreciate their hard work and dedication to bring each day to serve our members and patients. I'd also reiterate the thanks to our shareholders for their continued support. Humana's fundamentals are strong and we remain committed to leveraging the strength and scale of our enterprise to navigate near-term challenges, while continuing to advance our strategy. And importantly, we remain committed to our 2025 adjusted EPS target of $37, reflecting a 14% compounded annual growth rate from 2022 to 2025. I hope everyone has a great day.

Operator

[Operator Closing Remarks]

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