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Humana Inc. (NYSE:HUM)

Barclays Global Healthcare Conference

March 13, 2013 9:00 am ET

Executives

James H. Bloem - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

[indiscernible] thoughts before I do the official introduction, Jim. So hopefully, everyone's got their handhelds. You'll see the flashing green dots. We're going to ask a couple of questions real quick. We're going to start with -- and remember, we're asking all the companies these. So specifically to Humana, do you think that health reform will be a positive for the company in 2014? Starting with 1 very negative, 5 being very positive. Let us know what you think.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So a little -- relatively spread. Yes, all right. So exactly, second question: Do you expect the company to contract rate on the exchanges? So is Humana going to be paying facilities' Medicaid rates in 1, commercial rates at 5 or something in between?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Certainly not a believers in -- not a lot of Medicaid believers, which makes sense. I think, consistent with what we've heard. Next question: Utilization transfer '13, specific to Humana, so think about that across their broad book of business. Big increase at 1, big decrease at 5 or, again, somewhere in between?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Sort of flat to maybe slightly up. Sounds familiar. Next question: How would like to see Jim Bloem spend his last year, basically? Would you like M&A, repurchases, dividends, repaying debt or investing in the core business?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So where's the big special dividend that I was talking about? Apparently, I didn't answer. Yes, exactly. I did not answer, I should've. Next one: Do you think the company's going to grow their earnings. We've been defining this as EPS. I guess this is a big one. Do you think EPS will be up or down?

[Voting]

James H. Bloem

The answer is always your mileage may vary.

Joshua R. Raskin - Barclays Capital, Research Division

Right. All right. All right. So clearly, a bias there. And we -- I think we've got 2 more questions for you, guys, easy ones. Do you guys own shares in Humana currently?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

I think of this as the opportunity slide. And then last but not least, your current bias, would that be positive or negative or neutral? A 2 would be neutral?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right, I guess that mirrors.

James H. Bloem

This is the opportunity slide again.

Joshua R. Raskin - Barclays Capital, Research Division

It is again the opportunity slide. All right. So let's move on. This is the part of the conference that I was least looking forward to because -- and I'm not going to get choked up. But this will be the last time I introduce Jim Bloem at our Healthcare Conference. He's been a mainstay for the last decade. He's been the Chief Financial Officer for Humana over that time period. I don't even know where to start in terms of the success, but since I've already eaten 4 of his minutes, I probably shouldn't get too far into it. But I can give you a series of financial metrics to talk about the more than doubling of the company over that time, the capital stewardship that we've seen and, obviously, the success in earnings and the stock as well.

So it is my great pleasure to introduce Jim Bloem one more time to the Barclays Healthcare Conference.

James H. Bloem

Thanks, Josh. Again, very kind words. I've got 2 people here that have helped Humana immensely to get to where it's gotten to and we're going to talk about mainly the future here. But I want to introduce Regina Nethery, our Vice President of Investor Relations; and Steve McCulley, our Controller and Principal Accounting Officer. So again, plenty of -- we appreciate what Josh has said about us, but there's plenty of credit to pass around.

Well, let me just get started here. What do I want to do here? You're familiar with the cautionary statement. Today, we're going to talk about 3 different things: The strategic direction; and then we're going to talk about the rate notice, because we know that's on everybody's mind. Those 2 opportunity slides tell us that. And then sort of our financial performance and just sort of recap where the company is and sort of relate the first 2 items together.

So the first slide we have here -- and I always think it's interesting there's a source for this, we have to have a footnote for everything. So a footnote on healthcare costs drive the federal deficit. So there's your footnote, but everybody knows it's true. And so based on that statement, we make the definitive statement that's in the green box. But the federal government needs to have a partner with the private sector in order to really accomplish what it needs to get accomplished to get control of healthcare cost.

The federal government really presides over what I consider to be the biggest indemnity program. It buys about half the healthcare in the United States and basically -- but what that means is, there's not a lot of spare coordination; there's not a lot of utilization management; there's not a lot of health and wellness; there's not a lot of pharmacy follow-up; there's not a lot of fitness, nutrition and all the other things that we do for getting close to the same amount of money that Medicare pays and for less money than the government pays in some of the other programs that it administers. So again, our country has made the public policy decision that healthcare is acquired by people from different sources at different times in their lives, but again, the federal government is the largest. So we think we play and have an opportunity to play a very vital role in continuing to get people involved in the cost and effectiveness of their healthcare. And that's the only real way to get control of healthcare costs.

So we're going to talk about a lot of things that sort of cast appall over the entire thing. There's a lot of uncertainty. There's uncertainty in the rate book. There's uncertainty in the regulations. But when you think about it, the government's going to need a partner in order to really help get control of costs, and that's really the key thing that we want you to take away and think about through all of this.

So how do we do that? How do we have that partnership? So first thing is, let's just take a look at what's happened since 2005. The number of seniors who have chosen Medicare Advantage has really tripled. It's approaching 15 million, that's about 28% to 30% of the total Medicare population. And again, before 2006, the effective date of the Modernization Act, Medicare Plus Choice, which is the predecessor program, was probably only in about a dozen -- we, anyway, were only in about a dozen different areas and the program, in general, was only in maybe 8 to 10 states and always for metropolitan areas. So Medicare Advantage took that nationwide, first through private fee-for-service, and then eventually migrating over through into the types of arrangements we see with providers today. So taking a look at that, the provider practice and payment models continue to evolve and they were -- continue to evolve through the Affordable Care Act, which also was passed in 2010 and really moving from a fee-for-service to a risk-sharing model. Now, this really talks about the cost side of our business. I'm going to talk about the revenue side in a minute. But the integrated care delivery model and getting providers a rate round -- a way to take risk around outcomes and cost as opposed to fee-for-service where whatever the most procedures that can be performed on a patient is what determines payment due, payments for outcomes, and remuneration around payments -- or around outcomes and satisfaction of the member. So again, these -- and that moves us on the green bar on the bottom from more of an insurance kind of a model, which again, remember I said the federal government, but everybody else, too, was really spending everybody else's money in an indemnity-like situation where claim was submitted and the claim -- and some portion of the claim was paid, to now, where we really get into care delivery. And we call that the integrated care delivery model. Let me just show you a little bit.

This is what's happened, really, in the last -- since that same 2006 timeframe. But actually a lot of it happened at the end of last year, in the second half of last year, where we really started to, through strategic investments, through M&A and through CapEx, to build these capabilities that are on here. Now, let's sort of dissect this. So it kind of looks like a baseball diamond. Down at home plate is the individual, and then as you go out, basically if you go out the third baseline there, you can see that's where primary care is. Primary care includes Concentra, which we bought at the end of 2010; and then JenCare, which again we invested in; MCCI which we invested in during 2012; and Metropolitan Health Networks which we bought and Valor Healthcare, which we bought -- both -- all in 2012. So as we think about the rate book and as we think about the situation as we enter 2014, we need to think about these capabilities that we've put together here, again, as the ability really to help us deliver what we consider to be a far superior value to our members versus what they can get by buying a Medicare supplement, a separate Part D and then surrendering their Medicare premium for a fee-for-service. Those last 3 things probably cost a member $3,000 to $3,500 a year, and our products generally run around $900 to $1,000. So first of all, we have to continue to deliver that superior value when we look at the rate book, and we have to be able to give a better experience than our competitors, but we have to also continue to maintain that margin against those 3 things that are offered, really, on an indemnity-like basis. The integrated care delivery helps us do that and the primary care, which are those 4 things that I just -- or the 5 companies that I just mentioned, they really help us do that in a primary care basis.

So the second part of the care delivery part is home care, and that's where SeniorBridge and Humana Cares come in. SeniorBridge, again, helps seniors. It's got a large number of locations around the country where seniors are populated, and it helps them with both health-related and non health-related jobs that they do. And Humana Cares is an operation that we've had in cities where we've always had a large presence, again, in helping seniors navigate the healthcare system. Then sort of coming up into the center field quadrant, RightSource and RightSource in Humana Pharmacy Solutions. RightSource is really the fourth largest PBM in the country. Seniors take a lot of drugs and so we look at that as an opportunity to provide that service and to help seniors then with the medication therapy that goes with it, raising adherence and making sure that the medicines are taken. Pharmacy is the first line of defense against disease and against hospital admissions and everything else, so it's the most efficacious way to treat disease and we've been in that business a long time. We tried in 2002 to 2004 to use outside vendors to give us that, but we find that a core competency that we have is the purchasing and administering of drugs.

Then moving to sort of right-center field there, we have HumanaVitality and LifeSynch, HRI. Those are ways that we really foster wellness and well-being, and again, helping members really avoid chronic condition. And these have been recent acquisitions as well. LifeSynch was a behavioral health company that we bought at the end of 2005. It was a company -- we had 4 vendors doing this, of which they were 1 of the 4. And then we just said, "Well we're going to buy one. " So in the classic, undergraduate kind of thought process we could say, "Well, we could make that synergized and make a better outcome for that. " But the real benefit of that was that we got to take data from behavioral health and relate it to physical health, and physical health back to behavioral health. And those are very related. Obesity, diabetes, a lot of these things are accompanied by depression and feelings of anxiety, et cetera. So putting that together has really helped us treat those chronic conditions.

And then to integrate everything, this is what I call the right-field quadrant. This is where we take data and analytics and then again, to put -- go back to our members and say, "How can we avoid these chronic conditions?" Again, I'm spending a lot of time on this so that you'll understand that this integrated care delivery is really something that we're just now getting to see the fruits of, we've been investing in and we now have it and it's really here just in time for continued rate pressure that we know the entire industry and all of healthcare is going to face as the country moves from of fee-for-service kind of a model to more of an outcomes-based model.

We'll take a look here. Let's go to the rate notice now and relate that back to what happened in mid-February. Basically, just so -- those of you who are not familiar with the process, there's a 45-day notice which is -- gives the preliminary payment rates every year for Medicare, and it's issued in mid-February. It's called 45 days because it's 45 days before those rates become final, in early April. So as we get those rates every year, but we know that the industry and each of the individual companies discuss with CMS whys and wherefores. And generally speaking, it's an event that people look at because it's kind of like a warm up for the main event, which is when the rates come out, and then based on those rates, 60 days after they come out in April, we file our bids for the next year. Well, this year, those rates were probably 5% lower than everybody thought they were going to be based on -- because everybody keeps detailed records of their own business, and then people like Josh and his team keep track of what they think the industry is going to do and what that preliminary rate is going to be. So again, that was a big surprise. It came out on Presidents' Day weekend and we always say, "Well, thankfully, the market wasn't open on Monday, so we can figure out what our response was going to be." But again, and we indicated there that based on what we had said a couple of weeks before in the fourth quarter call, we had kind of said that we thought in 2014, we could still grow our membership and earnings. So we basically took back -- took that statement back, and said, "Now, we have to sort of reevaluate where everything is." That could still be the case or not, that, that's still true, but we can't tell based on what the preliminary rate is because we got to work our way through it.

So again, with this rather large change, and the change was really -- the biggest part of the change was on what the assumption of trend was. So the assumption of trend was basically it went from a positive, almost 3%, in 2013, to what will be perceived as a negative trend of about 2.3% in 2014. There's a 5% swing there. So that, again, the entire industry has said that's a lot different than what we thought. And so now there's been a lot of discussion between the industry and in individual companies with the CMS. And one thing we -- our response, we've not made public, but the -- but AHIP, which is the association -- American Association of Health Insurance Plans, has made theirs public. And if you haven't read that, I think that's a very good 7 or 8 page basic background on what the issues are. So that'd be a good thing to do, too.

So again, more than ever, the industry response and our response are that we have the 3 checkmarks there as our principal ways of having to deal with this. Again, always remembering that we have to beat the Medicare Supplement, the Part D and the original Medicare, and we have to do better than our competition. And we do this all basically on a county-by-county basis throughout the United States because that's where the rates are set. But I want to also -- as you look at those things, they're the product of what I did and what I mentioned in previous slides, which has to do with the integrated care model and all the other things we do with respect to hold down trend, to get people involved in the cost and effectiveness of their health care, the pass-through to providers, all the other things that we have the ability to do. So we have quite an array of potential responses. But again, we're saying to people, these are the major ones.

Now, let's talk just for a minute about our ability to grow in Medicare. Now, these are the last 4 years, but this year being the forecasted year. And you can see on the left where we have the Medicare Advantage, the gray is Group Medicare and Group Medicare is a big opportunity for us and for others, but particularly for us because a lot of companies still have legacy employees, that is retired employees that they offered a retirement healthcare benefit to. There's still about 10 million members to be had in this group of that, let's say, 48 million Medicare-eligible people. But then most of our business is the, I would say, the purple or the maroon, and that is individual, and those we sell one-at-a-time over a kitchen table after we've reached out to them with advertisements. They've called us back. We've verified the appointment. We've gone over there, we've sold them and then we've verified the sale. So there's -- we can't call you up and say, "Would like to buy Humana?" You have to reach out to us. There's a lot of regulatory action there. And again, I'm telling you this because we think that, that's a core competency of Humana as well. But you can see that we've had very substantial growth. Go back to that first slide where I told you 5 million turned into 15 million -- nearly 15 million now.

Same thing on the standalone PDP, which is the drug benefit. In 2010 and '11, we basically teamed up with Walmart for those 2 years. We were with Walmart today, but we had, by ourselves, throughout the country, a single premium for medical -- for drugs. And again, in insurance, across the country single premium, that just doesn't happen. So again, we've enjoyed very good growth there. We have the ability really to stand in with our members, to show them how to take control of the cost and effectiveness of their healthcare and that's what really is our core competency. That and designing benefits and premiums that, again, are better than the competitors in a lot of markets and are -- beat that 3-way purchase that you have to make from the federal government.

So when I then -- so when we take that and say "Well, how has that turned out for us?" We're saying for this year, $7.60 to $7.80, but inside there's $0.30 for expenditures that, again, continue to build out that integrated care model, which again, we think is going to be very important as we go into the 2014 through 2017 period. And that's -- and those are things that are for -- to continue to acquire other physician practices; to take those physician practices that we have and replicate them in other geographies; that we can continue to move physicians along that upward sloping arrow that I showed you on the second slide because I think that's the best way, again, for us to be -- maintain our leadership position. I think all of healthcare is going to need these capabilities and they're going to come into demand everywhere as, again, more and more the economics and the public policy is going to end up saying that people are going to be more and more responsible for their own status of health and that the companies will be here to help you do that.

So I think maybe at this point, it would be good to just take questions and go ahead.

Joshua R. Raskin - Barclays Capital, Research Division

[indiscernible]

James H. Bloem

I don't see the countdown clock and so I don't know where I am. Oh, okay. Oh, there it is, on the balcony. I'm sorry. All right, well good. Thank you. I hope most of you can make it there. If you can't make it there, please call us. We'd love -- we want to take advantage of that opportunity slide.

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