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Humana Inc. (HUM)

May 21, 2013 9:30 am ET


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


Albert J. Rice - UBS Investment Bank, Research Division

Albert J. Rice - UBS Investment Bank, Research Division


I'm A.J. Rice, the Health Care Services analyst here at UBS. Welcome to our next presentation, which is Humana. I'd like to introduce Jim Bloem, SVP, CFO and Treasurer of Humana. Humana is the leading managed care company with particular strength in the Medicare Advantage product line. I'm excited to have Jim here to tell us more about the Humana story. And with that, let me turn it over to him.

James H. Bloem

Thank you, A.J., and good morning, everyone. I'd like to just briefly introduce who are with me today, Steve McCulley, who's our Corporate Controller and Chief Accounting Officer; and Kevin Horsley, who's the Manager of Investor Relations. So we're ready to take your questions when we get through, and we'll be in the breakout room afterwards. But what I'd like to do today is to talk to you about principally the Medicare part of our business and what's ahead, where we've been and why we think we are uniquely positioned to continue to do well.

So here's our cautionary statement, and you're all familiar with that.

Let's start then with a pretty noncontroversial subject that says, health care costs drive the federal deficit, and again, I think that doesn't -- that has a footnote but it doesn't really need one, everybody realizes that. But it's our proposition, which is what's below there, that the federal government is going to need a partner with the private sector in order to continue to solve the Medicare problem, if you will. The fiscal problem that attaches to Medicare, which is a great tradition and a great benefit to our senior population.

The government, the federal government, is getting very close to being 50% of the buyer of all health care through various programs of which we participate in, principally Medicare, but also Medicaid and the Department of Defense and the Department of Veterans Affairs. Health care in the United States is over 17% of the GDP. So again, this is a very crucial benefit for our society, and we provide a very crucial service. And so we're going to get into that in a little bit of detail before we go here.

If we look at what's happened since 2006, the beginning of 2006 was the onset and the effective date of Medicare Modernization Act. And what that did was, it took Medicare Plus Choice, which was the predecessor program, which was only available in 8 to 10 states, and made it nationwide. Companies like ours used the opportunity that was presented by private fee-for-service to really expand into all the states and to bring the program to all the states, and therefore, the value proposition offered by Medicare Advantage compared to original Medicare, a part D and a Medicare supplement, that value proposition, actuarial equivalent set of the benefits to those things, has caused the population who elect to approach 30% of the total Medicare population right now, approaching 50 million members. It's keeping -- we're going to talk about in the next few slides, and there's only a dozen in this deck, we're going to talk about what we do to keep that value proposition alive and how we have fared over the years. We've got 25 years or a little more, actually, in the business of designing a set of benefits and premiums after the government says what the reimbursement rates are. We always go last, the government says, this is what we're going to -- the federal government says, CMS says, this is what we'll pay. And so we then design a set of benefits and premiums that gives a very solid and consuming value proposition to the seniors.

One of the ways that, that value proposition is -- continuous to be enhanced and maintained in the face of benefit cuts or payment rate cuts, and I will show you those in a minute, is through the evolution of provider practice and payment models. These are evolving as the chart here shows. Really, if you look on where the arrow is, that's basically introducing accountability and alignment into the delivery of health care services, that's not been there in the past. We've always had a fee-for-service type in terms of all medical services. The providers have traditionally been paid on how many procedures they do and how many patients they see, et cetera. And we're moving more and more, and we'll talk about this in a minute, to a care delivery, to an integrated care delivery model where, again, alignment and outcomes and consumer experience and costs get related as opposed to fee-for-service payments.

So let's take a look at how Humana has -- what Humana has done in the integrated care delivery model. And we've been very active, particularly since the end of 2010. So 2 full years and a little less than half a year now. And there are 16 names in what I would call the outfield of this ball diamond chart. And if you look at it, they're really divided into 5 things. We show 3 quadrants, but if you think about what the actual names of the companies that are part of the Humana family of companies do, you'll see that 5 of them are primary care companies. And those are the Concentra, the JenCare, Humana Cares, Valor Healthcare, Metropolitan and MCCI. Those are provider care practices. Now we've spent a fair amount of money last year in acquiring some of these, and some of them are in the form of joint ventures, some are strategic investments where we own less than a controlling interest, and some of them are outright acquisitions. But the idea here again is, going back to that previous slide, to get alignment and accountability in the provider area. And then Humana Cares is something that we've had for a long time that we've grown organically. So this is a very capital-effective and efficient model that we view as really to take -- to gather these capabilities. When you look at all these capabilities, you'll find that they basically cover the entire waterfront of provider activities. The next group -- so primary care is first, there's a couple of companies up there for home care, and those are SeniorBridge and Humana Cares. Then the pharmacy coming in the center field there, in that middle slice, RightSource and Humana Pharmacy Solutions, we started that organically. We're now the fourth largest PBM. Again, these things, again, all relate back to what a member has to have in order to maintain either wellness, control chronic conditions and, again, get better outcomes for a lower cost with a better experience.

Then there's health and wellness, which was HumanaVitality, another joint venture; HRI; LifeSynch is a company that we bought in behavioral health. And a lot of people would say why you bought a behavioral health company, so you consolidated out your outside vendors and now you run all your behavioral health through LifeSynch. But -- that's true but the real learning there was that mental -- that behavioral health and mental health have a lot to do with physical health and vice versa. So again, continuing to align and integrate the care.

And then finally, in the right field, the last one is data analytics and information. And that's in the form of 2 companies we bought last year, Certify and Anvita, and then CareHub, which we've developed on our own. So again, we've got all of these companies, all of these capabilities. We've spent basically a little under $2 billion to buy all of these capabilities. And now, we have the ability to take them to all the rest of the places that we are. And that's really the important part because in that sense, it's very effective and, again, capital efficient as opposed to buying one of these, each places are continuing to contract out these various services. Again, that are all important in the integrated care.

Now I want to talk a little bit about Medicare Advantage funding changes. This is a lot that's on a lot of people's mind. Again, I'd like to just start with 2010 and 2011. Arguably, those are 2 of the more difficult years we've had in terms of the funding cuts that our company has responded to and still maintain a value proposition in the last 25 years or so. 2010 was marked by a 5% rate cut and, basically, a 5% trend. So we had a 10% problem followed by, in 2011, per the Affordable Care Act, rates were not allowed to increase. And there were other things that took away from rates in terms of coding intensity, et cetera. So basically, if you put those couple of years together, you have a very significant problem that we had to overcome. Now these changes for us, basically, give us the challenge then of continuing to maintain that value proposition. Let me repeat what the value proposition is. The value proposition is that our Medicare Advantage products are equal to, or the actuarial equivalent to original Medicare plus part D -- a separate part D, plus a Medicare supplement. Now those 3 things, basically, particularly the supplement and original Medicare, are just indemnity like products, which basically a person turns in claims and then those claims are paid. In the case of ordinary Medicare, it pays for up to 80% of a covered procedure but it doesn't pay 80% of anywhere near everything. So again, that number continues to change. And then, so people buy the supplement. A supplement might cost $250 a month or $3,000 a year. The ordinary Medicare, you would change that out for the -- for your Medicare Advantage premium. The part D, which comes with Medicare Advantage, which you buy separately in the ordinary Medicare plus a part D plus a Medicare supplement, adds about maybe $100 a month.

So you're basically looking at $4,000 versus in our case, probably about $1,000. So there's a very good value proposition. And that's maintained by, again, what I said before, in terms of the value proposition and the integrated care delivery model that we do.

And another thing, when you -- now let's go over to 2014, which is what everybody is talking about today. And in 2014, there are 3, let's say, headwinds, that we need to address. The first one is the trend itself, which is always there, the underlying trend in Medicare services. Remember, seniors are the biggest consumers of health care, so they have the largest trend. And even though you read that Medicare trend -- or that overall Medicare trend is down or constant, Medicare trend continues to go pretty much as it was in the 4 to 5 range for sure. Then there's the industry-wide premium fee, which we estimate will be about 2% of revenue and has about a 2% effect on the '14 bar that we see there. And so that also continues to work its way in, too. And then you have the reimbursement rate itself, which was reduced, as you know, in the preliminary rate book. Then they put the Doc Fix back in, but they also did a rescore recalibration, which haven't been done for several years and then county re-basing. So basically, we are looking at about a 3% crop for that, another couple of percent on the industry-wide fee. And again, so now what do we have to overcome that? And basically, there are a number of levers we pull there. The first one are the trend benders or what we get from the integrated care delivery model. Those companies and those capabilities that I have -- that I showed on the previous slide that we, therefore, incorporate into the rest of -- into our business to get better understanding with customers about their engagement in the cost and effectiveness of their own health care.

We have MRA documentation, which we continue to work on. In other words, Medicare Advantage or Medicare itself are not underwritten. All citizens over 65 or those who are disabled are entitled to get them without underwriting, but then there's a Medicare risk adjuster. And that basically is based on information provided by physicians to CMS through us. And then there's a coefficient, if you will, given by CMS saying that, let's say, the average acuity is 1. If you have more acuity in your population than that, then you get a greater than 1 score, and if you have less, you get less, and then you're payment's adjusted on that basis. So again, we have that as a second way of doing it. So we have our trend vendors, we have that.

We also have the ability, basically, to adjust premiums and benefits, and that's the part where I said is one of our core capabilities, which is we, basically, we name the terms after the government names the price. And so subject to a lot of different rules that go into that, but not a market-by-market basis, that's really how we work our way through it.

Then the other thing we have are quality Star awards, or called Star ratings. And again, we had a very good year this year on Star ratings. And we continue as an organization to work very hard at all the different criteria for Star ratings so that we can continue to enjoy favorable Star ratings. We have -- basically, most of our big plans are over 4 ratings. Our large plans in Florida are 4.5, and we're the only public company to get a 5 Star rating this year. Ratings are published in September for the ensuing year, so again, we get plenty of notice as to what they are, and that's another source of revenue that we can plug in, in order to work on the funding cuts.

Another possibility is market exits. And there's been talk about market exits in the industry because of the initial reduction, which basically caught the industry and everybody else offguard in terms of how deep the funding cut was. But again, I want to continue to point you back to 2010 and 2011 where we successfully overcame that in the past, again, through a lot of the things that I've said here.

Other things that we have, sequestration is also part of this. We have the ability -- we pay Medicare rates to most of our providers, and so we have the ability to pass through to providers the effects that we get. If our rates are reduced by 2%, then we have a corresponding right with providers to pass that through. Now there's a lot of discussion that goes back and forth, it's not just an automatic thing. We have a very good relationship with our providers, that's what we need to have with respect to the integrated care model. But again, very helpful for us to be able to do that.

So again, these are the -- I gave you a lot of things to think about in terms of what you could go against those 3 principle headwinds, and then you have to think about that, that we do this over a couple of 100 contracts in a lot of different markets. So we're -- these are all done individually by people who spent actuarially a lot of time in each of these markets, as well as the sales people, the operations people, the finance people. So that, again, when we decide what we're going to do with respect to anything, with respect to any market, we're very well armed, and I can tell you, that's a very robust product and process.

We -- I worked a lot of places in my career, and I've seen a lot of processes. I come from a background where the only way you could make more money was to lower your unit costs and take market share from your competitors. And I can tell you, this is one of the most robust processes I've ever seen. And again, I've seen it, this will be the 13th time that I've watched it.

If I looked at then what are we doing to continue the -- remember I said, we've got the basic capabilities in the baseball diamond slide. So what are we doing right -- what are we investing in for the rest of this year and what did we invest in last year? And how are we doing in terms of continuing to take the things we've bought and the things we've developed and make those into the entire organization, not just in the locations where they are but take those competencies and make them organizational competencies? So we've got 4 basic stars -- bullets here to look at. And again, care management professionals, as you can see, we've raised those by 3,200. And again, when we talk about care management, we're talking about the thickest, the most -- the people that have the most comorbidities and have the deepest chronic conditions. And then we work with them, again, to continue to figure out what their health status is and how we can improve it.

Then the other thing is predictive models and clinical assessment. That basically gets, and has really, toward new people that come in to our groups because when somebody comes into us, they don't have that history that gives that medical risk adjuster, so you have to look at what is it that they have and how do they -- how is their health status, how does that affect what we get paid. We don't desire to be paid for more than the risk we assume, but we don't want to be paid less either. So we're always making sure that these people who have -- who come to us, we can see right away on a predictive sense what chronic conditions they might develop and what comorbidities might come out of that.

Likewise, you can see care management professionals and how we continue to work with risk providers. Let me just talk about that on the next one here. So here's really how we deal with providers and what the optimal outcome is for us and also a goal that we have at the bottom of this slide. We right now, and this is not well known in the industry or in the public, but right now, our -- when we have no incentives to our providers, we still pay about 91% of the cost of original Medicare. So Medicare Advantage, even though I said it has equivalent benefits and cost -- or benefits, we receive about 91% of what original Medicare would pay. So again, we get all these on a 9% reduction over what original Medicare is. Then doing well on the Star awards, like I said before, that takes another 6 points off that, takes us down so we can have -- we can work at 85%. And then as we start to work with providers to get them into the idea of understanding that it's the relationship with the member, and it's the engagement of the member and the cost and effectiveness of their health care, and that it's outcomes and cost and experience, then that really, that puts them on what we call the path to risk. And then when they get to full risk, you can see, really, that's where the real payoff is. The numbers that are in black there for 2013's first quarter, that tells you how much of our total 100% of the population is in each one of those columns. And we want to get to 50% in the next 3 years in the far column. And again, when you think about how we would overcome the funding challenges, this would be the best way to do it.

So when we look at 2014, I've said there are challenges. We know there are challenges. But we also have a lot of levers we can pull, and we urge you to think about each of these levers in each of the markets because we do these by the ones. And when it's all rolled up, that's when we have the answer. We want to continue to focus on long-term earnings growth. Remember what I said before about, you take market share from people and you lower your unit cost? It's the same kind of principle here. So we have a lot of flexibility around our 5% pretax earnings margin for Medicare. We want to make sure that we get a lifelong view of what a member is worth. You might remember, last year, basically, we enrolled almost 2x as many people as we originally said in our guidance. Well, we don't regret that but it did caused us to have to really work through and build up these investments that I've said before. But over time, the lifetime of a member in Medicare is -- the average person is with us for 7 years, and the number one reason they leave us is they passed away. So again, we form lifelong bonds with our members. We have a dedicated sales force that meets with each of our members each year to tell them about their benefits and what's changing every year because if reimbursements change, so do the benefits. So we take an enterprise-wide view on everything in terms of how we work, and then we expect to continue to grow that membership, and that's the -- that's what we can say today but what we will be saying is that when we get to our third quarter call, which is right at the end of October or early November, then we can see what everybody else has done in all these markets and then we give guidance as to what 2014 holds for us in terms of membership itself. I've always said here we're going to grow and, more importantly, what follows from that, revenues, earnings and cash flows.

Real quick, here's our history of growth in Medicare. You could see, this year, again, looking for another -- taking Medicare Advantage, the purple, up to about 2.5 million, and also the standalone PDP members to about 3.2 million. And earnings-per-share, again, for this year, we raised it $0.80 at the first quarter call to around $8.50. And remember what I said about 2010 and 2011 and the big challenges, in 2010, $6.47 was the most money we ever earned. 2011, that was the most money we ever earned. So again, I think the company has demonstrated over time the ability to work through these different headwinds, strong organizational confidence towards helping preserve the value proposition by giving members a really solid experience and lower costs and better outcomes.

Thanks for your attention. We're going to have a breakout, and I see we're out of time. So please come there, and if you can't make it to the breakout, please contact anyone of us when you get back to your offices and if you have questions. Thanks for your attention.

Albert J. Rice - UBS Investment Bank, Research Division

Yes, thanks to Humana for participating in our conference. The breakout will be in the Carnegie West Room across the hall there. And next up in this room will be Amgen.

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Source: Humana Inc. Presents at UBS Global Healthcare Conference, May-21-2013 09:30 AM
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