Humana's Management Presents at Oppenheimer 24th Annual Healthcare Conference (Transcript)

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Humana Inc. (NYSE:HUM) Oppenheimer 24th Annual Healthcare Conference December 11, 2013 9:30 AM ET


Regina Nethery - Vice President, Investor Relations

Kevin Horsley - Strategic Consultant - Investor Relations


Michael Wiederhorn - Oppenheimer & Co. Inc.

Michael Wiederhorn - Oppenheimer & Co. Inc.

Welcome to Oppenheimer’s 24th Annual Healthcare Conference. I’m Michael Wiederhorn, the Healthcare Facilities and Services Analyst. It’s my pleasure to introduce Regina Nethery, Vice President of Investor Relations for Humana.

Regina Nethery

Thanks, Mike and good morning, everyone. With me from my team is Kevin Horsley. So if you have the opportunity to meet him, I would encourage you to do that as well. But I appreciate you coming this morning. Humana’s had quite a bit going on as (indiscernible). So I’m happy to be here with you this morning to share a little bit about the Company.

We will start out with the usual cautionary statement. Our integrated care delivery model leverages all the capabilities that we have, that’s where we’re going to focus a lot of the discussion today is around the integrated care delivery model. Humana has invested a lot in the infrastructure and in our clinical infrastructure trying to make sure that we’re not only implementing programs, but do them in a very integrated fashion.

We try to take each of the elements of the integrated care delivery model, care delivery member experience and the clinical and consumer insights and really blend those, so that we get a cross-functional implementation and that gives us a better bang for the buck if you will on the investment spending that we’re doing.

So our care delivery aspect is really focused on the primary care physician and putting that person there, the central point of contact with the member in terms of their healthcare experience. So really focusing on that relationship and proactive care on the part of the member by the primary care physician for risk arrangements through aligned incentives and through quality and cost outcomes.

The member experience we want to be just superb. We try for that everyday. We have something we call Perfect Service that we try for and we’ve actually evolved that into the perfect experience initiatives that we shoot for our members. We want to keep them informed. We want to keep them satisfied and we most of all want to keep them engaged.

The clinical and consumer insights, again we come great -- we've made great strives over the last several years in terms of the real time information. So not only do we share information with the clinicians that help take care of our members, its much more real time and insightful integration. It’s integrated, it’s connected, it’s relevant, it’s actionable. So those are all critical elements making sure that the provider taking care of the members and integrating with the members can give a much more proactive wellness focused experience for our members.

We are continuing to grow in our Medicare products. A lot of this has to do with the fact that we’ve invested in these infrastructure programs and the trend benders as we like to call them, the things have them trend down. So as we look to the coming year we’re expecting to rather robust growth for our Medicare products. We feel very comfortable with that. We are seeing sales that have us comfortable with the estimates that we’ve shared with you. We don’t see the terminations for a while. We will get those from CMS in the coming weeks, but again we feel comfortable with the growth estimates that we’ve shared.

We believe it -- the fact that we have aligned around all the clinical initiatives that have allowed us the trend bender progress that we’ve anticipated for 2014. That combined with Star bonus money, our ability to code appropriately and consequently get the Medicare risk adjustment and then our focus on administrative spending in operational efficiencies, all aligned to help us minimize the level of benefit changes that we were having to make for our members next year and so that put us in a nice competitive position and so we think we will grow quite well next year.

Medicare consumers are experiencing some difficulties because of the volatile funding environment out at Washington. This slide demonstrates not only the premium cuts, but also includes the industry fee because that is in fact funding cuts. It’s a cost we have to cover, that we would not otherwise have incurred. So for 2014 you can see with the -- all in it was close to 5% and at this point we’re anticipating a little more than 4%, for 2015.

Now that assumes several different things. Its looking at trend being in line with where CMS had it over the last couple of years plus technical factors probably averaging net out to a breakeven sort of rate, but then we have [ph] after cuts. We have additional [ph] after cuts that are coming next year, that’s close to 2%.

We probably have another 150 to 200 basis points of fee associated with the CMS Stars demo program going away. The Stars program is very well supported in Washington. I think the administration likes it, CMS likes it, it’s focused on quality and quality outcome. So the Stars program itself I think is in good shape.

But as the demo sunsets, we’re going to experience some pressures on the premiums even though our ratings, our quality ratings are actually up for 2015. So that factors into that and then you have another incremental step up from the industry fee. So those are the major pieces that we know about right now and -- so 2015 we’re looking at some significant heat as well in terms of funding pressures.

What we’re doing as a Company is already sitting down, looking at what can we do from a trend bender perspective. How can we expand the programs we have, what new programs can we develop so that we can try and minimize the impact that shares on seniors, because at the end of the day it does impact the Medicare beneficiaries to the extent that the Company is not able to absorb it.

So I talked about the Stars quality, bonus money and trend bender programs. This is a slide that shows the different network arrangements that we have with providers and how that aligns to get higher quality. So across the top you will see the HEDIS scores for the 2015 bonus years. The individual columns, the first one no provider incentives, so again providers in our network that has no aligned incentives. We still are able to reduce the cost associated with those members and it’s about 91% of the cost for a member under fee for service.

As we progressed across, we’ve where they’re engaged in the Star quality program and they get some reward money associated with our Star rating. So those costs come down slightly to 85% progressing over to path to risk, that’s where we’re introducing the provider to a risk arrangement. So they may take risk on some portions of the members cost, but not all of the members cost and/or they may have agreed to take full risk on the member, but they don’t have a panel of members big enough to really absorb that risk yet.

So usually within one to three years they move from path to risk into a full risk arrangement. And as you can see once they move into a full risk arrangement, the cost drops dramatically, so it’s about 71% and the HEDIS scores jump up as well. So everything coming together nicely on that. We have currently about 27% of our members are covered by full risk arrangements. We are seeking to get that number up to 50% by 2017.

So this is a summary again of the Star ratings, showing that the progress that we’re making around the ratings, so we were really pleased that on average our Star ratings for the bonus year 2015 are at 4.0. Unfortunately with the purplish the plum line, you can see that the bonus money does get down in 2015. And again that’s due to the sunset of the CMS demonstration program on the Star quality. But we anticipate to continue keep working -- to keep working to increase those ratings and that have higher revenues in the future.

So one other things that we look at as we think about our integrated care delivery model and how do we expand that more into a growth perspective and so we think about where are some of the growth opportunities across the sector. Medicare advantage an obvious one and obviously a focus of the Company. So if you look the plum colored circles are the opportunity levels associated with the differing, the revenue opportunities associated with the different businesses. The green are our current level of business on these different pieces and part.

So if we think of that PDP, Medicare advantage, the dual-eligibles, and the exchange and the individual business through the exchange opportunities, we’ve got some significant opportunities here and we think we’re well aligned the integrated care delivery model, aligned really well with these various opportunities and how we can make each of these come to bear. Medicare advantage, obviously the demographics are working in our favor. We’ve well respected plan, we care strongly about the members that we take care of. There is a significant focus in the Company on keeping the member in the forefront of our minds each day. I know we had our executive team even went through a member emerging experience where they actually went through and experience the same thing that a member would experience for an entire day.

Again, the focus was trying to make sure that we know what our consumers are experiencing. So not just designing products and be an insurance company, but how can we ensure that that portion of their healthcare experience is positive as possible. We focus on what is happening with the members, again looking at from a proactive stand from their health, it keeps the members to happier, it keeps the costs down and it’s just good for the program all around.

As we look at the dual-eligibles, that’s an opportunity for us. We currently have about 300,000 dual-eligibles that we serve. But as the states are rolling out their varying programs where they’re beginning to focus on the blend of Medicare and Medicaid benefits and the administration of those benefits for the dual eligible members is a great opportunity for us. We’ve been very successful in and I will come back to that in just a moment. So we currently got contracts in five states for dual-eligible opportunity associated with the blended and nature of the contracts or a Medicaid contract where we’re positioning for down the road in opportunity to serve the dual-eligibles.

The individuals and exchange opportunity, obviously a lot going on with the exchanges these days. And so that’s something that will keep an eye on and are actively engaged in with the administration.

So talking first about the state-based contracts, that’s where we’re -- again we’re trying to leverage our current infrastructure and so we’ve got contracts in Ohio, Virginia, Florida, Kentucky and Illinois. We’ve got dual-eligible contracts in Ohio and Illinois and Florida -- I’m sorry, in Virginia and then in Florida we actually have Medicaid contracts and same thing for Kentucky.

So what we’ve done is a unique relationship with the company called CareSource and many of these locations we partnered were CareSource takes care of the TANF portion of the population, the temporary assistance for needy families. So they take care of that portion of the population and we see the premium to them and we take care of the dual-eligibles. That is where our experience lies and that way we can best serve the population and expand our business without diving into a capital intensive Medicaid acquisition. So that’s where the Company’s thought process is now; that arrangement has been working very well. We have been really pleased with CareSource.

The slide shows you again the five markets or the five states where we have the varying contracts. The pie charts are meant to demonstrate what we think our membership breakout would ultimately look like in those varying states.

Turning to the exchanges; again this is somewhere where we were very focused in terms of where we chose to participate. So we picked 14 states. We picked those that had significant MA market share in terms of what we had. We also looked at where we had current individual HumanaOne business; individual off exchange business, and so that was where we chose to play. So I believe we’re in -- but we’re not statewide in these 14 states.

So, I think we’re in 240 counties across the nation and off the 4000 counties across the nation or thereabout, so a relatively limited presence. We still think it's a great opportunity. One of the things we wanted to do was to get in, learn a lot about the business in the early years and when we had the cover of the RRR, reinsurance risk corridor and risk adjustments and make sure that we had that backstop if you will.

Now things have not gone as originally planned as everyone is aware on the exchange websites. The administration is working hard to try and keep that fixed, but it has caused an issue in terms of flexibility to enroll in the exchanges. So we’ll see how that continues to progress. The good news is the administration extended the deadline for our January 1 enrollment to I believe its December 23rd and additionally the opening enrollment period runs through the end of March. So people still have time to enroll in the exchanges.

We are assuming as we move into next year that we do see some adverse risk selection from the exchanges given the problems that folks have had with the enrollment process. So while we originally priced to make an underwriting gain, we do anticipate at this point that we are going to have some pressures on our earnings next year from enrollment in the exchanges.

So as we look at the transition from our earnings projections for this year over to 2014. 2013 had about $0.50 worth of items that we would not anticipate to trend forward into ’14 the varying mix of things, the biggest piece of which is some higher than expected prior period development. We always had some prior period development in the run rate, but this year it's been incredibly high. So we don’t forecast all of that forward.

We are going to have to absorb the big hit from the industry fee. So we got $3.57 of share is our estimate of what we think is going to happen with the industry fee. We’ve offset the bulk of that with operational improvements. Again the lion share of that is the trend bender progress that we’ve talked about primarily from the Humana Chronic Cares Program and the Humana Transitions Program.

So those are programs that really work hard to identify early members that are eligible, and the progress we’ve made around that is significant over the last few years. We’ve taken a much more proactive approach to identifying the members eligible for these programs so that we can get them in quickly, get the risk quoting where it needs to be and again get the member experience to a more positive light. The Chronic Cares Program and the Transitions Program are currently about 60% penetrated into the top 20% of the members that account for the bulk of medical costs. We anticipate that will go up to about 70% for 2015. And then we have membership growth. Again as I touched on earlier, the membership growth is expected to be very positive for 2014.

So that gets us to relatively flat earnings year-over-year before the investment spending. But the investment spending is really important because the state based contracts and the exchanges we think as I mentioned a moment ago are great opportunities for the company longer term. So we think that’s really worth the investment that we would anticipate. Of the $0.50 to $0.90; $0.70 is the mid point that we’re looking at in terms of investment spending. About half of that is for the exchanges and about half is dual based contracts related.

With the exchange investments mostly being related to expected underwriting losses given everything that’s going on with the exchanges and in anticipation of the adverse risk selection because when people take it through, the ones who are going to be the most persistent at trying are the ones who really, really need that benefit. So we are anticipating some adverse risk selection on the exchanges.

On the state based contracts it's a combination of build-outs ahead of the revenues coming on board. So we have revenues that will be coming on throughout 2014, but we certainly can’t wait till the member shows up to hire people, get them trained, get the infrastructure built, so we’ll have some of that. There will also likely be some Medicare -- some medical loss ratio pressure because people don’t come into a program behaving exactly the way that they would over time. So we’ll have a little bit of pressure there, but the bulk of the investment on the exchanges is primarily administrative cost related. And so that gets us to our estimate for 2014, $7.25 to $7.75 and again feel comfortable with that estimate at this point.

And with that, I will take questions. Mike?

Question-and-Answer Session

Michael Wiederhorn - Oppenheimer & Co. Inc.


Regina Nethery

So the question for those listening on the web was Star ratings, and where do we think that can get to over time, tell me if I missed -- and will there be a limitation given the (indiscernible).

Michael Wiederhorn - Oppenheimer & Co. Inc.

How much of advantage will that be?

Regina Nethery

How much -- I apologize, how much of an advantage will the four Star rating be? I think of course, I'll answer the last part first. I think the four Star rating will be a good advantage, because you get basically an additional percent of premium for every Star beginning at four Stars. Now that’s done at the contract level, so you can’t take four Stars times Humana’s average premium and so that’s where we’re going to be. But again it's a significant advantage to have that in your basket of goodies if you will to try and offset some of the pressures that we have going on in those sectors.

So, I think it does provide a distinct competitive advantage. I think it's some of what we’re seeing in terms of enrollment growth next year that we’ve got Medicare advantage enrollment higher because of the combination of things. Again I think we did a good job on star quality, bonus money and the trend bender is all providing opportunities for offsets for ’14, so that put us in a good competitive positioning. Where I think it can get to over time?

We will continue to work to increase the star ratings, while we’re seeing some payment pressures for 2014 from the star bonuses that’s again because of the sunset of the demonstration project from CMS but the actual star ratings went up. I would anticipate is to continue doing that. So I still see positive development longer term from the star qualities on this money in the ratings. Yes.

Michael Wiederhorn - Oppenheimer & Co. Inc.

There has been a lot of talk actually your largest competitor coming at work; can you comment how you’re positioning (indiscernible) rate pressure going forward?

Regina Nethery

So the question for those listening on the web was; what is the anticipation in terms of network changes, and one of our competitors who had some headline news about competitor changes recently. Humana does work on its network on a constant basis. We do evaluate our providers to make sure that they are achieving the quality metrics that we want them to achieve and we have made changes in the past. The changes generally don’t play out in the news as one of our competitors has experienced, but it's an opportunity that we work on constantly.

So, Bruce Perkins and his team who are responsible for the provider arrangements, again they are looking at Medicare data and the cost and quality outcomes to make sure that we have the most efficient and effective providers in the system. So we do make changes in the network over time and that’s both adding and dropping some provides, it does happen. Yes.

Michael Wiederhorn - Oppenheimer & Co. Inc.


Regina Nethery

The question for those on the web is; is the updated view on exchanges incorporated in our original guidance? Yes. So when we gave our guidance for 2014 we have already seen the problems with the federal enrollment site and so we did make some adjustments to that. Correct. Mike?

Michael Wiederhorn - Oppenheimer & Co. Inc.

I know you really got the 45 day notice (indiscernible), can you just touch on the key variables that could (indiscernible)?

Regina Nethery

So the question was; key variables that could swing the 45 day notice that’s coming on in February on the Medicare rates for 2015? That’s hard to say. We’ve done everything based on what we know. So we’ve made a very preliminary projection on 2015 rates, but frankly one of the challenges associated with that is that trend is sort of a black box. CMS’s trend projection we don’t get really any color behind how they come up with their trend estimate. So that is the biggest challenge in terms of predicting cost is the trend estimate.

Okay. Well, with that we’ll go ahead and wrap up. And I thank you all very much for coming and I hope you have a happy holiday season with your families.

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