Good day and thank you for standing by. Welcome to the Humana Third Quarter 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Lisa Stoner, Vice President, Investor Relations. Please go ahead.

Thank you and good morning. I hope everyone had a chance to review our press release and prepared remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, Humana’s President and Chief Executive Officer; followed by a Q&A session, where Jim will be joined by Susan Diamond, Humana’s Chief Financial Officer; and George Renaudin, President of Humana's Insurance segment. 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 could 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 2024 earnings press release as they relate to 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 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. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, this call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana’s website, humana.com, later today. With that, I’ll turn the call over to Jim Rechtin.

Thanks Lisa and good morning everyone. Thank you for joining us. In the last quarter, I outlined four basic drivers of our business that we need to deliver against over and over again. Those are; first, providing a Medicare product experience that delivers against consumer needs and is priced with discipline. Second, operating with clinical excellence. This really is the foundation of industry-leading margins. Third, managing a highly efficient back office and fourth, deploying growth capital in a way that complements our Medicare Advantage core business. I would like to review the quarter's results with a little bit of a lens towards those four drivers. Before I do that, let me just start with a few headlines. First of all, we exceeded expectations for the quarter. We're also confident that we will achieve at least $16 of EPS for the full year, and we are comfortable with where 2024 EPS consensus sits today. Exactly where we're going to land is largely dependent on a number of investment decisions in AEP and in STARS that we continue to evaluate. We feel good that we priced our MA product margin expansion in 2025. However, similar to our strategy for the rest of 2024, we will be balancing near-term earnings progression with investment in the business. When we say investment in the business, certainly, we mean STARS, but it also involves investment opportunities in growth, admin cost efficiency, and medical cost management. We understand that investors would like more clarity on the multiyear outlook of the business and to address this, we are targeting an Investor Day in May of 2025. Let me turn to the four basic drivers for a moment. Starting with the product and experience we are delivering through our Medicare product, we're feeling pretty good about what we're delivering. Our individual MA membership growth continues to outpace our expectations for the year, with full-year growth year-over-year expected to be around 5%. The year started slowly in AEP last autumn, but we've made significant gains over the course of 2024. This reflects disciplined product pricing that has allowed us to emphasize growth at a time when others in the market have pulled back. We attribute some of the growth to incremental marketing investments we've made in our internal sales channel, which we believe is increasingly important for us, and those investments have been paying off. We continue to deliver best-in-class service, recently ranked the number one health insurer for customer experience by Forrester, now for four years in a row. While it's early in this year's AEP cycle, sales appear to be generally on track with expectations. Turning to the second driver, clinical excellence; we've acknowledged that we've got work to do to get back to the results that we expect of ourselves and for our members, patients, and investors. We've moved quickly to make investments and align incentives in our provider and pharmacy networks to close more gaps in care. We've redirected care management and call center capacity to increase member outreach, which relates to closing gaps in care. Just last week, these efforts led to about 5,000 incremental primary care appointments, and I've learned we have another 3,000 appointments scheduled this week. We are also making technology investments, including improvements to our plan finder capability. We're on a sprint to take ground for 2027 and I feel good about the team's focus, effort, and positive impact, while also being frustrated that we've allowed ourselves a shorter runway than we would like to close that gap. Clinical excellence translates to lower costs when we deliver better care. In Q3, medical costs are largely in line with our expectations. The environment remains dynamic, and we will be careful with our expectations around medical cost trends. Right now, we're seeing success across several of our cost control efforts. One example is extending value-based care contracts beyond primary care into areas like kidney disease and oncology management, yielding good results. Shifting to the third driver, the highly efficient back office. We continue to make progress in this area. We expect a 30-basis point decrease in our adjusted operating cost ratio for the year. An example of the work that's driving this is our implementation of generative AI solutions that enable our care management team to spend about half as much time on post-call documentation, while maintaining the same level of human oversight for clinical decision-making. This brings us to the final driver, deploying growth capital to drive efficient growth. I believe we're building a leading senior-oriented primary care organization in the nation. Our primary care clinics are meeting both clinical and financial targets and are on track for mitigating V28. We've released a study in collaboration with a leading researcher from Harvard, demonstrating the clinical and economic value of our clinics, finding that our members have a better experience when they are part of a senior-focused primary care clinic. We expect to add roughly 40 clinics this year, often through acquiring underperforming clinics we've demonstrated the ability to turn around quickly, leading to patient growth that continues to outpace expectations. While I acknowledge our STARS performance in BY26 has its challenges, I'm encouraged by our recent performance trajectory and growth. It's critical we strengthen the organization by investing in long-term shareholder value while balancing short-term earnings progression. We look forward to providing formal 2021 guidance on our fourth quarter call and a more detailed update on our strategic initiatives at the Investor Day in May of 2025. Our conviction remains high regarding the positive outlook for MA and value-based care. With that, we will turn to Q&A.

Our first question comes from Justin Lake with Wolfe Research.

Thanks. Good morning. I wanted to ask about your comments on 2025 and specifically your comments on investment spending. Prior to this call, you talked about a margin improvement in MA next year, and combined with top-line growth, the expectation in the market was for $2 to $4 of improved earnings year-over-year. Given that you're talking about now a more flattish trajectory, does that suggest that investment spending will be around $500 million? Can you provide more color on what you're spending that on, especially given you had sharply cut admin spending over the past few years? Is there stuff to reinstate, or is there a return you're targeting that will lead to break-even given improved STARS? Over what timeframe should we expect to see that? Thanks.

Thanks for your question, Justin. I'll start with 2025. We recognize that we won’t be able to answer everything, but I'll aim to clarify what we're saying about 2025 right now. We feel good about our bid, reaffirming our pricing and plan exits, maintaining a minimum 2024 performance as we head into 2025. Thus, we expect room for EPS progression. We need to see how things unfold in the next few months, particularly regarding AEP results and continued monitoring of medical cost trends for better visibility into where we stand. We're maintaining a similar posture to how we've approached the last couple of quarters, allowing us to make tailored investments for stronger footing in 2027 while establishing a floor for 2025. We don’t have precise figures just yet, as we are making smaller investments and evaluating returns to double down on successful efforts. Thus, there's uncertainty around some investment choices. We want to balance long-term potential with short-term progression. Susan, is there anything you would add?

Yes, I think that summarizes it well. I would add that, Justin, as we involve our discussion of necessary investments for STARS and operating performance led to concerns that investment levels might cause a rollback in year-over-year performance. Thus, we wanted to establish a performance floor for 2025 to ensure confidence in our pricing actions that offer the flexibility for needed investments without falling back.

Our next question comes from Ann Hynes with Mizuho.

Hi, good morning. Your MLR results imply trends were relatively stable sequentially. Is that a good characterization? If so, what does this mean for your 2025 bids? Are they tracking in line or better than your expectations? Thanks.

Yes, Ann. As we saw the results develop for the third quarter, our current year claims did develop as expected in total for the MA business. There were geographic variations, with some improvement in inpatient side and deterioration in the non-inpatient side, but overall, we remain in line with expectations for claims development in Q3. As we evaluate trends versus our initial bid assumptions, we continue to feel good about our pricing approach. Despite some geographical variances across claims and risk adjustments, our aggregate metrics indicate a positive trajectory.

Our next question comes from Andrew Mok with Barclays.

Hi. I wanted to follow up on the 2027 margin target and how you're thinking about the STARS recovery in the context of that 3% target. Is that a realistic goal considering elevated investment spending and your current Star scores? What minimum bonus level do you have in mind to achieve that target?

Let me clarify your question regarding the 3% margin target in 2027 and the associated STARS progression. I acknowledge there is both risk and effort to reach that number, but we are committed to trying everything possible to achieve it. Yes, we need to make significant STARS progression, though we have not specified a specific number due to the dynamic variables involved. However, meaningful progression in STARS is necessary for attainment.

I concur with your points, Andrew. Additionally, the rate environment and market competition are also critical factors. By 2027, we'll no longer be grappling with some headwinds we face today, ideally creating an environment with more margin recovery capability. These targeted investments we're currently discussing should yield returns supporting that recovery over the long term.

Our next question comes from Ben Hendrix with RBC Capital Markets.

Thank you very much. You flagged higher specialty drug costs in non-inpatient utilization for the quarter. One of your peers noted a pull forward of some specialty drug utilization ahead of Part D changes next year. Is that something you'll expect to price for as we head into 2025, or is there a component we should consider as a headwind for MCR modeling?

Yes, we did see higher oncology costs, particularly, and have been monitoring this closely. We believe this trend is less about IRA changes, as the impact has been minimal regarding member out-of-pocket exposure in 2024. What we’re observing is mainly attributed to new treatments emerging and label expansions contributing to higher unit costs. We do anticipate further upticks in trends next year due to IRA changes with induced utilization assumptions factored into our 2025 planning. Our approach will incorporate these evolving trends relative to our expectations as we navigate the IRA's implications.

Our next question comes from Sarah James with Cantor Fitzgerald.

Thank you. I'd like to know if Star ratings remain where they are, how much crosswalking is feasible for 2026, considering geographic overlap and planned ratings. Regarding your 2025 guidance, what MA margin is implied in that?

As we evaluate crosswalking, we’re weighing multiple factors to mitigate member concentration across contracts while also assessing how much progress we are seeing in STARS performance metrics alongside opportunities in group contracts. This will be a key consideration as we approach the next bid cycle, among others, as we assess our pathway forward.

I’ll address the question regarding 2025 MA margins. We haven't issued specific guidance yet, but we have talked about headwinds in 2025 due to trends that emerged after the filing of our 2024 bid. The majority of expected margin progression will come from exiting unprofitable plans where we have not found a clear path to profitability. We expect to assess guidance as we consider membership growth and the level of investments.

Our next question comes from Joshua Raskin with Nephron Research.

Hi. Thanks. Good morning. What are your expectations for MA market growth in total for 2025? Where do you think the members you're losing from plan exits are going? Are those exits more concentrated in larger plans or smaller ones? Are seniors returning to fee-for-service? Regarding loss lives, can we assume they had lower margins and lower benefits?

Hi, Josh, it’s George Renaudin. In terms of overall industry growth, we're estimating 5% to 5.5% for 2025, as opposed to roughly 6% achieved this year and our expected 5% performance to finish 2024. From our competitive positioning, we're still in line with bid expectations. As we've previously indicated, we anticipate a potential loss of several thousand members in 2025. In terms of retention, we are actively engaging our brokers to assist with plan shopping, and we’ve implemented tools for better consumer experience. The digital sales channel has also shown promising results, helping our members navigate choices.

To add on growth, the industry will still see some impact from ongoing redetermination processes in the MA segment. We believe this could represent about an 80 basis point impact, primarily observed in dual-eligibles losing their coverage. When thinking about the contribution of lost lives, it really depends. If these members are impacted by plan exits, they were unprofitable. While retention is preferred, most exiting members have viable alternatives that would positively contribute similarly. Moreover, we endeavored to protect our higher-performing plans in our 2025 bids, so larger cuts will be mostly in plans with historically poor performance. We will monitor the attrition information once available, even though it may take time to observe clear impacts.

Our next question comes from Stephen Baxter with Wells Fargo.

Hi, thanks. You mentioned that inpatient unit cost of Medicare came in better than expected. Can you discuss the two-midnight rule incidence in the quarter? Additionally, how do you envision the ability of the 2025 commentary to absorb higher inpatient unit costs?

As mentioned, we have witnessed lower inpatient unit costs throughout the year, and our team remained cautious about prematurely stepping in while monitoring the sustainability of these trends. However, the results so far are consistent with our expectations. During the third quarter, we identified some lower average unit costs, likely due to specific seasonal trends. For 2025, we have incorporated various impacts, including geographic adjustments factoring in lower patient unit costs and establishing a baseline for normal trends. We are confident our efforts will translate well into the 2025 framework.

Our next question comes from Joanna Gajuk with Bank of America.

Hi, good morning. I have a question similar to Steve's, but focusing on utilization trends. Some hospital companies have reported above-average volume growth, with your thoughts on your assumptions for 2025 regarding utilization. Can you grow EPS in 2025 under those circumstances?

Hi, Joanna. Our utilization has remained consistent and aligns with our expectations since our last update. We observed this in the second quarter, prompting us to adjust our estimation on utilization and non-inpatient trends. Going into 2025, we continue to assume normal utilization trends, with no major regulatory changes expected to disrupt our outlook. We feel optimistic about the assumptions, considering the landscape of utilization.

Our next question comes from George Hill with Deutsche Bank.

Yes. Good morning. Can you discuss outpatient claims denial rates over the past year? Many hospital companies have reported increased denial rates. Is there a significant trend to note, and has this impacted MLR meaningfully?

With Humana's implementation, we had that result in more initial approvals, which effectively reduced denials and appeals. However, we initially saw higher appeal rates on those approvals for a while. We've undergone audits validating our evaluation of clinical rules. What we're observing is a consistently high uphold rate for appeals, and we suspect other providers may not have recognized the impacts yet, explaining why they report higher appeal rates.

I would add that our clinicians continue direct engagement with provider clinicians to discuss these issues, ensuring a mutual understanding of the two-midnight rule's intent and execution.

To wrap up the inpatient discussion collectively, we've experienced stable trends since late Q1 and Q2, addressing any regulatory changes effectively. We believe everything is back to stability, allowing us to project costs accurately moving forward.

Our next question comes from Whit Mayo with Leerink Partners.

Good morning. Could you comment on STARS relative to the recent lawsuit or appeal? Regarding contract 5216, does it seem like you need to improve both Part C and D ratings to achieve a 4-star rating? How many calls must overturn for improvement?

It's three calls across both metrics, therefore, we would need all three calls to be overturned to enhance those ratings.

In addition to those calls, we are pursuing further clarity from CMS regarding how thresholds for calculation are handled.

Our next question comes from A.J. Rice with UBS.

Hi everyone. If your STARS appeal is successful, would that impact your 2025 investment needs? I understand you've historically achieved high Star ratings, but now you believe significant investments are required to regain traction. Would a successful appeal reduce that necessity? As for the broader discussion, what enrollment hit might arise if the appeal is unsuccessful?

Regarding the STARS appeal, understand that there are two related but distinct aspects. One pertains to specific metrics affecting star ratings, where litigation is occurring, while another relates to broader metrics and thresholds that are becoming more stringent. Regardless, we view 2025 investment needs as crucial for keeping pace with shifting metrics, whether in light of the appeal outcomes or broader regulatory dynamics. We need to enhance investments to maintain our program’s performance.

It's essential to emphasize that the investments in STARS align with improving health outcomes for our members. We're enhancing quality and performance across our provider network, which benefits our operational excellence and customer experience.

Lastly, A.J., our 2025 investments encompass more than just STARS. We’re looking broadly at operational performance improvements as well. We are navigating complex choices that balance immediate needs and longer-term goals, maintaining our focus on delivering shareholder value.

Regarding the enrollment-margins trade-off, we need to approach this with a long-term perspective. Our aim is to ensure we do not compromise long-term viability for short-term gains. We will need time to assess conditions, particularly on the STARS issue and broader marketplace dynamics.

Our next question comes from David Windley with Jefferies.

Hi, good morning. I have two questions on channel investment. Last year, we discussed how brokers focused more on helping existing members shop, impacting new member growth. What actions did you implement to remedy this? Additionally, how should we consider the cadence of membership through AEP versus intra-year? I’m also interested in your early insights regarding 2026 rates for announcements early next year.

Thank you for that question. We've taken significant steps in preparation for the expected changes due to benefit adjustments and member disruptions in the industry. We're investing in our internal sales channels, enhancing digital self-service options, and assisting our external brokers. Our internal brokerage has seen a 70% increase in sales, reflecting our investments in both improving member experience and providing better tools for our sales teams. We expect considerable changes in AEP this year, which could lead to strong membership growth.

We've strengthened our internal sales capabilities, which is within our control, while also supporting our external partners. We anticipate 5% to 5.5% growth despite these necessary adjustments.

On the 2026 rate outlook, we recognize that 2028 and IME are to be phased in, impacting rates. We’re hoping for positive adjustments to the 2026 rates, informed by trends we are observing currently as well as data shared by CMS. We’re cautiously optimistic.

Our last question today will come from Michael Ha with Baird.

Hi, thank you. I wanted confirmation regarding D-SNP redetermination implications. Did you reference an 80 basis point headwind in industry growth for next year, which could be due to the six-month grace period? What percentage of lives are anticipated to fall off your book as a result? Additionally, how do you assess STARS updates considering you are nearing completion of the measurement year?

Yes, you are accurate that we expect about an 80 basis point headwind due to the redetermination process completing and not just due to the grace period. We expect some shortcomings in dual-eligible members that aren't recaptured. We have expected the loss of several hundred thousand members in 2025 as a direct consideration of this process. For the STARS updates, we have limited visibility into our performance as well as industry-wide metrics until we can assess performance comprehensively as the measurement year progresses.

As we proceed through the year, we’ll observe how metrics trend and perform during the measurement period, creating a clearer picture of how we might act strategically based on our current assessment.

I appreciate everyone's participation this morning and their interest in Humana. I want to extend my gratitude to our 65,000 associates who serve our members and patients every day. We value their contributions and the support you have provided. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.