Humana Inc. (HUM) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Mary, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Humana's First Quarter Earnings Call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Amy Smith, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Brian Kane, Chief Financial Officer will discuss our first quarter 2019 results and our updated financial outlook for 2019. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Our Chief Legal Officer, Joe Ventura, will also be joining Bruce and Brian for the Q&A session. 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 of 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 could differ materially. Investors are advised to read the detailed risk factors discussed in our first quarter 2019 earnings press release as well as in our filings with the Securities and Exchange Commission. 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 and 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.

Thank you, Amy. Good morning, and thank you for joining us. Today, we reported adjusted earnings per share of $4.48 for the first quarter of 2019 and raised our full year 2019 adjusted EPS guidance to $17.25 to $17.50 primarily reflecting improved results in our retail segment. We continue to expect strong industry leading individual Medicare Advantage membership growth, and today are raising our full year 2019 guidance to a range of 415,000 to 440,000 members, primarily reflecting improved rest of the year growth projections, as a result of solid performance in the open enrollment period that ended in March. We take pride in the fact that we are leaders in Medicare Advantage. The fastest growing sector of healthcare as a result of the significant value that Medicare Advantage plans provide to over 22 million seniors across the nation. Seniors who participate in Medicare Advantage receive a higher level of benefits relative to fee-for-service with a cap on the total amount of expenses the member will incur in a given year. At the same time the Medicare Advantage program drives quality, improved health outcomes, lowering the cost to the healthcare system by effectively managing the member's care, saving the system millions while helping seniors achieve their best health. For example, Humana MA members and value-based care settings are going to the ER 7% less and hospital admissions are 5% lower than traditional fee-for-service Medicare. Our members are also getting 11% more colorectal cancer screenings and 10% more breast cancer screenings. As you know, under Medicare Advantage, members are able to participate in a variety of programs and services including in-home care coordination services. Proactive care management programs such as remote monitoring, medication adherence and various supplemental benefits including dental and vision coverage. As a result of the payment model in MA, private organizations are motivated to treat seniors with more complex conditions and to go beyond traditional healthcare needs to address the whole health of an individual including social determinants of health, financial support and transportation. Today approximately two-thirds of our individual Medicare Advantage members have access to physicians incentivized to spend more time with each patient. Take Betti as an example, Betti is a 78-year-old who lives with her disabled son and as primary caregiver. She likes to be independent and self-sufficient and wants to spend time with their grandchildren and great grandchildren, but is living with multiple chronic conditions including congestive heart failure, diabetes and COPD. A stroke has left her with shoulder and sciatic pain. In addition, she struggles with depression and anxiety. We enrolled Betti in our Humana At Home Telephonic Chronic Care Management program and assigned a care manager to her. To tackle Betti's fear of doctors develop an action plan for COPD. Educate Betti regarding monitoring her blood sugar, blood pressure, and weight and in the importance of regular primary care and specialist follow-ups. Finding transportation and eyeglass resources, applied for financial grants for medication. Signed Betti up for an in-home well being assessment and enroll her in Humana's mail-order pharmacy. As a result of these actions, Betti experienced reduced financial strain significantly lowered her A1C, lost 15 pounds was able to get her blood pressure in the normal range and stop smoking after 60 years. She was so happy with her improved health outcomes and service. She then recommended Humana to her sister and now she is a member. This is a example of one of many that demonstrates the effectiveness of our integrated care delivery model. The results experienced by Betti and millions of seniors are why Humana and Medicare Advantage continue to grow. As we look ahead to 2020, we are pleased that CMS enabled plans to offer greater flexibility and benefits, so that we may continue to focus on the areas to improve the health of seniors and people with disabilities we serve. The final rate notice for 2020 reflects an increase of approximately 2.5% for the industry. We expect the impact on Humana to be slightly lower given small differences in various components. In addition, for 2020, CMS has added Telemedicine as a covered benefit and we continue to work with them on broadening the scope of these services. Expanded the benefits that plans may offer to address social determinants of health, improved interoperability with blue button for MA, putting more data at members finger tips and in their control and added a demonstration program that narrows our risk via the corridors in Part D, a point-of-sale rebate regulations become effective after bids have been submitted. With the increased likelihood of this policy change, we believe the implementation of drug rebates, at the point of sale in January 2020 creates certainty for both the industry and the members. In result, we stand ready to implement. In the interim, we recognized that we may still be exposed to manufacture actions in 2019. In addition while we appreciate the changes from CMS. We would caution that all of the recent changes add more complexity to the bid process. Particularly, as it relates to how the various components of the Part D bids interrelate including premiums, formulary design and risk corridors. As we navigate this transition, we believe that PBMs will continue to play an important role as an advocate for lower prices for members at the counter to both retailer and manufacturer negotiations. Perhaps more importantly robust clinical programs related to medication therapy management, drug adherence, and specialty drugs are essential to the PBMs ability to impact health outcomes. In this respect, our clinical and pharmacy capabilities position us well to lower healthcare costs and improve member health. Despite these updates from CMS. The rate notice alone is not enough to overcome the formidable headwind from the return of the health insurance industry fee in 2020. Estimated at $1.2 billion for us and is not tax deductible. While we will continue to work on designing new programs to improve health outcomes and lower cost as well as productivity initiatives, we do expect seniors nationwide to experience a decline in benefits and/or increase in premiums in 2020 as a result of the return of the HIF. Now I'll offer a few words on Medicare for all. Humana does not support any bill that would eliminate Medicare Advantage or make private insurance illegal and here's why. Insurance and Medicare Advantage created an incentive to have a holistic view of a member, which is critical to the long-term success of the program and the ability to offer greater benefits and more security for individuals. MA is a program where the payment model motivates plans to engage with individuals with complex chronic conditions while driving quality improvement clinical outcomes resulting in lower cost and higher customer satisfaction. The success of this program is evidenced by the continued increase in MA penetration, the percent of Medicare eligibles enrolled in Medicare Advantage has grown from 22% to 34% in the last decade nearly doubling membership. Looking ahead, the increasing number of Medicare beneficiaries participating in programs like Medicare Advantage coupled with the rapid advancement in technology only served to reinforce the strength of our integrated care platform. Our investments in this platform are consumer-centric operating model and deeply integrated technology and analytics to enable personalized care and high-value services such as primary care, home, pharmacy, behavioral health, and social determinants of health will significantly improve health outcomes. The end goal of our strategy is to slow the rising cost of healthcare and enable expansion of coverage, while positioning the organization for growth and sustainability to deliver long-term value for our shareholders. Over the past 30 years, our company's commitment to improving the health of those we serve has meant working in private and public partnerships that transcend party lines, and we look forward to continuing that work. With that I will turn the call over to Brian.

Thank you, Bruce, and good morning, everyone. Today, we reported adjusted earnings per share of $4.48 for the first quarter. This exceeds our previous expectations primarily due to favorable utilization in our Medicare Advantage business. Consequently, we raised our full-year 2019 adjusted EPS guidance to $17.25 to $17.50 from our previous guidance of $17 to $17.50. We expect second quarter adjusted EPS to be in the low 30s relative to the full-year number on a percentage basis. I also would like to echo Bruce's remarks that we are excited about our ability to guide to full-year expected adjusted EPS growth of 19% to 20% well in excess of our long-term growth target of 11% to 15%, while also delivering industry-leading individual Medicare Advantage membership growth. This reflects continued solid execution around our strategy of improving health outcomes and delivering significant value for our customers. I will now turn to our segment results. In our retail segment, all lines of business are performing well. And as I've already mentioned, we are experiencing lower utilization relative to our initial expectations, particularly in our Medicare Advantage business. In addition, we performed well during the open enrollment period or OEP for individual Medicare Advantage and are reaching our membership guidance range to an increase of 415,000 to 440,000 from our previous range of 375,000 to 400,000. As a result of our first quarter outperformance, we've increased our retail segment revenue guidance by $200 million to a range of $55.1 billion to $55.7 billion and lowered our benefit ratio guidance for the segments by 20 basis points to a range of 86.4% to 87.4%. We also raised our retail pre-tax guidance by $50 million at the midpoint. Turning to our Group and Specialty segment. Our level funded ASO product for small groups continues to gain traction in the marketplace as healthier groups migrate out of the community rated segment. As a result of greater than expected ASO growth, we now expect net medical membership losses of 60,000 to 80,000, an improvement from our previous guidance of 80,000 to 100,000. This migration has resulted in a modest deterioration of our community rated block, which is reflected in a small amount of negative prior period development this quarter. How this ultimately manifest in the 2018 risk adjustment settlement this June will be an important marker to understand how our book is developing relative to the broader market. As a result, we increased our segment benefit ratio guidance by approximately 30 basis points to a range of 81.3% to 81.8%. We continue to expect full year 2019 pre-tax earnings of approximately $300 million to $350 million for the Group and Specialty segment with core trend of 6% plus or minus 50 basis points. Lastly from a segment perspective. Healthcare services is performing in line with expectations and our adjusted EBITDA guidance remains unchanged for the full-year at $1 billion to $1.05 billion. Our Home business including both Kindred at Home and Humana at Home is outperforming our initial expectations, primarily reflecting higher than anticipated volume and increased deal synergies relative to expectations. Similarly, results for our care delivery organization and Conviva are coming in slightly better than we previously anticipated driven by positive prior period development. Our Pharmacy business, however, is slightly behind relative to our initial expectations primarily due to overall lower network volume in the PBM as a result of better-than-expected utilization, which is a positive for the health plan and Humana overall. Accordingly, we are lowering our full-year largely inter-segment revenue guidance to approximately $25.1 billion to $25.6 billion versus previous guidance of $25.95 billion to $26.25 billion. Briefly touching on operating costs, we increased our full-year operating cost ratio guidance by 10 basis points to a range of 10.7% to 11.5%. This primarily reflects accelerated investments in our integrated care delivery model to position us for 2020 and beyond contemplating the return of health insurance fee in 2020, which I'll discuss in a moment. From a capital deployment perspective, in the first quarter, we completed our $750 million accelerated share repurchase program that began in the fourth quarter of 2018. Our full year guidance does not contemplate any additional share repurchase. With regard to sources of parent cash, we expect subsidiary dividends to the parent in 2019 to be approximately $1.6 billion to $1.8 billion with payment expected both in the second and fourth quarters of this year. Though disproportionately weighted to the second quarter similarly to 2018 subsidiary dividends that were paid to the parent. Additionally, the parent company receives the cash from the non-regulated earnings of our healthcare service segment immediately. We will continue to evaluate strategic opportunities to deploy our capital. Lastly, as we look to 2020, I would again echo Bruce's remarks in reference to the return of the health insurance fee, which as we have previously stated is approximately $1.2 billion with a $2.15 EPS impact from the non-deductibility of the fee for tax purposes. While we continue to develop and execute trend vendors and meaningful productivity initiatives, these actions together with the final rate notice of just over 2% are not sufficient to overcome the health and medical cost trend without impacting member benefits and earnings growth. In light of this and keeping in mind that 2020 bids have not yet been submitted, while we do expect to grow earnings per share reasonably in 2020 off of our original $17.25 baseline midpoint, it will be below our long-term target of 11% to 15%. I would remind you, however, that we have delivered adjusted EPS growth in excess of our long-term growth rate for each of the last four years. This includes, as I've already mentioned, our expectation of adjusted EPS growth rate of 19% to 20% for 2019 together with individual MA membership growth of approximately 14%. With that, we will open the lines of 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.

[Operator Instructions] Our first question is from the line of Matt Borsch from BMO Capital Markets. Your line is now open.

Yes, thank you. Could you maybe step back and just give us your sense of where we are with Group Medicare Advantage. I know it's early in the year and I'm not expecting you to give a guidance point for 2020, but how is that market developing now, how much is it impacted by the HIF and do you see adoption accelerating there?

Good morning, Matt, it's Brian. Our Group MA business continues to perform quite well. We are seeing similar trends in our Group MA business that we see in our Individual MA business. I would say the pipeline for 2020 looks good. There were fewer large jumbo accounts out there, but there are some sizable accounts that we're pursuing as well as our standard growth of small and mid-size accounts. So, from that perspective, I think, we feel very good. The HIF and frankly rebates at point-of-sale due impact Group MA disproportionately relative to say Individual MA or PDP because the risk corridor proposal that there are ability that CMS has given us in terms of risk corridor protection does not apply to Group MA, and so we will see that goes into effect like we significant premium increases on the Group MA side. That being said, I think, people generally view the Group MA product as compelling. We see growth continuing there and we continue to play there pretty aggressively.

Thank you.

Our next question is from the line of Charles Rhyee from Cowen. Your line is now open.

Yes, thanks for taking the question. Maybe sticking with MA, you know, given sort of the benefit of investment this year and, obviously, the continued upwardly revised MA growth this year. Now that we also have the final rates. How should we think about the improvements as we think about 2020 MA margins and maybe sort of in line with sort of getting overall target margins here. And then secondly maybe touch on the announcement you made the other day with a little bit more details around the partnership with Doctor On Demand. How do you see that fitting in? Is that sort of should we just think of it really as a another physician practice into your network that happens to be virtual or how do you see it being posed differently? Thanks.

Sure. On the margin question. We continue to make good progress towards our target margins. As we said coming into 2019, we expected a reasonable margin improvement of our 2018 baseline. Obviously, today as we raised our retail pre-tax number, those margins continue to improve. As we go into 2020, I would just say that in order to deliver EPS growth, as we said we would for 2020, you're going to have to increase your pre-tax profits, obviously, in excess of your after-tax just given the significant tax headwinds that we have. So, that will require continued improvement in the margin profile of the business from a pre-tax perspective. But, overall, I think the business is tracking well. We have a very important principle of balancing that margin improvement with top line membership growth. We believe, we struct that balance appropriately in 2019. We'll continue to do that, we believe in 2020. As it relates to Doctor On Demand that's really for our commercial business and we're excited about that partnership. I think we're in a position on the commercial side to disrupt the existing commercial infrastructure and commercial plans that are in place. And I think this is just one example of our ability to do that and give our members additional choices as they look to choose their various health plans. And I would add that this Doctor On Demand is just in Florida, in Texas at this point, but we're excited about the partnership, and we'll see how it goes.

Great. Thank you.

Our next question is from the line of Ana Gupte from SVB Leerink. Your line is now open.

Hey, thanks, good morning. My question is on the membership growth for Medicare that you raised your guidance based on first quarter. Can you talk about what percentage of your growth is coming from dual special needs plans and what the outlook is for the rest of the year? Then if you can just comment on your Medicaid strategy as it dovetails with the dual special needs in light of the Centene-WellCare announcement and the upcoming Texas contract awards?

Sure. I'll take the DSNP question and then turn it to Bruce to talk about Medicaid. On the DSNP side as we pointed out in our release. We did see a nice increase in our DSNP annual enrollment period growth of call it 30,000 members versus only 1,400 last year, which obviously is a very significant increase. I would say, we are bullish about our ability to continue that growth in the rest of your period where that's an opportunity unlike the more traditional Medicare with a few exceptions, you can enroll members. So, we are excited about our ability to do that. We expect that growth to continue. But if you look at our overall MA growth of 415,000 to 440,000, a majority of that is in the traditional Medicare space. But again we are seeing nice traction in our DSNP product.

And Ana this is Bruce. A few things related to our Medicaid strategy. First, we are continuing to orient to how do we expand our DSNP presence both in adding additional regions that we offer DSNP plan, and then secondarily, how does our benefits are more competitive and you saw the share of adding the over-the-counter and some other aspects to our DSNP that has allowed this growth to happen. Some at the Medicare Advantage side, we're very oriented to continue to expand our presence. The second area is in the Medicaid and the contractual area with states and as you all know in Florida, we had a wonderful growth. This year we grew 37% on a membership basis, as a result of our contract win last year, that contract is actually going quite well and our quality measurements and so on are aligned with what our expectations are and what the start expectations are. We are participating in RFPs Louisiana and Texas are the two RFPs that we're participating in from an organic point of view, and we're very bullish about those RFPs as we are engaged at both the community level and the state level in that particular population. You mentioned and asked about the WellCare, Centene transaction. We continue to be confident in our organic direction. We are always looking at the market and the M&A sign like no different than we have in the past and we continue to believe what our strategy is very, very exciting, and I think we'll be very competitive in the future.

Helpful color. Thanks, Brian and thank, Bruce.

Our next question is from the line of Ralph Giacobbe from Citigroup. Your line is now open.

Thanks. Good morning. I wondered the 3.5% hospital inpatient rate proposal for 2020 came in a little bit higher than what we had expected and higher than recent history. And I think the spread of that rate and your 2.2% bump is a little bit wider than what we've seen. Can you just flush out and talk about the dynamics there and whether those payment rates directly tie or whether your payment rates directly tied to HIFs and how you offset that difference and/or whether we should think about that as a headwind for 2020? Thanks.

Good morning, Ralph. I won't comment a lot on that or going to say clearly is an input into our overall cost structure. There are many of our contracts are tied to Medicare and so there will be an impact there. That is something that we would have the price for it. But what we've seen on the inpatient side is really a significant reduction year-over-year and admissions for thousand and obviously we're working very hard to ensure that continues. And so year-over-year, it's becoming less of a driver of our results. So, obviously still critical and a big component, but we are working to mitigate any unit cost increases through continued utilization transfers out of the hospital into more of an outpatient setting.

Okay, thank you.

Next question is from the line of Gary Taylor from JPMorgan. Your line is now open.

Hi, good morning. This wasn't really the question I was going to ask, but I might as well because I know it's going to come up. When we talk about 2020, Brian, you had set a reasonable growth rate below the 11% to 15% long-term guidance. I think the rationale for that's reasonable and understandable. So the street currently is at 10% to 12% above your latest 2019 guidance. So, can you help us triangulate a little more you -- is the reasonable rate below where the street is today, oftentimes you've commented, if you think the forward year is in a reasonable place or not. So just trying to get a little more precise on that?

Yes, obviously, there's a wide range of estimates out on the street. We look at our growth relative to our $17.25 baseline because as we go towards the base for 2020. We typically price for what we call emerging experience, as we see emerging experience good or bad, we will put that into the pricing of our products. The good news is that we're seeing good emerging experience this year as I mentioned. And what we just said was we would grow reasonably off that $17.25 baseline. We're not prepared to give any more guidance than that because we're giving frankly more color than we typically give. I know there's been a lot of questions around it. So, we're trying to help investors and analysts with that, but beyond that, we don't really want to comment further, it's still very early.

Okay, understood. Yes, I have to ask. I appreciate it. Thanks.

Our next question is from the line of Steve Tanal from Goldman Sachs. Your line is now open.

Thanks guys. I appreciate all the color. Just one follow-up on that, I mean, is it fair to sort of think about 2018 is maybe analogous to '20 just with the HIF returning. In '18, if we think about sort of 24% adjusted EPS growth seem like tax reform net of investments was sort of 17% ish, and so maybe reasonable then to sort of think about a 7% sort of net underlying growth in the year when the HIF came back and the other sort of variables here would be obviously much worse MA rate update that year than in '20 and slower growth in the prior year '17 then you'll have this year. So, that the market rate maybe better in '20. Is that a fair enough thought process or is there anything else you'd say to the sort of sway that one way or another?

Look, I think, that is one way to look at it. I do think '18 is analogous to '20 other than, obviously, you said that the tax reform. HIF, as we continue to grow because we're growing MA, so rapidly becomes a bigger portion and therefore is a bigger tax deductibility impact there, our non-deductibility, but broadly as you thought about is not unreasonable but again, I think, we're still working through exactly how we're going to price our products, achieving that balance between sort of top line and bottom line, and so again beyond what we've said, which is a reasonable growth rate of the $17.25 is all we're prepared to say today.

Okay. All right. Thank you.

Our next question comes from the line of Justin Lake from Wolfe Research. Your line is now open.

Thanks. Good morning. First off, Brian, thank you for the 2020 commentary. I know that isn't typical and you must have -- really have to twist your arm to get you to say that. The question I had was on Part D with the HHS regs basically giving you some increased protection in terms of the corridor on margins. Everybody searching for Part D membership with synergies whether it's through a retail business or through a PBM. Do you think there is a potential that you'll see more kind of aggressive pricing for 2020 with the thought process that you can grab some membership for a couple of years or do you think people can stay in the course and there is not a significant increase of membership volatility via pricing?

Look, I would say, that there are a lot of variables that, as Bruce indicated, in his opening remarks. There are a lot of variables in the pricing this year that are creating additional uncertainty versus prior years. And I think people can handle that in different ways. We're obviously thinking about our strategy and whether there are opportunities that we can pursue. It's really hard to say how people will price various things. We obviously are very supportive of CMS's notion of narrowing the risk corridors and giving more protection that provides really a support from a premium perspective and also allows plans to bid with more certainty. So, that's obviously helpful, but this is one of those years where there is a lot of gain theory that I think everyone's going through, and it's not entirely clear what will come out of it. But I will tell you that we have internally here, a lot of smart people working on this, and thinking about different scenarios and I would just say we'll have more things to talk about after bids are submitted.

Thanks.

Next question is from the line of Kevin Fischbeck from Bank of America. Your line is now open.

Great, thanks. Just wanted to follow-up on that point there. I guess it wasn't clear to me exactly what your comments meant when you kind of said that, it felt like point-of-sale rebates are going to be increasingly likely for 2020 and that you are prepared to move in that direction. Does that mean that if the rule comes out before the busy move in that direction. But if not you're going to big under current law or that you're looking to actually move the point-of-sale rebates kind of regardless of whether the reg comes down in time because it's just a matter of time before the industry moves in that direction?

So, we're going to bid under current law because that's the instructions we've been given, but our expectation and we are supportive of rebates going point-of-sale for 2020 and we'll be ready for that. The CMS risk corridor program has provided the requisite protection, if rebates go point-of-sale for 2020. So, industry participants can feel more confident about bidding sort of under the old rules, but the new rules happen, you're protected. And I think that's why we're supportive of both the CMS program and as Bruce said we want to get rid of the uncertainty. Let's just go there and get it done. We're ready to implement for 2020. We think bringing that certainty to the industry at least from our perspective will be a positive, so that's what we were indicating.

Okay. And then just maybe clarify the corridors to your point earlier applied to certain parts of the MA and Part D businesses, but not Group MA and certain other components think of the bid that aren't included what percent of kind of the pricing is kind of insulated by that reg versus what you have to do to maintain margins, if you think about your book in total?

Well, that's a really complicated question, I mean, to dodge it, but it depends on the various components of your existing book that you have in terms of how all the hydraulics work, and again I would distinguish individual MA from PDP from Group MA all the dynamics are different there , and it really depends on your membership mix. The nature of the drug utilizing population that you have and then, as I said, in the Group MA side just quarters just don't apply. So, it really varies, and again we are doing all sorts of simulations and working through how various things may work out and we'll be prepared to bid and feel good about our bids when we submit in June.

Thanks.

Next question is from the line of Josh Raskin from Nephron Research. Your line is now open.

Thanks. Good morning. Question about the PDP, but more about sort of building of that business. In the past, I think, you've talked about some of the weakness this year and maybe relative to competitors around. Sort of a difference in retail strategy and assumptions etcetera. I know you guys have talked about regional strategies and putting a couple of stores in Kansas City etcetera, but maybe just any progress I know we're only a month away now. So, bids are due, but are you thinking that you are sort of retail network of pharmacies going to look any different in 2020 and just updates there? Thanks.

We probably, I can't give you a lot of detail, as we are in the big process. I would tell you that we are looking at different strategies who reunite the Part D membership growth. As Brian articulated on a few questions. It is complicated because of the changes in the point-of-sale and the rebates and then all the hydraulics that comes from the risk corridor being inserted into that. I would just probably leave it at this as the year progresses we'll be able to give you more details, but I do we as an organization are committed to trying to find that strategy that will reignite the Part D growth.

All right. I won't put words in your mouth, but it sounds like stuff in the works and we'll find out when we can. Is that fair?

Yes, you're not going to put words in my mouth.

Thanks, Bruce.

Thank you.

Next question?

Next question is from Dave Windley from Jefferies. Your line is now open.

Hi, good morning. It's Dave Styblo in for Dave Windley. Just wanted to come back to the MA growth and I'm sure there has been a nice benefit from the improved broker relationships you guys have obviously talked about the investments there. I'm just curious how you think you are positioned versus your peers seems like you may have leapfrogged them in some regards. But can you talk about what is different to the extent that you can and how you feel about sustaining that advantage in 2020 and beyond as that contributes to outsized MA growth?

Well, I'll start and then Brian can add. I would say that, it is market-by-market dependent. We think in some markets we are leading, but in most markets, we're in the competing with everybody else in a reasonable comparison between our premiums and medicine. So I wouldn't say that we're just highly differentiated in the marketplace. I will tell you that one thing that we've seen this year is the retention is stronger. We've seen our broker sales be stronger in the markets where we have traditionally been strong market share wise and had really good relationships with providers that's also been a great add for us. So, I think, in general, it's a lot of different things, it's not just the benefits and premiums. We see going into 2020 as being carrying that forward our strength with our brokers and the strength with the providers. Can't really speak about the benefit design as we are in that process now. But we, as Brian has said on many occasions both in calls and in investor meetings that we will be balanced and how we approach our benefits both in looking at margin expansion and at the same time being competitive in the marketplace as we like at our competition.

Got it. Thanks.

Next question?

Our next question is from the line of A.J. Rice from Credit Suisse. Your line is now open.

Hi, everybody. I guess I'll just continue on with the HIF discussion. Two aspects to it. One, you comment, you couldn't, you wouldn't be able to deliver the 11% to 15% if it comes back next year in terms of long-term growth. But I'm assuming there's nothing on an ongoing basis that would move you away from the 11% to 15%. It's just a one-year impact of that coming back and then you would assume that you can deliver that type of growth beyond that. And second, I guess, I'd just ask, is there comments today a reflection of anything you're picking up and watching in terms of a willingness to address the HIF. I mean I guess it's pretty obvious they're not going to get it done, anything done before the bids are due, and your commentary and others had been that if it got done, it would probably be something like the debt ceiling, which now looks like it's going to be addressed later in the year. Is the assumption if they address it later in the year through the debt ceiling because the bids are already in, they probably be looking at 2021 instead of 2020 in terms of addressing it or are you less optimistic because they'll even address it at all?

So, let me take the 11% to 15%. We are reaffirming as we have our 11% to 15% that hasn't changed. I think this is important that investors understand the earnings growth that we've delivered over the last number of years, well in excess of 15% on a compound annual basis. And so, obviously, the HIF is a material headwind that we're dealing with and our goal is to strike the balance this year as it comes back to continue our advancement in the marketplace. As it relates to policy, I think, the way you characterize it is right. We believe that there is bipartisan support to get rid of the HIF. It needs a vehicle to attach to and, as you said, it certainly doesn't look like that will happen before the bids happened and therefore we're bidding as if it's coming back. We are obviously hopeful and are very focused on making sure people understand the impact that the HIF has on member benefits and the like, and so we continue to be advocates for repealing the HIF, and we're hopeful there this year as other legislation has taken up that will be part of it.

Okay, thanks.

The next question is from the line of Frank Morgan from RBC Capital Markets. Your line is now open.

Good morning. Your expectations around the moderation of utilization for the MA business. Is that more a function of your existing book of business or is that in some way related to your expectations around these new members you've added during this special open enrollment period, presumably, these are all switches from other plans. So is the ramp up in profitability of that population perhaps better than what a traditional AGN is, that's question number one. And then just number two, it seems like your commentary seems more encouraging around your Health segment business. Just I was wondering about and I'll be getting some more color and commentary around some of these investments you're having to make indeed the home care, home base and as well as your preparation for PDGM? Thanks.

Sure. So, on the utilization side, I would say, it's really across the Board. We are seeing utilization of our new members, which are both switchers as well as folks new to MA or AGN. And really both all components of the business are performing better than our expectations. Obviously, when you get the significant growth that we got, you ask yourself whether you in anyway attractive and unbalanced risk pool and that's certainly doesn't appear to be the case. And so the new members are running quite well as our what we call our concurrent members. As it relates to healthcare service and we are seeing really nice performance in our Kindred business and our Humana At Home business home care, home base is being implemented. That's going well. We're committed to getting on home care, home base those one of the investments as you point out that we made this year. We think that will create a better clinical model ultimately for us as we continue to integrate with Humana and so that's going well. As we've said from the get go, we're supportive of PDGM. We believe that better aligns our clinical focus and focus on health outcomes with the homecare model and where the payment model works. We'll encourage home health providers to run towards the more complicated in chronic members of patients and so we are very supportive of that. Overall, we feel good about the investments we're making some of which are in healthcare services, some of which are in the retail and group segments but, as you said, I think healthcare services is off to a good start. We are seeing a little bit of softness in pharmacy that's just around the number of scripts we're filling because like we said, we're seeing lower utilization across the Board on our MA book, but other than that we feel very good about how broadly our business is developing here.

Next question?

Next question is from Scott Fidel from Stephens. Your line is now open.

Hi, thanks. Just had a question on the PYD trends the research development, and trying to tie that together. I guess sort of two parts. One just on the retail segment. Just given how much higher the PYD was year-over-year, Brian, when you sort of add that back into last year. How did the MA margins actually look relative to the update you had given us that they were significantly below the long-term 4.5% to 5% range. So that's the first part of the question. And then just secondly just given the negative PYD on the Group and Specialty segment and I know that you mentioned sort of looking at the risk adjuster settlement for some signals there, but just interested in how you guys are approaching either pricing or reserve assumptions, just to get back on the right side here in terms of the negative development in the Group and Specialty side? Thanks.

Sure. On the MA side we are not, I'd rather not sort of put everything back into the incurred year. I think you can get a sense of that. We have PYD every year, but the good news is our book did developed favorably. So you are correct that will be called the incurred results for 2018 was better than where we finished year given the positive development, but I really don't want to comment any further other than to say our book continues to develop favorably, utilization assumptions that we made, closing the books for '18 turned out to be better as we get more results as we go into '19. Remember it takes a number of months before the actual claims matured develop before you really know how you did, and so we're happy to see that '18 is developing favorably on the MA side. It is true that Group had, yeah, it's a small mountain and immaterial for the company, but group commercial did have some negative PYD in the quarter. And again I think what we're seeing is that bifurcation in the marketplace and the community rate side what for us will be interesting to understand is how our book is progressing relative to the rest of the market and as the whole market deteriorating, are we deteriorating faster than the market. I think, the assumptions we have around our risk accrual are very reasonable and we will see again get what happens in June when that occurs, obviously, as we think about pricing our book both for MA and for Group. We incorporate prior period development and our views, as I mentioned earlier of emerging experience because that sets the new baseline off of which we trend and so we do put that into the pricing, and so we will incorporate all of our best information that we have into pricing to make sure we're appropriately priced.

Okay. Thanks.

Next question is from the line of Sarah James from Piper Jaffray. Your line is now open.

Thank you. Sticking on the home health topic, one of your peers recently quantified the company specific PDGM impact and it looks like one factor is where your home health patients are coming from whether it's acute or not. Can you give us some insight on to your mix of home health whether they are coming from acute or other sources. And if you think that Humana's PDGM impact could be better or worse than the industry average? Thanks.

We don't go into that level of detail. I would tell you that Humana's mix will be more weighted, more acute settings and that's where our focus is as we think about our discharges and certainly where the opportunities are versus some of the more community-based settings that some of the home health companies have. Again, we don't -- we are not going to give that level of detail. I would just say that the Kinder team is ready for PDGM, they're embracing PDGM. Obviously, there are some perhaps near-term financial impacts that frankly were anticipated in our deal model. We knew there's some form of this was going to happen. So we anticipated the 2020 impact and we feel good about the assumptions we've made. But again, we're very focused on the incentives that provides the home health providers to take complicated patients and so we're excited about that.

Yeah, just to add to that, and I know there's a lot of details in the reimbursement and especially if you're highly oriented to fee-for-service payment model, which the Kindred management team as Brian has said is really managing that transition. More importantly for Humana as a whole, we feel there's a wonderful opportunity to address admissions, ER visits and other preventable events through home health and what we see in our initial test within data sites that we have going is that's actually the case is that we can reduce the utilization and institutions that are very reactive. That is one of the things that I think is coming from this reimbursement change is really encouraging nursing to be more oriented to areas like COPD, diabetes, and CHF of which to date has been much more oriented to therapy. So, within the home health sector as a whole, I think, that's much of a Kindred issue. They are managing that transition, feel comfortable with managing that transition and we invested in it based on a reimbursement change that would have some impact on lowering the impact from a therapy. But, in addition, we see a great opportunity and being able to assist us and what our core business and that is really driving down the cost of care through preventing hospital admissions.

Next question please.

Our next question is from the line of Steven Valiquette from Barclays. Your line is now open.

Great, thanks. Good morning, Bruce and Brian. So just a question around your PBM operations and there has been some discussion around this moderation of generic drug deflation in the US market so far in 2019. So a couple of questions around that. I guess just first can you speak at a high level, how it may be impacting your PBM business and also your mail order profitability in particular. But also curious just to hear about your overall pharmacy cost trends for your overall book of business in 2019 just went balancing this moderating generic deflation with what we've seen also as moderating brand inflation this year versus 2018? Thanks.

Yes, on the second question, we don't break out the trend by service category. But you are correct that we are seeing favorable pharmacy trends as a general matter and particularly on the specialty side where we can have very significant cost, the pipeline has not developed as we forecasted and it's lighter than we expected. And so from a trend perspective that's obviously a good thing. The question of a generic deflation and a lack of inflation is actually quite complicated. We think about it as holistically from both the PBM and then the impact from the plan and depending on the contracts you have in place with various manufacturers, it can be a good thing, it can be a bad thing. I'd rather not comment further than that, other than to say, I think, our PBM business more broadly, I think, is gearing up, it's working to drive more volume into the mail setting. Historically in the last a year or so, as we mentioned, we are not getting the mail order penetration that we want to get. We are very focused on driving that mail order penetration. We have really a state-of-the-art facilities to be able to service that mail order opportunity, and so we take over time it will be continued to be a source of growth for the enterprise.

That's one of the strength of having the insurance component with the PBM side that you are the beneficiary of an ability to effectively manage the utilization on the price that drive, which shows up into the insurance product Part D and MA. And so as you think about the integration that we have together are, we have a different perspective than somebody as a retailer, for example, that is having an impact that the volume and the price is an important part that shows up in the profitability of our insurance side. And so as we are a little bit of a different breed as a result of it being integrated. Most of it is really -- our members and therefore they sort of work in harmony.

Okay. I appreciate the color. Thanks.

Next question.

Our next question is from the line of Michael Newshel from Evercore. Your line is now open.

Thanks. Can you give us an update on how you view your core cost trending or MA membership versus the growth factors that CMS is using in the rate setting process. I know the fee-for-service trend has accelerated into the 4% range in recent updates and it's actually closer to 5% and CMS projections in the outer years. So, are there demographics or other factors influencing that, where do you see the actual core trend in MA that you have to manage on a like-for-like basis?

The way CMS formulates the rates and that fee-for-service trend factor is doesn't necessarily always really correlates the trend that we use in our pricing. And so it's sometimes hard to understand exactly how that trend is developed. We effectively take the rate we're given and then after sets for ourselves when our core trend is, and that's really the key assumption that we're focused on. I would just say that we continue to see moderate trends, we see movement from the inpatient setting to the outpatient setting. We have seen moderating specialty trends, but we have seen as we commented higher outpatient and physician trends, and so we balance all those various factors. Obviously what matters is what you price and the development relative to that pricing and I think we've been very successful ascertaining what the various trend components are and then pricing it accordingly.

Thank you.

There are no further questions at this time. I turn the call back over to Bruce Broussard.

Thank you. And I would like to thank all our shareholders for continuing to be strong supporters of the organization. And like every quarter our results and especially this quarter with great results we have could not be obtained without the 55,000 people that are working every day to help us. So, we really thank their dedication and efforts and allowing the organization to continue to be successful and with quarters like this. So, thank you and everyone have a wonderful day.

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