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Text: In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our second quarter 2021 results and our updated financial outlook for 2021.
Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan for the Q&A session.
Before we begin our discussion, I need to advise call participants of our cautionary statement.
Actual results could differ materially.
Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP.
Finally, any references to earnings per share or earnings per share made during this conference call refer to diluted earnings per common share.
Today we reported adjusted earnings per share of $6.89 for the second quarter of 2021, in line with our previous expectations.
We continue to focus on delivering strong operating results while navigating a dynamic environment due to the ongoing COVID-19 pandemic, all while staying true to our commitment to delivering the highest quality healthcare experience for members and patients.
Well, we are maintaining our full year 2021 adjusted earnings per share guidance of approximately $21.25 to $21.75 at the midpoint, representing full year adjusted earnings per share growth of 16% above the 2020 baseline of $18.50 in excess of our long-term growth target, while acknowledging the continued uncertainty driven by COVID-19 hospitalization trends and the rate at which non-COVID cost normalized.
As Susan will describe in more detail, our full year adjusted earnings per share guidance now assumes a $600 million COVID-19-related headwinds that is expected to be largely offset by favorable operating items.
In addition, this guidance assumes no COVID costs will run -- non-COVID costs will run approximately 2.5% below baseline in the back half of the year, including an assumption of minimum COVID testing and treatment costs for the remaining of the year.
I'd like to reiterate that our core fundamentals are performing well, and 2021 is a year of COVID-19 transition with various pandemic-related financial impacts, including reduced Medicare Advantage revenue resulting from the significant temporary deferral of utilization in 2020 as well as the lingering near-term uncertainties regarding the pace and level of the return of utilization for the balance of the year.
While we continue to navigate this pandemic-related uncertainties in 2021, as Susan will lay out in detail, we expect 2022 to be a more normal year.
The healthcare system has been open for several months, and we have seen vaccination rates in the seniors reach approximately 80% nationally.
Accordingly, our members continue to engage in more routine interactions with their providers, which we anticipate will result in more normalized Medicare Advantage revenue next year as providers are able to ensure that our members are receiving appropriate care and that their conditions are being fully documented.
I would reiterate our remarks from the last quarter regarding our Medicare Advantage bids for 2022, which reflected the continued uncertainty associated with COVID-19 and our premium and claims assumption with a focus on maintaining benefit stability in 2023.
While it is still too early to provide 2022 guidance, we believe our operating discipline in 2021 combined with the depth of our planning for 2022 Medicare Advantage AEP puts us in a strong position for financial growth in 2022.
I will now turn to an operational and strategic update.
Importantly, our underlying core businesses continue to deliver strong results on solid fundamentals with individual Medicare Advantage membership growth outpacing the industry.
As we highlighted at our recent Investor Day, this growth is balanced across various product lines, including HMO, PPO and Dual Special Need Plans or D-SNPs.
Our Medicaid business continues to perform well in 2021 and our South Carolina plan is now operational.
We are diligently preparing for the Ohio contract go live date in early 2022 and are continuing to improve our operating model building off of our core Medicare Advantage capabilities.
We also experienced slightly better than expected results in our home and provider businesses and increased mail order rates in our pharmacy business.
Finally, as announced last quarter, we've entered into an agreement to acquire the remaining 60% interest in Kindred at Home, and we expect the transaction to close mid-August, which we've included in our revised estimates for the year.
Our strong operating performance this year is in part attributed to our strong partnerships with providers who are delivering high quality care to our members.
We are currently seeing 87% of our provider partners and value-based arrangements and surplus.
On the public policy front, as policymakers explore changes to Medicare, including adding dental, vision and hearing as part of the Medicare benefit, we stand ready to both innovate for the more than 12 million of our members who already have these benefits, including 7 million dental and vision policies in our MA group as well as offer ideas of public private collaboration to leverage our deep capabilities in Medicare and specialty markets so that beneficiaries could quickly see benefits go from a proposed law to a tangible benefit.
Before turning the call over to our new Chief Financial Officer, Susan Diamond, I'd like to take a moment to speak about Susan's experience at Humana over the last 15 years.
She has served in various leadership roles across the company during her tenure, spending eight years as part of the Medicare and leadership team with various financial and operational in line of business responsibilities.
She also spent two years on the finance team, leading enterprise planning and forecasting and overseeing the company's line of business, CFOs and controllers.
Most recently, she led our home business, growing it to the largest offering of its kind.
Her strong financial background and extensive knowledge of our business make her uniquely positioned to step into the CFO role.
The board and I have great confidence in our abilities and the contribution she will make in the next chapter for Humana as we execute on our strategic plan and deliver shareholder value.
In addition, during the strategic nature of the CFO role, Susan will continue to contribute in a meaningful way to our home health business.
Today we reported adjusted earnings per share of $6.89 for the second quarter, in line with our previous expectations.
Our underlying core business fundamentals remained strong, and we experienced a positive start to the year across our segments with the first quarter coming in modestly ahead of our previous expectations.
Our results moderated back to expected levels in the second quarter, albeit with variation in the way specific underlying assumptions emerged, with COVID treatment costs coming in lower than expected, offset by non-inpatient utilization continuing to bounce back faster than originally anticipated.
As I will describe in further detail in a moment, uncertainty remains for the balance of the year due to the pandemic, specifically as it respects COVID hospitalizations and the rate at which non-COVID costs normalized inclusive of both volume and unit costs.
Recognizing the majority of today's call will focus on our emerging experience and our 2021 guidance, I want to quickly touch on operating performance across our segments before diving into that detail.
Our Medicare Advantage growth remains on track and consistent with our previous expectations with individual MA growing solidly above the market at an expected 11.4% at the midpoint.
Our Medicaid business results are exceeding our initial expectations given membership increases largely attributable to the extension of the public health emergency as well as higher than expected favorable prior period development.
In our Group and Specialty segment, consistent with our commentary on our last earnings call, medical membership declines are lower than we expected coming into the year.
Our Specialty business results are exceeding expectations as utilization, particularly for dental services, has been slower to bounce back than initially expected.
Finally, within we set our healthcare services operations, pharmacy continues to see increased mail order penetration as a result of customer experience improvements and additional marketing initiatives.
The home business, CenterWell Senior Primary Care and Conviva are performing slightly ahead of expectations, and we remain on track to open 20 new clinics this year with Welsh Carson.
In addition, as Bruce indicated in his remarks, we now expect the Kindred at Home acquisition to close in mid-August subject to customary state and federal regulatory approvals.
Before I go into more detail on our 2021 guide, I want to reiterate that the uncertainty we are seeing in 2021 relates solely to the difficulty estimating the impact of the pandemic and is not expected to carry forward into 2022.
We remain comfortable with how we approach 2022 pricing, which I will expand on later in my remarks.
Turning to full year 2021 guidance.
I would remind you, our adjusted earnings per share guidance represents growth at or above the top end of our long-term target of 11% to 15%.
Our philosophy regarding 2021 guidance has been to provide transparency into the uncertainty caused by COVID-19 and the ability to deliver our targeted earnings growth with solid underlying core business performance and largely offsetting COVID-19-related headwinds and tailwinds.
We have been consistent in and remain committed to this philosophy.
There is a reasonable path to achieving adjusted earnings per share within our initial guidance range.
And accordingly, today we are maintaining our full year adjusted earnings per share guidance of $21.25 to $21.75, while acknowledging the continued uncertainty as it respects to COVID hospitalization trends as well as the pace at which non-COVID costs bounce back and at what level they ultimately normalize.
Additionally, we expect our third quarter adjusted earnings per share to reflect a low-20s percentage of our full year adjusted EPS.
As Bruce indicated, given our experience to date, together with our current estimates for the back half of 2021, we have effectively recognized a $600 million COVID-related headwind for Medicare Advantage in our full year guide, offset by favorable operating items.
These favorable items include, among others, higher than initially expected prior year development, the previously discussed better than expected specialty and Medicaid results and the expected contribution from Kindred at Home given the transaction is expected to close in the coming weeks.
Now let me provide an update on the underlying changes since our initial detailed guide in February, articulate key assumptions regarding utilization in the back half of 2021 and expand on the continued pandemic-related uncertainties I described.
I will begin with Medicare Advantage revenue.
As discussed last quarter, given our significant exposure to Medicare Advantage, we are disproportionately affected by COVID's impact on Medicare Risk Adjustment or MRA.
Recall, our risk-adjusted revenue for 2021 is determined by 2020 dates of service, medical utilization and resulting documentation, which as previously discussed, was materially depressed in 2020.
As we have indicated since the beginning of the year, the MRA headwind we are facing in 2021 is significant, and we have closely monitored it over the course of the year.
Our April guide recognized we had $300 million of additional pressure from MRA relative to our initial expectations for the full year, which was offset by the net benefit of the extension of sequester relief.
In July, we received the mid-year MRA payment, and it came in modestly lower than expected.
We are however taking operational steps now to be able to recover some of the MRA revenue in the final payment for 2021.
Accordingly, our MA premium estimates, net of capitation, remained largely in line with our initial expectations when factoring in the net sequestration benefit.
Now turning to benefit expense.
At the beginning of the year, we indicated that we expected non-COVID costs for our Medicare business to run 3.6% to 5.5% below baseline.
We define baseline and 2019 experience trended forward based on a normalized trend factor excluding the effects of COVID.
However, that was offset by COVID utilization decelerating faster than expected.
We also recognized, however, visibility into non-inpatient claims were significantly less than inpatient.
However, at that time, we could still tolerate overall utilization returning to baseline late in the year if the non-inpatient acceleration we were seeing was due to pent-up demand and leveled off in the second and third quarters.
In the first and second quarters, non-COVID costs run approximately 7% and 3% below baseline respectively with the bounce back outpacing expectations in the second quarter.
Non-inpatient utilization did not level off and instead continue to increase in the second quarter and was offset by lower than expected COVID costs and other business outperformance.
As the healthcare system has been open for several months and a high rate of the senior population has been vaccinated, our current guidance now assumes that non-COVID costs level off and run approximately 2.5% below baseline levels in the back half of the year.
Consistent with our original forecast, our current guidance assumes minimal COVID testing and treatment costs in the back half of the year.
Finally, as it respects to our 2021 guide, for our commercial business, we expect all-in utilization for COVID and non-COVID to continue to run above baseline as anticipated.
In summary, I want to emphasize that 2021 is a COVID transition year.
There is a reasonable path to deliver against our guidance expectations.
However, if non-COVID utilization or COVID treatment costs increase beyond our expectations in the back half of the year, it will present a headwind to our guide absent offsetting tailwind.
I also want to reiterate that the $21.50 midpoint of our original guide continues to be the right jumping off point for 2022 adjusted earnings per share growth.
Our members continue to engage in routine interactions with their providers, which we anticipate will result in more normalized Medicare Advantage revenue next year as providers are able to ensure that our members are receiving appropriate care and that their conditions are fully documented.
During the first half of 2021, provider interactions and documentation of clinical diagnoses that will impact 2022 revenue outpace those experienced in the first half of 2020 and are approximately 80% complete in line with the estimated completion rate for the same time period in 2019.
Lastly, I would remind you that our Medicare Advantage bids for 2022 reflected the continued uncertainty associated with COVID-19 as it relates to our premium and baseline non-COVID claims trend assumptions with a focus on maintaining benefit stability into 2023.
First, with the expected integration of Kindred at Home, our home business is growing significantly, and Amy has accepted the role of Vice President and CFO of Home Solutions.
She will be a key member of the Home Solutions leadership team, responsible for the financial oversight and planning and forecasting for the segment.
Lisa Stoner will succeed Amy, accepting the role of Vice President, Investor Relations.
Lisa has worked with Amy over the last four years and is well known and respected by our investors.
We are excited about the opportunity this affords both Amy and Lisa, and Lisa's continuity in Investor Relations will allow for a seamless transition.
In fairness to those waiting in the queue, we ask that you limit yourself to one question.
Operator, please introduce the first caller.

user
sees fy adjusted earnings per share $21.25 to $21.75.
compname reports 2q21 earnings per diluted common share of $4.55 on a gaap basis, $6.89 on an adjusted basis.
maintains fy 2021 earnings per share guidance of $21.25 to $21.75 on adjusted basis.
company’s fy adjusted earnings per share guidance assumes $600 million covid related headwind expected to be largely offset by favorable operating items.

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