HUMANA INC Q4 FY2024 earnings call

New Team Members - Introduced new Chief Financial Officer Celeste Malay, Chief Human Resources Officer Michelle O'Hara, and Chief Information Officer Joppa Mehta. ### Four Levers Driving the Business - Product Experience: Moving in the right direction with nearly 5% membership growth in 2024, shedding unprofitable plans, resetting lower margin plans, and shifting membership mix. - Clinical Excellence: Closed 650,000 care gaps in the fourth quarter of 2024, with progress made and focus on bonus year 2028. - Operating with a Highly Efficient Back Office: Made progress over the past few years, improved operating expense ratio by 40 basis points, and expects to communicate path to additional efficiencies. - Capital Allocation and Growth: Good about expanding primary care footprint in 2024 second half and Medicaid organic expansion, with priority on margin recovery and balancing with growth through organic reinvestment and acquisitions. ### Industry Context - Medicare Advantage delivers better outcomes than original Medicare, operates more efficiently, and enables more affordable healthcare access to seniors, with room for improvement.

2024 adjusted EPS was in line with initial guidance. In 2024, there was nearly 5% membership growth. The company is reaffirming its 2025 outlook and remains committed to achieving at least a 3% margin in individual MA. In 2024, the operating expense ratio was improved by 40 basis points through optimizing care models, unifying shipping activities, outsourcing non-core capabilities, and streamlining internal distribution. The membership mix is being shifted with a focus on sustainable long-term value, with membership losses largely consistent with strategy except in the D SNP space.

2025 - 2024 adjusted EPS was in line with initial guidance and 2025 outlook is reaffirmed. The improvement in MLR ratio is driven by MA plan exits, benefits adjustments in remaining plans, and favorable calendar in 2025. The increases in the ratio are due to Medicaid growth (higher benefit ratio), IRA impact (increases benefit ratio), and incremental investments. ### 2026 - Typically does not provide guidance far out to 2026 due to unknowns like STARS litigation, final funding for MA, etc. Focus is on driving operating performance, with clinical excellence and efficient back office being key focuses for 2026.

• Uncertainty around STARS litigation. - Uncertainty regarding final funding for Medicare Advantage. - Potential changes between preliminary and final rate notices. - Higher than expected D SNP attrition and uncertainty around SCP rules. - Uncertainty regarding Medicare and Medicaid integration rules.

Q: Can you just break down the levers of the increase in 2025 MLR guidance?

A: The majority of the improvement is driven from the MA plan exits, which all had very high benefit ratios. We also made other adjustments to our benefits in our remaining plans, which also improve the ratio. And then finally, the favorable calendar in 2025, given both how the days fall, and the extra day in 2024 due to leap year. The increases to the ratio, which are our drag, first, business mix changes given Medicaid is growing. Medicaid carries a higher benefit ratio versus MA. Second, the IRA impact, which increases the benefit ratio given increased revenue with offsetting increases in claims. And third, incremental investments, which are important to the long term, but increase the benefit ratio in the near term.

Q: People are trying to look through 2026 and understand the moving parts. Maybe you could just frame for us if you think about it in two buckets. One, the core business. Last year, you said before the rates came out disappointing, you the company could grow six to ten dollars of earnings. Rates seem to be coming in better. Is that a reasonable framework x the x the stars? And then how would you think about stars relative to that to give us an idea of how 2026 kind of moving parts might shape up.

A: We typically do not provide guidance that far out all the way out to 2026. There's a bunch of unknowns that we're still navigating. The STARS litigation is a big piece of that. The final funding for MA is a big piece of that. Obviously, the preliminary notice is out. Things can change between the preliminary notice and the final rate notice, and so we'll be waiting to see how that plays out. What I can tell you is that what we are focused on differentially is how do we drive operating performance? And so what are the things that we can do fully under our control to get better at managing the business? When we do that, that leads us to a place where we can get to a sustainable compelling competitive position in the market, and then you know, look at some level pricing and benefits become easier and they take care of themselves if we're nailing that underlying operating performance. And so that's really where the orientation is right now on 2026. And, you know, when we talk about operating performance, what are we talking about? We're talking about that second and that third lever. It's clinical excellence. And all the components that go into it. And it is driving an efficient back office. Those two things, more than anything else, is really the focus for 2026. But we're not yet ready to provide guidance around that.