Humana Earnings Call Insights: Transitioning to HMO Products and Base Rate Update for 2014

Humana (NYSE:HUM) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Transitioning to HMO Products

Matthew Borsch – Goldman Sachs: Could you just talk in a little more granularity about the transition process to HMO products and what have you set quantitative goals that you can share there and maybe just tell us how that’s going with some market examples?

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James E. Murray – EVP and COO: Well, this is Jim Murray. Yes, we’ve set targets. I think that the targets that we had shared with a lot of you in the November Investor Day here in Humana detailed a lot of those, I don’t know have those in front of me, but if you reference those materials you can see those. Philosophically what we’re attempting to try to do on a market-by-market basis have a conversation with our members about the additional benefits and lower premiums that they can enjoy with the HMO products. As you know, the HMO products are more like the integrated care delivery model that Bruce detailed in his remarks and that’s where we can create a lot of economic benefits for the members that we serve and also the satisfaction measures and experience for the members is enhanced with that model. The conversations at our market point selling representatives have with the individual members goes through a lot of that discussion with them.

James H. Bloem – SVP, CFO and Treasurer: Matt, I’d like to add to that. I think you know we are (indiscernible) that process was building capacity and building the capacity is around bringing the providers to the risk-based contracting as we’ve talked about we’ve had great progress in that. Then the second aspect is I was alluding to we are also focusing in certain markets I think when everyone was here in November we talked about five markets maybe increasing that to seven markets, but our intention to be very, very strong in those five to seven market and the ability to build the integrated deliveries.

Matthew Borsch – Goldman Sachs: Just one last question here is as you now realize it’s early but as you look ahead to 2014 do you know is it your judgment at this point that you would make member benefit reduction commensurate with the amount of the industry fee that’s being introduced if it is introduced as scheduled for next year?

James H. Bloem – SVP, CFO and Treasurer: This is Jim again. Obviously, there is a lot of things that have to go into the pot to try to figure all that out. It is our intention to recover the industry fee and either lower benefits or higher premiums. But as you know what has to happen with the funding with the government is something we will learn in the next couple of weeks where our competition is, what we are able to do with the 15% solution that you are all familiar with, secular trends, risk revenue and some of the good work we are doing around the in-home assessments and you know the whole integrated care delivery model progression that we are detailing here. So, there is a lot of things that we study market-by-market, but it is our intent to recover that fee both on a pre-tax and in those cases where we can on an after-tax basis.

Base Rate Update for 2014

Christopher Rigg – Susquehanna: I guess, just a follow-up on that last thought there. When we get the 45-day notice in a couple weeks what are you guys anticipating in that in terms of sort of a base rate update for 2014?

Bruce D. Broussard – President: There is a lot of things that we read about many of you have different opinions about what ultimately will happen. We have our own ideas about some of the variables that go into that funding rate that we look for. When we step back we look at it – we’re sensing something that is flattish to slightly down and that’s an environment that we’ve demonstrated in the past that we can live with. But again that’s a lot of studying and a lot of by-market evaluations on all of the things that I just talked through here a moment ago and a lots of work to do in and around the February through April timeframes. But again based upon what we’re sensing, we feel comfortable that we’ll be able to come out with a set of products, benefits and premiums that will be very attractive to the members that we serve.

Christopher Rigg – Susquehanna: Then on the Retail segment, medical loss ratio guidance, it’s up 50 basis points. When I look at the impact of the flu, I guess what’s driving that increase? Does that anything to do with the recent acquisitions or is it all just on the cost trend side?

Bruce D. Broussard – President: It’s all the cost trend side. It’s basically the worst flu season we’ve had in more and at least the decade and it’s as we showed it’s in the fourth quarter for about $25 million and it’s carried over peaking in mid-January in 2013.

James H. Bloem – SVP, CFO and Treasurer: Yeah, relative to our prior guidance, it’s the flu. There is also some additional quality measures, we’re doing around our drug programs that we’ve identified some additional costs related to that and also these in-home assessments and them included in that benefit ratio calculation are very – are part of that increase.

Christopher Rigg – Susquehanna: So, when I look at on Slide 12 and the $45 million benefit from operations that you’re projecting is that, I guess I’m just trying to figure out the math here because it looks like the $45 million would be less than 50 basis points and is the $45 million of benefit not in the cost side or how should we think about the net impact here?

Steven E. McCulley – VP, Controller and Principal Accounting Officer: This is Steve. The operating cost is down versus the last projection as well. So, the increase in benefit ratio is offset by a lowering of the operating cost ratio, the admin cost ratio.