Humana Inc. Q4 FY2025 earnings call

Key Sections:

• Membership Growth: Grew by approximately 1,000,000 members (20%) in AEP, retention rate improved over 500 basis points year over year. Over 70% of new sales were switchers from competitor plans, with 70% of new sales in four stars or better and nearly 30% bounce-back members. Anticipate individual MA membership growth of approximately 25% in 2026.
• Clinical Excellence: Efforts to strengthen STARS program continue, with outlook unchanged and confidence in returning to top quartile STARS results by 2028. Once hybrid season is complete, will provide additional visibility into final operating results.
• Efficient Operations: Expect significant improvement in consolidated operating costs ratio for 2026 driven by operating leverage from membership/revenue growth, tactical cost cutting, and transformation efforts like outsourcing, process simplification, and technology automation.
• Capital Allocation: Medicaid spans 13 states with Georgia and Texas launching next year. Hoping to announce a strategic acquisition in primary care. Focus on capital efficiency to fund member growth and M&A while protecting credit rating.

In 2025, the insurance segment benefit ratio was 90.4%, slightly better than guidance. The full year ratio included a benefit set aside for a potential doc fix in 2025, which was invested in areas like network management and technology. CenterWell saw growth in pharmacy, with a tailwind from new membership, and expected increases in PCO patients and home health volumes related to membership growth. Revenue contribution details weren't explicitly broken down by percentage in the provided transcript but focused on the insurance and CenterWell segments' performance.

Forward-Looking Statements:

• Expect full year adjusted EPS of at least $9 in 2026, with the decline driven by STARS headwind net of mitigation. Anticipate doubling individual MA pretax margin in 2026 normalizing for STARS. Initial guidance for 2026 is more conservative than typical due to dynamic environment. Membership growth is expected to be enterprise accretive in 2026.
• Net STARS headwind for 2026 including individual and group MA is approximately $3.5 billion, net of contract diversification and provider offset.

Risks Discussed:

• Uncertainty around STARS performance and its impact on margins. The net STARS headwind for 2026 is significant. Changes in the funding environment affecting Medicare Advantage benefits and the need to adapt to regulatory and policy changes.

Q: Scott Fidel asked about MA growth breakdown by PPO vs HMO and PPO new member percentage from competitor exits.

A: David Dintenfass said they can't disclose exact growth rates but aim for reasonable margin across all plans and are more balanced than past strategies.

Q: A. J. Rice asked about transformation initiative impact on 2026 earnings.

A: Celeste Mellet said revenue growth from member and CenterWell growth is close to 2028 expectations, but cost cutting is just beginning with significant pickup in 2027 and 2028.

Q: Jason Kusorla asked about 2025 investment spend and 2026 investment thinking.

A: Celeste Mellet said incremental investments were over $550 million, not currently contemplating incremental investments in 2026, with star spend down on a PMPM basis due to program scaling and efficiency.

Q: Ryan Langston asked about bounce-back members and V28 impact.

A: George Renaudin said bounce-back members are from several years back, and V28 impact number is still in the ballpark as nothing has changed.

Q: Elizabeth Anderson asked about EPS seasonality and OEP.

A: Celeste Mellet said seasonality is affected by STARS headwind, and OEP is too early to know but has upside due to momentum and transactional NPS.

Q: Kevin Fischbeck asked about 2027 thoughts and margin vs membership growth.

A: James Rechtin said they have good visibility by April and May to adjust bids, and focus is on long-term sustainable margin while retaining membership.

Q: Erin Wright asked about rate notice exposure and capital strategy.

A: James Rechtin said rate notice changes are within a narrow band for the industry. Celeste Mellet said most capital work is done, but more work on reinsurance and legal entities can be done.

Q: Matthew Gillmor asked about value-based contracting proportion.

A: George Renaudin said about a third of members are in full risk, a third in value-based, and a third in other models, with proportion increasing as members progress through the year.

Q: Lance Wilkes asked about value-based care impact on MLR and incremental investments in medical costs.

A: George Renaudin said value-based care financial terms are stable, and 90% of 2025 incremental investments were in medical costs.

Q: Benjamin Mayo asked about provider contracting strategy.

A: James Rechtin mentioned improvements in prior authorization process, payment rates, and ongoing efforts to improve provider relationships to reduce friction.