A deep dive into Humana’s 2022 investor day and what’s in store for the MA insurer.
Humana hosted its annual investor day last Thursday, and it provided a really nice overview of how Humana views key components of the business moving forward. We included a TL;DR here at the top with some of our key takeaways summarized, and then a much longer deep dive below. Lets dig in!
If you’re still reading from here, you might want to have a cup of coffee in hand. It’s a long post from here as we dive into our various takeaways from the day, we’ve broken it down into the following sections:
Also, in case you're interested in following along in Humana's materials, here are the links:
Humana’s investor day on Thursday last week provided a really nice overview of the business. It’s interesting to see how they’ve chosen to simplify their story versus their 2021 investor day. In 2021, they spent a good deal of time on all lines of business, including employer and Medicaid. This year, those topics barely got mentioned, with Humana focusing the entire session on the core MA business and how it’s pulling levers across primary care and home health in order to enable the business. Coming on the heels of a poor open enrollment season for 2022, it makes sense that Humana would choose to focus on explaining the core growth story, particularly when there’s a lot of opportunity within the core story alone. The agendas for the two investor days highlight that difference well:
The simplification seems intended to highlight the core flywheel that Humana - and every other insurer that is building a services business - is leaning in on these days. Having a scaled insurance offering enables Humana to funnel members into its care delivery offering, both of which generate additional value that they can reinvest to reinforce the strength, thus creating the flywheel. The slide below depicts this dynamic:
The slide itself seems pretty underwhelming, but you get the point. The key data cited is that number on the bottom right side of the page, where contribution margin “potential” (which is an interesting word to see in there) is 2 - 4 times higher for members who utilize Humana’s suite of healthcare services business. That feels very similar to the waterfall slide (see below) Bright Health showed in its initial investor deck, which remains a very helpful way of visualizing this dynamic. If you can get 4 - 6% EBITDA up to 7 - 10% EBITDA via the services business, obviously that helps improve the customer lifetime value of members significantly.
As we’ll get into below, the crux of this business case seems to be that the clinics are actually contributing positively to the overall enterprise margin, and that in this case, Humana is able to move all of its clinics towards profitability over time.
Humana repeatedly highlighted during the investor day how much they have added in terms of member benefits, which should help continue making their Medicare Advantage product more attractive for consumers. Here’s an example of one slide highlighting how Humana has leveraged analytics and consumer research to improve customer value, both for Duals and non-Duals members.
It seems this narrative of richer benefits help solve two potential challenges for Humana’s overall narrative:
It’s a brilliant move for MA insurers who are increasingly facing political scrutiny over MA benefits as the program continues to grow and take center stage. It is worth noting that there is almost no discussion in the investor day of whether Medicare Advantage increases or reduces costs - I counted one mention during the session that Medicare Advantage enrollees cost about 13.4% less than Original Medicare enrollees (around 21 minutes 30 seconds in). At the end of the day, if insurers are adding additional value to individuals, and that value causes those individuals to sign up for the plans, that seems like a good thing, no? It’s a hard narrative to argue against if you believe that fact pattern, unless you believe it is so much worse financially that the whole Medicare system is going to go insolvent because of it. So it’s a smart move by the payors to focus the conversation on benefits to patients, and move the conversation away from whether MA actually saves money for the government compared to Original Medicare. Humana certainly doesn’t answer that question here. We think that is still a conversation that should be had, and needs to be had, but it is worth watching how this conversation continues to evolve.
Highlighting how much richer the benefits are now raised the question for analysts as to whether this will negatively impact Humana’s MLR ratio moving forward. Logically, you could see why that question comes up. If Humana is getting paid the same amount of money for delivering insurance services to members, and it then is spending more money giving services away to members, shouldn’t it be making less money? Either it has to be making more revenue, or spending less on other services in order to offset these benefits. Humana shared in response that they’re funding this increase in benefits via internal value creation initiatives, although it’s not exactly clear what these initiatives are specifically. The answer is light on data actually proving that case, which should naturally invite some skepticism.
Telephonic sales have been challenging in a number of ways both for Humana and the broader industry over the past year. Industry wide, you have regulators now looking at the MA marketing space as more seniors were confused this past year by aggressive sales tactics (discussed in the HTN community here and here). These approaches also had negative impacts on insurers like Humana, which had a poor open enrollment period at least in part due to churn from these telephonic sales groups.
Humana shared during the session that they’re aware that members who sign-up via internal Humana channels have higher lifetime value than those who sign up externally (see the slide below). Presumably, this is because those who sign up via external channels are more likely to churn each year as those external groups attempt to sell individuals on new products. Seeing that they are external, they are likely incentivized to do this. To address this, Humana has apparently revamped its marketing and distribution capabilities internally, and intends to grow its internal sales channel by 20%+ year-over-year.
For a number of startups who are trying to build in the Medicare brokerage space, this seems like a meaningful shift they will need to keep an eye on - between Humana building in house and Google’s announcement last week that it is going to help consumers better understand what their coverage options are, it seems like this space is evolving rapidly.
Later on in the presentation, Humana also discussed how the national telephonic brokerages were having a negative impact on CenterWell clinic utilization. As the national call centers have been driving a significant volume of patients, Humana has had a tough time engaging those patients to get them to come to a clinic. Thus, Humana has invested in building direct scheduling capabilities with those national call centers that enable those brokers to schedule first appointments for Humana members at the point of sale. It seems like a relatively minor strategic move but a really smart one for Humana as flywheel enhancing activity for the organization. Even if it is minor strategically, I’m sure it was a relatively large operational lift as it requires the ability to coordinate scheduling from the brokers to Humana’s owned clinics, which are discussed more in the next section.
In news that shouldn’t be a surprise at this point, Humana expects a significant contribution from its primary care business by 2030, estimating it will be generating $1 billion in contribution from its clinics at that point. As the slide below highlights, even by 2025, Humana cites that it has $900 million of opportunity if the clinics were performing as mature clinics. This will be dragged down by the fact that Humana will still be in the midst of its growth period in 2025, which will bring expected EBITDA down to $100 - $200 million.
Not surprisingly, the vast majority of Humana’s clinic revenue growth through 2025 will come from Humana’s Wholly-Owned clinics in 2025 as shown in the chart above. This growth in Wholly-Owned clinics appears to come largely from tuck-in acquisitions of providers, as we discuss below. It’s also worth noting how the growth in patients and staffed centers is significantly higher in Humana’s De Novos clinics, but there is little revenue growth associated with that in 2025. This steps largely from the mechanics of how these clinics are reported - Humana won’t report revenue until it acquires those clinics from the WCAS JV, and that will start happening in 2025. So you can imagine how that de novo clinic revenue and EBITDA number will expand substantially from 2026 - 2030 as Humana acquires more of those clinics from the WCAS JV (note: we’ll get into this more below, but Humana expects to acquire all of the clinics from the WCAS JV. It will acquire them 5 years after they are built, so in 2025 it will acquire the first 20 clinics built in 2020).
It’s also interesting to note that it looks like there is virtually no growth in the IPA business between now and 2025, which again seems like a focus element for Humana. Rather than trying to sell the platform business externally, it is focusing on building out the clinic approach via both de novo builds with WCAS and acquisition of IPA it has worked with historically.
Humana reminded us during the investor day that it is the largest senior clinic business in the country, and spent a good deal of time walking through the business strategy. They started off sharing how in 2018 they decided to focus on the scale and growth of these clinics. It’s interesting to note that in this preamble to Humana’s strategy in the space, there is no mention of Iora and Oak Street or Humana’s key role as the first primary customer for those organizations. It would be interesting to see how those relationships have evolved over time, as it certainly appears that Humana has decided it is in its financial best interest to compete against those models directly. If you’re on the Board of any MA primary care delivery startup, this has to be a concerning move by Humana, which must have been at the top of the list of potential acquirers for those organizations over time. Now, Humana likely is not interested at the moment given its upcoming capital outlay for the WCAS clinics. It’s a reminder that having the insurance arm and the ability to drive more utilization of the clinics via insurance is a key driver of success in these efforts, and that organizations like Humana (and other large insurers) have a huge leg up as a result.
Humana is organizing the CenterWell business into three segments:
The distinction between Wholly-Owned and De Novo gets a bit confusing because CenterWell clinics fall under both. The Conviva segment was created back in 2018 to house a group of existing underperforming clinics in what was really a turn-around of that business. In 2018, it was underperforming and was below breakeven for the organization. Since then, Humana cited an $80 million turnaround in the business due to improved center economics.
They discussed moving to a dyad leadership model in clinics, with both a physician and business leader as partners in managing the clinic. It is interesting to see one of the MA primary care delivery companies mentioning implementing a dyad model as a key driver of profitability, as it sounds like the exact same type of thing health systems have been doing for years. After all this promised change driven by MA primary care models, here we are implementing the same care delivery leadership structures as incumbent care delivery orgs have been doing forever. Maybe those incumbent orgs weren’t entirely wrong when they argued they could provide this care, too, if they could adopt the payment model successfully.
One of the key elements to the profitability of these clinics is consistently increasing the number of patients, and moving those patients into full risk contracts in order to move the clinic to profitability and generate the contribution margin that Humana is seeking.
However, the numbers don’t quite tell that story when you dig in. It appears they’re only at roughly 900 patients per Wholly-Owned clinic and only 400 patients per De Novo clinic on average. Humana shared they intend to have 3-4 teams per clinic, so in the Wholly-Owned clinics you’re talking about ~300 patients per provider on average.
As we look at the data Humana shared on the patient ramp in De Novo clinics in the chart below, it’s worth noting that it appears only one clinic has surpassed 1,000 patients, with a second clinic hovering right around 1,000 patients. And it’s equally confusing as those clinics are three full years open, which is when those clinics should be approaching profitability.
You can see in this chart two clear clusters for Humana’s year 1 and year 2 clinics, with most year 1 clinics centering <200 members and most year 2 clinics around 500 members.
One of the more interesting parts of the story over the next few years will be whether Humana can consistently move clinics along the “J-Curve” in order to generate the returns they’re outlining for investors here. If you look at the chart below, which highlights the J-Curve opportunity, it looks pretty compelling, right?
But if you look closely, what do you notice? Humana doesn’t actually have any meaningful data points in years 5 or 6, demonstrating it has consistently gotten these clinics to $3 million of contribution margin over time. It’s also a little confusing where the WCAS clinics do and don’t show up on this J-Curve. If you look at slide 36, highlighted in the section above, it looks like some clinics have been open and seeing patients for over 36 months. So why are there no data points for WCAS clinic performance in operating years 2 and 3?
Now, certainly there is a very logical story as to why Humana should be able to execute on this and continue along that trajectory. The slide below features a very similar J-Curve and walks through how Humana plans to move clinics toward profitability. If you look at the three focus areas at the bottom of the slide below, you can see Humana moves across three key phases:
This is worth paying attention to as phase three – clinical management and margin – is in many ways the crux of the model. It is the only phase that is actually about generating profits through improved clinical management of these patients, and where we should see cost savings as a result of that clinical management. Phase three is also what happens to occur in years 5 and 6 of the J-Curve, which as discussed above just so happens to be the unproven piece of this puzzle for Humana.
And here lies the major risk in Humana’s play. Humana seems to have shown it can execute reasonably well on phases one (acquiring patients) and two (move them to global cap contracts) of the J-Curve, even if we do have some questions above about how quickly the clinics really are ramping members. But these two phases seem straightforward and well within Humana’s control, while the third phase involves management of expenses outside the four walls of a CenterWell clinic. This third phase is a tremendously complex operational undertaking that will ultimately be the crux of the success of this space over the coming years. As organizations that have focused on growth, either organically or via acquisition, operational efficiency has been glossed over as part of the “next phase” of the plan. But we’re quickly entering that phase, and the rubber is going to meet the road here.
If profitability tops out and these clinics look more like the Conviva clinics of 2018, which as Humana mentioned during this call weren’t profitable at that time, it seems like Humana’s plan to acquire the WCAS JV clinics has the potential to be a huge albatross for the organization. If there’s a risk in the primary care strategy here, it appears to be this. It’ll be worth keeping an eye on as Humana’s entire primary care strategy seems reliant on them being able to execute on this third phase of the clinic model.
The first cohort of the WCAS clinics will be purchased in 2025, and then Humana intends to acquire these clinics beyond 2025. Humana intends to add 30 - 50 clinics per year through 2025, with 15 - 25 via acquisition. The remaining ~30 per year will be via WCAS, and won’t impact earnings in the near term. Humana can acquire clinics 5 years post-clinic build. It plans to acquire the first 20 clinics that were opened in 2020 to 2025. These clinics will begin contributing to Humana starting in 2025.
Humana shared some details on what the acquisitions of these clinics will look like, sharing that Humana expects to pay between $450 - $550 million in 2025 for the 20 clinics that were built in 2020. This equates to a payment of ~$25 million per clinic to WCAS. You can imagine that WCAS is set to do very well financially in this deal with a guaranteed exit for its clinics after 5 years. In total, Humana is anticipating it will spend $2.5 to $3.5 billion between 2026 to 2030 acquiring these clinics. Humana plans to fund these clinics with a mix of debt and cash on hand.
Around minute 53 of the session, Humana spent time detailing how inorganic growth is a key part of Humana’s growth strategy for primary care clinics. As they note, they expect to be acquiring 15 - 25 clinics a year via acquisition, and view the seamless integration of these clinics cited as a key competency for the organization moving forward. Humana discussed here that its existing IPA affiliate footprint provides a good opportunity for Humana to continue acquiring these clinics. It is not surprising to hear Humana thinking this way, as it mirrors the playbook of many other insurers these days - leverage the relationships you have with provider groups to identify acquisition targets and bring those in house.
This chart below in the investor presentation provides a helpful reminder of the fragmentation in the home health market. CenterWell is the leading provider in home health by market share, at only 6%. The top 20 home health providers make up only 31% of the market. Not surprisingly, Humana views this as a large opportunity for them to grow inorganically via acquisition.
The discussion in the home health space recently has focused on the upcoming proposed reduction in reimbursement, which Humana highlights as a key challenge upcoming for the home health space. But in general, Humana seems to think that reduction is only a short term challenge, and that it is well positioned in the space over the long term.
Humana is moving to integrate its VBC home health model into a full model where it combines all of its offerings into one service, as depicted on the left hand side of the slide below. One Home serves as the value-based convener for Humana, contracting with Humana as the health plan and coordinating across various Humana services for the member.
It’s interesting to note here how Humana calls itself out as the payor, versus the primary care space where it makes a point to note that the primary care clinics are payor agnostic. This seems to do with the payment rates in value-based home health. As noted during the analyst Q&A, Humana feels it is well positioned to perform well in value-based home health because it can accrue value via the insurance arm. For many of the standalone home health businesses, they have struggled in value-based care because the reimbursement levels are limited. So, by focusing on Humana as the payor for home health, it enables Humana to capture value via the insurance business.
They note during the session that they’ll still also be focused on growing the FFS home health business, similar to the other players in the space.
It’s interesting to see how Humana thinks about its suite of in-home services and how it thinks about potentially expanding those services into other areas. Humana calls out Heal, Dispatch, and Gentiva as potential partners for the organization, all of which it has invested in.
It’ll be interesting to watch how this strategy evolves for Humana, particularly in the context of the capital it is deploying into the WCAS joint venture and its limited capital to make other larger acquisitions. It should be noted that for Dispatch in particular, it was called out as a key capability that Optum leadership is looking to build as they build out their home care strategy in this article. As we get into below, it’s hard to imagine Humana beating out Optum for capability acquisitions like that in the near term given Humana’s capital allocation strategy and its tie up with WCAS.
One of the potentially more meaningful takeaways from the day for other players in the industry: Humana shared that its capital deployment strategy is going to limit its ability to make large acquisitions moving forward. You can see that between 2022 - 2025 its strategic M&A capital deployment bucket decreases from $7 billion to $2 billion, of which it’s already allocating ~$500 million to the WCAS JV in 2025. That means Humana has roughly $1.5 billion earmarked to deploy on strategic M&A opportunities over the next several years.
As you think about the capability expansions Humana might want to consider, it seems like that will shut them out of being a major player in the M&A market moving forward, which seems like a challenging spot to be in when compared to other big Medicare Advantage players like UHG. During the analyst Q&A, while Humana noted that the WCAS JV is likely their big M&A play for the foreseeable future, they will continue to seek to come up with creative partnerships moving forward in order to continue advancing Humana’s strategic priorities. So certainly there is still the desire to explore potential acquisitions, but it seems like they’ll be stuck exploring acquisitions of the bolt-on / tuck-in variety beyond WCAS.
As discussed above, during the home health section of the presentation, Humana highlighted its partnerships with Heal and Dispatch as examples of how it is driving innovation forward and expanding service offerings. But this also highlights the challenge that Humana might face moving forward - what does it do if Dispatch goes up for sale in the next several years, and UHG, CVS, or Amazon have the free cash to pay a premium for that asset that Humana isn’t able to afford? It seems like a tough spot to be in, particularly if the WCAS JV experiences any hiccups getting to the profitability Humana has planned for it.
Humana called out during the call that it is taking a conservative approach to ACO REACH / Direct Contracting while it learns more about the program. It’s interesting to see Humana take this position, particularly given the excitement we’re hearing from so many startups in the space.
Perhaps most noteworthy was Humana’s response to an analyst question about the topic, where Humana shared that a key part of their conservatism is due to different member demographics. As they note, individuals who are signing up for Original Medicare + Med Supp plans might have a different set of needs than Humana is used to in its Medicare Advantage clinics, and so it is proceeding cautiously while seeking to understand the needs of the population and how it is able to manage those needs.
It’s actually refreshing to hear a public company talking about having conservatism while it seeks to meet the needs of a population, rather than jumping straight to the profitability expectations they have for the segment.
But it’s worth noting that Humana either has massive upside built into its plan, or many of the newly-public companies pumping up DCE / ACO REACH might be a bit over their skis in doing so.
Historically, Humana seemed a bit different from UHG and other insurers going after an owned clinic strategy in that they appeared to be intent on supporting an ecosystem of providers. This was evident in their strategy of supporting MA care delivery startups, serving as the initial customer and key investor in multiple MA startups, notably including Iora and Oak Street. But it wasn’t just startups Humana was seeking to work with, as its 2021 Value Based Care Progress report featured local providers including Mankato Clinic and Paxton Medical. Humana highlighted these efforts across various provider organizations during its 2021 investor day, sharing the following:
This diversified approach, we believe, delivers greater value in more markets in a capital-efficient way while also creating supply chain protection and a platform for innovation in integrated care. This allows us to strengthen our engagement with the provider community broadly as well. As we are not simply bringing in new, we're also working with providers that exist in the community to help them move down the value-based continuum. Our variety of investment models in the multiple ways we have to engage well-performing groups is a different approach, perhaps than some of our competitors. But we believe if we're going to change health care for the better, we need a multifaceted approach. We need to invest in strong regional players, such as Summit in Knoxville, Tennessee, and the Vancouver Clinic in Vancouver, Washington. We need to be involved with and invest in strong national primary care platforms such as we have been in Oak Street and Iora and, of course, continue to expand and grow our owned CenterWell and Conviva provider-owned assets.
That quote highlights pretty clearly the difference in strategy between Humana’s 2021 and 2022 earnings call. While Humana mentions at times that it’s not giving up on IPAs, it comes through pretty loudly that supporting them via a platform is not a key part of Humana’s growth flywheel. Instead, Humana sees value from these groups primarily via acquisition - the local groups, at least, as those fit more into the category of tuck-in acquisitions described above.
If you go back to Humana’s investor day in 2021 (here’s the transcript), the technology platform was at the center of the story for the day. Check out this statement as an example from Humana’s opening remarks in 2021:
Our platform that we will be talking about today is going to include contemporary technology. technology that is facilitating the integration, scalability, speed and flexibility. It's a technology that is not about transactional system. It's about an enterprise platform, a platform that offers 360 view of your customer, data analytics that allow you to be much more proactive and a digital experience that is simplified.
In contrast, at this year’s investor day the technology layer played a much more subdued role in the background, with Humana discussing it only to the extent that it is enabling some of its key strategies. Note the key shift in that language - technology has moved from being a key strategy in and of itself to being a background element supporting other strategies. For instance, they discussed how improved analytics is helping support marketing in attracting new members. They also briefly discussed how primary care clinics are using Humana’s platform to drive care decisions, and then also included the slide below on the benefits of interoperability - with Humana expecting to see $1 billion in enterprise value created by interoperability between 2021 - 2025. There isn’t much detail on what exactly that means, though.
All in all, it seems like an organization that has struggled on its journey through transforming to digital. As mentioned above, efforts like Author, Humana’s new digital-first health plan experience, went from being featured as a key example of Humana’s strategic transformation to a digital organization in 2021 to being non-existent in 2022 as Humana talks about its strategy moving forward.
It highlights how hard this change can be to navigate for large organizations like Humana. Even if efforts are well-intentioned, and generally the right idea, they require the organizational design to support them over time such that they don’t fizzle out, particularly when the organization gets squeezed by broader market conditions. That appears to be exactly what is happening here, as Humana has chosen to focus on the key elements of the business, which relegates all those expansive initiatives to below the line. From our perspective, this shift isn’t necessarily a bad thing as Humana gets more disciplined focusing around how it provides value to patients / members via its care delivery offerings that allow it to perform well in insurance products. So many organizations have gotten enamored with the idea of digital transformation without having a clear line of sight to the end game, which is providing better care to patients. Hopefully, this focus allows Humana to figure out how to leverage technology to that end.
Humana chose to focus this investor day telling the story of its core MA business and how its primary care and home health efforts feed into the overall flywheel the organization is mentioning. Gone from last year’s investor day is the more expansive vision of a digitally transformed organization becoming a platform for care. There’s a lot of reason for optimism around this narrative as Humana rightfully mentions - given the tailwinds for the MA space as a whole and Humana’s strong position on the services side of the business, it is well positioned to execute on a strategy that has lots of room for growth. Humana appears to be investing heavily into benefits and reorienting its sales strategy to emphasize internal sales channels, which has the opportunity to pay major dividends in support of Humana's flywheel.
The key question of course will be execution - last year Humana’s investor day was all about how the core business is strong and they were setting their sights on platform expansion, inadvertently highlighting the execution challenges that have cropped up. Efforts like Author, Humana’s virtual plan design, which were mentioned repeatedly last year, were nowhere to be found this year. So while the tailwinds are all there and generally make for a really strong narrative, moving hundreds of primary care clinics to each generate $3 million of contribution margin is one of many large tasks Humana has in front of it that will require organizational focus and discipline, which likely explains the tone of this investor day.
Humana is placing a lot of emphasis on continued growth of its MA business, its WCAS JV in primary care, and its ability to drive growth in the home health business. Those three businesses certainly appear to have a nice flywheel effect that should generate long term growth for Humana. But in many ways it feels like Humana’s cards are down on the table now for the next several years. In particular, its plans to spend $2.5 billion - $3 billion by 2030 on acquiring the clinics within the WCAS JV will be key to keep an eye on, as it expects to generate $1 billion of contribution margin from those clinics by 2030. It will be fun to revisit this over the coming years and see where they’re at on this journey.