Given COVID Surge, Humana Deviates From Peers With Lower Guidance

  • Like the other publicly traded insurers that reported third-quarter 2021 earnings late last month, select Medicare Advantage insurers in early November demonstrated strong performances during a quarter that was tainted by a rise in COVID-related costs. Unlike its more balanced peers, however, MA-focused Humana Inc. took a decidedly conservative approach to projecting earnings for the full year given continued COVID uncertainty.

    For Cigna Corp., total medical costs came in higher than expected with an overall medical loss ratio (MLR) of 84.4%, while there were sequential improvements in both the commercial and MA lines of business, the company reported on Nov. 4. During a conference call to discuss recent quarterly earnings, Cigna Chief Financial Officer Brian Evanko said that medical costs were “driven largely by the impact of the Delta variant in our U.S. commercial business and increased medical costs for special enrollment period customers in our U.S. individual business,” per a transcript from The Motley Fool. He reminded analysts that approximately 80% of Cigna’s revenues come from service-based businesses that are not significantly impacted by medical cost fluctuations.

    Adjusted revenue for the quarter of $44.3 billion and adjusted earnings per share (EPS) of $5.73 exceeded the company’s expectations, reflecting growth across all business segments, according to Evanko. Cigna this year has added 368,000 members, driven by “net growth in select and new markets within U.S. commercial and continued organic growth in Medicare Advantage and individual within U.S. government,” he added. The company, which does not break out MA membership numbers in its earnings reports, said the government segment served 1.5 million members as of Sept. 30, compared with 1.4 million a year ago.

    Recognizing the “ongoing fluidity of the broader environment,” Evanko explained that the company raised its adjusted EPS expectations by about 15 cents to at least $20.35. That reflects growth of at least 10% from 2020, consistent with Cigna’s long-term EPS target growth range of 10% to 13%. Cigna also projected a 2021 MLR range of 84.0% to 85.0%.

    In earnings posted Nov. 3, Humana beat Wall Street’s estimated $4.66 per share with an adjusted EPS of $4.83, compared with $3.08 recorded in the third quarter of 2020. Its MLR also came in slightly better than consensus at 87.1%, compared with 82.6% in the year-ago quarter.

    Humana lowered its adjusted full-year EPS guidance to approximately $20.50 (compared with a previous estimate of $21.25 to $21.75), representing expected adjusted EPS growth at the lower end of its long-term target, explained Bruce Broussard, president and CEO, during a Nov. 3 earnings call. That $1 decrease in anticipated earnings is largely the result of COVID and the company’s expectation that overall MA utilization (including COVID costs) will run closer to “baseline” than it formerly predicted.

    The company in July said its 2021 guidance assumed that non-COVID MA utilization would be about 2.5% below baseline in the second half of the year, with minimal COVID testing and treatment costs for the same period. But after the September surge in COVID cases due to the Delta variant, Humana said it now expects non-COVID MA utilization to run 5.5% below baseline in the second half of the year, “while being partially offset by 3 percent of COVID costs.”

    “Our revised guidance does not assume that the higher levels of favorable current period development seen in the third quarter will continue. Taken together, our updated full year 2021 adjusted EPS guidance takes a more conservative posture going into the final months of 2021, and it’s important to note, as we’ve consistently shared throughout the year, the midpoint of our original guidance range of $21.50 remains the correct baseline for 2022 given our approach to pricing,” stated Chief Financial Officer Susan Diamond, according to a transcript of the call from The Motley Fool.

    Is 4Q Earnings Concern Just ‘Noise’?

    “Admittedly the numbers are difficult to reconcile given [the] high percentage of vaccinations among the MA population, and implied 4Q assumptions will be a source of questions,” observed Citi analyst Ralph Giacobbe in a Nov. 3 note to investors. “On the positive side the company continues to point to $21.50 as the right baseline to consider growing off of for 2022, potentially making 4Q/2021 guidance more noise than anything.”

    Regarding membership growth, Humana expects to add 450,000 individual MA members for the year, which is the midpoint of its previous guidance of up to 425,000 to 475,000 members, representing “above market growth” with an increase of 11.4% from 2020, added Diamond. Humana reported serving nearly 4.4 million individual MA members as of Sept. 30.

    Looking ahead to 2022, the insurer is projecting MA enrollment growth of 325,000 to 375,000, representing a year-over-year increase of 8% and reflecting Humana’s “prudent approach” to MA bids for 2022 and “the competitive nature of the market,” Diamond said. Broussard noted that Humana has had outsized membership growth of 40% in its Dual Eligible Special Needs Plans, which add enrollees throughout the year and will be available to nearly 65% of the dual eligible population next year.

    In pricing its products for 2022, Humana prioritized “long-term benefit stability” for members, said Broussard. “While it is early in the selling season, we believe we struck the right balance and are competitively positioned for our continued growth in Medicare Advantage,” he told analysts. “Our brand promise to deliver human care resonates with seniors given our comprehensive set of offerings and focus on providing a patient-centric experience based on their specific needs.”

    Aetna/CVS Health Raises 2021 Outlook

    Finally, CVS Health Corp. on Nov. 3 reported consolidated revenue growth of 10% to $73.8 billion, while revenue in its Health Care Benefits segment reached nearly $20.5 billion, up 9.5% from the prior-year quarter. Adjusted operating income for the segment, which houses the Aetna insurance business, rose 2.4% from the prior year driven in part by strong performance in government services, despite higher costs related to COVID-19, net of deferred care, primarily in Aetna’s commercial book of business, explained President and CEO Karen Lynch during a Nov. 3 earnings call.

    The segment’s MLR of 85.8% — up from 84.0% in the third quarter of 2020 — exceeded the company’s expectations and was also driven by COVID-related costs, primarily in the commercial business. Year-to-date MA membership has climbed 9.2%, and the company is expecting double-digit growth in individual MA, with strong momentum in dual eligibles, said Lynch. The company reported serving 2.95 million MA enrollees as of Sept. 30, compared with 2.69 million a year ago.

    “With the surge in nationwide COVID cases emanating from the Delta variant, we experienced higher-than-expected COVID-related medical costs in August and September,” CFO Shawn Guertin explained during the call. COVID inpatient admissions in August and September were in line with peak levels seen in January 2021, and COVID testing costs also approached January 2021 levels, representing approximately 35% of gross COVID costs in the quarter, he estimated. And while non-COVID deferred care was better than anticipated, it wasn’t enough to offset the higher COVID costs on the commercial side. In Aetna’s government business, however, the increase in COVID treatment and testing costs was “far less pronounced” but “fully offset by better-than-expected deferred care,” he added.

    For the full year, Aetna is projecting MLR of 84.4% to 85.6%, an increase of 30 basis points from prior guidance, on the assumption that higher-than-expected commercial COVID costs will continue. Nevertheless, CVS Health lifted its EPS guidance for the year by 20 cents to between $7.90 and $8.00.

    Contact Giacobbe at ralph.giacobbe@investmentresearch.citi.com.

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  • Lauren Flynn Kelly

    Lauren has been covering health business issues, including drug benefits and specialty pharmacy, for more than a decade. She served as editor of Drug Benefit News (the predecessor to Radar on Drug Benefits) from 2004 to 2005 and again from 2011 to 2016, and now manages Radar on Medicare Advantage. Lauren graduated from Vassar College with a B.A. in English.

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