Humana (HUM) Raises FY16 Guidance; Comments on Medicare Star Quality Ratings

Humana Inc. (NYSE: HUM) commented on updated Star quality ratings for the 2018 plan year published today by the Centers for Medicare and Medicaid Services (CMS), showing that the percentage of the company’s July 31, 2016 membership in 4-Star plans or higher declined to approximately 37 percent, or 1.17 million members, from approximately 78 percent, or 2.15 million members, in the prior year. The company noted that the decline in membership in 4-Star rated plans does not take into account certain operational actions the company intends to take over the coming quarters to mitigate any potential negative impact of these published ratings on Star bonus revenues for 2018.

The company believes that the decline is primarily attributable to the impact of lower scores for certain Stars measures as a result of the company’s recently-closed comprehensive program audit by CMS. The Civil Monetary Penalty imposed by CMS on December 29, 2015 resulted in an automatic downgrade to the Beneficiary Access and Plan Performance (BAPP) Star measure, and certain other issues associated with the timeliness of member service and appeal measurements noted in the audit resulted in downgrades to two additional Star measures. In addition, higher threshold levels for certain individual Star measures as compared to the previous year reduced the company’s ratings on these measures. Thresholds for Star measures are calculated across the sector, without regard to weighted average membership of each plan. Together, these factors more than offset the company’s improved Star rating performance in certain quality measures such as Healthcare Effectiveness Data and Information Set (HEDIS).

Humana believes that its Star ratings for the 2018 bonus year do not accurately reflect the company’s actual performance under the applicable Star measures. Consequently, the company intends to file for reconsideration of certain of those ratings under the appropriate administrative process.

Humana expects the impact of CMS’ comprehensive program audit on the company’s Star ratings to be limited to the 2018 bonus year. On September 8, 2016, CMS notified Humana that, based upon the results of an independent validation audit demonstrating that the company had substantially remediated the issues identified in the audit, CMS had formally closed that audit.

Humana expects to evaluate its contract structures for rationalization to mitigate the negative impact on Star bonus revenues for 2018. Additionally, the company intends to take certain measures to address the challenges described above, including:

• Taking steps to improve the company’s performance for future CMS audits
• Further leveraging the company’s predictive analytics capabilities to identify and execute on Stars improvement opportunities
• Enhancing provider partnerships to improve education and focus on patient experience data
• Continuing investment in the company’s integrated care delivery model and its Stars operational processes and procedures, encompassing clinical engagement, provider engagement and consumer engagement

Star results for the 2018 bonus year are also not expected to materially impact the company’s Medicare membership growth for 2017.

• The member value proposition of the company’s 2017 benefit designs is strong with a continued focus on pretax margins
• The company believes Star ratings do not reflect the value proposition Humana’s PPO plans provide Medicare beneficiaries (retention rates in the company’s Medicare PPO plans approximate 90 percent), notwithstanding certain Stars program challenges associated with the company’s large PPO plans with geographically diverse membership and provider networks

Additionally, Humana believes:

• The most recent CMS Star ratings do not fully reflect the company’s focus on quality care for its members. The company’s HEDIS measures, demonstrating the achievement of clinical outcomes, are at record-high results for the company with an average Star score of 4.16.
• The demonstrated success of Humana’s integrated care delivery model is indicative of the company’s dedication to quality outcomes for its members.

Financial Guidance Update

The company is in the process of closing its books for the quarter ended September 30, 2016 (3Q16). Based on preliminary results, Humana now anticipates diluted earnings per common share (EPS) for the year ending December 31, 2016 (FY16) to be approximately $8.80 on a Generally Accepted Accounting Principles (GAAP) basis and approximately $9.50 on an Adjusted basis, or $0.25 per diluted common share above its previous guidance range.

(Street sees FY EPS of $9.30)

The increase in FY16 EPS guidance was primarily due to better-than-previously-projected performance in the company’s Medicare Advantage business (group and individual) and its Healthcare Services segment as well as in-line performance in the company’s individual commercial business.

The company also increased its EPS guidance for 3Q16 by approximately $0.30 per share to approximately $3.07 on a GAAP basis and approximately $3.15 on an Adjusted basis. A reconciliation from GAAP to Adjusted measures for the company’s updated guidance follows:

The company has included financial measures in this press release that are not in accordance with GAAP. Management believes that these measures, when presented in conjunction with the comparable GAAP measures, are useful to both management and its investors in analyzing the company’s ongoing business and operating performance. Consequently, management uses these non-GAAP financial measures as indicators of the company’s business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

Footnotes

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