Operator: Good day and thank you for standing by. Welcome to the Humana Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Lisa Stoner, Vice President, Investor Relations. Please go ahead.

Lisa Stoner: Thank you and good morning. I hope everyone had a chance to review our press release and prepared remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, Humana’s President and Chief Executive Officer; followed by a Q&A session, where Jim will be joined by Susan Diamond, Humana’s Chief Financial Officer; and George Renaudin, President of Humana's Insurance segment. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risk and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K or other filings with the Securities and Exchange Commission and our third quarter 2024 earnings press release as they relate to forward-looking statements, along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements in future filings or communications regarding our business or results. Today’s press release, our historical financial news releases, and our filings with the SEC are also available on our Investor Relations' site. Call participants should note that today’s discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP. Management’s explanation for the use of these non-GAAP measures and reconciliations of GAAP to non-GAAP financial measures are included in today’s press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, this call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana’s website, humana.com, later today. With that, I’ll turn the call over to Jim Rechtin.

James Rechtin: Thanks Lisa and good morning everyone. Thank you for joining us. In the last quarter, I outlined four basic drivers of our business that we need to be able to deliver against over and over again. Those are; first, providing a Medicare product experience that delivers against consumer needs and is priced with discipline. Second, it is operating with clinical excellence. This really is the foundation of industry-leading margins. It is -- third, managing a highly efficient back office and its fourth, deploying growth capital in a way that complements our Medicare Advantage core business, but really focused around CenterWell and Medicaid. I'd like to review the quarter's results with a little bit of a lens towards those four drivers. Before I do that, let me just start with a few headlines. First of all, as we noted, we exceeded expectations for the for the quarter. We're also confident that we will achieve at least $16 of EPS full year and we are comfortable with where 2024 EPS consensus sits today. Exactly where we're going to land is largely dependent on a number of investment decisions in AEP and in STARS that we continue to evaluate. We also feel good that we priced our MA product margin expansion in 2025. However, similar to our strategy for the rest of 2024, we will be balancing near-term earnings progression with investment in the business. And when we say investment in the business, certainly, that is STARS, but it's also looking at investment opportunities in growth, admin cost efficiency and medical cost management. We understand that investors would like more clarity on the multiyear outlook of the business and to address this, we are targeting an Investor Day in May of 2025. So let me turn to the four basic drivers for a moment. So right now, if I start with product and experience that we are delivering through our Medicare product, we're feeling pretty good about what we're delivering. And let me point out a couple of things our individual MA membership growth continues to outpace our expectations for the year. We anticipate at this point, full year growth -- year-over-year growth of around 5%. The year started slowly in AP last autumn, but we've made pretty significant gains over the course of 2024. When we look at it, we believe that this is a reflection of disciplined product pricing that has allowed us to continue to emphasize growth at a time when others in the market have pulled back. And also attribute some of the growth to incremental marketing investments that we've made in our internal sales channel. This is a channel that we believe is increasingly important for us in that and those investments have been paying off. We continue to deliver best-in-class service. Recently, we were ranked the number one health insurer for customer experience by Forrester. This is now four years in a row being right number one by Forrester. And finally, while it's early in this year's AEP cycle from what we can tell, sales appear to be generally on track with expectations. Turning to the second driver, clinical excellence let me start with STARS. We've acknowledged now that we've got work to do to get back to the results that we expect of ourselves and that we expect for our members and our patients and our investors. We've been moving quickly to make investments and to align incentives in our provider and pharmacy networks to close more gaps in care. We've also redirected care management and call center capacity to increase member outreach and that is also related to gaps in care. Just last week, those efforts resulted in about 5,000 incremental primary care appointments. And I learned last night that we've got about another 3,000 to start this week, 3,000 primary care appointments scheduled. We're also making technology investments. This includes improvements to our plan finder capability. And really the way I'd characterize it, we're on a sprint to take ground to impact 2027. And I simultaneously feel good about the team's focus and the effort and the impact that we're making and frankly, frustrated that we have allowed ourselves a shorter runway than we would like to make up that ground. Clinical excellence also translates to lower cost when we deliver better care. And so in Q3, medical costs are largely in line with our expectations. There's obviously some give and take across categories. The environment is still dynamic. And we will be careful with our expectations around medical cost trend. However, right now, are seeing some success in a number of our cost control efforts. The example I'll give is -- we've been extending value-based care contracts beyond primary care into areas like kidney disease and oncology management. And we're seeing good results from that effort. Shifting to the third driver, highly efficient back office, we do continue to make progress in this area. We're expecting a 30 basis point decrease in our adjusted operating cost ratio for the year. And just to give one example of the type of work that is helping to drive this, we're implementing more and more use cases for AI. We recently launched a generative AI solution that allows our care management team to spend about half as much time on post-call documentation. They are still doing all the same human oversight for any clinical decision-making, but they're spending less time on documentation. That brings us to our final driver, deploying growth capital to drive efficient growth. I would argue that we're quietly building the leading senior-oriented primary care organization in the nation. Our primary care clinics are hitting their clinical and their financial targets. They're on track to mitigate V28. We recently released a study in collaboration with a leading researcher and professor of Harvard that demonstrates both the clinical and economic value of the clinics V28. It found that our members have a better experience when they are part of a senior-focused primary care clinic. We expect to add another roughly 40 clinics this year often, this is through an acquisition of underperforming clinics that we've demonstrated we can pretty rapidly turn around, and our patient growth continues to outpace expectations. I'm encouraged by our recent performance trajectory and growth, absent our STARS performance in BY26. And at the same time, recognize that these continue to be dynamic times for the industry, and I believe it's critical that we continue to strengthen the organization by making investments to drive long-term shareholder value. This is obviously a balance with how we think about short-term earnings progression. We look forward to providing formal 2021 guidance on our fourth quarter call, and we will also look forward to providing a more fulsome update on our strategic initiatives and their expected impact at Investor Day, which again, we're targeting in May of 2025. Finally, I'd just say, look, our conviction remains high regarding the positive outlook for MA and value-based care. And with that, we will turn to Q&A.

Operator: [Operator Instructions] Our first question comes from Justin Lake with Wolfe Research.

Justin Lake: Thanks. Good morning. I wanted to ask about your comments on 2025 and specifically your comments on investment spending. Prior to this call, you talked to a margin improvement in MA next year. And combined with top-line growth, I think the expectation in the market was for $2 to $4 of improved earnings year-over-year -- given that you're talking about now more flattish, that would seem to put that investment income spending or investment spending, I should say, at $500 million, give or take. Is that a reasonable ballpark? Number one. Number two, can you give us some more color in terms of what you're spending that on, given you had just caught admin spending pretty dramatically over the last two years to three years? Is there stuff that you overcut, you have to bring back? And then how should we think about that rolling forward? Is there going to be a return there where it kind of nets to zero because you're going to get improved STARS or what have you. And over what time frame does that happen? Thanks.

James Rechtin: So, Justin, thank you for our first four questions. This is Jim, I'll start, and then I'll let Susan jump in. So, let me just start with 2025. And I recognize that we're not going to be able to answer everything people would like. Obviously, we're going to give guidance here in a few months. But I'm going to try to be as clear as I can in kind of what we are saying and what we aren't saying about 2025 right now. The first thing I would just reemphasize is we told everybody we felt good about our bid, meaning both our pricing and our plan exits. And what we're essentially saying is, hey, we're reaffirming that even after you incorporate the things that we've learned since the bid season, we still feel good about where we're at with our product. The result of that is that, look, at a minimum, we see a 2024 performance floor -- we see 2024 performance as a floor as we head into 2025. So in other words, we have room for EPS progression. What we're also saying is we do need to see some things unfold over the next few months to establish how much room is in there. And so whether you think about AEP results, both the final member count and member mix as well as thinking about continued monitoring of medical cost trend, the better visibility that we have into those things, the more confident and precise we can be in where we think we'll be next year. We also are telling you, in fact, that just as importantly, we're going to be approaching 2025 with a similar posture to how we've approached the last quarter or two where we can make good investments to put ourselves on better footing in 2027, we're going to do that. And we're going to prioritize leaning into that long-term earnings potential over near-term EPS progression where we have good investments to make, but we're going to do that with a floor. I would love to tell you that we've got precise numbers on all of those choices and decisions. We don't. Some of that is still in flux. And in some cases, we're actually making smaller investments. And as we see those generate returns, we're doubling down on. And so we don't have a precise number today. What we're making sure is that we're creating room to make the right decisions for 2027 and the long term, but we're telling you we can do that while establishing a floor. So, again, I recognize everybody would like more clarity. I really do. And I want to reiterate that we're kind of trying to balance or focus on two things. Given the dynamic in the market, we want to be appropriately prudent and make sure that we're doing the right things to establish targets, hit those targets, build credibility over time, and we are trying to establish the best way to navigate through the next 24 months. I mean that's really the two things that we're trying to balance here as we try to give -- set expectations the best we can. Susan, what would you add to that?

Susan Diamond: Yes. No, I think that says it well. The only thing I might add is, Justin, that as we've begun to talk about some of the investments that we believe are needed, both for starts, but also to improve core operating performance given some of the benchmarking work that we've done, we got some questions and concern, well, gosh, could the level of investments cause you to go backwards year-over-year. So, I think that was one of the reasons that we wanted to introduce the floor for 2025 just to make sure that was -- so we're prepared to give formal guidance that we made it clear that we felt like with the pricing action we did take in the 2025 bids that did give us the room and flexibility to make these needed investments while not creating a situation where we might go backwards.

Operator: Our next question comes from the line of Ann Hynes with Mizuho.

Ann Hynes: Hi, good morning. So your MLR results imply trends were relatively stable sequentially. Is that a good characterization? And if so, what does this mean for your 2025 bids. Are they tracking in line or better than your expectations? Thanks.

Susan Diamond: Yes, Ann. So as we saw the results developed for the third quarter, as we said in our posting commentary, current year claims did develop as expected in total for the MA business. There were some geography differences in terms of seeing some improvement on the inpatient side seems like deterioration of the non-inpatient but in total, in line with expected in terms of claims development through the third quarter. As Jim mentioned, as we continue to evaluate emerging trends versus what we expected at the time of bids, we continue to feel confident in how we've approached the trend assumptions within our pricing. Again, some geography differences both across claims and risk adjustment as we've talked to you guys in prior quarters, but the aggregate, continue to continue to feel good about the MLR that we would have been targeting inherently within our bid. And as we also mentioned, at least based on the early information we have access to feel like our assumptions around membership for next year, meaning the loss of a few hundred thousand members continues to feel like a reasonable question.

Operator: Our next question comes from the line of Andrew Mok with Barclays.

Andrew Mok: Hi. I wanted to follow up on the 2027 margin target and how you're thinking about the STARS recovery in the context of that 3% target? One is that a realistic goal with the elevated investment spend and where your Star scores sit today? And is there a minimum bonus level that you have in mind to deliver on that target? Thanks..

James Rechtin: So, I want to make sure I captured the question. So, let me just play this back real quick. I think what you said is focus on 2027 is the 3% margin target, a realistic target at this point. And then what does that assume around STARS progression basically, right?

Andrew Mok: Is there a minimum level you need to recover in order deliver on that target?

James Rechtin: Yes. So look, I'm going to talk a little bit out of both sides of my mouth on this 3% is realistic, and there is risk to that number. And so we just want to be super clear. We're going after it. We're doing everything we possibly can to get to that point. And in light of STARS, yes, there is risk whether we will get all the way the way there in 2027 or not. We have to make meaningful STARS progression is that I would describe it. We're not putting a specific number on it. There are too many puts and takes across different variables in the business to try to put a specific number on it. But yes, you're going to have to make some meaningful progression in STARS to get there. Susan, what would you add?

Susan Diamond: Yes, I agree that. And then the other thing, Andrew, that obviously, the rate environment, the competitive environment, those are all things that, as we say every year, will also be important -- as you know, 2027 is the year where we'll have 2028 behind us, hopefully, IRA will then, at that point, be very good guy versus a headwind. And so there are -- there is an environment, hopefully, where we do have the room to take some additional margin, which we've talked about, but those will be variables that we'll have to consider. And then I would just say some of these investments that we've been discussing now should pay off in terms of returns over that time frame that also support that continued margin recovery.

Operator: Our next question comes from the line of Ben Hendrix with RBC Capital Markets.

Ben Hendrix: Thank you very much. You flagged higher specialty drug costs within the non-inpatient utilization for the quarter. One of your peers noted a pull forward of some specialty drug utilization ahead of Part D changes next year. Is that something you would expect would be priced for as we head into 2025? Or is there a component there that we should assume as a headwind for MCR modeling? Thanks.

Susan Diamond: Dan, yes, as you said, we did see some higher oncology costs, in particular, I did call that out. I think one was seeing in a conference I was at in early September. So we have been seeing it for a bit. We would say that our view is that it is not really largely attributable to IRA changes, they were relatively minimal in 2024 in terms of sort of member out-of-pocket exposure. And so what we have seen so far is that we believe it's mostly attributable to either new treatments that have come to market or label expansions around existing treatments. And what we're seeing is, in some cases, these treatments are being added to existing therapies, resulting in net higher unit costs than we've seen historically and higher than you had anticipated as we evaluate the pipeline. We do anticipate that we will see some further uptick in trends next year just given the IRA changes and the introduction of the much lower maximum pocket -- and so we have built in induced utilization assumptions into our 2025 thinking as well as just, again, continued sort of expectations around the emergence and uptake of some new therapies. So, we have considered that. Obviously, with IRA, there is more exposure on the plan side in 2025, which is why we said you can expect that we'll start -- we'll take a more thoughtful approach in terms of our early guidance around some of these things that we can see how the trends emerge relative to our expectations in IRA.

Operator: Our next question comes from Sarah James with Cantor Fitzgerald.

Sarah James: Thank you. I was wondering if Star stay where they are, how much crosswalk is possible in 2026, given how you think about geographic overlap and planned ratings. And then if you could clarify on your 2025 guidance, what MA margin is implied in that? Thanks.

Susan Diamond: Yes. So, George, do you want to take a third question then I can take the MA margin question?

George Renaudin: Sure. thanks for the question, Sarah. So as we think about the cross possibility, we'll be evaluating that in line with lots of other things. So we certainly want to derisk the amount of members that we have concentrated in certain contracts, and we'll be thinking through that as we go into the next bid cycle. And one of the considerations will, of course, be how much progress we're making in the current STARS work that we're doing as well as thinking about the opportunities that we have for Cross with regard to our group contracts. So, there are a number of considerations we'll be taking into hand when we do that as well as what our 2025 membership looks like in membership mix and the progress that we're seeing in medical cost management, some other items. So it is certainly one of the levers we'll be exploring, but I don't think that it is the sole by any means. There are a number of issues that we'll be thinking about as we go through thinking about our STARS mitigation efforts as we go into next year.

Susan Diamond: Yes. And then, Sarah, as far as 2025 MA margins, obviously, we haven't given any specific guidance yet. Jim provided some commentary. So I'll just remind you, as we previously have talked about our 2025 margin expectations on the MA side, we acknowledge that the because of the pressures that were absorbing within 2025, including the higher trend than emerge after filing of our 2024 bid, V28, IRA, et cetera. And given the TVC threshold, there was limited ability to take true margin expansion within the pricing because the PBC would offset all of those headwinds I just mentioned. So, we had mentioned the majority of the margin progression we would be achieving would largely come from the plan exits where we had exited plans that were historically performing unprofitably, and we didn't feel like we had a reasonable pathway to getting them to profitable or contributing performance levels. That continues to be the case. Again, all of the emerging trends that we've seen, we continue to still feel good about those pricing decisions and how we thought about trend in the aggregate. As Jim mentioned this morning, though, we are now contemplating those some additional investments. The pricing action we took allowed us some flexibility to do that. And so as we've established the notion of at least the floor, obviously, if we end up close to flat, the margin be relatively comparable. But ultimately, we'll have to evaluate again how membership growth comes in, what level of investments we choose to make and a variety of other things as we set guidance. And certainly, when we do can talk more about the inherent margin within our guide.

Operator: Our next question comes from Joshua Raskin with Nephron Research.

Joshua Raskin: Hi. Thanks. Good morning. Do you have a view on MA market growth in total for 2025? And then where do you think the lives that you're losing from those exits are going? Is that that sort of one or two larger plans, do you think smaller plans or are people going -- seniors going back to fee-for-service. And I think you just answered this, Susan, but we should assume that those loss lives have lower margin. But does mean they had lower benefit levels, less rebates? And then lastly, how are you thinking about retention outside of the market exits?

George Renaudin: Hi, Josh, it's George Renaudin I'll take the question. So on the overall industry growth, we are thinking 5% to 5.5% in this coming year versus the roughly 6% the industry saw this year and our 5% performance that we are expecting as we finish out the year. So we feel pretty good about where that growth is going to come from. And if we think about our competitive positioning, it is very much in line with our thinking at the time of bids [ph]. We continue to anticipate Susan said, a few 1,000 members in 2025 down so we feel pretty good about that. From a standpoint of retention, there's a lot of work that we're doing to focus on that. We're helping our brokers. As you think about the county and plan exits, there's, of course, going to be a lot of shopping. And so we have put in place lots of tools to help those -- the sales teams, both our internal sales and outside brokers work through the shopping experience to make sure it's a better consumer experience for our customers. And so we put in place things that allow them more real-time access to benefits help them with a best fit tool so they can choose a plan that fits their needs better. And we have also put in place with our internal team capabilities, including AI to help them with helping those members make better decisions into the needs of -- I would just say that on another item in retention that we're seeing very positive results from and I think in the opening comments Jim made a comment about this, and that's that we are getting a better focus into our digital sales and our new digital sales tool also is allowing us to handle members who are trying to find out as we did do some of those exits because keep in mind, 98% of our members in those exit areas have another planned choice so the digital tool is helping them make those choices easily, and we're seeing a very significant increase in the amount of digital sales were happening as a result. All that will lead to increased retention.

James Rechtin: And then, Josh, one thing I'd add to George's comments on growth. One thing to keep in mind is we do believe that 25% growth for the industry will still have some impact from the ongoing redetermination process on the MA side. We think it's probably worth about 80 basis points, where given the gaming period, we will continue to see some attrition in the duals in particular as they lose eligibility. In terms of your question about how to think about the contribution of loss lives, I would say it depends. As we've always said, for the members impacted by plant exit, those are unprofitable. So to the degree, we don't retain them, that is positive to the degree, we do retain them, as George mentioned, because most of them have other plan options that is incrementally positive because those planes that are available would be positively contributing. Across the rest of the book, if you remember, we did work very hard and intentionally to make sure we try to protect our higher-performing plans as we did our 2025 bids, so it would have taken less benefit action in those higher-performing plans and where you see larger cuts is going to be those that were below our targeted margins. So our hope would be that within the attrition that we see, it is more concentrated within the lower-performing plans. But, obviously, we'll have to see how the AP results come out. as you know, it takes longer to see the attrition information because a benefit are you have to enroll in and that are playing same process and give it cut. So we have no real visibility into that just yet, but something we'll be watching closely.

Operator: Our next question comes from Stephen Baxter with Wells Fargo.

Stephen Baxter: Hi. Thanks. You mentioned that the inpatient unit cost of Medicare came in better than expected. Can you just talk a little bit about what you saw with two midnight rule in the quarter? And then just maybe more broadly, how you think about the ability of the 2025 commentary to tolerate a higher level of inpatient unit costs in 2025? Thank you.

Susan Diamond: Hi Stephen, yes. So, as you might recall, we've been talking about seeing lower in patient unit costs really over the course of the year. And I'd say the team in retrospect has just been somewhat cautious and fully stepping up to that until we see further run out to make sure that what we were seeing was durable and would continue. And that has proven to be relatively consistent, meaning if we had fully accepted to what we were seeing early, what we're ultimately seeing emerge continue to be consistent with that. So, we feel good about what we're seeing. I'd say, within the third quarter itself, we start to see some loan respiratory seasonality, which also tends to be lower average unit cost, which would be included in that as well. In terms of 2025, as we've always said, the way we've approached 2025 is we've incorporated all of the impacts that got into our baseline. With the changes we've seen across the geographies, the lower patient unit cost, higher non-inpatient that is all now embedded in our thinking as a jumping off point for 2025 and then we've got the normal trend assumed for 2025. We now have final rate changes from CMS for reimbursement so that obviously is included in our estimates and so really what we'd be exposed to is any mix changes. But I'd say based on what we've seen and the consistency of what we've seen, we feel good about how we're thinking about unit cost trends in 2025.

Operator: Our next question comes from Joanna Gajuk with Bank of America.

Joanna Gajuk: Hi, good morning. Thanks so much for taking the question. I guess a similar question to Steve's question, but I guess, from different angles. So instead of talking about unit costs, can you talk about utilization trends because we've obviously been hearing from some of the hospital companies or the public traded companies guiding for volume growth still above average, again in 2025 after growing well-above average this year in terms of just volumes, not just cost. So, the question for you is curious what are you currently assuming in your 2025 outlook when it comes to utilization? And then can you grow EPS in that scenario that this is happening based on that pricing consumption? Thank you.

Susan Diamond: Hi, Joanna. Yes, so in terms of utilization, we have seen results that are very much in line from a utilization standpoint since we updated our estimates as of the second quarter call. At that time, you might remember, we did step up our utilization assumptions and lower non-inpatient just based on what we're seeing in terms of some additional sort of site of service shift related to two-midnight rule. Our utilization has been very much in line with that since. Obviously, you've got things like respiratory season, the hurricane impact, those things that we can discretely identify but our core utilization, we continue to feel good about. Our utilization management impacts have been very consistent coming out of really the first quarter as well. So, we feel good about those trends. In terms of 2025, we have seen normal sort of utilization trend on top of that higher 2024 baseline, that is inherent within our bid. And so again, there's no large incremental regulatory change expected for 2025 that should create this level of uncertainty like we were dealing with for 2024. So I think feel very good about the assumptions we're making in terms of secular sort of utilization churn.

Operator: Our next question comes from George Hill with Deutsche Bank.

George Hill: Yes. Good morning. A little bit of a different topic. Can you guys talk about inpatient claims denial rate and have trended over the last 12 months? I know in the second quarter, kind of claims appeals was a topic that came up at the margin and a lot of the publicly traded hospital companies and private hospital companies have talked about an increase in claims denial rates. So I'm just trying to see if -- like if there's any meaningful trend to call out there and whether or not clean and aisles have impacted MLR in any meaningful way?

Susan Diamond: Hey, George, yes. So, with the Humana real implementation, as we've been saying, we had -- that result in more initial approval. So in theory, you would expect fewer denials, fewer appeals. As we mentioned throughout the year, when cement role was implemented, we did see initially higher appeal rates and higher uphold rates for those appeals than would have expected based on historical performance. As you've mentioned, we've completed audits ourselves. We've been through the CMS which is validated that we believe we're appropriately evaluating the clinical rules. And what we would say is, at the time, there was a question about, was that just a pool for and a change in seasonality of how appeals would come in and maybe see few repeals in the future because there's a reasonably long tail over which providers can appeal. We made the assumption that it would just result overall higher appeals and ultimately, uphold rate. That is what we have been seeing to date. We would just say we call it early and incorporate into our estimates coming out of the first quarter. I think why you may be hearing some different commentary from hospital systems is they may not have recognized that as quickly and may have seen that higher appeal rate initially and assume that the absolute appeals would still be comparable year-over-year. And what we've just seen is those appeals have been higher, which when you think about just the magnitude of the changes, I think it's everybody just trying to understand how those new rules are being applied across the payers and then the providers. So that's, I would say, very consistent with what we've seen since the first quarter and no meaningful variation since. And then George, I don't know if you want to add anything?

George Renaudin: Yes. Susan, I would just add that I think you're right about the question of testing the appeals and seeing where they are trying to figure out exactly how to mini rule will be applied. We, as you said, feel very confident about how we're applying given the CMS audit we had at the very start of the year that came out positively. The other thing I would just add to that is that our clinicians continue to speak with many of the provider clinicians to talk through the issues to make sure we all have a similar way of approaching that everyone is clear in understanding what the two midnight rule is and is not.

James Rechtin: Not to pile on here, but let me just try to wrap all the inpatient stuff together broadly, I think what we're try to convey is that since late first quarter, early second quarter, we've seen relatively stable trends. And so there was a fair amount of noise in the first quarter. I think everybody was adapting to the regulatory change. For us, we put a lot attention on it at that point in time. And we think we worked through all the changes in process and approach and whatnot and have gotten to a relatively stable place. So, when we look forward, we're feeling pretty good about the outlook and our ability to project what the inpatient cost is going to be, whether that's denial rates, utilization, unit cost, et cetera, relative to where we were back in the first quarter.

Operator: Our next question comes from Whit Mayo with Leerink Partners.

Whit Mayo: Hey, good morning. Maybe just a question on STARS as it relates to the lawsuit or appeal. Just looking at age contract 5216, maybe the math is off a little bit here. but it seems like you might need to flip both the Part C and D ratings on the call center to a 5 from a 4 to get back to a 4-star rating on that contract. It doesn't seem like you can do it with just improvement in one category, it seems like both. So, is that an accurate statement? And I'm just wondering like how many calls ballpark are we talking about to have to overturn to see improvement in either categories. One, is it multiple calls? Just any color would be helpful.

James Rechtin: Yes. In total, it's three calls across both metrics. And yes, we would need to see the three calls overturn.

George Renaudin: I would just add into that, Jim, bit. In addition to the three calls, one of the other things that we're talking that we are pursuing with CMS is the need for greater visibility and transparency into how the threshold to calculate.

James Rechtin: Yes, that is correct. Yes.

Operator: Our next question comes from A.J. Rice with UBS.

A.J. Rice: Hi everybody. Just want to make sure I understand the early thinking on 2025. If you are successful in your appeal on the STARS through litigation, would that change your view on the amount of investment you need in 2025? It almost sounds like up to this point, the discussion STARS ratings hit has been around the arbitrariness of the CMS presold cut points and some of that. And you had a great track record of having very high Star ratings. Now, all of a sudden, it sounds like, as you guys have looked at this, you now think you need to make a lot of investment to get back on track on STARS. And I wonder if your appeal is successful, would you not have to do that? And would that change your outlook for 2025 for the better? And then in the broad discussion about out years, there's always a discussion about trading off enrollment for margin. And obviously, we've got a lot of focus on getting you back to 3% margin. But any philosophical commentary about how much of an enrollment hit you might end up taking if the appeal is unsuccessful to get back to that 3% margin over the next couple of years with a view to 2027?

James Rechtin: Yes. So, let me start with the appeal and its impact on how we think about 2025. So, the way to think about STARS is there's two related but slightly different things. So, there's the appeal related to the single -- or I guess 2, but similar metrics that that are kind of the difference between 3.5 and 4 Stars a whole bunch of our members. That is one thing that is working its way through litigation, we're really can comment on that beyond what we have. But separate is the broader trend within the STARS program of cut points and thresholds getting harder. And that's across a lot of different metrics. And so while there's one critical metric for BY2026, broadly, I think the entire industry is looking at a movement in metrics and cut points and thresholds that is causing pretty much everybody to reevaluate how far do you have to lean in, to investment in this program to make sure that you can keep up with those -- with that metric movement. I don't think we're alone to that. So as we contemplate investments for next year, if the -- I don't -- the appeal is not going to have any kind of meaningful impact on how we think about investment. The investment is going broadly in the program to drive better and better and better performance at a pace that exceeds what we expected previously. That's really what the investment is about at the end of the day. George would you -- anything would add to that?

George Renaudin: I would just add, Jim, that the other thing about the investments we're making in STARS in many ways is the right thing to health outcomes for our members overall. The investments we take here enhancing provider and member performance. We're talking about incentive programs to close gaps in care, which helps our health outcomes while also improving the customer experience. It is a good thing for us to continue to work with our vendors to improve our relations with them and to improve their performance. And finally, the strengthening that we're doing around technology and integration to support operational excellence also nicely fold into many of the other things that Jim has talked about, we need to focus on moving forward in both his opening comments and in his earlier letter.

Susan Diamond: Yes. And then, A.J., the only other thing I'd remind you is we talked about investments for 2025. Just keep in mind, STARS is one piece of it, but there are investments remaining more broadly to drive just improved operational performance across a number of areas that Jim has referred to. So, a STAR is just one component. And then, Jim, the last question, I don't think you touched on is just the philosophy of membership growth and margin trade-off, if you wanted to touch on that.

James Rechtin: Yes. And again, I think this was related to how would, we react to the STARS mitigation or STARS progression. Look, the short answer is we have a lot of questions around that very thing that we're going to have to answer over the next three, four, five months. So we don't have a perfect answer. We've got to understand how does -- what does the rate environment look like? How are we feeling about the progress that we're making on 2027 STARS, et cetera. So there's just a bunch of factors that we don't yet have visibility into to answer that. What I would say just generically is our intent is to balance long-term earnings potential with near-term progression. We need to balance those. All-in-all, we're not going to do things that harm the business long-term to work our way through a short-term issue. Now, what does that mean practically? We don't know yet. We have to sort that out.

Operator: Our next question comes from David Windley with Jefferies.

David Windley: Hi. Good morning. Thanks for taking my questions. I wondered on two fronts. First, on channel investment, basically, you've touched on some of this already. I recall last year, that after AEP, the discussion was that the brokers were more consumed by helping existing members shop and therefore, couldn't talk to new members as much resulting in AEP growth being relatively low, more shopping expected for 2025. I'm wondering, what you've done to address that issue and kind of relatedly, how should we think about the cadence of membership AEP versus intra-year. And then lastly, I'm wondering just if you have any early thoughts or expectations about 2026 rates for early next year announcement. Thanks.

James Rechtin: Yes. So, I'll start. And there are number of -- thanks for the question. There are a number of things that we've done in preparation for what we knew was going to be a sales view where there's going to be a dynamic change in the industry given the industry reset that we've all talked about we're going through with benefit changes, member disruption as we have had planned in county exits, a number of our competitors have as well. So, we know that, that's going to be something that we have to focus on. So we continue to make investments in both our internal sales channels to include improvements in, as I mentioned before, digital self-service options We also are making investments to help our external brokers. You also realize that we have a pretty large internal brokerage as well, we're seeing a 70% increase in sales in that internal brokerage channel. So, we're going at this from both improving the experience for the members to be able to sell service in digital, improving when our sales team gets those calls in person, how they can answer those questions by giving them better tools and leveraging AI as well as are helping our external partners in providing them with more real-time data and information and helping them on best benefit choices. So, there's a whole host of things we're doing across the whole marketplace that we are prepared for, knowing that this is going to be a year of pretty significant change in this AEP.

David Windley: Okay. All right.

George Renaudin: Yes. And let me just kind of headline that our external partners are really important to us and building and strengthening our internal channel is what we have the most direct control over, and we've been building capacity in that internal channel for that very reason. And that channel is also very important to us. And so, we have built capacity to the degree that we feel like we reasonably can under the timeframe and the circumstances, et cetera. And at the end of the day, we still look at the market and we expect 5% to 5.5% growth at the end of the day, even with the need to kind of balance these capacity constraints.

Susan Diamond: And then I think the last question was around 2026 rate, which, David, I would just say it's hard to right, we can't really predict working, we would say we still have 2028 and IME to be phased in. So we know those are impacts. And the big question will be, given the trend that we have seen, we will see some positive restatement embedded within the 2026 rate, recognizing their forward-looking 2025 rate hit as seen some trend improvement, which obviously hasn't transpired. The ACO reach detail that's shared by CMS is one sort of indicator of the trend they may be seeing. That does suggest that they are seeing some of these kind of trends as well. So I think we're cautiously optimistic that the rates for next year will include an appropriate adjustment for the trend that we're all absorbing.

David Windley: Okay.

Operator: Our last question today will come from the line of Michael Ha with Baird.

Michael Ha: Hi. Thank you. Just firstly quickly to confirm. On DSP redetermination, Susan, did you mention 80 bps of industry growth headwind expected for next year. Is that presumably because of the six-month grace period they have, are the bulk of those lives so yet to be redetermined what percent of those lives are expected to fall off your book. And then number two, I guess given that you're already 11 months into the measurement year, 2024 for next October's released Star ratings. I know cap still run through June, but based on the other I guess, let's call it, roughly 70% weighting or actually, I guess, 80% now that caps is being reduced. I know you're in a sprint right now, but how are you tracking on those 80% of measures? More specifically, I guess, what's the realistic likelihood of being able to sort of fully snap back to 80% to 90% of members in 4-Star plus plans? What's your level of confidence, conviction? Or is it just very unlikely given how late into 2024 it is and how late it was realizing how aggressive cut points are and just the time you have left to make incremental improvements? Thank you.

Susan Diamond: Sure, Michael. I'll take the first question and then hand it over to Jim or George for the SAR question. On D-SNPs, yes, you heard that correctly. We do anticipate a headwind in 2025 as the redetermination process completes. There was pressure in 2024 as well, slightly less than we would say, 70 or so basis points in 2024, and we think it will be about 80 basis points of pressure in 2025. Frankly, part of that is because of the Change Healthcare disruption, which disrupted the ability to confirm eligibility. And so even though we've largely seen the impact on the Medicaid side because of the deeming period on the MA side, there is that six-month period. And so we do expect that we will see some additional dual disenrollment as they lose coverage. Some of those we would expect to recapture within our non-D-SNP offerings, but some obviously are no longer eligible. So we've built that into our expectations all along for 2025 in terms of the loss of a few hundred thousand members that is already contemplated. But yes, you did hear me correctly. And then George or Jim, do you want to take the starts question?

James Rechtin: Yes, I'll just jump in on that. The short answer is, at this point, one, you've just got limited visibility into even your own performance and you've got no visibility into industry performance. And so we're not going to comment on industry performance or cut points of thresholds until they're actually out next year. On our own performance, we feel good about the progress that we are making. And there is risk, like we're resetting expectations with four months, three and a half months to go in the year, setting those expectations higher, driving towards higher goals. And while I think we all feel good that we are making progress and leaning as an organization into it as heavily as we can, we still need time to understand exactly how those things are going to play out. So there's just -- there's not a super clear answer to the question at this point in time. But everybody is leaning into it, and that is what we need right now. With that and being the last question, I'm just going to transition here and thank everybody for joining us this morning and thank everybody for your interest in Humana and in what we are trying to do to serve our patients and our members. And I want to thank our 65,000 associates who serve those members and those patients every day. We appreciate the work that they're doing, and we appreciate the support that you're giving us. So thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.