Humana Stock

Good day, and thank you for standing by. Welcome to Humana's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. We will begin this morning with brief remarks from Jim Rechtin, Humana's President and Chief Executive Officer; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session with industry analysts. 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 risks and uncertainties.

Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our second quarter 2026 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 and posted remarks, 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 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.

Thanks, Lisa. Good morning, everyone, and thank you for joining us. Today's headlines are, we are pleased with our year-to-date performance, and we continue to be tracking to expectations. We expect that our approach to 2027 MA bids will drive solid progress against our goal of delivering a sustainable pretax margin of at least 3% in 2028. We believe we are on track to meet our Investor Day commitments, including our Stars commitments, and we will host a virtual investor update on December 10 to discuss the meaningful progress we have made towards those commitments.

At that point, we will have full visibility into bonus year '28 Stars and some preliminary insights into '27 membership expectations. As usual, I will frame my comments today around the 4 drivers of our business: product and experience, which drive customer retention and growth; clinical excellence, which delivers clinical outcomes and medical margin, highly efficient operations and capital allocation and growth in both CenterWell and Medicaid.

So let's start with product and experience. Our 2026 member growth trajectory is on track and our membership, both the new and returning membership, is performing as expected. As we look ahead to '27, our #1 priority in MA bids was to make the necessary margin progression to remain on track to deliver our '28 commitment of returning to a sustainable margin of at least 3%. We must drive sustainable earnings and appropriate returns to be able to provide excellent health outcomes and service for our members and our patients.

We expect our targeted margin expansion in '27 to be driven by our ongoing focus on clinical excellence and operating efficiency work, combined with adjustments to our plan mix and benefits, which Celeste will touch on in a moment. Turning to clinical excellence. Our outlook on bonus year '28 or BY '28 Stars remains unchanged. We continue to be confident we are on the right track to return to top quartile Stars results in BY '28. I want to remind everybody that at our Investor Day, we defined top quartile Stars results as per member per month Stars revenue that is 10% above our peer group median.

Stars revenue PMPM considers the quality bonus and the percentage of rebate retained at each star level. We use this metric because Stars revenue PMPM is what is important from a competitive perspective. As a result, going forward, you will hear us focus on Stars revenue PMPM instead of solely on the percent of members in 4-plus star plans. Now turning to our Stars performance. Over the last 18 months, we have said that we were making strong operational progress.

I'm truly proud of how our Stars organization and the broader enterprise has risen to this challenge. Now that the measurement period for BY '28 is complete, we are pleased to be able to share some tangible examples to demonstrate the progress. I would point you to Appendix A within our posted remarks. This slide shows the rate of improvement achieved in BY '28 as compared to the previous 4 years for a selection of 12 HEDIS and Patient Safety metrics. We have de-identified the metrics for competitive reasons.

What I want you to take away from this slide is that our rate of improvement outpaced and in many places, meaningfully outpaced the historical CAGR across 11 of the 12 measures. And while we do not intend to share this detail every year, we wanted to share today as it demonstrates that the operational changes and the investments we have made in our Stars program over the last 1.5 years are driving the intended results. We are driven by our North Star to improve health outcomes for our members with the goal of achieving top quartile results on a sustainable basis.

Finally, as you know, we don't know industry thresholds. So while we feel good about our substantial progress, we cannot guarantee an outcome in October. And as a reminder, we will go into our annual Stars blackout period as soon as we receive the planned preview information from CMS beginning in August until the final data is released by CMS in October. For BY '29 Stars, we have maintained momentum with our member engagement efforts. Consistent with Q1, we remained 5% ahead of last year's quality improvement rate on a per member basis in key HEDIS metrics at the end of Q2.

Regarding our new members, we continue to remain encouraged by their performance to date as their engagement levels remain in line and on some measures, higher than renewing members. Now let me turn to highly efficient operations. I mentioned last quarter that we were making good progress on our operating model changes.

Our goals have been threefold: first, to be simpler, leaner and faster, so driving efficiencies while reducing friction for our customers; second, to lead on innovation, leveraging automation and AI and the best-performing vendors; and third, to attract the best talent and ensure effective performance management. Let me provide examples to bring these changes to life. We are centralizing certain operations to simplify process and reduce variability in outcomes. One example is utilization management, where we centralized 11 markets into one team.

This is driving G&A savings, but it is also creating a more consistent experience for providers and members. We are also expanding outsourcing while improving vendor performance. This year, we increased outsourcing in our finance and HR functions, while we also continue to advance vendor optimization efforts in IT. We are also in the early stages of transforming select other vendor relationships from tactical labor-based engagements into strategic partnerships that can deliver greater business value and capabilities.

Finally, we integrated our CarePlus operations. CarePlus is a legacy health plan acquisition that we integrated into our core platforms to eliminate redundancy, which drives greater value and scale while maintaining our reputable CarePlus brand in Florida. All in, we have made considerable progress in the first half of the year. Our operating model efforts have yielded hundreds of millions of dollars in value so far in 2026.

Finally, let me turn to capital allocation. As we have previously noted, we have been pursuing noncore asset divestitures. We recently announced an agreement to divest our minority interest in Gentiva, which is valued at approximately $900 million. This divestiture will largely fund our recent acquisition of MaxHealth. We also continue to expand our Medicaid platform with the recent award of a statewide Illinois Medicaid managed care contract.

That contract is set to go live in January of '27, and I'd like to note that Humana was the only new entrant awarded along with 5 incumbents. So in conclusion, we are performing as expected in 2026. Our member growth is expected to further fuel our ability to unlock the earnings potential of the business. We're making good progress on Stars. We expect to make meaningful progress on MA margin expansion in '27, and we remain on track to hit our Investor Day commitments in '28.

Before I turn it over to Celeste, I would like to highlight our announcement this morning that Paul Smith and Fred Crawford will join Humana's Board of Directors. Paul is the Chief Commercial Officer at Anthropic, where he leads commercial strategy and global go-to-market operations. Paul brings over 30 years of experience leading global organizations through major technology transitions.

Fred has deep financial and operational experience, having spent more than 30 years in the insurance and banking industries. Fred was the Chief Financial Officer of 3 publicly traded insurers and most recently served as the President and Chief Operating Officer at Aflac until his retirement in 2024. Paul and Fred will complement our Board's expertise well, bringing a unique perspective that will be invaluable as we advance along our journey of becoming a consumer health care company.

With that, I will turn it to Celeste for a few remarks before we go to Q&A.

Thank you, Jim. I will start with our comments on our '26 performance and '27 MA bid approach before touching on continued progress on balance sheet efficiency and capital optimization. Starting with '26. Based on available information to date, cost trends are in line with our expectations for both new and existing members.

As a reminder, we assume 2026 cost trend would be in the high single-digit range or 7% to 8%, inclusive of both medical and pharmacy. There are certain areas where we have seen slight favorability, particularly in the inpatient space. Based on approximately 4 months of completed claims data, favorability has been more heavily concentrated in members engaged with value-based providers.

While the risk-sharing nature of these agreements limit the favorability that flows through to our financials, it is positive for our provider partners and we believe an additional proof point of broader stabilization in the MA trend environment. And as Jim described, our transformation and operating model work is driving the intended result. Our 2Q consolidated operating cost ratio is down 120 basis points year-over-year, and we continue to expect a full year reduction of approximately 150 basis points.

Taken together, we are executing and delivering results in line with expectations and remain on track to double our individual MA pretax margin this year, excluding the Stars headwind. I will now touch on our '27 MA bids. As Jim mentioned, our #1 priority was to make the necessary progress to remain on track to deliver on our '28 commitment of returning to a sustainable margin of at least 3%. We expect meaningful progress toward our '28 margin goal next year with actual '27 results shaped by our final membership size and composition.

Our expected margin expansion in 2027 will benefit from our ongoing clinical excellence and operating efficiency work as well as benefit adjustments and targeted plan exits. While it remains too early to provide many specifics regarding our bid strategy, let me provide some perspective on our approach to plan exits. To reduce benefit disruption, we will use plan exits to prioritize higher-performing plans including those with greater value-based care penetration.

This approach is aligned with bid priority # 2, which is to retain as many members as possible while making the changes necessary to drive the intended margin expansion. For 2027, we anticipate these plan exits will impact approximately 600,000 members, though we will work to recapture a significant portion of that volume as we did in 2025.

Turning to capital deployment and balance sheet. We have continued our efforts to increase the efficiency of our balance sheet and fortify our foundation, including the establishment of $1.5 billion in contingent capital facilities, utilizing pre-capitalized trust securities or P-Caps, enhancing our access to low-cost, long-term liquidity. We are the first in the health payer space to utilize this innovative product.

We have also maintained a prudent capital deployment approach, including pursuing noncore asset divestitures. As Jim mentioned, we recently announced an agreement to divest our minority interest in Gentiva, which is valued at approximately $900 million and expected to close in the fourth quarter. More broadly, our capital and balance sheet efficiency efforts are delivering results, and we continue to evaluate a pipeline of initiatives to further strengthen the balance sheet and improve our capital efficiency.

Before going to Q&A, let me reiterate what Jim started with. We are pleased with our year-to-date performance. We expect to make meaningful progress on margin expansion in 2027, and we are executing on our Investor Day commitments and delivering on the earnings power and value of the company.

I will now turn the call back to Lisa to start the Q&A.

Thank you, Celeste. Before starting Q&A, just a quick reminder that in fairness to those waiting in the queue, we ask that you please limit yourself to 1 question. Operator, please introduce the first caller.

Our first question comes from Justin Lake with Wolfe Research.

I appreciate all your comments here. I want to make sure I understand your 2027 bid posture. My impression is that your individual MA margins are about breakeven this year, and you need to get to a little over 2% by 2028 via product design and bids and then Stars gets you all the way to 3% and plus.

So if you need to get 2% plus margin improvement over the next couple of years from your bids, should I read your statement in your remarks to indicate you expect to get more than half of that in 2027 via your bids? And then can you talk about your trend assumptions that you built in the bids and any potential conservatism layer you might have added there?

Yes, Justin, we are not going to comment on the specific progress from '26 to '27 in part because ultimately, where we land will be driven by the membership size and composition. As you know, we have a portfolio. There are some product with higher margin, some with mid-margin. But we do expect to make significant progress in '27 versus '26 and well on our path to 2028. In terms of what is embedded in our bids, we continue to assume trends in line with what we're seeing this year, although, as you know, the drug trend continues to be high and will tick modestly higher next year based on current expectations given the health technology pipeline or the new drugs that will be released.

And then, of course, as we always do, we build in effectively contingency into our bids because we're doing it well in advance 6 months before the next year and you have a whole year to get through to account for things moving in any direction. So we believe we are well positioned to make significant progress and look forward to this year's AEP.

Our next question comes from Jason Cassorla with Guggenheim Partners.

Great. Maybe if you could discuss a little bit more on what you're seeing on cost trend and your comments around inpatient. Maybe just anything else on what's driving that? And could you remind us of your site of service initiatives, how you're focusing on pushing appropriate care to lower cost settings and maybe help give a sense on how those efforts have offset underlying trend versus sort of the broader kind of industry movement due to the inpatient-only list wind down? Just any help there would be great.

Yes. So as a reminder, our all-in trend assumption for this year is high single digits or 7% to 8%. So a little bit lower on the medical cost and then in the double digit on drug costs. As we called out, things are within the range, though we are seeing favorability, particularly on inpatient. And we are seeing both lower admits per 1,000 and lower unit costs on those admits. So it's both the P and the Q on inpatient costs that are down.

And I'll turn it over to Jim on site of service.

Yes. So site of service is absolutely one of many initiatives around medical cost management that we are focused on. And the beauty of site of service is you're actually helping members move to sites of care that have higher quality as well as lower costs. And so we are very much focused on both of those things.

The types of things that we're doing range from rethinking how we do our contracting in local markets to make sure that we have access to the right sites of care to make sure that we have aligned incentives and using appropriate sites of care as well as thinking through how we design benefits in a way that create a financial incentive for our members to also use the right sites of care.

So we've got a number of initiatives going on there as well as initiatives around how you nudge or educate our members around how to make those decisions. So there's a lot going on. We're not going to share specific numbers at this time. This is one of many different initiatives that are focused on helping our members move to higher quality and lower cost care options. But we've got -- we do have quite a bit of work there, and we've seen progress over the last year, and we expect to see more progress over the next year too.

Our next question comes from Stephen Baxter with Wells Fargo.

I wanted to ask about the Stars color you provided. So I appreciate the commentary and the progress you're making. For these metrics that you provided, I believe this is a subset of HEDIS and patient safety measures. Could you expand a little bit on how these metrics were selected and kind of how confident we can be this is representative of the broader performance?

And then if there was going to be a line on this chart for your peer group average, which is what you're ultimately trying to outperform, like what would the trends look like in that context? Would you still have outperformance versus the peer group average that ultimately is going to dictate the cut points?

Yes. Happy to tackle that question. And I'm going to kind of step back and hit a few things around Stars, and then I'll answer the questions that you pose there directly. So the first thing I want to say is I just want to emphasize that there's no change in our tone this quarter versus the last quarter, the quarter before that or frankly, our tone dating all the way back to the Investor Day.

We feel good about our operational progress, and we have the inherent unknown of thresholds that we all have to wrestle with. The -- what we're trying to do here is simply provide a little bit more nuance or color so that you understand why our tone has been what it is. There are 2 things that are driving us as an organization.

You could think of it as twin North Stars in a way. The first is we should be closing every single gap we possibly can because it's the right thing for our members. And that is the motivation that drives our teams every day. And the second is that we need at a minimum to be hitting top quartile Stars results because that is what's required to be competitive in the marketplace.

And I want to reemphasize that we were very deliberate 1.5 years or a year ago back in June of '25 at our Investor Day around defining what top quartile means. Top quartile is measured on a per member per month basis. It is Stars revenue, taking into account each of the different star ratings. The reason that, that is important is because when you then look at the operational performance that we've had, what -- we know that there's going to be some variation in thresholds. We know that some are going to end up a little bit higher than we expect, some are going to end up a little bit lower than we expect.

That metric does two things. One, you look back historically and you know that if you hit that metric, which is 10% above the median player among the top -- our top 5 competitors, that if you hit that, you know historically that, that says, hey, you're competitive in the marketplace. And this type of operational progress gives us confidence that even if we are off on some thresholds, we have multiple paths to get to that PMPM number that we need to get to.

We have multiple ways to get there. And so there is inherently some threshold uncertainty, but we walk away with confidence that we can navigate that uncertainty because of the metric we know we need to hit and because of the operational progress that you're seeing. Specifically, the question around why these metrics.

The answer, honestly, is very simple. These are the metrics that we have clear longitudinal data over the last 5 years to be able to compare. So there are some metrics that simply came in or out of the program during that 5-year period. We don't have consistent operational data. There is some data where we don't have hard data at this point. We don't -- really the survey data is held by CMS. We don't have the same level of visibility. We have some metrics where, frankly, we're even getting an early read from CMS, and we're not going to share that data because that data is private between us and CMS at this point.

And so there's no magic to these numbers other than these are the metrics that we have good longitudinal data on and can share. We do believe they're representative. Like when you look at the program broadly, we believe that these metrics are representative of our performance broadly. And again, based on everything that we know today, there are obviously some things that we don't know. But based on everything we know today, we feel good that this is a pretty representative sample.

And to your last question around thresholds, we're not going to share our internal estimates around thresholds. But I would point back to the comment that I made earlier. We have looked at thresholds a number of different ways. And we do believe that this operational progress puts us in a good place that even if we have some surprises on thresholds, which inevitably we will have some, we will be able -- we will have navigated to a place that is consistent with our commitment.

Now of course, we can't guarantee that. Everybody knows that. But we feel pretty good. We feel confident that we have put ourselves in a position to land where we need to land. So that's how we're thinking about it, and that's why we wanted to share this data. And again, I hit two last things. We're not going to share this data every year.

I just want to be clear, but we have put so much time, energy, investment. This is so important to the business right now that we thought it was important that we give you this color. And second, we are about to walk into the blackout period. So as soon as we do get plan preview data from CMS, I just want to remind everybody, we're going to go dark until the final results are actually released by CMS. So that's where we're at on Stars.

The next question comes from Ann Hynes with Mizuho.

Last quarter, you provided some color in your prepared remarks on the sequential IBNR growth for Q1, and I didn't see it this quarter. Can you provide any directional or similar directional update on IBNR and how it's trending coming out of Q2? I think last quarter, you noted that it increased 35% versus your membership growth of 22%.

Ann, thanks. Yes, it will be out in our Q this afternoon. And what you'll see is that the IBNR remained basically flat from last quarter. We view this as still very prudent because if you think about it, IBNR should be going down as the year progresses, all else equal, because there are more pharmacy claims given the move as we progress through the year that are processed more quickly and they do not require IBNR.

We are up significantly year-over-year and versus the beginning of the year in terms of both IBNR and more importantly, more so than our membership.

Our next question comes from Ben Hendrix with RBC Capital Markets.

I was just wondering if you could provide some more color on the strategy behind the formation of the contingent pre-capitalized trust? Any thoughts you can give on what kind of drove the decision to form that? Are there trend observations that you're seeing or anything with how you're positioned with 2027 bids that made that more of an appropriate type vehicle? Any thoughts there?

Thanks for the question. So we really like this product. So you're able to increase your liquidity without increasing balance sheet or increasing leverage unless you draw on them. At this point, we do not anticipate using them or drawing on the P-Caps in the near to medium term. It really diversifies contingent liquidity sources at a relatively low cost.

In addition, you don't have counterparty risk because this is with fixed income investors, the cash is already in a pool that is holding securities. That's how they make their yield and then we pay a small premium on top of that. And it offers extended duration. So this is 10- and 30-year duration relative to the typical revolver debt duration. Ours right now is 5. Often, you'll see revolvers 1. So really great source, continues to provide flexibility, durability, strengthen our balance sheet, and we're really excited about it.

Our next question comes from Kevin Fischbeck with Bank of America.

Can you talk a little bit more about the bidding strategy for next year? Obviously, this year, you guys kept benefits stable. But for next year, you're talking about exiting markets. So why that change in exiting markets next year versus not doing it this year?

And is there anything related to Stars as far as how you chose what markets you'd be exiting and the membership losses that would be there? Or I guess just a little more color on what it means to be targeting kind of high-value plans.

Yes. So as we've talked about in the past, we have a multiyear approach to membership and benefits and I think across several years. But more importantly, from year-to-year and over the longer term, we look at specific underwriting margin targets at the plan level and continuously monitor benefit design, costs and the revenue to drive profitability. So funding is really important.

And increasingly, we're very much focused on the capital returns of the plan. So we take into account that certain states have much higher capital rates, Value-based care has lower capital associated with it, while fee-for-service higher capital, obviously, you're going to adjust pricing to generate the return. And as you know, markets have been super dynamic in the last year.

So we look at this every year. We did push harder on this year to let us make the margin progress that we need to and to protect our highest value plans. So I would think about it as the plans with the highest returns. So rather than cut more uniformly across the board, really remove or cut off the lower tail of profitability and returns to ensure we can protect and retain the members and the benefits associated with our high-value plans.

As I called out, we expect to capture a similar portion as we did in 2025. If you remember, it's just over 40%. The majority of the plan exits were in plans with 3.5 or lower ratings for BY '27, but I wouldn't really think about this as a Stars item. As you know, we are focused on returning to top quartile Stars on a sustainable basis. So this isn't really a Stars item.

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

Just 2 things on the MA book. First, and I know this is hard to compare, but your commentary about the 7% to 8% cost trend and being relatively in line with a little favorability on the hospital side. It seems like your peers, a number of the other companies are saying they also anticipate a 7% to 8% trend, but they seem to be seeing a little more favorability.

I don't know if you have any view on that? Is it because of all the new members that that's having some mitigating impact? It sounds like those are tracking more or less in line. But I wondered if you had any perspective on that. And then as you talk about the margin step-up for next year, I wonder if there's any way to sort of talk about things like lower commission, risk coding, your own things you control like medical cost initiatives and how much natural margin lift you have versus how much is just going to be dependent on the cost trend and what the competitive landscape looks like, et cetera?

I appreciate the question. So we did guide to 7% to 8% cost trend. My understanding is that some of our peers guided to significantly higher cost trend. I can't speak to what they're seeing other than we are in line with the range with some favorability. We also continue to build prudent reserves. We continue to be prudently reserved, especially versus the beginning of the year, we have built significant reserves this year.

We have a lot of data. We continue to look at data through the end of July. In fact, it's fairly consistent. And our goal is to deliver on our commitment to you in terms of our '26 results and more importantly, continue to make progress on our 2028 commitments really focused on the long term. Obviously, we need to deliver on the short term to do that.

In terms of margin progression next year, we're not going to get into a lot of specifics around the bids as we talked about, ultimately, where we land will depend on the membership size and composition. We are working on reducing cost of care more broadly. Jim talked extensively about site of care, really focused on clinical innovation.

We continue to drive our transformation, which gives us nice lift. We obviously made adjustments to the benefits, and we talked about the plan exits. You do get a natural lift in terms of what we call accurate diagnosis. There isn't anything unusual in terms of what we're doing. We're obviously working to mitigate the chart review item that was included in the rate notice, and we're making good progress there. But otherwise, nothing unusual from the MRA perspective.

Our next question comes from Lance Wilkes with Bernstein.

Could you talk a little bit about value-based care and looking at it from the 2 ways you can look at it. From a contracting perspective, if you could just give a little perspective on the trend differences you see fee-for-service contracting versus some of the positive things you're seeing with your value-based care contracting.

And are you looking at making any sort of contracting changes in '27, either expanding that further or contracting? And then as an operator in CenterWell, if you could just talk a little about the performance differences you're seeing with a de novo versus wholly owned versus IPA styles of business and then obviously, the business that's coming in from Welsh Carson as well.

Yes. So there's a lot in there. So with value-based care -- so we guided to 7% to 8% trend. We are doing within the better end of that range. And value-based care is slightly better than the fee-for-service. So all within the range, but value-based care are doing even better, which makes sense. If you think about it, value-based providers are focused on managing the health of our members, their patients, trying to drive better health outcomes, again, ensuring that people aren't hospitalized or readmitted if they don't need to be, ensuring they're taking their meds, et cetera.

In terms of contracting, we have been very focused on driving more consistency with our contracting, driving aligned incentives between us and our providers. They are obviously very important partners to us. Ensuring in the bids -- it's been a big focus, ensuring we understand the impact of our benefit changes on them. But this has been something we've been working on for the last, I guess, since Jim got here 2 years, and we continue to make very good progress and are pleased with the results we're seeing.

As it relates to CenterWell, it is performing across the board, sort of in line with broader trends. We have very strong patient growth this year, driven by both organic growth as well as the acquisitions that we made. We're not going to get into the detail across the various subsegments of the CenterWell members other than to say, as you know, the de novo, which often overlap with Welsh Carson are still working through the J curve, but we're making progress there.

Our next question comes from Scott Fidel with Goldman Sachs.

I was hoping you could maybe toggle over and give us an update on the Part D business and talk about how underwriting performance in the Part D plans have been trending this year? And then obviously, the timing is a little bit tight here granted with it just coming out last night.

But just with the announcement from CMS around sunsetting the premium stabilization program at the end of this year, did you have any visibility into that? Or was that something that was considered in your bids for 2027? Just curious around that program and the timing of CMS announcing it here after the bids have been submitted earlier.

Scott, I'll take the first part and then Jim will take the second part. So on Part D membership mix, drug trends for which, as you know, we have high visibility and member behavior are in line to slightly better than our expectations to date. We continue to operate as expected and remain confident in our pricing strategy for this year. And I'd just say for the purpose of '27 bids, we have focused also on margin here. And given the health technology pipeline, are very focused on ensuring we're pricing for that risk. Jim?

Yes. And on the policy side, with both the demo and the rebate data that has come out, I would just say nothing in there is outside of kind of the band of expectations we had. We knew there was a chance that the demo might get canceled. We took that into account as we were submitting our bids -- and look, the reality of the demo going away has a greater impact for better or worse, for worse on members more than it has on us.

And again, the tension that I think policymakers are wrestling with, and I've said this many times, is we have a lot of fiscal pressure and we have a popular program, and they're trying to figure out how to balance those things. And I think this is another example of policymakers trying to balance those two things.

But the impact is unfortunately going to be more on our members who will try to protect the best we can than it is on us. And we certainly planned for this possibility in our bid process. And similarly, the rebate information that has come back to us is kind of within our planning scenarios. It doesn't really change anything about our outlook on bids or plans for next year.

Our next question comes from Andrew Mok with Barclays.

I appreciate all the comments on your own Stars performance, but would love to hear your perspective on the recent litigation outcomes around the MA Stars program, how that impacts your view of the program, competitive landscape and required investment.

Yes. The recent litigation, we're not going to comment speculatively on the litigation itself. There's obviously a whole bunch of decisions that have to get made that we don't have control over, and we don't feel that speculating on that does much for anybody. What I would say is and just kind of reinforce for investors is this program is important, and it's important -- meaning the Stars program. It's an important part of the broader Medicare Advantage program.

It is important in driving quality. It is important in driving experience for members. Our view is that we need this program to be stable. And that doesn't mean that it doesn't need to evolve that there aren't opportunities to improve it. There certainly are. We want to be a partner in making that happen. But our North Star as we make decisions around this is how do we help reinforce a stable positive program that benefits members, that works for the MA program more broadly and how do we be a good partner to CMS in making that happen.

And that really is the guiding light as we kind of navigate through these things and make our decisions. And that's where we're at. Beyond that, we're going to have to let events play out as they may.

Our next question comes from Ryan Langston with TD Cowen.

In the prepared remarks, you mentioned medical and Rx trends in line for new and existing members. Can you give us a sense how that trended for your duals and non-duals membership? And then on the '27 bid strategy, was there any particular consideration on prioritizing capture or recapture of duals versus nonduals in your bids?

So the duals performance looked fairly consistent with the rest of the book. In relation to getting into subsegments of our bids, retaining members remains a very important priority for us on both duals and non-duals. And we very much focused on prioritizing the benefits that the members care about the most. We've done a lot of research on that. And we're not going to get into how we're positioning ourselves, particularly as we believe our competitors are listening to this call.

Yes. The only thing I would add to that is we do believe that we are one of the better positioned companies to be able to serve duals effectively. And that is important to us. And so we think we're good at it. We think it's important for the health care community to be providing very good services there. And so they continue to be a priority, but not in any way that is new or different from past years.

Our next question comes from Whit Mayo with Leerink Partners.

Celeste, I know that you're not giving specifics for next year on margins and targets. But just maybe remind us what the margin growth is that you'd historically expect to see from this year's new members to Humana next year, not what you expect for '27, but just again, historically, what that lift has been?

We'll just talk about the -- what would drive margin improvement from the first year to the second year. You have, one, the -- as we get to know the members better, we are better able to diagnose and manage their care. So typically, if they're properly diagnosed, you're paid appropriately for their acuity, and then we typically get -- are better at managing that.

So that gives you a lift on the underwriting margin. Second, as you know, the year 1 all-in marketing and acquisition costs, co-op marketing, et cetera, onboarding costs are 2x what the second year is. So to the extent you're retaining those members, that falls away. So ultimately, how that plays out will be dependent on the membership. The retention is super important to us. We think this drives a ton of value. It's just -- and the overall size of the book and the mix of the book.

Our next question comes from the line of Elizabeth Anderson with Evercore ISI.

I was wondering if you could help update us on sort of the cost-cutting progression. Obviously, a sort of multiyear effort, but sort of where are we on that? Like is it changing in composition or any changed assumptions on that? And then as an offshoot of that, can you also talk about sort of your expectations for the December Investor Day? Obviously, you're on your plan to '28, but could you just update us on sort of what you hope to communicate to the broader investor community on that date?

Yes. I'll hit that, and then I think Jim will jump in. Jim called out upfront that we're making significant progress on our cost-cutting efforts. We've talked a lot about a lot of the progress we made last year was more tactical. So there's figuring out where there's frankly fat or we could do things more efficiently. So pushing on contracting, consolidating vendors, et cetera.

This year, much more of the progress is really on the transformational side. Jim mentioned the outsourcing. That is really important, both in terms of increasing that in our support functions in finance and HR. But as we talked about last year at the Investor Day, we had very, very many outsourcing partners across the company. A lot of the relationships weren't strategic.

We're consolidating those. And what you get from that is it does help improve service. It improves consistency. And generally, if you're consolidating relationships, you have a lot more pricing power. But it's -- the primary driver is really improving the quality of service. We are a consumer health care company, who we outsource to, particularly if it touches our members and our patients is really important . You know that, Jim also talked about the operating model work more broadly, the centralization of many functions, reason number one to do it is, to improve the services that we deliver, for example, on utilization management, providing consistency across markets and across plans really matters.

It also saves G&A costs. So making continued progress. We're really happy and excited about what we've seen. We're not reflecting big benefits yet from technology over time, we think there's an opportunity there, but really making good progress. And I think doing it in a way that creates value in the near term, but also ensures that the changes we're making are really sustainable.

Yes. And Celeste said it well, I'm just going to reinforce one thing. A lot of the cost management effort is about making this business simpler. It's about simplifying our infrastructure. It's about simplifying how we're organized. It's about simplifying accountabilities. The more that you do that is about simplifying processes, simplifying our data management. The more that we do that, the lower our cost of running the business is and the better our services, the better our services.

We respond to the needs of our members and our provider network more consistently and better. And that's the journey that we're on. And while we've made progress here over the last year, 1.5 years, and we feel good about that progress, we also know that there's a clear road map over multiple years for us to continue to push on this. And so that's what we will continue to do.

So back to Investor Day? Yes. Thank you. I forgot about that. On the Investor Day or investor update front, look, we're -- in December, we are 1.5 years from the Investor Day that we had last June. We'll be on the other side of BY '28 Stars results. At that point, we'll have pretty good visibility, as I noted earlier, in AEP and kind of membership trends heading into '27. We obviously won't have perfect information on that by any means, but we'll have very good leading indicators.

And it feels like it is the right time to come back to you and give you an update on exactly where we think we're at. We do not have any intention of announcing a change in strategy, a change in direction. We feel good about the direction that we're in. We don't anticipate changing any of the goalposts that we've set out for you. This really is about us saying, "Hey, we're halfway-ish through a 3-year period of time, and it's time for us to pull up and give you a more comprehensive update.

And that is it. And so -- that is the plan on -- in December, and we're excited to be at that point where we can do that, and we look forward to having that meeting.

I would describe it as a mark-to-market. We're marking to market our commitments to the Street.

So with that, I am going to wrap up. And so I want to thank everybody for joining us this morning and for your interest in Humana. And I also want to thank, as we always do, the 65,000 associates who make this place work, who serve our members, who serve our patients each and every day. We appreciate what they do, and we appreciate your support, and we hope you have a great day. So thank you.

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

Good day, and thank you for standing by. Welcome to Humana's First Quarter Earnings Call.

[Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead.

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; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session where Jim and Celeste will be joined by George Renaudin, Humana's President of Insurance segment; and Dr. Sanjay Shetty, President of Center well.

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 risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2025 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 and future filings or communications regarding our business or results.

Today's press release, our historical financial news release 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 reconciliation 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 will turn the call over to Jim.

Thank you, Lisa, and good morning, everyone. Thank you for joining us today. We have a few headlines. Let me start with we are pleased with our first quarter, and that is because we are where we expect it to be. And I'm just going to repeat that for emphasis. We are pleased with our first quarter because we are where we expect it to be. And right now, second headline, we are turning our attention to bids and we are approaching bids with a focus on returning to a sustainable margin of at least 3% in 2028 and making progress against that in 2027. We know that we need to make some progress against that in 2027. Those are the commitments we laid out in June of last year at Investor Day, and we stand by those commitments.

The primary headline here is that we believe that we are on track to meet our commitments from Investor Day, and we're doing the things to follow through on that. So as usual, I will frame my comments today around the 4 drivers of our business. First is product and experience, which drive customer retention and growth; second is clinical excellence, which delivers clinical outcomes in medical margin; third, highly efficient operations; and fourth, capital allocation and growth in both CenterWell and [ Medicaid ].

So I'll start with product and experience where there are 3 things that I want you to take away. First of all, our member growth trajectory is on track. Now we will, and we have and we will continue to manage distribution and growth dynamically if things change, but our growth trajectory is on track. Second, I want to emphasize that membership, both new and returning, is performing as expected 3 months into the year.

Now as we turn our attention to bids for the 2027 plan year, we want express appreciation for CMS' engagement on the improved rate notice. This helps promote more stability in the industry as a whole, and it has a positive impact on the health of our seniors. Nevertheless, medical cost trend continues to outpace program funding. And so our third takeaway, which is something we have noted previously, is that we will adjust benefits to remain on track to deliver our 2028 commitment of returning to a sustainable margin of at least 3%. And again, we expect to make the necessary progress towards that goal in 2027. We are very aware that we need to make some progress in '27.

So turning to clinical excellence. Our outlook on BY '28 Stars has not changed. We continue to be confident that we're on the right track to return to top quartile Stars results in BY '28. Our performance on the Stars compensation metric as disclosed in our proxy is a good indicator of our progress. However, as you know, we don't know industry thresholds. And so while we feel good about our progress, we cannot guarantee an outcome in October. We will share more about our progress in the Q2 earnings call once the hybrid season is complete.

For BY '29 Stars, we are seeing a strong early start. We have early engagement efforts. These are new efforts, early engagement efforts, which are translating into improved member activation and improved outcomes. To provide just one example, we're identifying certain chronic conditions among new members faster than we have in the past. What this allows us to do is to better target our gap closure efforts. And as a result, at the end of Q1, we are about 5% ahead of last year's GAAP closure pace on a per member basis on certain key HEDIS metrics.

Now regarding highly efficient operations, we continue to make progress on our operating model changes. This includes centralizing certain teams, expanding outsourcing and increased automation of processes. All of these things are increasing efficiencies.

And then finally, on capital allocation, we recently completed the acquisition of Max Health. This is a Florida-based primary care organization that will expand CenterWell's reach into new critical markets. We also saw Medicaid membership grow by approximately 50,000 lives, and this is largely driven by the January start of programs in Michigan, Illinois and South Carolina.

So in conclusion, we expect to double individual MA margin in 2026 adjusted for Stars. We expect to double individual MA margin. We continue to feel good about the way our member growth is setting us up for this year in subsequent years. We are making good progress on Stars. We will continue to be disciplined in pricing with a focus on unlocking the earnings power of the business by 2028.

As a final note, before I turn it over to Celeste, I want to share an update on the insurance leadership transition that we announced in December. George Renaudin, Insurance segment President, will retire effective June 29, 2026. Until then, he will focus primarily on the annual MA bid process, and he will continue to serve as a strategic adviser through at least the end of 2026. Aaron Martin, who is currently President of Medicare Advantage, will begin leading the day-to-day management of the insurance segment now. He will continue to report to George and he will formally assume the role of Insurance Segment President when George retires. John Barger, a 30-year industry veteran with more than a decade in Medicare Advantage, will lead MA operations effective immediately and will formally assume the role of President of Medicare Advantage when Aaron transitions.

I want to personally thank George for his nearly 3 decades of service to Humana and its instrumental impact on growing the Medicare Advantage business.

And with that, I will turn it to Celeste for a few remarks before we get to Q&A.

Thank you, Jim. There are a couple of items I will briefly address before we begin Q&A. First, we are pleased that available information to date suggests that our Medicare Advantage members, both new and existing, are performing in line to better than our guidance, even after adjusting for a more subdued flu season and the winter storms. This data, including what we continue to monitor in April, includes risk scores, hospital admits per thousand, or APTs, pharmacy claims, and initial medical claims, which are continuing to complete for the first quarter. And we continue to enhance our claims and cost trend monitoring practices, including anomaly detection to identify and react to claims and payment trends faster as well as to improve first-time payment accuracy. This work -- this important work improves visibility into cost trends and further strengthens payment integrity.

Turning to capital deployment and the balance sheet. In the first quarter of last year, I posited that there was a real opportunity to increase the efficiency and resiliency of our balance sheet. Over the last 12 months, we have made considerable progress towards this end. Our efforts include bolstering liquidity and addressing future funding needs with rating agency-friendly instruments, such as the $1 billion junior subordinated notes we completed in March, which is expected to fund 2027 maturities. In addition, we executed on several initiatives to optimize the balance sheet, including deploying subsidiary reinsurance and augmenting legal entity structures successfully mitigating over $3 billion in capital contribution requirements for 2026.

We are maintaining dividend levels and limiting share repurchases to amounts necessary to offset dilution from employee stock compensation, and we intend to increase both when our cash flows and funding capacity grow with the execution of the plan laid out at our Investor Day. And we are pursuing noncore asset divestitures to help fund strategic acquisitions and expect to share more news with you on this front over the next several months. All in, we are pleased with the results of our balance sheet enhancements and are comfortable with our capital levels, which provide a prudent buffer above regulatory and rating agency requirements.

Consistent with this disciplined approach, we continue to evaluate a pipeline of initiatives to further strengthen the balance sheet.

Lastly, let me reiterate the key messages that Jim highlighted. We are pleased with the solid start to 2026 and believe our expanded membership base, relentless focus on returning to top quartile Stars and pricing discipline position us well to deliver stable and compelling MA margin and unlock the earnings potential of the business by 2028 as laid out at our Investor Day last year. We remain committed to taking appropriate action to meet the commitments we have made to you.

I will now turn the call back to Lisa to start the Q&A.

Thank you, Glen. Before starting the Q&A, just a quick providers. That's in fairness to those waiting in the queue. We ask that you please limit yourself to 1 question. With that, operator, please introduce the first caller.

Our first question comes from Ann Hynes with Mizuho.

I would just like to dig into DCP and IBNR a bit. in the press release, it looks like IBNR grew about 35% sequentially, and this is versus a 22% membership growth when looking at just total Medicare Advantage. Could you provide some insights into the drivers of this elevated IBNR growth relative to the membership growth? And also relative to your expectations coming online, if it came in line with your expectations? And is this a conservatism on your part? Anything would be great, any more details would be great.

Ann, thanks for your question. So consistent with the prudent assumptions we embedded in our guidance at the beginning of the year, which we are maintaining. We did take a prudent approach to claims reserves for the quarter given how early it is in the year and given the membership growth. So you are right. IBNR was up 35%, well above the growth in membership. We typically point you to looking at membership growth to understand how IBNR ship flows. So we believe we are prudently reserved coming out of the first quarter, just given the year ahead. I want to reiterate that we feel very good about what we saw in the first quarter and through the end of April in terms of all of the early indicators and completed claims. And what we're seeing in April so far is fairly consistent with what we saw in the first quarter.

Our next question comes from Andrew Mok with Barclays.

I wanted to ask about the Welsh Carson put call options given some near-term exercise windows. First, do you plan to exercise your June call options for the first 2 clinic cohorts? And second, if Welsh Carson were to exercise the full amount of its put options, what would the total cash obligation look like in '27 and '28?

Andrew, it's Celeste. So we need to make a decision on the put call option in the middle of this year. We will obviously be mindful of all of the other things that are going on in our cash position on our balance sheet. I would say that Welsh Carson has been an amazing partner to us, and we're proud of what we've built together and meeting in a leading primary care business for seniors and continue to see structural value in this type of relationship. In terms of if they put to us, next year, so next year would be the beginning of the first quarter, it would be about $1 billion to $1.5 billion in 2027.

And to be clear, they can only put the '25 cohort to us in 2027, but both would be about $1 billion to $1.5 billion. And we have included any outflows related to puts or calls in our funding plan.

Our next question comes from Justin Lake with Wolfe Research.

I wanted to talk a little bit more about your '27 bidding strategy. I appreciate your prepared remarks around rates and trend for '27, and how you'll be reducing benefits to bridge the delta between those 2 numbers and protect margins. But I want to ask your thoughts about protecting margins beyond that. Specifically, the reality that the full cost profile of your members probably won't be known for a couple of months, combined with the fact that you're in my confidence that you're going to get your Stars back for '28 will reduce your TBC for 2028? So I want to ask how investors should think about the potential that the company might get some cushion to bid above and beyond that retrend differential you talked about to reflect this new member uncertainty in the 2028 TDC reality in order to protect 2027 margins?

Justin, thanks for the question. I'll start, and then George will probably jump in here as well. So let me just be clear about how we're thinking about bids as we go into the year. Obviously, there's only so much detail that we can get into, but we can certainly share kind of philosophically what our principles are as we approach the bid. So Number 1 is the focus on being back to a normalized margin of at least 3% in 2028. And so to be there in 2028, we have to look at 2027, and we have to be mindful of the progress that we need to make in order to be on track for 2028. That certainly takes into account TBC considerations, it takes into account what we do and what we don't know about the current cohort, all of those things have to be accounted for in our bid strategy this year. Like that is priority Number one.

Priority Number 2 is within the constraints of priority Number 1, and I'm just going to -- again, I'm going to emphasize that one more time. Within the constraints, the priority Number 1, we want to provide as much stability as we can reasonably to our members so that we retain them. So retention is priority Number 2, retention, retention, retention. And the way that you do that is you have to understand the different segments of your customers, you have to understand what their needs are. And to the extent that you make adjustments to benefits, you do it in a way where it has the least impact on the things that are most important to them. It doesn't mean you don't make adjustments. It means you do it in a way that is thoughtful to your members.

And then, look, the third priority is growth, and that's a distant third priority. If we happen to grow some, great, but the priority is not growth. The priority is; Number 1, being on track for 2028, and; and Number 2, retaining the members that we have because, again, churn is expensive, and we want to minimize churn the most we can. George, what would you add to that?

Yes. Thanks, Jim. Justin, the other thing just to consider is that as we're looking through this, we are going market by market. So it's not just a matter of taking a look at the various benefits and paying a lot of attention to those that Jim mentioned our members care about most and it also helped drive better health outcomes and better Stars results. But it's also looking at it market-by-market, understanding the environment we're in with various providers and going through each one of those geographies because it's not just a matter of benefit changes, you also have to look at geographies and make sure that every geography is going to be supportive to the long-term trajectory of what we're trying to accomplish to get to our '28 targets, and we'll make a lot of progress in '27. We also do have a fairly good amount of information now about the new cohort. It's not perfect information by any means, but as Celeste has mentioned, all the key indicators of both our new and concurrent members we have, and those are lining up according to expectations, our APTs, our authorizations, pharmacy, MRA, all those things are lining up the way that we are expecting, as Celeste mentioned in her opening comments.

And the other thing just to emphasize here is, one of the things that we are seeing in the industry today is that the industry is taking it appears to be any way, a more measured approach given the funding environment medical trend. The help we received from CMS is helpful, but it is not, as Jim said, keeping up with medical trends. So we and others are having to make benefit adjustments, geographic adjustments in line with those expectations to continue to make progress towards our '28 goals.

Our next question comes from Jason Cassorla with Guggenheim Partners.

Maybe just a quick 1 on earnings seasonality. You guided 2Q MLR slightly above [ 91 ]. It represents a deceleration in the year-over-year step-up in MLR compared to this first quarter. I guess with your significant new member growth and as far as headwind, maybe can you just help bridge us to that MLR expectation for the second quarter that would be helpful.

Yes. So the first quarter to second quarter change this year versus last year is very much affected by the levels of PPD. So a year ago, we had higher PPD in the first quarter. If you recall, we've talked about how we reserve fairly conservatively at the end of '24 given the regulatory uncertainty, we were in a more regular position at the end of '25. So we released more PPD in the first quarter of '25 than the first quarter of '26 so the seasonality from the first quarter to the second quarter is less pronounced than it was last year.

Our next question comes from Stephen Baxter with Wells Fargo.

I was hoping you could maybe expand a little bit on trend dynamics in the quarter. I guess maybe speaking ideally to how much of a benefit you think you might have seen from flu and weather in the quarter. And then also potentially whether there's any difference in trend dynamics, if you were to focus maybe more on the retained membership you had in the MA book.

Thanks for your question. So first of all, if you recall, we reported our fourth quarter and gave our guidance for the year in early February. So we already had a pretty good understanding of flu, and we had captured the more beneficial flu season in our guidance. It was very, very modestly better than we had expected, but de minimis. As it relates to weather, it's fairly easy to isolate the impact. And if you think about where we are most concentrated from a plan perspective, it's an area that were less affected by weather. So we were able to strip out the impact of weather, and we're still seeing favorability running in line to ahead on all of the indicators that I mentioned to you.

Our next question comes from David Windley with Jefferies.

I wanted to switch to CenterWell and the operating cost ratio there, which ran a little higher than we were expecting. I wondered how much of that might be a result of the acquisitions and onboarding those? And then for the consolidated relatedly, the operating cost ratio seems to need to have a flatter trajectory through the year than would be normal for you? And how are you planning to execute that? I'm wondering if those 2 are related?

Great. Well, this is Sanjay. Thanks for the question. So first off, just stepping back and looking at Center wall more broadly for the quarter. I would say we're really pleased with the solid growth across each of our lines of business in the first quarter. We're seeing that both because of the growth in Humana's membership as well as our continued agnostic expansion. And so you can kind of see that across each of the 3 businesses. Starting with pharmacy, we continue to see industry-leading mail order penetration for our Medicare members and have seen really nice uptake by new members in 2026. We're also continuing to expand our agnostic volume across specialty, direct-to-consumer and direct-to-employer, including looking forward to the new [indiscernible] partnership that we announced earlier this week.

Second, in primary care, we're seeing really nice patient growth year-to-date, so sequentially 110,000 patients or 22.5% sequential growth. And that's both through organic growth as well as through our recent acquisition of Max Health. And in the home, we're seeing solid growth in Central Home Health and within One Home and that includes through the launch of the next phase of our skilled nursing facility value-based care model now covering an additional 2 million patients. So all in, we're really pleased with the growth and execution across CenterWell.

I think one of the things you may have noticed is that in the first quarter, we did have a handful of items that will not repeat, and in some cases, will actually reverse later in the year. And so I think that's what you're getting at. A couple of examples of what those are include the skin substitutes in our ACO reach program in the primary care organization. That's both current year and continued runout from the prior year, for which CMS will hold us [indiscernible]. Second, some timing-related items related to the Villages Health acquisition that as we continue to integrate, we'll see improvement for the rest of the year. And finally, some transaction and integration costs associated with the Max Health acquisition that were not previously contemplated in our Q1 guidance.

Thanks, Sanjay. And I'm just going to add to that -- sorry. And Sanjay, I'm just going to add to that, first, if you're comparing to the first quarter of last year, particularly in Central, it is a tough comparison. If you recall, we did mention onetime positivity, particularly in specialty pharmacy, which is driven by better-than-expected drug mix, and we also had some favorability in 1Q '25 in PC. If you take a look at the OCR and center well, it does actually tie to your question, it was, in 1Q '25, it was well below the rest of 2025. This year is you're going to have a more normalized OCR level throughout the year rather than the ramp that we saw in 1Q '25 through the rest of the year. And just generally in CenterWell, I would look to 2024 for seasonality. We had about 20% of our earnings in CenterWell in the first quarter of '24, we expect about the same in 2026.

And then just taking a step back to the consolidated OPR, yes, the first quarter was impacted by some of the noise in the comparisons in CenterWell. Our expectations for the year are in line with what we laid out in our guidance. And if you want to -- if you look towards the insurance business, you can see really nice progress there on the OCR. But we are still expecting a significant pickup in the OCR this year -- or improvement, I should say, not pick up.

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

Maybe just going back to the MA side of things. I appreciate the comments about all the metrics you're tracking and they're tracking well. I think historically, there's always been this view that -- and what reality has shown out is the second quarter claims experience really tells you whether you've got a problem or not. It sounds like some of these metrics are things you just normally would have tracked in prior years, but maybe some are new that you've done because of your initiatives. And I wondered if you could just give us a flavor for how much incremental information given the initiatives you have that you feel like you have to sort of get ahead of what normally shows up in the second quarter?

And just to follow up on one of the previous discussions about the bids. If your expectation and a lot of what you're gearing for is the earnings power in 2028, understanding the restrictions on TBC from year-to-year and understanding the desire to hold benefits constant, does that cause you to lean in to making sure you hold on to membership because you're going to get this big lift on Stars next year and maybe in a normal year, you go from more margin improvement next year. But because you know Stars and some of the other things happening for '28 are going to be positive, you'd sort of be willing to slow that progression just to hold on or even grow membership? Any thoughts on that aspect of your bid strategy?

A.J., let me start -- first of all, there's a lot in there. I'm going to try to tease it apart and hit the different components of it. I'll start, I'm sure either Celeste or George want to weigh in as well. So let me just start with kind of the leading indicators. I think the way to think about our understanding of trend as it progresses through the year is that each incremental month is narrowing the range of possibilities of what you might see then for the balance of the year. So you don't -- of course, you don't have perfect information at the end of March. You don't have perfect information at the end of April. You don't even have perfect information, frankly, at the end of June. But each of those months is narrowing the range of outcomes that you might see for the rest of the year. And so we're obviously looking at the first quarter. And as Celeste indicated, we have also taken an early look at April as it's coming in. And all of the indicators look as expected in that period of time.

And then what I would say is it's not so much that we're looking at new and more indicators, it's more -- the way I would describe it is we are being more disciplined in looking at them on a regular basis and a regular cadence so that we understand that trend even more in real time than we have in the past. I mean that's that's the way I describe it. So are we feeling better each month? Yes. Do we also want to see what happens at the end of the second quarter? Of course. Clearly, we want to see what happens at the end of the second quarter. And clearly, we will feel better than we feel now. So that's kind of how we think about that.

On the second part, which I'm going to now blink on is the bids, yes, bids in '28. Look, the way that we have thought about this, including last year, including this year, including next year, is that we have a margin expectation that is kind of consistent with over time being at a place that provides a sustainable attractive margin for the business and a good return on capital. And that during this period of time, where we have the Stars challenges, we are making adjustments so that we can protect the business through that period of time while also making progress against margin. And so we're starting with where does our margin need to be each year. We did that this year. We started with where does our margin need to be this year. We don't start with, hey, how much do we want to grow? We start with, where does our margin need to be to be on track to 2028 and and back to a sustainable and durable long-term margin? That is the first principle that we started with. That is the same thing we started with a year ago, frankly.

And so yes, we have an idea of the various scenarios that may play out in 2018. Obviously, we don't know what 2028 is going to look like, but we can kind of hone in on these 4 or 5 different scenarios that might play out, and we need to plan for '27 in a way that puts us in a situation where we can accommodate each of those scenarios. And when I talk about multiyear planning, which I've done a lot of over the course of the last few years, that's what we're talking about. We should always be looking out 2 to 3 years in trying to understand how the external environment might evolve and making sure that we are putting in place plans and contingency plans that can accommodate the unknown across that period of time. And that's really what we're doing. So let me open it up to Celeste or George to add.

I just want to add on the claims work. There's -- we're doing a lot more both in the front -- particularly on the front end of claims, where we are looking for anomalies and differences in terms of regional provider CRGs, just looking for things that might indicate that something which would normally be identified down the pike, something is different than our expectations. And we're also spending a lot more time looking at the inventory, what's in there and some of the drivers of that. And then on the back end, we're going deeper on the new member components than we typically would as well as the overall, but breaking down in much more depth and more green some of the things that we would look at so we are -- we can identify hotspots faster if they exist. And as I said previously, the early indicators and then the ongoing claims that we see are running in line to better than our expectations.

It's George. Thanks, Celeste. I'll just add 2 quick things. One is we've talked in the past about how much progress we're making into operability and the work we're doing in Stars where we're getting out of head, jim mentioned all the things we've done to be able to reach out on the front end to our members as they're coming in, our new members, that also is helping inform where we are. So that's yet one more indicator.

And then on -- I want to be very direct on your question about TBC. We are very well aware of the TBC limitations. We're very well aware of what happens when TBC comes back when -- with our expectations on what we're going to recover in Stars. And so that is very much part of our planning process as we're going to the '27 bids.

Our next question comes from Kevin Fischbeck with Bank of America.

Great. I guess I really do like the commentary around focusing on margins, first and foremost. But I just wanted to understand a little bit because this commentary because this year, you expect to double margins on an M&A basis. And now you're saying next year, you're willing to cut benefits even though this year you were able to do that without -- with a relatively stable benefit design. So are you saying that the funding shortfall for '27 is bigger than this funding shortfall for '26 as far as Humana goes? Or is there something else around the timing of some of the cost-cutting initiatives on the G&A side that make next year potentially more reliant on benefits? I'm just trying to understand a little bit of a change in tone here about margins and cutting benefits if necessary to achieve margin improvement.

Yes. Again, I'll kick off. Anybody who wants to add, feel free to add. The short answer is, yes, the gap between funding and medical cost trend is larger going into this bid season than it was a year ago. Like it just -- it's very clearly larger than it was a year ago. And that is really what is driving our thinking. And we're still on track on our plans around cost management. We're still -- the other components that go into our margin that we laid out last year in June, they are all largely on track. The difference right now is the funding environment relative to medical cost trend. And that's mostly the funding environment. Medical cost trend has been relatively stable now for 2 years so...

If I could just add 1 other piece of that, Kevin. And that is that while we appreciate what CMS has done to create a more stable environment, as we've said, the funding still doesn't keep up. And we will, this year, as we have in past years, make the appropriate adjustments. If you -- just as a reminder, we were having to adjust benefits for 2 years, and we made those adjustments earlier than most of our competitors did. And so we continue to take a very disciplined approach as we go into this bid cycle, and you can expect that going forward.

Our next question comes from Scott Fidel with Goldman Sachs.

I wanted to ask us 2 more targeted questions with the 2 of the Medicare lines of business and just around the themes in terms of the monitoring and sort of early utilization trends. First would be just on individual MA, how you're seeing sort of those trends on the new members of particular maybe playing out between HMO and PPO? And then also, we really haven't talked much on PDP yet where you have had pretty substantial growth. So curious around how the PDP line of business appears to be performing from a utilization perspective relative to the margin targets that you laid out in your guidance?

Let me just hit PPO and HMO here for a second, and then I'll hand it off to the others to handle PDP and add to the commentary on PPO and HMO. Look, the short answer is our portfolio as a whole is performing the way we expected it to perform, like that's the headline. But I think more importantly, I just want to continue to reinforce the message that we have delivered now for a couple of quarters, which is there is nothing inherently good or bad about any type of product. There's nothing inherently -- there's nothing inherent in the product that doesn't work. it is all about how do you price the product and how do you structure the product to target the right segments in the right way? And if you kind of look back in time, because I know there's all this talk about, hey, PPO is bad, PPO is not good. Look, if you look back in time, we had a number of years where the industry priced PPO aggressively and they were -- we, the industry, were using PPO as a growth engine, pricing aggressively and you saw disproportionate growth in PPO. And you saw that happen at the expense of margin in that product.

We spent 2 years repricing our PPO product. We spent been 2 years repricing our PPO product, and most of the industry either did it with us or followed suit shortly thereafter. And the result that you're seeing is that growth is rebalancing back to being more equal between HMO and PPO across the industry, we believe. And again, that is a result of the industry taking a different approach to how they price that product. And when we do that, that product can perform financially, and we see that product performing financially.

Now look, every year, we're going to step back, and we're going to look at our whole portfolio. And we're going to say, "Hey, are there pieces, are there geographies, are there pieces that we need to reconsider based on new information?" But the practical reality is all product, if priced appropriately, is good product. And right now, when we look at our portfolio, our portfolio is performing.

And just to add quickly, while we don't get into cohorts beyond new and concurrent members, as we called out, are what we're seeing from a claims perspective and an early indicator perspective on both new and concurrent members are running in line to better than expected.

It's George. Scott, you also asked a question about PDP. As we look at our PDP business today, it's still -- it's on line with our expectations. The membership mix, the pharmacy trends we're seeing and member behavior are in line with expectations. So we remain confident our '26 pricing. If you remember, our guidance is right along the same lines as our guidance for '25. So relatively flat, but what we're seeing so far looks fairly good.

Our next question comes from Erin Wright with Morgan Stanley.

Operating leverage still stands as a meaningful contributor to that 2028 bridge. Just can you remind us on the progress on addressing some of the operating costs? Was there any timing dynamics to call out in the quarter? Anything we should think about for the year? I guess, can you remind us of some of those components of the cost levers embedded in 2026 guidance? And what are some of the longer-term opportunities, the progress relative to what you were thinking maybe a year ago at the Investor Day and just have there been any changes or surprises on that front in terms of those levers near and longer term?

Yes. Thanks for your question. So we are making great progress against our operating cost targets. In terms of the particular quarter, as I mentioned earlier, there's a little bit of noise just given the tough comparison to last year in CenterWell versus some of the less favorable onetime noise in CenterWell this year, but our expectations for the year are on track for what we had guided to you or at the beginning -- on our fourth quarter call. As it relates to the cost cutting, both tactical and strategic, we are making really excellent progress there. So in terms of the tactical cost-cutting measures that we talked about, we -- Jim announced the early retirement program last year. We're continuing to see those employees exit. The last of them will leave at the end of the second quarter. That gives an opportunity to folks who've been here for a really long time to if they'd like to go do something else or fell off into the sunset and enjoy their lives outside of Humana. They can do that.

We've been optimizing our internal policies. They squeeze out differences. They also, in some cases, get us more in line with corporate best practices. We've been improving productivity and increasing volume discounts, while also improving payment terms with vendors. And we've been consolidating our supplier base to drive better supplier relationships. Those are some of the more tactical things. Some of the more strategic long term, some of which are running through 2026 are changing and expanding our outsourcing capabilities. What 2026, you'll see where we're seeing the improvement is really in some of our corporate functions where we were well below industry benchmarks in terms of outsourcing percentages. We're getting close to those benchmarks. So in finance, for example, and HR recently made some changes there as well.

Over the longer term, we see significant opportunities to consolidate our relationships and increase service and quality for our membership and our patients, at the same time, it will also reduce costs, continuing to standardize and simplify our processes while leveraging technology to use more automation and create efficiency. And Jim talked about our operating model changes. There are some components that have shifted already. We've been really focused on centralizing the things that make sense to centralize. We believe it makes sense for us strategically, but it also does have -- is beneficial to our cost, and I think provides better and more consistent experiences for our members and our patients across the country.

So those are just a few examples. And again, we are very confident in the progress that we are making this year and the targets we laid out for 2028.

Our next question comes from Ben Hendrix with RBC Capital Markets.

Just wanted to follow up on some of the CenterWell commentary. I'm just hoping to get any early observations within CenterWell on trend. Anything to call out on patient profiles or patient behavior that you've observed across your expanded Medicare membership versus the growth that you're seeing in the carrier agnostic population?

So this is Sanjay. Thank you for the question. So broadly speaking for CenterWell, the growth in Humana is definitely a tailwind to the business across the 3 businesses. We see that within the pharmacy business through the mail order penetration that we have in our Medicare business. We see that within the Home Solutions segment, both in CenterWell home health as well as within One Home, which, as a reminder, is our post-acute value-based convener. And specifically within the primary care organization, that growth has been helped by the growth of Humana.

Broadly speaking, what we're seeing in that population is in line with what the plan is seeing as we enter the new year, although it is very, very early for us in the year. So I think we will continue to monitor that. As an early indicator, though, some of the things that we track are engagement of those new patients and those are tracking very much in line with expectations.

Our next question comes from Lance Wilkes with Bernstein.

Great. I was wondering if you could help us understand some of the management processes that you put in place in order to drive the a large number of key initiatives you've got. So the first key question I had was just with Stars, with the integration in value-based care of the acquisitions, Medicaid rollout, the PBM initiatives, and outsourcing initiatives, are those things that are being done sort of within each of the units? Or are you setting up kind of flex corporate staff that are getting injected into those? And how are you monitoring and managing that?

And a kind of comparable question is, you've commented on how you're looking at cost trends, other key operating metrics. And just interested in how you're doing that more and faster? Is that an AI thing? Is it merely you just put more staff to look at things more frequently? Or if you had any other sort of adjustments to some of the financial systems and clinical systems that enable you to do some of this?

Yes, let me go ahead and touch on kind of management process around all the initiatives that we have. We actually did stand up a transformation office probably 15 to 17 months ago. We have staffed that with a combination of hiring some people from the outside, and we've moved some legacy teammates into that organization as well. And the way to think about it is, they do 2 things. One is they're helping to kind of track initiatives, just make sure that we're on track in making the progress that we expect, flagging issues or problems and escalating those to the appropriate place so they can get resolved. And then the second thing that they're doing is they're providing surge resources to the business is kind of the way to think about it where there are temporary need for surge resources. Sometimes that surge resource is extra analytical horsepower, sometimes it's the arms and lengths to get things done. But the primary owner and driver of the change is the business. It's the individual functions and teams that need to work differently over time for this to be sustainable change.

What the transformation office is, is an enabler and accelerator more than it is the entity that is making the change happen itself. The change has to occur in the base business and the base business appropriately needs help sometimes getting that done. And so that really is what we put in place. Look, realistically, again, I think it was probably about 17 months ago that we put this in place. It took 3, 4, maybe even 5 months for it to get up and running the way we wanted it to run. These things, when you start them off, they're always a little bit bumpy. Everybody is trying to figure out how to work together. Right now, it's working quite well, and you're getting good feedback from the business in terms of the support they're getting and the transformation office is kind of picking up momentum as we go.

So that's the way I would describe it. Again, if others have anything to want to add.

Jim, one thing I would just add is 1 of the things that the transformation office has added that's really helpful to us as operators is that as we are tracking towards our 5-year plan, which we talked about at Investor Day. And as we're talking about returning to our margin in '28, one of the things the transformation office helps us ensure we do at the business level is it keeps our eyes on the horizon where we're trying to go. And so that's one of the major inputs that the transformation office is doing beyond the surge help that Jim talked about.

Our final question comes from Michael Ho with Baird.

Great. I wanted to reframe Justin, A.J., and I guess, Kevin's question a little differently about the '27 margin setup. So if I were to use 2025 a year with flat rates, poor funding environment, where Humana was still able to drive individual MA margin improvement, I believe, doubling it to around 1% as sort of a comparison year. The setup for '27, stronger rate notice, stronger year-to-year star ratings improvement granted your star in payment year '25 or higher overall, but your diversification efforts are driving a stronger year-to-year improvement into '27 and now potentially similar conservative posture on benefits from pricing. Would it be fair to make this comparison and say the year-to-year set up into '27 actually feels even better than '25 when it comes to your ability to drive margin improvement?

So here's kind of the way that I would characterize it is, as we're heading into '27 bids, our transformation efforts are more mature -- well, frankly, they're stood up, they're more mature, they're giving us more tailwind operationally in a whole bunch of different areas, G&A cost management, clinical cost management, et cetera. And because of that, we do have a broader array of other levers that can help us achieve the target margin that we're trying to achieve next year. And so every year, we are looking at what is the funding gap or surplus relative to medical cost trend?

What are the things that we can do operationally to close a gap or increase the surplus in a way that then minimizes the impact that we have to have on our members? But then ultimately, you still have to come back and say, okay, but what are the changes that you have to make to benefits in order to get to your target margin, so in order to get to a sustainable, durable, attractive long-term margin that gives us an appropriate return on capital?

That's the logic you're going through each and every year. And again, what I would say is I do think we have more momentum on the transformation side that is giving us other levers -- giving us more levers outside of benefits than we had 2 years ago, but you're going to have to look at both. At the end of the day, you're going to have to look at both.

So look, with that, let me just move to close real quick. I want to thank everybody for joining us this morning and for your interest in Humana. We very much appreciate that. And I also want to say thank you to our 65,000 associates who serve our members and our patients every day. It's the work that those associates do that makes things happen here. And we appreciate your support. We appreciate their support, and we hope you have a great day. Thanks.

This concludes the conference call. Thank you for participating. You may now disconnect.

All right. Well, let's go ahead and get started. It's my pleasure to have the team from Humana with us. We've got Jim Rechtin, Chief Executive Officer; and Celeste Mellet, the Chief Financial Officer. Thanks, guys, for being here.

And I think, Jim, you wanted to make some comments before we get into some Q&A?

Yes. I just wanted to hit a handful of themes, which are really kind of the themes that we've been hearing since the first quarter earnings call. I'll start with -- I'm going to take us back to our Investor Day last June, we essentially made two commitments at the time. One is getting back to -- getting Medicare back to a stable and compelling margin of at least 3%. And second is getting the earnings power of the business back in place by 2028. And we just want to reinforce that those things have not changed. We are still committed to the things that we said last June.

What that means, of course, is that we have to make adjustments to the environment that we're in. And so what I mean by that is medical cost trend, rate environment, we will have to adjust benefits to accommodate the environment that we're in, both from a funding and from a medical cost standpoint. And that has led a number of people to basically say, "Okay, so clarify what you mean when you talk about lifetime value of a member in that context."

And first of all, I want to be very clear that when we talk about lifetime value, it's not a theoretical concept. It is rooted in math. The economic value of November in year 2 is substantially better than year 1. Year 3 is better than year 2. Year 4 is better than year 3. The jump from year 1 to year 2, in particular, is driven by those acquisition costs, which are higher than retention cost and it's driven by the fact that MER matures from year 1 to year 2. And it matures as we get to know a member better, we understand what their conditions are, and we help them manage those more effectively. And so the -- when we talk about lifetime value, what we're talking about is the economic incentive to make sure that we are minimizing attrition or maximizing retention of our members from year-to-year.

For that to work, for that lifetime value calculation to work, we still need a compelling MA margin over time. I think there were some questions, do we believe that CenterWell margin can replace or substitute the Medicare margin? The answer is no. The Medicare business has to stand on its own. The CenterWell business has to stand on its own. Combined, it makes the economics more attractive. But we needed a stable, compelling MA margin. We need to continue to run a good CenterWell business and combined, it creates a lot of incentive to keep our members around.

Okay. So I think the theme there is you can balance your lifetime value, strategy, adjust benefits and still achieve the desired outcome?

That's exactly right. We have to do that. That is the nature of the business at the end of the day. And obviously, as we adjust benefits, we want to do it in a way that takes -- that protects our customers, our consumers the best we can, but it has to be fiscally prudent at the end of the day.

Yes. And Whit, if I can just add to that. So the acquisition costs, I think, are when people generally understand they're higher in the first year, but the difference between the first and the second year is massive. We're talking over $1,000 on average per new member in the first year, and that's halved in the second. So that's a huge difference. But you have to have the medical margin to follow up on it, too, so you'd have to adjust your benefits. But this constant churn within the industry just generates a ton of money that's going to the broker pockets, it's not going to the enterprises, the shareholders or the members.

And I would think game theory, if the entire market is responding by adjusting benefits that further enables you to achieve the desired outcome and still focus on lifetime value?

Yes. That is exactly right. In periods of time where the industry funding is not keeping up with medical cost trend, you would presume that the entire industry is making an adjustment. And then the question is not are we making adjustment. The answer is yes, we are. The question is, are we a little bit better at making those adjustments in a way that are less abrasive for our members. And are we doing a better job of communicating and interacting and engaging with our members so that they are better able to absorb those adjustments.

Okay. Strong AEP this year, over 1 million members. Maybe just refresh us on some of the numbers around switchers retention, growth in D-SNP, how many are returning members?

Yes. So these are the metrics that we're looking at during AEP in many cases and then in some cases, in early January to basically ask ourselves, "Are we seeing the type of growth that we want to see?" And we have felt good about where those metrics have come in, what they're telling us about the membership that has onboarded in January.

So for example, about 70% of our new members are switchers as opposed to new to MA. On average, switchers are economically better in year 1 than a new to MA member. Now you look at that and you then say, "Okay, well, are you concerned that a bunch of those switches are coming from planned exits?" and the answer is we actually feel pretty good about the mix of planned exits versus non-planned exits. We absorbed about 12% of the planned exits. So that's less than our market share. That's less than -- if you think about it, our kind of fair share of the market and which means that we have -- we essentially have brought on board a lot of very positive switchers who are coming from other types of plans, not from planned exits.

In addition to that, about 70% of our new members are in 4-star better contracts. And so that also makes this a good mix of membership coming in. We also have about 75% of these members coming through channels that are more attractive sales channels. So we're looking at our sales channels, some tend to have higher retention. Some tend to have more engaged members. We are seeing about 75% of our members coming in through channels that we consider to be higher-quality channels. And so each of those looks, gives us a snapshot into the membership mix in a way that, right now, presents very positive.

And I would just add, it's not an accident that we're seeing an improvement in the sales channel mix. We have taken very deliberate action to as you think about some of the actions we took in AEPs to trim the lower performing call centers and broker partners. So we looked at Stars, we looked at retention, we looked at all of the things that drive the economics for the business. We weren't just cutting for cuttings safe, but we're really focused on the quality of the membership that we were going to acquire through whatever channels we had open.

Yes. And so for all those are the reasons that you feel confident in your ability to double the margins before the Stars headwind still?

That is correct. Yes.

Mix of HMO, PPO, it was largely unchanged versus the mix last year, correct?

That's exactly right. It looks very similar to our historical mix over the course of the past few years.

I believe -- I know you've got your January premium payments from CMS, your February payments from CMS that gives you a look with the [ NNR ] stuff. And any observations, things you care to share any changes in RAF versus expectations?

Yes. So the things that we -- there's obviously the things that we see during AEP that we will then adjust to over time. And then there's the things that we don't really see until January. So we have the MRA tape that comes in, in January now February. We've got a pretty early look on medication utilization. And you get early data on APTs, admits per thousand, you get some pretty early look at prior authorizations and what -- how that's trending. And on the whole, all of these metrics are kind of pointing to the same story, which is the mix of members coming in looks very consistent with what we were expecting again, as we were making all of our adjustments in AEP.

Like again, to Celeste point, we made a whole bunch of deliberate decisions to try to shape the type of growth that was coming in. And the data that we're seeing across all those different metrics reinforces that what we ultimately absorbed is pretty consistent with where we expected to be at this point in time.

Knowing what you know now about the competitor benefit design action that was taken, would you have changed your bids at all?

Yes. You're saying if you went all the way back to last June, would you have done something different?

Totally unfair question.

Look, I will tell you, every year, you see what your competitors have done and you would have done something different. Like that is just a given. When we were submitting our bids, did we expect to have the type of growth that we had this year? No. The answer is, at that point in time, no, we did not. As data began to come into the market even over the summer, you begin to see some of the actions that your competitors take even before the product is out there. You begin to realize kind of the direction that things are headed, and that's when you're stepping back and you're saying, "Okay, now on a forward-looking basis, what do we need to do differently to shape this environment in the direction that we want to shape it?"

And again, that goes back to what Celeste was pointing to. We made very deliberate decisions both geographically, product type, how we commission the channels that we were using from a sales standpoint to take advantage of the situation that we're in and shape it in a direction that made sense for the company.

But to go back to your original question, yes, you would go back and you would do some things differently if you had full visibility into what your competitors are doing. And having said all of that, we actually feel good about where we landed. A little bit different place than where we expected to be, but we feel good about where we landed.

Yes. I get asked a lot of questions about just the various margin profiles on different members and you had members in a 4-star plan last year that was one. And as those new members go to a new 4-star plan, is it 1, is it 2? And maybe it'd just be helpful to rank some of the margins, Celeste, on old members, the switchers and new lives from fee-for-service, et cetera?

Yes. So the bulk of our concurrent members, old members, are on plans with less than 4-stars. Then 70% of our new members are in plans with 4-stars or greater but you have the acquisition costs. So that would -- the acquisition cost pulls them down closer to the overall pool. So we've talked about sort of being breakeven in insurance and slightly negative in MA, but the profile is different.

Now typically, switchers do have higher margins. So if you start -- if you just strip out Stars and everything, and let's just -- like UM, utilization margin, you would -- your switchers would be the highest then your new to Medicare would be the lowest because they tend to be -- they don't -- they're not coded yet. You get paid more over time as they age in. So it's -- there's a lot going on beneath the surface with the margins, but if you strip away the noise of Stars and acquisitions, you get -- your switchers are still going to be your best.

Right. Maybe growth in D-SNP this year and maybe just update us on kind of what the margins look like on those members now last year versus this year?

The margins on D-SNP. The last year versus this year, I don't know that I actually know that off the top of my head.

It's going to be better. Yes.

A little bit better.

Well, I mean, if we're -- if you think about it, we're doubling ex Stars, if we were doubling for the book, then the margin improvement would be across all of the membership. So if you think about the drivers, so we have the rate notice plus trend vendors plus operational efficiency is greater than trend, which is what gets you the margin improvement that would be across the whole book.

The D-SNP remain, on average, higher margin than the non-D-SNP last year and this year?

Yes. I don't think the differential is any different than it was last year though.

Yes. Some of your competitors, I hate doing that, sorry. The tend to say that they don't feel like they can make money on PPO? Why is it that Humana feels like they can make money on PPO lives?

Yes. I don't understand where the notion that you can't make money on PPO product comes from, to be perfectly honest. Like at the end of the day, you have a risk pool, you have the ability to price product to that risk pool. The profitability of the product has everything to do with how are you structuring the product, how are you structuring your network within the product. And yes, it has to be appropriate to the risk pool of the members who use that product, but the product itself is not inherently profitable or unprofitable.

What we have -- we took two years of pulling back on benefits across the board, but in particular, much of that was in the PPO market because we did recognize that, that market over a number of years had kind of gotten out ahead of itself in essence that it was being priced too aggressively. But we took 2 years, we pulled that back. We, in essence, walked away from kind of where the industry had been, which is pricing for a thin margin in year 1 and then trying to deliberately ratchet back benefits in year 2 and 3 driving a lot of churn, but then making money on the members you retained. That was part of what was going on in the industry. We walked away from that 2 years ago.

And so when you walk away from that and you're pricing appropriately, the product should do fine. You just have to recognize what the risk pool is that you're serving and how to adjust the business to it.

I'd be curious to get an update on some of the engagement initiatives, early engagement with new members, either on the MA business and also maybe CenterWell, how that compares to prior years.

Let me start and -- Yes, I'm happy to jump in. So we have been much more proactive this year in engaging our members really starting at the point of sale. So if you think about the pre-effective period between point of sale and the policy going into effect in January, you essentially have a window of engagement where you can get ahead on closing Star gaps on scheduling primary care appointments on getting your annual wellness visits scheduled and moving and so we've had a higher level of engagement than we've really ever had largely driven by deliberate actions that we've taken in and post the sales period to onboard our members more effectively. It has helped with taking that approach has helped with call center volume, call center service levels. It has helped us get a head start on Stars performance. I've had a lot of benefits and frankly, we're excited to be managing that process in this way going forward.

I'd say generally, because we had a lot more switchers this year, 70%, they're going to be more engaged. Even the ones who come in under coded, they know how to use the program. They know how to use their benefits, they're much more familiar with it. So from that perspective, in addition to the actions we're taking to engage them faster and sooner, we're not seeing any cause for concern at the moment.

About 25% of our switchers we have actually had as customers in the past.

30%, yes.

Is it 30%? Yes. So we can look back at how those members performed and engaged historically. And again, it's good membership mix. It is highly engaged members who are active in their care, which again is positive for Stars. It's positive for MER.

All right. That's where I was going to go next. All that aligns with the investments and things you're doing with Stars. Maybe just elaborate a little bit more on the Stars investments, how you feel like you're tracking beyond some of those member engagement initiatives.

Yes. So the Stars -- operationally, Stars performance continues to perform well. We have made very positive strides year-over-year. We hope to share more about that, a little bit more color around that as soon as the hybrid season is over here in another couple of months.

But the headline is operationally, we're doing the things that we felt like we needed to do. We've got the inherent uncertainty of not knowing what your competitors are doing in a program that is created on a curve. But operationally, we feel good about the place that we're at. And that's both looking at the HEDIS and patient safety metrics that we were working on last calendar year. That is also true in metrics that are kind of in play right now, which is call centers and [ caps ] and house metrics.

So look, we're optimistic about where we're headed in the Stars program. And like every year, we need to see where competitors land to understand the final outcome.

Well there is some positive, I guess, near-term developments with Stars, the preservation of the reward factor was certainly, I think, a welcome development. And the technical note of CMS is now proposing some changes within Stars, maybe eliminating [ 12 measures ]. I mean you can run it through a model and see that it's a modest headwind to your raw score. What do you think the outcome of this is going to be just from a policy perspective at this point in time? And feedback maybe that you're providing to CMS. I know it's a busy week for you.

Yes. Well, look, on the Stars front, what it feels like CMS is trying to do is put more emphasis on health outcomes at the end of the day. Moving away from some of the administrative metrics that while meaningful to an extent, would also tend to drive costs up, cost burden up in excess of the actual benefit that members are seeing.

So we came out in support of the changes. We recognize that when you look at historical performance, it would appear to be a modest headwind. But a lot of our effort over the course of the last roughly 18 months now has been in those very metrics that CMS is emphasizing. So we've been putting a lot of effort into the quality and the patient outcome-oriented metrics. And so we feel good about where we're actually positioned at this point in time relative to the changes.

I get asked the question on Part D, where PDP margins are today and what sort of incorporated within the outlook and framework this year.

Yes. So we -- again, like last year, priced for margin, but we're guiding to effectively breakeven just given the continued evolution of that program, I think this -- the changes this year, then we'll sort of be more settled based on what we know today, that can continue to make changes. So just given the pipeline -- so we have a good view into the pipeline, but exactly when they hit and what the utilization looks like is the risk we're looking out for there, but we don't have heroic assumptions in terms of what we would earn in that business this year. But over time, we would expect as the program settles that you begin to generate more consistent profitability.

Yes. How strategic do you think about PDP now? I mean it's been, I don't want to call it a commodity, but when you've seen other competitor exits out of the market, it's helpful for the PBM in some ways, but long term, how's the thinking evolving around that business?

Yes. So there's a couple of components. One, it is a good starter product. We have a few products that are starter products for folks who may just start in one and then eventually switch right? You have much lower acquisition costs. You have a relationship. You have a sense-ish for their help. Two, you do have, as you think about the PD and then MAPD, the leverage and the insights and the risk pool across a broader set of individuals, which is beneficial. We have, as you know, our PBM in that business is structured very differently. So it's -- I mean, we get paid. It's more of like a transaction fee than we don't have like the massive markups. So it's beneficial to us, but we've structured that business very differently. So -- but obviously, we're going to continue to reevaluate it every year just as the regulatory environment changes and the rules for the program change to ensure that it makes sense.

Yes. Maybe just we'll hit on the rate notice obviously, some disappointing results and outcome of the preliminary rule. I don't know if there's much to share, Jim, but just -- I'll just throw it out as an open-end question with no answer.

Yes. I think you just summarized it in many ways. There is no answer at this point in time. Obviously, the industry has been very active and frankly, advocates for seniors have been very active in communicating to Washington, the potential implications of this rate notice. I think those implications are well understood. You can't have mid- to high single-digit cost trend and flat funding and expect benefits to remain the same. It's just the math doesn't work. And so again, I think policymakers understand that where things will land, it's hard to know. Obviously, CMS for all the right reasons, does not advertise where they're headed with a final rate notice. Our hope is that we see some amount of relief really for the benefit of our members, right? Like it is less about the impact it's going to have on us as a company and it's much more the impact that it's going to have on our members. And we'll know here in another couple of months.

And if I can just add that hope is not a strategy. So we understand what needs to be done to deliver on the targets and the margins that we laid out at our Investor Day. So it's better, it would be -- the productions or the adjustments in the industry will be less, but we understand what needs to be done.

I like that message. One of -- I've been studying a little bit this unlinked chart review thing, and there were some really interesting studies that have been able to show the wide variation and the potential impact of what this could be for participants within the industry. I've seen studies showing upwards of north of a 6% headwind, not 1.5%. And you guys don't feel like you're going to see as large of a headwind is that 1.5% but I'm asking more specifically around just like the industry and the wide variation and maybe the notion and idea that something like that could be phased in over a period of time?

Yes. I think -- while we do believe that there will be some variation. The variation is not going to be the same magnitude that it was with v28. I also think some of the variation that you see even today can get managed over time. So you've got companies that have kind of been -- that have essentially invested more in having the capabilities to link encounter data to chart reviews and then you've got companies who have lagged in doing that. But the whole industry is going to move there over time, and that will narrow the variation in the impact over a year or two.

Having said that, when you look at just the totality of the changes that have been introduced, the recalibration, combined with the chart review and then the skin substitute adjustments. When you look at all the magnitude of all of those adjustments and what it's had on the industry, what it will have on the industry, it's pretty significant. And so I think the question is, do you face some of these changes in over time more to allow the industry to have time to adapt to them. I think that's a real question that CMS is going to have to wrestle with.

But I think from the chart review perspective, from a policy perspective, they've been pretty clear about that. So that is -- they want to make sure that whatever is being paid for happened.

On CenterWell, you've got the relationship with Welsh Carson and in any given year, there's the put call and there was some -- I mean, you've seen that there were some press reports out there suggesting that perhaps that a put or call might be active. I don't know if that's true or not true, but just what's the latest update on the put or call.

So in '25 and '26, the ball is in our court. So we could call starting in '27, they could put and there's a lag. So there are a number of cohorts. So the '25 -- the first year, the first cohort, we could call in '25 or '26. And if we don't, they could put it in '27 and then '26 would be '28. So it's a 2-year period. And we'll take a look at where we are, we do a bunch of analysis. That decision would need to be made by June. As you saw last year, we did not call it.

Correct. Maybe last one here is you've announced a couple acquisitions of some risk-based, risk-bearing groups down in Florida. I'd like to just hear a little bit more on the strategic thinking about how those complement the business down in Florida?

Yes. In both cases, these acquisitions kind of filled, essentially, geographic gaps in our CenterWell portfolio in a broader geography, meaning the state of Florida and the Southeast. That's very important to us. And so we looked at these opportunities and said, "Hey, one, they're very good geographic fit." They are also unique in that -- in both cases, there's a limited number of other options in those geographies. So it's -- if you're going to build out your footprint and your network in those geographies, this was the opportunity to do it. And in both cases, they were operationally good fit. And in particular, with MaxHealth, this is a very, very, very high-performing group. And I actually think we CenterWell will learn some things from what Max Health is doing that we can apply to the rest of the portfolio in a very positive way. So they're good assets. They're geographically an important fit.

And I think the last thing I would just emphasize is as we grow CenterWell, one of the primary questions that we are asking ourselves is what does the primary care supply chain look like in any given geography. And are we exposed or do we have risk because it's too concentrated or it's concentrated in either competitors or less strong partners of ours. And in those types of situations, it is very important for us to be building out a primary care footprint of our own. And so strategically, these made sense not just short term but long term to protect and preserve the business.

But to be clear, they have to stand alone as investments, right? They have to stand alone on the CenterWell, just like MA needs to stand alone, and we need to be able to make the math work without the sort of planned element and network element.

Okay. Well, great. Well, maybe we can do a field trip to the villages. I want to see what that place is all about.

I'm supposed to go in a couple of weeks. I have a field trip.

All right. Lisa set it up right. Jim, Celeste, thanks so much for joining us today.

Yes. Thank you so much. We appreciate it.

Good day, and thank you for standing by. Welcome to the Humana Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Stoner, Vice President of Investor Relations. Please go ahead.

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; and Chief Financial Officer, Celeste Mellet. 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 risks and uncertainties. Actual results could differ materially.

Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2025 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 and 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.

All 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, the call is being recorded for replay purposes. The replay will be available on the Investor Relations page of Humana's website, humana.com later today.

With that, I will turn the call over to Jim.

Thank you, Lisa. Good morning, everyone. Thank you for joining us. Let me hit the headlines. We are pleased with our solid 2025 performance. We continue to feel good about our membership growth. We remain committed to a consumer-centric strategy that is responsive to what our patients and members want to need. .

And we also recognize that to do that, we must deliver a stable and compelling margin that requires regularly adapting to our funding environment. We will continue to do this to adapt to a funding environment to ensure that we stay on track with unlocking the earnings potential of the business by 2028 as we laid out at our 2025 Investor Day.

Now I will briefly describe the progress we are making operationally. And as usual, I will frame my comments today around the 4 drivers of our business. That is, first, product and experience, which drive customer retention and growth. Second, clinical excellence, which delivers clinical outcomes and medical margins; third, highly efficient operations; and fourth, our capital allocation and growth in both CenterWell and Medicaid.

I will wrap up with additional commentary on the advanced rate notice. Most of my time today will be spent on Medicare product and experience and given the continued concerns that have been expressed by the market.

So let me start there. First, let me clarify what I believe are the real questions related to growth. Is this quality membership with attractive economics? Can we operationally absorb the growth and are we sufficiently positioned to fund the growth?

Second, let me take a moment to remind everyone how we think about growth. Our focus is on maximizing customer lifetime value and customer NPV. To maximize life to value an NPV, two things must be true, we must be priced appropriately to a sustainable and compelling margin and we must retain our membership year-over-year.

The way that we do that is by investing in an exceptional experience that fuels improved health outcomes and member retention. We also have moved away from past strategies built around loss leader plans. We design all of our plans to be priced to a sustainable margin adjusting for Stars.

Third, let me provide an overview of our growth and why we like the growth. We grew by approximately 1 million members or 20% in AEP. Our retention rate improved over 500 basis points year-over-year, and I keep emphasizing that, that is good growth.

Over 70% of our new sales were switchers from competitor plans. On average, switchers had better economics. Now I recognize that there are concerns about switchers from plan exits that our competitors have done. We did not have a high percentage of members impacted by competitor plan exits.

We absorbed approximately 12% of these members. That is notably less than our market share. 70% of new sales were in contracts with 4 Stars or better and nearly 30% of our new sales were bounce-back members. So these are members that we have seen before in previous years.

We recognize them, and we are pleased with the mix. Over 75% of our new sales were from higher lifetime value channels. So they're from better sales channels. This is nearly a 10 percentage point improvement year-over-year.

And again, we view this as a very positive development. When we look at full year 2026, we do anticipate individual MA membership growth of approximately 25%. And I will continue to remind everybody that as we collect new information and as the market evolves, we are continuing to manage our go-to-market strategy dynamically.

We have levers to pull if and when needed, and we are constantly evaluating that. Now fourth, let me briefly touch on the economics of our growth. We expect our new [ members ] to be accretive to the enterprise in 2026. We also continue to expect that when normalizing for Stars, our 2026 pricing results in a doubling of individual MA margin year-over-year.

My final point on growth is that we feel good about our operational capacity to absorb the growth. As we previously stated, this is a focus area for us. We are committed to not outgrow our operational capacity and to ensure a quality experience and quality care for our members.

We have been very much managing this proactively. The early signs on our ability to onboard are positive. In January, during the height of onboarding, I'll touch on just a few examples, we reduced our complaints to Medicare year-over-year. We improved our transactional Net Promoter Score. So this is a measure of customer service when members interact with our service center or contact center.

And we increased our completion rate for health risk assessments. And I'd also just point out that complaint to Medicare CTMs and health risk assessments, HRAs, these are both Star metrics, where we are ahead of where we were a year ago in both of these areas.

So let me close with this. We expect our growth to be accretive in year, but more importantly, it further fuels our ability to unlock our earnings potential by 2028 as we laid out at Investor Day. In recognition of the high level of interest in our overall growth strategy, President of Enterprise Growth, David Dintenfass, will join Celeste, George and me again today for Q&A.

So now let me briefly turn to clinical excellence and touch on our Stars performance. Efforts to strengthen our Stars program continued to progress as anticipated. Our outlook remains the same as previously communicated.

We feel good about our operational progress so far. We continue to be confident that we are on the right track to return to top quartile Stars v28. Once the hybrid season is complete next quarter, we will provide some additional visibility into our final operating results.

However, we will not speculate on thresholds. Turning to highly efficient operations. We are making meaningful progress, which is evident in our 2026 admin expense ratio. Celeste will provide more color on the drivers of this improvement.

And regarding capital allocation, we continue to grow our Medicaid and CenterWell footprint. Medicaid now spans 13 states, including Georgia and Texas, which are anticipated to launch next year. We also hope to soon announce a strategic acquisition in the primary care space. Celeste will also provide color on our capital efficiency efforts that ensure that we have the capacity to fund both our member growth and some continued M&A while protecting our credit rating, which is a priority.

Before concluding today, I also want to touch on the advanced rate notice. I understand, I recognize that there is concern around the rate notice. As I have said in the past, Medicare Advantage sits at the intersection of U.S. fiscal pressures and a program that is incredibly popular with.

Every administration wrestles without these 2 forces. We are committed to always protecting our consumers the best we can, and we are very aware that we must do that within the constraints of the annual funding environment. If that funding environment cannot fully support our benefit structure, then we will adapt as we have in the past.

But right now, we must wait and see where the final rate notice comes in. So in conclusion, we expect to keep moving forward with margin progression in 2026 adjusted for Stars. We continue to feel good about the way our member growth is setting us up for this year in subsequent years.

We are making progress on Stars. We will adapt to the rate notice once it's final. Before turning it over to Celeste, I am pleased to share that Aaron Martin joined the company in January as President of Medicare Advantage and a member of the enterprise leadership team. Aaron joined Humana with vast experience in health care, including a focus on making health care more convenient, engaging and valuable to customers.

He will be working closely with George and the team over the coming months and will elevate to the President of Insurance role upon George's retirement. We're excited to have Aaron on the team and expect that you have the opportunity to hear from him later this year.

With that, I will turn it over to Celeste for a few remarks before we go to Q&A.

Thank you, Jim. I will begin by echoing a few key messages. First, we delivered on our commitments in 2025. We reported adjusted EPS of $17.14 in line with expectations and above our initial guidance of approximately $16.25 while electing to make higher than initially planned investments to accelerate our transformation and position us well for the future.

Second, we remain confident in our customer-led strategy and 2026 membership outlook. We expect new members to be enterprise accretive in 2026 on average. More importantly, we expect the membership to drive significant lifetime value further fueling our ability to unlock the earnings potential of the business by 2028 as laid out at our Investor Day.

Third, we always take an appropriately conservative approach to final guidance. For 2026, the level of conservatism in our initial guide is higher than typical to account for the dynamic environment. Fourth, we are confident in our ability to fund the 2026 membership growth and are comfortable with our capital and our debt to cap levels.

Finally, we are committed to delivering a stable and compelling MA margin and unlocking the earnings potential of the business by 2028. Our MA benefit strategy must and will contemplate the funding environment each year.

We must drive sustainable earnings and appropriate returns to be able to provide excellent health outcomes and service for our members and our patients. Turning to brief comments on 2025. Our results for the year were underpinned by solid performance across the Insurance and CenterWell segment. The full year Insurance segment benefit ratio of 90.4% came in slightly better than our guidance.

The full year ratio includes a benefit set aside for a potential Doc Fix in 2025, which was then invested in areas such as network management and increased administrative costs to support things such as technology and other areas that position us well for the future.

I will now pivot to further details on 2026. We expect full year adjusted EPS of at least $9 with the anticipated year-over-year decline driven by the previously communicated bonus year 2026 Stars headwind net of mitigation. We remain confident in the overall assumptions used in our 2026 pricing.

As a result, we continue to anticipate doubling individual MA pretax margin in 2026, normalizing for Stars. Meaning if 95% of our members were in 4-plus Star plans consistent with 2025, we would hit doubling of individual MA margin in 2026. The expected underlying margin expansion is aided by clinical excellence and operating efficiency efforts, which are progressing as anticipated.

Further, early indicators such as risk scores, pharmacy claims and hospital admits per 1,000 or APTs are in line with expectations. All in, after accounting for the '26 Stars headwind, our initial guidance assumes individual MA margins are slightly below breakeven.

Let me touch briefly on the Stars headwind. The net Stars headwind for 2026, including individual and group MA is approximately $3.5 billion. This is net of both contract diversification and provider offsets, which as a reminder, are lower than typical due to our Star support for providers.

When calculating the headwind for '26, it is important to keep the membership and revenue growth in mind, which is why the number is larger than what we have previously discussed with you. While we now have 45% of members in 4-plus Star plans for '26, our expected membership base will also be 25% higher due to the '26 member growth, which includes strong retention.

Higher retention means that we kept more members on the 3.5 Star contracts than we previously expected. In addition, approximately 30% of new sales were on contracts rated below 4 Star to by '26.

Turning to our ongoing efficiency efforts. We expect significant improvement in our consolidated operating cost ratio for 2026. The decrease is primarily driven by operating leverage from membership and revenue growth along with tactical cost-cutting and transformation efforts, partially offset by the impact of the Star rating headwind.

As outlined at last year's Investor Day, we have made meaningful progress on tactical efficiency improvements, including consolidating our supplier base and the early retirement program we discussed with you last year. These actions have contributed year-over-year operating expense ratio improvement.

Looking ahead, we expect our broader transformation efforts to increasingly impact results beginning this year. This includes expanding outsourcing capabilities, simplifying and standardizing processes, and leveraging technology and automation.

For example, our work with partners to outsource components of some corporate functions is progressing as planned and delivering improved capabilities and cost efficiencies. These items are just a sample of our multiyear transformation that is driving efficiency and changing how we operate.

I will now stick to the balance sheet and our plans for funding the '26 membership growth. As I discussed throughout 2025, we have been focused on efforts to increase the efficiency of our balance sheet and fortify our foundation. These initiatives include optimizing legal entity structures, refining, reinsurance and risk transfer arrangements, selling noncore assets and managing the timing and structure of capital deployment.

Of note, the capital optimization progress made to date significantly reduces the required funding for expected membership growth in 2026. Despite expected premium growth of 40% from '24 to '26, our statutory capital requirements will increase by less than 20%.

These improvements in capital efficiency will offset over $3 billion of growth in our capital requirements from the end of '24 through '26, representing the overwhelming majority of the capital needed to fund 2026 membership growth.

While maintaining capital with a prudent buffer above regulatory requirements and rating agency expectations. Finally, after contemplating capital required to fund '26 membership growth and select small to mid-sized strategic M&A opportunities, which we expect to fund with the sale of noncore assets, we remain comfortable with our debt to cap levels, which are expected to remain largely flat year-over-year.

We remain committed to prudent debt to capital management and are focused on maintaining our credit ratings. In summary, we are pleased with our solid performance in 2025 and believe '26 represents an important step forward on our journey of unlocking the earnings potential of the business v28 including delivering a stable and compelling MA margin.

I will turn the call back to Lisa to start the Q&A.

Great. Thank you, Celeste. [Operator Instructions]

Operator, please introduce the first caller.

[Operator Instructions]

Our first question comes from the line of Stephen Baxter with Wells Fargo.

We hear you on the membership growth being enterprise accretive. I mean, I guess, potentially, could you expand a little bit on the level of earnings that you can drive purely outside of the MA underwriting?

And then as we look at the MA underwriting margins in isolation, being slightly below breakeven. How would we contrast that against your retained growth versus the new growth that you expect to take on here?

Thank you for your question. So when we talk about enterprise accretive, we are including the earnings associated with CenterWell. So if you recall, last year, we had a headwind in CenterWell Pharmacy because of the decline in membership. This year, we have a significant tailwind in CenterWell Pharmacy associated with the new membership.

We also will have greater patients and at CenterWell PCO and expect to see an increase in home health volumes also related to the membership growth. And all of that growth across CenterWell is very positive from a margin perspective.

As it relates to individual MA margins, as I mentioned, we expect them to be just below breakeven in total in '26. While we don't provide cohort level margin information for competitive reasons, I'm going to give you a little more detail this year given the unique dynamics. So when you take the Stars headwind into account, the margins look largely similar for new and continuing members due to the following:

First, on continuing members, they're disproportionately impacted by the Stars headwind with the majority on contracts with less than 4 Stars. Absent the Stars headwind, as we've talked about extensively, the margin would be significantly better. New members are less impacted by the Stars headwind. So 70% are on 4-plus Star plans, but 30% are on plans with less than 4 Stars. They have a similar margin to the existing cohort for a couple of reasons.

One, the cost of acquisition, which is a little bit lower this year due to the actions we've taken still significant; and two, a higher MLR associated with the new members driven by: one, lower [ MRA ] if conditions have not been previously captured and, in some cases, potentially higher med costs if they have not been managed before joining Humana.

So net-net, the overall margin for the existing and the new cohorts are fairly consistent but for very different reasons.

Our next question comes from the line of Justin Lake with Wolfe Research.

I wanted to focus on kind of the trajectory forward. To Steve's question, you're losing -- you have slightly below breakeven margins in the Insurance business in the new members. Can you talk a little bit about how I'm estimating you got about 2.5 million new members here to Humana. It's a huge cohort. How is the typical progress we think about removing Stars in the equation. What's the typical progress in margins over a 3- to 5-year period? How should we think about that cohort becoming accretive?

And then Jim, your comments on getting back to 75% the towers should say, the top quartile on Stars. What would be the net benefit in 2027 from that approximately compared to the $3.5 billion headwind you had this year on a net basis.

Justin, I'll take the first part of your question. George may add to it, and then Jim will. So in terms of the margin progression. If you think about like from year 1 to year 2, you have a pretty substantial pickup as you have a more normalized marketing load. So your marketing load takes around 5 years to fully run out. But it typically will be cut in half between the first and the second year, the first and second year, though slightly less because of some of the actions we took this year, some of the levers that we pulled.

Second, you have an improvement in your medical benefit ratio throughout the period. So you'll have an improvement in the second year than the third year than the fourth and even in the fifth is probably where it normalizes. So you should have a fairly substantial increase in the first year with the combination of the marketing load being lower and then that improvement in the MLR and then slow improvement on the cohort in the years after that. George, anything you might add to that?

Yes, Celeste. Thanks. The other things that I'd just think about as you onboard members move them through their experience with us, just 3 other things to think about that helps improve the margin as well. .

First, of course, is MRA, which as we continue to work, coding, getting members appropriately coding the follow-up care that they need as a result of the assessments that we do. We find an improvement in both the coding and in their medical management.

And that the second part of that micromanagement also is able to kick in. We have any program from any value-based programs as well as our care management programs that will take effect and that helps in the ongoing years. And third, if you think about how the membership comes in, they come in and typically there's a lower share of them that are paneled to value-based partners, our well-performing value-based partners.

So as they progress through they become more and more paneled to those well-performing value-based partners, which also helps improve the margin over time. So there really are 3 major impacts that happen as those numbers come in and as we get them into our programs and provide better outcomes for them.

Yes. Let me jump into the Stars question. I presume the nature of the question is you're trying to understand the difference between 95% of membership in a 4-star plan and our metric of 75th percentile, that -- what is that delta.

The -- let me remind everybody that we have chosen to anchor on 75th percentile for two reasons. One is, as changes in policy change the nature of Stars performance across the entire industry, it is better for us to index to the industry than to a specific number.

Obviously, anything that changes across the industry, you would expect to be incorporated into pricing benefits over time. And so it wouldn't have a net impact on margin or overall profitability, but it could have an impact on the revenue.

And the second reason that we anchored on 75th percentile is that from a planning perspective, we felt it was prudent to anchor on a place that gave us some planning flexibility over time. And so that was the rationale for 75th percentile.

The challenge that we have in giving you a specific number is that this does at the end of the day, tied back to where is the industry performing and what are the policy changes impacting Stars. So we don't have a specific number that we can give you around that. But what I would again emphasize and I know I just said this, but whatever that number is, if we're at the 75th percentile, we feel comfortable that we can accommodate that in our pricing and our benefits in a way that will not have an impact that we should be able to achieve our margin expectations over time.

And if I can just add, Justin, in the numbers we laid out for you at the Investor Day, we -- that 2028 number reflects -- or the math, as I told you guys to do reflects Stars at the 75th percentile. So that is the headwind of not being at the 95% is reflected in what we've laid out for you.

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

How did your expectations for 2026 change versus your thoughts on Investor Day? I know you didn't give guidance, but you did say 2026 would take a step back. I think the step back is probably a little steeper than what we thought. Can you just provide what the big deltas were from then to now? Also, you said in your prepared remarks that the guidance is more conservative this year than normal years. Can you just go through what product guidance do you think is the most conservative, that would be great.

Ann, I think the biggest difference between where we were at Investor Day and where our guidance played out is really the embedded conservatism in our numbers. So within the assumption themselves, we tend to always have conservatism in MA, given that we don't have a full picture until later in the year. Based on what we have today, we feel very good about where we are.

In terms of our trends, I'll share with you what's embedded in the guidance, but what we did in the end is basically haircut where we landed just given our known headwinds and tailwinds. So while some of the assumptions have conservatism embedded, there's just a broader haircut. So what's embedded from a trend perspective is cost trends that look a lot like 2025, but slightly higher for a reason a layout.

So as a reminder, we assume the higher end of mid-single-digit medical costs for 2025 and low double-digit Rx trends. That is about where we landed. So '26 would be similar, though higher because of the lack of Doc Fix in 2025 and the inclusion of Doc Fix in 2026.

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

I wanted to zero in quickly on the 140,000 new D-SNP members, 18% growth there. Just if you could kind of frame how that compared to your expectations both in the absolute number and then also on the profile, where they bounce back members? Did they come from exited communities from your competitors? And the degree to which they're handled to your value-based partners?

Ben, thanks. This is George. So on the D-SNP, the absolute number is higher than expectations because our overall growth is higher than our initial expectations. But as a percentage, it's slightly lower.

So that's the way to think about the D-SNP membership. Now to your other questions, as Jim said in his opening remarks, we did not gain our market share, if you will, of those planned exits from our competitors.

And so that holds true across the business. And to your last question about value-based partners, as I said, the membership comes in oftentimes not paneled at the same level as our ongoing block of business. And we would effect as we do every year that the amount of paneling to increase year-over-year.

Now having said that, our duals because most of them are on HMO products do tend to come in panel. So when you think about the dual membership versus our core membership, the dual membership would be a greater share panel compared to the overall block of business.

Our next question comes from the line of Joshua Raskin with Nephron Research.

I apologize sort of redundancy and where I think I'm going. But as you mentioned, the individual margins that are slightly negative in 2026. So going back to the Investor Day from June, is there anything you've seen that changes your view of the ultimate margin profile of this now larger book of business?

And as you look out to 2028, and specifically interested in any updated views around obtaining that top quartile Stars rating as well as perhaps the impact of the 2027 rate notice?

Josh, I'm going to take a crack at your question and then Jim will jump in. So as you think about 2028, I want to remind you of our scale. So with the growth this year, it gives us quite a jump on achieving the 2028 target.

So if you look at the operating cost ratio, the improvement is fairly significant, even accounting for the Stars headwind, and that's really driven by the operating leverage from membership and revenue. The cost cutting that we've talked about is consistent with what we talked -- spoke with you about at the Investor Day, we're on track for that.

And then the operating leverage does reflect the investments we made in onboarding and ensuring that we have the right capabilities in place with the expanded medical base -- with the expanded member base. So we are ensuring we spend the money to do it right, but still have the significant pickup. So I think about the step forward in terms of operating leverage.

And as I mentioned in my opening remarks and Jim mentioned as well, we are going to -- we'll adapt to the funding environment. So we expect to continue to make good progress on 2028 and feel good about our trajectory so far.

Yes. So let me hit Stars, and I'll touch on the rate notice as well. On Stars. Again, what I'm going to emphasize just philosophically is the single biggest thing that we were adjusting to as we went through AEP and as we considered OEP and , is our ability to onboard a big portion of that is what can we absorb from a Stars standpoint.

Again, there's always so much that you have clear visibility into early in the year. We tried to give a couple of examples there with both CTMs and with the RAs, where we do have some early look at progress and progress is actually quite positive. And to be clear, that's not on an absolute basis. That's on a per member basis. That is adjusted for the cohort who is onboarding.

The other thing I would point out on Stars, there's a couple of things that we are doing differently versus 2 years ago that also better positions us to manage a large new member cohort. One is we are simply starting our programs earlier in the year. So if you went back 2 years ago, we would really start most of our proactive programs in the second half of the year and sometimes as late as the fourth quarter of the year.

Most of those are starting late first quarter, early second quarter when we get our initial data on those members' health status. The second thing that I would point out is we have gotten much better at using that data to do appropriate targeting to understand who very early in the year has already cleared a whole bunch of Stars metrics. And therefore, where do we devote our resources to close gaps for those who have open gaps. So both of those things just put us operationally at a much better place to handle Stars.

Now look, I'm also just going to state the obvious. This is Stars. It is a relative score. There is always risk in this. Can we say that there's no risk? Of course, we cannot, but can we say that we feel good about our ability to mitigate that risk? Yes, this has been very much top of mind. So let me flip to rate notice here for a second. I know that I have a lot to add over my initial comments. I think everybody is well aware that the advanced rate notice is -- came in below medical cost trend, like that's not new at this point. We recognize the pressures that are constantly being balanced here. We are doing what we can to advocate for our members and our patients to make sure that we get to an appropriate funding level that protects their interests. And at the end of the day, this is a difficult dynamic, but we will adjust to wherever the final rate notice lands. Like that is the bottom line. Wherever we end up, at the end of the day, we will adjust to that. And between now and then, we're going to do everything we can to advocate for our members.

Our next question comes from the line of Scott Fidel with Goldman Sachs.

Can you give us some detail into -- relative to the 25% overall MA growth, how that breaks down in terms of [ PPO ] versus HMO in terms of the relative growth rates that you're seeing across there? And then also in terms of relative to the metric had around the percentage of new members that you gained from competitor exits, maybe holding on the PPO specifically, what percentage you estimate for the PPO product?

Scott, this is David. We won't be able to disclose all those details. But what I would say is this is that between HMO, PPO and frankly, across our plants, we've tried to have a reasonable margin across all of them. That's part of the new strategy is not to have higher margin and lower margin plans, going to be worried about outgrowth and the lower margin plans. So we can't disclose the exact growth rates, but the ability for both of those to be accretive much more balanced than it has been in the past.

Our next question comes from the line of A.J. Rice with UBS.

I appreciate all the comments about different aspects of operating leverage and so forth. But just to make sure I got the right perspective on it. I think at the Investor Day, you talked about the transformation initiative broadly, having an improvement from '25 to 2028 of $1.6 billion to $2 billion in pretax earnings.

I know there's a lot of things going on this year, but in your '26 outlook, how much of that will you have realized this year, if any? And how much sort of progressively do you expect to get over the next few years to get to that level. I don't know if there's upfront cost. So maybe it's not having any impact to positive this year, but just some flavor for how we can sort of track how you're progressing given that's a big part of the -- getting to the earnings power of the company for '28?

Yes. Thanks, A.J. So there -- as I said before, there are 2 components of the operating leverage. There's the revenue growth, which is driven by member growth and then growth in CenterWell and then cost savings. So in terms of member growth and the pickup at least from a member volume perspective and CenterWell, we have -- we are close to where we would have expected to be in 2028. In terms of the cost cutting, we are only just beginning.

So we expect a significant pickup in '27 and then 28. So we still have quite a bit to go the same sort of trajectory as we talked about at the Investor Day. We've been very deliberate about how we do the cost cutting. We want to ensure that we do it in a way that makes sense and is sustainable and doesn't put the business risk -- business at risk as we do it.

So still quite a bit to go there. So we continue -- we expect to continue to see upside there. Let me also remind you that we expect continued growth in terms of our clinics in CenterWell as well as progress in some of the strategic initiatives on the pharmacy side that we've talked to you about.

And we also expect to continue to see improvement in the margin in group MA. We did have, before the Stars headwind this year, a 500 basis point pickup due to recontracting efforts. There's still several hundred basis points to go. We still have upside in Medicaid as we continue to move through the J-curve and then moving through the J-curve also on the CenterWell PCO clinics. So all in, we still think there is upside through both the overall work we're doing on margin improvement as well as the cost cutting.

Our next question comes from the line of Jason Cassorla with Guggenheim Partners.

Great. Maybe just looking back to 2025, your investment spend that you spiked out appears to be peers have totaled well over $550 million, which seemingly indicates that your individual MA business outperformed pretty well this year, kind of netting against those investments.

Can you remind us how much of that investment spend is run rating into 2026? And I guess, relative to how you're thinking about guidance and our conservative posturing, are you taking a similar approach in terms of spending away any outperformance this year? Or can you frame how you're thinking about further investment spend?

Yes. So let me hit the first part. So we -- your estimate is close to about right in terms of the incremental investments. We did -- we do have a lot that we want to do to transform the company, and we did invest there. As it relates to this year, we are not currently contemplating any incremental investments.

We are continuing to just generally invest in the company. We are not cutting back on tech investments. In fact, that's a little bit higher. So we're not starving the business as we move forward. We're trying to balance the short term and the long term, but we are being very mindful of our spending.

And then in terms -- and as it relates to Stars, we talked about last year being a transition year. So the overall Stars investments on a PMPM basis are down that's driven by sort of scaling back in some of our old programs and scaling up some of -- a lot of the new programs, including the work we're doing about member onboarding and some of the other things that Jim spoke to you about.

We've also found much more efficient ways to improve Stars. So overall, actually, our Star spend is fairly consistent with last year on an absolute dollar basis, but on a PMPM basis, it's down significantly, and that's driven by the 25% membership growth. And I forgot the second part of the question.

Just if you were going to some incremental investments for...

Sorry. We -- if we decide to do that, which we may, we will be very transparent with you if we decide to make incremental investments throughout the year. We will share that with you, so you understand the operating performance versus where we might be offsetting it with investments.

Our next question comes from the line of Ryan Langston with TD Securities.

On the higher level of bounce back membership recapture, is there a way to generally think about how long those members have been away from Humana. And then v28, I think you previously said it's about a 160 basis point impact just given the sort of level of new growth. Is that still in the ballpark? Or is there anything to add there? .

On the bounce back, we'll be able to disclose specific details. We look back over several years to say where have the members in bouncing back. And obviously, the more recent membership is a bigger percentage of the overall, but we look back several years to say which members we actually have previously experienced with, and that's the close to 30% number. I miss with the second part of the question, Jason. .

Yes. And v28, yes, your number is correct. Nothing has changed there. Yes..

Our next question comes from the line of Elizabeth Anderson with Evercore ISI.

I was wondering if you could talk in a little bit more detail about the change in EPS seasonality this year. It's a little bit different than prior SKUs. So I just wanted to better understand if that's all IRA related or if there's anything else involved in there? And then any early comments that you guys can share on OEP in terms of what you're seeing in terms of additional retention or anything else there?

Yes. So the seasonality is a bit different than last year. The underlying factors are the same. So the IRA is driving steeper curve, a steep curve, but it's, I guess, aggravated, if you will, by the Stars headwind. So as you have the loss of operating leverage from Stars, and that sort of aggravates the second half of the year versus 2025. But otherwise, outside of Stars, the trajectory would be very similar.

And Elizabeth, you asked about AEP. It's a little early to know. Again, we quoted a 500 basis point improvement in AEP. I think for OEP, it's too early to know, but we do think there's upside to that. I mean we like the momentum. As Jim said, we're liking the transactional NPS. There's a lot of indications that are member liking the benefit stability. And so we do think there's upside, but it's just early to have a number.

Our next question comes from the line of Kevin Fischbeck with Bank of America.

Great. I wanted to ask about 2027 thoughts. Obviously, you're not concerned about how things are going to play out from a cost perspective in '26, but the market is. I want to understand how you guys believe your visibility is going to play out over the next several months? Is there anything you're doing extra to make sure that if there is an issue, it is in fact captured before you have to submit bids for 2027?

And then it's not clear to me what you mean when you say you're going to factor in the rate environment for 2027. We've seen a bunch of companies more recently just say we're focusing on margin lever membership lands, it lands. And the market seems to like that. But your LTV commentary seems to leave some wiggle room to kind of say, no, I need to retain members. So like what does it mean like to adjust to the rate, are you going to immediately go back to the margin trajectory you were on? Or are you going to have to balance margin and membership growth when you think about LTV?

Yes. Thanks for the question. On the first half of that, we have a good look at member performance by around April, and then we have a better look in May. And both of those views are early enough that if we need to make adjustments in the bid, we can make adjustments in the bid. So we should have a solid enough understanding of what the current cohort looks like at the time of bid and be able to incorporate that in. So we feel good about that. And by the way, that is no different than other years. So we feel good there. On the Second half of the question, yes, look, let me be clear.

We made a set of commitments to ourselves and to investors at Investor Day last year, and we are standing by those commitments. And so our focus is on retaining membership to be sure, but it is on getting the first goal is to get to the margin trajectory that this business needs to be on over the long term, right?

Like we are focused on getting to the right long-term, sustainable, durable, attractive margin. And -- and yes, we're going to retain as many members as we can along wait. Are we focused on new member growth? No. Like new member growth is not the focus. It is great experience, it is retention and it's getting to the right margin profile.

Our next question comes from the line of Erin Wright with Morgan Stanley.

A two-part question here and going back to the rate notice, but is there anything specifically on the rate notice that you would have outsized exposure to relative to the industry from a coding perspective? Or can you talk about some of those components of the rate notice and how you're thinking about that?

And then just from a statutory capital perspective, the requirements there, the more favorable positioning. Was that associated with the emphasis of certain states or jurisdictions? And is there more to do on that plan and -- or more to accomplish there? And then just your capital deployment thereon.

We're now focused on the second question. Remind me what the first question is?

The rate notice .

The rate notice, yes. So on the rate notice, the -- first of all, we're still working through some of the detailed analysis. But the high-level message is that changes that have occurred from a policy standpoint this year do not have the same type of variance that v28 had. In general, most of the industry should be impacted around a pretty narrow band around the and so even as we're working through some of the details, we feel pretty confident everybody is going to be a margin of error around the industry mean.

Yes. In terms of the capital efficiency activities, we have done most of the work that we think makes sense in terms of redomestication which is really focusing on moving around the legal entities. There is more work that we can do that there is more opportunity for us on some of the other areas, including reinsurance.

So we'll -- we still have those in our pocket as we think about going into 2027, et cetera. But overall, we're very happy with the progress we made and expect to continue to really focus on ensuring that we have the right amount of capital in place but not too much, which becomes a drag in terms of our overall efficiency and our ability to invest in other areas.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I wanted to ask about value-based contracting. Can you just remind us the proportion of MA members that are capitated versus the risk models. And is there any comment in terms of how that's changed as you think about 2026 in future periods?

Thank you for the question. I appreciate that, Matthew. So the percent of membership is relatively the same, about 1/3 in risk, 1/3 in value-based other types of value based and then the 1/3 that are in either nonvalue based or just some basic pay for performance. One of the things that I mentioned before is that when you have an influx of members, generally, that number comes down a little bit at the start of the year and as the year progresses when members are choosing primary care doctors and/or we have claims-based attribution of members into panels. .

That number builds back up. So that's the typical thing we see. We work with many highly performing value-based partners and do not have really a significant percent of our membership with any particular provider. And we continue to see value-based partners, wanting to grow with us. We have many value-based partners that we've been speaking to as recently as in the last month or so that want to expand significantly with us. So we feel good about where we are with the value-based partners. And very much appreciate all the good things they do for our members to contribute to better health outcomes and higher quality care.

Our next question comes from the line of Lance Wilkes with Bernstein.

Yes. I wanted to follow up on the value base a little bit. Just to ask, for '26, what's the impact to MLR, if any, of any changes to value-based care financial terms or carve-outs of thing? Or is that fairly stable? And related to value-based care, what's the -- your sense of the capacity to absorb the magnitude of risk that you're talking about? And then just a quick cleanup question. In the incremental investments that you made in '25, what portion of that, if any, was in -- would have been in the medical costs or attributed to medical costs? .

Nothing really has changed with regard to the financial performance of the value-based providers as far as proportionately how they contribute to our margins. So what we've shared before in Investor Days and what we shared before, still holds true. I won't go into many details there because obviously, those contracts between us and our value-based providers are proprietary, but we do a lot of work with them to help support them to help them be successful in caring for our members and improving the health of those members. So nothing really has changed there from a value-based standpoint, except for I will say a couple of things we've talked about before.

The first is that we did provide significant support to them in 2025 by taking back the Part D risk, which given the volatility that, that can have at a relatively smaller number of membership for our value-based partners. We didn't think it actuarially made sense for them to take on that risk. So we took that back now significant assistance to them in '25, and we continue that into '26. That's why as we've said before, we also have done a lot of work to help mitigate the Stars impacts of '26. So we continue to work with our partners in a very collaborative way and appreciate the work they do for us.

And as it relates to the incremental investments, I'd say, 90% were in medical costs.

Our last question comes from the line of Ben Mayo with Leerink Partners.

Jim, any meaningful changes to your provider contracting strategy this year? I feel like I've heard provider contracting a couple of times on the call. So just wondering if something's changed to minimize that friction. And I guess I mean this through the lens of the Stars question around member satisfaction.

Yes. There have been a number of things we've done. I just mentioned two with what we did with Part D and what we've done with supporting and mitigating the Stars headwinds. But we also continue to do many things across the provider landscape. We have a whole team that is looking at how we improve our contractual relationships with our providers in a number of ways, including, as you mentioned, reducing the friction.

We did make a large announcement last year about how we're improving the prioritization process to decrease the number of things that take prior authorization and to increase the automation of how we do prior authorizations as well. One of the things that we have continued to do and that we have historically been very good at, for example, is for both our rural and nonrural providers. We essentially pay on average those claims in under 15 days. So we think that we also appropriately [indiscernible] our providers with their payment rates. So there are a number of things that we do to move and we have teams that are very much focused on improving those provider relationships and reducing the abrasion. They are oftentimes the face of Humana to our members, and we want to make sure that we maintain great relationships with them.

With that, I'm going to turn to the close. And as we close out, I'm going to start -- I'm going to end where we started with the key messages that we want to make sure everybody understands. Again, we're pleased with our 2025 performance. We continue to feel good about the membership growth. We remain committed to a consumer-centric strategy that is responsive to what our patients and members want to need. And we recognize that to do that, we must deliver a stable and compelling margin. So I'm just going to say that again. We must deliver a stable and compelling margin. And that requires that adapt to our funding environment. We will continue to do that to ensure that we stay on track with unlocking the earnings potential of the business by 2028 as we laid out at our 2025 Investor Day. With that, I would thank you for joining us this morning and for interest in Humana, and I want to say thanks to our 65,000 associates who serve our members and our patients every day. We appreciate your support, and we hope you have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect.

All right. Good morning. My name is Justin Lake. I cover health care services here at Wolfe Research. Appreciate everyone joining us for our next presentation. Very excited to have the Humana team here. Celeste Mellet, the company's CFO; the Queen of IR, Lisa Stoner, sitting up there in the audience.

Before I kick off kind of my question list here, I thought I'd give Celeste a second, to give us a little bit of a state of the union coming out of 3Q. How the company views kind of the momentum in the year-end in 2026, and then we'll get into it.

Thanks everyone for coming in the rain. So this is for every company, big time and in MA in-particular, bigger given that we're in the big sales season. So we're in our budget -- working through our budget processes, thinking about where we're going to invest? We have been deep into a transformation all year, some of which you're seeing in the way that we're approaching AEP, but we're working through everything [ from design ] to tech to generally employee benefits.

So a lot going on right now, trying to balance, as I talked about on the earnings call, the short term and the longterm. There is no longterm without a short term. But excited about the future, really seeing some great things coming out of the work we've been doing this year. For those of you who get deep into the product, we have a new tool, it's called -- it's a weird name, it's like Reliance, something. It's the digital tool for our IFG, which is our internal agnostic broker where you can go in and really shop a product, one of the investments we made actually this year. So a lot of momentum, a lot of excitement about the change in the company and the change we think that we can bring more broadly to MA and to healthcare in general.

That's exciting. Wanted to, obviously, a lot of focus on the open enrollment season. right? You gave us some color on the call, declined to give up in terms of a specific target. I know we've already talked offline. We're not going to press for a number. I know there's not an update here.

But you did talk about being towards the higher end of expectations. And so we're a little more than halfway through open enrollment. I know that you can't cut commissions on a dime, but there are other levers that you can pull. I think you said on the call, you hadn't pulled those levers, 2 weeks in. We're now 4, 4.5 weeks in. Any update there that you can share with us in terms of, are you still kind of letting the kind of machine turn? Or have you pulled any of those levers that are at your disposal?

Yes. Just if I can just take a step back and talk about how we're thinking about the season and just how we're thinking about our approach to membership and new members in general. So as you know, the last year and the year before, we took pretty significant action to rightsize, reprice our products, ensure that we didn't have unprofitable plans anymore. A lot of the actions you're seeing this year from our peers, we took last year and the year before.

So that, from our perspective, was really important. David Dintenfass talked about on our earnings call, we don't want to have loss leader product, where we go out and we sell a bunch of product that doesn't make money and the only way you're going to make money is then to cut benefits later. Of course, they are -- it's not to say we'll never cut benefits, if you don't have the funding, if something goes a little sideways on a product, you're going to have to make adjustments. We're not religious about that.

But we believe that stability of benefits makes a lot of sense to the extent you can do it financially. So I just want to be clear on that. One of the big changes we also made this year, and this is something you will continue to see us do is really think a lot more strategically about our distribution. So we have a lot of distribution. We have a good brand. People want to sell our product, but we've been really focusing on the distribution that is high-value.

So we are looking, of course, David talked about at lifetime value or NPV, but we're also looking at Stars. We're looking at how they are on-boarded separate from our process. We're looking at complaints to Medicare. We're looking at accretion in year in terms of earnings. So there are a number of things that we've looked at, and we took a bunch of action on distribution, including parting ways with our biggest call center with thousands of brokers, and I think you should expect us to continue to refine that, as we improve the averages, you should expect us to continue to raise the bar.

You see hotel chains do that from a franchise perspective, right? The average keeps going up. So I think those levers regardless of what's happening with the broader environment, we're going to continue to pull those because we want to make sure that it's not just the product we sell, but how we're selling it because those things matter to the financials, CTMs, Stars, et cetera, those things matter to the financials, right? They drive revenue, they drive profitability.

In terms of pulling levers, we have pulled back and optimized marketing in a couple of different areas. Co-op marketing and regular-way marketing. We are looking at pulling levers like that into next year and then really focusing on the distribution some more, and to the extent that we are -- we believe we need to do something in a particular region or a particular product, there are other levers that we can pull and would pull. And we are monitoring this very closely. We are monitoring what we are selling, where we are selling it, how the on-boarding is going, what it means for the call centers, what it means for day 1, right?

If you think about day 1, what are the expectations on January 1 from our members? So very dynamic, and we will continue to be dynamic, always. We should not just sit on our hands and not be making changes to product, to distribution to the way that we're thinking about our members.

Got it. And just to be clear, the pulling back in some of the co-op marketing and the marketing in general, right, television, web marketing. Is that incremental versus what you talked about doing in the third quarter call?

It is incremental.

Okay. And in that -- so those are a couple of things. It kind of gets to my next question, which is the levers that you have, and I think about it as twofold, right? Commissions being the kind of more blunt object.

My understanding is that you need to give 30 days notice there. So effectively, the way to think about commissions then is you're kind of locked in during open enrollment at this point, but you do have a decision to make, and you'll share that, I assume, with what you want to do for AEP that starts on January 1st. You decide that by December 1st effectively. Would that be the right way to think about it?

Generally, yes. There are a lot more levers other than commissions that you are allowed to change and some of which you can do on your own. If we continue to refine our distribution channels, we can do that on our own. If you decide you want to do something with a product in a region or a specific product or market, you can do that.

You need to be careful about what you do on commissions because you don't want to have inadvertently direct members to product that they should not be in, which happens, has happened historically, not on purpose, but there are a lot of levers that you can pull. And in fact, you're seeing -- you've seen others do it. You can suppress in a region or a market or a product. It's separate from pulling commissions. But yes, we are -- we understand all of our options. We're looking at all of our options. If we need to take action, we will do so.

That's helpful to know. And just in terms of those, let's call it, intermediate types of levers you have versus commissions, we know from looking, for instance, one of your peers last year that was growing pretty well and then they pulled that lever pretty hard and the growth stopped. So we know what you can do with commissions. When you think about these other levers, how impactful can you be there? Is it somewhat similar where you can really -- almost halt growth with some of these other levers? Or is it kind of somewhere in between there?

Yes. I mean -- not to -- I don't want to front-run things that we'd be doing or not. But if you think about commissions, if you just stop paying, people can still get the product, right? So do you not make the product available. They are different -- if you look at historically at other levers that competitors have pulled, there are a number of things beyond commissions that there is a lot of scrutiny about commissions right now.

And as I said, you potentially have a selection issue where you're inadvertently directing people into the wrong plan. So there are levers that are more effective than commissions because the product would not necessarily be available. I'm not saying we would necessarily pull those, but commissions isn't the only way. I think people have -- there are very visible things that people see and like, "oh, they stop paying commissions because brokers complain", but there are a lot of other things that you can do that may or may not be visible to The Street.

I would expect that if we were to pull levers, there will be some that you won't -- that won't be understood and seen, right? People don't really know what we're doing with our marketing. And then there are things that would bubble out and people would have a sense for what we're doing.

That's all helpful. I appreciate it. Maybe just in terms of the communication timeline from here, right? My recollection is typically when the company would go to JPMorgan, for instance, there would be an update on membership there. My understanding is you're not going to be at JPMorgan this year?

We will -- we may be at JPMorgan for -- there's a lot of other things that happen besides equity investors there. We may be there for that, but we have no intention of presenting. It's a weird time of year for corporates given it is a quiet period, and there's a lot going on at year-end. So we don't intend to present at JPMorgan.

At this point, our intention is to give an update on our fourth quarter call. But as you saw from us with Stars, if we think it makes sense to do something different, we will, and we'll be thoughtful about that. So as we approach Stars, we thought it was really important for people to hear from Jim, not just on a piece of paper. So we will be really thoughtful about what we think makes the most sense for us to get the information out in a way that helps The Street understand what we're doing.

Got it. So if I read between the lines there, the Stars came out instead of waiting for the quarter, you came out and gave a little bit of an update in terms of how you viewed it. The update on membership would come kind of with that January enrollment file that typically comes kind of in the middle of January, a lot of times, it's very incomplete. A lot of times, there's an incorrect read if you try to interpret that and extrapolate it. So that would be an interesting probably the next data point that you might look at and see if it makes sense or not. Is the way to read it?

Maybe. The latest we will give an update is on our fourth quarter earnings call. But we will look, like we know the questions that are being asked, Lisa is an excellent advocate for investors and questions. And as you know, I was an IR person for a while, and I have dealt with The Street for my entire career.

So we we have a sense for what we think makes sense, and we're going to -- we'll make decisions [indiscernible] we're not. Absolutely we had to waiting until our earnings call. If we think it makes sense to do something before that, we will do that.

I appreciate it. Thanks for that detail. So getting into a little bit of the fundamentals of membership growth, right? We're all trying to kind of parse through what -- if there is significant growth, what it means, right?

So retention, you've talked about is good growth. You want as much retention as you can get, right? You did exit a bunch of products, right, like everybody else did less, but whatever but similar in terms of the structure there. So you stepped away from the products that you think didn't make sense. And so retention is good retention.

Typically, we've been seeing retention -- or I should say, churn increase pretty significantly over the last 3 to 5 years. You hear numbers and see numbers up in the 15% to 20% range. Just curious, you've started getting, I think, those files or at least give us the update on kind of the timing of when you see those files and when you feel like you understand retention from a business perspective and maybe what you think retention could be this year versus historical?

Yes. So not recently, but at a point in time, we were on average keeping a member for 7 years, which is a pretty good length of time and you really get to know them, they're appropriately diagnosed and cared for, that would be great.

The industry, I don't think is anywhere close to that right now. nowhere close to that. We are nowhere close to that, and the product changes we made over the last few years, in-particular, aggravated the attrition, right? If you cut benefits even some of the ways, we did historically where you didn't actually reduce that much, you're just moving things around like you lose members. So I don't think that in 1 year, you can get back to that sort of having a member for 7 years, but we think we'll make a lot more progress this year just based on -- we talked about on the call, the plan-to-plan, there's much lower this year.

Usually, if you have Humana plan-to-plan, it's because people are unhappy with what they have and they're looking for another plan. We are starting to get some detail on retention. The numbers look good, but you really don't know until the end, about 1/3 of activity for AEP happens in the last 2 weeks. So what we're seeing so far is good. We like we're very, very happy with it, but you don't really know. You don't know what your growth is going to look like? You don't know what your retention is going to look like until you get through those last 2 weeks.

Got it. And the company talked about on the last call, and I think you've talked about even at the Investor Day, trying to narrow down the breadth of margins between your highest margin product and your lowest margin product, and I think that makes a lot of sense in terms of, obviously, mix changes being less dynamic to earnings. So maybe you can give us a little bit of history there? Like what was that number a few years ago in terms of the breadth? And how close do you think that, the margins are across products here such that we don't need to worry about as much that mix change?

So I'll answer this in two-ways. So we did previously have product that was losing money. So your lowest was negative. And you -- I mean, I think we've all had very good margin products. In general, the distribution is -- our distribution is tightened. I don't know about others, where your lowest is profitable, so your lows are higher and your highs are higher as well. You don't move your highs up, quite as much. But it is tighter and we're averaging up just like we're averaging up the quality of the distribution.

In terms of bringing on new member to us in this period, I guess. So there are really three categories, and then I'll go in decreasing profitability. So the highest profitability typically are switchers from another plan. They're accurately diagnosed, you're assuming that they've been engaged at their prior plan, but those typically are by far the most profitable.

The second is switching over from fee-for-service to MA. They are less profitable, but because they were in fee-for-service, you need to get them diagnosed and coded and everything else. And then the least profitable, but a lot more profitable than they've been historically as we went from v24 to v28, is new agents. The agents are profitable. They are not as profitable as others, but typically, they are also healthier. You don't have some of the same issues. And overtime, they obviously increase. You can't just get the switchers from others.

And then new to Medicare member, new to [indiscernible] member used to be even pre v28 was fairly significantly negative margin that now at least is less of a risk going forward as you're growing because of that v28 and the risk score that they get coming in.

That's right. That's right. Yes. That was one of the positive things that came out of v28 in terms of the impact to our financials.

Got it. And then the -- in terms of one of the things I thought Jim mentioned that was interesting is myself, and I'm sure everybody that follows your stock has done a fair amount of work trying to understand competitive dynamics, right? And even actuaries have a hard time looking at a set of benefits and seeing who's are better and who's are worse?

Jim talked about seeing, there are markets where, yes, your benefits are a little bit above. There are plenty of markets where they're still below and in line. And I wanted to see if you could share with us your view, since it's so hard for us to interpret. If you just look at your kind of TAM out there, how would you kind of bucket that? Do you feel like you're in line to below in the vast majority? Would you kind of think it's 1/3, 1/3, 1/3? How would you encourage us to think about your product positioning here?

Yes. We are, I'd say, in line to below in the vast majority. We were last year as well. We're in a handful of markets, we're above we were last year as well. So if we -- I really concentrate on the top 25 markets, and we are not ahead. I don't think we're ahead in any more markets than we were last year, that might be different. But the vast majority, we are in line to below.

Got it. And when you talked about the growth coming in the right places, are you seeing a lot of your growth in those markets where you're above? Or do you feel like it's pretty well distributed?

It's pretty well distributed across non-D-SNP. D-SNP growth has been on the lower end versus the rest of the growth. It hasn't been -- I mean, it's still strong, but it's not nearly as high as the non-D-SNP growth. But it's pretty well distributed across markets and products.

Got it. And then just to kind of wrap this up before we start talking about some of the other fundamentals of the business. The company obviously respects the dynamic market out there, but feels good about its product growth, right, and its product positioning and the growth potential out there.

And we've seen companies that have had outsized growth have some margin pressure, right? And it's a big chicken and egg discussion, right? Why did you grow so much? Was it because the other guy pulled back, which is kind of what we're seeing this year? Or is it because you mispriced overall?

So maybe you can give us 1 minute or 2 on kind of take us from '25 to '26 and why you feel good about regardless of what everybody else is doing, why you feel good about how you position your products and the level of confidence going into '26 around that margin expansion that you talked about pre-Stars?

Right. So a lot in that. So as we talked about, as I talked about upfront, we reposition the product in '24 and in '25. And we've been watching '25 all year. We feel good about what we're seeing.

So by and large, our product looks fairly similar going into '26, obviously, adjusting for the rate notice and all of that, which -- we didn't invest -- so the product looks pretty similar. So we priced it. We know what -- how that -- generally how it fares, right? So a lot of changes flow through.

If you ever have an opportunity to do a focus group with members, which maybe is a good thing for you to do like from various plans.

Is that an invitation?

No, but you can organize one yourself. That feels like something that your clients would really like. If you -- what -- everybody is a little annoyed with their health plan, who isn't a little annoyed with their health plan? And when you affect their benefits a lot, it's super disruptive, and they're going to go and shop.

There are some people who always look. They're not the shoppers who are looking for the biggest -- just like making sure they're they are in good shape. But when you pull a lot of benefits away, you really disrupt the market and people are going to go out there and look at the product. So that is what's happening this year, a lot of disruption in the product, a lot of disruption in the distribution and people are shopping. We have a good brand. We have a good relationship with our distribution. We treat our distribution with kindness and respect and there is stability.

And because of that, they are selling our product. It's not because our product is materially richer and we didn't go and invest while everybody was pulling back. So it's -- people know what they're getting with us, and they know that stable means sometimes we will have to adjust. But this year, a little bit of a port in the storm in terms of product out there.

Got it. And if I had to think about when I talk to investors, what one of their concerns is less around how you price and more just what kind of new membership are you going to get, right?

Like the -- if United is walking away from 0.5 million members, they must be the worst members, they must be high utilizers, and I hate to throw United's name around, but there's 2 million members out there that are getting walked away from. Are they coded correctly, for instance? So I'm curious, the -- so if you have -- if we have the unknowns of coding, right, are they coded correctly and what kind of utilizers they are? Maybe we can think about just the timeline here of that. Like when would you know relative to kind of that risk score that the member would have relative to what you think they should have? How early would you know that?

So first, to be clear, number one, there was the same amount of plex this year as last year, right, just from different players. There -- and you always -- people always forget about the smaller players out there, both in terms of investing and coming out, right?

The amount of plex is about the same, maybe tiny bit higher this year. So that's the same. Going into AEP, we knew where people were plexing. We took actions to ensure while we don't believe they are bad members, they're just mispriced members, mispriced risk. We did take action in a number of markets. We decommissioned 1/3 of our plans. We turned off product in certain markets. One area in particular where we turn up product is in Medsup because if you are a member in a -- in an MA plan and you get plexed, you can go to any Medsup plan in your market and not be underwritten. So you can end up upside down on from a MedSup perspective, and it would take a couple of years to get back.

So we took action to ensure what we believe our pricing is appropriate, but we also took action to protect ourselves given this -- the most dynamic, I believe, market in MA in a very, very long time, if not ever. So -- and then to the -- we do know generally in various markets where folks will be coming from, we have capacity to ensure that we can get them on-boarded and coded. Generally, we are going to make assumptions with newer members period that -- as to where they come on and build that into our forecast. So we don't know for sure until we get the last of the member files in January, February, but we generally would take that into account in the way that we do our buildup.

And then as I think about these new members coming in, if you do end up at the higher end of expectations, right. Yes, it probably widens the range of outcomes for numbers. But there are some benefits to new members in terms of operating leverage in the Insurance business. There's the flow-through to CenterWell, especially the PBM. Can you walk us through a little bit of that in terms of how much cushion do you get from fixed cost leverage there that would again add some cushion and then the CenterWell benefits?

Yes. So just a reminder, we do have a $3 billion revenue -- $3-plus billion revenue headwind going into next year. And we are working through a transformation. So we're going through our budget process right now to figure out where we want to invest, how much we want to invest when -- and then as we've talked about in the past, there's a lot of things that we can step-up and lean into as we get deeper into the year, if we have out-performance. So we're working through that right now.

There, of course, would be some fixed cost leverage, but we have these pretty big headwind that we are taking a number of steps to offset. In terms of your typical -- you normally would have a cap offset with the Stars revenue, but because we're providing Stars relief to a bunch of our providers, this was contemplated in June. It doesn't -- we don't get that same cap offset. In addition, we called out a couple of other headwinds that are sort of nonoperating, including NII as it relates to the yield curve and then The Villages acquisition that long term would be very positive. So we're working through all of that now.

We will try to be as transparent as we can be with what's in our numbers and -- but we also don't want to be in a position where we're going to miss right out of the box, too. So I'd rather under-promise and over-deliver. It's not saying we're going to land anywhere in particular, but we're balancing all of those things right now.

In terms of benefits to CenterWell, certain members, there is a nice, what I would call, intercompany pickup, in particular, on the Pharmacy side of things. So you have more members. Our non-Specialty businesses are all Humana members. So you get -- and you typically get a pickup there. And then just generally, you would get a pickup on the Specialty side of things. But it depends on the plan that comes in. And there is a wide range of outcomes in terms of what the benefit is to us.

And you talked about plan-to-plan changes, which are typically negative, right? Someone's going from a lower benefit to a higher benefit plan, so the margins will contract a bit. You talked about those being down fairly materially year-over-year. Is that -- like can you -- any kind of quantification there in terms of, are they down in half or...

I don't -- actually, I should have looked at this through yesterday. I don't -- off the top of my head, have that, and I don't think it's meaningful until we actually get through the end of AEP, but they are down very significantly, which correlates with so far the data we're seeing from CMS in terms of the better retention.

Got it. And then maybe just a quick comment on CMS rolled out this new demo on GLP-1s. How do you think that affects you? I know there's still probably a little bit to be determined here, but any kind of early -- are you going to -- early impact? Do you feel like you're going to have to cover these drugs in '26?

I mean it's we only know there's going to be something. The date isn't clear. I've seen two dates, how they're going to do it is not clear, but typically, they would have to cover it in the first year.

Really, the devil is going to be in the details on the second year. I would say the -- they ask good questions about understanding because all of this is very well intended, but understanding the unintended consequences generally, in terms of understanding what it means for members, what it means for premiums, et cetera. So still way too early to say, but they would cover the '26 benefits if they are provided and depending on when they come in.

Perfect. That's helpful. Celeste, Lisa, I appreciate you guys being here today. Everyone, I appreciate your time, and we'll move on to the next presentation. Thanks again.

Thank you.

Good day, and thank you for standing by. Welcome to the Humana Third Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. I hope everyone had a chance to review our press release and posted 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; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session, where Jim and Celeste will be joined by George Renaudin, Humana's President of the Insurance segment; and David Dittenha, President of Enterprise Growth.

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 risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission, in our third quarter 2025 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 and 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 all 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, the call is being recorded for replay purposes. That replay will be available on the Investor Relations page of our website, humana.com, later today.

With that, I will turn the call over to Jim.

Thanks, Lisa, and good morning, everyone, and thank you for joining us today. Before we get started, I just want to take a second to acknowledge the tragedy that occurred here in Louisville last night, it's had quite an impact on the community, and our thoughts go out to the community and all the families who are impacted.

With that, let me turn to the quarter, and let me hit the headlines. As you have already seen, we delivered a solid third quarter in line with our expectations.

Our third quarter medical cost trends continue to be in line with expectations and we also continue to anticipate our full year 2025 EPS outlook of approximately $17. We remain committed to achieving individual MA pretax margin of at least 3% over time and the external environment continues to evolve largely in line with expectations, and we are executing against our plan.

I'll now briefly describe the progress we're making operationally. And as usual, I will frame my comments today around the 4 drivers of our business. The first of those is product and experience, which drive customer retention and growth, second is clinical excellence, which delivers clinical outcomes and medical margin. Third is highly efficient operations; and fourth is our capital allocation and growth in [indiscernible] in Medicaid.

I'm going to spend most of my time today on product experience as well as clinical excellence. Let me start with our Medicare product and experience. So first, I want to emphasize that it's very early in AP. We have roughly 2 weeks of incomplete data. And while we will provide a sense of what we are seeing, this is very much subject to change. Second, I want to reinforce how we think about growth. Our focus is on maximizing customer lifetime value and customer in PV. That's our focus. The way we do that is delivering an exceptional experience that fuels member retention. Other key growth levers like benefit design and member and product mix and channel mix are all tightly aligned with our operational capacity so that we can absorb onboard and serve members in a way that maximizes lifetime value in NPV.

Third, I want to reinforce again that we are confident in our pricing, and we're pleased that we expect to return to growth. We will take as much growth as possible from improved retention. This is unquestionably desirable growth. and we welcome new sales. However, we are prepared to take targeted actions to slow new sales if we reach the point where the volume risks negatively impacting member experience. We do recognize that you want us to provide a specific growth target. We do not think that focusing on a net growth target is the right metric because, as I just shared, growth through retention is desirable, and we will take as much of it as we can.

We also will not give a specific number around new sales targets. Because the amount that we can absorb is dependence upon member product and channel mix. So now as to what we are seeing. New sales are at the high end of the range, the high end of the anticipated range of outcomes that we expected in AAP. Channel mix has meaningfully improved relative to prior years. We have greater volume in our own distribution channel, with select high-performing partners and in digital distribution. This channel mix tends to be correlated with customer segments that have a higher lifetime value and are more engaged.

We are also seeing favorable product mix, including higher than initially expected sales and plans with 4 stars and greater. We are not seeing outsized sales in areas where competitors have exited plans. We are experiencing significantly reduced Humana plan to plan mix with plan to plan sales down year-over-year. We believe that this is likely an early indicator that our stable benefit strategy and changes to our customer service approach are working to reduce voluntary attrition, though we need more time to validate this assumption.

So while it's early, we feel good about what we are seeing so far in AEP. And as we have said previously, we will continue to monitor new sales volume and manage it dynamically. We are prepared to take further mitigating actions as we did heading into AEP if it appears that new sales will put member experience at risk. We do recognize that there's a lot of interest in our overall growth strategy and the ongoing AEP.

So I'm pleased that David [ Diddenfass ] will join Celeste, George and I for Q&A today. David joined the company nearly 2 years ago as President of Enterprise Growth. He came to Humana with 30 years of experience across a range of industries, including financial services, where he was focused on customer segmentation, acquisition, driving an experience that fuels retention to ultimately drive sustainable and profitable growth.

David's consumer-focused experience and perspective is -- has been and is instrumental to our journey to become a consumer health care company. Now to turn to clinical excellence. I will focus on Star's performance. Just to recap the key messages from our 8-K and audio file released in early October, we are disappointed, but we are not surprised by our bonus year '27 Stars results. The results are consistent with our baseline planning scenario, and our outlook remains the same as we previously communicated at our investor conference in June. We have -- we did see operational gains in Q4 of 2024 that have continued into 2025, and we feel good about our operational progress this year.

More specifically, in our current measurement year, bonus year '28, we are seeing meaningful year-over-year improvement across the vast majority of metrics. We also continue to see week-over-week improvement as recently as October, and we are showing 600,000 more gaps closed year-over-year as our momentum continues to remain steady. Given the STARS program is measured on a curve, it will not be prudent to share additional results at this time.

However, once the hybrid season is complete in the second quarter of next year, we will provide some additional visibility into our final operating results. However, we will not speculate on thresholds. All in, the takeaway remains that we continue to be confident that we are on the right track to return to top quartile Stars results in bonus year '28.

Now I'm going to turn to our highly efficient operations. We are making -- where we are making meaningful progress and going to share a couple of examples. We recently partnered with [ Genpact ] to outsource elements of our finance capabilities. This will both improve our capabilities and it will reduce cost. We also have a newly introduced Agentic-AI platform, which is helping deliver capabilities like agent assist that help our call center advocates and agents focus on supporting our members. This is helping to improve call accuracy, and deliver faster response times, which drive better outcomes and experience.

Collectively, we expect these items to generate greater than $100 million of savings over a few years while also improving the quality of our operations. These changes are a small sample of our multiyear transformation, which will include near-term tactical cost programs, but also longer-term efforts that change how we operate.

Now turning to capital allocation. We have freed up capital by selling a noncore asset, the Enclara Pharmacia business and are working to sell additional noncore assets. We also agreed to deploy capital to a deal that is expected to close this month in Florida, the Villages Health, which provides primary and specialty care services at the fastest-growing retirement community in the country. We also continue to feel good about our center well pharmacy strategies. We continue to develop our direct-to-consumer capability, and we are also moving into direct-to-employer opportunities.

So in conclusion, we are pleased with our solid performance year-to-date, and we continue to have confidence in the full year 2025 outlook. We feel good about our pricing and the outlook for AEP 2026. And Bonus year '27 Stars results were disappointing, but consistent with our expectations and the outlook for bonus year '28 continues to trend in the right direction, and we remain confident in a return to top quartile results.

With that, I will turn it over to Celeste for a few remarks before we go to Q&A.

Thank you, Jim. Our third quarter results reflect solid execution and underlying fundamentals, including membership and patient growth, revenue and medical cost trends that continue to develop consistent with our expectations.

In addition, we experienced some favorability in the quarter, which enabled higher than previously anticipated investments. These investments were focused in areas to both accelerate our transformation and where we have seen strong returns to date, such as Stars and clinical excellence as well as in areas such as network management, which position us well for the future. We are pleased that our year-to-date performance and outlook support reaffirmation of our full year adjusted EPS outlook of approximately $17 while also making an additional approximately $150 million in incremental investments, including the higher investments in the third quarter.

As a reminder, we included the Doc6 in our guidance for '25. If it is not implemented for '25, we may invest all or a portion of the onetime savings into items that position the company for long-term success.

Now turning to the balance sheet and capital deployment. I would first like to comment briefly on the days in claims payable or DCP metric. Our DCP changes, both sequentially and year-over-year, were largely driven by items that are generally timing in nature and not related to claim reserve levels, including changes in process claims inventory and provider payables. And as previously discussed, the year-over-year comparison was further impacted by changes related to the inflation reduction Act.

Importantly, the estimate for claims incurred but not reported for IBNR, remain largely consistent in these periods, even with our year-over-year decline in individual MA membership. As we have previously shared, we believe this serves as a better indicator of the consistency in our reserve methodology and the relative strength of our claims reserves.

Now moving to our ongoing efforts to increase the efficiency of our balance sheet. As Jim mentioned, we completed an asset sale during the third quarter and are continuing to pursue the sale of additional noncore assets while also making significant progress on capital optimization, the details of which we will share when we complete the execution.

With respect to capital deployment, we will remain prudent in our near-term approach taking a balanced view to evaluating capital investments and returns. Accordingly, our '25 outlook does not contemplate additional share repurchase activity beyond the buybacks in the second quarter, which offset dilution from stock-based compensation. From an M&A perspective, we see significant opportunities to take advantage of the current market dislocation and acquire attractive small to midsized provider businesses such as our pending acquisition of the Villages Health, while remaining focused on managing our debt-to-cap ratio.

Our debt-to-cap ratio at the end of the quarter was 40.3%, down from 40.7% as of June 30, and we continue to target a ratio of approximately 40% over the longer term. Looking ahead, I echo Jim's message that we feel good about our pricing and the outlook for AEP.

In addition, we are executing on the plan that we laid out at our Investor Day in June, managing the levers within our control, with a focus on delivering best-in-class clinical excellence, transforming the company to enable scalable growth and driving enhanced operating leverage. We believe that these efforts will allow us to return the business to its full earnings power while driving better outcomes and experiences for our members, patients and associates.

With that, I will turn the call back to Lisa to start the Q&A.

Thanks, Celeste. Before starting the Q&A, just a quick reminder that to fairness and those waiting in the queue. We ask that you please limit yourself to 1 question. Operator, please introduce the first caller.

Our first question comes from Andrew Mok with Barclays.

I understand that it's too early to share any membership growth projections. But I was hoping you would be able to offer a framework for the level of new growth that you're comfortable with before it starts to impact your operational capacity and based on your prepared remarks, are you already starting to pull some of those levers you mentioned.

Andrew, thanks for the call. So this is David [indiscernible]. First of all, it's good to be in my first Humana earnings call. I'm really glad to be part of this team. So Andrew, let me just a step back and answer your question, but let me just make sure the approach to growth is really clear, and Jim touched on this.

Our focus is increasingly on the lifetime value and NPV of our membership. And so growth is an outcome of that, but also our current membership and retaining them is a primary objective. How do we do that? How do we drive lifetime value and our margin objectives that we shared at Investor Day. So number one, we have to have appropriate pricing. We have to price for risk. And that is a very collaborative process working with underwriting. It goes to number 2, which is that there's been a bit of a cycle, right, which is why there's all this question about is growth good or is growth not good. And that really comes from an approach that says, we're going to grow on plans that frankly don't have a very attractive margin. they're attractive for the customer. We bring them in and then those plants to degrade over time.

The problem is if you overgrown those low-margin plans, you say growth might not be good. We don't think that's the right long-term strategy. We know that our customers don't want their plans to be changing cost base. So instead, what we've done is try to stabilize the margin across all of our plans. So that matter where growth might come from that growth is attractive for the long term. It goes to #3, which is a focus on the customer.

So increasingly, we're saying, how do we design our plans and we're saying, let's start with the customers most want, which is stability, especially on their core medical benefits, and we've tried to provide that this year. Now this is in the context that we've had 2 years we've been cutting benefits. And we've also exited markets where we didn't think the margin profile is where we need it to be. That's put us in a really good position this year to follow the customer and have more stability. And that goes to number 4, the final part, which is when we talked about at Investor Day, Jim touched on as well, which is we need to differentiate the experience in the long term. Products is important, but it's only part of the equation. If we have products that have appropriate pricing for risk, then it's about attracting members, retaining them, getting to do all the things clinically and on stars that drive true lifetime value.

So with that approach, you asked how much growth can we handle from an operations perspective. We are working through that very dynamically. We're not sharing a number in part because we are working on our operations. The principle we have is that, first of all, let's make sure that all of our members have a great outcome, and we're retaining them at a better rate. We committed to much better retention at Investor Day, and we are fully committed to make progress on that next year. But as far as new membership, we want to make sure that every member comes in has a great experience as well and that we're able to retain them. And we're working very dynamically across all parts of the operation to make sure that we're balancing the new member growth to our ability to consume the volume.

Our next question comes from Ann Hynes with Mizuho.

I know you don't want to give a growth number in my membership, but can you give an update on your certification strategy I know you're trying to ship some members out of H5216. Can you give us an update how that strategy is going?

Yes. Let me touch on that. And I'm going to start by just being very clear about what our intent is around the diversification strategy. What we are trying to do, first and foremost, is deconsolidate 5260. So I think as many of you are aware, roughly 43% to 45% of our membership has been in 5216 over the last few years. That is putting too much risk in a single contract. We should be thinking about this from a portfolio standpoint.

We should have a portfolio of contracts. We should have reasonably even membership across that portfolio so that if any 1 contract does not perform in a given year, there is less risk to the entire business. So that is goal #1. And we feel good that we've taken a step in that direction. It's not something you can fully accomplish in a year. But we feel good that we have taken a step in that direction, and you should see us take incremental steps really over the next 2 or even 3 cycles of product. Along with that, as you deconsolidate 5216, of course, you're going to look to contracts where you have 4 and 4.5 stars to try to create that balance. And so that is what we have done this year. We've looked to some of our contracts, they have 4 to 4.5 stars to create that balance. And right now, we feel good that we are making real progress. We are not at a place after 2 weeks of data that we're going to want to talk about numbers or get super specific about it. But this was always part of the plan, and we have made good progress from what we can see in the first couple of weeks. And and we'll share more as we better understand what that is -- where that's going to land in January.

Our next question comes from Justin Lake with Wolfe Research.

Just a quick follow-up first. You talked about membership growth at the high end of expectations. Can you share with us what that expectation range is on new membership? And then -- my question is, can you give us an update on your percentage of MA individual membership and fully capitated agreements this year? And what do you expect it to be next year? And are you seeing any pushback from providers in terms of giving you these lives back because they're having economic issues making a margin on these benefits. .

Justin, let me hit the first half of that, and then I'm going to hand it to George for the second half of that. On the first half, and I know you expect this answer, but we're not going to give a number I will just go back to why we're not going to give a number. We are truly looking at multiple things -- we are looking at member mix, we are looking at product mix, we are looking at channel mix because each of those impact our operations in slightly different ways. We are also ramping up operations because that's what you do when you're headed into a solid growth year. And so we are looking at all of those dynamics and if we will make adjustments along the way based on the collective set of things that we're looking at. And when we say that we will make adjustments we made adjustments going into AP.

I think people recognize that. There have been reports out on that fact. And we will continue to monitor in AEP, but we'll also be looking at, hey, do we want to think about OEP differently? Do we want to think about rest of year differently? So all those factors are in play -- and it just makes it really hard to say, "Hey, here's a number at this point in time.

With that, I'll hand it off to George.

Thanks, Jim. .

So we have taken measures such as taking Part D risk back where we saw the IRA shift cost in a very significant way. As David mentioned, we have been reducing benefits for 2 years to reset the product so that it is a product that we and our value-based partners want to grow. And so we've taken those actions in addition to those 2 major actions, we're also because of the Stars program, we are also implementing Stars mitigation programs that mitigate the impact of the Stars revenue hit based upon their success and their performance in the Stars program.

So we are taking very specific mitigation tactics working with our value-based partners, looking for ways to help mitigate any headwinds that they face, work with them every day. We are out in the field, talking with them about contract changes that are necessary, and we feel good about the progress we're making there. So I would just remind you that we've taken actions in the past couple of years. We also, in addition to that, have a Stars mitigation program that's going on. So when you combine those factors, we feel good about where you are with the value-based partners.

Our next question comes from Stephen Baxter with Wells Fargo.

And I know you're not providing 2026 guidance today clearly. But I wonder if you could give some initial thoughts on the type of margin that you'll assume for the new to Humana sales growth. Is it reasonable to think that, that would be comparable to the 2% roughly you're targeting ex the Stars headwind for the overall book? And then obviously, I'm sure it's dependent on the mix, but just based on what you know today.

Yes. Thanks for your question. So as Jim said in the opening remarks, most importantly, we're on track for the plan we laid out at our Investor Day for 2028. And it is too early to provide guidance for 2026, particularly given where we are in AP. As we think about the margin of the new members to some extent, it will be driven by which contracts they are sold on.

So obviously, those sell onto the 4, 4.5 star contracts will come in at a higher margin. But in aggregate, we continue to expect that our margins for individual MA, excluding Stars word, double in 2026 over 2025 and then we'll continue to make progress in 2026. So it's going to be really, again, like how it comes in as a question of what contracts they're sitting on. But based on all the work we did going into AEP in terms of our product design, and our channel mix, we are happy with the margin we're seeing and expect it to be relatively consistent with our overall margin, although some will be above and some will be below.

Our next question comes from Ben Hendrix with RBC Capital Markets.

I was hoping to hear a little bit more about some of your Stars recovery efforts. You noted last month that the latest drone scores did not fully reflect some of the improvements that you've implemented. And now that we've seen how 516 has performed across the member experience and chronic conditions measures. Can you talk a little bit about the measures or general categories where you feel like you've made the most tangible progress versus the latest data?

Yes. So the operations in this current year are obviously focused on HEDIS and patient safety metrics. And as I kind of referred to in my opening remarks, we're actually seeing strong progress pretty much across the board in those metrics. And look, again, we remain confident, optimistic, positive about the operating progress that we've made across those range of metrics and the position that will put us in next year as we obviously have another set of metrics that we have to work through in the first and second quarter of next year around CAPS and HOS and the TTY metrics. So right now, based on the things that we can control this year, it's been broad improved performance that makes us feel good about our overall trajectory.

Yes. George, do you want to add?

Yes. Jim, the only thing I would add to that is part of the strategy that David laid out is including the stability. Stability will also help us as we continue to make progress in our termination rates and as well as how our members perceive us through the experience we're delivering through stable benefits. So those are also positive factors to contribute to not just the administrative measures and the health outcome measures that Jim mentioned, but overall to the caps as well.

Our next question comes from Kevin Fischbeck with Bank of America.

Great. I guess you mentioned 3 things, I guess, that were giving you comfort into the, I guess, quality of the membership growth that you're seeing so far I think, better channel mix, fewer plan to plan sales and then, I guess, lower voluntary disenrollment. Can you just kind of remind us what the MLR or margin differential is between good channel, bad channel plan to plan now to plan and then retention versus new memberships, so we can kind of better think about what it means to have those buckets growing faster?

And then just on the disenrollment comment, you talked about better enrollment. Is it back to normal? Is it better than normal that you're thinking about?

Yes. Let me touch on 2 things. And then, David, if you have anything you want to add, jump in here. So we're not going to give explicit margin information here, but let me give you a little bit about the dynamics across the channels that we watch that make us feel better -- the biggest 1 is actually going back to NPV and long-term value. We see better attrition rate in some channels and others or retention.

So that is 1 piece. We have a different cost of acquisition depending on the channel. So that is another piece that we look at. And then we tend to find that we have different engagement rates. So when you think about things like Starz, accurate diagnosis, individuals managing their medical care, we see a different engagement rate across channels. And so we look at all of those things when we're then trying to understand what the economic impact is of any given channel. So those are kind of the pieces that we look at. And then the one other thing I do want to touch on we do not know right now that we are seeing better retention. What -- we just don't have the data, right? The data is not available at this point in the year. But when we see reduced plan-to-plan sales, that tends to be correlated with better retention. So we don't know what that retention number is going to be right now. But the reduced plan to plan sales is correlated with better retention, and we are seeing reduced plan-to-plan sales year-over-year. So that -- so those are kind of the components. John miss anything there, David, you want to throw in.

Yes. I think you got it exactly. I don't know if you mentioned, I think there's also different complaint to Medicare Stars outcomes we see by channel. This has been a big factor, especially if you look at the broker channels, and you've seen us take some actions. That's largely based on the quality of how those customers are experiencing that relative to how the Stars outcomes are going to look.

Our next question comes from Joshua Raskin with Nephron Research.

I guess I wanted to focus on this LTV and NPV focus that you're talking about, I guess, is this long-term value of a member as the North Star, a strategic shift for the organization? Meaning, are you willing to accept different margin levels in, say, your insurance segment because you can create more margin through Center well. I just want to understand how this impacts long-term margins? And if this is, in your view, a shift in how you've thought about things in the past as an organization.

Yes, Josh. Thanks for the question. I think it's an evolution. I think this has always been part of how the company has thought about this. But as I said, part of this question about is growth good is it not. It comes down to the margin of that growth. And what drives lifetime value. You need to have margin to drive lifetime value. You need to have retention to drive lifetime value. And we are trying to get to a place where all of our products on the insurance side have a reasonable margin trying to get out of the cycle of having low margin products that are high growth and then you worry about overgrowing in them and then having to drive margin in the out years.

We don't think that's great for our sustainability. We don't have great for the customers. You also brought up the enterprise value. That's absolutely part of the play here. We know that integrated health is a big part of what we think differentiates Humana and looking at the lifetime value of a customer across the entire enterprise is becoming how we look at all of our activities.

Josh, if I could just add one other thing that is as the long term are here, I can just tell you that what I've seen over the past couple of years, and we've actually talked about this directly during the investor conference. Which is we're taking a multiyear view towards lifetime value. And that longer-term view is having us approach products in a different way. And this a way that leads to better stability, I think, better long-term value for the company.

Can I just add the pile on here. While we are focused on LTV and MPV, we are -- we recognize can have a long term without the short term. So we are balancing the long-term value, the long-term value creation with delivering on the next year or the next quarter. So we are balancing those things. We're not just looking 3 and 5 years out.

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

Just maybe on the MA market overall. There was some data from CMS early before open enrollment that they were forecasting in the market might not even grow this year. I wonder -- I know you're not commenting on your specific situation. But do you have any feel for where the overall market is. As you said, your comments that where there's planned exits, you're not picking up disproportionate numbers of those. Are we finally at an area where the market's been disruptive enough that some people are just choosing fee-for-service again. Is that possibly happening? And then maybe if I could just ask on your mitigation efforts during this open enrollment. I know the -- I believe there's some notice period on commission adjustments that would probably make it tough to do that during the open enrollment. So I'm just trying to understand what are the mitigation factors that you can push on if you see too much growth in a particular area.

Yes. Let me hit the first of those, and then I'll hand it over to David for the question around plant exits and commission growth. On the market growth, I would just point out a few things. One, the forecasts are never right, right? Like they're never right. You can go back and you can look at the 5, 6, 7 years, historically, they're never right. Second, we don't see a reason that the market should grow materially different than the way it did last year or the way it has historically. And so our expectation is it's going to be somewhere in the mid-single digits growth. And again, this is forecasting.

So CMS is not going to be right. We're not going to be exactly right -- but we don't see what the big difference is from last year in terms of where the market is at as a whole when you look across all plants. And so our expectation is growth is going to look somewhat like last year at the end of the day. And we will obviously know come January or February, but that's kind of what our expectation is at the moment.

Yes. And Dave, the second part of your question about commissions. You've all seen, we've already decommissioned a number of plans. That is a potential lever, but there are other levers. Keep in mind that we own a big part of our own distribution, including our own marketing.

So we're able to do other levers beyond commissions if we want to have volume match our operational capacity in the back half of the year. I'm going to go back to the Plexes real quick. The bottom line on the plexes, we don't know if people are going to fee-for-service or if they're going to other plans. But what I would just point out, and we've said this a few times, we are at parity or below the richest plan in the market in many, many geographies. And it just so happens that in a lot of the ex geographies, we tend to be below or behind other plans in terms of benefit structure. And so that could be playing into it. But again, we don't have enough data to know that for sure.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I was wondering if you could comment on this year's MA enrollment. Obviously, that number -- the decline in membership is coming in not as much as you had originally expected. Given the sort of short-term dynamics with this year with that membership change, I'd be curious on that. And with all of your comments on retention for next year, how that plays into your plan to sort of double the margin number for 2026.

Can I just ask you to repeat the first part of that? What are we not seeing?

No, I just -- I was just saying sort of the change in membership numbers for this year? Like how are you sort of seeing that impact the short-term number? Does that sort of make any big differences versus your original assumptions in terms of maybe the fourth quarter MLR? And then as we think about 2026, given your focus on retention, how does that play into and contribute to your doubling of the margin number for next year, thing.

Okay. Got it. I missed the 2025 plan.

Yes. Elizabeth, it's Celeste. The -- for -- in terms of our better-than-expected or lower-than-expected declines in membership this year. There the pickup has been driven by 2 things. One, the retention is better -- and two, sales have been on the margin better as well. But in particular, as we've gotten later in the year, the increase in the numbers has been driven by better retention. As it relates to MLR, we don't see an impact to our prior expectations based on what we picked up at the end of this year.

Our next question comes from the line of Scott Fidel with Goldman Sachs.

Obviously, knowing that there's still a lot more to play out in the AEP. Just based on the initial comments that you made around the sales tracking to the high end of the scenarios, -- can you maybe give us some insights into -- in terms of from a product mix perspective, how you're seeing new sales tracking between PPO, HMO and then, I guess, maybe DSNP products. And then also on the LIS PDP commentary around most of the growth coming from the LIS -- just any observations you can give us in terms of where you're seeing that growth coming from in terms of -- from either competitor exits or other existing plans in the market? Just any observations around that as well.

Yes. I'll take the first part. I think -- it's really early to be able to project at that level of detail on the growth. We're just a few weeks into AEP. And what we're seeing is that across the board, we're seeing healthy growth on all segments, but not disproportion in any 1 segment. We're also not seeing disportion in any geography at the moment, including the plaque markets from our competitors. So it's too early to parse it apart, but it looks like it's much more even than it is choppy.

Scott. So on the PDP side, what we're seeing thus far is some strong growth there. And what it's come -- where we expect the majority of it to come from is from our basic and value plans on the basic side, which I think was your question around the low income, what we saw is that we are below the benchmark in about twice the number of states we were in '25. And so that will lead to a significant pickup in auto enrollees and that will include, of course, competitor reassignments. What we've generally seen is that, that is good business in PDP and so we are thinking that, that is a very positive development.

Our next question comes from Ryan Langston with TD Cowen.

I'm sorry if I missed this, but what drove the decision to not cross walk the group MA members from H5 216? Is that just you're thinking you're going to get that back to an appropriate star rating for 2028 or other logistical reasons you didn't make that move?

Yes. I'll jump in on that one. It goes back to 2 things. One is well, really 3 things. One is our attitude towards having a balanced portfolio of contracts. The second is the desire to provide stability to our members in order to drive retention. And then third is the outlook on Stars. And so it's all 3 of those things combined that led to that decision. George?

Yes. I would just say that another part of that because it's multifactorial, as Jim said, and we've been saying since we've been talking about the group business. So we remain focused on improving the group MA margins through the various renewal cycles to reflect the reimbursement environment as well as the cost environment. And our business so far, we've renewed 91% of our current group members. Along that line of recovering margins. So we are making good progress there in the recontracting to improve the margin.

We expect fairly solid growth in 2026 and with some key new business, including a major airline, a large group in Kentucky as well as Alabama. So as far as Star go, our plan is to move the group members away from 52 is not to move our members away at this time because we're making good progress, both on the Stars side as well as the margin recovery through the renewal cycles.

If I can pile on again, this is again an example of not cross-walking these. It's balancing the short term and the long term. We could get a bump in the short term, but risk the longer term on Stars, and we're not willing to do that. So it's a balance of what we deliver in '26 versus what we deliver in '20 on that front.

Our next question comes from Jason Cassorla with Guggenheim.

Great. Just it sounds like medical and pharmacy trends coming in line with your expectations for 2025. I think looking back at the Investor Day, you previously assumed trend would remain elevated for 2 million -- there's obviously the mix elements you've talked about, but any early thoughts on how 2026 cost trend developments coming in relative to 2025? And then any way to help quantify how you're thinking about the trend vendor opportunity specifically for next year?

Yes, we have talked about in the past that we expect a continuation of the same growth levels in medical and Rx cost trends into 2026. So the mid-ish on the higher end of mid on the medical cost side and low double-digit on the Rx side of things.

So we're not seeing anything that would suggest it should be different than that at the moment. And then sorry, this -- what was the second part of your question?

Yes. Just any way to help quantify how you're thinking about the trend vendor opportunity -- clinical excellence opportunity for next year.

Yes. So if you think back to our Investor Day, we talked about the levers of transformation and the clinical excellence trend vendor opportunity is one of our larger ones. We expect to make progress versus what we delivered this year, not ready to size that yet. Some of that will be driven by the size and mix of our membership and then make progress again in '27 and '28. But it's too early to say where that will be just given the number of dynamics that are -- that still need to settle down.

Our next question comes from Lance Wilkes with Bernstein.

Great. Could you talk to some of the margin characteristics and long-term margin targets you've got, in particular, in Medicaid, if you could talk to differences between traditional and duals, where you see long-term margins and how you perceive year 1 margins in that sort of business? And then over in the group MA business, what sort of J curve do you expect as you get new business in there? And maybe just a quick clarification. You had mentioned a direct-to-employer opportunity, I think, in Center well pharmacy.

So if you could just clarify that as well.

Josh, you want to kick off, George?

Yes, I'll start. On the dual opportunity, just keep in mind that when we think about that and we think about Medicaid since you combine those 2, I'll try to hit on both of them. We prioritize our Medicaid business based upon where we think there is a great linkage to duals, including some of the changes that are currently slated for the dual integration states. And so we have had an industry-leading win rate in procurements and Medicaid. And the reason for how we've targeted those is really to where the dual opportunity remains. And the overall reason for that, of course, is that the duals do have outsized margins compared to the traditional or MA business. And so we see that those do deliver margins in the first year.

Unlike some of the core products all year along, those dual products tend to perform well from a financial standpoint. We have -- we're seeing that. We continue to see that happen. We have won a number of Medicaid states. It allows us to increase our dual penetration in a few key markets I would just point out that in 2026. We'll be moving into the Michigan Hide program in Illinois, which is, as we've talked about before, a very new dual marketplace. We are also going to be growing into Illinois this year in -- and we also have an opportunity in South Carolina, where we're carving in the dual eligible. So there's lots of great opportunity in the dual market in Medicaid that we feel very good about.

Yes. And let me just quickly hit the direct employer. I think people are familiar with the direct-to-consumer work that we've been doing in Center well pharmacy, the partnerships, particularly around some of the GLP-1s. We have also seen some interest in similar programs but through employers. And we've been exploring that space. It's too early to know exactly what that's going to look like but it is potentially another interesting opportunity for us to take advantage of the capability that we have in our pharmacy business.

Our next question comes from Michael Ha with Baird. .

I know it's a bit early to think about 27 advanced rate notice, but yesterday, we learned a key data point. Maybe it's unsurprising, but if your reach fee-for-service cost trend for 25% is 8.5%, usually a pretty strong leading indicator for the rate notice. And really much higher than what was implied to the '26 final notice, I think, over 300 basis points. So when you couple that with BMS' estimate on '27 trends, it feels like you have a starting point in the advanced notice that could be north of 9% on the effective growth rate alone.

Clearly, very strong for MA and very strong for Humana. So -- and again, I know it's early to think about it, but does this roughly make sense and jive with your internal expectations? And wondering if there are any other important variables you think we should also consider heading into the rate notice?

Yes. Look, I think it's as we've learned over the last few years, speculating on where the rate notice of the land has been a very much more imprecise answer than than we would like. So we're not going to comment on sort of where they are, where they're starting, what the headwinds and the tailwinds are, and we'll obviously get a first look at that in the beginning of next year.

Our last question today will come from Whit Mayo with Leerink Partners.

All right. I was just wondering if you guys had any views on the changes to the reward factor to EHO for all whatever it's being called next year and implications on your stars or more broadly, what do you think this means for the industry. I don't think you have any challenges with your duals mix, low income or disabled population, but just not sure yet what this actually means.

Yes. With regard to social risk factors that go into that, we're seeing great progress. We're tracking that on a weekly basis as we're tracking all of our Stars progress, and we know that we are making very good progress there. We're seeing week-over-week improvement -- so we feel that we're on track for where we need to be to have that factor be positive. We have a good mix of low income within our product mix, including our dual and even products that don't have as large of a specifically dual product population.

With our group being on 52 16, as we've talked about before, we're seeing progress there and having a good mix of membership on 52 16, even with the deconsolidation, we should still be in good shape of social risk factor members.

Yes. I'd just say, operationally, we feel good. And obviously, it's hard to tell where the thresholds are going to come in exactly. So this is just a -- 1 of these things that will be difficult to forecast.

Hey, with that, I just want to thank everybody for joining us this morning and for your interest in Humana, and I will say again that we're extremely appreciative of our 65,000 associates who are driving the performance that we talk about on these calls and who are serving our members and our patients every day. And so we appreciate your support, and we hope you have a great day. Thanks.

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