Good day, ladies and gentlemen and thank you for standing by. Welcome to the Humana Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Lisa Stoner, Vice President of Investor Relations. Ma’am, please begin.

Thank you and good morning. In a moment, Bruce Broussard, Humana’s President and Chief Executive Officer and Susan Diamond, Chief Financial Officer, will discuss our first quarter 2022 results and our updated financial outlook for 2022. Following these prepared remarks, we will open up the line for a question-and-answer session with industry analysts. Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan for the Q&A session. We encourage the investing public and media to listen to both management’s prepared remarks and the related Q&A with analysts. 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. 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 first quarter 2022 earnings press release as they relate to forward-looking statements. And to note in particular that these forward-looking statements could be impacted by risks related to the spread of and response to the COVID-19 pandemic. Our forward-looking statements should therefore be considered in light of these additional uncertainties and risks, 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. 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. Finally, any references to earnings per share or EPS made during this earnings call refer to diluted earnings per common share. With that, I will turn the call over to Bruce Broussard.

Thank you, Lisa and good morning, and thank you for joining us. Today, Humana reported financial results for the first quarter of 2022, reflecting a solid start to the year. I’ll speak briefly about our first quarter results and outlook for the rest of the year before providing an update on our strategy and the steps we’re taking to position Humana for continued long-term success. Adjusted earnings per share for the first quarter were $8.04, which was above our initial expectations. This outperformance was primarily driven by favorable pharmacy results combined with lower-than-planned administrative expenses, some of which is due to timing. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. We raised our full year 2022 adjusted EPS guidance by $0.50 to approximately $24.50, representing 19% growth over our 2021 results. Importantly, our updated financial guidance continues to include an explicit $1 COVID headwind. Our update guide also includes the dilutive impact related to the pending divestiture of the company’s 60% ownership of Kindred at Home’s Hospice and Personal Care division. Susan will provide additional detail on our first quarter performance and our full year outlook in a moment. Turning to our previously announced $1 billion value creation initiative, you recall, we committed to delivering this value for the enterprise through cost productivity initiatives and value acceleration from our previous investments. This will create capacity to fund growth and investment in our Medicare Advantage business, driving more robust benefits and lower cost for our members, which we believe will lead to improved membership growth. In addition to – enables further investment in our healthcare service capabilities, including expansion of our value-based home health model and transformation of the consumer experience and home delivery service model in Humana Pharmacy. I am…

Thank you, Bruce and good morning everyone. I will provide an update on our first quarter results, including line of business performance details, our outlook for the full year and progress made to date on our $1 billion value creation plan. Finally, I will provide an update on capital deployment, including the planned use of proceeds from the pending divestiture of our majority interest in Kindred’s, hospice and personal care businesses. Today, we reported first quarter 2022 adjusted earnings per share of $8.04 driven primarily by lower-than-anticipated administrative costs, some of which is timing in nature and outperformance in our pharmacy business. All other lines of business are performing as expected or slightly positive, further contributing to our strong quarter. Inpatient utilization was favorable across our Medicare and commercial businesses due to a faster decline in COVID admissions and slower rebound in non-COVID admissions than we’ve seen during previous surges and we will need to continue to monitor how utilization further rebounds in the coming weeks. Typically, we would not raise guidance at this stage as it is too early to fully evaluate results and medical cost trends in particular. However, given the main drivers of our first quarter outperformance, we are raising our full year guidance by $0.50 to approximately $24.50, representing nearly 19% growth over our actual 2021 results. Importantly, this revised guide continues to anticipate $1 of conservatism to cover a net COVID headwind should it emerge and also anticipates the estimated impact to earnings of divesting 60% of our interest in the Kindred hospice and personal care businesses later this year. With respect to quarterly earnings seasonality, at this time, we expect the percentage of second quarter earnings to be in the low 30s. We want to reiterate, however, that investors should continue to focus on…

Our first question or comment comes from the line of Kevin Fischbeck from Bank of America. Your line is open.

Okay, great. Thanks. I guess I just wanted to dig in a little bit more to the guidance raise, if I understood it correctly. It seems like a little over half from the services business being higher and the rest is G&A, so you didn’t – should we read that into that you feel a bit at the lower end of your G&A guidance is the to change the range there? And I just want to make sure that I understand the MLR guidance is unchanged. There seems to be getting some questions about how MLR looks given the decline in BCP. Thanks.

Sure. Happy to take that. To your first point, yes, as you think about the raise relative to our performance for the first quarter, First, I would mention that consensus was lower than our internal estimates for the first quarter. So, as we think about it internally, we think about $1 of the outperformance is what we were looking at from an internal perspective. And you are correct, you can think about that as roughly half attributed to lower administrative expenses and half attributed to the pharmacy outperformance. So as we thought about the year, as you said and as I said, we do expect that the pharmacy outperformance will continue, although with some moderation. And so that will allow us to support the $0.50 raise as well as the dilution that we’re currently estimating from a hospice divestiture later this year. On the administrative expenses, as I mentioned, some of that is timing. Some of that is a pull forward of savings we would have otherwise expected later in the year, so not necessarily incrementally positive. We want to see how that continues to develop. And then we will also look to see if we continue to see some favorability that may allow for some additional investment in the distribution and marketing strategy that we’ve talked to you about and may allow us to accelerate some of those investments, again, if we continue to see favorability, but we are not taking any of that into the full year guide currently. On the MLR then, I would say looking at the retail MLR in particular, analyst ranges were quite wide as we looked at the models. And so the comparison to what’s reported this morning is heavily influenced by the few that actually responded to the survey. So I think…

Thank you. Our next question or comment comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Hi, good morning. And thanks for the question. I wanted to ask on bid strategy for 2023. And in the release, you talked about the final rate notice and you expect rates to be up for Humana, 4.6%. A little bit below the sector average, and I think gap than you faced in recent years. I guess how does that impact the strategy for ‘23? And then I appreciate the details that you gave, Bruce, upfront about kind of the plan design and distribution strategy. Do you have an updated view on how you might allocate that $1 billion of savings across plan design and distribution that will ultimately provide the best ROI on those investments? Thank you.

Relative to the rate notice and our investment, I would say we feel very confident that we are going to have the ability to be competitive in 2023. So even though we might have a little bit some – because of our STARS scores, we see higher STAR scores in absolute, but on a relative change, it’s lower than the industry there. So we still have the same amount of dollars going into the program. The second part of your question, just about the allocation among the various different components, the bucket, so to speak, between plan design and the distribution and marketing. We just don’t feel comfortable today to give you that disclosure. As we enter the latter part of the year, and we’re in the AEP cycle, we will probably give you more details there. But I think today, it would be best that we don’t do that.

Fair enough.

Thank you. Our next question or comment comes from the line of Justin Lake from Wolfe Research. Your line is open.

Thanks. Good morning. Bruce, I wanted to follow-up on your commentary around the Investor Day. Specifically, you talked about doing something in June, you pushed it until September, just curious on the driver of that. And then what have you been hearing from investors in terms of what they – what they’ll be looking for at that Investor Day, specifically, any thoughts around margin targets in the Medicare Advantage business. Thanks.

Yes. As I mentioned, we are shipping for September. And the reason for the move between June to September is we just felt that the information more relevant as we entered the latter part of the year for a few reasons. First, we will be closer to AEP and provide more thoughts around our go-to-market strategy since we’re getting close to that. Second, we will have more progress on the $1 billion program, and I know that’s important in the short run. So those are really why we just felt that getting later in the year would be important to allow more timely information for the investors. Relative to the subject matters, I mean, we do look as an important part of our strategy of the Healthcare Service business being important, I think giving more disclosure around what that looks like and the strength of that over a longer period of time will be an important discussion. In addition, we will discuss just our earnings potential and the growth in our earnings potential, including how that affects margin and our view on the margin side. So we will discuss that as you articulated. It is an area of particular interest by our investors, and we will be prepared to discuss both the individual MA margin and then also just how healthcare services impacts the enterprise side. And then lastly, we will also just be able to give the investors much more update just on how we see the healthcare service business growing and the impact it has in the integration within the market itself because as I articulated, we’re building the capabilities, we’re leveraging and scaling the capabilities. And then in addition, an important part of that value is the integration in the local market as referred to in the commentary around the flywheel effect. And so that will be an important discussion that we will have.

Thank you. Our next question or comment comes from the line of Matthew Borsch from BMO Capital Markets. Your line is open.

Yes. Thanks. As I’m looking back, I know there have been other years where it seems like you have weighted your MA product designed towards earnings improvement. And whether it was deliberately or somewhat unintentional that was seem to be the case for this year. I’m just wondering if I can ask why that isn’t more apparent in the Medicare Advantage profit margin that you’ve seen so far this year? I would have expected that to be a bigger driver maybe on the medical cost ratio side of the upside this quarter?

Sure, Matthew. I can take that. And you’re right. As you look at the first quarter, and again, you’re looking at retail MERs versus individual MA. And so there are some differences in terms of the underlying product mix year-over-year, particularly around Medicaid and some growth in DCE membership, which has a higher MER than individual MA. Again, I do want to reiterate that from an internal perspective, as we look at the underlying businesses, each are performing as we would expect. So no concerns there. In terms of one other difference I would highlight in terms of just the first quarter specifically is the change in prior period development year-over-year. With COVID, there were a lot of changes in claim processing payment policy changes as a result of some of the stress that hospital systems were under. And so that significantly impacted prior period development. We anticipated a significant decline in prior year development year-over-year, and that will disproportionately impact the first quarter results. Which is why in our earnings release, we gave you the detail on what that would look like if you just stripped out PPD and the noise that, that creates. It’s hard to tell whether some of the analysts fully understood or anticipated the magnitude of that change year-over-year. So those are really some of the main drivers. And again, I just want to stress that we continue to feel comfortable with our expectation of a 50 basis point improvement in the individual MA margin, as we said, and believe we’re on track to do that and know early concerns. The other thing to keep in mind is the dollar of COVID contingency you can assume that’s largely in the retail MER expectation. As we said in our commentary, we continue to hold that conservatism within our guide. So, if it proves unnecessary over the course of the year, then that would benefit the retail MERs as well.

Very helpful. Thank you.

Thank you. Our next question or comment comes from the line of Kevin Caliendo from UBS. Your line is open.

Thanks so much. I just want to get a little bit of better understanding, maybe a better way to ask this is what do you expect the MLR trend to look like over the course of the year, meaning given what we saw in the first quarter with the prior period development, would we kind of just take where we started this year and where you expect to end, how would you see – is it more of a straight line, or is there going to be a little bit more of a hockey stick to the back end of the year? And just the part of that question, I guess is did you see any of the COVID headwinds in 1Q at all to $1?

Hi Kevin, this is Susan. So, in terms of your second question around the COVID headwinds, we would say that we did not see a COVID headwind emerge in the first quarter. As I mentioned, given the dynamics we saw with the utilization patterns, the way we have thought about it is not just the absolute gross COVID impact, but rather net of any offsetting reductions in non-COVID. And so as I mentioned, while January saw higher COVID levels. And in fact, we saw that was the highest level of COVID admissions in any given month since the start of the pandemic in February and March, given the rate of decline and how much faster that was versus previous surges. We just didn’t see non-COVID have the ability to rebound at the same pace. So – and that’s true both across Medicare and commercial. So, we would say that, that was net positive. As we said in our fourth quarter commentary, we do not – we will be very cautious in releasing that dollar of contingency that we are holding, just recognizing the longer COVID goes on, we just don’t want to assume that patterns will remain the same as we have seen historically. And then as I mentioned in my commentary, just the rate of sort of COVID positivity itself, while the public health emergency is in force, we will drive additional unit costs for any admission that does happen to have a COVID positive diagnosis associated with it. So, we will need to continue to watch that. In terms of MLRs, with the exception of the PPD that I mentioned that will disproportionately impact the first quarter. I think if you normalize for that, then I would say there is nothing sort of unique about this year that we would expect MERs to be to vary other than the fact that sequestration, if you recall, is still in play, the way we were for the first quarter. It will reduce by half for the second quarter and then is assumed to be back in force for third and fourth quarter. So, that will cause a little bit of seasonality differences year-over-year. But aside from that, I can’t think of anything else specifically that we would expect unless, as I said the COVID – depending on what happens with COVID, which we have acknowledged could create some quarterly variations.

Thank you.

Thank you. Our next question or comment comes from the line of A.J. Rice from Credit Suisse. Your line is open.

Hi everybody. I thought I might just ask you about the home health, Kindred at Home business and some of the things you are doing there. First of all, I think Susan, you called out some labor challenges that you are trying to address. I wondered how widespread those are in the business? And have they gotten worse in the first quarter versus what you saw in the fourth, or are they getting better? And then on the virtual value-based work you are doing. I am just trying to make sure I understand, is that Kindred at Home contracting with the Humana MA plans, or is it subcontracting with your primary care docs, how does that work? And how do you manage the steerage of the patients to make sure they end up in your home health operations and not someone else’s?

Hey A.J. Sure. Happy to take that. The first question on labor challenges. I would say they are fairly widespread. There are certainly some markets where we have sufficient capacity and we are certainly doing everything we can to take advantage of growth opportunities there. But generally speaking, some of the larger markets where there is more of an opportunity, we continue to see challenges. I would say though they are – I would say they are getting a little bit better, primarily due to the fact that COVID has subsided. So, some of the labor challenges are due to nurses having to quarantine as a result of COVID. And so as we see that come down to, again, the lowest levels we have seen. That certainly helps as we have more nurses available. As I mentioned in my commentary, we are also pleased to see that we – our initiatives are having some positive impact on recruiting nurses and retaining those nurses, again, creating some additional capacity. But I don’t want to diminish the fact that it continues to be a challenge. We continue to watch sort of the wage environment and other sort of resources being used to recruit and retain nurses and we will try to make sure we stay contemporary with that. On the value-based model, the way that works is One Home, which is a company you might recall, we acquired last year, which currently provides home health DME and infusion services to our Florida and Texas members under a value-based model. That is the model that we are looking to expand. So, One Home actually contracts with the health plan under a capitated arrangement for all of the spend for those three service categories. And then in markets where there are downstream risk providers,…

Okay.

Thank you. Our next question or comment comes from the line of Stephen Baxter from Wells Fargo. Your line is open.

Hi. Thanks. I appreciate all the color on utilization and PYD certainly gave us a lot to digest. Just wanted to ask a clarifying question on the lower-than-expected PYD. So, on the inpatient unit cost side, can you just clarify whether or not the higher unit cost you experienced was purely the result of these incidental COVID dynamics? If you were to look at the remaining inpatient non-COVID utilization, I guess how did that compare to your expectations on the unit cost side? I guess big picture, just an update on acuity trends and how they are running on the non-COVID population? Thank you.

Sure, Stephen. So yes, so on the PYD, we did see lower – prior period most favorable was just lower than we had previously expected and really attributable to higher inpatient unit costs in the fourth quarter. There were two main drivers of that. One was higher non-COVID unit costs. They were quite high in the fourth quarter. Frankly, there is still some work we are doing to understand why that is. And then also on the COVID admissions, as we set reserves at year end, we have the benefit of authorization data. And so we have really good data on the absolute level of admissions. From the utilization perspective, claims of restated just as we would have expected. So, the absolute level of admissions is consistent with what we thought. What we saw, however, is of those admissions we anticipated more restated as a COVID admission when on the initial authorization, they did not reflect COVID as the reason for the admission. And so we would have contemplated those as non-COVID admissions. Given the significant difference in unit cost for COVID admission versus non-COVID, that caused our December unit cost to restate higher. So, I would say it’s a little bit of a mixture with December, specifically related to COVID and the previous months more reflective of increases in the non-COVID unit costs, which we are still studying. Those are things again, we want to see how those continue to play out. But for the first quarter estimates, we have contemplated those higher unit costs. In terms of acuity, I would say broadly, we do not believe we are seeing an increase in acuity of the patients across any of our lines of business. There is no indicators of that so far. We think, again, when you are talking about the level of – particularly in the fourth quarter of sort of COVID admissions to some degree, this is a reflection of as you see that higher incidental COVID positivity rate, as I mentioned, the admissions that are then sort of left in the non-COVID bucket tend to be higher average unit costs and in this case, just happened to restate higher than we had initially expected.

Next question please.

Our next question or comment comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is open.

Yes. Hi. Good morning. Just wanted to focus on the pharmacy outperformance, I think you said it was about half of the dollar upside from your initial targets. So, what specifically kind of like drove outperformance? Susan, you mentioned that the existing members that are using your pharmacy services had a higher utilization of mail versus the wanted off-boarded. Is that sort of the entirety of it? Is it just kind of like that current member mix, or are there other more underlying trends that we can extrapolate for the rest of the year?

Hi Ricky, yes, sure, happy to answer that. So, there were a couple of contributors to the pharmacy outperformance. One, as you said, was related to just some of the slightly favorable membership we saw across MAPD and PDP from an absolute perspective. And then as you mentioned, and Bruce and I highlighted, what we saw was that the members that were retained by the health plan through AEP had a higher use of Humana Pharmacy than members who disenrolled in AEP. And it was about a 9% difference. And that was a larger difference than we have seen historically. So, it was not something we had specifically anticipated. And so that higher membership and that dynamic of retaining more members who are more likely to use Humana Pharmacy contributed to some of the volume outperformance. I would say there was additional volume outperformance even above that, and we think that’s a reflection of the continued investments we are making in the pharmacy business to improve the service delivery model and experience overall. We implemented a number of initiatives over the course of 2021 designed to drive improved mailer penetration and use of the pharmacy business and saw success there. And we have seen further success in the first part of 2022, just beyond what we had originally anticipated. And as I mentioned, we did anticipate higher mailer penetration in ‘22 versus 2021 and we are just seeing that come in slightly higher even than we had expected, which we view very positively. In addition, we did see lower unit costs. That is a function of just the underlying drug mix and the negotiated rates. And so that is contributing as well. And then finally, we also saw a favorable cost to fill. And so as a result of some of the investments and enhancements they are making in the service delivery model and Bruce referred to some of those investments. We are also seeing some positivity with reduced cost of fill than we expected. So, all of those we view very favorably. And generally, you can assume that those do continue, although as I mentioned, we do expect some moderation because our plan did contemplate continued increases in mail order penetration over the course of the year. And so as we described in the commentary, you can think about our thinking on pharmacy is raising $0.50 now that reflects the outperformance and then also that outperformance allowing us to cover the potential dilution from a hospice divestiture, assuming that we don’t use the proceeds for share repurchase.

Thank you. Our next question or comment comes from the line of Joshua Raskin from Nephron Research. Your line is open.

Thanks. Good morning. I wanted to clarify the 2022 sort of run rate or jumping off point for next year. Should we think about the $24.50 plus the dollar as sort of that starting point and maybe you could give us a little bit more color on the hospice dilution in 2023 or if buybacks or something else will offset that. And I apologize for the long question, but the real question is really, are there potential headwinds for 2023 that we should be thinking about that would preclude you from attaining your long-term EPS target, specifically thinking about investments in primary care, etcetera?

Hey Josh. So yes, so for your first question, we would say that you should think about the ‘22 baseline at the $24.50. Similar to how we talked about it in our initial guide, we would just encourage you not to get ahead of us on the dollar of COVID contingency. As I mentioned, there is still a lot to see in terms of how medical costs play out over the course of the year and utilization more broadly, morbidity, etcetera. So, you can consider the baseline for now the $24.50 and we will continue to be transparent about what we are seeing. But certainly pleased with the ability this early to raise and get towards the higher end of our range and certainly hope that we can see continued progress, but I would encourage you to consider the baseline for now the $24.50. In terms of hospice solution, so as we have said, for 2022, the pharmacy outperformance will allow us to cover any potential dilution. We are internally anticipating that the transaction would likely close third quarter. And so that’s what we are thinking about in terms of our current guide. As we have talked about, this has been something that we have been planning and looking at options for some time. So, from a 2023 perspective, we have always been anticipating that we would divest a majority stake in hospice. And so that is contemplated and will be contemplated in our earnings progression in 2023, where we would expect to, again, see a return to higher levels of Medicare growth while also delivering within our targeted long-term range of 11% to 15% off of that $24.50 baseline despite the hospice divestiture. For the proceeds, as I mentioned in my commentary. My preference would be to use as much as possible towards deleveraging, just so we can get that down and give us some additional flexibility we mentioned in my commentary that we would expect to be at approximately 40% by year-end versus the 45% we reported for the first quarter. And so we do expect to use a majority for debt repayment.

Okay. So, 11% to 15%, even including the dilution off of the $24.50, that’s the right way to think about it.

Yes, exactly.

Perfect. Thanks.

Thank you. Our next question or comment comes from the line of Scott Fidel from Stephens. Your line is open.

Hi. Thanks. Good morning everyone. Interested just to get your thoughts on Medicare provider contracting the environment for FY ‘23. Just as we are tracking all of the proposed Medicare FFS provider rate updates that are coming out from CMS. Most of them are tending to be notably lower than what the final MA rates actually came in at. So, just interested whether you see any type of positive arbitrage around that variance, or do you think ultimately that providers will be pushing for higher MA rate increases than what they seem to be getting on a net basis in Medicare FFS, at least based on the proposed rates so far. Thanks.

Hey Scott. So, yes, so to your point, so right now, we will have to see, obviously, what the final rates come in at. But currently, with what we have seen preliminarily, they are lower than the overall average sort of rate increase in terms of the rate book. Most of our – on the hospital contracting side, I would say most of our contracts are tied to fee-for-service reimbursement. And so typically, we would not see much – whatever those rates come out with is what we would see. It’s not to say that we might not see some providers come and sort of want to talk to us. I would say they may want to talk to us about some other components of our contracts in terms of how we handle claims processing and audits and some other things, but I would not anticipate that we would be opening contracts up to move off of the them being tied to the Medicare reimbursement rate. I think that there are some other service categories, home health is one example where we tend to pay lower than Medicare fee-for-service rates. So, depending on where those rates come in, that could be an area where providers may come where they are being paid less than Medicare reimbursement, and they may want to have a conversation on that in this inflationary environment. So, we will continue to monitor it. I would say that at this point, based on what we have seen, we are not considering that a significant headwind that we are considering for 2023 and would view it as something that we can manage through.

So, is it fair to say that you aren’t seeing some favorability here between the final MA rates and the likely net provider FFS rates, right?

I mean based on what’s come out so far, and then that’s what it would suggest. And we will have to see where the final rates come in.

Okay. Thank you.

Thank you. Our next question or comment comes from the line of David Windley from Jefferies. Your line is open.

Hi. Good morning. Just focusing on the home health build-out and expansion there. You mentioned I think One Home relative to Texas and Florida launching your value based in North Carolina and Virginia. Can you talk about how rapidly you can continue to expand markets with that strategy? And then are there other – is that mostly an organic strategy or are there some inorganic bolt-ons that you could add to that to accelerate it?

Yes. A few things, I think our goal is to get to close to 50% over the next 5 years of our members to be in that. And that’s the full relationship with One Home. And there is really components of that relationship. One is around the actual ability to as Susan was describing the value-based payment area where you manage that and go through One Home from a contractual point of view. The second part of it is the build-out of DME and their pharmacy. And as you look at sort of the length of time it takes it actually is the latter part, the DME and the pharmacy takes more time than the actual contractual side. So, what we are testing right now is actually sort of a light and heavy model, so to speak. The heavy model has everything. And the light model is really more oriented to the contractual area of that. And we are hoping that, that will facilitate getting to the 50% quicker as a result of that and actually provide further improvement on the clinical costs, both in the clinical cost of the actual cost of providing the services, but also downstream prevention of ER visits and hospital admissions there. So, it’s really two-pronged. And again, we are trying to find how we can facilitate it quicker through a lighter model that doesn’t just have to require the build-out of the DME and the pharmacy side.

Yes. And the one thing I would add to Bruce’s comment is, today, the model is deployed in markets that are heavy risk-based primary care. So, we are moving into markets where that’s not the same dynamic. And so we are really interested to see how these first implementations go and assuming those go well, then I do think we would look to go ahead and accelerate some of the further expansion. But I want to make sure we fully assess sort of how the model works and anything that we need to learn in the environment, recognizing it’s a little bit different.

And then your second question was organic versus inorganic. This will be mostly organic. I think the ability to – there is not a lot of assets out there to buy. And then in addition, I think the integration of it will probably not be as free as us just continuing to build the organic side.

Thank you.

Thank you. Our next question or comment comes from the line of Lisa Gill from JPMorgan. Your line is open.

Thanks very much. I just wanted to ask about your risk-based primary care relationships. Can you talk about the percentage of premium that are under those types of relationships and the impact to MLR? And then as I think about primary care services more broadly, how do you think about virtual healthcare?

I will take that. Today, it’s about two-thirds of our revenue is within the Medicare Advantage business is really with practices that are under a risk model. Now that varies between a full risk to we refer to as a path risk which is up and down, but whether it’s a bonus or up and down risk with some color around protection of it. So, we do see continued growth in that area and continued not only improvement in the number of members that are under that relationship, but also more and more of our practices are in surplus, which we really consider as being the most important value because this means that they are earning more dollars than they would in a fee-for-service environment. So, first, we do measure not only the total, but also the effectiveness and the impact it has on providers. Relative to virtual health, I would say we look at that as virtual primary care. We look at that as not only being part of the primary care itself and being incorporated in our relationship. But in addition, we are testing through our Heal relationship, actually attribution of individuals to a virtual health provider and then the ability to not only use virtual health but also go into the home. So, it’s not office base. It’s actually at traveling physician along with a virtual health component to it. And they are actually attributed the patient. And so we are testing that in a few markets as we speak today with a partnership that we have with one of our joint venture relationships we have, Heal.

Great. Thank you.

Thank you. Our next question or comment comes from the line of Gary Taylor from Cowen. Your line is open.

Hi. Good morning. I just want to go back to reserves for a second, just a couple of parts to my question. I know days claims payable only down 0.7 of a day sequentially. But the fee-for-service IBNR piece was down about three sequentially. So, I just wanted some help if there was anything in particular driving that? And then my second part of the question was you are sitting at 43 days claims payable. There is a comment that pre-pandemic you ran closer to 40%. And just wondering, is that just sort of an FYI? Are you alluding to the fact that as we sort of move post-pandemic you anticipate moving back towards $40 and releasing some of those reserves into earnings over time?

Yes. Hi Gary. And so to your point, there is a lot of noise just the last couple of years due to COVID and the impact to sort of claims submission timelines, capitated provider surplus amounts in payments. And I know we have talked about that in the last number of quarters and the magnitude of the impact of those dynamics. And so that’s why we provided the reference to the pre-COVID levels, which we think is a better benchmark to assess this it’s hard to otherwise normalize for all of those considerations. And so as you said, we are sitting three days above what our average ran pre-COVID, which we view is the more relevant compare to and feel good about the level of reserves that we are sitting on as of the end of the quarter.

Can I just follow-up real quick. Is the dollar of COVID cushion? Is that – in your view, is that sort of already sitting in reserves that would be released, or is part of that anticipated to be generated by ‘22 operating results?

Yes. So, I would say in terms of what’s currently sitting in DCP, to the degree some of our reserve estimates for the first quarter or prior year proved to be conservative as that would unwind, then that would have been some of what is currently reflected in the reserve levels. And the way we thought about in our plan anyway, we sort of layered in that conservatism ratably. And as we said in the earlier commentary, we certainly did not see a net COVID headwind in the first quarter, but we are being cautious about how we think about unit cost trend in particular.

Got it. Thanks.

Thank you. Ladies and gentlemen, this concludes the Q&A session. I would now like to turn the conference over to Mr. Bruce Broussard for any closing remarks.

Well, thank you, and thank you for all our investors in both participating in today and continuing to support the company. As we have communicated, we continue to believe that we started with a strong year and look forward to continuing that progression throughout the remaining part of the year. And then lastly, I would like to thank our 90,000 employees that are every day going to work to help support both these results, but more importantly, our members and patients that we serve on a daily basis. Thank you, and everyone have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.