Good day and thank you for standing by. Welcome to the Humana Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lisa Stoner, VP of Investor Relations. Please go ahead.

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 fourth quarter 2022 results and our initial financial outlook for 2023. Following these prepared remarks, we will open up the lines 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 fourth quarter 2022 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. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. With that, I’ll turn the call over to Bruce Broussard.

Thank you, Lisa, and good morning, everyone. We appreciate you joining us. Today, Humana continued the momentum seen throughout 2022 and reported another quarter of strong operating and financial results. Adjusted earnings per share for the full year were $25.24, which was above our previous estimate of approximately $25 and represents an annual growth of 22%. We achieved this compelling earnings growth while also making meaningful progress in advancing our strategy, which I will touch on more in a moment. Looking forward we provided full year adjusted EPS guidance for 2023 of at least $28 representing growth of 11% over 2022, consistent with our previous commentary. We anticipate this strong growth despite the headwind we faced from the divestiture of 60% interest in Kindred Hospice. We also reaffirmed our expectations for a full year individual Medicare Advantage membership growth of at least 625,000 members, a 13.7% increase year-over-year. Recall that our 2025 adjusted EPS target of $37 is underpinned by an assumption of return to individual MA membership growth at or above the industry rate by 2024. We are very pleased to have accomplished this goal ahead of expectations. Before providing additional detail on our operations and outlook, I’d like to take a moment to address the RADV final rule released Monday. I want to start by emphasizing the strength of the Medicare Advantage program, supported by a value proposition that is superior to fee-for-service Medicare. 30 million seniors have chosen to enroll in MA, of which nearly 34% identify as racial and ethnic minorities. The MA program delivers high-quality and improved health outcomes, resulting in a 94% satisfaction rate and lower total cost of care through improved care coordination providing savings to the Medicare program while helping seniors achieve their best talent. The strength and support of MA is…

Thank you, Bruce, and good morning, everyone. Today, we reported full year 2022 adjusted earnings per share of $25.24, ahead of our expectations of approximately $25 and representing a compelling 22% growth year-over-year. As Bruce shared we delivered as impressive earnings growth while making significant advancements in our strategy, including a quicker-than-anticipated return to above-market individual Medicare Advantage membership growth for 2023 and further advancement of our CenterWell platform. Before discussing details of our performance and outlook, I would note that we realigned our reportable segments in December, moving to two distinct segments, Insurance and CenterWell. I will speak to our 2022 results and 2023 outlook in terms of the new segment structure with references to the old segments to provide clarity as needed. I will start by discussing our fourth quarter results and underlying trends before turning to our 2023 expectations. We reported fourth quarter adjusted EPS of $1.62, above internal expectations and consensus estimates. Results for our Insurance segment were modestly favorable to expectations. As recently shared, total medical costs in our Medicare Advantage business ranged slightly above previous expectations during the fourth quarter, driven by higher-than-anticipated flu and COVID costs, as well as higher reimbursement rates implemented for 340B eligible drugs. Collectively, these items had an impact of approximately 80 basis points on the fourth quarter benefit ratio for both the Insurance segment as well as the previous retail segment. Importantly, these are discrete items in the quarter and do not have a carryover impact into 2023. Excluding these items, total medical costs in our Medicare Advantage business were modestly below our previous expectation. Our Medicaid business continued to perform well in the quarter with lower-than-anticipated medical costs. In addition, the favorable utilization seen throughout the year in our commercial group medical and specialty businesses persisted in…

Certainly. And our first question will come from Josh Raskin of Nephron Research. Josh, your line is open.

Hi, thanks. Good morning. I want to focus on CenterWell, and I understand the decline from the hospice sale. But maybe if you could give us some color on what’s the organic growth rate around both the revenues and EBITDA. And then if you could talk about your recruiting initiatives and how you’re trying to bring physicians into the centers? Thanks.

Yes. Hey Josh, thanks for the questions. On the recruiting side, we do it both nationally and locally. And what we’re finding in the – we have a dedicated team also to the recruiting area. What we’re finding in the recruiting is that we are really the younger population we’re able to recruit to, and then also the older population, the more the experienced ones that are really looking to change their approach and clinical area and specifically around moving from an E&M code driven, primary care billing to more of a value based. And what we’re finding is once we – they are experienced with the value base, the retention side is much greater because it’s a better quality of life for them. But more importantly, it’s also much aligned with what they went to school for around proactive care and care that is more oriented to prevention as opposed to just the treatment side. So through a centralized approach and also oriented to locally, but really oriented to people that are looking for value-based payment options.

And Josh to address your other question related to just the organic growth that we anticipate for the CenterWell segment. So in total, the segment is expected to grow revenues about 6% year-over-year with pharmacy slightly above that number based on the strong individual MA growth, although they’re also impacted by the decline in the PDP membership. The home is slightly down, and that’s again reflective of the growth that I had mentioned in my commentary about the core fee-for-service expansion as growth as well as the expansion of the value-based model, but obviously offset by the disposition of the 60% interest in hospice and the movement of that line of business to below the line is a minority investment. For CenterWell primary care, that business continues to grow. But as you know, the majority of the de novo growth is off balance sheet as part of the Welsh, Carson deal. So also isn’t reflected in our actual revenue growth and EBITDA it’s going to be reflected in that minority investment as well. But specifically, the segment in total is expected to grow 6% for the on-balance sheet portion.

Okay, Thanks.

One moment. And our next question will come from A.J. Rice of Credit Suisse. And A.J. your line is open.

Okay. Hi, everybody. I think she’s calling on me, it was a little jumbled there. Thanks for the comments on the RADV rule, and I know that’s still under review by you guys and the industry. One of the things in some of the data that was released by Kaiser and others running up to the rule release was some data suggesting various error rates on audits done on results from the 2011 to 2013 time period. And one thing that got some play was the fact that Humana seem to have a little higher audit error rate or somewhat higher error rates than some of the peers. I know that was years ago. I’m sure the entire industry has invested in making sure that they do better in future audits. But I’m wondering if you guys could give us your perspective on that and any initiatives you’ve done to try to make sure that going forward, that won’t be an issue.

Hi, A.J. Thanks for the question. In terms of the variation that was reflected in the report that came out, I would say first, we don’t have access to the data, obviously, to be able to really evaluate or assess those differences, so I really can’t comment on the variation. More generally, I would just say that we don’t have any reason to think that the inherent error rate within the Humana population would be meaningfully different from others. And so maybe just reflective of the audit selection and process that they’ve used historically. In terms of the question of what we might expect going forward, I would say, that is also impossible to really assess. Even in the periods they have audited, they have used different methodologies over that period. And as you saw in the final rule that came out earlier this week, they did not provide specificity on what the audit methodology will be going forward. And so the error rate that you might expect is going to be highly dependent on the audit methodology and extrapolation that they ultimately define. And so that is one of the things that we look forward to working with CMS on to better understand to fully assess, what might be expected going forward.

Okay, thanks a lot.

One moment.

Operator, are you there?

Yes, I’m sorry. Justin Lake of Wolfe Research. Your line is open.

Thanks. Good morning. I guess, first, I’ll just follow-up on A.J.’s question and then ask my own. Maybe the – I assume – I know CMS methodology changing and they didn’t give a lot of specificity, but I kind of would assume an error rate is an error rates. So maybe you can just tell us, I mean, even CMS has said errors rates for the industry have improved. So one, are you doing your own audit to see how this has trended over the last 10 years? Maybe you can give us some color on how the error rate, forget about extrapolation and all that, but just how the error rate in these in your own audits might have been trending over that period of time? And then my question would just be, as a follow-up. The – as you think about CMS in 2018 will be the first time they use extrapolation on an audit. Whatever that error rate is, can you give us some color in terms of how you share that with investors. And more importantly, kind of how you would think about it from a bidding perspective? Would you kind of take a onetime charge on something that was from 2018, whatever that repayment might be? Would you build it into the bids going forward as kind of a reserve and just assume it’s a lower revenue number, a premium number like a rate cut? Can you give us some color on that as well? Thanks.

Sure. Hi, Justin. To your first question about just broadly how to think about how error rates may have trended over time. What I would say is that generally, the growth in value-based provider penetration as well as the increased activity within in-home assessments over that timeframe as well as just the normal course activities that all health plans undertake to – as part of Medicare risk adjustment, frankly, all work to improve accuracy. And so I would expect that some of those programs have grown, particularly value-based care and home assessments that we would see hopefully some improvement relative to those initiatives. But in terms of what might be happening in the broader sort of and much larger organic base of provider claims, it that’s difficult to say because again, we don’t have that information. And it will ultimately depend on how the audit methodology is defined in order to fully assess the impact of that. In terms of how we might think about the impact of this from 2018 and forward, I would say that from a 2024 bidding perspective, based on what we know today and given that the 2024 bids are due in just a few months, I would say it’s unlikely that there would be any impact to 2024 bids. But we’ll certainly need to look to see if CMS provides any guidance in the advanced notice and bid instructions given just the uncertainty that exists regarding how the contract selection and audit methodologies will be defined in the future. But our focus will continue to be on delivering value and strong value within our MA claims to members, including the goal of stable premiums and benefits in 2024. So we look forward again to working with CMS to better understand the planned audit methodology going forward and assessing any future impact, but unlikely that will be finalized in time for the 2024 bids.

Thank you. And our next question will come from Kevin Fischbeck of Bank of America.

A little more color on your insurance MLR guidance. I think in your comments, you mentioned that it’s up in part due to and they benefit design improvements. I guess, I was under the impression that you guys were trying to target stable margins on the MA business. So just want to understand that nuance. And then you mentioned Medicaid pressure due to new contracts. So, I was wondering if there’s anything in there about redeterminations? And then finally, any color on commercial would be great. Thanks.

Hey Kevin, this is Susan. Yes. So in terms of the MLR guide for 2023, the way you should think about it is that we did through our value creation initiative, create capacity with the enterprise to fund those targeted investments without impact to overall earnings and EPS. But keep in mind that the enterprise savings that were generated were across the entirety of the enterprise. They wouldn’t have all been generated by the Medicare line of business. And so given all of that investment was redirected to Medicare, you would see some impact to the MLR, all other things being equal for Medicare. And then as always, you have to consider, given the growth that we saw and some of the dynamics that Bruce mentioned about new members, switching members and retention all of those would go into our estimates for MLR for the year as well. Outside of just the Medicare trend, as you pointed out, the Medicaid growth will also impact the MLR Medicaid in general has a higher MLR. And given the growth that will happen at the beginning of the year – will be in Ohio, that will certainly impact it and be mitigated over the course of the year through redeterminations. And as we’ve commented previously, the members who had access Medicaid through the deferral of the redeterminations did tend to be lower acuity and higher contributing. So as they roll off, that would have an impact to the Medicaid MLRs as well. So those, I would say, are the two main drivers as well as just more generally, our continued approach of a more conservative initial guide as we set expectations with the – they intend to certainly mean and hopefully exceed those expectations.

Thank you. And our next question will come from Stephen Baxter of Wells Fargo. One moment. Stephen, your line is open.

Hi, thanks. I wanted to ask about retention in Medicare Advantage. I think you said you more than doubled the improvement that you targeted for 2023. So it sounds like you’ve gotten retention back to where you would have initially planned heading into open enrollment for 2022. I was hoping you could talk about what your outlook is for retention as you continue to evolve your channel strategy? Do you think retention is stable from here? Do you think it can improve? And if it can improve? Any sense of what the pacing would look like would be great. Thank you.

Thanks for the question. Yes, as you articulated, we’re very happy about the 200 basis point improvement in the retention this year. It is a combination of both internal work and the combination of our partnership with the channel, they increased 350 basis points. As we look forward, it’s probably going to be more stabilized as we think about it with some improvement, we’ll continue to work on it. But with the large increase in improvement in the channel outside that really contributed to the 200 basis points. And I don’t know if you’re going to see that, is that large of an improvement in 2023 and 2024. [Technical Difficulty]

This is your operator. Unfortunately, you could not hear me speaking. I have introduced Scott Fidel [Stephens] twice. Scott, your line is open.

Thanks. Can you hear either of those first introduction Scott, can you hear me okay?

Yes.

Okay, good. Just wanted to follow-up on just the home, the home outlook and appreciate the details you did give. Just interested give, just given some of the moving pieces with the hospice divestiture. When just looking at the home health business, can you give us your view on what you’re expecting the revenue growth trends to be there when considering some of the volume indicators that you gave us? And then also just interested in your expectations for home health margins in 2023. Just when considering both the final fee-for-service rates and the shift that’s playing out to value-based care? Thanks.

Sure. Hi Scott, this is Susan. So in terms of revenue trends, because of the hospice divestiture, you will see a decline year-over-year. It’s just over $100 million decline. We have a meaningful offset in the growth of the value-based model, in particular, which is a risk-based capitated arrangement with the health plan. And so as we significantly expand the coverage of that to one million members that does drive meaningful revenue appreciation, consider that close to $1 billion for 2023. That’s offsetting what otherwise would have been pressured from the 60% divestiture of the hospice asset. From an EBITDA contribution, you can think of, again, this segment is being down year-over-year, and that’s primarily a function of that higher-margin hospice divestiture being replaced with the less mature value-based model contribution. We expect increasing contribution in markets over time. They don’t start immediately at full impact. And so the value-based model expansion, you can think of is closer to breakeven in 2023. And then that being offset by the loss of the hospice earnings in our reporting. And I would say on the core home health services, we do expect, I would say, relative margin stability. We’ll certainly continue to watch labor trends and make some further investments in nursing, recruiting and retention, as I mentioned in my commentary, but I’d say relatively stable margins in the home health business.

Okay, thanks.

And our next question will come from Stephen Baxter of Wells Fargo. Stephen, your line is open.

Hi. Yes, I’ve had my questions, so I’m happy to give you the floor back and move to the next person.

Certainly.

Our next question will come from Gary Taylor of Cowen. Your line is open.

Hi, good morning. I wanted to ask about the 2023 MLR guidance, but maybe come at it from the other side of the angle from what Kevin asked. We tried to look back at years in the last decade where you had really above-trend enrollment growth like 2014, 2015 and 2019. And generally, MLR was up in those years, although 2019 was probably mostly the HIF holiday. But I’m just trying to think through your commentary about retention being higher, which should imply keeping more comprehensively coded patients and 50% of enrollment from plan switching, which should also imply more comprehensively coded patients. So, I’m just wondering if inherent in the MLR guide is an assumption that your new class of 2023 is better profitability than typically you would ascribe to a new class of patients and any implications on kind of that margin improvement progression we would expect in the 2024.

Hi Gary, great question. So there are a number of things that will impact the MLR as a result of the membership mix. As you said, the higher than typical rate of members – new members coming from competitor MA plans would generally be viewed as positive. Those numbers do tend to be contribution margin positive even in the first year. We’ve many times commented on, in general, when you think of the full new cohort of new members as being breakeven from a contribution margin basis, but that’s based on that historically lower switching rate. So the fact that we saw more switchers, incrementally that would be viewed as positive. As you said, relative to our previous expectations, at least, the higher retention is certainly positive from a contribution margin perspective as those are going to be the most impactful from a current year contribution standpoint. The other two things I would say, work negatively against MLR. One is, one plan in particular, the plan where we offered a meaningful Part B giveback. We do expect that plan will attract an overall lower acuity membership given the plan design and the way it’s structured, and we did see stronger growth in that plan than we had originally expected. So again, that relative to all other members would likely be a negative to MLR. And then finally, I would say the plan-to-plan switching that we saw this year, and we commented on this at JPMorgan as well. For the existing members that we do have, we did see more members switch to another Humana offering than we had initially anticipated. Typically, that’s where they will see a richer plan in market and select that plan. So while still positive and more so than an otherwise new member, year-over-year, they would see less contribution given the planned change that they initiated. And the last thing I’ll just point out that is a bit unique this year is in order to make the level of investment that we did in our Medicare offerings, the way the bid dynamics work, we have to create savings for relative to A&B cost to fund those additional benefits and recall that CMS shares in those savings through the rebate. And so in order to invest $1 billion in benefits, you have to actually save more than that and then share some of that with CMS. And so the implication of that is and otherwise increased to MLR relative to what it would have been at a lower investment level. So all of those things are contemplated in our current year guide as well as, as I said a moment ago, just our continued approach of taking a conservative view of the guidance at the beginning of the year.

Thank you.

Thank you. And our next question will come from Nathan Rich of Goldman Sachs. Your line is open.

Hi good morning. Thanks for the question. I wanted to go back to RADV, if I could. It looks like the elimination of the fee-for-service adjuster, is set to go into effect. I guess, how significant of an impact could that element have relative to some of the other factors you mentioned where there seems to be a bit more uncertainty around contract selection and sampling methodology? And then Susan, I think you had previously talked about potential for the industry to litigate the outcome of the final rule to try to resolve some of these uncertainties. It’d be great to get your kind of updated thoughts on how you think that process could play out?

Sure, Nathan. So, I would say, as we think about the ruling, as Bruce mentioned, the fact that they will not be extrapolating to periods of 2017 and prior, we certainly view as positive and we would consider the exposure for the audits that have been completed for those periods to be immaterial. So that was definitely positive. As we think about what CMS has shared for 2018 and forward, and as we said in our commentary, it will be – we will need to evaluate obviously, the audit selection methodology and extrapolation methodology. And also understand our compliance concerns as part of our normal course MRI activities. And as we do that, we continue to evaluate all of our options to ensure that the omission of a fee-for-service adjuster and the resulting impact is addressed. And so again, at this time, that’s really all we can say. There’s going to have to be additional collaboration with CMS to better understand some of the go-forward activity, but we just continue to – and we’ll continue to evaluate all of our options to address the primary issue of the lack of acknowledgment of the need for a fee-for-service adjuster.

Thank you.

Our next question will come from Lisa Gill, JPMorgan. Your line is open.

Hi, thanks very much. Good morning. Susan, I was wondering if you could just maybe discuss your expectations around the number of patients that will be in capitated relationships for 2023. And maybe just overall, the number that will be in any type of risk relationships as we think about 2023?

Sure. Hi, Lisa. I would say that – we would probably expect relatively stable percentages and as we’ve disclosed historically, you consider about a third of our membership in full capitated arrangements another third in some form of value-based arrangement, and then the final third in more fee-for-service type arrangements. And just given the strong growth, our goal every year is to a minimum maintain that penetration and ensure that the new members who are enrolling with us get to that penetration level. So given the strong growth this year, you’ll certainly have to evaluate that. But as Bruce said, we saw very strong growth in highly penetrated markets. So hopefully, that may be a bit of a tailwind as respect to those ratios. But generally, you can – given the high penetration already, the goal is to maintain that as we continue to grow at or above the market rate.

And if you see better penetration, can you just remind us, will that help to improve the initial guidance that you’ve given here around medical cost trend for 2023?

I would say, we’ve evaluated the 2023 membership growth and the quality of that. And as we’ve said earlier in the commentary, net-net, you can think of that all in as net positive relative to what we would have previously expected, but immaterial really to our overall estimates for 2023. And certainly, we’ll evaluate the claims trend as we do every year. And if we do see some positivity, we’ll certainly keep you apprised. But I would say from the growth itself, while positive, would not be considered material to our overall estimate.

Great. Thank you.

Next question.

Thank you. And our next question will come from Michael Ha of Morgan Stanley. Your line is open.

Hi, thank you. Just a quick follow-up on Susan’s response to Gary’s question and then the quick one value creation plan. So at least Susan mentioned existing MA members switching to a plan with a higher Part B rebate had a meaningful impact MLR. Just wondering how many approximate members is related to larger impact MLR? And then quickly on the value creation plan. I understand it’s tracking very well. I think on track to exceed $1 billion in savings. So that’s great. And just a couple of questions, like how much in excess of $1 billion are you now targeting to save for 2023? And then now the AEP is over, you think about that $1 billion in relation to strong membership growth, increased planned investments and sales margin? And how does it compare to your original expectation? Are the investments tracking in line with the $1 billion? Thank you.

Hi, Mike. Yes. And just to clarify, the enrollment in Part B plans was a broad comment. We saw a strong sort of choice within that product from new members. And I’m sure some of our existing members may have switched to those plans as well. But I would say the majority of the outperformance in that product was more related to new members than switching. But certainly, provides a different alternative in terms of the way the benefits, the guarantee Part B giveback on the premium side, and there is a trade-off for the relative richness of the benefits relative to other plans. So again, just based on, I would say, more of the acuity of the membership that we expect those plans to attract being lower is why I would say that, that would sort of all other things being equal, negatively impact the MLR that you would expect. The plan to plan change broadly is just recognizing that typically when a member changes plans, it’s usually because they’ve identified a plan that has richer benefits that they will move to. And so year-over-year, their contribution, while positive, will just be less than it was in the previous plans. In terms of the value creation plan, yes, as you said, we did outperform our initial goal of $1 billion. I would say you can think of that as sort of a 10% to 15% outperformance. As we mentioned, though in 2023, we did plan for the intent to reinvest some of those savings into other admin categories and investments, particularly marketing and distribution with the intent of continuing to take progress on shifting some of our external call center market share back to our proprietary channels, which we’ve described historically is requiring some upfront investment, given that we fully fund the marketing for our proprietary channels. We’ll see lower commissions over time, but relative to the external channel, those costs are a little bit more front-loaded. And so our 2023 plan does continue to contemplate that, increased investment in 2023, so that we can make further progress. Having said that, we will certainly evaluate the stronger-than-expected results that we’ve seen so far in 2023 overall, but also by channel and the team is currently evaluating all of the marketing metrics and developing sort of a point of view of how we will think about our go-forward plan, particularly for 2024 AEP and whether there’s opportunity to optimize what we might have initially expected. So more to come on that, but our claim does contemplate the same level of increased investment that we planned for at the time of our bids last year and the planned use of some of those value creation savings to fund that investment.

Thank you. And our next question will come from Steven Valiquette of Barclays. Steven, your line is open.

Yep. Great, thanks. Yes. Good morning everybody. Thanks. Yes, we talked about the MLR guidance for 2023 a lot on this call so far. Just one other question around that sort of a clarification. But you mentioned that you expect the provider labor capacity to improve modestly throughout the year. Just wanted to get some quick clarification around that in terms of – do you consider that to be a pent-up demand when you’re referring to that? And maybe just the other question would just be at the midpoint of the MLR guidance, are you assuming any sort of pent-up demand related to elective procedures or any other pent-up non-COVID care coming out of 2022 that may have to be absorbed in 2023 at the guidance midpoint. Thanks.

Hi Steven, so as we thought about the MLR and specifically the mention of provider labor capacity, I would say that is more a broad belief that over time, we will see improved clinician labor capacity which, as we all know, has been impacted throughout COVID, and we believe still at lower levels than we would have exchanged in the absence of COVID. So our belief is that over time, it won’t be an immediate correction, but over time that we will see clinician labor capacity increase and that when we do additional utilization will also follow. And I think as we’ve commented before, one of the spaces that we continue to see lower than historical utilization is in the observation space within the hospital systems. Today, what we’ve seen throughout COVID is ER utilization in inpatient stays, observation stays, which you can think of as the sort of shorter duration stays are materially lower, which makes sense as the hospitals would certainly look to maximize sort of the revenue within their beds for any given patient. So we would expect as labor capacity increases. That will be one area where I imagine we will start to see some return to pre-COVID levels as there is sufficient capacity to support those additional patients in the facilities. So I would say it’s not explicitly pent-up demand. And based on all the analysis we’ve done, we don’t believe there’s a large amount of pent-up demand sort of that needs to work its way through the system. Historically, we have seen some evidence of that, but it’s typically after a very large COVID spike where there’s significant depressed non-COVID utilization, which fortunately we haven’t seen for some time, and we are not forecasting that type of event to occur again in 2023. So our guide does not have an explicit assumption around pent-up demand, but rather just taking the resulting sort of baseline trend we experienced in 2022. Increasing that for normal course trend as well as the expectation of some higher utilization is labor capacity returns. And as I mentioned in the commentary and expectation that flu will also see higher costs than we saw in 2022 as well.

Okay. All right. That’s helpful. Thanks.

Thank you. Our next question will come from George Hill of Deutsche Bank. Your line is open.

Hey, good morning guys, and thanks for taking the question. Susan, I hopped on a couple of minutes late. I was wondering if you could just spend another minute talking about, what drove the increased cost in 340B and the duration after this year. And I guess I would just know – I’m sure you guys thought it was a court ruling on Monday that looks like it’s going to give the manufacturers more flexibility with which pharmacies they want to participate with and which drugs they kind of want to provide discounts around. So just kind of would love more color on kind of what happened in 340B and what you guys see going forward?

Sure, George. So the impact that we saw in the fourth quarter of 2022 was a result of an increase in the ASPC schedule. That was defined as for claims paid on or after September 28, 2022. And there was no ability for CMS to provide any budget neutrality offset in 2022. And so the lack of a neutrality offset is what caused the higher cost that we incurred in the fourth quarter that we had not previously anticipated. As you think about going forward in 2023, we will have that same higher ASPC schedule in effect. However, CMS did implement a change in the outpatient conversion factor, which reduces the cost for other services and drive something much closer to budget neutrality, which is why you haven’t seen ongoing run rate impact into 2023.

Thank you.

One moment. And our next question will come from Ben Hendrix of RBC. Your line is open.

Yes. Hi. Thank you very much. With regard to CenterWell, you’ve noticed focus on payer-agnostic platform, but you’ve also noted strong margin contribution from integration with your MA book. Can you remind us how you are prioritizing engagement with your MA plans versus payer-agnostic development as you plan de novo center development going forward? Thank you.

Well, we actively pursue and engage other payers on this. We do believe that’s an important part of our growth strategy and in addition, continuing to provide value back to the MA industry overall. But it is highly dependent on the growth of the plan. So this year, you saw significant growth as a result of our MA – the insurance side doing quite well. And so I would say our engagement is very broad and very oriented to continuing to be payer-agnostic, but it’s highly dependent on the insurance plans ability to grow.

Thank you.

No further questions. I would now like to turn the conference back to Bruce Broussard for closing remarks.

Thank you, operator, and thanks for your continued support. And most importantly, thanks for our 65,000 teammates that allow us to really report these wonderful results. As Susan and I have reiterated, we are entering 2023 with – in a position of strength and look forward to continuing to provide you updates throughout the year on based on this strength. So thank you and everyone have a wonderful day.

I would now like to conclude today’s conference. Thank you for participating. You may now disconnect.