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Humana (HUM) Q3 2017 Earnings Conference Call Transcript

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Humana (NYSE: HUM)
Q3 2017 Earnings Conference Call
Nov. 8, 2017 9:00 pam. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Humana Q3 2017 earnings call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Amy, you may begin your conference.

Amy Smith -- Director, Investor Relations

Thank you and good morning. In a moment, Bruce Broussard, Humana's President and Chief Executive Officer and Brian Kane, Senior Vice-President and Chief Financial Officer will discuss our Q3 2017 results and our financial outlook. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Christopher Todoroff, Senior Vice-President and General Counsel will be joining Bruce and Brian 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 all participants of our cautionary statement. Certain of the matters discussed in the 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 Q3 2017 earnings press release as well as in our filings with the Securities and Exchange Commission.

Today's press release, our historical financial news releases and our filings with the SEC are all also available on our "Investor Relations" site. Conference [inaudible] 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.

Bruce Broussard -- Chief Executive Officer, President and Director

Thank you, Amy. Good morning and thank you for joining us. Today, we reported strong Q3 results and [inaudible] full-year adjusted 2017 earnings guidance. Our Q3 2017 GAAP EPS of $3.44 or $3.39 on an adjusted basis once again exceeded our previous expectations.

Our individual Medicare Advantage in business continued its strong performance in line with our most recent guidance and our group and specialty segment performed well ahead of our previous expectations.

We raised our adjusted EPS guidance by 10 cents to approximately $11.60, reflecting the improved group and specialty segment performance. This was partially offset by lower than a previously expected healthcare service segment pre-tax. Our full year 2017 GAAP EPS guidance is now approximately $17.62 per share.

Over the last several years, in particular, 2008 through 2017 we've committed to productivity initiatives designed to promote operational excellence, accelerate our strategy, fund critical initiatives and advance our growth objectives. Following my remarks, Brian will comment on our Q3 results and some of the specific multifaceted productivity initiatives.

In addition, in October CMS published its updated Star Quality Rating Bonus year 2019 showing that we have 12 contracts rated four stars or above and 2.4 million members in four-star or above-rated contracts to be offered in 2018. This represents approximately 74% of our Medicare Advantage membership as of July 31, 2017. We are pleased that Humana received a four-star rating for five Medicare Advantage contracts offered in eight states, an increase from one such contract last year. all Humana Medicare Advantage HMO contracts in Florida received a four and a half star rating, improving our position with our provider partners.

These higher ratings are expected to result in higher rebates in 2019. As discussed in our Q2 earnings call, over the last year we've renewed our focus on stars and I've made operational changes to reduce volatility in future years. The effectiveness of which we believe is showing an improved results in certain star measures.

As our sharp focus on productivity continues to drive costs out of the system, one area we are making critical investments is around our providers. A key pillar of our strategy that we highlighted at our Investor Day in April is to partner with providers to support their transition to value-based care that fosters the management of health holistically.

Medicare Advantage is one of the few reimbursement models that reward holistic health management but primary care physicians on their own, especially independent physicians lack the capital, scale, and expertise to make the investments in technology and analytics necessary to thrive in a value-based environment. To that end, we are making investments in payer agnostic care coordination, technology and analytics capability that enable providers to be successful in the value-based models, using their administrative burden and enabling more time for clinical management of their patient population.

In a recent study completed based on 2016 results for Humana Medicare Advantage members affiliated with providers and Humana value-based reimbursement models, we found that medical costs for Medicare Advantage members affiliated with providers and value-based models were 15% lower versus those affiliated with physicians under original fee for service Medicare. In addition, [inaudible] scores were 26% higher for providers in value-based arrangements with Humana and providers in standard Medicare Advantage settings.

We will execute a provider strategy using a range of models that fit the unique characteristics of a local market. This includes owned senior-focused primary care clinics, many of which are payer agnostic, as well as joint ventures, alliance clinics and our MSO model where we will focus on supporting affiliated independent primary care providers.

We spoke to you previously about our 2016 launch of four wholly owned clinics in Greenville, South Carolina. Membership growth in these markets have exceeded our initial expectations and today I want to share with you some early encouraging results that we saw between the second half of 2016 and the first half of 2017. These results include a 5% reduction in admissions per thousand, a 24% decrease in readmissions per thousand, positive trends in member satisfaction with an improved net promoter score and improved star scores associated with the patient experience. These results are a testament to the effectiveness of a value-based care model.

During 2017 we opened five additional clinics four in Kansas City and one in North Carolina.

In addition, we continue to do sophisticated value-based alliance and joint venture partners in new markets. In 2017 we launched 15 new clinics in seven markets. Among our alliance and joint venture relationships and our fully owned clinics, we today operate 195 clinics across 27 markets. We will continue to evaluate further investments and M&A opportunities in the provider space that improve our position in priority markets or accelerate the advancement and expansion of our MSO platform.

Interwoven with our provider strategy, we continue to be very focused on the home as home is often a superior clinical environment to deliver care and reduce high-cost hospital admissions. In its current state, care in the home is often disconnected from primary care physicians, challenged with issues and timeliness of care, lacking in robust data exchange as well as based on a fee for a service-driven business model.

We've been utilizing our six existing Medicare-certified home health agencies in Florida and Texas along with enhanced relationships with high performing agencies in select markets to pressure test some of these paradigms. Through these early tests and learned efforts, we've seen that these barriers can be overcome and the member and provider experience can be improved.

As we look to advance our integrated care delivery strategy and expand our access and reach in the home, we're taking a multifaceted approach including but not limited to care coordination, remote monitoring, telemedicine and the provision of care in the home through nurses and doctors. The insights we've gained from owning home health agencies demonstrates the value of having a home health platform to evolve capabilities and services including integration of data, advancing moments of influence and transforming home health to value-based reimbursement. This model produces improved outcomes such as lower admissions, readmission and emergency room visits and common high-cost conditions including congestive heart failure, diabetes, and COPD. This is a change from today's fee for service home health reimbursement model which does not encourage the holistic management of health.

It also provides us with an additional touch point with our members to enhance engagement, trust and close additional care gaps such as missing [inaudible] measures.

Many aspects of the care coordination are already in place and we continue to look for ways to expand and optimize these capabilities. For example, our entry into the long-term support service business via our acquisition of American Elder Care in 2013 and the beginning of what is today our Humana At Home business with the acquisition of Senior Bridge in 2012 are becoming even more important as we continue to seek greater linkage of the Medicare de-step population and Medicaid long-term support services.

However, other aspects of this strategy, particularly the provision of care in the home will require M&A and other partnerships for collaborations to effectively bring them to life as we've discussed previously. In order to advance our strategy, we need to continue to evolve the capabilities of our healthcare service segment. Accordingly, over the last several months, we have been working on a newly refined operating model to better align the healthcare services segment, strategy, business and processors. The new organization will afford us a greater opportunity to engage our members, patients, physicians and associates to drive the best possible financial and clinical outcomes.

With this new organization, we recently named new leaders of both our home and pharmacy operations who will work under the leadership of William Fleming President of Healthcare Services. We welcome Kirk Allen to Humana to lead our Home Operations as President of Home Care. Kirk brings more than 20 years' experience in healthcare and was most recently the President of Ascension Health At Home and Executive Vice-President of Home Care Services at Evolution Health. We also welcome Labeed Diab to lead our pharmacy operations as President of Humana Pharmacy Solutions.

Labeed is a registered pharmacist who brings extensive operations, management and business development experience in both the retail and healthcare industries, most recently serving as Chief Operating Officer and Executive Vice-President at Brookdale Senior Living. Prior to joining Brookdale in 2015, Labeed served in executive leadership roles for Wal-Mart Stores since 2009, most recently service serving as President of Health and Wellness which included managing retail pharmacies.

Now to touch on 2018, we are confident in our Medicare Advantage competitive positioning despite the return of the health insurance industry fee in 2018. As a result of our over performance in 2017 and various cost-saving measures, we've made targeted investments in our product design, clinical programs and operating processes which enable us to maintain stable benefits, simplify the member experience and improve clinical outcomes. We've been proactive in our broker outreach this year demonstrating for them our confidence in our stand-alone strategy and commitment to helping seniors achieve their best health. Additionally, we worked to simplify the broker experience by investing in technologies that enable them to have 24/7 access to our information with further plans to simplify enrollment tools in 2018.

As a result, we expect to return to meaningful individual Medicare Advantage membership growth in 2018.

Brian will provide additional commentary on our 2018 in his remarks. With that, I'll turn the call over to Brian.

Brian Kane -- Chief Financial Officer and Senior Vice President

Thank you, Bruce and good morning, everyone. As Bruce mentioned, today we reported adjusted EPS of $3.39 for Q3 which is ahead of our previous expectations. We raised our full year 2017 adjusted EPS guidance to approximately $11.60 from our previous adjusted EPS guidance of approximately $11.50 and we increased our operating cash flow guidance by approximately 250 million dollars at the midpoint to a range of 3.3 to 3.6 billion dollars primarily due to continued better than expected financial performance.

Our retail results are in line with our most recent forecast and continued to significantly exceed our initial expectations for 2017 led by our Medicare Advantage business. Consistent with the first half of the year, Q3 MA medical utilization trends including hospital missions and pharmacy spend are running favorably relative to our pricing assumptions.

In addition to our retail segment producing strong results, our group and specialty segment significantly outperformed our previous expectations primarily due to the favorable prior period development and better than anticipated utilization trends. The trend is now running at the low end of our initial expectations of 6% plus or minus 50 basis points. Accordingly, we raised our pre-tax target for this segment for the second consecutive quarter from a range of 320 to 340 million to a range of 350 to 400 million dollars. We also decreased our benefit ratio expectation to a range of 79% to 79.25% compared to our previous range of 79.75% to 80.25%.

The group of specialty segment continues to consistently deliver solid results due to the team's strong focus on productivity and on offering innovative products that resonate in the marketplace. We're pleased with the return on investment we generate from this segment. As we discussed last quarter, while the healthcare services segment continues to generate profits and steady cash flow to the parent and importantly reflects the integration of our business model by delivering clinical excellence and trend benders for our insurance lines, we continue to see lower than expected mail order utilization particularly for new members in our Humana Wal-Mart stand-alone PDP offering. Today, we slightly lowered the pre-tax target range for this segment to 950 million dollars from our previous target of 925 to 975.

Turning to our individual commercial segment results which are excluded from our adjusted EPS, we now expect individual commercial segment pre-tax income of approximately a 150 million dollars up from our previous estimate of approximately 85 million dollars. Consistent with last quarter, these results reflect significant positive productivity development as well as lower than expected utilization in our ACA compliant business. With regard to cost share reduction payments, we do not expect the impact of a recent executive order to be material for us. As these collective results demonstrate, we've had a great year so far with significant outperformance that has enabled us to take the opportunity to invest in our future including higher AEP marketing spend.

This outperformance also results in higher compensation as our performance-based compensation arrangements reward our associates for their excellent work.

In addition, as Bruce discussed, we've taken significant actions to reduce administrative costs in a sustainable way for 2018 and beyond. Some of these measures have resulted in incremental spend in 2017 including investments in analytics and enabling technologies that have significantly advance our integrated care delivery model such as investments in our big data and our customer relationship management or CRM system among others. Our big data environment now enables us to integrate and routinely mine status sources such as clinician notes, home health assessments and social determinants of health data. Through our CRM, we now have comprehensive longitudinal data view of our members which helps us know our members deeply and engage them effectively.

We have also made investments in the provider space to advance care coordination capabilities, focusing on interoperability and analytics to improve the provider experience. And lastly, we invested in a number of productivity and expense management initiatives related to internal management systems as well as vendor contracting and rationalizing our real estate footprint across the country. More fundamentally, we've completed the build-out of a process transformation office or PTO and we recently named process champions and owners for three critical processes that together comprise over 1 billion dollars in administrator spend. These include processing claims, resolving inquiries and issues and designing and delivering member communications.

The PTO is working diligently with leaders throughout the organization to optimize these processes horizontally across silos and has already identified meaningful savings by connecting upstream and downstream workflows and eliminating inefficiencies, ultimately increasing automation. We believe that by focusing on these core areas and then extending the PTO to additional processes over time throughout the organization, we can continue to reduce administrative costs and increase the reliability of our processes while proving the member and provider experience that together will set us up for sustainable growth over the long term.

Lastly, as a result of our efforts to continue to evolve and streamline the organization to align with our integrated care delivery strategy that Bruce has articulated, we've had to make some difficult decisions including closing certain open rolls and initiating both a voluntary early retirement program and an involuntary workforce reduction program that are expected impact approximately 2700 employees or just under 6% of our workforce. In the Q3 2017, we recorded charges a 54 cents per diluted common share associated with these programs which have been excluded from our adjusted EPS. This has resulted in a higher operating cost ratio than initially expected for 2017 and we now expect to end the year at or slightly above the higher end of our previous forecast range.

We believe the combination of these investments and our associates' hard work during 2017 has positioned us for a solid 2018 in the face of significant headwinds, in particular, the return of the health insurance fee or HIF. While we do not intend to provide specific 2018 guidance until our Q4 call, I will now offer some higher level commentary and direction about next year.

I'll begin with membership. We're only one month into the annual election period for individual Medicare Advantage but we're encouraged albeit very cautious with early sales results in our competitive positioning. Our philosophy heading into this enrollment season was to maintain stable benefits for our members and in some markets improve benefits where we believed we were well positioned relative to the competition. We did this recognizing that the return of the HIF presented significant challenges given its magnitude and therefore, as discussed previously, we invested our 2017 outperformance and made significant strides in administrative spend productivity to fund this benefit designed for our customers.

We believe that balancing growth and margin are paramount and it was essential after two years of stagnant membership growth in no small part attributable to the Aetna to drive our top line in a disciplined fashion that would enable us to achieve our EPS growth targets of 11% to 15% over the medium and longer term. In this process, we've also strengthened our relationships and enhanced our partnership with the external brokerage community who, along with our outstanding market point career sales organization, allows us to achieve this objective.

Based on what we know today, achieving individual MA membership growth in the neighborhood of a 150,000 to 180,000 lives is a reasonable estimate and while there are scenarios that could certainly reduce that number including a sale slowdown for the remainder of AEP, there are also factors that could increase it including greater than expected retention of existing members and higher post-AEP sales figures that are currently forecasted. It is important to note that data on member retention is very limited at this point.

I would also like to comment briefly on our forecast for group MA membership. Based on what we know today which is significantly more certain than individual MA given the timing of the pricing cycle, we estimate membership growth to be comfortably in the low double digits on a percentage basis for 2018. This achievement will be the second consecutive year of double-digit percentage increases in highly competitive business particularly for jumbo accounts where we've committed to remaining disciplined with our pricing.

While we're pleased with our estimated growth in MA, there is some pressure in the competitive stand-alone PDP space for 2018. As you are likely aware, Humana offers three PDP plans including a basic plan that serves among others our low-income members, an enhanced plan and a low-priced Wal-Mart plan whose extraordinary growth has made us the leading individual PDP carrier in the country. With regard to the basic plan, we priced the breakeven contribution margin at a regional level. In Florida and South Carolina, our bid proved to be priced over the benchmark which we anticipated resulting in the loss of our auto-signed low-income members in those states.

Additionally, our enhanced plan continues to lose members each year but historically this has been more than offset by the significant growth in our Wal-Mart plan. This year, however, the Wal-Mart plan is no longer the low-price plan in a number markets as other carriers have priced more aggressively. And as a consequence, while we will still grow that plan, it will likely be at a maturely lower rate. Collectively, therefore, we expect that our overall PDP business will decline by a few hundred thousand members.

While the impact on PDP insurance profitability will not be meaningful, we expect the lower Wal-Mart plan growth will impact the growth of our pharmacy business given the industry leading mail order rates in this plan.

I will now turn to making a few high-level comments regarding our projected 2018 financial performance. As we've discussed previously, Medicare Advantage membership growth drives top-line revenue growth that is a critical component of our long-term EPS trajectory. Recall that MA membership growth not only benefits the health plans but also feeds our healthcare services segment as our members engage with us in our pharmacy, homecare and provider businesses. Moreover, we're able to achieve an increased scale of our administrative spend as the top line increases which helps drive the bottom line over time.

From a profitability perspective, I've already highlighted the return of the HIF which for overall Humana is a non-deductible fee in the neighborhood of 1 billion dollars as well as the impact of lower PDP growth on our pharmacy business as meaningful headwinds toward 2018 performance. It is also important to note that we will not assume that our mail order rate in the Wal-Mart plan while still very high will recover from the lower levels of mail order usage that we've seen this year, particularly among the new members who joined us in 2017 and any members who select this plan for 2018. Our provider business also continues to face significant rate pressures in south Florida.

Additionally, the group and specialty segment will have a timing headwind associated with the HIF through to the timing differences that result from group renewals that are not on a calendar year basis. And finally, there are certain stranded costs that result from our exit of the individual commercial business on January 1, 2018. Together, they HIF timing issue and individual business stranded costs represent a headwind of approximately 30 cents. We expect to offset these headwinds through the productivity initiatives described above and capital deployment both through share purchase and M&A.

It is important to recall that the impact of new Medicare Advantage members on profitability is relatively muted in the initial year before they are documented appropriately for the risk we're taking and are engaged in our clinical programs.

Turning out to EPS, recall that on last quarter's call we discussed the need to begin with a baseline adjusted EPS of approximately $11.00 which is largely unchanged. It is also important to note that we have achieved EPS growth well in excess of our long-term range over the last several years. Additionally, we would anticipate guiding to a slightly wider range than we did in 2017 which were more in line with historical practice given our anticipated greater MA growth in 2018 versus 2017 which can create slightly more uncertainty in our earnings for cash.

Finally, we would expect that the high end of our initial guidance range will be a bit below our long-term target of 11% to 15% growth with our individual MA margin guide slightly below 4.5% to 5% range. This reflects the significant headwinds that I've articulated and the importance of offering a compelling value proposition to our customers while continuing to invest in the build-out of our integrated care delivery model that will create long-term sustainability. Consistent with our historical practice, our 2018 initial guidance will assume a normalized rate of favorable prior period development for our retail segment which exceeded expectations in 2017 while assuming no favorable prior period development for our group and specialty segment.

Finally, I would like to briefly discuss the recently announced deal to sell our non-strategic closed block of the long-term care insurance business. Upon consummation, we will have no remaining exposure to this business where we've seen significant reserve strengthening over the last number of years. Based on the terms in the agreement, the transaction is expected to result in an estimated GAAP loss on sale of approximately 400 million dollars or $2.75 cents EPS which includes some non-cash charges. That said, we do anticipate a net positive economic benefit for Humana as the 203 million dollars a parent company cash contributed into the subsidiary together with the transfer of approximately 150 million dollars or statutory capital with the sale should be more than offset by the estimated 500 million dollars of cash savings associated with the expected tax treatment of the sale.

We anticipate the transaction will close by Q3 2018 subject to customary closing conditions including regulatory approvals. Excluding a loss on sale, the company does not anticipate a material impact to earnings in 2017 or 2018 from the sale of a business.

With that, we will open the lines up for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.

Questions and Answers:

Operator

Your first question comes from Peter Costa with Wells Fargo Securities.

Peter Costa -- Wells Fargo -- Analyst

Good morning. Thank you. I'd like to understand a little bit more about why the change in the way you're giving 2018 guidance this time as opposed to giving more detail on the straight up EPS number and also your expectations for Medicare Advantage growth next year given the increased competition we're seeing from others in the marketplace and why do you believe you see better growth there.

Bruce Broussard -- Chief Executive Officer, President and Director

Sure. Good morning, Peter. On the guidance side, we didn't actually give guidance on Q3 last year either. We're trying to give investors a broad direction of what we see 2018 to be but there's still a lot of things that are going to happen in the next few months and we think it's appropriate and prudent to give guidance on Q4 call and that'll be our practice going forward.

With regard to individual MA growth, really the reasons that I discussed in my opening remarks relating to the stability of benefits that we provide for our members and investing in certain markets where we believed we had a high right to win and as we think about our value proposition and as we see the competitive data, we feel good about the range that we provided this morning.

Peter Costa -- Wells Fargo -- Analyst

Thank you.

Operator

Your next question is from Kevin Fischbeck with Bank of America/Merrill Lynch.

Kevin Fischbeck -- Bank of America / Merrill Lynch -- Analyst

Great, thanks. I guess I wanted to go back and make sure I understood what the commentary was around the EPS guidance for next year. Did you say that you were going to guide below the range of 11% to 15% or below the midpoint of that range? And I guess when we think about the rationale for doing below that this year, would we think that there's anything unusual in 2019 that should stop you from getting to that long-term target?

Bruce Broussard -- Chief Executive Officer, President and Director

Sure. So, with regard to the range, what we said was our initial guide at the high point will be a bit below our 11% to 15% range. So, a bit below 11%. So, it's not below the midpoint.

It'd be way too early to comment on 2019 since we haven't given 2018 guidance. The only thing I would say is that given the HIF return in 2018, that was a particularly large headwind that we've had to deal with. I mean, a billion dollars non-deductible fee is a very big number. So, that's been a major issue that we've had to grapple with and it really affects our customers and affects our earnings performance.

Amy Smith -- Director, Investor Relations

Okay, next question?

Operator

Your next question is from Justin Lake with Wolfe Research.

Justin Lake -- Wolfe Research -- Analyst

Thanks, good morning. Just questions on Medicare Advantage and the outlook there. First, can you talk to the rationale for not being able to guide to a target margin at 4.5% to 5%? You'd given how strong the business was this year and specifically, you said, Brian, I think during your prepared remarks that cost trend's running better than what you built into the bid. Is this guidance that's lower than 4.5% assumes that bid margin or does it assume inclusive of a lower trend? And lastly, can you just tell us what kind of attrition rate you're assuming for this year for 2018 and how that compares with previous year's [inaudible].

Brian Kane -- Chief Financial Officer and Senior Vice President

Good morning, Justin. That was three questions. Okay. Again, we've invested our outperformance in 2017 into the product design which got just below that 4.5% to 5% and that's really what's driving it.

Again, we're facing very significant headwinds, as I mentioned a few times, with the HIF. We've, I think, done a good job of offsetting a lot of the headwind with very significant productivity savings that we've been very focused on and driving in 2017. I think you'll see that ultimately in our 2018 guidance but that's really the rationale for driving below our target range of 4.5% to 5%. I'm trying to remember now [inaudible] the second question.

Just remind me the second question.

Justin Lake -- Wolfe Research -- Analyst

You said there is a better trend.

Brian Kane -- Chief Financial Officer and Senior Vice President

Sorry about that. On the trend side, what I was referring to was the commercial business trend. Trends continue to run favorable to pricing but consistent with where we were really last quarter when we gave the updated guidance. Nothing has really materially changed from what we saw last quarter but on the commercial side we have seen continued lower trends and that's why we were able to improve our pre-tax guidance.

We don't want to comment too much on attrition embedded in our numbers. I would say that we feel very good about our attrition levels. I'm just not going to comment at this point. It's way too early to give a sense of where attrition will be.

Justin Lake -- Wolfe Research -- Analyst

Thanks.

Brian Kane -- Chief Financial Officer and Senior Vice President

No problem.

Operator

Your next question is from Matt Borsch with BMO Capital.

Matt Borsch -- BMO Capital Markets -- Analyst

Hi. Not to belabor the point again but on your 2018 our guidance, can you just talk to how maybe your view evolved over the last few months relative to how you described the outlook on the Q2 call.

Brian Kane -- Chief Financial Officer and Senior Vice President

I would say, Matt, it's really consistent. I think as the business continues to perform quite well, we feel good about all the initiatives that we're pursuing, we made the decision at that time to invest the outperformance into our 2018 product design. We believe that was the right decision to create long-term sustainability. We also believe it's important to continue to invest in the business which is what Bruce and I have talked about in our remarks.

So, we're going to continue to do that but I would say that nothing has really materially changed in our business outlook from this quarter from last quarter.

Matt Borsch -- BMO Capital Markets -- Analyst

Okay and if I could just one more which is in the Medicare Advantage growth. How is your very preliminary view of the open enrollment process compare with what I understand to be CMS's prediction for 9% overall growth in programwide enrollment which I guess would include both individual and group?

Brian Kane -- Chief Financial Officer and Senior Vice President

It's really hard to comment on how CMS calculates the numbers. I would tell you that what we've seen the last few years on the individual side is a little bit less than 6% growth. For us, that's not an unreasonable way to think about market growth this year but obviously, we'll see where the data shapes out but there's nothing that's meaningfully changed this year that would change that growth rate.

Matt Borsch -- BMO Capital Markets -- Analyst

All right, thank you.

Operator

Your next question is from Josh Raskin with Nephron Research.

Josh Raskin -- Nephron Research -- Analyst

Thanks and good morning. A question is around the reductions in force and the voluntary retirement. I'm just curious what the catalyst was. Was there some sort of strategic review process? Was this sort of just a "Hey, [inaudible] you have yet [inaudible] transaction.

You've to start thinking about the business in a longer-term fashion." I'm just curious what created that and was any of that tied to the MA bidding and the inability to get into that 4.5% to 5% range?

Brian Kane -- Chief Financial Officer and Senior Vice President

Really throughout 2017 we have been oriented to improving the productivity of the organization and it's really to create capacity both to be competitive in the marketplace from a benefit design point of view for our customers and, as everyone knows, there's continued need to invest in the business for long-term competitive position whether it's in technology or it's in areas that are building capabilities like in our provider area or even in our home area which helps us with clinical outcomes. So, wouldn't say it was really a planned process that we went through over the year. Ultimately, it came together at the end of the last month or so but I would say that we've been working on these productivity initiatives really even before the Aetna transactional termination. So, I wouldn't call it anything but just continuously trying to improve the productivity of the organization and reinvesting those dollars in our customer and reinvesting those dollars in the infrastructure of the company.

Josh Raskin -- Nephron Research -- Analyst

All right, that makes sense. And just, Brian, real quick follow-up. I just want to make sure I understood. The starting point is $11.00 in terms of a run rate for this year and that's the number from which you'll grow, the high end slightly less than or a bit less than 11% [inaudible] now?

Brian Kane -- Chief Financial Officer and Senior Vice President

That's correct.

Josh Raskin -- Nephron Research -- Analyst

Okay, perfect.

Operator

Your next question is from Ana Gupta with Leerink Partners.

Ana Gupta -- Leerink -- Analyst

Yeah hi. Thanks. Good morning. First question on the workforce reduction, what is the timing of realizing the run rate savings or all of that termination happening by the end of this year?

Brian Kane -- Chief Financial Officer and Senior Vice President

We have notified the majority the majority of the individuals. First, let me back up now a little bit. As I mentioned, we've been doing this throughout the year. So, we've had reductions that have begun to show up in our financial numbers probably starting in Q2 or so but this particular reduction will show up in Q1 of two thousand and eighteen as we transition individuals out.

Full transition would be done by the middle of January.

Ana Gupta -- Leerink -- Analyst

Okay, thanks. And if I could just do a quick follow-up. On the physician services where you're seeing pressure, how do you not double count that pressure on your Medicare MLR outlook and will that persist into 2018 or is that kind of done at this point because that's related to the rates [inaudible], correct?

Brian Kane -- Chief Financial Officer and Senior Vice President

When you said physicians, do you mean our provider business in South Florida?

Ana Gupta -- Leerink -- Analyst

Yeah.

Brian Kane -- Chief Financial Officer and Senior Vice President

Yeah. I mean, look, it's an interesting dynamic in south Florida. Those rates have continued to be ratcheted down over the last few years. We've seen that multiple years in a row.

I would tell you today that the competition really hasn't changed fundamentally the benefit design there. So, as a consequence, I think, people have just had to get better and better to continue to drive profitability but there's no doubt that profitability has been reduced in the provider segment because of those actions. We've also adjusted some of our contractual terms with our providers to help ease that transition and we've been very thoughtful about our benefit design and working with our provider partners but net-net it has had an impact on our overall profitability in that region in the provider business. As it relates to growth, as I said, I think the carriers and us included, I think, try to be very prudent about how we deal with these rate declines and still offer a compelling value proposition to members and that's allowed us to continue to grow.

I would tell you that were it not for those rate reductions, we would grow more. There's is no doubt about it but we've done everything we can to try to minimize the impact on the customer.

Ana Gupta -- Leerink -- Analyst

Thanks for the [inaudible].

Operator

Your next question is from A. J. Rice with Credit Suisse.

A. J. Rice -- Credit Suisse -- Analyst

Hi. Hello, everybody. Just a point of clarification to Josh's question and then I want to ask about pharmacy. On the $11 base earning, you commented, Brian, that you would guide differently than what your actual PYD was this year.

Is that reflected in the $11 base [inaudible]? And then more broadly on your pharmacy comments, [inaudible] able to drill down as to what's happening in mail order? And I know you guys did a strategic review of pharmacy a few years ago but there seems to be a whole lot of changes in the PBM landscape? Has that caused you to look at anything different, partnerships, opportunities? And then your push for integrated models. I know, guys, you were talking about engaging with the pharmacist more and at the retail pharmacy outlet. You have your relationship with Wal-Mart. Is there any evolution in how you're deploying that in terms of maybe provision of care or dealing with gaps in care.

Brian Kane -- Chief Financial Officer and Senior Vice President

Good morning, A. J. So, on the $11, the $11 reflects the 2017 performance. So, effectively what that does is takes into account the PPD for 2017 as we start at baseline but if you think about 2018, when we grow up that $11 base, we're not going to assume the same level of PPD that's occurred.

So, that's the distinction we make between the 2017 PPD that's effectively reflected, that outperformance is reflected in taking the baseline back to $11 but the 2018 guide will not assume the same level of PPD that we've seen in 2017.

Bruce Broussard -- Chief Executive Officer, President and Director

So, hopefully, that makes sense.

Brian Kane -- Chief Financial Officer and Senior Vice President

On the mail order side, I would separate the mail order reduction we've seen in some of the broader questions that you're asking. It's hard to know exactly what's driving the mail order reduction, particularly for the new members. We think it might have something to do with benefit design. It could have something to do with just the nature of the risk that was attracting versus the competition and where is perhaps the higher [inaudible] are going.

I think, overall, we're benefiting from a health plan perspective in terms of the risk dynamic we're seeing but it has had an impact on the pharmacy profitability. More broadly to your question on strategic reviews and cost, we constantly are looking for opportunities to drive cost out of the system. We continually review our cost of goods. We continually look at our cost of [inaudible] and I will tell you that the pharmacy team really does a fantastic job of being best in class in both those areas as we look at the opportunities that are out there but, as we said multiple times, we are not wedded to any particular philosophy with regard to if we can find opportunities to drive out cost from the system, we will do that but what's critical for us is that the pharmacy is a critical clinical engagement opportunity or mechanism with our members.

So, that can't change but as it relates to cost, we're always open-minded and I'll tell you these guys do a great job of driving best in class cost of goods for our plan and for the pharmacy.

Bruce Broussard -- Chief Executive Officer, President and Director

A. J., you did further ask the question around leveraging pharmacists and the inability to close gaps. We do think that pharmacists serve an important role in the clinical interaction with our members and today, in fact, we have quality contracts with a number of retail chains that allow that benefit to both encourage pharmacists at the counter to do it and in addition to get rewarded for any kind of improvement in quality and clinical outcomes. In addition, we are continuously adding pharmacy locations to our provider areas where we will have a pharmacy inside our primary care clinics and, again, it's leveraging that moment of influence that the pharmacist has.

We are finding mixed results in our relationships with the retail pharmacies in the clinical outcomes we find where it's convenient and it's more in a clinical setting and it's more effective than it is in the retail side but I think that's also just the time that the pharmacist has at the counter to be able to have that engagement.

A. J. Rice -- Credit Suisse -- Analyst

All right, great. Thanks a lot.

Operator

Your next question is from Chris Rigg for Deutsche Bank.

Chris Rigg -- Deutsche Bank -- Analyst

Good morning. Just wanted to ask a big picture question about the competitive environment in the Medicare Advantage business. Seems like you guys are working really hard to get to sort of market growth albeit at a target margin slightly below where you want to be long term. Do you think other participants are being a little bit more aggressive or slightly irrational in their attempts to grow membership at this point? Thanks.

Brian Kane -- Chief Financial Officer and Senior Vice President

I don't know if I'd use the word 'irrational' but I think it's fair to say that our competitors view Medical Advantage as an exciting growth area. I think they've invested a lot to grow their platforms and to expand their positions across the board and it's just something that we're going to have to deal with. I think we feel good that we are really in the strike zone of where the growth of managed care is happening. We believe that we have superior clinical programs and the right operating model to capitalize on that growth but there's no doubt that we're facing a much stronger competitive environment and I would say that's been compounded by the fact that we have this massive health insurance fee that's returning in 2018 that impacts the customer and impacts the industry.

So, I think those two factors have required us to take significant action which we've done this year and invest some of the outperformance that we've had this year into our 2018 benefit design but long term, I would say that we feel very good about our position.

Bruce Broussard -- Chief Executive Officer, President and Director

I would just add to that. I think as you look at the trajectory of the industry, it has a very strong demand trajectory but I would also say that I think even on our investments we're making today that the competitive nature is going to evolve and we think the competitive nature is going to continue to evolve to be much more oriented to a clinical approach as opposed to just from an insurance and pricing point of view and as you look at our investments, it's is really focused on how continuously proactively help people, especially chronic members, in managing their conditions and I think long term all organizations to be in this business are going to have to have some really clinical strength. And we believe in the short run we have to meet the competitive natures of pricing relative to a number of players being in the marketplace but long term we have to invest and build those clinical outcomes. It is the combination of those two things that you see the organization doing.

Chris Rigg -- Deutsche Bank -- Analyst

Great. Thanks a lot.

Operator

Your next question is from Gary Taylor.

Gary Taylor -- JPMorgan Chase -- Analyst

Hi, good morning. Just had one clarification and then my question is going to be awfully redundant [inaudible] clarification. I just want to make sure I have this perfectly correct. So, if we start 2017 base of 11, we're going to grow a little below 11 to 15, 11% growth [inaudible] 12.21, so something a bit below that.

And you're going to give a wider range than the initial 30 cents range. Is that fair?

Brian Kane -- Chief Financial Officer and Senior Vice President

Yeah without applying on the $12.21, that is correct.

Gary Taylor -- JPMorgan Chase -- Analyst

Okay. And just going back to the early retirement and the layoffs announced, I want to make sure I heard Bruce's comments correctly. You expect most of that to be effective in January so you get a full year of earnings benefit from that? Did I understand that correctly?

Brian Kane -- Chief Financial Officer and Senior Vice President

You did, yes.

Gary Taylor -- JPMorgan Chase -- Analyst

And can you give us a dollar amount that you're targeting and does most of that just come out of G&A?

Brian Kane -- Chief Financial Officer and Senior Vice President

These are big numbers. Ultimately, at the end of the day, our savings initiatives will run into the hundreds of millions of dollars for 2018 and I would say some of that is in G&A, someone of that will show up actually in our MER because of the nature of the associated base that's being impacted that actually gets classified as MER expense. I think it's fair to say that when you look at our adjusted operating cost ratio next year when we pull out the HIF and other things that you will see a reduction, for sure. We'll obviously give more color on that on the Q4 call.

Gary Taylor -- JPMorgan Chase -- Analyst

Okay, thank you.

Operator

Your next question is from Dave Windley from Jefferies.

Dave Windley -- Jefferies -- Analyst

Hi there, it's [inaudible] for Windley. I wanted to just come back to the RIF and understand a little bit more specifically what parts of the business does it effect. I'd imagine maybe some of it is [inaudible] exchange support but can you give us a better sense of what departments these are coming in and to what extent the saving is going to be used to offset the HIF or is this going to be used to invest in initiatives you outlined and in the prepared remarks about care in-home or the providers.

Bruce Broussard -- Chief Executive Officer, President and Director

I'll take that. I think it really is across the organization. There wasn't only one area that was impacted geographically or from a department point of view at the organization. Really, as Brian has mentioned, we're looking for productivity improvements throughout the company.

So, I wouldn't say it's one specific area related to any one initiative we have. In regards to the investment side, is it going to the shareholders or is it going to benefits? I would say it's [inaudible] and sort of goes through all that. I think we've continued to manage and how do we invest in the business for a long-term sustainability and compete in the local marketplace, how do we continue to have a competitive market offering and if you look at our market offering, you'll see that we're not the cheapest in the market. So, we're constantly trying to ensure that was not giving the product away and our brand and all the things we do from a customer experience point of view wins a customer over and then at the same time we also look at the ability to invest in the advancement of our initiatives.

And I would say it's sort of all those items. I wouldn't say we did it just to fund a particular initiative. We really work through saying how can we be competitive, how can we meet the long-term goals of our shareholders and at the same time how do we ensure that we are productive and being able to also invest.

Dave Windley -- Jefferies -- Analyst

Okay. And then as you're looking to reduce some of these costs, how do we get a little bit more comfortable from the outside that these don't impact your ability to move forward on trend benders?

Brian Kane -- Chief Financial Officer and Senior Vice President

Yeah I would tell you that way we cherish the trend bender area and I would tell you a lot of what we've done is to look at where are areas that are less work, is not as impactful but the trend bender area is a very important part and, as you can tell from the script that I outlined, we are investing in the areas that we feel will affect the chronic conditions and really bring alive longer-term trend benders. So, investors should not worry about that. That is a passion of ours is continuing to ensure that our clinical programs are advanced.

Amy Smith -- Director, Investor Relations

Next question, please.

Operator

Your next question is Zachary Sopcak with Morgan Stanley.

Zachary Sopcak -- Morgan Stanley -- Analyst

Hey, thank you for the question. Can you just remind us included in that preliminary 2018 guidance what the contribution of [inaudible] and then you talk about [inaudible] opportunities for M&A but how you do M&A versus share buyback as we are heading to next year?

Brian Kane -- Chief Financial Officer and Senior Vice President

At this stage, we're not prepared to talk about the specifics around capital deployment. I think you've seen a willingness to deploy capital and buying back stock and we will continue to do that. Similarly, on the M&A side, it's really not something that we're prepared to give any more color around today other than just referring back to Bruce's opening remarks that we actively look for assets that advance our strategy and we're going to continue to do that because it's important to do that. I would tell you that if we found an M&A opportunity that advanced our strategy, that would take precedence over share repurchase if it made sense to do that but we're very committed to share repurchase.

You'll see that we have leverage capacity on our balance sheet. We're 30%, 31% [inaudible] cap. We have ample parent company cash to accomplish our objectives. So, we won't be shy about deploying our capital, obviously maintaining our investment grade rating which is also very important to us.

Zachary Sopcak -- Morgan Stanley -- Analyst

Okay, thanks. Just to clarify, when you give full guidance, I guess, in Q4, will we get more color and how much [inaudible] capital deployment?

Brian Kane -- Chief Financial Officer and Senior Vice President

Yeah, we typically in our guidance waterfalls will call out for you exactly what relates to capital deployment. So, yes we will do that.

Zachary Sopcak -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Your question is from Sarah James with Piper Jaffray.

Sarah James -- Piper Jaffray -- Analyst

Thank you. I appreciate the detail on analytics and data [inaudible]. Can you tell us how [inaudible] that data? I am assuming [inaudible] clinical side or are you [inaudible] and product development? And do you feel that you have the technology and human assets that you need for your analytics [inaudible] to get more competitive in recruiting data scientists?

Bruce Broussard -- Chief Executive Officer, President and Director

We have multiple sources of information both clinically which are coming from claims based to electronic medical records information which also includes coming from notes within the electronic medical records. So, you see that one side but on the other side we also pull a significant amount of consumer information both from as much we can get from public but also in the interactions that we have with our members. So, we look at how they're using the digital, from the pharmacy point view what are they using in the pharmacy area, how they're using it, are they using mail order, are they using retail and that gives us a lot of information about how their preference is engaging in their healthcare. So, I would say that there's a whole host of ways we go about bringing the analytics to the forefront.

In regards to the question on analytics from a human resource point of view, we have over the last number of years, and really haven't brought it out to our investors ladies that have invested significantly both in the consumer analytics and also in our clinical analytics and I think people would be very surprised at the depth of our analytics capability today. We're always adding and expanding our clinical capability as just part of our normal planning cycle in our HR recruitment area. So, I would say that just to answer your question that we will continue to be investing in that area but I would say today we are in this area of predictive analytics and contextualization of the member, I would say we're fairly advanced both from a competitive point of view but I think the industry in general.

Sarah James -- Piper Jaffray -- Analyst

You said that we would be surprised at how much Humana has invested in [inaudible] analytics. Is there any [inaudible]?

Bruce Broussard -- Chief Executive Officer, President and Director

I don't think I would do that. I think both from a competitive point of view and then in addition just [inaudible], we don't disclose that kind of detail.

Operator

Your final question comes from Christine Arnold with Cowen.

Christine Arnold -- Cowen & Co. -- Analyst

A couple of things. Healthcare services, I hear that we still have some headwinds here but also I'm hearing that MI fees in the healthcare services. Is healthcare services headwind or a tailwind next year with respect to earnings? And then good growth and group MA but we're hearing that it's a pretty competitive environment there. Do you expect the margins there to come in kind of below your target range of 4.5% to 5% as you do with individual or do you expect margins to be maintained there? Thanks.

Brian Kane -- Chief Financial Officer and Senior Vice President

Hello, Christine. So, I'm not prepared to comment giving individual segment guidance. So, I think there are pluses and minuses on the healthcare service side. Obviously, you mentioned MA growth.

That's obviously a positive. I talked about some of the headwinds on the pharmacy side which [inaudible] PDP growth, etc. So, I'm not prepared really to give segment level specific guidance at this time but obviously, we'll comment extensively on that on the Q4 call. With regard to group MA, we've been very clear that we're going to maintain pricing discipline on that.

As we've said before, our margins in group MA are not 4.5% to 5%. That is not a target margin in group MA. It is below that but I think we feel pretty good about our group MA business. I think the team is doing a really nice job of finding opportunities where we can earn a good return on capital and, again, being very disciplined in some of these larger accounts where we can drive profitability as well as customer satisfaction.

So, I think we feel very good about the position of our group business.

Christine Arnold -- Cowen & Co. -- Analyst

So, on the margin, is the margin a headwind or a tailwind do you think for group MA next year?

Brian Kane -- Chief Financial Officer and Senior Vice President

Again, I'd rather not just give ... I'm sorry.

Christine Arnold -- Cowen & Co. -- Analyst

Is it a [Inaudible] long because you're dealing with a group?

Brian Kane -- Chief Financial Officer and Senior Vice President

Typically in the larger accounts, there's a specific adjustment for the HIF, particularly the jumbo accounts. That obviously impacts overall growth in this space but also potential willingness of a group account to actually choose group MA. So, there's some impact there but it is, I would call, a very transparent market, particularly at the large end. So, the HIF is well known and is [inaudible].

Christine Arnold -- Cowen & Co. -- Analyst

Okay, thanks.

Operator

I'll now turn the call back over to Bruce Broussard for closing remarks.

Bruce Broussard -- Chief Executive Officer, President and Director

Well, thank you. Again, thanks to all our investors that support the organization over the years. You've been part of us. And lastly, and importantly, I'd like to thank our talented Humana team members who really made these results possible.

So, we appreciate it and this will be the close of the call. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 64 minutes

Call Participants:

Amy Smith -- Director, Investor Relations

Bruce Broussard -- Chief Executive Officer, President and Director

Brian Kane -- Chief Financial Officer and Senior Vice President

Peter Costa -- Wells Fargo -- Analyst

Kevin Fischbeck -- Bank of America / Merrill Lynch -- Analyst

Justin Lake -- Wolfe Research -- Analyst

Matt Borsch -- BMO Capital Markets -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Ana Gupta -- Leerink -- Analyst

A. J. Rice -- Credit Suisse -- Analyst

Chris Rigg -- Deutsche Bank -- Analyst

Gary Taylor -- JPMorgan Chase -- Analyst

Dave Windley -- Jefferies -- Analyst

Zachary Sopcak -- Morgan Stanley -- Analyst

Sarah James -- Piper Jaffray -- Analyst

Christine Arnold -- Cowen & Co. -- Analyst

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