This morning (06/18/18) MOH issued a press release disclosing that the company has been awarded Florida Medicaid contracts in 2 regions (Regions 8 and 11) as the result of protests filed in May. MOH currently serves 105K members in those regions, generating $550M in revenues out of the company’s current ~$1.4-$1.5B from the Florida Medicaid contract. Recall that in February MOH disclosed that the company was only invited to negotiate in 1 of 8 current regions (Region 11). When contract awards were announced in April, MOH was not selected in Region 11. With the revised award MOH has withdrawn its protests in the other regions. Implementation remains scheduled for 1/1/19.
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On Friday (06-15-18) CNC hosted its June Investor Day in New York. CNC reviewed the company’s growth and financial track record, provided color on future growth opportunities including M&A priorities and discussed the current political / regulatory uncertainty and potential impact on their business. CNC also introduced preliminary 2019 revenue guidance of ~$69B, above consensus of $67.2B (more below) and discussed slightly negative 1-time impact from CA MLR floor regs (pg 4). Overall we saw little new ground broken but continue to be impressed w/company’s ability to take share in Medicaid and execute in Individual.
Tomorrow (6/15/2018) CNC will host an Investor Day in NYC. In addition to a detailed business update and thoughts on the political and regulatory landscape, CNC typically provides a preliminary view of revenue guidance for the next year. As discussed below, we see a path to meeting / exceeding 2019 consensus rev making generally conservative assumptions.
Federal Judge Richard Leon ruled AT&T (T) can proceed with its acquisition of Time Warner (TWX), a vertical merger that had been pending since October 2016. The DOJ’s lack of success in challenging the merger is a positive read through on the AET-CVS and CI-ESRX deals considering the vertical nature of these transactions and the potential that DOJ will have less of an appetite to challenge other mergers post AT&T / Time Warner failure.
Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast to cover his takeaways from the recent management meetings of DVA and HUM & other MCOs.
We recently had the opportunity to host investor meetings with DVA CEO Kent Thiry, CFO Joel Ackerman and IR Jim Gustafson. Meetings focused the CA ballot initiative, the Choice and PATIENTS Acts, capital deployment, CPA / AKF and core performance. While much of what the company said was not new in our mind, it is clear CEO Thiry is confident in both the close of DMG and getting a CBO score on the Patient Act “relatively soon”. On the CA ballot initiative, the company is well into the process of working on its strategy and has assembled a strong coalition. We expect more on $ and strategy on Q2 call once 6/28 deadline to pull the ballot initiative has passed. At this point with stock at 12.3x 2019 cash EPS we see positive risk/reward while acknowledging the stock could remain range-bound in intermediate term until there is clarity on the ballot initiatives which could take until November. Reiterate Outperform.
Yesterday (06/07/18) the WSJ and other news outlets reported that the Justice Department supports a legal challenge to the Affordable Care Act brought by 20 state Attorney Generals and that the DOJ won’t defend the constitutionality of the ACA. The lawsuit argues that because the Individual Mandate penalty was set to $0 last year, the entire Affordable Care Act was made unconstitutional. The DOJ doesn’t seem to support the argument that the entire ACA is now unconstitutional, but a memo produced by DOJ identified the provisions on guaranteed issue, community rating (charging same price regardless of health status) and age/gender pricing protections as being “inseverable from the mandate” and invalid / unconstitutional as of January 1. The issue appears far from being decided as the AG lawsuit still needs to make its way through the court system. However, this news is likely to unsettle MCOs offering coverage in the individual market given the potential for significant market instability / shrinkage (vs. 15M individuals today per CBO) if this challenge is successful. Subsides and risk adjustment would likely prevent the Individual market from fully returning to pre-ACA status but there would still be significant concern. MCOs are currently in the process of submitting 2019 rate requests to state insurance officials under the assumption that the ACA protections described above will remain in place. The DOJ’s decision to not defend federal law is described as very unusual although the WSJ notes that the Obama administration did something similar with the Defense of Marriage Act. A letter from Attorney General Jeff Sessions to congressional leaders indicated the decision on the ACA was made with approval from President Trump.
Last night (06/07/18) CNBC and Politico reported that Dr. David Feinberg, CEO of Geisinger Health System, was at one point the top choice to lead the Amazon / Berkshire / JP Morgan Chase health care partnership but has since said he is committed to saying at Geisinger. Dr. Feinberg was the President of UCLA Health System / CEO of UCLA’s hospitals before joining Geisinger. Feinberg’s biography can be found here (also on Page 2). The report says that the top 10 candidates wrote white papers on how they would fix the health care system and went through a series of interviews. The final 3 candidates interviewed with JPM CEO Jamie Dimon, who passed his 2 favored candidates to interview with Berkshire CEO Warren Buffett. Buffett then passed his favored candidate to interview with Amazon CEO Jeff Bezos, who could have vetoed that choice.
Earlier this morning (06/07/18) Warren Buffett confirmed on CNBC that the healthcare venture with Amazon and JPM had chosen a CEO and would likely make an announcement within two weeks. Recall the initial formation of the JV is being spearheaded by Todd Combs (investment officer, Berkshire), Marvelle Sullivan Berchtold (Managing Director, JPM Chase) and Beth Galetti (Senior Vice President, Amazon) and is still in early stages. The goals discussed include aligning incentives and studying waste/fraud/admin costs among others. Please see here for our initial thoughts on the venture and find an update on Amazon’s pharmacy plans here.
Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast of his lunch featuring DaVita, Inc. managment, Joel Ackerman, Chief Financial Officer, and Jim Gustafson, Investor Relations.
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