In October Individual Med Adv enrollment increased 7.9% y/y and Group Med Adv enrollment increased 7.6% y/y, producing total y/y Med Adv growth of 7.9% or 8.6% ex. MN market which declined y/y due to the ongoing cost plan conversion. On an absolute basis total Med Adv enrollment increased by 1.66M members y/y and 1.55M YTD with our coverage universe growing by 1.77M and 1.67M respectively (taking share at ~107% of industry growth over both time periods). See Page 2 for data by plan and email us for the tracking spreadsheet.
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According to Bloomberg, UNH will be losing a portion of Verizon group retiree members to CVS-AET and the Alabama Public Education retiree plan to HUM starting in 2020. While Verizon is sticking with UNH for retiree benefits in its Eastern region, its Western region will be transitioning to CVS. Per the article, there were nearly 87k members (including retiree + spouses) in the Alabama plan as of 09/30/17 and Verizon has a total of 200k retirees. In our follow-call with the company, UNH didn’t provide us with a specific membership # but indicated these losses combined with some wins will keep their Group Med Adv membership approximately flat (fully implied in 2020 guide) – with strong growth still expected in Individual. The co. has not provided commentary on 2020 Individual Med Adv but did note that it feels “extremely well positioned” for the selling season and our Med Adv benefit analysis would agree with our 2020 est. of Individual growth at 10%.
According to a press release from the Louisiana Department of Health on Monday (10/15/19), LA “will resume auto-closures for approximately 82,000 Medicaid members”, many of which are still likely eligible and could lose coverage if they don’t respond timely. The department is also starting “a new outreach effort that will include calling Medicaid members who have not yet completed their annual renewal and are at risk of losing their healthcare coverage.” Based on 2Q stat filings data, there were 1.44M members in the state so up to ~5.7% of enrollment could get dropped from the rolls if they fail to renew or meet eligibility requirements. Phone calls from health plans have begun Monday and calls directly from LA Medicaid will begin in November. For some background, the latest July Medicaid data from CMS shows LA Medicaid enrollment has declined 6.0% y/y – the 3rd steepest decline on relative basis out of 50 states and D.C (only better than WY down 9.7% and MO 10.9%). We note the current market leader in LA is CNC with 452k members representing 31% market share, followed by UNH (418k / 29%), ANTM (244k / 17%), Amerihealth Caritas (206k / 14%), and AET (120k / 8%). In our view, resumed auto-closure by the state poses a risk of further pressure on enrollment / risk pool for MCOs but this could be mitigated by increasingly proactive outreach measures by both plans and the state.
Today (10/15/19) the PA Department of Human Services released its Medicaid Managed Care re-procurement RFP for the PA Health Choices program. This is the third attempt by the state in last 4 years to re-procure this program. The first rebid happened in 2016 but implementation of awards was blocked by a preliminary injunction granted by the Commonwealth Court of PA to AET who lost 4 out of 5 zones (UNH won all 5, CNC won 3) – forcing the DHS to do another procurement. The second happened in 2017 but awards were also ultimately negated as AET and UNH who lost all zones this time successfully protested (CNC again was a winner of the rebid). In 2nd rebid, other bidders besides AET, CNC, and UNH included NFP plans AmeriHealth Caritas, Gateway, Geisinger, Health Partners, and UPMC.
Early Mgmt. Commentary on 2020 Suggests Initial EPS Guidance Range of $16.25 - $16.55 Which Brackets Pre-3Q WR Estimate $16.30 and Puts Consensus $16.56 at High End. UNH “prudently” expects to grow core EPS ex. HIF headwind at the lower end of 13-16% LT range. For the first time the co. sizes 2020 HIF headwind at $0.50, which is slightly lower than our est. of $0.63. With 13% growth off updated 2019 guide of $14.95 and a typical range of +/- $0.15, this gets us to a $16.25 - $16.55 range or 8.7%-10.7% y/y growth. CEO Wichmann clarifies this assumes a typical level of share buyback but excludes any potential impact from future M&A – also indicating guidance was both prudent (3 times) and conservative (once) – likely suggesting room for upside as typical vs. last few years (see Exhibit 1 on pg. 3). Today’s move in the stock is reflective of investor concerns on trend/calendar coming into qtr. along w/UNH mgmt. again doing good job setting expectations on 2020.
3Q19 adj EPS of $3.88, above Wolfe/Cons $3.73/$3.75 as the co beat on services revenue (driven by upside in OptumInsight & ASO membership) and PBM margins vs Wolfe, partially offset by a higher tax rate. Total rev of $60.4B (up 6.7% y/y, ~8.0% adj. for 2018 HIF) was above Wolfe/Cons of $59.7B/$59.8B with MLR of 82.4% inline with Wolfe/Cons of 82.3%/82.4%. FY 2019 guidance of $14.70-$14.90 was raised by $0.15 or slightly more than the beat to $14.90-$15.00 or midpoint of $14.95 vs pre-earnings WR/Cons of $14.80/$14.83. New FY guidance implies 4Q EPS at $3.74 – in-line w/ WR/Cons pre-3Q estimates of $3.73/$3.75. Importantly $0.15 upside in qtr. leaves potential that UNH could indicate on call that $16.56 consensus is now within the range of expected guide (albeit likely at higher end) assuming 13-16% growth and our $0.63 HIF headwind est. In terms of read-thru to group we see qtr. as solid start to MCO earnings given significant concerns but would note UNH was in-line last qtr. as well w
Wolfe Research Senior Healthcare Analyst Justin Lake hosted a webcast to discuss thoughts on Q3 MLR for MCOs, quantifying impact of 3Q calendar shift on MLR, quantifying HIF headwind for UNH into 2020, 2020 Med Adv competitive positioning, and why we have questions on the CMS Planfinder cost estimates.
The HIF resumption in 2020 is set to put MCOs under a tougher operating environment than 2019 although a solid Med Adv rate environment should provide some cushion to benefits and plan economics. Our usual work looking at Medicare.gov Plan Finder appeared misleading and we spent a week trying to figure out the issues (see more beginning on slide 19). In the meantime, we instead dug into specific benefit changes YoY by MCO to better understand 2020 setups for margins / competitive positioning. Please see below for our key takeaways and slides starting on page 3 for further details.
Last week we discussed w/UNH the impact of the extra business day (one more Monday, one less Sunday in 3Q) on MLR. The co. indicated it est. ~70bps impact to MLR given Monday is typically the highest utilization day at ~140% of average and Sat / Sun the lowest at ~40% of avg. With this information in hand we attempt to assess the achievability of current 3Q / 4Q Consensus MLR for UNH ahead of the co.’s EPS release on Tuesday as well as for ANTM given heavy investor concerns around this metric going into #s. In addition for UNH specifically, we attempt to size 2020 HIF headwind given lack of guidance from co. here – our math shakes out to a ~65c EPS headwind. See below and slides starting on page 3 for more details. We will host a webcast to go over this and more tomorrow 10/14 at 2pm ET.
Gov. Newsom signed AB 290 into law yesterday (see page 2) (10/13/19) and AKF put out a press release last night confirming that “on the day this bill becomes law—January 1, 2020—the American Kidney Fund will be forced to stop providing financial assistance” which could impact ~3.7K Californians. AKF has previously said they will have to discontinue operations in CA if AB 290 is signed as the bill would force the organization to violate the federal rules. Our checks indicate that the AKF has already stopped taking on new patients as of October 1st. At its Capital Markets day last month, DVA reiterated expected impact of $100M-$250M if the entire charitable premium assistance goes away and potentially $25M-$40M impact from CA’s AB 290. Despite the language of the bill delaying any change to dialysis reimbursement until 01/01/22, if the AKF decides to discontinue operations in CA, the negative impact will be pulled forward regardless of the implementation date of AB 290.
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