Based on FY21 appropriation bill HB 793 from the Governor’s Office of Planning and Budget, Georgia will put in place a retrospective rate adjustment (to 07/01/19) and risk corridors for Medicaid MCOs. These actions are projected to generate $102M in savings or 2.3% of 2019 premiums of $4.3B – see exhibit 1 on page 2. Per our review of the budget reduction proposal from the GA Department of Community Health (DCH), which runs the state’s Medicaid program, the risk corridors will include a min MLR at 85% and a max MLR at 91%. We note this will be the first time GA implement a min MLR or risk corridor for the Medicaid population. We see risk corridors as a more reasonable and balanced solution vs. rate cuts (as seen in CA / OH) in terms of states being able to recapture COVID-19 related cost savings in Medicaid and expect both the plans and investors will view these types of corridors as a positive path for states to take as we move into the 2021 rate cycle – see our recent webcast / slides on state budgets and plan exposure / rate setting timing by state for more detail.
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MCO Election Impact Model - we have analyzed potential Democratic outcomes including, coverage expansion, an increase in exchange tax credits, as well as public option.
MCO stocks have typically had a hard time showing positive returns going into presidential elections. MCOs (incl. ANTM, CNC, HUM and UNH) have struggled recently, underperforming the S&P 500 by ~6.5% since 6/1, and we believe this underperformance has been completely driven by the increasing potential for a Biden win in November coupled with a Democratic Congressional sweep. That said, we expect further swings in sentiment / odds between now and Nov and while uncertainty remains, the breadth of outcomes is much less severe than those contemplated under Sanders/Warren. Overall, we have analyzed potential Democratic outcomes including coverage expansion, higher corp. tax rates and a significant amount of detail around public option, with the combination of current valuations coupled with our est. of manageable impact to earnings in most scenarios leaves a compelling MCO risk / reward setup.
According to IQVIA, the overall market script growth (unadj. for prescription length) has shown continued improvement since mid-May with total market scripts now only down 0.8% y/y for the week ending June 19th vs. -2.3% in the prior week and -9% / -7.5% / -6.3% in April / May / early-June – see exhibit 1 on page 2. Chronic scripts (refills), that typically account for ~70% of total scripts, increased 2.2% y/y for the week ending June 19th, likely driven by a second wave of 90-day refills following the first wave in mid-March, while acute scripts (non-refills) that account for the remaining ~30% of total scripts declined 8.2% y/y vs. -10.5% in the prior week and the avg. decline of 18.3% in May.
We hosted 2 days of meetings w/DVA CFO Joel Ackerman and VP of IR Jim Gustafson — Management’s tone was cautiously optimistic on their ability to execute through current uncertainties, pointing out natural hedges to unemployment / mix in terms of lower employee costs / turnover and a continued view that margins are achievable over time, allowing for sustainable core growth. Key swing factors for 2021 include Med Adv penetration and rates, upcoming CMS rulemaking on calcimimetics and the pace of unemployment through the current recession. Overall, while headwinds and tailwinds remain, we were most intrigued by CFO Ackerman’s confidence in DVA’s ability to control costs in an uncertain rate environment as any improvement in visibility around core growth would be well received given mgmt. has already illustrated a shareholder friendly cap deployment strategy.
According to the guidance released by the Trump administration yesterday, insurers are not required to cover potentially repeated COVID-19 screening tests that employers may mandate as they bring employees back to work. Initial CMS guidance has indicated testing should be covered by insurers when medically appropriate but there was some uncertainty around whether repeated surveillance testing would fall into that category. Our conversations with industry participants indicated a concern here given significant potential costs of surveillance testing, with a study conducted by AHIP / Wakely Consulting Group finding testing could cost between $6B-$25B annually, and antibody testing could cost $5B-$19B – we note that the estimates include costs for medical necessary tests, public health tests, as well as occupation health tests. The new guidance clarified that screening for general workplace health and safety will not be considered medically necessary and insurers will not be required to cover the costs – see exhibit 1 on page 2 for exact verbiage. Beyond the obvious cost concerns, we would read this as positive for MCOs in terms of a reasonable regulatory environment around COVID-19 in general as this is clearly going to be a area of focus for some time to come.
Yesterday CA Governor Newsom and lawmakers announced they reached an agreement on the FY20-21 state budget. According to this budget scorecard from Health Access California (a consumer advocacy coalition), all 3 proposals from Governor Newsom that would reduce reimbursement rates for Medicaid MCOs were adopted in the final budget deal: 1) 1.5% rate cut for the period 07/01/19 thru 12/31/20, 2) implementation of new managed care efficiency adjustments, and 3) reduction of underwriting margin from 2.0% to 1.5% in 2021 rating period. See exhibit 1 on page 2 for the scorecard.
Since 05/11, Strata Decision Technology, a healthcare focused financial analysis & analytics enterprise software provider, has published a report that tracks volumes at 243 hospitals across the country. Strata recently changed their report to a bi-weekly (every second week) schedule to allow more data to accumulate in their reported trends. The latest report shows a continued rebound in outpatient volume thru the middle of June with the last 14-day volume, as of June 13th, up YoY by 7.6% and the past 30-days up 2.5% compared to 2019 levels.
According to IQVIA, the overall market script growth (unadj. for prescription length) has shown continued improvement since mid-May with total market scripts now only down 2.3% y/y for the week ending June 12th vs. ~-9% / -7.5% / -6.3% in April / May / early-June – see exhibit 1 on page 2. Chronic scripts (refills), that typically account for ~70% of total scripts, increased 1.0% y/y for the week ending June 12th, the first y/y growth since the end of March, while acute scripts (non-refills) that account for the remaining ~30% of total scripts declined 10.5% vs. -14.9% in the prior week and the avg. decline of 18.3% in May. We believe the improvement in chronic scripts may be partially due to a second wave of 90-day refills following the first wave in mid-March.
Earlier this week the CA legislature passed budget for the next fiscal year starting on 07/01. According to this legislative plan, CA lawmakers have approved all 3 budget proposals from Governor Newsom in May that would reduce reimbursement rates for Medicaid MCOs: 1) 1.5% rate cut for the period 07/01/19 thru 12/31/20, 2) implementation of new managed care efficiency adjustments, and 3) reduction of underwriting margin from 2.0% to 1.5% in 2021 rating period. See exhibit 1 below for language. The Governor has not signed the legislature budget and both sides are still negotiating to finalize the budget by 07/01 – so there is the possibility this doesn’t go thru. That said, given the cuts were originally proposed by the Governor we see it as likely that they are eventually passed. For more details on CA’s rate adjustment proposals, see key takeaways from our recent webcast on the topic.
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