This afternoon (3/25/19) CMS released its final report for the 2019 Open Enrollment Period. Approximately 11.4M consumers enrolled in an Exchange plan vs. ~11.8M in 2018 (~2.6% decline) as higher # of automatic re-enrollees (~+500K y/y) partially offset the decline in new consumers (~-500K y/y) and active/unknown re-enrollees (~-300K y/y). See Exhibit 1 on Page 2 for more details. CMS noted that the y/y decline in enrollment could be due to the strong economy and growing employment as well as the new Virginia Medicaid expansion which made previous ~100K exchange members eligible for Medicaid. We note the demographic and plan characteristics for 2019 enrollees were similar to 2018 enrollees.
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While CFO Brian Kane’s comments around 2019 being off to a strong start were constructive, the key debates into investor day were around 2020 EPS if/when HIF returns and potential impact of Point of Sale rebates. Mgmt reiterated its LT 11%-15% EPS growth target while noting there will be years above and below that # and the last few years have been above. On drug rebates HUM sees 50/50 probability of 2020 HHS POS implementation and has probably been the most cautious among MCOs in terms of potential for 2019 disruption. Specifically, concerns here are focused on how peers react from a pricing perspective and potential for changes in the risk pool as high pharma utilizers search out best rebates. In terms of strategy CEO Bruce Broussard sees no slowdown in Medicare Advantage growth or the company’s ability to take share and highlighted Humana continuing to evolve its operating model by advancing digital health/analytics and developing a more fully integrated value-based health ecosystem at the local level.
In March Individual Med Adv enrollment increased 7.3% y/y and Group Med Adv enrollment increased 8.1% y/y, producing total y/y Med Adv growth of 7.5%. 64.8% of total Med Adv enrollment of 22.3M lives were in our covered companies vs 60.2% of 20.7M lives y/y. Generally, most of our coverage composite is tracking in-line or above their guidance for 2019. See Page 2 for data by plan and email us for our tracking spreadsheet. Additionally we note Humana at its Investor Day today laid out a path to 41-50% MA penetration by 2025 – see slides on page 3.
We are updating estimates and PTs for DVA, HCA, THC, and UHS to reflect 1) our revised estimates / 2019 earnings bridges post Q4 results and 10K reviews as laid out in this note and 2) the current S&P 500 market multiple of ~11.25x NTM EV/EBITDA (up from previous 10.25x coming into 2019). We are adjusting our 2020 estimates at all 4 facilities post generally solid Q4 results and in-line to better 2019 guidance releases. See summary of changes and our commentary by company on pages 2-12. We maintain our Outperform ratings on DVA, HCA, UHS and Peer Perform for THC.
At recent investor conferences and meetings, MCOs have indicated strong confidence in their ability to navigate the uncertainties that could accompany a potential 2020 start for the HHS rebate proposal and pickup in authorized generic introductions. Specifically on HHS proposal, while MCOs had different views on the right timing of the implementation of the new rebate rule, with HUM/CNC advocating for an early implementation and WCG/CVS preferring a phase-in period (see comments on Page 2), all expressed that they will be well prepared to bid under both scenarios for 2020 Med Adv & Part D. Meanwhile, MCO mgmt teams joined most HC investors in seeing a low likelihood of Medicare-for-All while indicating a strong start to 2019 and solid visibility to 2020 regardless of HIF return and/or rebate rule enaction.
CEO Gail Boudreaux laid out a vision for positively differentiated growth over a multi-year period led by commercial share recapture, government growth and PBM / Blue partnerships. EPS growth of 12-15% over 5 years (ex PBM) was ahead of expectations underpinned by a high top-line growth target of 10-12%. Overall the investment thesis here remains intact, a solid management team with a unique growth set-up both in terms of intermediate terms drivers and longer-term strategic opportunities.
Yesterday (3/5/19), Rep. Cheri Bustos, the chairwoman of the Democratic Congressional Campaign Committee (DCCC) questioned the feasibility of Medicare-For-All in an interview with the Hill stating that it is just one idea and “the $33 trillion price tag for Medicare for all is a little scary”. We doubt anyone finds the comments themselves surprising but given the pressure on MCOs in particular and HC Services in general since Dems introduced legislation that sought to move to single payer in 2 years without any discussion of how to pay for it, we expect there should be some comfort that “universal healthcare tomorrow” is not the party line. Bernie Sander’s version of Medicare-For-All was est. to cost $32T+ over 10 years. We believe that most healthcare investors and ourselves see little chance that this type of legislation becomes more but acknowledge the discussion is likely to continue for at least the next 6-9 months during Democratic primary season / debates with the potential to abate from there once the national election campaign sets in.
We continue to see ANTM as the most compelling risk/reward in the MCO space given combination of unique opportunities, earnings visibility and potential for upside to both top and bottom line via PBM contract savings retained and passed thru to clients – which we laid out in our Anthem deck last May in significant detail and expect management to add visibility to at March 7th investor day in NYC. While the PBM savings have been accelerated and generally discounted into the stock we still see multiple growth accelerants include commercial risk market share gains, Med Adv market expansions, Group Med Adv growth, increased specialty product penetration, and BCBS partnership opportunities. Heading into investor day we think investors could see mgmt. raise its LT EPS growth target to 10-14% from current 8-12% and lay out path to commercial / Medicare share gains as they pass thru lower pharma COGS to clients but we would not expect a specific multi year earnings power target.
Per a Reuters article released last night (03/03/19), CMS is looking at a trial payment design that would favor home dialysis vs clinic-based treatment, along with attempting to improve early stage care for kidney disease and increase kidney transplant access – “…goal is to reduce the $114B paid by the U.S. gov each year to treat CKD and ESRD”. HHS Sec Alex Azar is scheduled to speak on transforming kidney care at 1:30-2:00pm today – additional details could possibly emerge then. For now we don’t see reason to be alarmed here as the industry is aligned with increasing home (better margins adjusting for center capex) and we do not expect CMS to lower rates for in-center dialysis but rather potentially attempting to incentivize physicians instead. There could be concerns of further slowdown in growth of ESRD should gov’t make headway in delaying kidney failure via better CKD education and getting more kidneys into the system.
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