Effective Saturday July 11th, 11 hospitals in HCA’s West Florida division will begin to delay certain inpatient procedures in an effort to conserve capacity due to the recent surge in COVID cases in Florida (link to the news release here). Surgeries performed in an outpatient setting or in an ambulatory surgery center will not be affected. We note that these 11 hospitals are in addition to the 4 other HCA hospitals, also in Florida, which announced last Wednesday (July 2nd) that they would begin delaying inpatient procedures (link here). Ravi Chari, president of HCA’s West Florida Division stated, “The number of COVID cases in our hospitals are increasing daily, and we need to ensure that our caregivers and hospitals are in a position to provide safe, effective, and compassionate care to our patients. We will continue to monitor the situation closely, making adjustments as necessary.” These announcements come as new COVID cases in Florida have been surging the past month. As of Wednesday (July 8th), Florida has seen ~11,500 peak new cases, a 7-day average of 4,013 new cases vs. a 30-day average of 2,059, and ~224K cases overall. See exhibit 1 for estimates by state.
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WBA reported 3Q adj. EPS of $0.83, vs. WR/Cons of $1.18/$1.17 with COVID-19 related impact of $0.61-$0.65 for the quarter. Total adj. op profit of $919M (down ~47% y/y) was -32%/-27% vs. WR/Cons of $1,354M/$1,257M primarily driven by lower gross profit margin of 18.9% vs. our WR/Cons of 20.3%/20.5% - adj. OI had a negative $700-$750M impact of COVID-19. US Retail OI ($792M vs. WR/Cons of $1,025M/$1,052M, down 38% y/y) and International Retail OI (-$143M vs. WR/Cons of $58M/$17M) were materially below WR/Cons ests. while Pharma Wholesale ($271M vs. WR/Cons of $272M/$263M) mixed. WBA provided updated FY EPS guidance of $4.65-$4.75, which includes COVID impact of $1.03-$1.14, implying another tough quarter with 4Q EPS of $0.98 vs. WR/Cons of $1.34 – this includes impact of share repo suspension and importantly assumes continuation of June trends thru Q4. In terms of read-thru, CVS lacks a UK business and the company’s US trends reported for April/May were similar to WBA in terms of relatively solid revenue trends – costs and product mix / margin impact likely less severe for CVS vs. WBA based on company disclosure.
Investor expectations fully contemplate and have discounted the fact that COVID-19 driven utilization declines will drive significant MCO outperformance in Q2 as evidenced by stock performance of ANTM/HUM which both closed lower post raising Q2’20 EPS. In the attached slides we lay out our view on 2Q results across the MCO space as well as updated thoughts on key focus areas into earnings. In addition, we have slides with updated data points on Medicaid rates ahead of state decisions for 7/1 and federal fiscal stimulus likely to pass Congress in August.
Earlier today (07/08/20) the Pennsylvania Department of Human Services (DHS) announced contract awards for the state’s Medicaid managed care program PA Health Choices that caters to the TANF & Expansion population. CVS-AET, which was a statewide incumbent, lost all 5 zones. UNH was incumbent in 3 zones and kept only 1. We estimate revenue losses of ~$1.2B / $0.8B for CVS-AET / UNH respectively, which at 2.5% net margins would be worth 0.3% / 0.1% to 2021 EPS – see Exhibit 1 on Page 2 for details. 4 non-public incumbent plans incl. AmeriHealth Caritas, Health Partners, UPMC, and Geisinger all scored big wins w/ statewide contracts. Per the state release, 2 non-selected bidders have already filed protest against the awards; and the state clearly stated the “DHS may not take on any further action until the protests are resolved.” 1 losing bidder must be incumbent CVS-AET and we think the other one is likely CNC given the co. bid in both of the previous 2 re-procurements (more background below) and CNC is currently an incumbent plan in the state’s LTSS program.
CMS released a proposed rule for 2021 ESRD PPS which included a 1.8% rate increase, better than the 2019/2020 proposed increases of 1.5%/1.7% respectively. More importantly, calcimimetics was added to the bundle as expected, with an initial proposed addition of $12.06 per treatment based on Q2’20 ASP, above expectations. That said there are two things to consider here. First, DVA will only get this payment on ~70% of treatments that are Medicare and Med Adv. which would leave the reimbursement on all treatments at $8.44 per treatment and comparable to most recent cost per treatment of $4.94. Second, CMS noted that the final rule will include a rate that is based on Q4’20 ASP. Using Q3’20 ASP we est. the addition drops to $10.31 per Medicare/Med Adv treatment or $7.22 per overall. This would leave the estimated OI benefit at $72M by our math – see exhibit 1 on page 2 with potential for further change depending on Q4’20 ASP and where DVAs costs migrate into 2021.
Senate Majority Leader Mitch McConnell gave a clear signal last week that Republicans are ready to move swiftly on another coronavirus relief package, with the goal of passing both chambers before the August recess that begins on August 10th. We advise investors to focus on the potential inclusion of an FMAP $ increase that could lock in a pre-determined time period for these $ to be paid to states as well as lock in a lack of state Medicaid disenrollment for a similar period.
On Thursday July 2nd Date Set for NC Medicaid Transition – On Thursday July 2nd, N. Carolina Gov. Roy Cooper signed Senate Bill 808 to transition the state’s Medicaid program from fee-for-service to managed care, with a targeted start date of July 1st, 2021. The state will pay five managed care companies $30B over 5 years and will cover an estimated 1.6M members. Notably, while the bill does outline a deadline of July 2021, it does not establish a penalty for failing to meet the deadline.
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.
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.
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