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.
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.
LLY announced today (03/04/19) that it will soon launch an authorized generic version of its Humalog insulin, which generated ~$1.8B of net revs in US in 2018. IQVIA data suggests FY18 gross sales of ~$6.3B for Humalog, indicating significant rebates / discounts of ~$4.5B (~70% of gross sales). While price action on a single drug should not have any meaningful impact to earnings, MCOs are trading down today at least partially due to the fear around a potential broad shift in drug pricing trend which can lead to a temporary misalignment between the MCO bids that assume current rebate levels maintain. Recall that we highlighted the concern in our previous slides when we discussed our thoughts on the OptumRx letter to pharma cos requesting 7 quarters of advance notice on list price reductions. We believe the entire system shifting to net pricing is highly unlikely but MCOs could experience some potential interim negative impact from a portion of drugs shifting to net pricing until MCOs can reprice higher to reflect lower rebates collected.
The Louisiana Department of Health (LDH) released its Medicaid Managed Care RFP yesterday (2/25/2019). There are currently 1.5M enrollees statewide, with CNC / UNH / ANTM / CVS-AET from our coverage universe managing significant amounts of enrollment. Most importantly with this new RFP the LDH will currently contract with only up to 4 insurers statewide under the new contract down from the 5 current members of the contract. We note the number of insurers ultimately selected could possibly change between now and before the proposal is due. Proposals are due by April 29th (a relatively quick turnaround of 2 months from announcement date February 25th). The contracts will run from 1/1/20 to 12/31/22, with the LDH having the option to extend the contract for up to 24 additional months. We note that the “LDH will not use a competitive bidding process to develop the MCO capitation rates” – per the LDH rates will be set at an actuarily sound, risk-adjusted rate.
We are revising our estimates for CNC / MOH / HUM / WCG post 4Q18 results. We are also updating our price targets across our MCO / Drug Retail coverage universe to reflect 1) our revised earnings estimates laid out in this note and 2) the current S&P 500 market multiple of ~16x NTM earnings (up from previous 15x coming into 2019) given that our valuation methodology is based on relative P/E. See table below, links to all updated models and new PT build-up on page 2 for further details.
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