We recently obtained the KY Medicaid Award scoring – please e-mail us for a copy. The summary scoresheet of key sections – see Exhibit 2 on Page 2 – shows WCG had the highest total score at 1,548.5 vs. maximum of 1,650 followed by AET at 1,525.5. Passport had the lowest score of 1,315.5 followed by ANTM at 1,338.5. HUM, UNH, and MOH are in the middle of the pack with very close scores of 1,467.5 / 1,446.0 / 1,440.0 respectively. Overall the range of scores is relatively wide between winners and losers w/lowest scored winner MOH ~100 pts higher than runner-up ANTM – potentially making any appeal difficult. See Exhibit 1 on Page 2 and our previous note for estimated financial impact of the award where we see MOH (potentially adding ~3.1% to earnings power) as the biggest winner. We note both ANTM and Passport have protested these awards which were made under Governor Bevin’s administration.
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Earlier this morning (12/05/19) CNC announced it has received final state approvals from IL and NJ state regulators. Completion of the deal will now remain subject to antitrust clearance by the DOJ, approval of divestitures in IL and NE, and other customary closing conditions. In the release, CEO Neidorff reiterated the deal “remains on track to close by the first half of 2020” but we think clearly there is an opportunity to close earlier in 2020 and perhaps even by year-end 2019 given today’s update. Recall as conditions from state regulators for approval of the deal, WCG has entered into agreement to divest its Medicaid plans in NE and MO to ANTM while CNC will divest its IL subsidiary, IlliniCare, to CVS. We previously estimated the total run-rate premiums generated by these 3 assets to be $3.16B (NE $410M, MO $710M, and IL $2.04B) or $0.14 for the combined co. assuming 2.5% after-tax margin – see Exhibit 1 on page 2 for details. Importantly, CNC has consistently indicated that these divestitures were contemplated within the deal model and the company’s $500M synergy targets in Year 2 were net of the expected impact of divestitures but look for any potential updates at the investor day in NYC next Friday 12/13.
Today (12/04/19) CMS released its 5th weekly exchange snapshot for the 2020 Open Enrollment Period for states using the HealthCare.gov platform. Cumulative sign-ups on health insurance exchange lagged well behind last year’s pace with ~2.88M enrolled in HealthCare.gov during the first 5 weeks (11/01–11/30) of open enrollment vs. ~3.19M last year (-10.0% y/y). New consumer enrollment of 765k (-5.8% y/y; -2.7% on a day-adj basis) continues to track better than the overall enrollment trends while renewals were 2.11M (-11.5% y/y). We note that there was one fewer day of enrollment this year vs. last year in Week 1 and NV transitioned to a state-run exchange this yr. If we adjust for this by adding 1-day worth of enrollment using avg daily sign-ups of ~95K and removing NV from last yr, cumulative sing-ups are still down 6.1% y/y.
CMS released its early preview of the Medicare Fee-For-Service United States Per Capita Cost (FFS USPCC) growth rate for the 2021 plan year which came in at +4.46% in 2021 (see exhibit 1 on page 2), very similar to the 2020 trend estimate of 5.0% included in last year’s April 2020 Med Adv Final rule. This compares to the 4.0% trend and 3.86% early preview with a final trend of 5.62% for FY2020. The ESRD dialysis-only early preview rate came in at +2.91% which will become important b/c the 21st Century Cures Act allows Medicare-eligible individuals with ESRD to enroll in MA beginning in 2021. We see this rate as a solid starting point for 2021 and likely indicative of a strong inflationary component within final 2021 rates (see Exhibit 1 on Page 2). Importantly, however, the FFS USPCC rate is just one layer of the all-in Med Adv rate update for 2021 (see our 2020 analysis of all moving parts) and this preview rate will be subject to revisions with both the advanced rate update expected in late Jan / early Feb 2020 and the final rate update expected in early April.
In addition to laying out an EPS target that bracketed current consensus management walked thru the key growth opportunities & strategies at Optum and UnitedHealthcare as well as highlighting the company’s continued focus on improving NPS scores across its businesses and lowering total cost of care via expanding site of service and out-of-network initiatives. The company also mentioned a couple of areas of frustration in the lack of Commercial membership growth and lackluster performance in the Medicaid segment as well as in Brazil. Overall, we see the big picture read-thru as more of the same as UNH remains the clear leader in terms of breadth and depth of assets and execution, allowing for best-in-class growth while continuing to lead the industry on an agenda utilizing technology, lower cost settings of care and changing incentives to lower costs while delivering better outcomes. Lastly, we asked both during and after Q&A about drivers of 2019 MLR guide moving up to 82.6% vs. previous indication of being comfortable at midpoint of previous range of 82.5% +/- 50bps. Mgmt. reiterated there is nothing new or incremental to note and Medicaid is running as expected. See more from investor day beginning on page 2 including takeaways from Seminars and Capability showcases.
We are updating our year-end 2019 Healthcare Services price targets for now-higher S&P 500 market multiple of ~18x. Our MCO and Drug Retail price targets remain based on relative valuation and incorporate an NTM S&P 500 P/E multiple of 18.0x (vs. 17.25x prior) our 2020E EPS estimates. Our Facilities price targets also remain based on relative valuation and incorporate an NTM S&P 500 EV/EBITDA of 12.25x (vs. 11.75x prior) our 2020 EBITDA-NCI estimates. Note these PTs are effectively very short term and we will update and roll out PTs to be YE2020 based on 2021 EPS estimates with our year ahead Outlook early next year. Please see exhibits 1 and 2 on page 2 for a summary of our price target changes, and page 3 and 4 for our PT buildups.
We had dinner w/CEO David Wichmann last night (12/2/19), with the UNH story remaining intact as significant opportunities among high acuity populations and care delivery are met with a continued focus on delivering best in class technological and medical management. There were meaningful discussions on the outlook for the commercial business given all the political focus and the company indicated a renewed focus on delivering lower costs to fuel affordability and growth, with a target of lowering trend by 500bps over 3 years once new initiatives are put in place over the next several years by UHC CEO Dirk McMahon. The promotion of Optum CEO Andrew Witty to the role of President was discussed with CEO Wichmann indicating Witty will direct R&D and have significant input on strategy across both UHC and Optum going forward. Looking ahead UNH sees significant capital deployment opportunities in Optum Health with International “more measured and modest pace than in the past”.
According to the latest flu report from the Centers for Disease Control and Prevention, this year’s nationwide flu activity is trending higher vs. the same period in recent years. Per CDC, influenza activity continues to increase but the amount of activity varies by region w/ noticeably higher activity in several southern states, including Alabama, Arkansas, Georgia, Nevada, South Carolina and Texas – see exhibit 2-3 on page 2 to see y/y comparison. Outpatient visit for influenza-like illness was 2.9% of total patient visits during week 47 (latest – week ending Nov 23) vs. the national baseline of 2.4%, which reflects the levels in the past three seasons. However, only four of 10 regions were at or above their baseline with other 6 being below their region-specific baselines – again showing activity varies by region.
UNH released high-level 2020 guidance before the co.’s Investor Day tomorrow guiding to adjusted 2020 EPS of $16.25–$16.55 which brackets current consensus of $16.47 and WR of $16.40. The midpoint for this range of $16.40 implies 9.3% growth off 2019 guidance of $15.00 or 12.7% ex. HIF headwind of $0.50 sized by UNH previously. This is consistent w/ the company’s earlier expectations on 3Q call to grow core adj EPS at the lower end of 13-16% LT target. Revenue guidance of $260B–$262B was ~in-line with Cons of $260B but below WR of $264B. Other guidance items provided were GAAP EPS of $15.45-$15.75 and CFO of $19.0B–$19.5B. We expect UNH to provide additional segment level information tomorrow at its Investor Day – for additional details on what the co. usually provides see our notes on guidance / Investor Day from last year.
Earlier this morning (12/2/19) CNC announced it has entered into agreement to sell its Illinois subsidiary, IlliniCare Health Plan, to CVS. The deal is subject to the closing of CNC-WCG deal as well as other customary regulatory closing conditions. Under this transaction, CNC will divest its Medicaid and Medicare Advantage businesses in IL but retain its current MMAI book and new Foster Care contract, which is set to begin in February 2020. Based on 3Q19 stat filings, CNC currently serves ~356k Medicaid members in IL and has generated $1.53B of premiums YTD, implying a $2.04B run-rate. For traditional MA, it only has ~200 beneficiaries and we estimate premiums of $2M assuming $1,000 PMPM. At 2.5% net margins these would be worth 1.9% to CNC-WCG 2020 pro-forma EPS and 0.5% to CVS. We note CNC-WCG’s net synergy target of $500M by Year 2 and >$700M in run-rate include a “prudent amount of divestiture”.
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