The first Democratic Primary Debates set the battle lines on healthcare reform and the second debates held on July 30-31 helped further clarify many of their stances. Yet again though, the structure of the debate (10 candidates/night sharing a 2-hour window) prevented any real in-depth discussion on the topic. The majority of candidates reiterated support for some type of public option with a role for private insurers while Sanders, Warren, de Blasio and Yang continued to champion elimination of private pay (see more on page 2). At the debate, Biden continued to criticize the potential costs associated with M4All - “If you noticed, there is no talk about the fact that the plan in 10 years will cost $3 trillion… My plan costs $750 billion.” - with other moderate HC reform candidates generally agreeing on the need to raise taxes on the middle class to implement M4All.
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The company is now in the deal process of getting acquired by CNC with expected close in 1H20 (announcement on 3/27/19). Its stock has been trading at a thin deal spread of 3-5% for the past 2 months (see next page for chart) after several states have approved the acquisition. We step aside at this point as we expect deal to close but have little to add in terms of proprietary visibility on the regulatory approval process / deal timing. Our new PT is $282, which reflects 75% implied deal price of $292 and 25% standalone price of $251.
In August Individual Med Adv enrollment increased 7.7% y/y and Group Med Adv enrollment increased 7.5% y/y, producing total y/y Med Adv growth of 7.6% – 8.4% ex. MN market which declined y/y due to the ongoing cost plan conversion. 65.1% of total Med Adv enrollment of 22.7M lives were in our covered co’s vs 61.6% of 21.1M lives a year ago.
With this note we are updating our models for MCO / Drug Retail coverage post 2Q19 results. We are also updating our price targets across our coverage universe to reflect 1) revised earnings est laid out in this note and 2) current S&P multiple of 16.25x (previously used 16.0x). Please see links to all updated models and new PT build-up on page 2 for further details. We continue to rate the MCO group Market Perform with top picks remaining ANTM, HUM and UNH.
According to the Wichita Eagle, the Kansas Department of Health and Environment (KDHE) has rejected a corrective action plan AET submitted on August 7 in response to a non-compliance letter it received from the department last month. The letter sent on July 24 detailed 11 contract compliance concerns such as provider credentialing taking >90 days to complete, providers denied as non-contracted in error, and claim copy and encounter issues. The KDHE gave AET 10 days to submit a corrective action plan in writing and noted if AET fails to remedy these issues, it “may seek any and all remedies available under contract.” After rejecting AET’s first take at the corrective action plan, the state is now asking the insurer to re-submit a new plan and “plans to meet with AET leadership to negotiate a resolution that best serves Kancare members.” Based on its 1Q stat filing, AET serves ~90k Medicaid members in KS and would generate ~$865M in annual premiums assuming a $800 PMPM. At 2.5% net margins we est. this contract would be worth ~0.2% to CVS 2020 EPS. AET’s struggle in KS Medicaid program follows its losses in the re-procurement of LA contract last week and NC bid earlier this year. Lastly we note AET situation in KS exemplifies the increasingly stringent performance standards that states are requiring from its managed Medicaid providers.
Today (08/07/19) the Louisiana Department of Health (LDH) released the scoresheet for the recent Medicaid RFP award which includes evaluation results of technical components and redacted proposal responses from bidders. The summary scoresheet of technical components – see Exhibit 1 on page 2 – shows CNC had the lowest total score at 621 vs. maximum of 1500 among bidders followed by AET at 669. AmeriHealth had the highest score of 868 followed by HUM 2nd at 819 with top score in the provider network component of 103 vs. peers’ average of 85, likely reflecting strong relationships w/ providers thru their large Medicare footprint. ANTM and UNH are in the middle of the pack with scores of 712/706 respectively. Overall the range of scores is quite wide and potentially indicative of a state which is requiring more from its managed Medicaid providers as indicated yesterday on our consultant webcast with former LA Medicaid medical director Roxane Townsend. Plans have 14 days to submit protests and we expect CNC and AET to protest these results.
Wolfe Research Senior Healthcare Analyst Justin Lake hosted a webcast with Roxane Townsend, Managing Principal, Health Management Associates, to discuss LA results and MCO exposures, the selection process/RFP background, and the focus on CNC post LA/NC decisions heading in TX.
Today (8/5/19) the Louisiana Department of Health (LDH) awarded contracts to non-profit AmeriHealth Caritas, ANTM, HUM, and UNH to serve the state’s Medicaid Managed Care program. This was a re-procurement of LA’s existing Medicaid contract. Recall from the RFP document that the state planned to contract with only up to 4 insurers down from current 5 incumbents. After today’s award, there will be only 4 plans left with 2 incumbent losses (CNC & CVS) and 1 new entrant (HUM). AmeriHealth, ANTM, and UNH are retained incumbents. The biggest surprise in the results was CNC’s loss of a major contract as an incumbent which has not happened in more than a decade since CNC lost its contract in KS in 2006 (re-entered several years later). We note CNC’s LA loss follows its disappointing NC results (only won 2/5 regions w/ protest ongoing) and puts an even larger spotlight on upcoming TX awards (expected end of August) where CNC has significant EPS exposure (more below).
The first Democratic Primary Debate set the battle lines on healthcare reform and the second debate helped further clarify many of their stances. Yet again though, the structure of the debate (10 candidates/night sharing a 2-hour window) prevented any real in-depth discussion on the topic. The majority of candidates reiterated support for some type of public option with a role for private insurers while Sanders, Warren, de Blasio and Yang continued to champion elimination of private pay (see more on page 2). At the debate, Biden continued to criticize the potential costs associated with M4All - “If you noticed, there is no talk about the fact that the plan in 10 years will cost $3 trillion… My plan costs $750 billion.” - with other moderate healthcare reform candidates generally agreeing the need to raise taxes on the middle class to implement M4All.
EPS $4.30, above WR/Cons of $3.67/$3.74, primarily driven by strong results in Integrated Medical - lower SG&A / tax rate. Integrated Medical MLR came in at 81.6% vs. WR/Cons of 81.6%/80.8% w/ favorable PYD of $28M in qtr - $0.06 to EPS and ~40bps to MLR. Total op revenue of $34.4B was 2.2%/5.3% above WR/Consensus $33.6B/$32.6B, primarily due to higher Health Services rev vs. our model. FY19 EPS guidance of $16.25-$16.65 was raised by ~30c at the mid-point to $16.60-$16.90 – less than the beat likely driven by lower tax rate which including $45m (~$0.12) one-time benefit. We expect focus on drivers of MLR miss vs. consensus and management’s view of Services results and achievability of $5.05-$5.20B guide (unchanged) which from our view continues to look back-end loaded despite Q2 results slightly above our est. w/ramp potentially driven by shifting scripts inhouse from OptumRx and specialty transition to ESRX both in 2H.
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