Following UNH’s earnings report and conference call this week, we are revising our outyears estimates upwards to reflect UNH’s ability to manage through potential HIF headwinds in 2020+, driven by partially the multi-year medical cost / G&A savings noted at the 2018 Investor Day and continued improving performance across Optum. Our ‘19/’20/’21 est. are now $14.60 / $16.50 / $18.70 vs. previous $14.57 / $16.10 / $17.96 – generally in-line w/consensus. PT is now $276 off new 2020 EPS of $16.50 assuming a 10% premium to S&P multiple of ~15x / target relative multiple of 16.7x.
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On the Q4 earnings call UNH stressed the MLR miss in the quarter was almost entirely due to Medicaid performance. The co noted 2018 saw a pullback in TANF Medicaid performance in 5 states but wouldn’t talk to which states these are other than to say none of their peers are in all 5 and IA is clearly one of them. UNH remains focused on trying to move Medicaid business back to its target margin range 3% to 5% (more below) and also stated that performance in 2H improved vs. 1H but still not up to par. The co reiterated the MLR of 81.6% for FY18 and UHC operating earnings of $9.1B were in-line with the guidance laid out at November I-day. Additionally, UNH noted that commercial MLR trajectory through the year was steeper in 2018 vs. previous due to more high deductible products.
UNH reported 4Q’18 adj EPS of $3.28, above Wolfe/Cons $3.24/$3.21 as a strong top-line and lower than expected SG&A offset higher MLR / lower inv income in the qtr. Total rev of $58.4B (up 12.2% y/y, ~10.5% ex-HIF) was above Wolfe/Consensus of $58.1B/$58.0B w/SG&A of 15.1% for the year vs. guide of ~15.3% and MLR at 81.6% for the year vs. 2018 guide of ~81.5% at investor day. 2019 guidance reaffirmed at adjusted EPS of $14.40-$14.70 (Cons pre earnings was $14.62, implying ~13.5% growth off FY18 earnings of $12.88). We expect the focus for investors to be drivers of elevated MLR and read-thru’s for rest of MCOs with our view being UNH is likely seeing some impact from increasing seasonality as well as the typical white noise in MLR that ensues when medical cost trend is fairly stable rather than declining – which is the feedback we have gotten from NFP checks.
Earlier today (1/14/2019) CMS released the January enrollment data for Medicare Advantage providing the first look of how the fall 2018 Annual Enrollment Period played out and thus far it looks like growth is mixed across the group with AET (CVS) being a notable outperformer. While we note that January enrollment in general has become a bigger piece of annual growth (January was ~20% of total in 2015 growing to ~40% in 2018) a majority of the growth is still yet to come and the return of the Open Enrollment Period in 2019 (seniors can shift from plan to plan once during the first three months of 2019) may also impact enrollment #s unexpectedly. While co. specific growth is too early to call, the Jan enrollment paints a picture of large for-profit plans taking significant share again and the Feb growth report next month will bring co. specific and industry growth into greater clarity.
CVS’s recent commentary on rebate guarantees at a competitor conference forces questions for peers. As discussed in our note last night (1/8/19), CVS management has been the most vocal about the headwinds from lower branded drug price inflation to contracted rebate guarantees. Our industry checks indicate the practice has been wide-spread across the industry, begging questions around exposure at peers ESRX and OptumRx. As we discuss below we think the exposure at OptumRx should be much more moderate for a couple of reasons while ESRX is likely similar but potential offsets have left us more comfortable here while also acknowledging the topic as one of the main risks to our Outperform rating on post-deal CI.
We Remain Constructive on MCOs but See Risk/Reward More Balanced. MCOs have a strong fundamental backdrop and several tailwinds (HIF holiday / investment income) that support unique earnings visibility into 2019. That said, given current relative valuations appear to reflect much of this 2019 MCO earnings momentum we take a more measured view on the group as there are a number of potential factors that could weigh on sentiment and operating performance going into 2020. See PDF page 11 below for more details on these potential factors and please join our webcast this morning at 11am ET (click here to register) where we will discuss our views and answer questions.
In December Individual MA enrollment increased 7.2% y/y and Group MA enrollment increased 11.9% y/y, producing total y/y Med Adv growth of 8.1%. 62.1% of total MA enrollment of 21.3M lives were in our covered cos vs. 58.5% of 19.7M lives y/y, with the increase driven by both market share gains and M&A. Dec data demonstrates the typical intra-year seasonality post Annual Election Period with generally consistent m/m growth. See Page 2 for data by plan and email us for our tracking spreadsheet
While not unexpected given recent focus here from investors, Friday’s ruling is certainly unfortunate given potential for angst (even if we think it is very low probability) into likely Supreme Court decision in early-to-mid 2020 coupled with recent market volatility heightening stock moves such as JNJ 10% selloff on Friday. In this note we attempt to lay out and quantify where possible, various ACA related impacts to both MCOs and Hospitals to better understand the potential moving parts here should the ACA be struck down. In short we think it is very unlikely the Supreme Court votes this down on third try given 5 Justices remain who have voted to uphold 2 previous times in last 6 years - as we lay out in attached slides and will discuss on webcast at revised time of 8:30am ET. Thinking about stocks across the sector we see diversified MCOs best positioned, hospitals potentially less negatively impacted than investors might expect and CNC/MOH most negatively exposed.
This morning (12/12/18) CMS released its sixth weekly exchange snapshot for the 2019 Open Enrollment Period for states using the HealthCare.gov platform. Week 6 enrollment of 934K was -13% vs. last year’s 1.74M, compared to the Week 5/Week 4/Week 3/Week 2 delta of -6.1%/-0.7%/-6.3%/-8.2%. Cumulative sign-ups on health insurance exchange continue to lag behind last year’s pace with ~4.1M enrollment during the first six weeks (Nov 1. – Dec. 8) vs. ~4.7M last year (-11.7%). We note that there was one less day of enrollment this year vs. last year in Week 1. Within the total sign-ups, ~3.0M (~73%) were renewing customers who already have a plan through the exchange and ~1.1M (~27%) were new customers. See Exhibit 1 on page 2 for more detail. The enrollment period runs to 12/15 (end of this week) and we continue to expect a weaker enrollment year vs. last year for the negative factors discussed below.
As larger PDP players including UNH (~21% market share) and HUM (~19% market share) have guided to lower PDP membership for 2019, we took a detailed look at the premiums in all 34 PDP regions to analyze competitive positioning of each MCO to better understand the 2019 growth outlook. The most notable finding from our analysis was that WCG has launched a low premium plan, “WellCare Value Scripts”, in all 34 regions for 2019, compared to being in only 4 regions in 2018. As a result, see Exhibit 1 in Page 2, WCG now offers the lowest premium plan (~$15 PMPM) in 25 out of 34 PDP regions for 2019 vs. zero in 2018. The 25 regions account for ~66% of current PDP enrollment (see Exhibit 2 in Page 3) and we expect there could be upside here when mgmt. provides initial 2019 guidance on Dec 17 vs. our current 32k or 3% growth target and please note we will be hosting meetings in NYC w/mgmt. on Dec 18 where we expect questions on both potential growth/upside as well as underwriting assumptions given low cost nature of product.
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