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.
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.
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.
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”.
Warren’s lead in RCP’s betting odds aggregate has deteriorated meaningfully, Bloomberg is a late entrant to the race, Buttigieg leads in IA/NH polls but trails widely in more diverse states, and Biden continues to quietly lead polling averages at ~27%-30% nationally. Meanwhile, MCO shares have ground higher post-solid Q3 results and Warren backing off of M4All. However, most important in our mind has been the decline of Elizabeth Warren’s momentum in the polls and the significant decline in assumed probability of her becoming the Dem nominee – as illustrated in Exhibit 1 on page 2 – and we expect her trajectory here will remain a key determinant of MCO stock prices over the next 2 to 4 months as we head into the Democratic primaries (timing on slide 12).
In November Individual Med Adv enrollment increased 8.0% y/y and Group Med Adv enrollment increased 7.6% y/y, producing total y/y Med Adv growth of 7.9% or 8.7% ex. MN market which declined y/y due to the ongoing cost plan conversion. On an absolute basis total Med Adv enrollment increased by 1.68M members y/y and 1.62M YTD with our coverage universe growing by 1.77M and 1.72M respectively (taking share at ~105% of industry growth across both time periods). See Page 2 for data by plan and email us for the tracking spreadsheet.
Today (11/27/19) CMS released its fourth weekly exchange snapshot for the 2020 Open Enrollment Period for states using the HealthCare.gov platform. Cumulative sign-ups on health insurance exchange is now only moderately behind last year’s pace with ~2.37M enrolled in HealthCare.gov during the first four weeks (11/01–11/23) of open enrollment vs. ~2.42M last year (-2.1% 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 ~103K and removing NV from last yr, cumulative sing-ups are actually up ~3% y/y.
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