Different from the first and second debates, prior to the third the candidates had already defined their stance on healthcare reform. Once again Biden and Sanders were the most forthcoming with details on their healthcare plans while Harris and Warren stuck to high level talking points. Notably, Warren avoided explicit questions direct at her on the role of private insurers and raising taxes on the middle class in her version of M4All. The rest of the candidates advocated for their version of M4All / Public Option with Yang the only one suggesting a change to how providers are paid – see our summary of each candidate’s comments on Page 3. 11 candidates have qualified for next months debate which may get more granular on potential disruptive impacts of single payer (hospital closures, people losing coverage they like, etc) will move to the fore.
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In August, the Trump Administration announced a final rule that will now include Medicaid status as a determinant of whether an alien applying for admission or adjustment of status (to Lawful Permanent Resident) is financially dependent on the government for subsistence and should be inadmissible to the U.S. Simply put being on Medicaid will become a factor in citizenship decisions, likely discouraging some current non-lawful permanent resident Medicaid enrollees from continuing their enrollment. We note that this does not apply to individuals who already obtained a lawful permanent resident status (green card holders), but only impacts “aliens seeking to adjust their status to that of lawful permanent residents from within the United States, and aliens within the United States who hold a nonimmigrant visa and seek to extend their stay in the same nonimmigrant classification or to change their status to a different nonimmigrant classification.”
Yesterday (09/10/19) the CA Assembly voted 42-16 in favor of passing AB-290. Similar to the Senate, the Assembly floor vote was close and AB-290 passed by 2 votes after an extended voting window. The bill now goes through a final QC by staffers (Engrossing & Enrolling) and will be certified/signed by both the Senate Secretary & Assembly Chief Clerk before being passed to Gov. Newson to sign or veto by 10/13. We continue to anticipate AB-290 will pass this year and take effect in 2020 albeit with no direct impact to DVA’s OI from the bill likely until 2022 at the earliest. However, at DVA’s capital markets day yesterday mgmt. noted the AKF could decide to discontinue operations in CA as early as 01/01/20 which would pull the full negative impact of AB-290 forward.
DVA provided 2022 rev / EPS guidance of $11.5B-$12.5B / $6.25-$7.25 which implies a 3-year CAGR of ~3-4% / ~13%. While the guidance includes impact of AB 290 ($25M-$40M) and typical annual advocacy costs (~$30M), it does not include potential impact from any ballot initiatives. Biggest debate of the day was around treatment growth – with mgmt. indicating industry trend in the 1.5-2.0% range and expected to grow faster over time. Most compelling, the co. provided $750M-$1B FCF guidance vs. 2018 FCF of $480M, driven by both increase in earnings and decrease in CapEx – vs. current market cap of ~$7.5B assuming our 2020 sharecount est. of 125M. Overall, while some assumptions still lack clarity (ability to hit margin target despite lack of rate visibility for one) and moving parts outside the co’s control remain, we see mgmt. heading in the right direction from a strategic, disclosure and shareholder value creation perspective.
Today (9/9/19) the CA Senate voted 21-13 in favor of passing the amended version of AB-290 and the bill now moves to a concurrence vote on the CA Assembly floor. The final day for the Assembly to vote on the bill is 09/13 and assuming it passes then Gov. Newsom has until 10/13 to sign or veto the bill. Based on our consultant checks this outcome was expected and we anticipate AB-290 will pass in the CA Assembly as well by Friday. Interestingly though, the vote was much closer than we originally anticipated as the Senate did not vote along party lines like what happened in the Appropriations Committee – there are 29 Democratic Senators and 21 votes was the minimum required to pass. We continue to anticipate AB-290 will pass this year and take effect in 2020 albeit with likely no impact to DVA’s OI until 2022 at the earliest.
Over night (09/06/19) the CA Senate posted their amended version of AB-290 that is up for a third reading today before being passed to a concurrence vote by both the CA Senate and Assembly (09/13 deadline). The amended version of AB-290 would become law on 07/01/20 but any change to dialysis reimbursement would now be delayed until 01/01/22. While somewhat dovetailing with what we heard previously (bill becomes operative in Jul-20) these amendments go further and would remove OI headwinds to the co. in both 2020/2021 which we est. at $5M/$15M respectively vs. DVA’s prior est. of $25M-$40M prior to the amendments. The most impactful amendments in our view include: 1) delayed start date – “(e) Commencing January 1, 2022, if a financially interested entity makes a third-party premium payment to a health insurer on behalf of an insured, reimbursement to a financially interested provider for covered services shall be determined by the following…”; 2) grandfathering of existing patients – “(2)… on or after March 1, 2020. (3) The amount of reimbursement for services paid to a financially interested provider shall be governed by the terms of the insured’s health insurance policy contract, except for an insured who has changed health insurers pursuant to paragraph (2), in which case, commencing January 1, 2022”. – see page 2 for extended bill language. We believe the amendments’ most significant impact in the NT are the rate delay to 2022 and then grandfathering diluting any immediate impact from the bill after commencement.
Given flattish core growth implied in FY 2019 guide driven by slowing volumes and continued pressure on pricing from “outlier” comm’l rates normalizing all coupled with a number of potential headwinds next year we expect significant focus on management’s forward outlook at next week’s capital markets day in NYC. While the moving parts impacting 2020 earnings seem to be well understood at this point, we would note that 2020 consensus OI of $1.6B, down 3.6% YoY, appears to assume a pick-up in core-growth and may have more risk to the downside than upside (WR $1.58B) at this point but a lot of this will depend on factors outside of the company’s control. Given modest visibility on these swing factors it is unlikely mgmt. will give detailed 2020 guide next week but we expect to hear thoughts on the multi-year outlook for key underlying growth factors such as volumes, pricing, cost and cap deployment. We are hosting an investor lunch and small group meetings with mgmt. following the capital markets day that are capacity constrained, please contact your sales representative or email us to express interest.
Based on our conversation with proponents of AB-290, which passed the CA Senate Appropriations Committee on Friday, the bill was amended to delay implementation to July 1, 2020 and create a timeline by which AKF needs to request a new OIG opinion prior to the new implementation date. Recall that the Senate version of the bill “would require reimbursement to be the higher of the Medicare reimbursement rate or the rate determined pursuant to an arbitration process, as established by the bill, if either party elects arbitration” for contracted providers. Based on our check, arbitration would likely be focused on reimbursement on a basis of cost + some margin target rather than existing commercial rates but that is unknown for certain at this point. Finally and most significantly in the NT the new language of the bill includes grandfathering of existing patients which would significantly dilute the potential impact on dialysis centers early on post implementation. We note that it is impossible to know the exact changes until the amended bill is posted which would probably be later today or tomorrow. From a timing perspective we expect a Senate vote first within a day or two post amendments then the Assembly would be behind that by another day or two most likely.
Today (8/30/19) the CA Senate Appropriations Committee voted (Ayes 5, Noes 2) to refer AB-290 to the Senate Floor after the bill progressed through the committee’s Suspense File, interestingly the committee voted along party lines with Republicans voting against the bill. This is in-line with the timeline we laid out in our webcast / slides in July and we anticipate the bill will be sent to Governor Gavin Newsom in September if it passes the CA Senate. We continue to see it as more likely than not that AB-290 passes but the industry has put up quite the battle from a lobbying standpoint. Our $1.55B 2020 OI est. for DVA contemplates a ~$35M est. headwind from AB-290 (vs. $25M-$40M est. by the co.).
According to the Associated Press, LA is planning on using emergency contracts with the five existing Medicaid MCOs in the state until the protests are resolved for the recently announced Medicaid contract award. This means CNC and AET are likely to continue to offer Medicaid plans in 2020 as the protest process has just begun with CNC filing an official protest on 08/19. We have confirmed with the Louisiana Department of Health that the Chief Procurement Officer will make her initial ruling on or before Sept. 3, 2019. However, the department says it is still unclear at this time if the initial decision will be published. Our consultant check suggests if the protestor disagrees with the decision, the next step is to file with the Commissioner of Administration. The protestor has 7 days after receiving the decision from the Chief Procurement Officer to appeal to the Commissioner. The Commissioner then has 14 days to render a decision.
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