As expected Sanders wins the NH primary with Buttigieg/Klobuchar close behind. Based on Sanders’ narrow margin of victory (<4%) 538’s model forecasts he has 48% chance of winning the majority of delegates followed by None (27%) and Biden (15%). With the field still rather spread out and Bloomberg gaining mindshare into Super Tuesday, it is increasingly possible that there is no clear winner going into the Democratic Convention in July and we expect investors to focus on this potential outcome – see convention rules here. Given results in-line with expectations we expect focus to shift to polling changes heading into NV on 02/22 and SC on 02/29 and from here we see MCOs still pricing in approximately 50/50 odds of Sanders getting the nomination vs. a more moderate candidate. See Exhibits 1 and 2 on pages 2 and 3 for current MCO group multiple and our view of sector multiple shifts depending on election outcomes.
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DVA Q4’19 OI of $463M came in above WR/Cons $446M/$447M, and adj. EPS of $1.86 beat WR/Cons $1.68/$1.66 – the OI beat vs. our model was driven by lower patient care costs and EPS was further helped by a lower tax rate in the qtr of $0.14. We est. core US Dialysis OI growth came in at ~6% in 4Q vs. our est. of (1%) again driven by lower patient costs vs. our model, with lower corp/Int’l somewhat offsetting. Importantly, DVA issued updated EPS guidance of $5.75-$6.25, up $0.50 vs. previous including implied OI of $1.495B-$1.638B (more below) that bracketed Consensus’ $1.522B but was above WR’s $1.470B on higher calcimimetics earnings and benefit of AB 290 court injunction in CA. We est. this implies ~flat to slightly positive core growth in 2020 – see our OI bridge on page 2. On Med Adv in 2021 the company continues to indicate limited visibility here and expects a “gradual” ramp in penetration over time.
The Iowa Democratic Party (IDP) released the first look at results from the IA Caucuses and currently Buttigieg leads (26.9% of SDEs) trailed closely by Sanders (25.1%) with Warren (18.3%), Biden (15.6%), and Klobuchar (12.6%) rounding out what appears to be the top candidates, see exhibit 1 on page 2 for more. We note that Sanders currently leads both First and Final Alignment votes but not SDEs. Compared with polls leading up to the IA caucus Biden is underperforming, Buttigieg/Warren are outperforming, and Sanders/Klobuchar are ~in-line. While nice to get some information regarding last night, the race is too tight and too many precincts are unreported to declare a winner (38% of precincts are unreported / 36.1% of SDEs are unassigned). Complicating matters more, the IDP has not committed to a timeframe for the next data release which may further reduce the relevance of Iowa’s outcome/increase the importance of NH, especially if the IDP releases data after the NH primary on 02/11.
At this point everyone expected to know the outcome of the first state in the Democratic Presidential Nomination yet due to “quality control” issues and “inconsistencies” the IA Democratic Party has not yet released results from their election. It’s still unclear when exactly the vote will be released but it is expected at some point today (2/4/20) and we anticipate some questions as to whether the impact of the outcome on national polls and candidate momentum will be softened (both on the race and on investors) given all the uncertainty.
This morning (01/30/20) CMS released guidance on how states can shift Medicaid populations to a block grant model with the guidance very similar to what we published earlier this week in our preview as it appears to be focused specifically on the Medicaid Expansion population and given only Republicans being interested most likely means ~5% of Medicaid population potentially impacted – more below. CMS is calling the initiative the “Healthy Adult Opportunity” (HAO) – see factsheet / letter to state Medicaid directors for language. Essentially states are encouraged by CMS to agree to a defined Medicaid budget, and in exchange, will gain some relief from federal oversight and greater flexibility around structuring their Medicaid programs. States can choose to receive block grant $ under 2 models: 1) Total expenses model, under which CMS calculates a fixed amount that will be trended forward annually without regard to enrollment changes but importantly state is not allowed to cap enrollment 2) Per enrollee model, under which the block grant $ will vary with enrollment but the per capita amount is capped and trended forward annually for inflation. In terms of flexibilities, states will gain abilities to: 1) Adjust cost sharing requirements, 2) Align benefits more closely to a typical commercial benefit package, 3) Adopt a closed formulary like in the commercial market, 4) Apply additional eligibility requirements, 6) Innovate delivery systems, 7) Waive retroactive coverage / hospital presumptive eligibility requirements, and 8) Make timely programmatic adjustments without additional federal approval.
4Q19 adj EBITDA of $2. 738B (+9.2% y/y) was ~3% above WR / Consensus of ~$2.66B driven by higher top-line. Cash revenues were $13.5B (+10.2% y/y), ~1% above WR / Consensus of ~$13.4B. Importantly, HCA issued 2020 EBITDA guidance of $10.45B (+6.0% y/y) at the midpoint that was consistent with their preliminary 2020 outlook from 3Q19 earnings call, and also ~in-line with Wolfe / Consensus est. of ~$10.4B. Volumes were again the driver of performance w/ss adj. admissions up 5.0% (vs. 4.2% in Q3) while rev per adj. admit was up 1.1% (vs. 2.0% in Q3). We expect mgmt. to focus on admission drivers of better admits, acuity (SS surgeries at ~2% vs. ~2.5% in Q3), and payer mix on the call. We will also look for color on seasonality of earnings given Q1’19 was incredibly strong in terms of core growth w/our est. of ~13% core growth vs. Q2’19 at ~ flat (see our EBITDA bridge on page 2) likely driving some seasonality vs. the FY’20 assumption of ~5.5% core growth.
The Centers for Disease Control and Prevention provided the latest update today that there were 110 cases tested in the U.S. for coronavirus as of 7pm last night - 5 were tested positive; 32 were negative; and 73 were still pending. We’ve been getting some questions from investors on the potential impact on MCOs’ medical costs if the virus spreads wider than the current levels. To get some insight on this, we have carefully looked at what happened during the period of SARS outbreak when there were 27 confirmed cases in the U.S. Overall, while it's far too early to come to any meaningful conclusions, we would not be trading MCO stocks on the coronavirus at this point as our look back at 2002-2003 SARS outbreak would indicate that should coronavirus follow a similar trajectory there would not be a meaningful uptick in costs for MCOs.
According to Politico, CMS is planning to release guidance on how states can shift Medicaid populations to a block grant model. Under a block grant system states receive a pre-set amount of $ from the federal govt instead of getting a matching payment based on state spending and a specified % of total expenditures (called the Federal Medical Assistance Percentage - FMAP). In exchange, states will gain relief from federal requirements and greater flexibility around structuring their Medicaid programs. In the past block grants have created concerns over potential enrollment declines and reimbursement pressures to both plans and providers – see our deck post-2016 election and below for thoughts on potential impact / uncertainty. From a regulatory and political perspective, we expect any future block grant proposal / implementation will face significant pushback from Dems and may get hung up in courts similar to states’ attempts to impose Medicaid work requirements in recent years.
Biden’s national polling aggregate is basically unchanged since our last update and he remains the favorite both in polling and RCP betting average at 35% odds to win vs. Sanders at 31%. From here it is clear that Iowa will be a significant catalyst. From a polling perspective, as we discuss below, after last weekend saw Sanders with strong polling results in IA this weekend Biden bounced back leading in 2 separate IA polls. With no less an authority than Nate Silver’s 538 Politics indicating that a IA win would catapult Sanders / Warren in front of the Dem field from a probability perspective and a Biden win here could make him a near lock to win (again more below), we see Feb 3 as a meaningful marker for the HC sector in general and MCOs in particular as the fundamental backdrop remains fairly benign in the NT after a solid UNH print last week and shaping up strongly for 2021 on the back of accelerating earnings growth post HIF repeal as outlined in our 2020 Outlook.
According to Politico, the Supreme Court has rejected Democrats’ request submitted earlier this month to fast track the ongoing ACA lawsuit to the high court before election. For background, recall the 5th Circuit Court of Appeals ruled on Dec 18th, 2019 that the individual mandate was unconstitutional, but sent back the case to the lower district court to assess how much the rest of the law can stand. If correct, the process of briefing, argument, and ruling will restart at the lower court which took 291 days from the start to finish when the lawsuit was first filed. From there the Court of Appeals will have to rule again which will likely delay any Supreme Court decision until 2021 / 2022. See Exhibits 1 and 2 for more on timeline of the case & plans’ exposure to the Medicaid expansion and exchange earnings by MCO with MOH/CNC/ANTM most impacted.
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