We are updating estimates and PTs for DVA, HCA, THC, and UHS to reflect 1) our revised estimates / 2019 earnings bridges post Q4 results and 10K reviews as laid out in this note and 2) the current S&P 500 market multiple of ~11.25x NTM EV/EBITDA (up from previous 10.25x coming into 2019). We are adjusting our 2020 estimates at all 4 facilities post generally solid Q4 results and in-line to better 2019 guidance releases. See summary of changes and our commentary by company on pages 2-12. We maintain our Outperform ratings on DVA, HCA, UHS and Peer Perform for THC.
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Per a Reuters article released last night (03/03/19), CMS is looking at a trial payment design that would favor home dialysis vs clinic-based treatment, along with attempting to improve early stage care for kidney disease and increase kidney transplant access – “…goal is to reduce the $114B paid by the U.S. gov each year to treat CKD and ESRD”. HHS Sec Alex Azar is scheduled to speak on transforming kidney care at 1:30-2:00pm today – additional details could possibly emerge then. For now we don’t see reason to be alarmed here as the industry is aligned with increasing home (better margins adjusting for center capex) and we do not expect CMS to lower rates for in-center dialysis but rather potentially attempting to incentivize physicians instead. There could be concerns of further slowdown in growth of ESRD should gov’t make headway in delaying kidney failure via better CKD education and getting more kidneys into the system.
UHS reported Q4:18 adjusted EBITDA-NCI of $454M, above WR/Cons of $450M/$443M. The beat in the quarter was driven primarily by slightly better than expected acute results, with behavioral EBITDA ~inline with our $276M estimate after adjustments. Behavioral SS rev growth remained tepid at 2% as length of stay continues to be pressured and pricing was modest. Other additional items of note in the quarter was another increase in the DOJ reserve by $31.9M (possibly indicating the co is getting closer to a settlement in 1H:19) and a $49M impairment charge associated with the 2015 acquisition of Foundations Recovery Network. 2019 guidance implying ~6% EBITDA growth at the midpoint (vs. Wolfe/consensus ~3%/~4%) which we expect to be well received by investors tomorrow with upside coming from better acute results with behavioral guidance implying continued modest growth as mgmt. waits for LOS to stabilize.
THC reported 4Q18 adjusted EBITDA of $684M, solidly above WR/Consensus of $667M/$666M with better revenue of $4.62B vs WR/Consensus of $4.52B/$4.51B. The beat was driven by strong Hospital performance on higher revenue per adj admit, up 5.4% y/y after adjusting for CA Provider Fee Revenue. Expect more color here from the co. on call tomorrow. Importantly THC introduced 2019 adjusted EBITDA outlook of $2.650B-$2.750B, implying 3.5%-7.4% y/y growth which is better than preliminary outlook of 3.0%-5.0% provided at 3Q18 earnings and reiterated in January at a competitor’s conference. Guidance at the midpoint of $2.7B is higher than current WR/Consensus ests. at $2.674B/$2.617B. The co. also announced new $200M cost reduction in 2019, which mgmt. expects to yield $50M of savings for 2019 and $200M run-rate by the end of year.
DVA reported Q4’18 adj. EPS from continuing ops of $0.90 compared to WR/Cons of 0.85/$0.90 with op earnings relatively in-line with our est. at $370M adj. and EPS upside vs. our model via lower taxes. DVA reiterated FY19 Kidney Care OI guidance of $1.54B-$1.64B that was introduced at an investor conference earlier this year – we would note that this est. per previous comments includes ~$30M of advocacy costs. Revenues were ~$100M below expectations at $2.8B with the entire miss in the Other Ancillary segment as DaVita Rx revenues fully transitioned out – core dialysis revenue was in-line. Additionally, DVA introduced 2019 guidance of $1.375B-$1.575B for CFO and a tax rate of 28.5%-29.5% (above our model of 24.5% – we look to the company for additional color but likely driven by advocacy spend).
Today (02/04/19) the North Carolina Department of Health and Human Services (NCDHHS) awarded contracts for its ongoing managed Medicaid transition. The four plans that were awarded statewide contracts include AmeriHealth Caritas, Anthem, UnitedHealth, and WellCare. Centene won in regions 3 and 5 and we note there were eight total bidders – all public MCOs except CVS-AET won at least some of the business. Given the history of these large contract awards we would not be surprised to see an appeal in the future. See our note on the RFP post-RFP release for key exhibits from the RFP Summary and Draft Rate Book and our webcast / slide deck pre-RFP release.
North Carolina is expected to announce awards for its Managed Medicaid RFP next Monday 2/4. For background on the RFP, North Carolina is planning a two-phase approach to a shift to Medicaid Managed Care with Phase 1 scheduled to begin on November 1, 2019, and Phase 2 beginning on February 1, 2020. Populations targeted in the first wave of Medicaid transition include ABD, TANF, and maternity with exceptions including duals, medically needy, Pace beneficiaries, and others. See our note on the RFP post-RFP release for key exhibits from the RFP Summary and Draft Rate Book and our webcast / slide deck pre-RFP release.
Part 2 of the 2020 Medicare Advantage Advance Notice was released this afternoon (01/30/19). Based on CMS’s estimate of key items plan reimbursement should increase by ~1.6% ex-HIF, modestly below our recent preview of 2.9%. See exhibit 5 on page 4 for a full breakdown on rates and page 2 for estimated rates / MA exposure by co. FFS Normalization (more below) was the key drag to reported rates relative to our expectations and a higher FFS growth rate relative to the early preview # somewhat offset to the positive, with other items relatively in-line. Final rates are expected on 4/1 and we note that rates have historically been more likely to improve than deteriorate vs. the Advance Notice. Overall, while slightly disappointing the 2020 Advance rate is still the second-best seen by the industry in recent memory, and has the potential for improvement with the final rate notice. Recall at this point last year the Advance Notice predicted rates of 1.8% ex-HIF, which were revised to 3.4% with the Final Notice (see page 5).
AB 290 was introduced in the CA legislature yesterday (1/28/19) (text of the bill here w/key parts on pgs 2 and 3). Similar to SB 1156 last year, the primary goal of the legislation is to prevent dialysis co’s from benefiting from Charitable Premium Assistance (CPA) in CA by setting reimbursement to the lower of the commercial rate or the Medicare Rate. Recall SB 1156 ultimately passed the Assembly last year but was vetoed by former Gov Jerry Brown – we believe new Gov Gavin Newsom is less likely to veto. From here we expect bill to move thru Assembly into Senate thru the spring with final votes likely late summer, similar to timeframe of SB 1156 last year.
EBITDA $2.50B up 6.2% y/y on tough comp. Excluding net $18M benefit from insurance vs. hurricanes, adj EBITDA of $2.48B is solidly ahead of WR/Cons. est. of ~$2.40B driven by strong top-line of $12.3B up (+6.2% y/y) vs. WR/Cons. $12.1B. Importantly, HCA introduced 2019 EBITDA guidance of $9.35B-$9.75B, implying 6.7% y/y growth at the midpoint. We note that guidance includes contribution from Mission Health (expected to close 1/31). Assuming Mission $135M annually and $120M for 11 months (Jan 31 close), the mid-point of guide is in-line w/consensus $9.45B EBITDA which doesn’t include Mission. One question for call is given upside to Q4, 2019 guide implies 5%+ growth vs. 7% growth ex Mission discussed on Q3 call.
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