We see a continued reasonable operating environment for managed care heading into 2020 featuring a strong Medicare Advantage growth outlook, signs of stabilization in Medicaid enrollment / risk pool pressure and benign commercial cost trends per our proprietary NFP channel checks all indicating reasonable visibility around 2020 earnings performance.
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The first Democratic Primary Debate set the battle lines on healthcare reform and the second debate helped further clarify many of their stances. Yet again though, the structure of the debate (10 candidates/night sharing a 2-hour window) prevented any real in-depth discussion on the topic. The majority of candidates reiterated support for some type of public option with a role for private insurers while Sanders, Warren, de Blasio and Yang continued to champion elimination of private pay (see more on page 2). At the debate, Biden continued to criticize the potential costs associated with M4All - “If you noticed, there is no talk about the fact that the plan in 10 years will cost $3 trillion… My plan costs $750 billion.” - with other moderate healthcare reform candidates generally agreeing the need to raise taxes on the middle class to implement M4All.
Post the first set of Democratic debates, Biden’s lead has eroded while Harris advanced in the latest polls. The latest CNN/SSRS poll / Morning Consult survey / Quinnipiac University national poll all show Harris in second or third place vs. distant fourth prior to the debates. While Biden remains the leader, he saw the largest drop in all the latest polls following the debates. According to the RCP’s national polls, Biden continues his status as the front-runner with a lead of ~12.4 points (vs. 14.5p 1-week ago / 16.9p 2-weeks ago) – see page 3. We are not surprised at the recent volatility in polling as our analysis from May of prior Presidential primaries indicated that it will likely be early 2020 before the market gets certainty on who the Democratic nominee will be despite Biden’s significant early lead in the polls.
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).
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.
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.
CYH reported adj EBITDA of $372M, ~2.2% above WR/Consensus of $364M. Net revs were $3,451M vs. WR/Consensus of $3,442M/$3,356M. Compared to our ests the beat was driven by margin. CYH raised 2018 rev guidance by $100M at the low end to $14.0B-$14.2B (+0.4% at mid-point) and left EBITDA and SS adj admission growth guidance unchanged at $1.60B-$1.65B and (1.0)% to 0%.
Latest reports suggest Hurricane Florence is expected to make landfall in the Carolinas beginning this Friday (9/14/18) and continue on into the weekend. Based on current projections of the path, the center of the storm is expected to make landfall near the southern coast of North Carolina and veer into South Carolina (See Exhibit 2 on page 3). Currently Florence is a Category 4 Hurricane (130+ MPH Winds) with significant rainfall / storm surge expected. Overall relative to Hurricanes Harvey and Irma last year, our coverage composite has significantly less exposure to Hurricane Florence.
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