The American Hospital Association wrote a letter yesterday (03/31/20) to HHS / CMS to immediately distribute a portion of the $100B Public Health and Social Services Emergency Fund to hospitals directly. Specifically, the group is asking for $25,000 per bed, and $30,000 per bed for “hot spots”, which will total to ~$23B, not including the additional funding for hot spots. We believe this is only a portion of the total funding that hospitals are expected to get from the Emergency Fund as the AHA initially estimated $65B will be allocated to hospitals, according to CNN. Based on the disclosed # of beds by each hospital under our coverage universe, we estimate that HCA / UHS / THC will see a 12% / 8% / 15% benefit to their COVID-19 unaffected 2020 EBITDA with the $25,000 per bed direct funding. If hospitals indeed get a total of $65B and these get distributed evenly by bed count, which at this point is difficult to assume, we estimate HCA / UHS / THC would see a benefit of 33% / 24% / 42% to their EBITDA – see exhibit 1 on page 2. These dollars are needed to offset significant elective utilization deferrals across the country which we expect will significantly pressure hospital economics over the next several months as indicated in our previous work on potential COVID-19 impact to hospital economics across our group.
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Thus far, CI, CVS, HUM, and UNH have announced a waiver of member costs for COVID-19 related treatments. UNH and HUM appear to cover member costs for all risk members whether treatment is delivered by in-network or out-of-network providers while CI specified the co. will reimburse providers at CI’s in-network rates or Medicare rates. Meanwhile, CVS will waive member costs for Commercial members only for treatment at in-network facilities. While ANTM, MOH and CNC have announced expanded access to care for COVID-19, including access to testing, medication, telehealth / virtual care etc., they haven’t yet announced a broader out-of-pocket waiver at this point. Our COVID-19 Model (email for a copy) est. impact of co-sharing at <1% of EPS for all MCOs ex-HUM which is ~2% of EPS for each 1% of membership testing positive before any deferred utilization offset – details on pg. 2 and we checked in w/NFP plans who indicate our est. are likely conservative.
Based on the learnings from our conversations w/ providers and payors, we have put together an interactive COVID-19 impact analysis worksheet to allow investors to input key assumptions and assess potential earnings at risk for MCOs and Hospitals.
Senate Republicans’ new $1.6 trillion COVID-19 stimulus package now includes a $75B bailout for hospitals; a freeze on the 2% Medicare Sequestration cut; 20% Medicare add-on payments for COVID-19 related admissions; as well as a delay in Medicaid DSH cut – see exhibit 4-7 on pg. 5-8 and link to the bill here. The sequestration freeze would take effect on May 1 thru Dec 31, 2020 and this applies to all Medicare payments, including MCOs via Med Adv and PDP. We expect this would boost Providers’ EBITDA in the 2%-3% range for the year – see exhibit 1 on pg. 3.
As hospitals mobilize to care for COVID-19 cases the questions include what to assume for the impact to hospital economics from a potential increase in flu-like cases including ICU stays vs. the costs of implementation and likely deferral of elective care and procedures during any potential outbreak. It seems clear with gov’t agencies calling for a rescheduling of elective procedures that there is likely to be some timing impact here but importantly we expect this would be more of a deferral of treatment rather than lost revenue and earnings.
Post SC primary 3 Dem candidates Steyer, Buttigieg, and Klobuchar have dropped out of the race as Moderate Dems work to block Sanders nomination into Super Tuesday. It appears both former South Bend mayor and current MN senator are planning to endorse Biden at his rally in Dallas, TX tonight. Based on the latest RCP national polling aggregate from 02/20 to 03/01, which has only incorporated 1 poll conducted after Biden’s victory in SC over the weekend (out of 5 used in the aggregate calc.), these 3 dropouts would leave a total of 16.5% (Buttigieg 9.8% + Klobuchar 4.4% + Steyer 2.3%) of votes up for grabs. In terms of Super Tuesday states, latest RCP state polls show Sanders is leading in the 2 largest states by delegates – CA and TX which have 416 / 228 delegates or 31% / 17% of total contested tomorrow – w/ a 14.7% lead vs. Biden in the former and a 4.5% lead in the latter.
Biden won the SC primary by a much larger than expected margin of nearly 30% (vs. 15% seen in RCP polls on Sat) w/ 48.4% of total votes followed by Sanders at 19.9%, and Steyer at 11.3%. Incorporating SC results, 538’s primary model continues to forecast a brokered convention (more below) as the most likely outcome at 59% chance (+7% vs. pre-SC) while Sanders’ odds declined to 27% (-5%) and Biden’s declined to 14% (-2%). Given 34% of delegates up for grabs in 16 contests on Super Tuesday, we think the results here will go a long way toward indicating whether there is a viable path for any of the top candidates to win a majority of votes OR whether Dems are looking at a Convention battle in July. From a stock perspective, Biden’s win in SC is clearly favorable for MCOs but we expect the next major move in the group is more likely to occur post Super Tuesday.
THC reported 4Q19 adjusted EBITDA of $805M, slightly above WR/Consensus of $799M/$797M w/ better revenue of $4.81B vs WR/Consensus of $4.74B/$4.76B. The beat was driven by better Ambulatory performance partially offset by weaker Hospital results. Importantly THC introduced 2020 adjusted EBITDA outlook of $2.785B-$2.885B, implying 2.9%-6.6% y/y growth which is ~in-line w/ preliminary outlook of ~4.5% provided at 3Q19. Guidance at the midpoint of $2.835B brackets current WR/Consensus ests at $2.844B/$2.832B.
W/ 96% of NV precincts having reported already, Sanders has won the NV caucuses by a wide margin w/ 46.8% of total county convention delegates won followed by Biden at 20.4% and Buttigieg at 13.9%. This win continues Sanders momentum post IA / NH and has made him the clear front-runner for the Democratic nomination heading into SC on February 29 and Super Tuesday on March 3.
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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