Today (5/16/19) the Kentucky Cabinet for Health and Family Services (CHFS) and Department of Medicaid Services (DMS) released its Medicaid Managed Care re-procurement RFP. There are currently 1.22M enrollees statewide, with WCG / CVS-AET / HUM / ANTM from our coverage universe managing significant amounts of enrollment along with NFP plan Passport. With this new RFP the DMS will contract with up to 5 insurers statewide consistent with the number of current incumbents. The KY DMS will also award one of the selected MCOs to provide services in a new Foster Care program called Supporting Kentucky Youth (SKY), which we est. to be a $150M oppy. Most importantly the new contract will now require PBM pricing transparency from MCOs which will have to disclose all contracted PBM terms to the state and utilize a pass-through pricing model where plan’s drug reimbursement to PBM must = PBM’s reimbursement to pharmacy.
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Today (5/16/19) after market close, CMS issued a final MA / Part D rule (final rule / fact sheet), which created a lot of confusion as to whether the rule means the agency is not implementing the proposed HHS rebate rule in 2020. Based on our conversations with consultants / MCOs, as well as our interpretation of the language in the rule, we are highly convicted that the rule does not discuss manufacturer rebates at POS but only confirms that CMS will not implement DIR (performance-based payments from pharmacies to plans) at POS in 2020 – see page 2 for the exact language from the CMS press release.
Earlier today (5/15/2019) CMS issued new guidance clarifying that Medicaid MCOs should exclude the $ retained by a PBM under spread pricing when calculating the actual claims costs used in the MLR. CMS expressed concerns that “if spread pricing is not appropriately monitored and accounted for, a PBM can profit from charging health plans an excess amount above the amount paid to the pharmacy dispensing a drug, which increases Medicaid costs for taxpayers”.
We are revising our estimates for MCO / Drug Retail coverage post 1Q19 results. We are also updating our price targets across our coverage universe to reflect 1) revised earnings est laid out in this note and 2) an incremental group discount vs. S&P given the ongoing political uncertainties. See table below, links to all updated models and new PT build-up on page 2 for further details. We continue to rate the MCO group Market Perform with top picks remaining ANTM & UNH.
CBO released a report today (5/2/19) projecting the new proposed HHS rebate rule will increase federal spending on Medicare by $170B and Medicaid by $7B over the next decade, if implemented in its current form. We note that this is slightly less than the $196B estimate by the CMS Office of the Actuary. In addition, CBO estimated that the implementation costs to create/operate chargeback systems would increase premiums by ~1% of the amount of the chargebacks. CBO does not expect the final rule to be released before mid-June “on the basis of the typical timeline for a rule to move from proposal to implementation”.
MOH reported adj EPS of $3.04 well ahead of Wolfe/Cons of $2.42/$2.43 driven by better MLR across Medicaid / Exchange segments coupled with favorable G&A and tax rates. Revenue of $4.1B (-11.8% y/y due to FL/NM losses as expected) was relatively in line WR/Cons. of $4.0B/$4.1B. MOH raised adj EPS guidance by more than beat at $1.25 to $10.70-$11.20 (~+13% at midpoint assuming $0.20 amort.) mainly on lower MLR which is now expected to be ~86.0%, down 90bps from previous 86.7%-87.0%. 1Q results mark a strong start to year and we will look for additional color on margin performance drivers and sustainability on call tomorrow. Overall expectations were high but the beat is strong and we expect commentary on items such as TX RFP timing, setup for potential CNC/WCG divestitures and 2020 exchange bid strategy will likely be key to how stock trades.
As reported by Politico yesterday (04/28/19), late Saturday Washington state lawmakers passed senate bill SB5526 which would create a public health insurance option, marking WA as the first state to approve a public option policy. The bill now goes to Gov. Jay Inslee – a Democratic 2020 presidential candidate – who proposed it earlier this year and is likely to sign the legislation. Starting in 2021, WA will contract with health insurers to offer standardized health insurance plans on its behalf at different metal levels through its state-run Obamacare exchange. It is not yet clear operationally how it will run and the law appears to indicate existing plans will be asked to also offer and operate the government option but again we are still working on the operational details. See next page for key text from the bill.
We are hosting a webcast today at 11AM ET to discuss several topics that have arisen over the past few weeks including thoughts on #s post- ANTM & HUM investor days, our detailed state / regional overlap analysis for CNC-WCG, and latest thoughts on the Re
CMS today (04/05/19) sent a letter to plan sponsors providing guidance for 2020 Part D bids, which are due on June 3rd. The letter (see Page 2 for the full letter) indicates that CMS will modify the Part D risk corridors so that CMS bears or retains 95% of the plan’s deviation from target margins above or below the first 0.5% of the target, if there is a change in the safe harbor rules effective in 2020. Recall that under the current risk corridors, CMS bears or retains 50%/80% of the plan’s deviation from 5%/10% of target margins. CMS will run this new program for two years and while participation would be voluntary, plans choosing to participate would have to do so for both years. We remind investors that the comment period for the proposed rule closes on April 8th. From here questions include whether this notice indicates CMS plans to move forward w/ 2020 implementation and how plans will react in terms of pricing products – i.e. will we see attempts at share gains if CMS is effectively guaranteeing margins for two years.
Monday ( afternoon CMS released the 2020 Medicare Advantage Rate Announcement with rates improving from the Advance Notice, with CMS’s estimate of revenue increasing by 94bps to 2.53%, down from 2019 rate of 3.4% pre HIF holiday benefit. We note this does not include a benefit from coding growth unlike previous total reimbursement estimates produced by CMS pre-2018. Overall the rates are encouraging, and in our view would set up a solid benefit / membership growth outlook ex expected HIF return. With HIF return we see net rate in the 0-1% range, likely forcing plans to focus on improving coding, medical management and SG&A efficiency vs. reducing benefits / margins for 2020. Look for plan commentary on upcoming Q1’19 earnings conference calls.
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