In March Individual Med Adv enrollment increased 7.3% y/y and Group Med Adv enrollment increased 8.1% y/y, producing total y/y Med Adv growth of 7.5%. 64.8% of total Med Adv enrollment of 22.3M lives were in our covered companies vs 60.2% of 20.7M lives y/y. Generally, most of our coverage composite is tracking in-line or above their guidance for 2019. See Page 2 for data by plan and email us for our tracking spreadsheet. Additionally we note Humana at its Investor Day today laid out a path to 41-50% MA penetration by 2025 – see slides on page 3.
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At recent investor conferences and meetings, MCOs have indicated strong confidence in their ability to navigate the uncertainties that could accompany a potential 2020 start for the HHS rebate proposal and pickup in authorized generic introductions. Specifically on HHS proposal, while MCOs had different views on the right timing of the implementation of the new rebate rule, with HUM/CNC advocating for an early implementation and WCG/CVS preferring a phase-in period (see comments on Page 2), all expressed that they will be well prepared to bid under both scenarios for 2020 Med Adv & Part D. Meanwhile, MCO mgmt teams joined most HC investors in seeing a low likelihood of Medicare-for-All while indicating a strong start to 2019 and solid visibility to 2020 regardless of HIF return and/or rebate rule enaction.
Yesterday (3/5/19), Rep. Cheri Bustos, the chairwoman of the Democratic Congressional Campaign Committee (DCCC) questioned the feasibility of Medicare-For-All in an interview with the Hill stating that it is just one idea and “the $33 trillion price tag for Medicare for all is a little scary”. We doubt anyone finds the comments themselves surprising but given the pressure on MCOs in particular and HC Services in general since Dems introduced legislation that sought to move to single payer in 2 years without any discussion of how to pay for it, we expect there should be some comfort that “universal healthcare tomorrow” is not the party line. Bernie Sander’s version of Medicare-For-All was est. to cost $32T+ over 10 years. We believe that most healthcare investors and ourselves see little chance that this type of legislation becomes more but acknowledge the discussion is likely to continue for at least the next 6-9 months during Democratic primary season / debates with the potential to abate from there once the national election campaign sets in.
LLY announced today (03/04/19) that it will soon launch an authorized generic version of its Humalog insulin, which generated ~$1.8B of net revs in US in 2018. IQVIA data suggests FY18 gross sales of ~$6.3B for Humalog, indicating significant rebates / discounts of ~$4.5B (~70% of gross sales). While price action on a single drug should not have any meaningful impact to earnings, MCOs are trading down today at least partially due to the fear around a potential broad shift in drug pricing trend which can lead to a temporary misalignment between the MCO bids that assume current rebate levels maintain. Recall that we highlighted the concern in our previous slides when we discussed our thoughts on the OptumRx letter to pharma cos requesting 7 quarters of advance notice on list price reductions. We believe the entire system shifting to net pricing is highly unlikely but MCOs could experience some potential interim negative impact from a portion of drugs shifting to net pricing until MCOs can reprice higher to reflect lower rebates collected.
The Louisiana Department of Health (LDH) released its Medicaid Managed Care RFP yesterday (2/25/2019). There are currently 1.5M enrollees statewide, with CNC / UNH / ANTM / CVS-AET from our coverage universe managing significant amounts of enrollment. Most importantly with this new RFP the LDH will currently contract with only up to 4 insurers statewide under the new contract down from the 5 current members of the contract. We note the number of insurers ultimately selected could possibly change between now and before the proposal is due. Proposals are due by April 29th (a relatively quick turnaround of 2 months from announcement date February 25th). The contracts will run from 1/1/20 to 12/31/22, with the LDH having the option to extend the contract for up to 24 additional months. We note that the “LDH will not use a competitive bidding process to develop the MCO capitation rates” – per the LDH rates will be set at an actuarily sound, risk-adjusted rate.
We are revising our estimates for CNC / MOH / HUM / WCG post 4Q18 results. We are also updating our price targets across our MCO / Drug Retail coverage universe to reflect 1) our revised earnings estimates laid out in this note and 2) the current S&P 500 market multiple of ~16x NTM earnings (up from previous 15x coming into 2019) given that our valuation methodology is based on relative P/E. See table below, links to all updated models and new PT build-up on page 2 for further details.
MOH reported adj EPS of $3.88 ex items, significantly ahead of Wolfe/Cons of $2.00/$1.63 on lower exchange MLR, G&A, and tax rates. Exchange net income margins ended the year pushing 12%. Revenue of $4.69B ex. CA risk corridor of $24M (-5.3% y/y) was above WR/Cons. $4.56B. Importantly MOH introduced initial 2019 EPS guidance of $9.25-$9.75 – which after adding back $0.20-0.25 amortization consistent with 2018, guidance of $9.50-$10.00 is materially better than WR/Cons. of $9.06/$9.28 with main driver being exchange NI margins guided at 10.8%. We expect focus of call tomorrow around potential upside drivers including how much of the previously discussed $550m in cost opportunities are in the guide and note guide assumes no upside from excess PYD vs. $1.55 benefit to 2018. In our view stock performance from here will come down to top-line growth going forward as mgmt. has clearly delivered on the margin opportunity.
MCO and Pharma Supply Chain stocks were weak last Friday post OptumRx letter to pharma requesting / requiring 7 quarters of advance notice on list price reductions that could meaningfully reduce rebates to plans/employers. While there are legitimate concerns around PBM earnings exposure to rebates, we do not see this as focused on protecting rebate economics from the clear push toward lower list price from pharma / HHS but instead a plea on behalf of all its insurer and employer clients against a NT shift away from rebates before they can increase premiums enough to offset and protect underwriting margins. Finally, we think stock weakness on Friday was overdone given we expect any material changes here to be orderly but lay out EPS exposure (below) and will host a brief webcast to discuss on Mon morning at 11am ET to discuss.
YE Medicaid MLR came in 10 bps above the top range of guidance primarily due to the reserve build in 4Q for new business and associated revenue streams incl. Meridian, AZ, and FL. Absent any reserve build, WCG would have ended up in the middle of the MLR guidance range. The co noted that it “ended 2018 and entered 2019 with medical trends stable and in line with our expectations”.
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.
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