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.
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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.
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.
The Iowa Democratic Party (IDP) released the first look at results from the IA Caucuses and currently Buttigieg leads (26.9% of SDEs) trailed closely by Sanders (25.1%) with Warren (18.3%), Biden (15.6%), and Klobuchar (12.6%) rounding out what appears to be the top candidates, see exhibit 1 on page 2 for more. We note that Sanders currently leads both First and Final Alignment votes but not SDEs. Compared with polls leading up to the IA caucus Biden is underperforming, Buttigieg/Warren are outperforming, and Sanders/Klobuchar are ~in-line. While nice to get some information regarding last night, the race is too tight and too many precincts are unreported to declare a winner (38% of precincts are unreported / 36.1% of SDEs are unassigned). Complicating matters more, the IDP has not committed to a timeframe for the next data release which may further reduce the relevance of Iowa’s outcome/increase the importance of NH, especially if the IDP releases data after the NH primary on 02/11.
The state now plans to announce RFP winners for STAR / CHIP programs in February 2020 (previously expected in January). There are currently ~3.3M members statewide with ANTM, CNC, CVS, MOH, and UNH from our coverage universe managing slightly more than half of enrollment in total along with 12 other regional plans – more details on exposure below. Similar to awards for TX STAR+ programs in October we expect February awards for STAR / CHIP to be preliminary before final contract negotiation and signing, which could take another month. Recall from the awards of TX STAR+ contracts which were for high-acuity populations (ABD / LTSS), CNC was the biggest winner along with CVS / UNH while MOH would see the largest negative revenue / earnings impact with CI / ANTM standing to lose membership as well.
Given the high level of investor interest around the upcoming 2020 Iowa Caucuses that will take place on Monday Feb, 3rd and potential implications for MCO stocks, we decided to conduct a survey to gauge investor sentiment on the most likely outcome and potential stock moves post-Iowa results. In total we received 152 responses - thank you again to all those who participated and provided feedback!!! Before we begin investors should keep in mind that more than 93% of our responses were received before the market open and thus did not reflect today’s 3% selloff in the MCO space vs. the S&P 500. This is important given we think much of this move was pricing in increased risk of a Bernie Sanders win in Iowa and the selloff now leaves the MCO space trading at an ~16% discount to the S&P vs. the Sept 2019 low of ~27%.
This morning (01/30/20) CMS released guidance on how states can shift Medicaid populations to a block grant model with the guidance very similar to what we published earlier this week in our preview as it appears to be focused specifically on the Medicaid Expansion population and given only Republicans being interested most likely means ~5% of Medicaid population potentially impacted – more below. CMS is calling the initiative the “Healthy Adult Opportunity” (HAO) – see factsheet / letter to state Medicaid directors for language. Essentially states are encouraged by CMS to agree to a defined Medicaid budget, and in exchange, will gain some relief from federal oversight and greater flexibility around structuring their Medicaid programs. States can choose to receive block grant $ under 2 models: 1) Total expenses model, under which CMS calculates a fixed amount that will be trended forward annually without regard to enrollment changes but importantly state is not allowed to cap enrollment 2) Per enrollee model, under which the block grant $ will vary with enrollment but the per capita amount is capped and trended forward annually for inflation. In terms of flexibilities, states will gain abilities to: 1) Adjust cost sharing requirements, 2) Align benefits more closely to a typical commercial benefit package, 3) Adopt a closed formulary like in the commercial market, 4) Apply additional eligibility requirements, 6) Innovate delivery systems, 7) Waive retroactive coverage / hospital presumptive eligibility requirements, and 8) Make timely programmatic adjustments without additional federal approval.
According to Politico, CMS is planning to release guidance on how states can shift Medicaid populations to a block grant model. Under a block grant system states receive a pre-set amount of $ from the federal govt instead of getting a matching payment based on state spending and a specified % of total expenditures (called the Federal Medical Assistance Percentage - FMAP). In exchange, states will gain relief from federal requirements and greater flexibility around structuring their Medicaid programs. In the past block grants have created concerns over potential enrollment declines and reimbursement pressures to both plans and providers – see our deck post-2016 election and below for thoughts on potential impact / uncertainty. From a regulatory and political perspective, we expect any future block grant proposal / implementation will face significant pushback from Dems and may get hung up in courts similar to states’ attempts to impose Medicaid work requirements in recent years.
Last night (01/21/20) CNC announced it has received antitrust clearance from the DOJ to acquire WCG, the last piece of regulatory requirement under the merger agreement. The companies now expect to close the deal and related divestitures on Thursday, January 23rd. In terms of post deal catalysts, look for any update around accretion targets at CNC’s 4Q19 EPS on February 4th vs. I-day guide of breakeven in Year 1 turning to / MSD-to-HSD accretive in Year 2 last Dec. Importantly this assumes WCG will deliver only S-4 projections (9 months old), which suggests potential for upside to accretion given WCG has been on track to outperform 2019 S-4 #s. Once mgmt. factors in revised WCG projections from S-4, we see potential upside to #s coming from 3 buckets: 1) better Med Adv margins, 2) AET PDP’s strong performance and membership retention, and 3) savings from new PBM contract. On the PBM topic we would expect an update here w/ CNC 4Q19 results, with key discussion including whether WCG stayed w/ CVS or moved (we expect they stayed) and if they indeed did stay w/ CVS whether there will be benefits to pricing beginning in 2020 or will those better drug costs come in 2021 post current contract expiration at YE20. Overall we estimate these 3 upside drivers could add $0.20-$0.30 or 3-5% accretion to Year 2 / 2021 EPS, potentially moving our current post-deal est. of $5.70 (7.0% accretion) closer to $6.00. See Exhibit 1 on Page 2 for more details around our calculation. Also we note current 2021 Consenus EPS of $5.45 does not appear to reflect deal accretion and will very likely be revised upwards after yesterday’s announcement. We recently upgraded CNC to Outperform coming into the new year and see it as the most interesting new money idea in our coverage universe. Lastly, as a reminder CNC will get another shot at retaining LA post Friday announcement of RFP rebid and the TX STAR / CHIP awards are expected to come out this month. CNC serves ~810k members under this contract and generates ~$2.2B in premiums, which at 2.5% would be worth 1.5-2.0% of our 2021 pro-forma est at $5.70.
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