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.
In response to the news, CNC added 6.6% yesterday vs flat HUM and WCG down slightly. While it is possible that HUM make a “friendly” bid for CNC we think the probability is <50% given CNC’s reiterated commitment to the WCG deal, likely significant premium required by CNC Board and CNC’s management’s view of significant growth opportunities ahead of the company. That said anything is possible when it comes to MCO M&A. One thing is certain – a “friendly” deal would be in HUM’s best interest given how important CEO Michael Neidorff is to CNC’s key state relationships and growth profile. Below we walk thru a # of considerations and potential read-thru’s.
On Friday CNC filed form S-4 related to the proposed acquisition of WCG. Below we review the financial projections made by CNC and WCG including synergies and the Background of the Merger section of the S-4, which reveals more details on the deal timeline / process. Overall the S-4 did not offer any meaningful surprises – most importantly there was no clear discussion of an interested potential buyer of CNC such as HUM. CNC noted it has had preliminary conversations over time w/other MCOs around potential business combinations, strategic partnerships or other transactions – this is similar to the language used by CNC in the HNT S-4. WCG indicated clearly it has had no other offers. Please see here for our latest thoughts on the deal.
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”.
Adj. EPS of $3.69 was well above WR / Consensus of $2.84 / $3.06 with upside vs. our model driven by better MLR and lower tax rate (19.5% vs. FY guide of 24%). Revenue of $6.76B was up 45.5% y/y, primarily due to the acquisition of Meridian and organic growth, and 1.8%/3.3% above WR/Consensus of $6.64B/$6.55B while adjusted MLR of 88.7% was in-line w/ Cons but 70 bps below WR’s 89.4%, primarily due to better than expected MLR in the PDP/Med Adv segments. SG&A of 7.3% was ~in-line w/ our est. Despite the beat, WCG did not provide updated guidance for the year due to the pending merger w/ Centene. We see today’s results having a positive read-through for CNC and the group in general as there were questions in the market around WCG core results given management’s willingness to sell.
Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast to discuss latest thougths on ANTM/HUM post-investor days, updated CNC/WCG overlap analysis, and his review of the latest newsflow on the HHS rebate rule.
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
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