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.
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.
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”.
EPS of $1.63 was above WR of $1.48 and Consensus $1.55 primarily driven by higher revs, MLR favorability in the PDP segment, and SG&A offset somewhat by higher MLR in the Medicaid/Med Adv segments. Revenue of $6.07B was up 39.7% y/y, primarily due to Meridian, and 3.7% above consensus of $5.86B while adjusted MLR of 88.3% was above Wolfe/Cons 87.8%/87.5%. WCG raised 2019 adj. EPS guidance by ~1% to $13.25-$13.50 driven by better than expected PDP membership growth (raised PDP revs by $50M) w/o any changes to other components of guidance. With MLR higher in Medicaid/Med Adv we expect focus on drivers here which may include Meridian MLR mix given revenue well above consensus. Also look for early thoughts on NC RFP success and pipeline going forward.
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.
North Carolina is expected to announce awards for its Managed Medicaid RFP next Monday 2/4. For background on the RFP, North Carolina is planning a two-phase approach to a shift to Medicaid Managed Care with Phase 1 scheduled to begin on November 1, 2019, and Phase 2 beginning on February 1, 2020. Populations targeted in the first wave of Medicaid transition include ABD, TANF, and maternity with exceptions including duals, medically needy, Pace beneficiaries, and others. 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.
Part 2 of the 2020 Medicare Advantage Advance Notice was released this afternoon (01/30/19). Based on CMS’s estimate of key items plan reimbursement should increase by ~1.6% ex-HIF, modestly below our recent preview of 2.9%. See exhibit 5 on page 4 for a full breakdown on rates and page 2 for estimated rates / MA exposure by co. FFS Normalization (more below) was the key drag to reported rates relative to our expectations and a higher FFS growth rate relative to the early preview # somewhat offset to the positive, with other items relatively in-line. Final rates are expected on 4/1 and we note that rates have historically been more likely to improve than deteriorate vs. the Advance Notice. Overall, while slightly disappointing the 2020 Advance rate is still the second-best seen by the industry in recent memory, and has the potential for improvement with the final rate notice. Recall at this point last year the Advance Notice predicted rates of 1.8% ex-HIF, which were revised to 3.4% with the Final Notice (see page 5).
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