MCOs have significantly outperformed the S&P 500 both over the past 12 months (36% vs. 14%) and since the election (36% vs. 16%). This outperformance has pushed the stocks above historical valuations across the board and naturally engendered questions around whether the group is still an attractive investment over the near to intermediate term. We believe recent outperformance has been driven by three key factors: (1) strong fundamental performance (EPS growth CAGR of 12% over last 3 years), (2) company specific optionality being priced in such as HUM M&A potential and (3) industry optionality such as potential benefit from lower tax rates, HIF repeal/delay and higher interest rates.
Search Coverage List, Models & Reports
Search Results1-10 out of 292
This morning’s (7/18/17) conference call was somewhat uneventful as management was relatively guarded with regards to its 2018 outlook beyond the expectation that the company’s strong fundamental momentum would be sustained. There were a couple of more specific comments, with MLR/cost trend/tax rate guidance all tracking toward lower end of 2017 expectations and management expecting continued share gains in Med Adv (both individual and group) and the PBM business. Combined, these comments on underlying fundamentals are consistent with our estimates but we continue to see a ~$0.45 headwind to 2018 EPS from HIF resumption and tax rate as previously discussed, leaving us $0.23 below consensus which is currently $10.81. In terms of offsets, mgmt did mention all of those discussed in our note previously, including potential for SG&A savings particularly on the Optum side of the business which has been relatively acquisitive over the past 3 years (Catamaran, MedExpress, Surgical Care Affiliates, etc) and capital flexibility. Overall we saw nothing in the quarter to change our positive view of UNH. We are increasing our 2017 EPS for the beat but leaving our 2018-2020 estimates and PT unchanged.
UNH reported 2Q’17 adjusted EPS of $2.46, above Wolfe/Consensus of $2.35/$2.38 driven primarily by lower MLR and taxes ($0.06), partially offset by higher SG&A. Total revenue of $50.1B (up 7.7% y/y, 12.2% ex individual and HIF suspension) vs. Wolfe/Consensus of $50.8B/$50.0B. UNH increased 2017 adjusted EPS guidance to $9.75-$9.90 from $9.65-$9.85. The quarter was solid both from a top-line and MLR perspective, and with the guidance up $0.10 on the low end and $0.05 on the high end would expect limited stock reaction this morning given expectations, pending any interesting UNH commentary on the call.
Late last night (7/17/117), Republican Senators Mike Lee (UT) and Jerry Moran (KS) announced that they would not support a motion to proceed on the current version of the Better Care Reconciliation Act (BCRA), leaving Republicans two votes short of the 50 votes needed to pass the motion. Lee objected on the basis of the legislation not repealing all ACA taxes, not lowering premiums enough for middle class families and not doing enough repeal the ACA’s insurance regulations. Moran withheld support due to the closed-door process used to develop BCRA and the bill not addressing the rising cost of health care. See page 2 for each Senator’s statement. With the current version of the BCRA seemingly dead in the water, we would not be surprised to see additional Senators announce their opposition to the bill. In response, Senate Majority Leader McConnell announced that in the coming days the Senate would vote to take up the House bill (AHCA) and amend it to repeal the ACA with a 2 year implementation delay without including a replacement plan. See page 3 for his statement. While Republicans passed a similar repeal and delay bill during the Obama administration, the vote was largely symbolic given the knowledge that Obama would veto the legislation. Given the difficulty Republicans have had coalescing around a replacement plan to date, it’s difficult to imagine that repealing the ACA and figuring out a solution later with the clock ticking is going to be able to garner enough support from moderates in particular. In the meantime, the Individual market will likely remain front and center given the ongoing CSR funding dispute and general uncertainty overhanging that market given the lack of support from the Administration (although the market economics themselves do appear to be stabilizing in many areas). Please see our earlier work on the Individual market as well as our notes on the revised and original version of the BCRA legislation.
The revised version of the Better Care Reconciliation Act (BCRA) included changes that are generally in line with what has been reported in recent days including increased funds to address the opioid epidemic, additional funding for state-based coverage reforms, the Cruz amendment effectively splitting the individual market into two risk pools (see page 2) and the removal of the repeal of the net investment income tax and the non-deductibility of insurance executive compensation from the previous bill. As expected, the revised bill does not do much to address the concerns of moderate Republicans around the phasedown of Medicaid Expansion funding and financing changes to Medicaid (block grants).
This afternoon (7/13/17) CMS released proposed Medicare policy and rate changes for outpatient hospital services for 2018. Excluding changes to the 340B program (more below) payments are expected to increase by 2.0% in 2018. This consists of a 2.9% market basket update, reduced by 0.4% for productivity cuts and 0.75% required by law, slightly offset by other policy changes. Overall we view the core rate update as in line with expectations and expect the final regulation to be released in November.
While proposed legislation in CA mandating staffing ratios for nurses, technicians, social workers and dieticians in the state’s dialysis clinics has been widely covered, another bill introduced earlier this year could begin to get attention (hearing tomorrow). This bill would essentially attempt to cap the profitability of dialysis clinics and require rebates to commercial payers of any excess payments. Assembly Bill 251 was introduced on 1/30/17, and similar to a minimum MLR conceptually, the bill would require direct patient care service costs, health care quality improvement costs, federal/state taxes and licensing fees to be at least 85% of total treatment revenue, otherwise revenue rebates to payers would be required. The bill passed the California Assembly in April by a wide margin. The bill was then referred to the Senate Health Committee for a hearing, scheduled for tomorrow 7/12. If it passes the Health Committee, the bill would be referred to the Senate Appropriations Committee where it would need to be approved before it could receive a full vote in the Senate. If the bill becomes law, it would not go into effect until 1/1/19. Importantly, we note that the staffing ratio bill discussed below if passed would likely close a meaningful amount of the delta between current dialysis clinic economics in California and the profit cap included in AB-251 making this second bill largely irrelevant. In addition, given the union’s focus we would expect the largest push will be on the staffing bill rather than margin caps.
Look for solid results when UNH reports next Tuesday 7/18 – We expect strong business momentum across both UHC and Optum will continue with likely upside to our $2.35 EPS est. for Q2 (consensus $2.38). Given expectations are already here look for focus to shift ahead including any early read on 2018. While UNH is unlikely to give details this far ahead, we would note that our 2018 est. is on the low-end of consensus views (Wolfe $10.58 vs. consensus $10.79). This is important as we note our 2018 growth est. of ~8% assumes a strong “core” growth rate of 13% partially offset by our est. of ~$0.45 of headwinds resulting from the 2017 HIF suspension plus 1x tax benefits (more below) in 2017 – which we are unsure are fully reflected in consensus (consensus core growth would be 15% if included) given both our top-line and share-count assumptions are ~ in-line (page 2). We expect these headwinds to get vetted on the call as well as any potential offsets including the balance sheet (UNH will end 2017 back at their 40% LT debt to cap target leaving optionality here), SG&A leverage and other areas of potential margin improvement (Medicaid/Optum). Overall we continue to view the stock as a core holding given best in class insurance assets, Optum growth and strong business momentum.
Most MCOs (5 of the 7 impacted) disclose what they are accruing for these items, allowing us to compare their accruals to the actual position indicated by the data. Risk adjustment in particular is important not only to settling 2016 economics, but given timelines for pricing (exchange bids for 2018 already submitted) could have flow-thru effects to 2017 and 2018 exchange margins as well. Based on our analysis AET and CNC will see a 5-6% EPS benefit to 2017 EPS before considering flow-thru effects while MOH appears to be under accrued for risk adjustment by $23M ($0.26, 10% of our 2017 EPS est). CI and HUM appear to be relatively in line with their accruals. While ANTM and UNH don’t disclose their accruals we note that both companies’ risk adjustment position improved meaningfully y/y, potentially indicating there may be some favorability vs accruals. See Exhibits 1 and 2 on page 3 for details by co.
We recently hosted meetings with UHS President Mark Miller, CFO Steve Filton, and Behavioral Health President Debra Osteen. The meetings were primarily focused on recent OIG investigation updates, the trajectory of the Behavioral business given recent LOS pressures and overall thoughts on the business environment / fundamentals. We came away positively inclined given increased interaction w/OIG, continued management confidence in behavioral s.s. revenue trajectory and sustained demand in the company’s hospital segment. That said, execution remains key as both behavioral and acute EBITDA #s are contingent upon continued improvement in labor cost management and we think consensus 2Q’17 EBITDA (~$460m) is slightly high and lower our #s here modestly from $449m to $440m while leaving the full year intact (more below). That said we think this is generally already in the stock. Overall, UHS remains our favorite provider stock, with risk/reward positively skewed given a FCF yield pushing 7% and limited leverage at ~2x Debt/EBITDA, which should provide downside protection even if bull case scenario of behavioral turnaround and psych investigation settlement takes longer to play out than expected.
- 1 of 30
- next →