CNC reported 1Q17 adjusted EPS of $1.12, ahead of both Wolfe/Consensus of $1.07/$1.04. Compared to our estimates the beat was driven by top line (+2%), with MLR in line (although 20bps below consensus), adjusted G&A 10bps above our estimate and a slightly lower tax rate helping by $0.02. With Q1 CNC recorded $0.04 of the $0.20 of EPS conservatism it imbedded in guidance for the exchanges, leaving the quarter in line with our estimate excluding the exchange upside and tax upside. CNC increased 2017 adjusted EPS guidance by 1.6% to $4.50-$4.90 from $4.40-$4.85 and left guidance for revenue, MLR, adjusted SG&A, tax rate and share count unchanged. We expect the stock to react positively given upside to both top and bottom line with questions around drivers of top-line and thoughts on the individual business into 2018 given questions around what Republicans will ultimately do with cost sharing subsidies which we expect CNC has above average exposure to given focus on lower income members.
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This afternoon (4/24/2017) after the market closed HUM previewed 1Q17 results ahead of its Investor Day tomorrow, reporting adjusted EPS of $2.75 vs. Wolfe/Consensus of $2.50/$2.52. Recall that HUM expected 23% of EPS to fall in Q1, implying guidance of $2.48-$2.53. HUM noted that results were better than management expectations primarily due to Retail segment performance, largely attributable to PPD in Individual Med Adv. HUM increased 2017 adjusted EPS guidance to >$11.10 from $10.80-$11.00, up at least 2% from the midpoint of the initial range. HUM also noted that “all of the company's businesses performed well and early indicators are positive relative to management's initial expectations around medical utilization”. These results are a positive read through for other Med Adv plans including AET, which we estimate generates ~20% of EPS from Med Adv.
This afternoon (4/24/2017) after the market closed ESRX reported 1Q17 results and disclosed that ANTM management has said it intends to move its PBM business upon the expiration of the current contract on 12/31/19. ESRX has not been participating in ANTM’s RFP process but offered $1B of annual price concessions to ANTM through 2019 in exchange for a contract extension. While ANTM walking away from ESRX removes the near-term optionality to #s from price concessions before the end of the contract, we note that with ESRX shares down 15% in after-hours trading there was clearly skepticism about the $3B of annual savings ANTM has stated it was entitled to. With the ANTM contract already contributing $2.2B of adjusted EBITDA (+20.7% y/y) and ESRX’s expectation that the profitability delta vs. its continuing business will widen further from here, ANTM’s savings targets now look increasingly achievable (more details below).
The Huffington Post and Politico are reporting that Republican leaders in the House are getting close to a compromise on the next iteration of Repeal and Replace that is being negotiated by House Freedom Caucus chairman Mark Meadows and Tuesday Group co-chairman Tom MacArthur. The proposal as currently structured would allow states to obtain waivers to eliminate the community-rating provisions of the ACA and return to medical underwriting (charging the sick more than the healthy instead of an average price across a geographic rating area) if states participate in a federally-run high risk pool or set up their own state-based risk pool. No details were included on how the proposal would address Medicaid expansion.
Management highlighted strong business momentum across both UHC and Optum and with current year cost trends running in line with expectations UNH was comfortable raising guidance at this point in the year. We are increasing our 2017 EPS estimates by ~3% but only increasing 2018-2019 by ~1% to reflect the TRICARE contract loss (we estimate $0.03-$0.05 EPS headwind), larger HIF headwind and piece of the 2017 tax benefit that is more 1x in nature (more below). Our PT increases to $191 from $190.
UNH reported 1Q’17 adjusted EPS of $2.37, above Wolfe/Consensus of $2.09/$2.17 driven primarily by lower MLR and taxes as well as a higher top line. Total revenue of $48.7B (up 9.4% y/y, 13.5% ex individual exit and HIF suspension) vs. Wolfe/Consensus of $48.4B/$48.3B. UNH increased 2017 adjusted EPS guidance by $0.30 to $9.65-$9.85, we expect this to be well received given relative rarity of guidance raise for any MCO this early in the year. There will be some focus on the fact that ~$0.25 of the raise comes from tax rate but we would note two things: (1) we est. about ¼ or $0.06 of the tax rate comes from adding SCAI (not in guidance previously) given the company’s lower statutory tax rate – this is important as SCAI is earnings neutral overall – meaning op inc drag offset by lower tax rate – outside this impact taxes drive only half the guide-up with ops driving the rest; (2) in addition to SCAI differential we est. some of the lower tax rate will also be sustainable, leaving about half of the $0.25 improvement sustainable overall in our view. The rest of the upside to EPS comes from better operations including revenue guidance up 1% to $200B and CFO guidance up by 2% to $12.0B.
This morning (4/17/2017) HCA previewed 1Q17 results. HCA expects revenue of $10.623B and adjusted EBITDA of $2.005B, implying EBITDA margins of 18.9% and reiterated its financial guidance for 2017. Same store adjusted admissions increased 1.6% in Q1 with same store admissions increasing 1.2%. Adjusted EBITDA for Q1 is 1.9% below our estimate and 4.7% below consensus. Compared to our model top line is driving most of the miss (-1.6%) despite volumes being relatively in line (+1.7% estimate vs. 1.6% reported), implying that pricing was weaker than expected vs. our estimate. This is consistent with HCA’s commentary, which cited results as being “affected by changes in payer mix and the loss of one day when compared to the first quarter of 2016”. Specifically, commercial admission mix declined 120bps y/y to 27.4% while Medicare mix increased 110bps to 48.1%. We think the street was somewhat mis-modeled for Q1 due to leap year and that it’s likely the miss was closer to $50M than $100M, and we expect HCA can pull some cost levers going forward. A key question will be whether this is just a poor quarter for commercial payer mix in HCA’s markets or whether the increased level competition (particularly outpatient) that HCA has discussed has intensified. Please see our note from recent management meetings discussing these issues.
CMS Releases Proposed Medicare Inpatient Rule – On Friday CMS released the Medicare FY2018 Hospital Inpatient Prospective Payment Systems (IPPS) proposed rule. Before accounting for Medicare/Medicaid Disproportionate Share (DSH) payments CMS estimates that industry rates would increase by 1.7%, with proprietary (for-profit) rates increasing by 1.9%. We also note that rates for Urban hospitals (+1.8%) are better than Rural (+0.8%) due to the interaction of other factors such as MGCRB (Medicare Geographic Classification Review Board) reclassification and the expiration of MDH (Medicare-Dependent Small Rural Hospital) status. Key drivers include a market basket update of 2.9%, ACA cuts worth -0.75%, productivity cuts worth -0.4%, documentation and coding benefit of +0.46% and a -60bps cut to remove the temporary adjustment in FY2017 related to the 2-midnight rule. CMS estimates that changes to Medicare DSH payments for FY2018 will add an additional 80bps to rates for CY2018, although the impact for proprietary hospitals is expected to be 1/4 of that size or ~20bps. Including the 130bps of pressure we expect from Medicaid DSH cuts in 2018, we would expect all-in reimbursement for the industry of +120bps and +80bps for the for-profits based on the proposed rule. This is generally in line with our expectations heading into the proposed (although the components stack up differently) and represents a modest improvement over the flattish rates for the past several years. We expect rates will continue to improve in 2019/2020 with more moderate Medicaid DSH cuts and ACA cuts ending after 2019. Please see the impact table from the proposed rule in Exhibit 1 on page 2.
Market Stabilization Reg – This afternoon HHS issued the final PPACA Market Stabilization regulation introducing changes to the individual and small group ACA-compliant markets with the goal of stabilizing/improving the risk pool and ensuring access to affordable coverage. The regulation is available here. The regulation finalizes the key provisions of the proposal (see our note) generally with very few changes. The regulation will tighten the use of special enrollment periods, expand pre-verification of eligibility for special enrollment periods, help address potential gaming of premium payments, modestly change actuarial value requirements and shorten the open enrollment period to 6 weeks for the 2018 coverage year. These are generally positive steps to address a number of the issues we discussed in our previous work on the Individual market but we doubt it changes whether plans will exit or not, particularly given the continued uncertainty around the administration’s willingness to fund cost sharing reduction payments to insurers (CSRs). Also this afternoon Politico reported that President Trump is expected to meet with a number of top health insurance executives on Tuesday- we would expect CSRs to be a key focus of the meeting. In addition to CSRs we continue to be concerned about the outlook for off exchange membership given this is the area that will be most impacted by increased rates given the lack of subsidies.
Yesterday afternoon (4/12/17) Bloomberg reported that AET has recently begun to work with financial advisers to explore the sale of its “group benefits business”, described as including dental and life coverage and excluding the core health insurance business. We think the report likely refers to AET’s Group Insurance segment, which primarily includes Life, Disability and LTC (closed-block). We note that Dental results are reported in the Health Care segment and the logic of divestiture here is less obvious, although it certainly can’t be ruled out given the implied multiple for the Group Insurance business alone (more below). Potential buyers are speculated to include Axa SA, Unum Group and Principal Financial Group as well as private equity. The article suggested the unit could be valued at $2B in a sale, which would be 22.5x AET’s implied Group Insurance operating income guidance for 2017. Group reported $124M of operating earnings in 2016 (down 8.8% y/y) and AET’s 2017 guidance bridge included $0.10 EPS headwind from this segment worth ~$35M, implying $89M of operating earnings for 2017. Of course, the multiple would be lower if other assets like Dental are reflected in that purchase price. While not a huge transaction we think that selling non-core assets with an uncertain / low-visibility earnings growth trajectory above AET’s current P/E multiple would be well received by the market as long as the company can deploy capital to make the deal non-dilutive.
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