Wolfe Research Senior Healthcare Services Analyst, Justin Lake, hosted a webcast exploring the effects of the AHCA's failure on MCOs & Hospitals.
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With Republicans officially waving the white flag on ACA repeal, we expect stocks in the hospital and Medicaid MCO universe that benefited most from sustained coverage expansion to perform well this morning, with national MCOs likely underperforming as the market attempts to digest the increased probability of the health insurer fee returning in 2018 and what it means for earnings and membership growth next year. From here we expect investor focus to shift to potential changes to the individual market (more below), tax reform and Medicaid changes among others (more below). We will host a webcast this morning at 10am ET (slides attached to this note) to go over our early thoughts on both groups- invitation to follow shortly.
Late Thursday (3/23/17) the White House made it clear to Republican leadership and American Health Care Act (AHCA) holdouts that negotiations have ended and that a floor vote in the House is expected on Friday (3/24/17). If the amended AHCA doesn’t pass on the House floor, the White House has said it will leave the ACA intact and move on to other priorities such as tax reform (although clearly markets will be skeptical of entire Republican agenda at that point). Republicans still are not believed to have the necessary votes, but the White House apparently thinks some holdouts will capitulate and vote for the AHCA if they believe this will be their only chance to act on 7 years’ worth of opposition to the law. Looking at yesterday’s trading (3/23/17) it is clear the market started discounting a lower probability of passage as providers outperformed and MCOs were weak. Important to note on MCOs, while we would expect some weakness should bill fail as HIF repeal becomes uncertain (likely best case is another one-year holiday passed later in the year). Indeed, MCO weakness may be a bit more significant should the market begin to discount lower probability of tax reform which was another component of MCO long-thesis optionality (along w/HIF repeal and higher interest rates).
This afternoon (3/23/17) the Congressional Budget Office (CBO) released a revised score of the American Health Care Act (AHCA) following the introduction of Monday’s manager’s amendment (3/20/17). Importantly, the CBO score released today does not reflect any of the changes to essential health benefits (EHB) discussed over the past ~24 hours. Recall that Monday’s manager’s amendment included accelerated tax relief and additional changes to Medicaid. Consistent with our expectations the changes lowered the CBO’s estimate of federal deficit reduction over the 2017-2026 period, going from $337B in the original score to $150B in the revised score. Of the swing, $90B comes from reducing the qualifying AGI threshold for medical expense deductions from 10% to 5.8%, $48B comes from reduced revenue from ACA tax provisions and $41B comes from Medicaid changes. Coverage estimates were little changed, with the CBO noting that estimates differ by no more than 500k in any category for a given year from 2017-2026 and still resulting in 24M fewer people covered by 2026. As we’ve discussed previously, it is important to note that it appears approximately 30% or 7M of the 24M decline comes from the opportunity cost of future coverage growth the CBO projected through an increase of exchange enrollment and additional Medicaid expansion. The trajectory of individual market premiums was unchanged in the revised analysis. See our previous analysis of the original AHCA CBO score for more details.
Yesterday (3/22/17) Republican leadership began discussing changes to the American Health Care Act (AHCA) designed to win support from holdout House Republicans, primarily the Freedom Caucus. These changes focused on the ACA’s insurance regulations, in particular the requirement that all non-grandfathered plans in the individual and small group market cover a set of essential health benefits (EHB). Initially changes to the ACA’s insurance regulations were left out of the AHCA given concerns that they would run afoul of reconciliation rules and be struck out of the bill in the Senate. Republicans indicate they have received input from the Senate parliamentarian that there isn’t necessarily a reason why changes to insurance regulations couldn’t be included in the bill, but there seems to be significant uncertainty here. The changes would come in the form of a manager’s amendment and haven’t yet been released. The amendment wouldn’t be scored by the CBO from a cost or coverage by the time the House holds a floor vote later today. Also, the CBO hasn’t yet released a score for Monday’s amendments - indications are that the score will be released before the floor vote today but will only include budgetary items and not coverage impacts.
The administration and House leadership are committed to bringing the American Health Care Act (AHCA) to a floor vote on Thursday (3/23/17) despite persistent uncertainty around whether they will have enough votes to pass the legislation and send it to the Senate. If the bill passes in the House on Thursday, Senate leadership intends to bypass committee hearings in order to hold a floor vote by Friday 3/31 (likely after adding their own amendments). If the bill passes in the Senate, it would likely be sent back to the House for an up/down “take it or leave it” vote for passage on or before the 4/7 recess.
Late Monday (3/20/2017), House Republican leaders from the Committee on Energy & Commerce and the Committee on Ways & Means introduced changes to the AHCA bill through a manager’s amendment. The amendment contains changes that primarily seem designed to win the support of hardline Republicans through accelerated tax relief and additional changes to Medicaid. Earlier press reports suggested there would be an additional $75B-$85B of tax credits allocated to older Americans- this did not end up in the House amendment but may be addressed by the Senate. Taking all of the changes together, it doesn’t appear that the manager’s amendment will meaningfully lower the estimates of coverage loss produced by the CBO last week and would almost certainly lower the estimate of $337B of federal deficit reduction from 2017-2026. Ways & Means Chairman Kevin Brady said Monday that there would be a revised CBO score before Thursday’s planned floor vote.
We are updating our AET and HUM models to reflect recent announcements around capital deployment and capital market activity. We are also revising our year-end 2017 price targets for the group to reflect a higher forward S&P 500 P/E multiple of 18.1x, which is the underlying basis for our relative valuations and target multiples. See Exhibit 1 on page 2 for more details on price targets and our leverage adjusted earnings power assumptions / comp sheet.
Between the long-awaited introduction of the American Health Care Act (AHCA), CBO score speculation, the CBO score itself and the behind-the-scenes negotiations among Republican stakeholders the past two weeks have been the most hectic period on the D.C. / HC policy front since the pre-implementation 2013 period. All signs point to this pace continuing for at least the next several weeks, so we take the time to put together a preview of upcoming events and share news and analysis that we found particularly helpful / informative over the past week. Looking ahead we expect Republicans to negotiate potential changes (more starting pg 2) to get consensus in the House ahead of planned vote on Thursday (subject to change).
On Friday (3/17/2017) several media outlets reported that the Department of Justice (DOJ) filed a corrected notice in the whistleblower lawsuit it joined against UNH. Recall that the unsealed whistleblower lawsuit included several other defendants in addition to UNH but the DOJ’s 2/14/17 notice joining the case stated that it declined to intervene against the other parties. The corrected notice filed on 3/14/17 clarifies that the DOJ “has been conducting, and continues to conduct, on-going investigations of defendants Health Net, Inc., Aetna, Inc., Bravo Health, Inc. (which is part of Cigna), and Humana, Inc”. Given that the investigations are ongoing and the DOJ doesn’t have sufficient information with regards to whether to intervene at this time, the investigations will continue independent of the whistleblower lawsuit. Please email us for a copy of the notice.
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