This morning (10/12/17) President Trump signed an executive order (fact sheet on page 3) that directs government agencies to evaluate making several changes to insurance regulations. The potential changes include expanded access to Association Health Plans and Short-Term Medical Insurance (STM), as well as modifications to health reimbursement accounts. Overall, the content of the executive order was generally consistent with recent media reports. Government agencies will now study these issues and go through the normal rule-making process, some of which may be subject to legal challenges when issued. These potential changes add to the current uncertainty in the individual market including the outlook for CSRs, and may create concerns for providers around covered lives and weaker coverage incl. higher out of pocket costs.
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This morning (10/11/17) CMS released the Med Adv Star Ratings that will impact reimbursement for the 2019 plan year. CNC and CI saw the largest declines, HUM was stable, AET/ANTM/UNH saw modest declines and WCG improved solidly. See Exhibit 1 on page 3 for more detail. As we saw for 2018 clearly plans can appeal / crosswalk membership and the results implied by today’s release won’t be finalized for nearly a year.
Wednesday morning (10/11/2017) CMS is scheduled to release the Med Adv Star Ratings that will impact reimbursement for the 2019 plan year. The ratings will be posted here. We note that last year HUM’s press release discussing their Star Ratings decline (also raised 2016 guidance) came out before the data was posted by CMS. With ratings seemingly impossible to diligence using public information, we continue to default to the view that MCOs with >80% of membership in plans with 4 Star ratings or better (AET, UNH) likely have more potential downside than upside but as we saw for 2018 clearly plans can appeal / crosswalk membership and the results implied by Wednesday’s release won’t be finalized for nearly a year.
Over the weekend The Wall Street Journal reported that President Trump will sign an executive order this week that makes several changes to insurance regulations. The executive order is expected to make it easier to create association health plans, which allow small employer groups to band together and purchase coverage. This change appears to be what Trump referenced recently when discussing plans being able to sell coverage across state lines, given that association health plans would presumably be able to include groups from different states. The executive order is also expected to remove the 90-day limited on short-term medical insurance and expand the use of health reimbursement accounts. The order also will instruct govt agencies to explore how to reduce regulation and lower premiums. These changes would likely add to the current uncertainty in the individual market including the outlook for CSRs, as well as create potential concerns for providers around covered lives and weaker coverage including higher out of pocket costs.
Clearly the trajectory of exchange results in 2018 is critical for ANTM, CNC and MOH. One of the key unknowns is whether the administration will continue to make CSR payments to plans and whether a bipartisan agreement can be reached for permanent CSR funding. Given uncertainty, we analyzed the rate filings and state department of insurance releases for the 20 largest exchange states. We found that 65-70% of the enrollment analyzed fell in states requiring plans to assume CSRs weren’t paid. Based on each company’s geographic exposure we estimate ~80% of ANTM and CNC’s premiums and ~60% of MOH’s premiums will be in states requiring plans to assume CSRs aren’t paid. Given CSR payments are estimated to be ~19% of Silver exchange plan reimbursement, it would appear that the risk/reward on ANTM/CNC is most skewed to the upside here, with MOH also positive but to a lesser extent for 2018. See pages 4-5 for details by state.
This afternoon (10/3/17) CMS posted the Med Adv crosswalk file for 2018, which maps contract information from 2017 to what will be in effect for 2018 in the event of any changes. This file is particularly important because it can impact the mix of each company’s enrollment in plans with 4 Star ratings or better, which is the threshold to receive a 5% bonus payment to county benchmarks. HUM saw the largest benefit from contract consolidation, with 38% of membership shifting into plans with 4 Star ratings or better. This brings up the % of membership in plans with 4 Star ratings or better to 74%, in line with the company’s disclosures with Q2 results. ANTM saw the next largest increase (19%) to its % of membership in 4+ Star plans, followed by CNC with 12%. For CI, the % of enrollment in plans with 4 Star ratings or better improved from 20% at the initial announcement to 59%, in line with company disclosure of ~60%. We note that 37% of the improvement came through an appeal to CMS (revised ratings were posted in July) and that only 2% came from contract consolidation. AET, UNH and WCG were unchanged here. See page 2 for more details on Stars and page 3 for a calendar of key Med Adv dates. For more on Med Adv, see our thoughts on of 2018 membership growth here and our analysis of 2018 benefit positioning here.
With the Medicare annual election period (AEP) set to begin 10/15, plans become available for preview on Medicare.gov on 10/1 (yesterday). For each MCO we looked at a sample of markets to understand how plans are changing benefits in 2018 on an absolute basis and also compared to fee-for-service (FFS) costs. Changes to benefits for 2018 are particularly meaningful given that the HIF resumes which all else being equal should require ~3% higher bids in 2018 (~2% for the expense itself, ~1% for lack of tax deductibility). Most MCOs have said they are trying to keep benefits relatively stable for 2018, which despite having 2017 margin upside to reprice back to members due to lower trend will raise questions on margins. Results varied by MCO but in general the company discussions around benefit stability do appear to be the norm. We will host a webcast at 10AM EST today to review our findings.
During Q&A with reporters this afternoon President Trump said that “he will probably sign executive order next week to allow people to buy healthcare across state lines” according to Reuters Health. Recall that selling insurance across state lines has been discussed by Trump before, both during the campaign and as part of repeal / replace discussions earlier this year. No details have been reported, including whether this change would apply to only the individual market, the entire commercial market (group + individual) or even commercial + Medicare (Med Adv and PDP). Within commercial, risk coverage is regulated at the state level and ASO is regulated under ERISA, so we suspect any changes could only impact the commercial risk market there. Of these markets, Medicare seems less likely to be included but we note there would be likely issues particularly on the PPO side given rate/cost differentiation by county.
The increasing role of MCOs in government health care programs is a critical growth driver for the industry and Med Adv is widely viewed as the single most compelling end market in the sector due to a combination of strong underlying demographics, share gains vs. FFS and a relatively stable reimbursement outlook. Heading into 2018, most companies we cover are expecting to grow at or above the ~ 6% growth rate of the overall market. One of the most frequent questions we get from investors is whether it is plausible that the plans in our coverage universe can hit growth targets given most expect above market growth – in short how can everyone be “above average”.
With MCOs continuing to outpace the S&P 500 YTD (32% vs. 11% YTD, 4.4% vs. 2.2% in Q3) our YE 2017 price targets have minimal upside/downside from here, and we expect 2018 earnings guidance/visibility coupled with extraneous factors (HIF repeal/tax reform/CSRs) to likely define group performance in the near-to-intermediate term. With management teams at various conferences and into 3Q earnings calls it is likely that questions will focus on 2018 and thus we take a detailed look at numbers and come away with a view on each company in terms of potential guidance and 2018 earnings power versus consensus. Overall we think CI is best positioned here in terms of visibility to achieving 2018 consensus earnings with CNC facing the most questions versus our model. We will host a conference call at 11AM today (9/5/17) to review our findings – invitation to follow.
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