1、1North America Equity ResearchSeptember 2019Healthcare Facilities&Managed Care Gary Taylor AC212-622-J.P.Morgan Securities LLCH E A L T H C A R E F A C I L I T I E S&M A N A G E D C A R E2019 Fall OutlookDiversified HMOs|Govn HMOs|Acute Care|Sub-Acute|Outpatient|Outsourced ServicesAnthony Makdessi21
2、2-622-J.P.Morgan Securities LLCSee the end pages of this presentation for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm m
3、ay have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.22019 Fall Outlook Key PointsSource:J.P.Morgan1)2Q19 Cost Trends/MLR Concerns are OverdoneWe still see some risk to 3Q19 c
4、onsensus MLRs from calendar seasonality,even if now largely discounted.Our preliminary August hospital survey results today suggest further moderation of AA trends vs 2Q19.2)Political Risk Unlikely to Materially Recede before 2020The leading Dems disagree on M4A,how can it ever pass?On the other han
5、d,Bidens polling is declining;Warren is ascending.3)Recession Risk is Not Fully Discounted But Beyond our Pay GradeHC facilities&managed care stocks underperform in recessions despite defensive EPS.4)Early 2020 Outlook More Headwinds than TailwindsThe HIF returns,HIX margins compress,MDCD adverse se
6、lection,peak commercial enrollment.5)Positioning&Top PicksWe still favor Medicare fundamentals and HUM as a top pick(Analyst Focus List).We also favor UNH for 2020 when MLR sentiment is likely to improve.Wed be fading high short-interest stocks that just rallied 25%in two weeks.We continue to questi
7、on sustainability of the CPA ecosystem supporting DVAs margins.32019 Fall Outlook Key PointsSource:J.P.Morgan20192020YTDBy Year-EndBy Year-EndCommentsForward Fundamental OutlookAverage/WeakerAverage/WeakerAverage/WeakerHIF return weighs on 2020 guidance,recession risks in 2020Concerns-Outlook(1)MLR
8、ConcernsHighMedium/HighMedium/Low2Q19 misses are fully discounted,2020 cosmetic tailwind(2)Political OverhangHighMedium/HighMedium/LowDems cant agree,how can they pass anything?Investment Risk-Outlook(1)Investor SentimentLowSlight ImprovementImprovementBinary Election impact,but more paths to improv
9、ement vs deterioration(2)ValuationLowSlight ImprovementImprovementUnknowns become more known(3)Alpha GenerationNegativeModestAt Least ModestPossible material alpha generation ex-fully discounted recession We see a path to modest 4Q19 managed care performance and a better 2020.This array of factors h
10、as led to material YTD under-performanceThis array of factors may lead to modestly better 4Q19 performanceThis array of factors may lead to materially better 2020 performance4Thesis,Top Picks,Catalysts&“Out-of-Consensus”HighlightsSource:J.P.Morgan and Bloomberg.LONG-TERM THESIS Own payors vs provide
11、rs.Managed care represents a high-ROIC play on the longest-duration secular investment trend in the US;healthcare spending growth GDP growth”.Providers generally represent a lower-ROIC play on that same secular trend.The long-term shift from FFS to Value should reduce volatility of earnings for payo
12、rs while threatening growth and increasing volatility for providers.Our thesis assumes M4A will ultimately fail.NEAR-TERM POSITIONINGPayors():We believe a modest inflection in commercial medical trend will continue to threaten 3Q19 MLRs,generally offset by G&A upside.Providers(-):We remain only sele
13、ctively positive.Second half-loaded guidance(ACHA,THC,UHS)threatens stock performance,particularly if recession concerns rise.TOP PICKS HUM Well positioned pure-play MA story with strong fundamentals.“The simplest story in healthcare”.UNH Now surprisingly“less favored”.Still the most diversified sca
14、le player in a scale business with solid normalized YTD MLR trend.CATALYST CALENDARTexas STAR+PLUS Award-PENDINGAug 30?5thCircuit Appeals Court Ruling on TX ACA CaseSept/OctCMS Releases MA/PDP Landscape FileLate Sept2021 MA Star Ratings releasedEarly OctOEP for 2020 MA beingsMid-OctUNH 3Q19 Earnings
15、Oct 15Democratic DebateOct 15KY&MN MDCD RFP AwardsOct HIX Open Enrollment BeginsNov 1Texas STAR and CHIP RFP AwardDec 1OUT-OF-CONSENSUS IDEAS1)“Status Quo Joe”Bidens Public Option proposal would be a material negative for payors&providers,but the Senate remains a key barrier to healthcare reform thr
16、ough 2022 and beyond.2)Post-Election;MCO parity with SPX valuation is warranted&sustainable as consolidation&diversification reduced earnings volatility over the last decade.3)2Q19 commercial medical trend did accelerate;aberration or material inflection?We believe a“modest inflection”that has now s
17、ubsided.4)Despite defensive earnings,payors&providers do not trade defensively vs SPX during recessions.5)Recession:Year 1 own MDCD vs Commercial,Year 2 Commercial vs MDCD.MA fundamentals are non-cyclical.6)DVA still derives 60%+of EPS from its contributions to AKF.CA AB290 likely to be introduced i
18、n other states in 2020.7)THCs Conifer spin will be value-destructive as RemainCo multiple declines.OUT-OF-CONSENSUS RATINGSTHC JPM“Underweight”vs Street 91%“Buy”or“Hold”UHS JPM“Neutral”vs Street 54%“Buy”DVA JPM“Neutral”vs.Street 54%“Buy”MOH JPM“Overweight”vs.Street 53%“Neutral”or“Sell”CROWDED HEDGE
19、FUND POSITIONSNet Long:THC(19%),MD(10),HUM(8)Net Short:CYH(-10),LHCG(-6)Controversial:THC(+31/-12%),MD(+17/-7),ACHC(15/-15),CYH(+13/-23),CNC(+12/-7),DVA(+14/-8)ACUTE SEASONALITY Jun(-0.9%),July(+1.1%),Aug(-1.1%),Sept(+2.4%)1Q19:-0.7%;2Q19:-0.3%;3Q19:+0.8%;4Q19:-0.3%5Source:J.P.Morgan,BloombergHealth
20、care Facilities&Managed Care Coverage Universe9/14/2019JPMEPS GrowthP/EEV/EBITDACompany/SubsectorTickerPriceTargetMkt CapRatingC19EC20EC21EC19EC20EC21EC19EC20EC21EAcute Care HospitalsCommunity HealthCYH$3.69na$421UW15%(16%)(3%)-8.5x8.2x8.1xHCAHCA$129.07$157$44,968OW11%10%10%12.5x11.3x10.3x8.6x8.1x7.
21、7xTenet HealthcareTHC$25.17$23$2,634UW27%5%3%10.8x10.3x10.0 x7.6x7.6x7.4xTotal Market Cap$48,022Median:13%6%(0%)11.7x10.8x10.2x8.5x8.1x7.7xSub-Acute CareAcadia HealthcareACHC$31.97$33$2,808N(13%)0%9%15.8x15.7x14.4x10.0 x9.7x9.1xUniversal Health ServicesUHS$152.52$159$13,610N7%4%9%15.1x14.4x13.3x9.6x
22、9.4x9.0 xTotal Market Cap$16,418Median:(3%)2%9%15.4x15.1x13.8x9.8x9.5x9.1xOutpatient CareDavita IncDVA$61.86$65$10,318N44%7%16%12.7x11.9x10.3x7.4x7.9x7.5xOutsourced ServicesMednax IncMD$23.55$29$1,971N(27%)14%10%9.2x8.0 x7.3x8.4x7.9x7.5xManaged Care-DiversifiedAnthemANTM$253.08$322$66,054OW21%18%14%
23、13.1x11.1x9.8x10.6x9.1x8.2xCignaCI$160.85$225$61,279OW15%12%11%9.7x8.7x7.9x9.4x8.9x8.4xHumanaHUM$274.69$322$37,242OW22%7%13%15.5x14.5x12.8x11.1x9.7x8.7xUnited HealthUNH$233.61$276$225,200OW15%10%15%15.8x14.4x12.5x12.4x11.2x10.2xTotal Market Cap$389,775Median:18%11%14%14.3x12.8x11.2x10.9x9.4x8.6xMana
24、ged Care-MedicaidCenteneCNC$45.40na$19,053NR30%11%10%10.3x9.3x8.4x7.9x6.8x6.2xMolinaMOH$114.96$173$7,357OW9%12%10%9.9x8.8x8.0 x7.2x6.2x5.8xWellcareWCG$267.18na$13,576NR28%17%12%19.0 x16.1x14.4x13.0 x9.9x9.0 xTotal Market Cap$39,986Median:28%12%10%10.3x9.3x8.4x7.9x6.8x6.2x6Gary Taylor|Table of Conten
25、tsSource:J.P.MorganPage 72019 Performance ReviewPage 9Topical Issues:Fall 2019Page 41Review of Recent FundamentalsPage 52Company Overviews&ModelsPage 84Regulatory CalendarPage 85Managed Care 101Page 94Healthcare Facilities 101Page 105Healthcare Facilities Same-Store StatisticsPage 109Appendix I:Mana
26、ged Care TopicsPage 134Appendix II:Managed Care Market/Enrollment Summary7Gary Taylor|15%(4%)(14%)20%(6%)20%(20%)(10%)0%10%20%30%40%50%2010201120122013201420152016201720182019YTDPayorsProvidersS&P500Our Secular Call to Own Payors over Providers ContinuesSource:J.P.Morgan,Bloomberg(9/13/19)Payors hav
27、e outperformed providers in 7 of the last 9 years,as the managed care sector was completely revalued post-financial crisis and ACA implementation.Our 2019 Outlook predicted that an emerging political overhang would compress valuations and limit alpha generation in 2019 that prediction turned out to
28、be not nearly bearish enough.Commercial pricing/cost trend/adverse selection concerns have also emerged.Medicaid redetermination/“public charge”rule/slowing growth concerns have emerged.HIX competition/margin concerns have emerged.Meanwhile,beaten down providers have generally exceeded expectations
29、but appear curiously immune from the relevant political overhang.8Gary Taylor|Recent Trading Dominated by Violent Factor ShiftsOur US equity strategy team writes“when factor positioning becomes extreme,rotations can be very violent and managers can give back prolonged periods of gains in a matter of
30、 days and weeks(see Momentum Sell-Off,Low Vol Bubble).In the current rotation,5 months of Momentum outperformance was given back in only 3 days.”In our universe the most heavily shorted stocks(21%median short interest)have rallied dramatically during just the first two weeks of September(+24%median
31、stock performance vs+1%XLV).MTD Price Performance of Highest Short Interest Exposure CompaniesSource:J.P.Morgan,Bloomberg(9/13/19).Note:JPM analyst Lisa Gill covers TDOC.SGRY,QHC,ARA are uncovered by JPM.9Gary Taylor|Topical Issues:Fall 2019Source:J.P.Morgan1)Cost Trends/MLR Concerns 2)Political Ris
32、k M4A3)Valuation Update4)Recession Risk5)Early 2020 Outlook Headwinds&Tailwinds6)Positioning&Top Picks10Gary Taylor|Cost Trend/MLR Concerns Real&PerceivedSource:J.P.Morgan.Note JPM Analyst Lisa Gill covers CVS.With the exception of CVS,“pure-play”managed care stocks have significantly underperformed
33、 the broader markets since 2Q19 earnings season began.We attribute most of this move to the 2Q19 MLR“misses”and some portion to Bidens shrinking lead in the Democratic polling.TickerName2Q19A MLR vs Cons%Stock Reaction Day Of%Stock Reaction since ReleaseANTMAnthem Inc90 bps-4.5%-15.9%CNCCentene Corp
34、40 bps0.7%-12.7%CICigna Corp70 bps-1.4%-5.6%CVSCVS Health Corpna7.5%17.2%HUMHumana Inc-120 bps4.3%-3.1%MOHMolina Healthcare Inc-60 bps-3.4%-15.8%UNHUnitedhealth Group Inc0 bps-2.3%-12.5%WCGWellcare Health Plans Inc140 bps-0.4%-8.6%Managed Care Median:20 bps-0.9%-10.5%SPXSPX Performance since 7/18/19
35、(UNH Release)0.9%XLVXLV Performance since 7/18/19(UNH Release)-0.7%11Gary Taylor|Cost Trend/MLR Concerns Perceived TrendSource:J.P.MorganThe“perceived”portion of MLR concern are factors that might be attributable to sellside mis-modeling vs true underlying deterioration of fundamental performance.Th
36、e table below provides an example of the cosmetic yty MLR increase experienced due to the 2019 heath industry fee/tax(“HIF”)holiday.The arithmetic varies depending on tax rate,initial MLR level and line of business(HIF is not a pass-through in MA like commercial or MDCD,so plan behavior in terms of
37、benefit/MLR/margin can differ),but generally for commercial and MDCD,the 2019 HIF Holiday caused a 270bp cosmetic increase in yty MLR.We believe some sellsiders conscientiously build this cosmetic increase into their models,others are less rigorous such that the consensus MLRs for 2019 have a bias t
38、owards understatement creating a challenge for companies.Importantly,the 2020 HIF return should have the opposite effect,where consensus MLRs will be biased toward overstatement,easing the way for companies to perform better vs consensus.Note all MLR comparisons in this report are normalized for HIF
39、 comparability.Various companies MA exposure brings their avg 2019 HIF inflation downHIF Holiday MLR Inflation ExampleHIF Year(2018)HIF Holiday Year(2019)Premiums$100.0$100.0Medical Benefits$85.0$85.0HIF2.59%0.00%Tax Rate21%21%Grossed-Up HIF3.3%0.0%Premiums Grossed Up$103.3$100.0MLR82.3%85.0%MLR yty
40、270 bpsMLR ex-HIF85.0%85.0%MLR ex-HIF yty0 bpsHIF Holiday Year(2019)HIF Year(2020)Premiums$100.0$100.0Medical Benefits$85.0$85.0HIF0.00%2.59%Tax Rate21%21%Grossed-Up HIF0.0%3.3%Premiums Grossed Up$100.0$103.3MLR85.0%82.3%MLR yty-270 bpsMLR ex-HIF85.0%85.0%MLR ex-HIF yty0 bpsHIF Return MLR Deflation
41、Example12Gary Taylor|132 bps194 bps221 bps72 bps29 bps0 bps50 bps100 bps150 bps200 bps250 bps1Q192Q193Q19eMedian MCO MLR ytyReported MLR ytyNormalized MLR ytyNotes:1)“Normalized MLRs”reflect adjustments for flu,calendar,3R accrual true-ups&merger reclassifications.2)What do we mean by“calendar seaso
42、nality”?There is more healthcare utilization on weekdays vs weekends and more healthcare utilization on Monday vs Friday;we have a model that calculates the percentage headwind/tailwind for MLR/utilization on a monthly basis.Cost Trend/MLR Concerns Real DataSource:J.P.Morgan estimatesIf consensus ML
43、Rs for 2019 have a bias towards understatement(creating a challenge for companies),why did the issue emerge in 2Q19 vs 1Q19?1)1Q19 flu comps were 40bp easier yty(vs a 20bp median 2Q19 group MLR miss);2)2Q19 calendar seasonality was 40bp harder than 1Q19 yty;the bad news its 110bps harder seq in 3Q19
44、,we expect the reported gross MLR trend will increase sequentially again.3)De facto:There was a measurable increase in underlying commercial cost trends in 2Q19(from below to the high end of guided ranges).The commercial group PMPM trend is compiled from stat filings representing 30m lives.13Gary Ta
45、ylor|Cost Trend/MLR Concerns:Real Data from Statutory FilingsSource:J.P.Morgan,NAIC statutory insurance filings1)Except for HIX margin deterioration(relevant for two companies;CNC&MOH),YTD LOB trends look very solid.2)However,2Q19 commercial margins clearly deteriorated sequentially,as did NFP BCBS
46、government margins.(1)ANTM stat filings capturing only 48%of commercial group lives.(2)CNC stat filings capturing only 36%of commercial group lives.(3)UNH stat filings capturing only 35%of commercial group lives.The figures in the tables represent HIF-normalized YTY change of MLR2Q19MedicareMedicaid
47、IndividualGroupNational(-38 bps)17 bps230 bps13 bpsBig53 bps44 bps249 bps140 bpsNFP BCBS11 bps270 bps524 bps72 bpsCVS(-74 bps)665 bpsnanaANTM169 bps175 bps67 bps(-112 bps)1CI275 bps(-2005 bps)nanaCNC(-565 bps)(-25 bps)391 bps162 bps2HUM4 bps(-55 bps)na4 bpsMOH(-87 bps)(-188 bps)799 bpsnaUNH(-53 bps)
48、(-116 bps)(-1110 bps)408 bps3WCG23 bps225 bpsnana1Q19MedicareMedicaidIndividualGroupNational(-32 bps)4 bps407 bps(-122 bps)Big538 bps48 bps829 bps(-175 bps)NFP BCBS(-189 bps)55 bps579 bps(-62 bps)CVS(-43 bps)424 bpsnanaANTM247 bps42 bps511 bps(-215 bps)1CI159 bps(-509 bps)nanaCNC173 bps25 bps(-53 bp
49、s)(-302 bps)2HUM46 bps233 bpsna208 bpsMOH(-749 bps)11 bps1436 bpsnaUNH(-16 bps)(-32 bps)699 bps(-229 bps)3WCG(-25 bps)185 bpsnana2019 YTDMedicareMedicaidIndividualGroupNational(-35 bps)11 bps322 bps(-55 bps)Big521 bps46 bps516 bps(-21 bps)NFP BCBS(-89 bps)162 bps554 bps2 bpsCVS(-59 bps)544 bpsnanaAN
50、TM207 bps110 bps277 bps(-160 bps)1CI217 bps(-1266 bps)nanaCNC(-209 bps)0 bps168 bps(-78 bps)2HUM25 bps90 bpsna110 bpsMOH(-417 bps)(-88 bps)1062 bpsnaUNH(-36 bps)(-74 bps)(-200 bps)88 bps3WCG(-1 bps)205 bpsnana14Gary Taylor|Cost Trend/MLR Concerns Real&PerceivedSource:J.P.Morgan.AHIP,DCD National Hea
