1、1North America Equity ResearchApril 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 Spring UpdateDiversified HMOs|Govn HMOs|Acute Care|Sub-Acute|Outpatient|Outsourced ServicesAnthony Makdessi212-6
2、22-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 may
3、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.2Thesis,Top Picks,Catalysts&“Out-of-Consensus”HighlightsSource:J.P.Morgan and Bloomberg.LONG-TERM THESIS Recommend owning pay
4、ors vs providers.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 earn
5、ings for payors while threatening growth and increasing volatility for providers.We believe M4A will ultimately fail.NEAR-TERM POSITIONINGPayors():We see a modest rebound after the worst M4A bullet,Bidens likely declaration&strong 1Q19 earnings.Providers(-):We remain only selectively positive.The YT
6、D short rallies dont seem sustainable on 2H-loaded guidance,weak volumes&political uncertainty.TOP PICKS HUM Well positioned pure-play MA story with strong fundamentals.“The simplest story in healthcare”.CATALYST CALENDARMA 2020 Advance Notice Final RuleApr 1HHS Drug Rebate Rule Comments DueApr 8UNH
7、 2Q18 EarningsApr 16Plaintiff Response Due in ACA 5thCircuitApr 24Reply Briefs Due in ACA 5thCircuitMay 15MOH Investor Day NYCMay 30Cigna Investor Day NYCMay 312020 MA/PDP Bids DueJune 3CVS Investor Day NYC June 4CNC Investor Day NYCJune 14First Democratic Presidential DebatesJune 26-27Texas STAR+Pl
8、us,STAR,Chip RFP AwardJune/July 5thCircuit Appeals Court Rule on TX ACA CaseOct/NovOUT-OF-CONSENSUS IDEAS1)The Senate likely remains a key barrier to healthcare reform beyond 2022.2)Neither payors nor providers traded defensively vs SPX during the last two recessions.Payors tend to outperform provid
9、ers&SPX in rate tightening cycles.3)NFP Blues commercial group margins deteriorating in 2018,which may mitigate 2019 pricing pressure,contrary to the“improving RBC”thesis.4)MCO parity with SPX valuation is warranted,in our view,&sustainable as consolidation&diversification reduced earnings volatilit
10、y over the last decade however,we expect relative valuations to be pressured during the 2020 election cycle.5)FL hospitals should not experience material EBITDA growth from MDCD expansion due to“crowd-out”of HIX-subsidized population 40%co-sponsor the radical“Medicare for All Act of 2019”.Impact on
11、Sentiment Recalling the bruising fight to pass the ACA in 2010,and the fundamental uncertainties created by the legislative battle,we envision a sentiment overhang on both payors and providers into 2020.The recent Texas ACA court ruling(the entire ACA unconstitutional)will(has)further animate,embold
12、en and accelerate the Democrat proposals we believe generalist investors will(have)become more wary of investing in the sector as the year progresses,which could(has)drive multiple compression despite our strong EPS growth outlook for managed care.Managed Care The possible fundamental impact of an e
13、xpanded government role in healthcare really depends on the details.In a true single payor scenario,publically-traded payors essentially cease to exist.On the other hand,“Medicare for All”could serve to move 90m EGHP ASO lives into risk products for which managed care has 30%market share this would
14、constitute an$500b risk premium opportunity.Either scenario poses some risk to commercial enrollment and profitability,a key reason why our 2019 bias shifted from commercial(CI&ANTM)to government insurers(WCG&HUM).Providers Most providers earn the majority of their profits from commercial patients.T
15、herefore,we cannot imagine a scenario of increased government/lower commercial enrollment that isnt materially negative for most healthcare providers(HHA&sub-acute generally would be a clear exception).9Gary Taylor|Implications to:Representative LegislationPresidential Candidates(i)Payors(ii)Provide
16、rs1)Federal Govn as Single PayorThe Medicare for All Act of 2019,HR 676,Medicare for All ActBernie Sanders,Kamala Harris,Elizabeth Warren,Cory Booker,Kirsten GillibrandPrivate health insurance model disappears or relegated to supplementalMargins dramatically squeezed from lower government reimbursem
17、ent rates2)Early Medicare Buy-InMedicare at 55 Act,Medicare Buy-In&Healthcare Stabilization ActSherrod Brown,Cory BookerEGHP profits decline,MA UW profits increase,commercial ASO lives shift to MA risk livesMargins incrementally squeezed from lower government reimbursement rates3)Public Plan Option
18、on ExchangesPublic Option Deficit Reduction Act,Medicare XAmy Klobuchar,Jay Inslee,Michael Bloomberg,John DelaneyHIX profits decline,eventually EGHP profits could declineMargins incrementally squeezed from lower government reimbursement rates4)Expanding Medicaid Eligibility/Buy-inThe State Public Op
19、tion ActAmy KlobucharHIX profits could decline,EGHP profits could decline,MDCD profits/enrollment increaseMargins incrementally squeezed from lower government reimbursement ratesPathwaysFour Contemplated Paths to Expanding Healthcare EntitlementsSource:J.P.Morgan Investors were spooked by last weeks
20、 radical“Medicare for All Act of 2019”,with its key sponsor Jayapal stating“we mean a system where there are no private insurance companies that provide these core benefits”.Sen Kamala Harris also recently supported a similar vision of M4A without the insurance industry.Joe Biden is notable as a lea
21、ding Democratic contender(not yet declared)who has not advocated for M4A or the“Green New Deal”.We deem Bidens likely emergence as a moderate voice as a potential positive,muting the political overhang.Michael Bloomberg has publicly criticized the feasibility of M4A,but could support Medicare access
22、 for the still uninsured(?).Beto ORourke supports“single-payor”but not M4A(?).10Gary Taylor|Implications to:Representative LegislationPresidential Candidates(i)Payors(ii)Providers1)Federal Govn as Single PayorThe Medicare for All Act of 2019,HR 676,Medicare for All ActBernie Sanders,Kamala Harris,El
23、izabeth Warren,Cory Booker,Kirsten Gillibrand(payors)(providers)2)Early Medicare Buy-InMedicare at 55 Act,Medicare Buy-In&Healthcare Stabilization ActSherrod Brown,Cory Booker(EGHP UW)MA UW(providers)3)Public Plan Option on ExchangesPublic Option Deficit Reduction Act,Medicare XAmy Klobuchar,Jay Ins
24、lee,Michael Bloomberg,John Delaney(HIX UW)(EGHP UW?)(providers)4)Expanding Medicaid Eligibility/Buy-inThe State Public Option ActAmy KlobucharMDCD UW(HIX UW)(EGHP UW?)(providers?)PathwaysLine of Business and Company ExposuresSource:J.P.Morgan The“devil is in the details”,but generally shifting comme
25、rcial lives with higher underwriting(UW)margins for payors and higher reimbursement rates to providers towards either Medicare or Medicaid is an incremental negative for commercial employer group(EGHP)UW profits,a possible positive for MA or MDCD UW profits but almost always only an incremental nega
26、tive for provider profits.Early Medicare buy-in with a role for MA could materially expand the size of the MA market if EGHP ASO shifts into MA(similar to EGWP for retirees).HUM&WCG were our 2019 top picks(JPM US Equity Analyst Focus List)because they are good fundamental stories that are positioned
27、 with higher MA&lower EGHP&HIX exposures.Approximate 2019 Profit ExposureMedicare(MA)Medicaid(MDCD)ACA Exchanges(HIX)Commercial(EGHP)Intl/OtherUNH30%10%0%55%5%ANTM15%20%5%60%0%CI10%0%5%65%20%HUM80%5%0%15%0%CNC5%55%35%5%0%WCG40%60%0%0%0%MOH5%65%30%0%0%HCA&Other Hosp0%(1%)10%101%(10%)DVA0%0%10%90%0%AC
28、HC10%25%5%30%30%MD10%15%10%higher/lower vs plan bidGenerally,it is difficult for PDPs to earn/lose more than+/-10%WCG doesnt record catastrophic reinsurance receipts as premium revenue,but CMS would,pushing the CMS calculated MLR even higher than shown(WCG 2019 MLR rebate was 2.3%of premiums)Plan Bi
29、dDrug Costs vs Bid0%5%10%20%30%40%Premiums100.0100.0100.0100.0100.0100.0Drug costs85.089.393.5102.0110.5119.0G&A10.010.010.010.010.010.0Margin5.00.8-3.5-12.0-20.5-29.0Corridor receipt0.00.02.18.915.722.5Net Margin5.00.8-1.4-3.1-4.8-6.5CMS MLR89.8%93.4%95.2%96.8%98.2%99.4%Drug Costs vs Bid0%-5%-10%-2
30、0%-30%-40%Premiums100.0100.0100.0100.0100.0100.0Drug costs85.080.876.568.059.551.0G&A10.010.010.010.010.010.0Margin5.09.313.522.030.539.0Corridor payment0.00.0-2.1-8.9-15.7-22.5Min MLR Rebate0.00.0-1.3-4.5-7.7-10.9Net Margin5.09.310.08.67.15.6CMS MLR89.8%86.1%83.6%80.0%75.9%70.9%Risk Corridor Impact
31、Source:J.P.Morgan estimates.18Gary Taylor|Emerging Recession Risk?Source:J.P.Morgan Quantitative and Derivatives Strategies Team (05/07/2015)Framework for Style Investing:Style Rotation and the Business CycleOur equity strategy team argues that the U.S.is oscillating between“expansion”and“slowdown”.
32、As we edge towards an eventual“slowdown”,their research suggests a transition from value to growth,from high volatility to low volatility and from neutral to overweight“quality”.Within managed care,such“factor-shifts”would skew towards government vs commercial growth,from small cap volatility to lar
33、ge-cap&towards more conservative balance sheets UNH&HUM stand out for possible relative outperformance.Within healthcare facilities,such“factor-shifts”would skew towards outpatient/home/behavioral and also towards larger cap&better balance sheets HCA&UHS stand out for possible relative outperformanc
34、e.J.P.Morgan Style Investing-Marrying Phases of the Business Cycle with Style Returns19Gary Taylor|Recession Risk to Sector FundamentalsSource:J.P.Morgan,SNLManaged Care:Empirical data of the last recession demonstrates stability of MA MLRs,with both commercial risk and MDCD MLRs demonstrating great
35、er early-cycle degradation.Ultimately,this proves to be a unique opportunity to buy short-tail businesses(commercial reprices and MDCD MCOs hold states hostage)as utilization ultimately slows.Sources of early-cycle utilization pressure include COBRA,preemptive elective procedures and provider upcodi
36、ng(as a defensive response to weaker utilization).Sources of rate pressure include employer pushback and state budget pressures from declining tax revenues and rising MDCD enrollment.Healthcare Facilities:Often some initial patient volume increases from COBRA and electives,before utilization and pay
37、or mix deteriorate over the cycle.For hospitals,declining labor cost is a strong counter-cyclical benefit that is often overlooked by the Street.Line-of-Business National MLRs During Last Recession20Gary Taylor|Recession Risk to Sector FundamentalsSource:J.P.Morgan,SNL,BBG,company filingsManaged Car
38、e:Of course we note that the last Recession was particularly deep,empirical data is more difficult to collect from the shallower and shorter 2001 recession in which we believe MLRs were more stable.Medicaid:Significantly aided in the last recession by the American Recovery&Reinvestment Act(ARRA),whi
39、ch boosted state Medicaid matching percentages from the Federal government during October 2008-June 2011($120b).Line-of-Business MLRs During Last Recession2007200820092010NotesYE U.S.Unemployment Rate5.0%7.8%9.8%9.1%Commercial Group RiskNational Stat Filings85.6%86.3%87.2%84.6%51m lives in 2007 down
40、 to 43m in 2010 capturing 2/3 of U.S.EGHP risk enrollmentAET Commercial MLR79.2%80.6%85.0%80.7%CI Commercial MLR82.7%83.4%85.0%80.7%ANTM commercial OI8.2%8.9%6.5%8.9%MedicaidNational Stat Filings88.9%88.5%91.1%88.7%14m lives in 2007 up to 20m in 2010 capturing 1/3 of U.S.MDCD enrollmentAET Medicaid
41、MLR89.4%86.8%84.9%86.0%AGP Medicaid MLR83.1%82.9%85.4%81.6%CNC MLR84.3%82.7%83.5%83.8%Includes immaterial MedicareMOH MLR84.5%84.8%86.8%84.5%Includes immaterial MedicareWCG Medicaid MLR80.8%83.5%86.3%87.5%Medicare AdvantageNational Stat Filings85.4%85.7%85.9%86.0%5m lives in 2007 up to 7m in 2010 ca
42、pturing 2/3 of U.S.MA enrollmentAET Medicare MLR86.5%86.4%86.7%91.1%HUM Govn MLR83.8%85.9%83.5%83.9%Includes immaterial Medicaid2007200820092010NotesYE U.S.Unemployment Rate5.0%7.8%9.8%9.1%Commercial Group RiskNational Stat Filings85.6%86.3%87.2%84.6%51m lives in 2007 down to 43m in 2010 capturing 2
43、/3 of U.S.EGHP risk enrollmentAET Commercial MLR79.2%80.6%85.0%80.7%CI Commercial MLR82.7%83.4%85.0%80.7%ANTM commercial OI8.2%8.9%6.5%8.9%MedicaidNational Stat Filings88.9%88.5%91.1%88.7%14m lives in 2007 up to 20m in 2010 capturing 1/3 of U.S.MDCD enrollmentAET Medicaid MLR89.4%86.8%84.9%86.0%AGP
44、Medicaid MLR83.1%82.9%85.4%81.6%CNC MLR84.3%82.7%83.5%83.8%Includes immaterial MedicareMOH MLR84.5%84.8%86.8%84.5%Includes immaterial MedicareWCG Medicaid MLR80.8%83.5%86.3%87.5%Medicare AdvantageNational Stat Filings85.4%85.7%85.9%86.0%5m lives in 2007 up to 7m in 2010 capturing 2/3 of U.S.MA enrol
45、lmentAET Medicare MLR86.5%86.4%86.7%91.1%HUM Govn MLR83.8%85.9%83.5%83.9%Includes immaterial Medicaid21Gary Taylor|Adjusted EPS Surpise(%Beat/Miss vs.Consensus)1Q082Q083Q084Q081Q092Q093Q094Q09UNH(1.8%)3.9%(0.1%)(0.3%)18.2%4.0%16.8%11.0%ANTM(9.0%)5.1%6.3%(1.8%)31.2%4.7%31.6%12.5%AET(0.1%)1.1%0.1%0.6%
46、3.6%(12.7%)5.2%(5.7%)CI(1.6%)11.7%(16.3%)6.1%(23.7%)18.4%10.1%8.1%HUM3.8%5.3%1.2%0.7%6.7%(0.2%)0.1%0.1%CNC2.5%4.6%6.7%2.3%9.7%1.9%1.2%2.4%WCG30.4%(25.5%)(153.3%)(14.8%)110.1%285.9%22.6%4.7%MOH1.2%9.9%1.8%(0.1%)2.2%0.6%(35.3%)11.1%HNT(74.8%)(3.1%)(58.8%)10.5%20.6%(6.8%)10.7%2.1%AGP10.9%38.5%46.2%22.6
47、%17.0%(18.7%)(7.9%)150.0%CVH(0.2%)(6.8%)(31.4%)(0.2%)21.0%23.2%23.1%31.4%Managed Care Earnings Performance During Last RecessionSource:J.P.Morgan,BBG.Company Filings.1910261112137817181445161Drivers:(i)MA and Commercial pricing pressure(ii)Unusually severe Flu season(worst seen in 5 years)(iii)Reduc
48、ed investment income(iv)Medicare pharmacy utilization is higher than planned related to the low income subsidy segment(v)Economic downturn has placed additional pressure on already price sensitive small group market2(i)Realized investment losses(ii)Less favorable than expected PY reserve development
49、(iii)Lower than expected fully insured enrollment(iv)Flu impact(v)MA product design causing adverse selection3(i)Net realized investment losses(ii)Increases in FEP programs reimbursement offset by loss of NY state prescription drug contract,exit from OH Medicaid,lower premium volume due to membershi
50、p declines in non blue Unicare business and conversion of Conn Medicaid program to self-funded(iii)Seeing cost increases in outpatient services related to unit costs with more procedures being done(up coding)5(i)Lower than projected group insurance operating earnings due to an increase in reserves i