1、FOCUS Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this rep
2、ort as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 16.Equity Research 29 March 2019 Restricted-Internal Restricted-Internal Restricted-Internal Restricted-Internal U.S.Health Care Services Medicare Part D Reb
3、ate Disruption May Create Opportunity for MCOs Disruption in Medicare Part D Creates Investment Opportunities:Recently proposed changes to the Medicare Part D marketplace for 2020 have created uncertainty and perceived risk for investors in many Healthcare Services stocks,including managed care comp
4、anies.More specifically,the HHS proposal to shift brand drug rebates to the point of sale(POS)within the Medicare Part D market has been a primary source of this perceived risk.However,this report demonstrates that some companies could actually benefit from this shift,particularly as we believe a li
5、kely increase in Part D premium prices for 2020 could cause current PDP beneficiaries to convert to full Medicare Advantage(MA)products,which can carry 10 x profits for plan sponsors vs.standalone PDP.We believe Humana in particular is best-positioned to capitalize on this potential conversion:we es
6、timate HUM may witness a$0.70 net run-rate EPS benefit from this dynamic.This equates to a 4%boost to 2020 consensus EPS for HUM(see Figure 14).Intuitively,this makes sense as HUM is highly levered to the MA market,and is neck-and-neck with UNH for leading market share in the Individual Retail MA ma
7、rket(excludes SNP members).PDP Members May Convert to MA:Our hypothesis is that price-sensitive seniors with an unsubsidized PDP plan are strong candidates to convert to MA given that full MA plans offer attractively priced alternatives,including Part D drug benefits.Standalone Part D monthly premiu
8、ms are in the$35-40 range for 2019,but we expect prices to increase by 10-30%in 2020 if brand drug rebates are shifted to the point of sale.By comparison,monthly premiums paid by beneficiaries for a full MA plan(which includes a Part D benefit)is only$28 in 2019,with 46%of MA plans offering$0 premiu
9、ms(HUM has 50%of MA members in$0 premium plans).As such,we expect accelerated member conversions from PDP to MAPD in 2020 should the HHS proposal go into effect next year.Based on our comprehensive county-level analysis that maps lost PDP members to MA plans based on current retail MA market share,w
10、e estimate that every 1%of unsubsidized industry Part D members that converts to MA equates to$0.07 of incremental EPS for HUM.So,at a 10%conversion rate we arrive at our$0.70 HUM EPS benefit estimate,which embeds 3%net margins on MAPD members and 4%net margins on lost PDP members.Part D Plans Spons
11、ors Preparing Multiple Bids:One of the themes from the Barclays Global Healthcare Conference we hosted earlier this month is that MCOs support the shift to POS drug rebates and are generally embracing HHS 1/1/2020 implementation date.Drug rebates are accounted for by health plans in PDP bid submissi
12、ons;thus any changes to the rebate program should be reflected in plan bids(i.e.higher Part D premiums).As long as plans can properly account for changes in the rebate program,they should be able to price accordingly and PDP economics will largely remain intact.Most plan sponsors(MCOs and PBMs)have
13、confirmed that they are preparing multiple Part D bids.In our view,this largely addresses concerns around price dislocation in the Part D market,and should mitigate investor concerns around Part D profits.INDUSTRY UPDATE U.S.Health Care Services NEUTRAL Unchanged U.S.Health Care Services Steve Valiq
14、uette+1 212 526 5496 BCI,US Andrew Mok,CFA+1 212 526 2687 Andrew.M BCI,US Jonathan Yong+1 212 526 3647 BCI,US Morgan McCarthy+1 212 526 1168 BCI,US Barclays|U.S.Health Care Services 29 March 2019 2 Overview of the Part D Market Medicare Part D is a supplemental prescription drug benefit available to
15、 Medicare eligibles as either a stand-alone prescription drug plan(PDP),or as part of a Medicare Advantage(MA)plan.While Part D is largely a voluntary benefit,approximately 75%of total Medicare eligibles are enrolled in the Part D program.The Congressional Budget Office(CBO)estimates that spending o
16、n Part D benefits will total$99 bn in 2019,representing 15%of net Medicare outlays.In 2019,901 PDPs were offered across 34 PDP regions in the US.Below,we show the composition of the Part D market and the corresponding market share of PDP and MA-PD plans.Note,the total PDP market has more than 25 mn
17、members,which are highly concentrated among 5 carriers:CVS,UNH,HUM,WCG(with legacy AET),and CI/ESRX.While the MA market is not as concentrated as the PDP market,the top three MA players(UNH,HUM,and CVS)still control more than 50%of the market.FIGURE 1 Historical Composition of Part D Market(Membersh
18、ip in Millions)Source:CMS,Barclays Research FIGURE 2 PDP Market Share(25.6 mn)FIGURE 3 MAPD Market Share(22.7 mn)Source:CMS,Barclays Research.WCG includes AETs PDP members.Source:CMS,Barclays Research.171717171818191920212121891010111214151516171811122555555522222333344528293032343840424446474801020
19、30405060200820092010201120122013201420152016201720182019Individual PDPIndividual MAPDGroup PDPGroup MAPDANTM1%CI13%CNC0%CVS24%HUM17%UNH20%WCG16%Other9%ANTM5%CI2%CNC1%CVS10%HUM17%UNH26%WCG3%Other36%Barclays|U.S.Health Care Services 29 March 2019 3 Part D Benefit Structure In order to understand why P
20、art D is so attractive it is important to understand the structure and benefits covered under the program.For 2019 premiums,the Part D national average monthly bid amount is$51.28 and the base beneficiary premium is$33.19.A plans basic Part D premium is equal to the base beneficiary premium plus the
21、 spread between the plans bid and the national average bid.However,actual premiums paid by enrollees will vary significantly based on the PDP region in which the member lives and the income that they earn:members earning above$85,000($170,000 for couples)are subject to a premium surcharge,ranging fr
22、om$12.40 to$77.40.On the coverage side,2019 Part D members have an annual deductible of$415 and 25%coinsurance up to the initial coverage ceiling of$3,820.From here,members enter the coverage gap,commonly referred to as the donut hole until spending reaches$8,140,or the start of the catastrophic pha
23、se.Cost-sharing in the donut hole will depend on which types of drugs members take:brand drugs require members to pay 25%of drug costs,while generic drugs require members to pay 37%of drug costs.Although cost-sharing in Part D has increased over the last decade,it still serves as a valuable safety n
24、et:most seniors would not be able to sustain drug treatments without Part D,which boosts program enrollment.Cost-Sharing for Brand-Name Drugs Despite the popularity of the Part D program,we believe that rising out-of-pocket(OOP)costs for branded drugs in Part D may play a role in beneficiaries shopp
25、ing for better alternatives a thesis underlying this report.In 2016,Part D dispensed 600 brand-name substances that cost beneficiaries and health plans$9 bn.As evidence that brand-name drugs drive up cost sharing amounts for Part D beneficiaries,we note that the Department of Health and Human Servic
26、es(HHS)found that Part D beneficiaries paid$1.1 bn in OOP costs for brand name drugs in 2016,almost twice as much as OOP costs for generics.Further,HHS found that brand-name therapies cost beneficiaries$30.69 per prescription vs.$22.41 for generic equivalents and that multiple-source drugs(drugs mar
27、keted as both generic and brand-name substances)further increased beneficiary cost-sharing totals on branded drugs.Multiple-source brand drug cost-sharing averaged$39.15 in 2016,while generic cost-sharing for substitutable products was$17.04.Beneficiaries could have saved over$600 mn in OOP payments
28、 if generic equivalents were dispensed(for the brand drugs that fall in to this multiple-source categorization).Over the past few years,the recent trend in the US of robust brand drug price inflation,coupled with higher-than-average price deflation in generic drugs(in the high-single to low-double d
29、igit range),has collectively served to further widen the cost-sharing gap between brand vs.generic drugs for Part D beneficiaries.FIGURE 4 Part D Historical Coverage Limits and Thresholds Source:Kaiser Family Foundation$5,726$8,140$4,050$5,100$2,510$3,820$275$415$0$2,000$4,000$6,000$8,000$10,0002008
30、20092010201120122013201420152016201720182019Catastrophic Coverage ThresholdOOP Threshold for Catastrophic CoverageInitial Coverate LimitAnnual DeductibleBarclays|U.S.Health Care Services 29 March 2019 4 Seniors in PDP Plans Are Price-Sensitive Shoppers Generally,it is well understood that seniors ar
31、e price-sensitive shoppers.Still,we decided to examine PDP premium and enrollment trends to confirm that this notion holds true in the prescription drug market.In Figure 5,we show the relationship between enrollment and premiums for the top 6 non-Group PDP plans.In 2019,four of the six plans increas
32、ed premiums,yet all experienced a member losses due to lower priced options(more below).In 2011,HUM partnered with WMT to launch a co-branded PDP plan with one low-cost national premium.This led to significant PDP market share gains from 2011 to 2017.However,over the last two years,HUM noted more co
33、mpetitive pricing in the PDP market and in 2019 acknowledged that it is no longer the low-cost option in any of its markets.In 2019,HUMs Walmart Rx Plan experienced a 19%decline in membership as a result of higher premiums and lower cost competitor options.Both AETs Medicare Rx Select plan and WCGs
34、Value Script plan were priced cheaper than HUMs Walmart Rx Plan and both saw meaningful market share gains in 2019.FIGURE 5 2019 vs 2018 Premium and Enrollment Changes Source:CMS,Barclays Research FIGURE 6 Historical PDP Enrollment Source:CMS,Barclays Research Top 6 PDP PlansParentPlan Name2018 Avg.
35、Premium2019 Avg.PremiumPremium%Change 2018Enrollment2019EnrollmentEnrollment%ChangeCVSSilverScript Choice(PDP)$27.79$31.50 13%4,6574,538-3%HUMHumana Walmart Rx Plan(PDP)$20.28$27.82 37%2,4611,988-19%UNHAARP MedicareRx Preferred(PDP)$78.43$70.19-11%2,4302,290-6%HUMHumana Preferred Rx Plan(PDP)$30.99$
36、31.46 2%1,6631,637-2%AETAetna Medicare Rx Saver(PDP)$30.57$30.62 0%1,2271,2220%WCGWellCare Classic(PDP)$30.71$32.20 5%999954-5%Notable Market Share GainersParentPlan Name2018 Avg.Premium2019 Avg.PremiumPremium%Change 2018Enrollment2019EnrollmentEnrollment%ChangeWCGWellCare Value Script(PDP)$37.56$14
37、.82-61%3616Very HighAETAetna Medicare Rx Select(PDP)$17.60$17.03-3%36262473%Members(000)200820092010201120122013201420152016201720182019Aetna3753456124294812,1741,5821,4722,0752,0872,2702,452Anthem1,3921,124769626536436436333314284277258CVS1,0501,5851,2063,4244,0094,2654,1444,5375,6285,5586,1526,068
38、Cigna3273065625411,2681,1951,1931,485979826771809Express Scripts00001,6902,8712,7332,7702,7222,7782,5322,500Humana3,0841,9381,6792,5372,9983,1973,8544,4344,8355,1874,8894,340UnitedHealth4,0904,3044,5444,8654,2315,2045,1845,3695,1685,3655,3475,160WellCare9867477689828747991,4471,0401,0151,1611,0661,6
39、26Subtotal11,30410,35010,13913,40416,08720,14220,57221,43922,73623,24623,30423,213Other Plans6,1807,2447,7895,4763,9792,6952,9682,8302,2692,1772,3602,347Industry17,48417,59417,92818,88020,06722,83723,54024,26925,00525,42325,66425,560Barclays|U.S.Health Care Services 29 March 2019 5 HHS Rebate Rule S
40、ummary and Implications for Part D HHS Proposal Overview On January 31,2019,the Department of Health and Human Services(HHS)released a proposal that would effectively shift rebates traditionally passed along to PBMs and health plans to consumers at the point of sale(POS).As structured,the current pr
41、oposal would only impact the Medicare Part D and Medicaid market.However,prescription drug cost-sharing in the Medicaid market is minimal,so changes to the rebate system would not materially alter rebate economics.Consequently,the HHS rule would have the largest direct impact on the Medicare Part D
42、market.Implications for PDP Plans Under the current rebate system,PBMs generally negotiate drug rebates with drug manufacturers in exchange for placement on a health plans drug formulary.The plan,in turn,uses the rebates collected to reduce premiums for all members.Simply put,rebates associated with
43、 high-cost brand drugs generally result in lower premiums for all members but higher out-of-pocket costs for the end-users of those brand dugs Under the proposed system,drug rebates will be applied at the point of sale.This means that seniors will receive a discount at the pharmacy counter based on
44、their specific brand drug prescriptions.Thus,the proposed system does a better job of matching the rebate benefit of a brand drug with the end consumer.Based on our conversations with management teams and industry experts,approximately 20%of PDP members will benefit from the proposed rule through lo
45、wer out-of-pocket costs.FIGURE 7 Key Dates Impacting HHS Rebate Proposal Source:Barclays Research PDP Submissions Drug rebates are accounted for by health plans in PDP bid submissions;thus any changes to the rebate program should be reflected in plan bids.The consensus view is that so long as plans
46、can properly account for changes in the rebate program,they will be able to price accordingly and PDP economics will largely remain intact.The comment period for the proposed rule ends on April 8,2019.After this,HHS would still need to draft the final rule,so it remains unclear whether or not plans
47、will have visibility on the final rule when bid submissions are due on the first Monday in June.January 31,2019HHS Proposal to Shift to POS RebatesApril 1,2019CMS Pubslishes 2020 Final Medciare RatesApril 8,2019Comment Period for Proposed Rule EndsJune 3,2019Medicare Bids DueOctober 15,2019Medicare
48、Open Enrollment BeginsJanuary 1,2020 Proposed Rule ImplementationBarclays|U.S.Health Care Services 29 March 2019 6 In reaction to the HHS rebate proposal,the principal concern among investors is that MCOs would factor manufacturer rebates into premium pricing(i.e.lower premiums),but rebates would in
49、stead be passed along to members at the point of sale.This would create a dislocation in the Part D market because members would effectively benefit from both manufacturer rebates assumed in pricing and actual rebates passed along at the point of sale.Conversely,the lower premiums would negatively i
50、mpact the Part D economics for MCOs.In order to comply with the aggressive implementation date of the HHS rule,MCOs are preparing multiple Part D bids.In our view,this largely addresses concerns around a potential dislocation in the Part D market.MCOs Embracing 2020 Implementation of HHS Rebate Rule