Medicaid HMOs: Growth Prospects Undervalued

Written April 16th, 2014 by

The outlook for commercial premium growth is sluggish; modest enrollment gains from the Affordable Care Act (ACA) and rising employment are offset by the rising tendency of beneficiaries to either buy cheaper policies, or forego coverage altogether

On top of this, the large ‘national account oriented’ commercial HMOs (e.g. CI, AET, WLP, UNH) stand to lose share of commercial beneficiaries, as employer sponsored beneficiaries move to the ACA’s exchanges or (more frequently) to private exchanges

Conversely, Medicaid is expanding; enrollment losses from rising employment are more than offset by more generous eligibility standards under the ACA; and by rising enrollment as states that have not participated in the expansion eventually choose to participate. Medicaid HMOs are gaining share of this growing population; and, average contract values stand to rise as dually eligible Medicare / Medicaid beneficiaries eventually enter HMOs

Importantly, we believe many of the Medicaid hold-out states would have expanded their programs to 100 percent of the federal poverty level (100 FPL) if Health and Human Services had agreed to pay the enhanced federal match on enrollees in these smaller expansions

Former Secretary Sebelius’ decision not to provide enhanced matching to partial expansions presumably was meant to encourage full expansions in most states, but this has not worked; more than 9 million Medicaid beneficiaries at or below 100 FPL remain on the sidelines in states that have not expanded. Former Secretary Sebelius’ policy was set to expire at the end of 2016, however we see some chance that the new Secretary nominee may choose to retire the policy sooner, bringing these additional 9 million beneficiaries into the program more quickly

We believe the relatively narrow difference between commercial and Medicaid HMOs’ valuations fails to reflect the broad differences in these subsectors’ growth prospects, and we conclude that the Medicaid HMOs are undervalued

For our full research notes, please visit our published research site.

ACA Enrollment Round-Up – How Many Have Paid Premiums; How Many Were Already Insured Last Year; How Their Health Compares to Employer-Sponsored Beneficiaries’

Written April 13th, 2014 by

As of Thursday April 10th roughly 7.5 million persons have selected plans on the health insurance exchanges (HIEs); of these roughly 86 percent have paid (or are likely to pay) premiums; this points to a total of 6.5 million HIE enrollees

Best available evidence indicates that only 35 percent of these 6.5 million persons were uninsured in 2013, making the net gain in coverage as a result of the HIEs 2.3 million

The young (18-34) are underrepresented on the HIEs (28% of adult HIE enrollees as compared to 38% of the adult population); even if the HIE enrollees were of normal health for their age (which they’re not – see immediately below), the skew in age-mix to older enrollees appears large enough to result in adverse selection

Early prescription claims (January/February) show that HIE beneficiaries are significantly more likely than other commercial beneficiaries to consume prescriptions indicative of significant chronic disease – i.e. the early prescription claims indicate the HIE beneficiaries are on average sicker, and to a greater degree than would be expected simply because of their higher average age

Net gains in Medicaid enrollment year on year are 5.7 million; 3.6 million of whom were uninsured in 2013. Total reduction in un-insured is thus 5.9 million persons, 2.3 million on the HIEs and 3.6 million on Medicaid

It bears emphasizing that an additional 9.1 million persons would enter Medicaid if the non-participating states expanded the income eligibility cut-off to 100 FPL – which we believe they will do if HHS will pay enhanced federal matching rates on the new beneficiaries. Former Secy Sebelius refused to do this under a policy that expires at the end of 2016; her replacement could gain a larger percentage of these 9.1 million Medicaid beneficiaries by reversing that policy. We have no direct indication she intends to do so in the near term, but we continue to believe allowing these states to expand to 100 FPL is the most likely outcome. This of course augurs well for the Medicaid HMOs, which we favor

For our full research notes, please visit our published research site.

Index of Generic Drug Acquisition Costs Now Available to Pharmacies Nationwide; Commercial Plan Sponsors Likely to Shift Away from AWP

Written April 7th, 2014 by

Medi-Span announced Friday the inclusion of National Average Drug Acquisition Cost (NADAC) data in its point-of-sale pricing products for retail pharmacies; First DataBank made a similar announcement last December. These two providers dominate drug pricing data; accordingly NADAC is now routinely available to pharmacies nationwide

NADAC closely tracks generic acquisition costs; the current drug pricing standard (average wholesale price, or AWP) does not. AWP creates an information asymmetry that favors the seller (e.g. a PBM selling services to an employer), and this enables large margins on generics. NADAC substantially narrows this information asymmetry, and is likely to narrow generic margins

PBMs are most negatively affected; ESRX is most affected among the PBMs by virtue of its greater mail order presence. Retailers are somewhat less affected; CVS is most affected among retailers by virtue of its large PBM operations. Wholesalers are least affected in the short term; however if falling generic margins lead to a loss of independent pharmacies, wholesalers could be seriously affected in the mid- to longer-term. ABC is most at risk among wholesalers; having taken over WAG’s generic volume it is more levered to generics than peers; and, unless ABC anticipated falling generic margins on the NADAC roll out it may have underpriced its relationship with WAG


For our full research notes, please visit our published research site.

The Bull Case for PCSK9 (AMGN, SNY, REGN, PFE): Why Estimates Are Too Low

Written April 2nd, 2014 by

PCSK9 inhibitors are injectables (biweekly to monthly) that lower LDL (aka ‘bad’) cholesterol by ≥ 50%, on par with max dose statins. AMGN and SNY/REGN are closest to market, followed by PFE

Statin-intolerant patients generally are restricted to the use of bile acid sequestrants or Zetia. At best the sequestrants lower LDL by 25% with substantial GI side effects; Zetia lowers LDL by just 15%. PCSK9’s offer 2x – 3x efficacy to sequestrant patients, and a chance to trade GI side effects for self-injection – in many cases a very fair trade. PCSK9’s offer Zetia patients 3x the efficacy at the cost of self-injection; this is a fair trade to patients at higher near-term risk of atherosclerotic events, but less attractive to many of the rest.  The US statin-intolerant market accounts for roughly 19M months of treatment annually; we believe PCSK9’s can capture 9M months of treatment in this sub segment

Further PCSK9 demand can be found among the 12M current statin patients who – despite already being on statin therapy – still meet the new criteria for needing high intensity (≥ 50%) LDL-C lowering. These patients’ options boil down to: 1) maxing statin dose if they haven’t already (20% add’l LDL-C reduction at most); 2) adding ezetimibe to their statin (15% add’l LDL reduction); or 3) adding a PCSK9 to their stain (≥ 50% add’l LDL reduction)

Of these high-risk current statin patients, 5M have LDL’s above 100 mg/dL; despite the new guidelines’ de-emphasis of specific LDL targets, we believe physicians will see the PCSK9’s as the most attractive option for these patients, even in the absence of outcomes data. If and when outcomes evidence warrants, we would expect the use of PCSK9’s to extend to the remaining high-risk statin patients whose LDLs are at or below 100 md/dl

‘Pre-outcomes’, we expect 9M months of treatment demand from statin intolerant patients, combined with an additional 9M to 12M months of treatment demand from high risk statin patients with LDL’s > 100 mg/dL. At $300 – $400 / month ‘list’ ($245 – $330 ‘net’), this indicates an early PCSK9 US market of $4.4B to $6.9B

‘Post-outcomes’, we expect a further 6M to 8M months of therapy, raising the total US market estimate to between $5.9B and $9.6B

Current consensus reflects a median 2019 global sales expectation of just $3.2B, as compared to our lower bound US expectation of $4.4B

For our full research notes, please visit our published research site.

SSR Index of Current-Quarter Healthcare Demand Growth: Interim 1Q14 Estimates

Written March 24th, 2014 by


We expect 3.4% (nominal) y/y growth in US health services demand during 1Q14, the product of 2.4% growth in demand intensity and 1.0% growth in price. Intensity growth reflects a 10bp improvement over actual 4Q13 growth of 2.3%, but a 20bp drop from our initial 1Q14 forecast. Price growth reflects a very large 30bp drop from 4Q13

Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model indicates that sequential acceleration in demand during 1Q14 is likely (82%)

Pricing suffers from the effects of the +/- 2% reduction in Medicare payment rates as a result of  the so-called ‘sequester’; and, from a deceleration in commercial pricing growth (at least for hospitals) now that the initial ACA enrollment period is closing

Our reduced estimate for intensity growth reflects falling hospital employment QTD. Fundamentally, we believe falling hospital employment reflects decisions by hospital administrators to reduce capacity in the wake of poor ACA enrollment, rather than any weakening of the sequential demand trend. Rather than edit the outputs of our models we chose to ‘print’ the reduced 2.4% intensity figure without adjustment; however we believe actual intensity growth is more likely to reflect the original 2.6% rate computed before the February drop in hospital employment

This year’s weaker flu season reduces YoY intensity growth by roughly 40bp in 1Q14; thus ‘true’ growth in intensity is closer to a range of 2.8% (if falling hospital employment actually reflects slowing sequential demand) to 3.0% (if falling hospital employment reflects capacity adjustment in the wake of weak ACA enrollment, as we expect)

We believe intensity of demand will continue to grow as employment improves, as this serves to move a larger percentage of the population into the most generous form (employer sponsored) of health insurance. For this reason, we favor healthcare sub-sectors that are: 1) positively levered to gains in US per-capita intensity; and 2) have stable pricing, such as Non-Rx Consumables (e.g. BD, BCR, COV, CFN, OMI)

For our full research notes, please visit our published research site.

The Trouble with Hospital Pricing

Written March 4th, 2014 by

As employees’ health insurance has shifted to high deductible forms, they’ve become personally responsible for larger and larger percentages of hospitals’ billed charges. And, as the average self-pay (i.e. deductible, co-pay, or co-insurance) collectible from an insured person has risen, their willingness to pay that bill has fallen. Using THC as an example, the collection rate on insured patients’ share of hospital charges fell from 51.9 percent in 2006 to 37.1 percent in 2013

Conversely, as Medicaid expands and the previously uninsured gain new health coverage on the health insurance exchanges, hospitals’ collections from persons previously uninsured rises. The obvious question: Which effect ultimately will be larger?

We believe that all else held equal, feasible Affordable Care Act enrollment gains (Medicaid and health insurance exchanges) would reduce hospitals’ provisions for doubtful accounts by roughly 2 percent. Using HCA’s 2013 provision of 11.2 percent as an example; if nothing changed other than reduction of the uninsured due to ACA enrollment gains, we would expect the HCA doubtful accounts provision to fall to +/- 9.2 percent

If we then add back the assumption that employer sponsored insurance is becoming less generous, we find that if the average employer sponsored plan paid roughly $0.72 per dollar of allowed charges (equivalent to a generous Silver plan on the health insurance exchanges) as compared to the current $0.82 average (equivalent to a generous Gold plan), that the 2 percent improvement in the provision for doubtful accounts would be wiped out. As employers move employees to private health insurance exchanges, employees may self-select into plans paying as little as $0.65 per dollar of charges

Thus it’s feasible that falling numbers of uninsured improve hospitals’ collections at about the same pace that falling generosity of employer-sponsored coverage impairs hospitals’ collections – but the risks are plainly to the downside

But for these net pricing risks, we would recommend hospitals, as we anticipate significant growth in unit demand for hospital services, and this typically brings share price outperformance. However because of these risks, we believe hospital suppliers (e.g. BD, CFN, COV, OMI, etc.) are a substantially better investment, as these companies are likely to see both stable* pricing and volume gains


For our full research notes, please visit our published research site

SSR Index of Current-Quarter Healthcare Demand Growth: Initial 1Q14 Estimates

Written February 25th, 2014 by

We expect 3.6% (nominal) y/y growth in US health services demand during 1Q14, the product of 2.6% growth in demand intensity, and 1.0% growth in price. The 2.6% intensity growth would be a 30bp improvement over actual 4Q13 growth of  2.3%; in contrast the 1.0% price growth would be a very large 30bp drop from 4Q13

Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model suggests a very high probability of sequential acceleration in demand during 1Q14 (92%)

Our continued expectation of modest acceleration is underpinned by slight wage growth for non-supervisory labor in healthcare settings (which we read as a contemporary indicator of health services unit demand), and more substantial improvement in GDP forecasts from the Philadelphia Fed’s Survey of Professional Forecasters (which we read as a contemporary indicator of health demand, and a leading indicator of employer sentiment)

2013 was the slowest year for services price growth in recent memory. The effect of the ‘fiscal cliff’ sequester on Medicare pricing lowered national average health services y/y pricing growth from 1.9% in 1Q13 to just 1.3% in 4Q13. Hospitals have fared – and January data suggests continue to fare – particularly poorly

Flu is a key demand variable during the fourth and first quarters, with the typical season beginning in late September / early October. The current flu season started slowly; got much worse very quickly; and then faded to very mild just as quickly. On net, this noisy season looks fairly typical which implies a +/- 20 – 30bps headwind to unit demand during 4Q13-1Q14 (after the very severe in 2012-2013)

We recommend a healthcare portfolio that balances US focused, volume levered names with selective bets on innovation (specifically innovator companies with pending or recent major new product approvals, and/or high-quality early- to mid-stage pipelines that appear undervalued)

This translates into overweight positions for Biotech; select Non-Rx Consumables (especially more US-focused names such as CFN and OMI); Medicaid HMOs (like WCG and MOH); Health IT; Hospital RCM providers (like AH and STRM) and select Dental names (particularly more US-focused names with product lines that include higher-mix items, such as XRAY and PDCO)

We recommend underweight positions in Large-cap Pharmaceuticals and Specialty Pharmaceuticals (on US real pricing power concerns); PBMs (especially ESRX), Drug Retail (especially CVS), and Drug Wholesale (especially ABC) (on the loss of AWP pricing, and risks of PBM disintermediation); Device Innovators; Medical Equipment (health capital spending will favor information technology in the near term); Diagnostic Labs; and Research Tools / Services (implied revenue growth exceeds R&D spending growth)


For our full research notes, please visit our published research site

ACA Enrollment and Adverse Selection Pressures – An Update

Written February 19th, 2014 by

Current health insurance exchange (HIE) enrollees skew older, to the extent that adverse selection pressures appear highly likely. Only 25% of enrollees are aged 18-34, as compared to the 40% enrollment share presumably needed for premiums and claims to balance across the HIEs

The argument is being made that enrollees’ age is less relevant than their health status, which is to draw a technically correct but practically meaningless distinction between known age and probable health. For this argument to pan out, the typical HIE enrollee must be dramatically healthier than his or her age and income would imply

We put numbers to this. At the currently enrolled age mix, for premiums collected to cover claims paid, and assuming HIE enrollees aged 35-64 have normal health for their age and incomes, the 18-34 year old HIE enrollees must:

be 21pct less like to incur an injury or develop an illness requiring urgent care;

weigh 17 pounds less;

have a 28pct lower rate of obesity;

have no physical limitations; and,

rate their health 25pct higher on a 5-point Likert self-assessment scale than the average 18-34 y.o. in the HIE eligible population

The likelihood of HIE enrollees being on average at all healthier than the broader population of persons eligible to enroll is very nearly zero; the likelihood of younger enrollees being this much healthier than their age and income matched peers is too small to take seriously

Adverse selection on the HIEs is far more likely than not, which implies significant policy changes in the relatively near term. Feasible options include: allowing greater premium differences based on age, allowing higher out-of-pocket maximums, reducing the scope of benefits, increasing subsidies, increasing penalties, and/or merging the relatively poor HIE risks into an existing risk pool having better average risks



For our full research notes, please visit our published research site

Harvest Time for the Bill Collectors? The ACA’s Narrow Hospital Networks May Spur Demand for Revenue Cycle Management (RCM) Services

Written February 18th, 2014 by

We compared hospital networks for plans sold on the health insurance exchanges (HIEs) to networks for plans sold (by the same issuer) off of the HIEs

For the non-profit issuers and HUM the ‘on-HIE’ and ‘off-HIE’ networks appear the same; for AET, CI, and WLP, the ‘on-HIE’ hospital networks are significantly narrower

Hospitals in the narrow ‘on-HIE’ networks have less revenue per patient day, lower receivables turnover, and lower net margins than hospitals offered outside of (but not on) the HIEs. These differences cannot be attributed to payor mix (‘on’ and ‘off-HIE’ hospitals are the same on this measure) or to average acuity of patients (‘on’ and ‘off-HIE’ hospitals also are the same on this measure). The most likely explanation is that ‘on-HIE’ hospitals are less adept than ‘off-HIE’ hospitals at revenue cycle management (RCM)

As we’ve shown elsewhere, the Affordable Care Act (ACA) has shifted the market for individually purchased health insurance to significantly higher deductibles, co-payments, and rates of co-insurance. Many 2014 HIE enrollees will have been 2013 individually-purchased beneficiaries; thus beginning in 2014 ‘on-HIE’ hospitals are going to have to collect a far larger percentage of these patients’ invoices directly from the patient, rather than from these patients’ insurers. Rates of collection inevitably will fall

‘On-HIE’ hospitals appear behind the game in RCM; and, to have little choice but to bring their RCM capabilities up to par. Rising demand for hospital-oriented RCM services is a likely outcome

Hospital-oriented RCM providers are a broad and diverse group, within which AH and STRM appear to offer the most direct exposure, followed by CPSI and QSII

Separately, the narrow nature of some issuers’ ‘on-HIE’ hospital networks is further evidence that potential HIE beneficiaries will not view the exchanges’ health coverage offerings as good value for money, with low enrollment and adverse selection the likely result

For our full research notes, please visit our published research site

Your (HIE-based) Plan Doesn’t Cover That: A Comparison of Drug Formularies On and Off the Health Insurance Exchanges

Written February 2nd, 2014 by

For a podcast of this and other research notes, please see the SSR Health YouTube channel

Popular brand drugs are much more likely to face restrictions in health plans sold on the Affordable Care Act’s (ACA’s) health insurance exchanges (HIEs), as compared to health plans sold outside of the HIEs

We compared the formulary status of 11 category leading brands on HIE-based and non-HIE-based health plans.  On average, HIE-based plans were less than half as likely to carry the category leading brands in a preferred position. All 11 category leaders were covered by all non-HIE-based health plans, but 5 of the 11 category leading brands were excluded from at least one HIE-based health plan. This note provides formulary status details for each brand analyzed

Thus not only are deductibles, co-pays, and co-insurance rates higher for a given level of formulary status on the HIEs than off, the most commonly used brands are more likely to be restricted on the HIEs than off. As a result, the out-of-pocket costs for any drug – and in particularly the most commonly used brands – will be much higher for HIE beneficiaries than for non-HIE beneficiaries

This increases the likelihood that brand manufacturers will use more generous co-pay card programs to keep HIE beneficiaries’ out-of-pocket costs low, which carries the risk of proving to plan sponsors and formulary managers in the far larger non-HIE market that these plans’ drug benefits can be similarly restricted, with little or no risk of beneficiaries not being able to afford prescriptions. We see this as the single most important risk facing brand manufacturers’ US pricing power

Separately, the austerity of drug benefits for HIE-based plans adds to our conviction that potential HIE beneficiaries – especially those with modest subsidies — will not see value for money in the plans offered on the public exchanges. Increasingly, we’re convinced that limited enrollment on the public exchanges has much less to do with website problems than with something far more fundamental and enduring – a perception that coverage offered is not worth the premium charged

For our full research notes, please visit our published research site

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