EHTH: Keeps Getting Worse

Takeaway: Management comments at a competitor's conference introduce new risk to the story. A much bigger risk is yet to emerge. We remain short.

KEY POINTS

  1. WHAT'S NEW:  Management suggested at a competitor's Healthcare conference that it hasn't seen much improvement in fixing its technical issues interfacing with the government exchanges, and this issue may not be resolved before the next Open Enrollment period.  If true, this will only exasperate its retention/attrition issues, which is the central part of our thesis.
  2. WHAT'S NOT SO NEW:  Management also said 2Q14/3Q14 applications will be a “fraction” of what they were a year ago.  Management already alluded to this during its last earnings call, suggesting applications will be down y/y.  We previously highlighted this as risk to consensus estimates, but this isn’t central to our thesis since applications were accelerated into the 4Q13/1Q14 period because of Open Enrollment.
  3. WHAT'S COMING: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.

See notes below for more detail on our thesis.  Let us know if you would like to see additional notes, have any questions, or would like to discuss further.

Hesham Shaaban, CFA

@HedgeyeInternet

 

EHTH: Déjà vu

03/04/14 02:15 PM EST

http://app.hedgeye.com/feed_items/33897

EHTH: Initiating Short

01/29/14 10:38 AM EST

http://app.hedgeye.com/feed_items/33017