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Takeaway: Bad news is mostly on the table, but we're expecting a guidance cut on the release. Stock has taken a beating, so downside may be limited.

KEY POINTS

  1. MOST OF THE BAD NEWS ON THE TABLE: Many of the headwinds we were expecting for 2014 are already on the table.  Attrition all but negated the 1Q14 surge in Individual & Family Plan (IFP) new membership growth.  Additionally, management suggested that application volumes will be down y/y from 2Q14-3Q14.  EHTH is down over ~40% since we initiated the short position, and we are running out of near-term catalysts, so we will be evaluating the position after the print.
  2. LINGERING 2014 RISK: The lingering tailwind that EHTH has going for them in 2014 is the flow-through of late 1Q13 applications before the Open Enrollment deadline.  However, the deadline could prove to be a headwind as well.  EHTH may have lost additional members who were looking for subsidized plans on the Government Exchanges (EHTH had limited ability to sell those plans in 2014).  For perspective, HCA Holdings, which is the largest hospital system in the US, said yesterday during its earnings call that only 40% of its Exchange patient volumes are coming from the newly-insured.  That means 60% already had insurance, some if not, most of that is coming from private exchanges (e.g. ehealthinsurance.com).  The quarter and guidance could go either way, but we suspect a guidance cut is the most likely scenario.  
  3. MAJOR RISK IN 2015: 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.

Let us know, if you have any questions, or would like to discuss further. 

Hesham Shaaban, CFA

@HedgeyeInternet