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Takeaway: EHTH cut guidance following a disastrous quarter. We're largely out of catalysts for 2014, but 2015 doesn't get any easier.


  1. 2014 RISK ALL ON THE TABLE NOW: Individual and Family Plan (IFP) net membership declined by 49K: EHTH gained 95K new members, while losing 144K existing members (18% of its members from the quarter prior).  While many believed EHTH was working with a massive tailwind from the individual mandate under ACA, we estimate that EHTH saw declining IFP revenues in 2Q14 on a y/y basis.  Turns out the public exchanges posed a much bigger threat than either the street or management believed they would be.  The company's updated guidance range suggests that management is only expecting ~1/3 of its previous growth outlook.
  2. BUT NOT OUT OF THE WOODS YET: Attrition risk will remain into 2015 as pre-ACA plans expire, and MCOs cancel those plans on their own to manage the overall risk profile of their books.  We have suggested that one of the bigger risks heading into 2015 is that MCOs cut commission rates next year now that the public exchanges are largely operational.  Further, when (if) EHTH gets the ability to sell subsidized plans, it must offer all subsidized plans that are available on the public exchanges, regardless of whether it has a commission agreement with that MCO or not.  In a worst case scenario, EHTH could sell an MCO's plan on its platform, and not receive any commission for it.  Under these circumstances, is there a compelling reason to believe that commission rates won't get cut next year?
  3. MULLING THE SHORT: All the major risks to 2014 are on the table now, so we're largely out of catalysts on the short side for the near future.  However, 2015 is around the corner, and as we highlighted above, EHTH is not out of the woods yet.  Remember, EHTH is essentially a distributor without a captive consumer.  It operates in a crowded industry with a growing competitive threat from the public exchanges.  MCOs are likely to push back on rates in 2015; and there's not much EHTH can do about it.  For now, we remain short.  

EHTH: Not Out of the Woods Yet (2Q14) - EHTH   Net Membership Growth 2Q14

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

Hesham Shaaban, CFA