If you’ve been employed (and even tangentially following healthcare reform efforts for the past twenty years) you’ve heard of the health savings account (HSA). First proposed in 1992, then signed into law in 2003, health savings accounts and other high deductible plans are currently offered by 72% of employers with over 500 workers as of 2016 (this represents 52% of U.S. employees).
Our Healthcare analyst Andrew Freedman hosted an institutional conference call recently to discuss top short idea and HSA provider Healthequity (HQY). They believe it will be difficult for Healthequity to sustain greater than 20% sales growth in perpetuity with adoption rates slowing to 10-13% market-wide through 2020 from the 23% compound annual growth between 2013 and 2016.
The reason why is pretty simple.
U.S. consumers simply don’t have enough cash on hand to cover the requirements of these high-deductible plans. “When you think about medical expenses broadly speaking, and the consumer’s willingness to take more financial risk through their health benefits, you have to keep in mind most households can’t afford their deductible to begin with or their out of pocket cost,” says Freedman in the video above.
A survey conducted by the Kaiser Family Foundation found just 76% of consumers have enough liquid financial assets to cover a mid-range deductible plan of $3,000 to $6,000. To make matters worse, about 26% of adults reported problems paying their existing medical bills in the past year.
All of this raises obvious questions for Healthequity.
According to Healthequity’s own data, 70% of all members are “spenders,” meaning they are transactional and keep, on average, a balance of $320 in their accounts. That’s a fraction of the $1,595 balance held across all of Healthequity’s accounts. In other words, most individuals are not using the accounts to save. “Assuming this trend continues that will weigh on the prospects for average account balance growth and the ultimate total addressable market and multiple that people pay for the stock,” Freedman says.
Given the prevailing growth narrative, we believe it will be difficult for the stock to hold its premium multiple (27x 2018 EBITDA / 71x 2018 EPS) in the face of slowing revenue growth due to a maturing market, higher attrition, and pricing pressure.
Bottom Line: We see -30% downside in the shares from current levels.
