THE HEDGEYE EDGE
Editor’s Note: Our Healthcare Policy analyst Emily Evans recently hosted an investing webcast dissecting last week’s Healthcare sector meltdown. She shared her insights and key takeaways on UnitedHealth Group (UNH), HCA Healthcare (HCA) and Tenet Healthcare Corp (THC). Click here to watch the entire 30-minute webcast.
Our Healthcare team maintains its short call on UnitedHealth Group (UNH) based on rebate rule changes, structural headwinds to Medicare Advantage enrollment growth, near term risks of accelerating utilization, and an unfavorable economic growth and stock market environment.
Pharmaceutical manufacturer rebates have been subsidizing Medicare Advantage. The impact of the rebate rule turns on how dependent MA-PDP and stand-alone PDP are on rebates to control benefit costs and premiums. For the large national plans, like CVS, CI and UNH which all have in-house pharmacy benefit managers and a national presence that give them strong negotiating power, rebates are a significant factor in managing premium prices.
According to state filings, UNH’s largest insurance subsidiary, UnitedHealthcare Insurance Company with $54B in premium revenue, incurred $7 billion in prescription drug claims in 2018 for its Medicare plans. This particular subsidiary has 4.7 million covered lives and 57 million-member months. Deducted from that cost was $4B in rebates. Prescription drug costs were then reduced to $3 billion. These rebates exceed by a significant amount the 24% of drug costs estimated by the Office of the Actuary.
The end to the safe harbor for these rebates in 2020 means plans will have to choose between raising premiums or reducing margins. The safe harbor rule change only applies to Medicare Part D but it seems likely to spread even without Congressional action.
CMS is also considering putting an end to other pharmacy price concession in Part D which will further disrupt UNH's model. The HIF moratorium for 2019 has kept premiums in check but there is no vehicle for another 2020 delay. With the Trump Administration demanding greater risk sharing by ACOs and generally skeptical of "value-based care" as envisioned by the ACA, the future of OptumHealth doesn't look particularly clear.
Congressional hearings last week during which Secretary of Health and Human Services Alex Azar spoke on rebates, deflation, and the cost of medical care caused significant weakness across much of Healthcare and Top Short UNH in particular (Speech Here).
The pejorative-laced speech, along with a number of hearings this past week, likely pushed consensus to the view that the new rebate rules will be implemented January 1, 2020. Of course the next question is what the change in rebate policy is worth, and the next debate arena, now that “it won’t happen” is off the table, will be for management teams and the sell-side to reach for “it doesn’t matter.”
While we doubt #MedicareforAll is to blame, it appears that these Congressional hearings have raised the level of concern on rebates.
We see an additional 20%+ downside from current levels even after the recent 10% decline.
ONE-YEAR TRAILING CHART
