We've been highlighting an uptick in utilization since late 2018 as the #ACATaper bottomed in 2017. After stabilizing in 2018, 2019 appears to be showing signs of acceleration. Medical utilization is often associated with economic slowdowns, typically as consumers respond to concerns about loss of coverage in a #growthslowing environment. So far, data points coming through 2Q19 earnings seem directional, but largely support our view. THC and DGX made positive volume comments while UNH and ANTM have now made negative MLR comments.
However, the specifics of the ANTM earnings call commentary were materially different and contradictory to a broad based utilization uptick. For ANTM, management was explicit that outside of Medicaid, cost trends were stable/inline in both their commercial and Medicare books of business. In our opinion, Medicaid re-determination is a reasonable "excuse" - one easily verified - for the MLR under-performance and one that resolves favorably for ANTM in 2H19.
Rebate Rule Part #2 COULD BE WORSE THAN AZAR's
We've spent an exhaustive amount of time understanding the level of rebates across UNH and ANTM in order to quantify the impact of the now-withdrawn Rebate Rule which was authored by Alex Azar, the Secretary of Health and Human Services. Rebates, especially for UNH, are deployed to reduce premiums which is a key determinant of enrollment share gains and losses. With the CMS Rebate Rule withdrawal, half of our thesis underpinning long ANTM short UNH was taken out and our response was to put UNH back onto the short bench.
However, a trio of bills released by the Senate Finance, HELP and Judiciary Committees suggest a similar but less direct impact as the Rebate Rule. Provisions prohibiting spread pricing and rebates in the commercial market, while also requiring robust reporting between PBMs and their clients, all argue for the same result: lower drug inflation and greater transparency. As the PBM industry and its associated support of share gains thrives on drug price inflation and opaque nature of pharmacy transactions, the Committee bills are a more comprehensive and negative for the industry, albeit with a delay until 2021
CREEPY MLR COMMENTS
ANTM missed consensus MLR and guided higher for 2019 and is the central issue causing today's negative price reaction. The rationale given was an unfavorable mix of patients in the Medicaid book of business. This explanation we find plausible because of our research on federal guidance on re-determinations of eligibility. We have previously highlighted the over-enrollment in Medicaid that was a hangover from the ACA and lax re-determination of membership by states. In extreme cases, as in California, Medicaid enrollment exceeds the population at qualifying federal poverty levels. As federal matching dollar percentages fall, determining a beneficiary's eligibility has become more important to state budgets. The federal government has supported stricter enforcement through the availability of additional funds. The result seems to be an adverse selection and it is highly likely ANTM receives incremental payments in 2019.
The MLR dominated the Q&A with management largely reiterating "stability" in both the commercial and Medicare books. Medicaid as a sole source of the MLR problem is reasonable and their assertion that they will receive relief in the second half of 2019 believable.
Medicare Advantage Remains the Thesis and on track
Our bullish view on ANTM is centered on their Medicare Advantage book of business. Our view is that Medicare Advantage penetration into the fee for service book is nearing peak. Incremental membership will be more difficult to secure in the coming years. In addition, based on a review of statutory filings and the rebate offsets, we believe ANTM has been at a relative disadvantage with MA premium levels given the lack of an internal PBM. With the launch of IngenioRX this MA premium disadvantage is now, in part, eliminated. Our thesis is that in combination with superior non-pharmacy unit costs, IngenioRX can now drive Medicare Advantage share gains. The company is targeting additions of 200,000 MA lives by the end of 2019 which appears to corroborate this view, although more substantial gains are likely in 2020 and beyond.
CLICK HERE for our Anthem Black Book presented May 22, 2019 where we detailed both the rebate impact and Medicare Advantage enrollment.
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