摩根大通：2009年美国卫生保健行业展望

2506

收藏 2009-01-20

Managed Care: 2009 Outlook and Model Book Spreads Matter: Getting More Constructive Managed Care John RexAC (1-212) 622-6600 <a href="mailto:john.rex@jpmorgan.com">john.rex@jpmorgan.com</a> Scott Hansen (1-212) 622-2250 <a href="mailto:scott.hansen@jpmorgan.com">scott.hansen@jpmorgan.com</a> Kris Weber (1-212) 622-2262 <a href="mailto:kris.weber@jpmorgan.com">kris.weber@jpmorgan.com</a> J.P. Morgan Securities Inc. See page 236 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at <a href="http://www.morganmarkets.com/">www.morganmarkets.com</a> or can call 1-800-477-0406 toll free to request a copy of this research. As we enter 2009 we move to a more constructive view on the managed care stocks than we maintained for much of 2008, this largely in the context of the potential for stable-to-modestly improving premium/cost-trend spreads. To be sure, the challenged economy will continue to weigh on membership and investment income, though we consider this largely reflected in expectations, with our current view mostly about operating margin stabilization. In a normal environment perhaps this would not be overly persuasive. Though when considering valuations and the economic climate, we find the prospect of stability to be interesting, even compelling, for some of the stocks. • Broadly, we see potential for some recovery in valuations, this is in part as the spread outlook improves. Overall, our bias is toward a view for stable to modestly improved spreads, with an environment that we believe favors 1) lower consumption of healthcare products and services and 2) a stabilizing pricing environment. Here we see continued weak utilization, with indications from the wide healthcare “vendor” community showing pressured as consumers avoid elective care. As it relates to the pricing outlook, we believe that 2009 will show some yield stabilization, as the not-for-profit/mutual companies seek to restore underwriting margin after the last several years of reductions and the now significantly lower contribution from investment income. • With this as a backdrop, we believe that group valuations should continue to recover, in our view sufficient to sustain 8-10x forward multiples. Historically the stocks traded at about a 15x multiple, with 9x having been the typical trough valuation, and generally about a 15-20% discount to the S&P. Even with a near 50% rally over the past seven weeks as financial contagion anxiety eased, the group currently trades at about 7x 2009 estimates, a 50% discount to the S&P. We do not, however, expect to see a recovery that will match historical valuations, in part due to a lower earnings growth outlook than over the prior decade and a political environment that is sure to be far less favorable for the health insurers than the one we are exiting. • We are also introducing year-end 2009 price targets. Among factors impacting our company-specific valuation parameters we consider 1) investment portfolio risks, 2) underwriting margin outlook, and 3) and sensitivity to likely political/regulatory changes. We are raising our rating on Centene to Neutral from Underweight, as we believe the state program pure plays are best positioned to benefit in the new political environment. We maintain our Overweight on UnitedHealth. We are also increasingly favorable on shares of Aetna, as moderating medical costs should alleviate concerns arising from the third quarter report. Here though, our continued Neutral rating is meant to convey the potential for somewhat higher volatility due to the company’s larger exposure to market/investment asset factors. In mid-cap, we believe that Health Net will continue to be in focus as it explores strategic options, a key supportive factor for the stock, while operating visibility constrains our fundamental view.Table of Contents Executive Summary .................................................................6 Operating Challenges Dominant the First Half .............................................8 Key Considerations for 2009 .......................................................................13 Company Snap Shot Positioning for 2009...................................................15 Underwriting Margin Outlook.....................................................................16 Investment Portfolios...................................................................................25 Political and Regulatory Outlook ................................................................28 Introducing 2009 Price Targets ...................................................................33 Key Industry Operating Metrics ............................................47 EPS ..............................................................................................................48 MCRs...........................................................................................................50 Medical Cost Trend .....................................................................................51 Component-Specific Trends ........................................................................54 Company-Specific Cost Trend and MCRs ..................................................56 DCPs............................................................................................................64 Reserve Development..................................................................................65 Cash Flow....................................................................................................65 SG&A..........................................................................................................67 Membership.................................................................................................68 Reserve Developments..........................................................73 Stock Performance.................................................................81 Third-Quarter 2008 Company Snapshots.............................85 Recent Developments Medicare Developments ..............................................................................91 Medicaid Developments ..............................................................................97 Regulatory Developments .........................................................................101 Access Initiatives.......................................................................................104 Political Developments..............................................................................106 Company Overviews and Models Aetna Inc. ..................................................................................................111 Amerigroup Corp.......................................................................................127 Centene Corp. ............................................................................................135 CIGNA Corp. ............................................................................................143 Coventry ....................................................................................................163 Health Net..................................................................................................173 Humana Inc. ..............................................................................................187 Molina Healthcare Inc. ..............................................................................199 UnitedHealth Group ..................................................................................207 WellCare Health Plans...............................................................................219 WellPoint Inc.............................................................................................223Figures Figure 1: Health Benefits Index 2008 Stock Performance..........................................6 Figure 2: Health Benefits Index vs. S&P 1990-2008..................................................7 Figure 3: Health Benefits Group – Forward P/E Ratio 1990-2008..............................7 Figure 4: Major Managed Care Sell-Offs Since 2000.................................................8 Figure 5: First Half 2008 Stock Performance .............................................................8 Figure 6: Managed Care Earnings Revisions During 2008........................................10 Figure 7: Second Half 2008 Stock Performance.......................................................12 Figure 8: Reported and Expected Employee Share of Total Health Care Costs ........14 Figure 9: Not-for-Profit Underwriting Margins.........................................................17 Figure 10: Not-for-Profit Net Margins.......................................................................17 Figure 11: Not-for-Profit Investment Income ............................................................18 Figure 12: Company Cost Trend and Pricing Outlooks.............................................19 Figure 13: Commercial Medical Cost Trend – 1961-Present.....................................20 Figure 14: Inpatient Cost Trend Indications ..............................................................20 Figure 15 : Hospital Operating Trends ......................................................................21 Figure 16: MCR, SG&A and Net Margin Change by Company – 2005-2010E........22 Figure 17: MCR, SG&A and Net Margin Change by Company – 2005-2010E........23 Figure 18: Detail of Net Commercial Organic Adds by Company (‘000s)................23 Figure 19: Commercial-Insured Enrollment Publicly Traded vs. Not-for-Profit.......24 Figure 20: 2009E Commercial Enrollment by Category and Company (‘000s)........25 Figure 21: Investment Income ...................................................................................25 Figure 22: RBC Ratios YE’07 ...................................................................................26 Figure 23: Investment Portfolio and Related Issues...................................................27 Figure 24: Medicare Advantage Participation '09E ...................................................29 Figure 25. Comparison of Health Reform Proposals .................................................32 Figure 26: Comparative Company Data as of January 8, 2009..................................46 Figure 27: MCR, SG&A and After-Tax Margin Change by Company – 2005-2010E ..................................................................................................................................48 Figure 28: EPS Growth Rates by Company, 2003-2010E .........................................49 Figure 29: Median Y/Y EPS Growth 2001-Present ...................................................50 Figure 30: Median Group Medical Cost Ratio, 1990 to Present ................................50 Figure 31: Not-for-Profit MCRs ................................................................................51 Figure 32: Median Commercial Medical Cost Trend ................................................52 Figure 33: Commercial Cost Trend and Core CPI 1961-Present...............................52 Figure 34: Reported Medical Cost Trend by Company, 2001-08 ..............................53 Figure 35: Medical Cost Trend by Component, 2003-09E........................................54 Figure 36: Hospital Operating Trends........................................................................54 Figure 37: Year-over-Year Hospital and Related Services Component CPI and PPI and Physician Component of CPI and PPI.................................................................55 Figure 38: Percentage Change in Pharmaceutical Sales ............................................55 Figure 39: Rolling 12 Month Hospital and Related Services Component CPI and PPI and Physician Component of CPI and PPI.................................................................56 Figure 40: Summary of Premium, Cost, and Enrollment Trends by Company ........61 Figure 41: Summary of Premium, Cost, and Enrollment Trends by Company (Cont’d)......................................................................................................................62Figure 42: Summary of Premium, Cost, and Enrollment Trends by Company (Cont’d)......................................................................................................................63 Figure 43: Summary of MCRs and DCPs by Company, 2005 to Present..................64 Figure44: Median Group Days Claims Payable.........................................................64 Figure 45: Group Median CFO to Net Income (Unadjusted) ....................................66 Figure 46: Consistency of CFO to Net Income, DCPs by Company .........................66 Figure 47: Median Group SG&A Ratio.....................................................................67 Figure 48: 2008E SG&A as a Percentage of Operating Revenue and PMPM Spend68 Figure 49: Median Year-over-Year Organic Enrollment Growth..............................69 Figure 50: Total Organic Enrollment Growth by Company (all payor classes).........70 Figure 51: First Nine Months 2005-08 Net Organic Commercial Adds (in thousands) ..................................................................................................................................70 Figure 52: Net Organic Commercial Adds by Company (in thousands) ...................72 Figure 53: Prior-Period Reserve Development Summary for First Nine Months 2008 ($ in millions).............................................................................................................73 Figure 54: Prior-Period Reserve Development Summary for 2000-08 ($ in millions) ..................................................................................................................................74 Figure 55: Aetna – Reserve Roll-Forward ($ in millions)..........................................75 Figure 56: Amerigroup – Reserve Roll-Forward ($ in millions)................................75 Figure 57: Centene – Reserve Roll-Forward ($ in millions) ......................................76 Figure 58: CIGNA – Reserve Roll-Forward ($ in millions) ......................................76 Figure 59: Coventry – Reserve Roll-Forward ($ in millions) ....................................77 Figure 60: Health Net – Reserve Roll-Forward ($ in millions)..................................77 Figure 61: Humana – Reserve Roll-Forward ($ in millions)......................................78 Figure 62: Molina – Reserve Roll-Forward ($ in millions)........................................78 Figure 63: UnitedHealth Group - Reserve Roll-Forward ($ in millions) ...................79 Figure 64: WellCare Health Plans - Reserve Roll-Forward ($ in millions) ...............79 Figure 65: WellPoint - Reserve Roll-Forward ($ in millions)....................................80 Figure 66: Health Benefits Sector Stock Performance 2008......................................81 Figure 67: Health Benefits Sector Stock Performance 2008......................................82 Figure 68: Health Benefits Group, Forward P/E Multiples, 1995-2008 ....................83 Figure 69: Summary 2008 Individual Stock Performance.........................................83 Figure 73. CMS Part D Payment Reconciliations 2007 Plan Year ($mm)................95 Figure 74: States with Mid-Year FY09 Budget Gaps and Change in July-Sep Y-o-Y Tax Revenue ..............................................................................................................98