2018 MEDICARE ADVANTAGE RATE PREVIEW

Transcription

1 HEALTHCARE SERVICES Managed Care Market Overweight 2018 MEDICARE ADVANTAGE RATE PREVIEW Rates likely to be modestly positive, HIF and Encounter Data biggest "known" moving parts 2018 Advance Notice expected imminently The 2018 Medicare Advantage Advance Notice is expected by Thursday 2/2/17 or earlier (we think it could come Wednesday 2/1/2017 given legislation is essentially at least 60 days before Final rates are due on 4/3/2017). Based on known rate components and including certain items CMS hasn t typically embedded in its impact tables such as Group Med Adv bidding changes and phasing in encounter data we est. plan reimbursement will increase by ~0.6%. If the initial rate is in this neighborhood we view it as relatively in-line given similar to 2016/2017 and thus a non-event for the stocks, assuming that CMS language and posturing towards future programmatic changes also remains benign (more below). The return or repeal of the HIF in 2018 after the 2017 moratorium is clearly the biggest swing factor (we est. 3.4% headwind) and though likely to be repealed, timing will be key given bids due in late May/early June. Company Price Rtg Aetna Inc(AET) $ PP Anthem Inc(ANTM) $ OP Centene Corp(CNC) $62.75 PP CIGNA Corporation(CI) $ OP Humana Inc(HUM) $ OP UnitedHealth Group Inc(UNH) $ OP Source: FactSet/Wolfe Research OP=Outperform, PP=Peer Perform, UP=Underperform, NR=Not Rated December preview of cost trend Based on the 11/29/16 Early Preview CMS expects 2018 FFS USPCC costs to increase by 2.3% compared to the previous estimate for 2017, which was the starting point for changes to 2017 Med Adv reimbursement. Other known items that will swing the rates for 2018 The weighting of encounter data is set to increase from 25% to 50% in Based on previous estimates by Oliver Wyman and Milliman we would expect this to decrease reimbursement by ~1% should it be implemented. We note that the GAO recently criticized the encounter data implementation and two prominent Republicans congressmen recently came out in support of the GAO s recommendation that the data not be used until fully validated, so the potential for a delay or even a unwind of encounter data fully for 2018 exists. The phase-in of Group bidding changes is est. at a 25bps headwind to industry reimbursement (2.5% impact to Group, two-year phase-in, 19% of total enrollment). On Stars MedPAC est. ~5% fewer Med Adv enrollees will be in plans with star bonus payments for 2018 based on contract enrollment mix (would be 25bps headwind) but we expect most of this will be offset though contract consolidation. County rebasing of FFS costs may be a modest headwind and risk score recalibration is an unknown. Justin Lake, CFA (646) jlake@wolferesearch.com Stephen Baxter, CFA (646) sbaxter@wolferesearch.com Amir Jairazbhoy (646) ajairazbhoy@wolferesearch.com DO NOT FORWARD DO NOT DISTRIBUTE DOCUMENT CAN ONLY BE PRINTED TWICE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY WolfeResearch.com Page 1 of 11

2 Looking Back at Rates After several years of negative Med Adv reimbursement updates as ACA cuts and other programmatic changes were implemented we have seen two consecutive years of positive updates and based on known rate components we expect this trend will continue in Exhibit 1: Review of Est. Med Adv Reimbursement, Note: 2011 not shown given that rates were frozen that plan year Source: CMS, Wolfe Research Final Final Final Final Final Final Dec Preview Advance Final Dec Preview Advance Final Total Trend 4.2% 0.8% -0.2% 2.8% 3.0% -3.4% 2.0% 1.7% 4.2% 3.1% 3.0% 3.1% IME Cuts (0.5%) (0.9%) (0.3%) (0.3%) (0.1%) Budget Neutrality Adjustment (0.8%) (0.9%) (0.1%) Final Rate Trend 3.4% (0.6% ) (1.2% ) 2.5% 2.7% (3.5% ) 1.7% 4.2% 3.0% 3.1% ACA Cuts (2.5%) (3.2%) (1.9%) (1.9%) (0.8%) (0.8%) (0.8%) (0.8%) Star Bonus & Benchmark Cap 3.5% 0.5% 0.5% (2.2%) 0.5% 0.5% 0.1% 0.1% Plan Reimbursement 3.4% (0.6% ) (0.2% ) (0.2% ) 1.3% (7.6% ) 1.4% 3.9% 2.3% 2.4% Recalibration (1.9%) 1.1% (1.7%) (1.7%) Risk Coding Adjustment (3.4%) (1.5%) (0.25%) (0.25%) (0.25%) (0.25%) (0.25%) County Quartile Rebasing (0.3%) FFS Normalization 4.3% (0.4%) (0.4%) (0.1%) (0.6%) Risk Model Revision (0.6%) (0.6%) EGWP Bidding Change Phase-In (0.4%) (0.2%) Encounter Data System Phase-In (0.38%) (0.38%) (1.50%) (0.56%) Net Plan Reimbursement 3.4% (4.0% ) (0.2% ) (0.2% ) (2.1% ) (2.45% ) (1.3% ) 0.9% (0.6% ) 0.2% Industry Tax (2.0%) (0.7%) 0.2% 0.2% 2.5% 2.5% Net Plan Reimbursement Post-Tax 3.4% (4.0% ) (0.2% ) (0.2% ) (4.1% ) (3.2% ) (1.1% ) 1.1% 2.0% 2.7% Expectation for Med Adv Reimbursement in 2018 Based on CMS s early preview of 2018 growth rates and other known/likely components of reimbursement we estimate plans will see reimbursement increase by 0.6% on average, with significant plan-by-plan variation due to factors such as beneficiary premium changes, risk score changes, star bonus changes and change in competitive bidding. The post-tax impact to plans will be highly dependent on whether the HIF resumes as currently legislated, although we see inclusion in any ACA repeal legislation as being the most likely scenario. WolfeResearch.com Page 2 of 11

3 Exhibit 2: Wolfe Research Estimate of 2018 Medicare Advantage Reimbursement Component WR Estimate Comment 2018 Trend Estimate 2.4% Based on early preview of 2018 growth rates released on 11/29 Prior Year Trend Revisions -0.1% Based on early preview of 2018 growth rates released on 11/29 Preliminary Trend 2.3% Star Bonus Changes (0.25%) Plan Reimbursement 2.1% CMS estimates that 1 million fewer enrollees expected to be in bonus-eligible plans before offsets from contract consolidation, 5% of Med Adv enrollees losing a 5% bonus payment would decrease industry reimbursement by 25bps before expected offsets from plan contract consolidation to higher Star rated contracts Risk Coding Adjustment (0.25%) Minimum incremental increase in risk coding adjustment required by law, CMS can make larger adjustments FFS Normalization 0.0% EGWP Bidding Change Phase-In (0.25%) Encounter Data System Phase-In (0.9%) Recalibration 0.0% FFS Rebasing 0.0% Net Plan Reimbursement 0.6% Industry Tax (3.4%) Assuming neutral impact- was a modest headwind in 2016 and 2017 but a significant positive for final rates in AHIP estimates 2.5% headwind for Group Med Adv plans phased in over two years, at 19% of industry enrollment that drives a 0.25% headwind to reimbursement in 2018 Oliver Wyman estimates 0.0%-7.5% headwind from full phase-in, weight of EDS data scheduled to increase from 25% in 2017 to 50% in 2018 CMS has previously recalibrated risk scores, which has lowered reimbursement for the HCC (health condition) codes that plans have been most successful at documenting. We think the transition to encounter data makes this type of negative adjustment unlikely in 2018 and assume no impact. CMS recalculation of FFS costs by county, which has impact on benchmark rates in multiple ways including FFS cost quartile assignment. This rebasing is not required annually and last occurred in We assume no impact in Under current law HIF resumes in 2018 and increases to $14.3B from $11.3B in 2016, in our view HIF highly likely to be removed with any ACA repeal legislation. Net Plan Reimbursement Post-Tax, Assuming HIF Resumption (2.8% ) While we see it likely that HIF holiday extended or fully repealed, timing is key giving May/June bidding Plan-Specific Factors Beneficiary Premium Changes Change In Average Risk Score Star Bonus Changes Change In Competitive Bidding Recapture Source: CMS, Wolfe Research Comment Plan-specific Plan-specific, typically positive as plans improve coding Plan and contract-specific, while the # of enrollees in plans receiving bonus payments would decline if the number of members in each contract remained constant we expect plans to offset a significant amount of this headwind through contract consolidation Plan-specific, should be slightly positive with rates below medical trend 2017 CMS Rate Build vs. Wolfe Estimates All-in reimbursement to plans in our Wolfe Estimates includes a handful of items that CMS hasn t typically included in its impact tables such as Group Medicare Advantage bidding changes and phasing in encounter data. In addition CMS assumes a significant lift from coding - while we expect this to be a positive item for most plans we don t include it in our reimbursement estimates and we certainly are unwilling to assume it will be 2.0%+ across the board as CMS has assumed over the last couple of years. The table below compares CMS s presentation of 2017 Med Adv reimbursement vs. our estimate in order to highlight the key differences. WolfeResearch.com Page 3 of 11

4 Exhibit 2: 2017 Medicare Advantage Reimbursement, CMS Presentation of Impact vs. WR View Component CMS Reimbursement Build Wolfe Estimate Comment Effective Growth Rate 3.1% 3.1% In-line Transition to ACA Rules -0.8% -0.8% In-line Rebasing/Repricing 0.0% 0.0% In-line Improved star ratings 0.1% 0.1% In-line Risk model revision -0.6% -0.6% In-line MA coding intensity adjustment -0.25% -0.25% In-line Source: CMS, Wolfe Research Normalization -0.6% -0.6% In-line Expected Average Change in Revenue from Prior Year 0.85% 0.95% Components sum to 0.95% instead of 0.85%, presumably rounding issue Coding Trend 2.2% NA CMS includes estimate of coding trend in reimbursement build, we don't include but there is likely a positive contribution for most plans as they improve coding Expected Average Change in Revenue 3.05% 0.95% EGWP Bidding Change Phase-In NA -0.2% Encounter Data System Phase-In NA -0.6% CMS has not sized any impact Net Plan Reimbursement 3.05% 0.19% CMS sized impact separately but didn't include in reimbursement build Industry Tax Suspension NA 2.5% CMS build only includes reimbursement items Net Plan Reimbursement Post-Tax NA 2.7% Cost Trend The starting point for Med Adv reimbursement change is CMS s projection of Fee-For-Service United States Per Capita Cost (FFS USPCC) growth in CMS provides an early preview of these rates (see our note here) and projects that 2018 FFS USPCC will increase by 2.3% compared to the previous estimate for 2017 costs, which were the starting point for changes to 2017 Med Adv reimbursement. This reflects a 2.4% y/y increase for 2018 and a 10bps negative revision to baseline costs. This is below the 3.4% y/y increase projected in the 2017 Final Rule release in April We note that this growth rate could change, either based on CMS revising its projection of y/y growth in 2018 and/or revising its estimate of the underlying cost baseline in For 2017, CMS previewed FFS USPCC growth of 3.1%. This decreased slightly to 3.0% when revised in the Advance Notice but returned to 3.1% in the Final Rule. In 2016 FFS USPCC was previewed at 2.0% and decreased to 1.7% in the Advance Notice. In the Final Rule FFS USPCC was revised to 4.2% primarily due to prior period costs being revised upwards (1.9% for prior period, 0.6% for y/y growth in 2016 and 0.1% for impact of then-pending SGR fix). Affordable Care Act Cuts 2018 will be the first time in six years the industry doesn t face a headwind from the phase in of the new Med Adv reimbursement system under the ACA that moved the industry to fee-for-service parity. The new system was fully implemented in 2017, as plans faced a modest headwind from comparisons to 2016 when counties under a 6-year transition period were still paid 1/6 under the previous reimbursement system. Star Bonus Changes Based on current enrollment mix MedPAC (nonpartisan legislative branch providing Medicare policy advice to Congress) estimates that 1 million net fewer enrollees will be in plans receiving benchmark bonuses for the WolfeResearch.com Page 4 of 11

5 2018 plan year. This represents ~5% of total Med Adv enrollment and moving from a 5% benchmark bonus to no bonus would be a 25bps headwind to industry reimbursement, all else being equal. We note that the impact here is completely plan-specific and comes before any membership has been consolidated into higher rated contracts. See our previous notes on 2018 star ratings and HUM s star ratings announced in October that cover this topic in significant detail. Risk Coding Adjustment The American Taxpayer s Relief Act legislated minimum coding intensity adjustments through The minimum coding intensity adjustment required for 2018 is 5.91%, which would be an incremental 25bps vs. the minimum required adjustment in place for While we note that CMS has the authority to make larger coding intensity adjustments but we see the 25bps incremental cut as the most likely outcome here. Fee-For-Service Normalization A normalization factor is used by CMS to reset the average risk score in fee-for-service to 1. For 2016 and 2017 normalization was a modest headwind to rates (-0.6% and -0.4% respectively) but the industry saw a significant benefit in 2015 (+4.3%) when CMS adjusted for demographics skewing the average beneficiary age and average risk score lower, requiring a positive adjustment. We are assuming a neutral impact to EGWP Bidding Change Phase-In a Modest Headwind CMS is phasing in changes to the employer group Med Adv plan bidding (EGWP, also referred to as Group Med Adv) in 2017 and CMS and MedPAC found that because Group Med Adv was sold from MCO to employer group rather than selected by individuals that there was less of an incentive to bid below the benchmark in order to offer attractive extra benefits and reduce costs for the federal government. CMS is addressing this by migrating Group Med Adv to the average bid-benchmark ratio found in Individual Med Adv. In the 2017 Final Rule CMS elected to phase in the changes over a two year period. AHIP estimated a 2.5% total cut for Group Med Adv plans, and given that they now make up 19% of Med Adv enrollment we assume a ~50bps impact to total industry reimbursement and a ~25bps negative impact to WolfeResearch.com Page 5 of 11

6 Exhibit 3: Group Medicare Advantage Enrollment, % of Total Medicare Advantage Enrollment MCO Group Med Adv Enrollment % of Total Med Adv Enrollment Aetna Inc. 519, % Anthem Inc. 22, % Centene Corporation 0 0.0% CIGNA 3, % Health Net, Inc. 27, % Humana Inc. 428, % Molina Healthcare, Inc., 0 0.0% Triple-S Management Corporation 28, % UnitedHealth Group, Inc. 1,160, % Universal American Corp % WellCare Health Plans, Inc % Industry 3,709, % Source: CMS, Wolfe Research Encounter Data System Phase-In a Headwind, Some Push for Reprieve CMS is also in the process of phasing in changes to the risk adjustment process to increase the % of risk scores coming from the CMS Encounter Data System (EDS) and reduce the % of scores coming from the Risk Adjustment Processing System (RAPS). CMS has not included an estimated impact from the conversion in its impact tables for 2016 or The 2017 Advance Notice initially proposed moving from 10% EDS to 50% EDS, which the consulting firm Oliver Wyman estimated would decrease plan reimbursement by 0.0%-3.0%. This implies the full phase-in of EDS would be a 0.0%-7.5% headwind to plan reimbursement. This is relatively consistent with a recent study by Milliman which found a 4% difference in revenue between the two systems after analyzing a sample of 900,000 members in 154 plans. With the % of risk score data coming from EDS scheduled to increase by 25% for 2018, we estimate an bps headwind to reimbursement. WolfeResearch.com Page 6 of 11

7 Exhibit 4: Encounter Data Phase-In Schedule Source: AHIP, Wolfe Research We note that the Government Accountability Office (GAO) recently released a report that concluded CMS hasn t made sufficient progress implementing EDS and validating the accuracy and completeness of encounter data. The GAO recommends that the data is validated before using it to determine payments to plans. The chairman of the Ways and Means Committee (Kevin Brady, R-Texas) and the chairman of the Energy and Commerce Committee (Greg Walden, R-Oregon) have both released statements supporting the GAOs recommendation. AHIP has also previously discussed complications with EDS implementation and cited ongoing systems issues that prevented the system rom capturing the full stream of diagnoses. AHIP is also concerned that the filtering logic that establishes rules for converting encounter data into diagnoses (and to risk scores) will result in a reduced number of diagnoses recognized by CMS. In our view there is at least some chance CMS halts the EDS phase-in in response to these concerns or even completely unwinds it, potentially as a lever to improve plan reimbursement in the Final Rule if necessary. Health Insurer Fee Appears Unlikely to Resume Under current legislation the Health Insurer Fee (HIF) would return in 2018 after a moratorium in 2017 that was put in place by the omnibus budget bill passed in late In our view HIF repeal is highly likely to be included in any budget reconciliation maneuver used to reverse key provisions of the ACA and therefore is unlikely to be in place for the 2018 plan year. With that being said plans need to submit their bids in the May/June timeframe and may not have clarity at that point despite Republican s current timeline to put repeal legislation on the Presidents desk in March or April. However if the HIF does resume industry collections are scheduled to be $14.3B, a 27% increase from 2016 collections. We estimate that the resumption of the industry fee would reduce after tax reimbursement to plans by 3.4% in 2018, a potentially significant headwind. WolfeResearch.com Page 7 of 11

8 Exhibit 5: Health Insurer Fee by Year Note: 2017 fee ultimately suspended Source: Milliman, Wolfe Research Risk Model Revision No changes are expected here for 2018 after the relatively significant change made to risk adjustment last year. CMS implemented a new segmented risk model for 2017 with the goal of more accurately reflecting the cost of dual-eligible enrollees. CMS estimated that this reduced reimbursement by 60bps. While the industry-wide reimbursement change wasn t overly significant there were relatively large changes to certain underlying populations and the segmented risk model introduces additional complexity for plans to deal with. Recalibration CMS has previously recalibrated risk scores, which has lowered reimbursement for the HCC (health condition) codes that plans have been most successful at documenting. We think the transition to encounter data makes this type of negative adjustment unlikely in 2018 and assume no impact. FFS County Rebasing and County Quartile Assignment CMS will typically recalculate FFS county costs which serve as benchmarks for reimbursement, a process called rebasing. These costs can move higher or lower depending on underlying FFS spending in a geographic area. Once CMS rebases the costs of each county then CMS will re-assign counties into quartiles by costs (highest to lowest) and at this point benchmarks are set by law depending on quartile. For background, Med Adv benchmarks are set at 115% of FFS costs in the 25% of counties with the lowest FFS costs and set at 95% of FFS costs in the 25% of counties with the highest FFS costs. The 25% of counties with the second lowest quartile of FFS costs are set at 100% of FFS, and the second highest are set at 107.5%. This rebasing is not required annually- CMS last made this adjustment in 2016 and the impact on industry reimbursement was -0.3%, although it can introduce significant volatility in the underlying counties that change quartiles. We assume no impact to 2018 from county rebasing. WolfeResearch.com Page 8 of 11

9 Other Potential Unknown Items CMS has previously focused on the use of home risk assessments (HRAs) as a means to improve coding without a corresponding change in use of services / treatment. CMS ultimately did not move forward to proposals to discard risk scores collected through HRAs without supporting encounter data but the agency said it would continue to study the issue. The Medicare Payment Advisory Commission (MedPAC, nonpartisan legislative branch providing Medicare policy advice to Congress) has also continued to study the issue. However, given the transition to encounter data we view HRAs unlikely to come back into CMS s crosshairs in Exhibit 6: MedPac December 2015 Med Adv Meeting Exhibit 7: MedPac January 2016 Med Adv Meeting Note: Source: MedPAC, Wolfe Research Note: Source: MedPAC, Wolfe Research WolfeResearch.com Page 9 of 11

10 DISCLOSURE SECTION Analyst Certification: The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research analysts personal views about the subject securities or issuers and (ii) no part of the research analysts compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. Other Disclosures: Wolfe Research, LLC Fundamental Stock Ratings Key: Outperform (OP): Peer Perform (PP): Underperform (UP): The security is projected to outperform analyst's industry coverage universe over the next 12 months. The security is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. The security is projected to underperform analyst's industry coverage universe over the next 12 months. Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC research contains more complete information concerning the analyst s views, please carefully read Wolfe Research, LLC research in its entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment advice and any investment decisions should be based upon individual circumstances and other considerations. Wolfe Research, LLC Sector Weighting System: Market Overweight (MO): Market Weight (MW): Market Underweight (MU): Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months. Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of December 31, 2016): Outperform: 39% 1% Investment Banking Clients Peer Perform: 49% 1% Investment Banking Clients Underperform: 12% 0% Investment Banking Clients Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements, Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform has been designated to correspond with Sell. Wolfe Research Securities and Wolfe Research, LLC have adopted the use of Wolfe Research as brand names. Wolfe Research Securities, a member of FINRA ( is the broker-dealer affiliate of Wolfe Research, LLC and is responsible for the contents of this material. Any analysts publishing these reports are dually employed by Wolfe Research, LLC and Wolfe Research Securities. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Research and its affiliates, including but not limited to Wolfe Research Securities, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Research, LLC or any affiliate to any registration requirement within such location. For additional important disclosures, please see WolfeResearch.com Page 10 of 11

11 The views expressed in Wolfe Research, LLC research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Research, LLC analysts research reports and modeling screens. Wolfe Research communicates with clients across a variety of mediums of the clients choosing including s, voice blasts and electronic publication to our proprietary website. Copyright Wolfe Research, LLC All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Research, LLC. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC. This report is limited for the sole use of clients of Wolfe Research. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Research, LLC content. Any distribution of the content produced by Wolfe Research, LLC will violate the understanding of the terms of our relationship. WolfeResearch.com Page 11 of 11