A Joe Biden presidency wouldn’t just be a win for the Democrats, it would be a win for managed care organizations (MCOs). Back in March, the former Vice President’s strong showing on Super Tuesday fueled a rally from large health insurance stocks. Why?
It came down to Senator Bernie Sanders’ proposed Medicare for All program that would largely do away with the need for health insurance, posing a major threat to the space’s top players. Biden’s policy, on the other hand, supports the strengthening of the Affordable Care Act, which is ideal for the companies currently on the exchanges established by that legislation. Additionally, his approach would focus on reducing drug prices and promoting the development of generic drugs.
With the polls indicating that the Democratic nominee is well ahead of President Trump, GOP pollster Frank Luntz believes the election is “Joe Biden’s to lose.” As a result, even though there’s still four months left in the race to the White House, Wall Street focus has locked in on MCOs.
Bearing this in mind, we used TipRanks’ database to take a closer look at three MCOs highlighted by SVB Leerink analyst Stephen Tanal. Each of these tickers, which have received Buy ratings from other members of the Street, stand to gain should Biden come out on top in November, boasting substantial upside potential from current levels.
Anthem Inc. (ANTM)
First up we have Anthem, which has placed a significant focus on revamping its cost structure throughout 2020. Combine this with a possible Joe Biden win, and you get significant praise from one member of the analyst community.
Tanal points out that 2020 marks the first full year in which ANTM’s pharmacy costs will be insourced with its wholly-owned PBM subsidiary, IngenioRx. Based on discussions that have been going on since 2017, the company believes this cost structure reset will yield savings of $4 billion per year. In addition, over 20% is set to be directed towards the bottom line. “One quarter into 2020, the cost savings have become apparent, and ANTM has already suggested that it is accruing more than the 20% threshold it has spoken to for ~2.5 years now,” the analyst commented.
Adding to the good news, Tanal reminds clients that ANTM is the second largest operator of fully-insured commercial plans and has a locally-concentrated Medicare Advantage (MA) business, which speaks to its vertically-integrated nature. He added, “Its recent acquisition of Beacon Health should provide ANTM with another synergistic means of converting medical costs into affiliated company profit.”
If that wasn’t enough, a “swoon in utilization” is slated for the near- to intermediate-term, which could “drive significant upside to consensus earnings in 2Q stemming from a lower MCR, dampened in part by elevated operating expenses as ANTM likely ‘pulls forward’ investments to depress 2020 earnings – including some amount of discretionary spending that can be dialed back in future years in order to bolster earnings growth,” in Tanal’s opinion.
Expounding on this, the SVB Leerink analyst stated, “A layup year for earnings in 2020 will give way to the permanent repeal of the HIF in 2021, which should manifest in faster MA enrollment growth (an earnings tailwind for 2022) while boosting earnings growth in 2021 by an incremental mid-single-digit percentage or more.”
It will be important for ANTM to meet its goal of growing PMPM profit from its commercial ASO members relative to its commercial risk members, especially due to the shift of its members from risk to ASO witnessed over the last few years. That said, Tanal believes that the MCO is up for the task. “IngenioRx and a savvy strategy of incentivizing pharmacy carve-ins from its existing ASO customer base, only ~20% of whom use ANTM for PBM today… have us optimistic that ANTM can deliver against its goal over the next 3-5 years,” he explained.
Everything that ANTM has going for it prompted Tanal to kick off his coverage by putting an Outperform rating and $325 price target on the stock. Should the target be met, a twelve-month gain in the shape of 22% could be in store. (To watch Tanal’s track record, click here)
Judging by the consensus breakdown, most other analysts also like what they’re seeing. 8 Buys and 3 Holds add up to a Moderate Buy consensus rating. Based on the $337.82 average price target, the upside potential comes in at 27%. (See Anthem stock-price forecast on TipRanks)
Humana Inc. (HUM)
Representing the closest thing to an MA pure-play, Humana also got a thumbs up from SVB Leerink recently.
Scoring a rave review from Tanal, he argues that the long-term investment case is the strongest among the MCOs in his coverage universe thanks to its line of business exposure. According to the analyst’s estimates, roughly 63% of HUM’s earnings come from MA and another 8-9% is generated by other government-sponsored lines of business. He further noted, “The secular growth of the Medicare population due to the aging of the Baby Boomers has proven to be a powerful earnings driver for HUM for years now, and the tailwind should persist for at least another decade to come.”
It’s also important to consider the fact that HUM was an early adopter of the integrated care model. Expounding on this, Tanal commented, “Its captive PBM and care delivery businesses should continue to support even faster enterprise earnings growth than its core MA business derives from natural market forces and deft execution – which the company has demonstrated in each of 2018, 2019, and 2020-todate, in our view. HUM’s care delivery business is underpinned by high levels of local market share in its core MA business across HUM’s broad geographic footprint, reducing its dependency on third-party payors even as it seeks to grow external revenue from them.”
When it comes to the repeal of the HIF in 2021, HUM is poised to benefit the most based on its high exposure to MA, as there is no reimbursement mechanism for the HIF. “We expect HUM to reinvest the entirety of the pre-tax fee toward enhancing benefits – which should manifest in faster MA enrollment growth (an earnings tailwind for 2022 given the ramp up in underwriting margins on new MA members) – while the absence of its tax burden alone should provide at least a 10% tailwind to adjusted EPS year-on-year,” Tanal explained.
Management has also mentioned that the company typically breaks even on new MA members in the first year, before seeing a boost in underwriting margins in the second year and a “ramp higher from there driven first by effective risk-coding and over time via care management processes that prioritize preventive health and site of care optimization, among other factors.”
Tanal added, “As MA enrollment grew by 15.5% year-over-year in 2019, we expect the ramp in underwriting margin to benefit earnings in 2020. We model MA members up another 10.6% in 2020, which should similarly benefit 2021. This pace of enrollment growth is differentiated – HUM is taking share in part due to embracing faster-growing sales channels and better-funding them.”
In line with his optimistic take, Tanal joined the bulls. To this end, he initiated coverage with an Outperform call and set a $465 price target, suggesting 15% upside potential.
The bulls have it on this one. Out of 14 total reviews assigned in the last three months, 10 analysts rated the stock a Buy and 4 gave it a Hold rating. So, HUM gets a Moderate Buy consensus rating. The $435.62 average price target puts the potential twelve-month gain at 8%. (See Humana stock analysis on TipRanks)
Cigna Corporation (CI)
When it comes to the last MCO on our list, Cigna actually is at somewhat of a disadvantage due to its lack of diversification.
Currently, most of CI’s earnings come from its PBM business, and Tanal argues that growth in this area is likely to remain slower. Not to mention it boasts the lowest percentage of earnings from MA among diversified MCOs, no meaningful exposure to managed Medicaid, and “the greatest proportion of its commercial business in ASO – where revenue growth depends in large part on enrollment growth – and the aggregate number of commercially-insured individuals looks likely to be flat-to-down long-term.”
Although its ASO segment has performed well over the last few years, its enrollment growth has decelerated. “With full-risk premiums poised to inflate at a slower clip into 2021 – due in part to the repeal of the HIF as well as some pricing effect of COVID – we would expect a smaller impulse for fully-insured plan sponsors to move to ASO… In the short term, COVID-19 is likely to negatively impact commercial enrollment, and while earnings for other MCOs should come out ahead due to lower medical costs on fully-insured members and an uptick in Medicaid enrollment, CI looks likely to have fewer, smaller offsets, due to its line of business mix,” Tanal said.
Despite this disadvantage, Tanal does see a path forward for CI. Following its recent acquisition of Express Scripts, CI can expand its fully-insured businesses, especially MA, and to a lesser extent, Medicaid and commercial risk.
“Higher exposure to insured businesses coupled with the ownership of Express Scripts could allow CI to capitalize on what we consider to be one of the biggest enterprise earnings growth opportunities in front of MCOs today – vertical integration… CI is, however, well-positioned to grow its commercial risk business organically, in our view, given its best in class commercial medical cost trend and improving pharmacy cost position related to the ownership of Express Scripts,” Tanal explained.
The addition of Express Scripts should also fuel major earnings upside, in Tanal’s opinion. “Into 2021, CI should benefit from the absence of ~$200 million of stranded costs associated with the earlier transition of ANTM away from Express Scripts (per CI), which burdens 2020, as well as the direct and indirect profit ramp on its Prime Therapeutics PBM contract – further compounded by the absence of related new business start-up costs that will be incurred during 2020,” he added.
Still waiting to see how things play out, Tanal started off his coverage by issuing a Market Perform call. In addition, the price target lands at $112, implying shares could surge 22% in the next twelve months.
The rest of the Street is more optimistic than Tanal. 8 Buys and 2 Holds have been published in the last three months, making CI a Strong Buy. At $246.30, the average price target brings the upside potential to 37%. (See Cigna stock analysis on TipRanks)
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