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22 October 2013
POSITIVE
Unchanged U.S. Health Care-Managed Care Joshua R. Raskin, CFA 1.212.526.2279 joshua.raskin@barclays.com BCI, New York Jack Meehan, CFA 1.212.526.3909 jack.meehan@barclays.com BCI, New York Rachana Fellinger 1.212.526.3647 rachana.fellinger@barclays.com BCI, New York Alex Pachman 1.212.526.3302 alex.pachman@barclays.com BCI, New York
Barclays Capital Inc. and/or one of its affiliates 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. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 10.
rankings are therefore partially estimates, based on weighted average rankings by membership. While our estimates may not be exact, we think they are representative of how the bonuses will be distributed. While CMS provides star rankings for each health plans individual H-contracts, the best way to analyze trends is through the overall score for the parent company on a membership-weighted basis. In essence, the star rankings for each parent organizations plan are weighted by their associated enrollment, in order to provide an overall score for the entire company. Based on the new methodology (plans with at least 3 stars rather than 4 or above), we note all eight companies within our coverage space would be eligible for bonus payments for at least some contracts, versus six last year. FIGURE 1 Historical Enrollment-Weighted Stars
Star Ranking Results Aetna Inc. Cigna Health Net, Inc. Humana Inc. Molina Healthcare, Inc., UnitedHealth Group, Inc. Universal American Corp. WellCare Health Plans, Inc. Wellpoint, Inc. Total Medicare Advantage 2014 4.03 3.76 3.89 3.98 3.24 3.46 3.69 3.04 3.23 3.86 2013 3.53 3.38 3.69 3.80 2.67 3.31 3.02 2.81 3.34 3.70 13/14 Change 0.51 0.38 0.20 0.17 0.57 0.15 0.67 0.23 -0.11 0.16 2012 3.47 3.30 3.60 3.18 2.89 3.22 2.85 2.96 3.29 3.56 13/12 Change 0.05 0.08 0.10 0.62 -0.22 0.09 0.17 -0.15 0.05 0.14 2011 3.32 4.00 3.39 3.04 2.91 3.18 3.17 2.99 3.05 3.44 12/11 Change 0.15 -0.70 0.21 0.14 -0.02 0.03 -0.32 -0.03 0.24 0.11 2010 3.05 3.99 3.06 2.76 2.68 2.93 2.97 2.39 2.83 3.24 11/10 Change 0.27 0.01 0.33 0.28 0.24 0.25 0.20 0.60 0.22 0.20 2009 3.07 3.50 3.09 2.62 3.00 2.87 3.00 2.00 2.64 3.06 10/09 Change -0.02 0.49 -0.03 0.14 -0.32 0.06 -0.03 0.39 0.19 0.18
Source: CMS, Barclays Research estimates Note: Uses most recent month enrollment for weighting (ex: 2011 stars came out in November 2010, use November 2010 enrollment) Assumes 3 stars for low enrollment and new plans, Uses overall ranking for 2011, 2012, 2013 and 2014 summary ranking for prior years
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Company Enrollment by Stars Aetna Inc. Centene Corporation Cigna Health Net, Inc. Humana Inc. Molina Healthcare, Inc., UnitedHealth Group, Inc. Universal American Corp. WellCare Health Plans, Inc. Wellpoint, Inc. Total Medicare Advantage
5 0 0 43,514 0 0 0 0 0 0 0 1,408,806
3.5
Total 959,522 6,015 421,717 238,551 2,331,929 37,831 3,106,830 121,775 281,397 627,977 14,641,406
129,166 333,714 25,808 0 0 1,165 87,857 183,424 64,920 190,299 43,074 3,518 420,064 874,889 87,524 0 18,081 15,327 728,417 1,433,352 902,185 76,849 15,264 29,528 0 80,293 157,147 57,947 217,108 339,630 3,237,369 4,398,237 2,389,006
Source: CMS September 2013, Barclays Research Note: Assumes 3 stars for low enrollment and new plans
Company Enrollment by Stars Aetna Inc. Coventry Health Care Inc. Centene Corporation Cigna Health Net, Inc. Humana Inc. Molina Healthcare, Inc., UnitedHealth Group, Inc. Universal American Corp. WellCare Health Plans, Inc. Wellpoint, Inc. Total Medicare Advantage
5 0 0 0 0 0 8,379 0 0 0 0 0 1,263,464
3.5
<= 2.5 0 0 1,943 63,210 0 34,997 23,379 136,020 40,673 80,888 17,629 735,694
Total 447,417 258,600 4,998 413,989 233,299 2,290,024 35,059 2,762,183 134,823 216,566 732,898 13,513,514
21,682 415,269 3,068 129,569 73,653 55,038 0 0 1,344 0 144,903 128,512 89,001 144,142 0 150,527 1,167,113 193,456 0 0 8,231 235,935 1,371,215 997,147 0 47,401 46,612 0 0 135,678 65,753 308,008 269,702 1,642,993 4,892,231 2,715,815
Source: CMS September 2012, Barclays Research Note: Assumes 3 stars for low enrollment and new plans
Star Bonuses Boost 2015 Reimbursement by 3.29%, due to Demonstration and Double Bonus Counties
Using data from CMS, we estimate that the enrollment-weighted average increase to reimbursement from quality star bonuses is 3.29% in 2015. The distribution of bonus increases varies by plan, from Health Net which will have a 5.16% boost, to Centene, Molina and WellCare which did not have any four-star plans. The variance in reimbursements is due to the different geographic footprints for each company in double bonus counties, along with their individual plan star rankings. As a reminder, we estimate that the enrollment weighted-average increase to reimbursement from quality star bonuses is 4.75% in 2014. The following table shows the impact of quality star bonuses, incorporating these assumptions:
Uses September 2013 enrollment by state and county contract. Low enrollment plans and new contracts receive 3 stars.
The following table shows the reimbursement impact from quality stars, assuming no change to qualifying counties and star bonus methodology for 2015 (expect to learn this Spring with the 45-day announcement and final 2015 rates). The Medicare Advantage program should see a 3.29% benefit from star bonuses, ranging from 5.16% at
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Health Net to 0.00% at Centene, Molina and WellCare. We note that Health Net, and Aetna are both expected to have at least a 4% higher reimbursement due to quality star bonuses. FIGURE 4 2015 Boost from Star Bonuses (September 2013 Enrollment)
PMPM w/ Star PMPM Excluding September 2013 Bonus Bonus Health Net $876.30 $833.30 Aetna $861.98 $826.34 Humana $848.90 $820.69 Universal American $899.57 $870.97 Cigna $904.72 $884.70 UnitedHealth $842.15 $829.22 WellPoint $833.19 $828.71 Centene $835.44 $835.44 Molina $818.21 $818.21 WellCare $854.59 $854.59 Total MA $842.64 $815.81 Source: CMS September 2013, Barclays Research
% Increase 5.16% 4.31% 3.44% 3.28% 2.26% 1.56% 0.54% 0.00% 0.00% 0.00% 3.29%
Enrollment in Double Bonus Counties 78,980 321,994 467,949 12,824 90,876 848,768 182,205 1,860 15,847 33,734 4,012,647
Enrollment 237,205 949,158 2,445,366 130,929 449,828 3,156,517 621,997 5,771 37,206 280,454 14,873,778
% of Enrollment in Bonus Counties 33.30% 33.92% 19.14% 9.79% 20.20% 26.89% 29.29% 32.23% 42.59% 12.03% 26.98%
As a reminder, we estimate that the enrollment weighted-average increase to reimbursement from quality star bonuses is 4.75% in 2014. The distribution of bonus increases varies by plan from Coventry (now part of Aetna) which will have a 5.6% boost, to AMERIGROUP (now part of WellPoint) which is closer to 1.6%. The variance is a result of the different geographic footprints for each company in double bonus counties, along with their individual plan star rankings. FIGURE 5 2014 Boost From Star Bonuses (September 2012 Enrollment)
September 2012 Coventry Health Net Humana Aetna WellPoint UnitedHealth Cigna Centene Universal American Wellcare Molina Amerigroup Total MA PMPM w/ Star Bonus $865.48 $863.53 $852.29 $849.99 $848.13 $856.96 $923.97 $846.70 $883.07 $865.07 $813.70 $928.07 $851.15 PMPM Excluding Bonus $819.71 $819.09 $813.01 $812.14 $811.91 $822.91 $892.40 $824.60 $861.25 $848.58 $800.68 $913.30 $812.55 % Increase 5.58% 5.43% 4.83% 4.66% 4.46% 4.14% 3.54% 2.68% 2.53% 1.94% 1.63% 1.62% 4.75% Enrollment in Double Bonus Counties 94,495 79,983 453,558 135,011 202,199 725,515 56,343 1,522 13,754 24,306 14,438 2,488 3,371,654 Enrollment 253,916 229,096 2,259,273 435,606 679,775 2,714,024 405,747 4,529 133,085 164,840 32,886 32,003 13,863,250 % of Enrollment in Bonus Counties 37.22% 34.91% 20.08% 30.99% 29.74% 26.73% 13.89% 33.61% 10.33% 14.75% 43.90% 7.77% 24.32%
The reimbursement impact from double bonus counties is meaningful. We estimate that double bonus counties will add roughly 69bps to reimbursement across the entire Medicare Advantage program. Aetna and Health Net are the biggest beneficiaries from double bonus counties (of plans with meaningful scale), with a 122bp and 117bp boost to reimbursement, respectively (each has >30% of enrollment is in double bonus counties).
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September 2013 Aetna Health Net Humana UnitedHealth Cigna Universal American WellPoint Centene Molina WellCare Total MA
Star Bonus w/ Double Bonus 4.31% 5.16% 3.44% 1.56% 2.26% 3.28% 0.54% 0.00% 0.00% 0.00% 3.29%
Star Bonus w/o Double Bonus 3.09% 3.99% 2.93% 1.18% 2.01% 3.16% 0.46% 0.00% 0.00% 0.00% 2.60%
Medicare Advantage
Our coverage universe has modest exposure to 5-star MA plans offered by Kaiser on the West Coast. The table below show the current enrollment-weighted star rankings for MA plans across our coverage universe. Of these companies, Cigna is the only to achieve a 5star rating, with its Florida plan covering roughly 44K beneficiaries. Cigna also achieved a 4.5 star rating for plans covering 38.4k lives. Aetna, Humana and UnitedHealth also all achieved plans with scores of 4.5 stars. Among the names with high MA earnings exposure, Humana posted the best weighted average score, at 3.98, followed by Health Net at 3.89 stars. Humana has enrolled 59% of its beneficiaries in plans given at least four stars. FIGURE 7 2015 Enrollment-Weighted Star Rankings
Low Enrollment New Plans 6,488 2,281 0 1,660 1,036 4,423 4,549 134 0 81 52,896 0 0 2,423 0 3,770 0 0 0 2,406 7,692 31,680 2013 Star Ranking 4.03 2.79 3.76 3.89 3.98 3.24 3.46 3.69 3.04 3.23 3.86 % in 4 or Above 61.9% 0.0% 40.3% 79.8% 58.5% 0.0% 23.6% 63.1% 0.0% 9.2% 52.0%
Company Enrollment by Stars Aetna Inc. Centene Corporation Cigna Health Net, Inc. Humana Inc. Molina Healthcare, Inc., UnitedHealth Group, Inc. Universal American Corp. WellCare Health Plans, Inc. Wellpoint, Inc. Total Medicare Advantage
5 0 0 43,514 0 0 0 0 0 0 0 1,408,806
3.5
Total 959,522 6,015 421,717 238,551 2,331,929 37,831 3,106,830 121,775 281,397 627,977 14,641,406
129,166 333,714 25,808 0 0 1,165 87,857 183,424 64,920 190,299 43,074 3,518 420,064 874,889 87,524 0 18,081 15,327 728,417 1,433,352 902,185 76,849 15,264 29,528 0 80,293 157,147 57,947 217,108 339,630 3,237,369 4,398,237 2,389,006
Source: CMS September 2013, Barclays Research Note: Assumes 3 stars for low enrollment and new plans
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Additionally, we note that ~6.2 million lives (representing 42.4% of MA enrollment) are within one star or less of reaching a 5-star ranking. The biggest chunk of MA enrollment is in 3.5 star plans, which had 4.4 million lives as of September 2013. FIGURE 8 Distribution of MA Enrollment by Star Category
Star Category 5 Stars 4.5 Stars 4 Stars 3.5 Stars 3 Stars 2.5 Stars 2 Stars Low Enrollment New Total
Source: CMS, Barclays Research
Enrollment 1,408,806 2,967,199 3,237,369 4,398,237 2,389,006 155,046 1,167 52,896 31,680 14,641,406
% of Total 9.6% 20.3% 22.1% 30.0% 16.3% 1.1% 0.0% 0.4% 0.2% 100%
Our coverage universe has exposure to Kaisers 5-star MA plan in California. 16 plans earned 5-star overall ratings for 2014:
Kaiser Contract H0630, ~86K lives in California, Arizona, Colorado and Nevada Kaiser Contract H2150, ~53K lives in Maryland, Virginia, Florida, Delaware California
and Washington D.C.
Kaiser Contract H6052, ~2K lives in California Kaiser Contract H9003, ~69K lives in Arizona, California, Hawaii, Oregon and
Washington
Kelsey-Seybold Medical Group Contract H0332, ~24K lives in Texas Medical Associates Clinic, P.C. Contract H1651, ~10K lives in California, Illinois and
Iowa
Blue Cross Blue Shield of Massachusetts Contract H2261, ~11K lives in Massachusetts Spectrum Health System Contract H2320, ~75K lives in Michigan Health Partners, Inc. Contract H2462, ~46K lives in Arizona, Minnesota and Wisconsin Marshfield Clinic Contract H5211, ~42K lives in Wisconsin Gundersen Lutheran Health System
Wisconsin Contract H5262, ~14K lives in Iowa and
Dean Health System, Inc. Contract H5264, ~21K lives in Wisconsin Cigna Contract H5410, ~44K lives in Florida UnitedHealth Contract H5652, ~5K lives in Colorado, Kansas, Maryland, Michigan,
New Jersey, Pennsylvania, Texas and Virginia
Blue Cross Blue Shield of Florida Contract H5938, ~15K lives in Florida Providence Health & Services Contract H9047, ~42K lives in Oregon and Washington
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We believe that Kaiser has the best opportunity to gain market share in California, where it has a dominant presence in almost every county it participates in. UnitedHealth has ~17% of MA enrollment in the state as the number two plan in California. Health Nets geographic footprint largely overlaps with Kaisers five star plans, and WellPoints California share is ~17% of its Medicare Advantage book. FIGURE 9 Largest MA Plans in California
Company
Kaiser Foundation Health Plan, Inc. UnitedHealth Group, Inc. Health Net, Inc. SCAN Health Plan, Inc. WellPoint, Inc. Blue Shield of California WellCare Health Plans, Inc. Care1st Health Plan Aetna Inc. Humana Inc. InterValley Health Plan CalOptima Other Total
Source: CMS September 2013 Enrollment Data, Barclays Research
CMS Sanctions
CMS has also decided to issue rules on how to treat plans with serious compliance issues. Plans that are currently under sanction will have their 2015 Plan Ratings reduced, under two scenarios:
Contracts with a ranking of 3 or more stars will be automatically assigned 2.5 stars Contracts with a ranking with less than 3 stars will receive a 1 star reduction
Contracts already under sanction will be evaluated and adjusted at two periods during the year, on August 31st and on March 31st. Contracts under sanction on August 31st will have their plan ratings reduced for that falls Medicare Plan Finder (MPF). On March 31st, the MPF will be adjusted for contracts either coming off sanction or going under sanction. Contracts that are placed under sanction will have their status updated immediately on the MPF and for quality bonus purposes. Contracts will be informed of the changes in time to synchronize their submission of plan bids for the following year.
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Next, the rule also gives CMS the authority to deny applications submitted by organizations that have performed poorly in the past. CMS has the authority to deny an application if it has terminated or non-renewed an MA or PDP organizations contract within the past 38 months. For new plans, there is a 14-month window to comply with the new regulations. CMS thinks that this is an appropriate amount of time; however, we think it could deter plans from joining the program (and be a positive for current participants). Using the 2014 star ratings, just over 156K MA lives across our coverage universe are enrolled in plans with less than three summary stars. Among the companies with the greatest risk, Centene is most exposed, with roughly 43% of its membership in plans below three stars, followed by WellCare with roughly 15% of its membership in plans below three stars. Humana continues to makes strides with the companys at risk enrollment declining from roughly 550k lives in 2011 to 35K lives in 2012 and further declining from 35K in 2012 to zero this year. While no plans will be terminated until the end of 2015, since star ratings are based on lagged metrics, plans need to start making improvements immediately to avoid any issues. To prevent organizations which have had contracts terminated or non-renewed from gaming the system, CMS added new language to its definition of covered persons. CMS may deny an application where the applicants covered person includes: 5. All owners who are natural persons, other than shareholders with an ownership interest of less than 5%. 6. An owner in whole or part interest of any mortgage, deed of trust, note or other obligation secured by the organization, or any of the property or assets thereof, with an interest equal or greater than 5%. 7. A member of the board of directors of the entity if it is structured as a corporation. FIGURE 10 Exposure to Plan Termination for Poor Performance from 2013 and 2012 Star Ratings
Total "At Risk" Enrollment Aetna Inc. Centene Corporation Cigna Health Net, Inc. Humana Inc. Molina Healthcare, Inc., UnitedHealth Group, Inc. Universal American Corp. WellCare Health Plans, Inc. Wellpoint, Inc. Total MA
Source: CMS, Barclays Research
% of Total 0.0% 42.7% 0.3% 0.0% 0.0% 0.0% 1.1% 0.0% 14.8% 0.9% 1.1%
2013 0 1,943 63,210 0 34,997 23,379 136,020 40,673 80,888 17,629 735,694
% of Total 0.0% 38.9% 15.3% 0.0% 1.5% 66.7% 4.9% 30.2% 37.4% 2.4% 5.4%
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ANALYST(S) CERTIFICATION(S):
I, Joshua R. Raskin, CFA, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Other Material Conflicts Barclays Private Equity, the private equity arm of Barclays Plc, has agreed to sell FirstAssist Insurance Services Limited to Cigna Corp.
Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe": U.S. Health Care-Managed Care Aetna Inc. (AET) Health Net (HNT) Magellan Health Services (MGLN) Universal American Corp. (UAM) Centene Corp. (CNC) Healthways Inc. (HWAY) Molina Healthcare (MOH) WellCare Health Plans (WCG) CIGNA Corp. (CI) Humana Inc. (HUM) UnitedHealth Group (UNH) WellPoint, Inc. (WLP)
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