MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
So much for a slow and smooth transition: immediately upon taking office, President Trump signed an executive order directing his administration to ease the burden of the ACA, including empowering it to take steps to write new regulations under legislative authority granted by Congress and to ease off the enforcement of the mandates, taxes and other regulations implemented to carry out the ACA. While pundits suggest that the order is mostly symbolic, we disagree. We see risk to real 2017 exchange enrollment if the mandate is not enforced and the potential for a roll-back of bundling and other risk-sharing, outcome-improving regulations. We further expect the administration to halt the appeal of the out-of-pocket subsidy case, essentially making coverage unaffordable for millions. We do not underestimate this President and believe that our negative view of hospital stocks remains warranted.
We expect the new HHS Secretary, once confirmed and sworn in, to immediately take steps to, at the very least:1) halt the enforcement of the mandatory nature of bundling (a slight positive for SNFs, a slight negative for home health) while potentially considering introducing revised regulations; 2) combined with the IRS, halt the enforcement of the mandates which, while too late for 2017 open enrollment, likely causes plans to seriously reconsider bidding on 2018 exchange business; 3) Perhaps make Medicaid waivers easier to get, especially if coverage is a little thin or put employment or copay mandates on individuals, given that the Executive Order alludes to granting states more flexibility; 4) stop the appeal of the court decision that the Obama administration improperly disbursed funds for out-of-pocket subsidies for low-income exchange participants. As the ACA was rife with instances of 'the Secretary shall ....,' (maybe about 2000 of them), there are a veritable host of other regulations that could be affected by this Order. For example, LTACH admit criteria that shifted from a 25-day length of stay was enacted with the ACA; so was home health rebasing. The full text of the Executive Order is available here.
While Congress mandated HHS to come up with those rules, the specific regulations were developed by the Obama CMS; the Trump CMS could halt enforcement and/or delay implementation and issue an interim rule followed by a new proposed rule and rule-making process. Until there is a new Secretary we probably won't know what stays and what goes, but we think it is prudent to assume that if Tom Price is confirmed, he will likely want to do many of the things he proposed in his May 2015 repeal/replace (hardly) legislation. The Kaiser Family Foundation has a nice graphic available here that outlines his bill in English. It eviscerates virtually every program, takes especial aim at value-based initiatives and would replace subsidies with a $900 per person/$3,000 per family tax credit to buy insurance. That's hardly sufficient to buy more than three months' worth. His high risk pools would have been funded at $1B per year of Federal money. That too seems hardly sufficient (she said with restraint). We strongly suggest that investors become familiar with this bill as it could well become the road map for the administration's repeal/replace efforts and its execution of the Executive Order.
If we are right about the exchange issue, i.e., that those who signed up purely because of the mandate (we don't know how many lives that represents) stop paying their premiums, then adverse selection in the exchange pool likely increases and hospitals are at least somewhat more at risk for uncompensated care, a negative cash flow event. Ditto if out-of-pocket subsidy payments cease to be made. And that would happen in 2017. We think that this Order throws 2018 exchange bids into chaos. So we have to wonder why the hospital companies and investors who have pushed the stocks back up to pre-election levels would be so enthusiastic? Indeed, the tone of our recent conversations, especially among long-only investors, has become notably more negative: how, they ask, can hospitals go up from here? What is the positive catalyst? Those were the questions last week....before Trump signed the first death warrant for the ACA. Our answer then was to call attention to our volume work (11/21/17 report, page 21, Exhibit 5) which shows a long-term decline in industry discharges, even through reform's boom years. Even without the poisonous politics we'd be negative on the sector's outlook. But with this first move, we are even more convinced that we must even more strongly warn investors of the risks associated with the fundamentals of the industry (volume drives performance, in our experience) and the highly uncertain, but almost certainly not positive, politics of health care. The best case was the status quo. The worst case is yet to come. We reiterate our ratings and negative/cautious view on our acute care hospital coverage as well as our post-acute companies. As UNH essentially exited the exchange business and as we remain convinced that private sector payer population health and value-based initiatives are likely to accelerate and benefit both segments of its business, we reiterate our Buy rating and $178 PT.
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