Mizuho’s Senior Healthcare Services equity analyst Ann Hynes took an in-depth look at the diversified managed care industry on which she initiated coverage recently with a positive outlook. Since her coverage launch, managed care stocks have been buffeted by Medicare-for-All political rhetoric that has risen and fallen with the poll numbers of Democratic presidential hopefuls. Filtering through the election year noise, Ann expects valuations to increase given promising fundamentals and her belief that Medicare-for-All will not pass. Below is a summary of her take on the managed care sector.
First, some background
Two types of healthcare plans are available in the US: Commercial/Private and Public. Commercial health insurance plans are provided by a private insurance company or private employer to its employees, and these cover a large swath of the US population, or ~152 million people. There are a number of different plan types offered by employers, including Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), and Point-of-Service Plan (POS).
Public health insurance plans are those provided by the government and include Medicare and Medicaid, which are two of the most popular public plans in the US. Currently, Medicare provides health insurance for Americans aged 65 and over, younger people with certain disabilities, and individuals suffering from end-stage renal disease and amyotrophic lateral sclerosis. Medicaid provides health insurance for people of all ages whose income is otherwise insufficient for them to afford health care. Examples of other public insurance plans include Tricare, which provides health benefits for US Armed Forces personnel, military retirees, and their dependents; and Children's Health Insurance Program (CHIP), which provides coverage for the children of families whose income is modest, but too high to qualify for Medicaid.
The fundamentals look good thanks to Boomers, the ACA, and a resilient economy
According to The Centers for Medicare & Medicaid Services (CMS), total spending on health insurance is expected to grow at a compound annual growth rate of +5.7%, reaching $4.5 trillion by 2027. This growth is largely driven by increased Medicare enrollment by Baby Boomers, government subsidies for marketplace enrollees resulting from the passage of the Affordable Care Act (ACA), and increased enrollment in employer-sponsored plans due to the good economic backdrop. Leaders in the industry also believe government-sponsored programs such as Medicare Advantage and Medicaid/Managed Medicaid will be primary revenue growth drivers for public health insurance in the coming years.
For commercial health insurance, enrollment numbers and growth in premiums paid are the two main revenue growth drivers. Data published by the United States Census Bureau show the percentage of individuals covered by employer-sponsored insurance stood at 55% in 2017, up slightly from 2012. The average annual premium for single and family coverage has shown a steady increase over the years as well. In 2018, average family coverage per year cost $19,616, up from $12,680 in 2008 and $6,896 for single coverage, up from $4,704 in 2008.
But 2020 fears of Medicare-for-All loom large
When it comes to the 2020 elections, Healthcare is perhaps the defining issue. Medicare-for-All – an umbrella term that describes plans to expand public healthcare programs while reducing or eliminating private healthcare – has been much debated by Democratic primary candidates, and could continue to dominate debate stages depending on which candidates remain in the race.
For a time, the growing national conversation around Medicare-for-All negatively impacted managed care group valuations, says Ann. But as compelling an issue as it is for the group, Medicare-for-All faces a steep uphill battle to becoming law. Hynes cites four primary reasons why this is the case:
1. Political: Based on an analysis of competitive Senate seats up for re-election, it’s more likely than not that Republicans hold on to their majority in 2020. If this bears out, Medicare-for-All legislation is likely dead on arrival.
2. Popularity: If Democrats win the White House and also take control of the Senate, they will need consensus to pass major legislation. But while Medicare-for-All is very popular among the more progressive candidates, there appears to be little support for it among moderate Democrats and influential Democratic leaders, most notably Speaker of the House Nancy Pelosi. Only 8.8% of the total US population is currently uninsured and, according to polls, the majority of Americans do not support Medicare-for-All.
3. Economic: Healthcare in the US is a big industry, accounting for roughly 17% of gross national product (GNP). Managed care payments currently subsidize the under-payments that Medicare and Medicaid pays to the system, and Medicare-for-All proposals would result in severe cuts to the private healthcare providers. The elimination of commercial payers and reduction in payments to healthcare providers, who are major employers, would likely lead to a negative economic event.
4. Affordability: Medicare-for-All would be expensive and, based on current proposals, would likely require a significant increase in taxes.
It might be true that Medicare-for-All is unlikely to become reality, but the headline risk means that it’s a relevant and important issue through the 2020 Presidential election, and potentially beyond, and will likely continue to put downward pressure on the group while it remains on the agenda.
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