CNC, MOH, WCG: Beneficiaries of a Likely Post-Obama Medicaid Expansion

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Richard Evans / Scott Hinds / Ryan Baum

203.901.1631 /.1632 / .1627

revans@ / shinds@ /


October 27, 2016

CNC, MOH, WCG: Beneficiaries of a Likely Post-Obama Medicaid Expansion

  • In a politically motivated act of economic self-denial, most states in the deep South refused to initiate their Medicaid programs until President Johnson (who passed the program in ’65) left office. Just two years after Johnson left, all the deep South hold-outs had Medicaid programs up and running
  • Of the 18 states that declined to expand their Medicaid programs under the Affordable Care Act, 14 are led by Republican governors with bicameral (upper- and lower-houses) Republican majorities, and 4 have mixed party control of the governor’s mansion and state legislature. All states with Democratic governors and bicameral Democratic majorities have expanded their programs
  • The deep South’s loathing of Johnson was orders of magnitude more intense than the Red states’ animosity towards Obama. And, the economic self-interests at stake in the late ‘60’s (Feds matched state spending dollar for dollar) pale in comparison to the Keynesian gains currently on offer (Feds match state spending 9:1). If the economic self-interests of ’69 overcame the South’s feelings toward Johnson, the economic self-interests of 2016 surely can overcome the hold-outs’ animosity to Obama
  • Potential enrollment gains from a likely hold-out state expansion are sufficient to drive low-double digit premium growth for the Medicaid-predominant HMOs (CNC, MOH, WCG). Further potential growth for the Medicaid HMOs is likely to come from an eventual shift of dually-eligible (for Medicaid and Medicare) beneficiaries into Medicaid managed care programs. Such a shift is further off than a Medicaid expansion; however, adding duals to Medicaid managed care has the potential to produce premium growth of circa 30% on top of Medicaid expansion gains
  • The Medicaid-predominant names are far more levered than the commercial-predominant names to the near-term Medicaid expansion and mid-term enrollment of duals; however, valuations fail to fully account for the difference in revenue growth potentials. This is particularly so when we consider structural risks to commercial-predominant revenue growth; particularly the prospect of enrollment losses as private exchanges (eventually) gain general acceptance, and falling average contract values as employers shift a greater percentage of costs to employees, and/or as employees on private exchanges self-select to lower-value plans

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

History Repeating: The political economics of (creating / expanding) Medicaid

The legislation[1] that created Medicaid was passed under President Johnson in 1965, and went into effect in 1966. Only 26 states created Medicaid programs in that first year. Twelve more states entered in 1967 and 1968; twelve states chose to create programs only after Johnson left office (Exhibit 1)

The creation of Medicaid in 1965 was every bit as controversial as its expansion under the Affordable Care Act (ACA) in 2010 – if not more so. And, the width of the ideological divide and depth of animosity between holdout states and the federal government were far greater than today – note for example that many of the holdouts who created Medicaid programs in the years after Johnson left office were those who most strenuously resisted the Civil Rights Act of 1964

Yet despite these tensions, every state but Arizona (whose Medicaid program was created in 1982) had joined the Medicaid program within six years of the program’s creation, and within three years of Johnson leaving office. To oversimplify, with Johnson out of office, southern states’ contempt for the program’s architect gave way to local self-interests served by the economic benefits of a program that generated at least $2 in healthcare spending for every $1 raised by the state[2]

We anticipate a similar turn of events in the years following the Obama Administration – namely a shift of the Medicaid politico-economic ‘framing’ from one of national-level ‘R’ vs. ‘D’ politics (Exhibit 2), to one of state-level self-interests. The Red states’ animosity for President Obama today is orders of magnitude less intense than the southern states’ feelings toward President Johnson in 1965. And the Keynesian benefits to states are now far greater: once the federal share of Medicaid spending on expansion beneficiaries[3] falls to its permanent 90 percent level, states will see $9 of federal spending for each $1 raised. Or look at it this way: states that expand their Medicaid programs can expect on the order of $4,100 in annual net federal inflows[4] for each new Medicaid beneficiary


What’s left to play for: expansion enrollees, and ‘duals’

Since the Medicaid expansion provisions of the Affordable Care Act went into effect in 2014, 17.7M new beneficiaries have entered the program, 14.3M from states whose programs expanded. The great majority of these new beneficiaries wound up in Medicaid managed care plans (columns ‘a’ and ‘b’, Exhibit 3). The non-expansion states currently hold an additional 5.2M potential enrollees, an estimated 4.2M of whom would end up in Medicaid MCO’s (columns ‘i’ and ‘j’, Exhibit 3) if current MCO penetration rates held constant. These 5.2M enrollees consist of 748,000 persons who are eligible under current state law but not enrolled (column ‘c’), 2.8M persons who would become newly eligible if the non-expansion states raised the eligibility threshold to 100 percent of the Federal Poverty Level (FPL) (column ‘e’), and an additional 1.8M persons who would become eligible (on top of those at the 100 FPL limit) if the non-expansion states raised the eligibility limit to 138 FPL (column ‘g’). If we add in the 4M persons who are eligible under current law but not enrolled in the expansion states (column ‘c’), we have 9.3M potential new enrollees, 7.4M of whom presumably would enter Medicaid MCOs at current MCO penetration rates (columns ‘i’ and ‘j’). Exhibit 4 allocates these potential enrollment gains by carrier, under the simplifying assumption that these carriers’ shares of the relevant states’ markets remain constant

Persons eligible for both Medicare and Medicaid – the so-called ‘dual-eligibles’ or ‘duals’ – total roughly 10M, and have generally been excluded from Medicaid MCOs, though this is (glacially) changing. Using authority gained under the ACA, CMS[5] has agreed to include as many as 2M duals in demonstration projects involving managed care organizations. Only 10 states have participated in the demonstrations, and just over 350,000 duals are enrolled. Of the many challenges facing the demonstration perhaps the greatest has been that duals are given the option of declining enrollment in a managed care programs. Because many of the duals are likely only contacted once a significant episode of care has begun, it seems natural that many potential enrollees decline enrollment, arguably seeing no positive reason to add the potential constraints of managed care enrollment to an episode of care that is already underway. The demonstrations are adapting, and most states have extended the end dates of their projects to 2019/20

Despite the troubled start to the duals demonstration projects, we’re convinced that better coordination of Medicare and Medicaid benefits for duals is in both federal and state governments’ clear best interests. Further, we’re convinced that this coordination can be far more practically achieved by giving states control over the duals’ Medicare benefits than by giving feds control over the duals’ Medicaid benefits. And finally, because most Medicaid beneficiaries are already in managed care programs (and because managed care programs are better able than state agencies to administer the duals), we fully expected the duals to ultimately wind up in Medicaid MCOs. Exhibit 5 gives some indication of the relative value of duals as compared to other Medicaid beneficiaries, by comparing per-member per-month (PMPM) premium levels for various beneficiary types over the last 8 quarters. All values are relative to PMPM’s for TANF/CHIP[6] beneficiaries. PMPM’s for duals (aka ‘Medicare-Medicaid Plan (MMP) Integrated’) are fully 12x premiums for TANF/CHIP, about 6x premiums for beneficiaries gained from the Medicaid expansion, and just over 10x premiums for HIM[7] beneficiaries. Exhibit 6 allocates potential dual-eligible enrollment gains by carrier, under the simplifying assumption that these carriers’ shares of the relevant states’ Medicaid managed care markets remain constant. Potential enrollment gains relative to the 2Q16 base are modest, but do not reflect that PMPMs for duals will be somewhat dramatically higher than average PMPM’s among these carriers’ current enrollees

Exhibit 7 expresses the potential enrollment gains from Exhibits 4 and 6 in terms of potential premium growth. Potential premium growth from full Medicaid expansion is shown in dollar and percentage growth terms in columns ‘g’ and ‘h’, respectively; and the dollar and percentage growth contributions underlying these totals (gains from unenrolled beneficiaries under current law, gains from an expansion to 100FPL, and further gains from an expansion to 101-138FPL) are provided in columns ‘a’ thru ‘f’. WCG has the most to gain from full expansion (13 percent), followed by CNC (12 percent) and MOH (10 percent). Columns ‘i’ and ‘j’ estimate the premium growth contributions of shifting dual-eligibles into capitated plans; N.B. these estimates conservatively assume no Medicaid expansion. Here MOH has the most to gain (34 percent), followed by WCG (30 percent) and CNC (28 percent)

Other strategic considerations

Beyond the obvious matter of having existing Medicaid managed care contracts in non-expansion states, carriers’ relative abilities to benefit from Medicaid expansion and/or the inclusion of dual-eligibles into Medicaid may have much to do with: 1) whether carriers have both Medicaid and HIM products in a given state, so that they are better able to capture the inevitable flow between Medicaid and HIM enrollment as beneficiaries’ incomes shift their eligibility from one program to another; and 2) whether carriers have both Medicaid and Medicare Advantage products in a given state

Exhibit 8 addresses overlap of Medicaid and HIM products, showing the percentage of each carrier’s Medicaid managed care enrollees who are in states where the carrier also offers HIM products. Of the 3 largest Medicaid-predominant HMOs, both CNC and MOH have 71 percent of Medicaid managed care beneficiaries in states where they offer HIM products; WCG has none

Exhibit 9 effectively recasts the allocation of Medicare duals into Medicaid HMOs shown in Exhibit 6. While Exhibit 6 allocates duals per carriers’ relative shares of Medicaid managed care in each state, Exhibit 9 modifies this by making the allocation of duals to a carrier further conditional on the carrier having a Medicare Advantage presence in any state in which it is allocated duals. The construct is theoretical, but serves to show which carriers are advantaged or disadvantaged in the capture of duals by having a running start in Medicare Advantage. Of the three large Medicaid-predominant HMOs, only WCG gains in this scenario, capturing 5 percent of duals when enrollment is conditioned on having Medicare Advantage plans in the duals’ state, as compared to 4 percent when enrollment is not so conditioned. CNC and MOH both lose in this scenario, capturing 6 percent and 3 percent of duals respectively in the Medicare Advantage conditioned scenario, as compared to 11 percent and 5 percent respectively in the unconditioned scenario



We believe that both enrollment and average contract values are under mid- to longer-term pressure in the commercial-predominant (e.g. UNH, AET, CI, ANTM) HMOs. Enrollment gains are largely limited by employment gains. Participation-adjusted employment levels are low, indicating employment and enrollment upside; however employment growth is at best glacial. And, these larger national-account oriented carriers face growing enrollment share risks if and when private exchanges take hold. Our view is that private exchanges have suffered reputationally from problems with the public exchanges (HIM), but that eventual repair of the HIMs and/or successful employer experiences on the private exchanges will lead to significant growth in private exchange enrollment. This has two adverse effects on the larger commercial-predominant HMOs, the first being to reduce these names’ shares of employer-sponsored beneficiaries, the second being to lower average contract values as employees on private exchanges self-select into plans with lower actuarial values, and thus lower premiums

By comparison, the Medicaid-predominant HMOs (CNC, MOH, WCG) are likely to see considerable enrollment gains if and when hold-out states expand their programs, and are likely to see rising average contract values if and when dually-eligible beneficiaries are moved into Medicaid managed care coverage. Relative valuations of Medicaid- and commercial-predominant HMOs fail to fully reflect the Medicaid HMOs’ advantages, particularly in the cases of CNC and MOH (Exhibit 10)


  1. Title XIX of the Social Security Act
  2. Beginning in 1966 states were guaranteed at least an equal match, i.e. $1 in federal Medicaid spending for each $1 of state Medicaid spending. Many states did far better, with the feds picking up as much as 65 percent of program spending that year. In later years the federal percentage would exceed 80 percent in some states
  3. Beneficiaries made newly eligible by the Affordable Care Act
  4. Using figures from MOH’s disclosures, we estimate $4,560 in spending per expansion beneficiary in 2016; 90 percent of this figure is $4,104
  5. Centers for Medicare & Medicaid Services, the HHS agency that administers Medicare and Medicaid
  6. TANF = Temporary Assistance for Needy Families; CHIP = Children’s Health Insurance Program
  7. HIM = Health Insurance Marketplace, which we have until now referred to as HIE, or Health Insurance Exchange


©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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