Healthcare Weekly – Diagnosing the Problem

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Within this report we discuss the latest regarding the implementation of the ACA (Affordable Care Act, aka Obamacare) as it relates to the Hospital and Insurance industries.  In addition, we discuss the Diagnostics space and recent events there.  Relevant articles are posted, as well.  Insurers mentioned include AET, CI, HUM, UNH, WLP, CNC, and WCG.  Hospital companies mentioned include CYH, HCA, LPNT, THC and UHS.  Diagnostics companies mentioned include BRLI, DGX, MYGN and LH.

Problems & Solutions – Healthcare.gov & ACA

Healthcare.gov glitches somewhat resolved.  Well, the Administration’s self-imposed deadline of Nov 30th came and went, and system improvements for the Healthcare.gov website appear to have been fairly successful.  The Administration brought a team of IT ‘repairmen’ into a war room last week with the mandate to assess the problems and find a solution in order to improve the website navigation process by which the uninsured across most states are to sign up for health insurance.  This team found that the issues causing a nearly 60% down-time rate were related to software and hardware glitches, as well as a lack of communication among those involved in creating and managing the site.  In other words, problems existed across the entire spectrum.  The system now appears able to handle 50K users simultaneously, or 800K per day, as was the goal.  Back-end connection issues persist; however, the sign-up process does seem to be vastly improved from the experience those had attempting to access the site in October.  We believe that as the December 23rd deadline approaches for consumers to sign up for insurance, we should see greater volumes able to be handled by the federal government’s website.    We also trust that, somehow, back-end issues are mostly resolved near-term.

More ACA delays & other issues.  As of last week, however, one more delay has been enacted by the Administration – the government has delayed for a year the small business requirement to offer health insurance or be penalized.  The individual mandate still stands (for now).  Also, the Federal government switched the payment plan to insurers for the subsidies for qualified consumers.  Originally, the government planned to pay the insurers directly for subsidies calculated for those signing up.  Now, however, the government will take time to gather info, then will distribute ‘true-up’ payments to insurance companies at a later date.  This adds another layer of uncertainty to the process, but the government has assured insurers that payments will be on time as of January 2014.  Also, no delays in payments by insurers to providers are expected.  .…And, in addition to all other problems noted, several states are now suing the Federal Government over the government’s ability to tax companies deciding not to offer insurance.  It seems there is a discrepancy between the wording of the ACA suggesting more selective taxation and the government’s intent for a tax blanketing all states.

What does all this mean?   A slower and or problematic roll out of the ACA appears to leave Hospital companies & Insurers vulnerable.  Hospitals may not get the reimbursement relief needed to correct a growing uninsured population walking through their doors.  Insurers may get early sign-ups from those most in need of care, without registration from a younger, healthier population needed to subsidize the sick.  If this happens, hospitals’ bad debt continues to grow, and the insurers’ costs rise, pressuring margins for both groups.  The reality is, however, that expectations for ACA roll-out are modest on the part of companies, valuations are low, insurers are cash cows, and the aging/ill/injured population will continue to walk through hospitals’ doors.  Managements of companies within these two areas have stated continuously that they have accounted for most of the issues noted above.  We believe that in the near-term, ACA implementation will be neither a boon nor a bust to these two healthcare sectors, but will, over time, gradually improve both their businesses.  In the interim, we believe these stocks will be somewhat range bound (with most insurers currently at the higher end of their range).  However, given low valuations, share buy-backs, and acquisitions supporting growth, we would recommend some exposure to these groups.  Keep in mind, December and January will face a tough comp year-over-year for patient volumes, but thereafter, easy comps ensue for hospitals, while utilization rates (and costs) could rise for insurers.  Publicly traded hospital companies include HCA, CYH, LPNT, THC, and UHS.  Publicly traded insurers include AET, CI, HUM, UNH, WLP, CNC and WCG.

Diagnostic CompaniesUpdate

Reimbursement reductions and competitive pressures plague the diagnostic arena.  Bio-Refernce Laboratories (BRLI) offers clinical diagnostic services primarily in the New York area.  The majority of its tests are higher margin esoteric tests as opposed to those administered in conjunction with a routine checkup.  Last Wednesday, BRLI lowered guidance, giving investors a head start on the indigestion experienced by most on Thanksgiving Day.  The stock is down over 25% from its high on that news.  BRLI cited reimbursement pressures, infrastructure costs associated with expansion into FL and CA, and costs for new test launches as reasons for its disappointing outlook.  BRLI has recently launched a new BRCA gene (breast cancer) test, which has not yet had time to contribute to revenues.  The company did note that patient volumes were solid.  While this stock may need time to settle out, we do believe BRLI is one to watch as its esoteric test base and new inherited cancer test launches offer a path toward solid growth.  A regional player, BRLI could also be a takeover candidate at some point.

Other diagnostic companies experiencing similar issues.  Quest Diagnostics (DGX) and Lab Corp (LH) also mentioned reimbursement pressures impacting their businesses on their 3rd quarter calls.  In addition, both companies and others have noted that some molecular tests payments are being delayed, and some outright denied, causing a setback to this industry.  LH was better able to manage its business during this tough time, while DGX missed estimates on both top and bottom line this last Q.  Both companies are talking to insurers to clarify the need for these denied tests and are hopeful that the issue of non-payment will be resolved in the near future.  While Myriad Genetics (MYGN) – the holder of the original BRCA-1 and BRCA-2 patents – showed very strong growth in Q3, recently MYGN has faced the same question of lower reimbursement rates, as well as future competition from the likes of BRLI and others planning to offer BRCA tests of their own.  The US Supreme Court decreed this summer that genes could not be patented, raising concerns as to the viability of MYGN’s patents.  We noted these concerns about MYGN at the time and suggested that the stock could decline from its highs where it was trading then.  The stock did retreat, as expected, but had recently returned to those highs until reports  yesterday of a competitor lawsuit and CMS reimbursement reduction.  These renewed concerns about MYGN’s future hit the stock.  We believe that these issues will continue to cloud MYGN’s outlook and pressure the stock for a while until test re-pricing and competitive challenges are fully incorporated in estimates and the stock.

Personalized diagnostics at a fraction of the cost?  A private company, 23andMe, offering a $99 genetic test kit and a teenager’s recent discovery of an early detection test for pancreatic cancer that costs 3 cents and takes 5 minutes to administer suggest that the future of diagnostics might be much simpler and much less expensive than is currently the case.  Is this low, low-cost testing the wave of the future?  And if so, does it portend the virtual demise of diagnostic companies and their current business models?  Perhaps.  That said, 23andMe has recently received a ‘cease and desist’ letter from the FDA, requiring a regimen of studies to be conducted prior to putting its test back on the market.  In addition, the now famous teenager referred to above has also indicated that more studies need to be done to support his initial test and other applications of this test.  Studies cost money, costs which are ultimately incorporated into the price of diagnostic tests approved for the market.  In that case, an industry of pervasive 3 cent to $99 home tests for all illnesses is likely several years away, yet the need for personalized or more targeted testing of diseases continues.  We, therefore, believe that a sizable market for diagnostic testing with a fairly traditional business model will continue to exist for some time.

Elsewhere in Healthcare

  • Cooper Companies (COO) reports earnings December 5th, with a conference call at 5pm ET.
  • Cantel Medical (CMN) reports earnings December 5th, with a conference call at 11am ET.
  • Piper Jaffray Healthcare Conference runs through Wednesday of this week.
  • Deutsche Bank BioFEST Conference is this week.
  • American Society of Hematology (ASH) runs from December 7th-10th.
  • Gilead (GILD)’s PDUFA date for sofosbuvir for Hepatitis C is this Sunday, December 8th.

 

Articles of Interest

Administration sees ‘dramatic progress’ on health siteMarketWatch

Obamacare Payment System to Insurers Changed in SetbackBloomberg

Insurers Claim Health Website Is Still FlawedThe New York Times

ObamaCare’s Next Legal ChallengeWSJ.com

The teenage scientist revolutionising cancer detectionBBC

FDA Tells Google-Backed 23andMe to Halt DNA Test ServiceBloomberg

 

Fusion Model Scores

AET             82

HUM           77

WCG            85

BRLI            73

LH                78

WLP             88

CI                  84

LPNT            92

CNC              76

MYGN          56

CYH              66

THC              50

DGX              76

UHS              89

HCA              84

UNH             83

 

Lisa W. Miller recently joined Fusion Analytics Research Partners LLC, which offers independent and unbiased research to the institutional asset management market. Lisa covers the healthcare industry. She has an impressive Wall Street career, primarily as a buy-side analyst. 

If you are an institutional investor, and would like to hear about some of our high conviction ideas, contact Lisa:  lmiller@fusioninvest.com

 

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