In the War Between Hospitals and Health Plans…
Thoughts on Alignment and Other Fantastical Events
Sheryl R. Skolnick, Ph.D.
Managing Director and
Co-Head of Research
(203) 569.4359
sskolnick@crtllc.com
GSMC 2014
Price target methodologies, risks, and disclosures begin on page 20
June 2014
In the War Between Hospitals and Health Plans…
How Did the Public Companies Do for 2013/2014?
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In the War Between Hospitals and Health Plans…
Hospitals vs. Health Plans, Round 1: Pricing
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In the War Between Hospitals and Health Plans…
Hospitals vs. Health Plans, Round 2: Volumes
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In the War Between Hospitals and Health Plans…
Hospitals vs. Health Plans, Round 3: Reform Impact
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In the War Between Hospitals and Health Plans…
Where’s the Collaboration?
Or Is There Any in For-Profit Hospital Land?
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In the War Between Hospitals and Health Plans…
Collaborating with the Enemy?
Why are Partnerships Between Plans & Hospitals So Few and Far Between?
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In the War Between Hospitals and Health Plans…
Then There’s Active Care Management by Managed Care
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In the War Between Hospitals and Health Plans…
Fuel to the Fire:
What Happens if Hospitals Get Good at Managing Population Health?
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What Happens Next?
Questions only YOU can answer…
• For How Long Will the Hospital Industry and Managed Care
• Keep Going Back to the Same Playbook?
• Can Reform Really be Transformative or Have We Lost the Only
Opportunity We’ve Had to Truly Transform these Broken Relationships?
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In the War Between Hospitals and Health Plans…
‘Fantastical’ Things in 2013
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In the War Between Hospitals and Health Plans…
Can We Please Say We Told You So?
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Fall 2008, HMA brings back Gary Newsome, this time as CEO
2009, HMA’s volumes surge as they fix their ERs and do better than average in
2010.
April 11, 2011 THC sues CYH; May 2011, July 2011 OIG subpoenas HMA
January 2012, CRT alerts Street to Paul Meyer case – a compliance officer alleging
he was fired for alerting senior management to fraud at HMA
December 2, 2012, 60 Minutes ‘visits’ HMA with ‘The Cost of Admission’
December 3, 2012, CRT Issues ‘roadmap’ to HMA hospitals with curious and
statistically significant admit/observation rate patterns, along with a significant
increase in EBITDA…a detailed and intensive statistical analysis of HMA vs local
competitors
1Q13 – really bad volumes; HMA slashes infrastructure
2Q13 Glenview goes ‘Active,’ seeking to replace the Board…
…And Gary Newsome resigns suddenly, announces he’s becoming the President of
the Mormon Mission in Uruguay
…All of which leads to….
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In the War Between Hospitals and Health Plans…
HMA
&
CYH
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In the War Between Hospitals and Health Plans…
Can We Please Say We Told You So?
• …And a new Board and CEO
• …And this
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In the War Between Hospitals and Health Plans…
Can We Please Say We Told You So?
Source:
And 7 others just like it
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In the War Between Hospitals and Health Plans…
In Case You Were Wondering
Source:http://www.oas.org/juridico/mla/en/traites/en_traites-ext-usa-ury.pdf
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In the War Between Hospitals and Health Plans…
But on a Cheerier Note…
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Healthcare.gov is, well, a disaster on roll-out.
Congress has a field day with hearings
Clearly something must be done!
But wait…along comes
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In the War Between Hospitals and Health Plans…
Fundamentally, Absolutely, Permanently
Fixing Our Broken Payment System
Optum
Source: http://www.jonco48.com/blog/knight.jpg
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Price Targets, Risks, Disclosures
& Disclaimers
In the War Between Hospitals and Health Plans…
Ratings and Price Target Methodology
LPNT is rated ‘Buy’ with a $63.50 PT based on a 8.1x multiple of our 2014E of $586 mm EBITDA less NCI estimate, which is close to the
midpoint of the historic multiple range and still at a significant discount to peers, which may be appropriate given its rural market
concentrations.
HLS is ‘Buy’ rated with a $39.00 12-month share price target based on a multiple of 8.0x our 2014E adjusted EBITDA estimate. We
believe that multiple is appropriate as it is approximately equal to the current LTM multiple on 2013 reported EBITDA and because it
explicitly includes the NPV of a $50 mm fine paid in two years using a 6% (approximate cost of capital) discount rate.
HCA Holdings, Inc. (HCA) is ‘Buy’ rated with a $57 12-month price target based on a multiple of 8.3x 2014E EBITDA less NCI estimate. In
our view, HCA deserves to trade at a premium multiple to the group even though our target multiple represents only a comparable
valuation relative to its larger peers. We'd rather own HCA at 8.3x than either CYH or THC, see below.
THC is rated 'Fair Value' with a $41.50 PT, which equates to 8.2x our 2014E EBITDA less NCI estimate and puts THC on a par with that
bellwether: even that may prove to be too high a multiple if EBITDA falls short of our estimate.
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Ratings and Price Target Methodology (cont.)
CYH: Our $38 one-year PT is based on an 8.3x EV/EBITDA less NCI multiple on our 2014 estimate. While that multiple is at the high end
of our covered hospital companies’ target multiples, we set our multiple there due to the high leverage and the inclusion of the CVR
trust value as ‘debt’ in our EV calculation even though that obligation may not be paid out in the next 12 or even 24 months.
CYHHZ: Our $0.07 one-year PT is based on $0.04 of option value and our $0.03 NPV estimate of the likely terminal value of the CVR
under our view of the ‘best case’ DOJ outcome.
GTIV is ‘Buy’ rated with a $16.00 12-month price target based on 18.2x our 2014E EPS and 9.4x our 2014E EBITDA (EV/EBITDA
multiple) of $171.6 mm. GTIV received an unsolicited offer to purchase the Company at $14.00 per share plus the assumption of debt.
AMED is rated ‘Sell.’ We base our $11 12-month PT on a support level we believe was created by significant stock purchases AMED's
largest shareholder. Our PT is not based on fundamentals, nor a comparable multiple analysis, as even at our PT AMED would trade at
a seemingly excessive 22x our 2014E EBITDA.
UNH is ‘Buy’ rated with a $90 12-month price target based on 16.2x our 2014E EPS.
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RISKS
LPNT faces reimbursement risks from Medicare, Medicaid, managed care, execution, reform implementation and RAC audit risks,
among others. Volume weakness has been prevalent in the industry and at LPNT and those pressures could continue to limit earnings
and cash flow performance. LPNT’s acquisition strategy presents both opportunities and risks, including risks associated with
integration and valuation. LPNT has several small investigations ongoing at its hospitals, some of which pre-date their acquisition by
LPNT and others of which are self-reported, which could mitigate their impact.
HLS: Risks to our recommendation and Company performance include the following: HLS derives approximately 70% of its
reimbursement from Medicare. Medicare rates may be adversely affected by factors outside of HLS’ control including Federal budget
and policy concerns, including a return to a 75% compliant case hurdle rate and implementation of a uniform post-acute payment
system. Medicaid and Medicare reimbursement risks may be significant, even beyond the 2% sequester expected to be implemented
as of 4/1/13. In addition, our estimates and HLS’s operating performance are based on continued growth in volumes and the success of
its development strategies. To the extent that performance deteriorates or that HLS is unable to develop or acquire new facilities,
growth rates could be substantially less than forecast. Finally, OIG subpoenas sent to seven HLS hospitals may represent a significant
expense not reflected in our estimates and potentially monetary fines and penalties above the $50 mm amount included in our
valuation model.
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RISKS (cont.)
HCA: There are material and many risks to our estimates and HCA’s potential future performance. Risks include, but are not limited to the following
concerns: Should HCA fail to achieve meaningful use certifications on schedule our estimates and likely the share price could be materially
negatively affected. In addition, HCA faces potential changes in managed care pricing and contract terms and risks associated with uninsured
patients, revenues and collection rates. Expense management is key to our estimates and Company performance, in our view, including IT
expenses as well as normal ongoing hospital operating expenses. The Company is highly levered and although it has been reducing its variable rate
bank debt, it still has meaningful variable rate debt balances. Finally, we believe we are in a period of high uncertainty and risk associated with
state budgets, Medicare reimbursement and pricing on the exchanges. Medicaid and Medicare reimbursement risks may be significant due to
sequester. HCA is the target of several DOJ/US Attorney investigations and the heightened anti-fraud efforts of the Federal government could lead
to additional scrutiny. There is still significant risk and unknown impact of Reform possible for HCA’s business and share price prospects, in our
view.
THC: Among the risks to our THC rating and PT are the following factors: VHS integration is a key risk and the addition of a new Qui Tam case in
Georgia adds a new legal/investigative risk, in our view. The 3/31/14 reform enrollment may provide a positive catalyst for the stock. THC faces
significant execution risks separate and apart from VHS and Medicare/Managed Care rate and volume pressures (shift from inpatient to
outpatient) may continue to limit revenue, EBITDA and cash flow growth. THC also added significant leverage with the acquisition of VHS and needs
to grow EBITDA and FCF to reduce leverage, in our view.
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RISKS (cont.)
CYH: Among the risks to our recommendation are: CYH could execute its operational strategies with less deviation that than we estimate (or,
alternatively, significantly more effectively than we anticipate). The DOJ settlement is still tentative and additional reserves could be required. The
Company is also potentially subject to higher levels of uninsured patients (bad debts) and lower volumes of paying patients should the economy
continue to deteriorate in its markets, rather than stabilize as we have assumed. Moreover, it receives a substantial portion of its revenue from
Medicare, which is subject to cuts by Congress and challenging regulation and reimbursement levels imposed by the Medicare and Medicaid
programs. Moreover, Medicaid and Medicare reimbursement risks may be significant. Health reform presents both opportunities and risks,
including both coverage and reimbursement. The pending acquisition of HMA presents execution and integration risks that are not yet well
understood, in our view. CYH is very highly levered relative to peers and historic levels. The HMA litigation could result in both operational and
financial risks should the total settlements exceed the $313 mm implied by the CVR terms.
CYHHZ: The risks to our rating and price target include but are not limited to the following: The outcome of the litigation and investigations/suits is
extremely uncertain and dependent on actions and variables that may not be visible. Some of the DOJ proceedings remain under seal and jury trial
outcomes are not robustly predictable. In addition, the time period from today through closure is also highly uncertain. Both of those factors have
material impact on the valuation of the CVR and the potential returns on investment.
The CVR value is highly sensitive to small changes in estimates of total fines especially at single digit prices for the CVR (small denominator). A $5
million delta in settlement estimates yields a full 10 percentage point different in return from the current CVR price.
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RISKS (cont.)
GTIV: Among the risks to our GTIV rating and price target are: Reimbursement risk: Medicare rules are complex and constrained by Congressional
mandates. Should a new hospice methodology or home health copayment be implemented, we could see materially negative impact on our
estimates, rating and PT. Execution risk: Our rating, estimates and PT would be at risk if GTIV fails to executive on One Gentiva as well as in other
synergy-creating and cost-saving initiatives currently underway. DOJ/OIG/RAC scrutiny: Medicare providers operate in a heightened anti-fraud
environment. Recovery Audit Contractors can aggressively pursue providers for allegedly inappropriate or inaccurate billing that could ultimately
be overturned on appeal. The DOJ and whistleblowers could sue for up to treble damages if Medicare fraud is proved in court. While we are not
aware of any material False Claims Act (Medicare Fraud) issues at GTIV at this time, the announcement of one for GTIV or a competitor could have
a materially negative effect on both our estimates and the stock price. Deal risk: Should GTIV continue to refuse to negotiate to sell the Company,
we could see material downside to a price below the $8.54 closing price the night before the bid was announced.
AMED’s shares are extremely volatile given the small number of shares outstanding (less than 30 million). AMED could also resolve its operational
issues more quickly or more efficiently than we think, and our estimates may prove to be too low. However, we note that our thesis is predicated
on troubles from the ongoing investigations, RAC audits and class action lawsuits as well as our concerns about earnings power over the next 18
months. AMED could also resolve its Senate Finance and SEC Investigations more quickly than we think (we think the SEC and potential other
unknown investigations may take years to resolve to finality). We note that the SEC submission is not yet complete based on management’s latest
public comments. AMED could also announce a cash conservation strategy that would cure one of our concerns about the Company’s intentions
over the next 18 months. AMED faces Medicare reimbursement risks that may be significant due to the sequester, rebasing, productivity cuts and a
potential for additional rate cuts and implementation of a copayment for Medicare beneficiaries. The involvement of an activist holder could result
in a change of management and/or the Board or even the sale of the Company. The activist is now on AMED’s Board, which may lead to strategic
combinations or other actions that may result in higher EBITDA and valuation.
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RISKS (cont.)
UNH: Risks to our UNH recommendation include both internal and external factors. The external factors that could adversely affect the Company
and our estimates (and share price, in turn), include uncertainties around the ACA (health reform), related to the regulations that still need to be
written in order to implement its provisions. Coverage expansions may never happen, while cuts to reimbursements and managed care taxes and
regulations may stay in place. Additional regulation and/or Medicare Advantage cuts may impose burdens on health plans. In addition, UNH
operates in highly competitive businesses and recent market share gains may not be sustainable. State budget crises may reduce reimbursement
for and the number of lives offered to UNH’s Medicaid managed care plans. These are among the types of external factors that could materially
adversely affect the Company and our estimates, but this is not an exhaustive list.
Internal factors for UNH include those elements of the strategy that are under UNH’s control. We especially point to UNH’s historically poor
reputation among providers principally, but not exclusively, hospitals. We believe it is crucial that UNH fix its provider reputation the way it has
been healing its customer reputation in order for the Company’s near- and long-term strategies to succeed. Beyond that UNH’s strategy relies
heavily on excellence across the enterprise in execution and strategy and places significant emphasis on innovation, i.e., finding new ways of doing
things both within UNH and as products and services to be sold outside of the Company. UNH may not succeed in this effort, which again could
have a material adverse impact on both short- and long-term earnings performance and returns to investors. We note that while UNH’s
management team is quite broad and deep, routine executive repositioning may either cause a period of delay or weakness in near term results.
The shifts can place new executives in key leadership positions and some of them may not succeed in managing those enterprises as well as one
might now hope. Finally, this list is not intended to be an exhaustive list of internal risk factors.
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