Despite a relative underperformance over the past two months, the managed care organizations ((MCOs)) remain well positioned as fundamentals are largely intact, JPMorgan analysts wrote late last week in a post-Q4 2022 analysis of the subsector.
In the iShares U.S. Healthcare Providers ETF (IHF), health insurers are among notable laggards this year, with Alignment Healthcare (ALHC), Centene (CNC), Molina Healthcare (CI), and Cigna (CI) all recording double-digit percentage declines.
Noting that managed care currently trades at a ~23% discount to the S&P 500 compared to an average of ~15% discount over the last ten years, JPMorgan analysts led by Lisa Gill attribute the underperformance to multiple factors ranging from sector-specific to political.
They argue that the newly issued Medicare Advantage ((M.A.)) Risk Adjustment Data Validation (RADV) audits, concerns around 2024 M.A. rates, and election risks have weighed on the subsector.
In addition, the market expectations over macro factors, such as peak interest rates and easing inflation which shifted investor interest into riskier assets, have also contributed to the underperformance.
However, “we remain positive on the group as we believe fundamentals are largely unchanged even as macro/technicals drive near-term price action,” the analysts wrote.
Noting that the MCO outlook for 2023 is mostly in line or moderately ahead of expectations, the analysts opted for only three downgrades for the group.
They reiterate the Overweight ratings for Cigna (CI), CVS Health (NYSE:CVS), Elevance (ELV), Humana (HUM), Molina Healthcare (CI), UnitedHealth (UNH), and hospital sector bellwether, HCA Healthcare (HCA).
However, the downgrades on Alignment Healthcare (ALHC) and Centene (CNC) to Neutral from Overweight were triggered by JPMorgan’s relative rating system, while that on Oak Street Health (OSH) indicates a ~$10.6B deal CVS Health (CVS) inked to acquire it.
“We believe investors have better visibility into two key overhangs following the publication of the final RADV rule and preliminary 2024 rate announcement,” Gill and the team argued.
The analysts expect a minimal impact from the final rule on the MA RADV program under which the Centers for Medicare & Medicaid Services (CMS) required health insurers to pay $4.7B for overpayments made to Medicare Advantage plans.
“RADV was not as bad as feared despite the lack of an FFS adjuster and CMS’s decision to move forward with extrapolation as the agency indicated it will only clawback overpayments beginning in 2018 with no cash collections until 2025,” they added.
Regarding the preliminary MA payment rates that CMS issued in February for 2024, JPMorgan reiterated its previous views arguing that final rates expected by Apr. 03 could reflect a 50 – 100 bps increase as “the Final Notice has typically improved over the Advance Notice.”
“We believe plans will likely look to offset revenue reductions and margin impacts with operational efficiencies and other administrative levers as opposed to reducing benefits,” the analysts added.
On the election front, the team argued that whether President Biden will run for reelection in 2024 is “the biggest near-term question for stocks.”
They note that Biden’s view on healthcare reforms and regulations largely backs coverage expansion and consumer affordability, which, according to analysts, is a positive for MCOs.
“If President Biden chooses not to run, we expect MCO stocks will be pressured until a clear Democratic candidate emerges,” the team opined.
In an article about the 2023 sector outlook for healthcare on Seeking Alpha, TD Wealth recently urged investors to keep an eye on health insurers as the U.S. enters the presidential election cycle over the next two years.