August 29, 2016 - 10:35am EST by
2016 2017
Price: 130.00 EPS 0 0
Shares Out. (in M): 263 P/E 0 0
Market Cap (in $M): 34,190 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • good call



  • Health care insurance provider that is roll-up of the US Blue Cross Blue Shield branded plans

    • Commercial insured = 55%

    • Government (Medicare, Medicaid) = 20%

    • Self-funded plans (ASO) = 15%

    • Individual = 10%

  • Employers and customers pay a fixed monthly payment in exchange for ANTM covering their health care expenses

    • Typically, ~ 80% to 85% of premiums are spent on health care expenses

  • Value-add

    • Insurers have local oligopolies that enable them to pressure health care providers (e.g., hospitals, physicians, pharma companies) to provide services for cheaper

    • Insurers manage patient populations to lower utilization, which is possible given 5% of the population accounts for 50% of health care expenses

  • Competitive Advantage

    • Blue Cross Blue Shield has a strong brand name

      • ANTM believes it can price 1% above peers (and thus gain a 1% greater margin than peers, which is meaningful given margins are only MSD%), and still maintain share b/c of the Blues brand name

    • Cost advantage given scale enables negotiating leverage vs providers


ANTM trades at a discount to (1) peers and (2) EPS growth potential, given concerns over ANTM’s commitment to Obamacare’s largely money-losing Exchanges.  However, what the market is missing is that (1) ANTM has a cost and brand advantage in the individual market, and so can make Exchanges profitable even while peers may not and (2) if the Exchange is unsuccessful for ANTM in the medium term, ANTM may simply exit the Exchanges, and so possible Exchange losses should not be capitalized

  • ANTM trades at a Forward P/E of 11.5x

    • vs 14.4x for AET, despite AET and ANTM growing EPS at the same % rate

    • vs 14.2x implied by ANTM’s historical discount to the market

    • vs ANTM EPS growth of 10% to 15%

  • Valuation is depressed b/c ANTM has been the most vocal about being committed to Obamacare’s Exchanges

    • Exchanges are marketplaces (created by Obamacare) where individuals who do not receive insurance from their employer can buy health care insurance, with the help of a government subsidy

    • Exchanges have been unprofitable for insurers b/c:

      • Members more sick than expected gravitated to the Exchanges, given the “stick” to get healthy members to join Exchanges was not onerous enough

        • The “stick” of an individual mandate payment of $325 per adult/ $975 per family per year is not enough to incentivize healthy individuals to buy insurance.  Additionally, there are ways for individuals to avoid paying the individual mandate

        • Insurers can’t deny members for pre-existing health conditions, and so can’t offset the lack of healthy members by denying sicker members coverage

      • Customers can buy insurance after they get sick based on “special enrollment periods” that only require a flimsy excuse to request insurance

        • This defeats the purpose of insurance, and led to customers signing up only after they were sick, leading to much sicker patient populations than expected

      • Difficult for insurers to raise prices enough to offset these sicker members’ costs given (1) the potential to trigger an insurance “death spiral” and (2) state regulations that monitor price increases

        • A death spiral is the risk that premiums increase enough to cause only exceptionally sick members to enroll, leading to even lower profitability for the insurer.  Raising prices too quickly can lead to this death spiral.

        • Price increases above a certain level must be approved by state authorities, which keeps pricing in check

      • Gov’t promises of risk mitigation payments were not paid to the insurers

    • Exchanges account for MSD% to HSD% of health care insurers’ revenues, and are -MSD% margin unprofitable

    • ANTM’s health insurance peers have said they would walk away from providing insurance on the Exchanges in ‘17

      • AET, UNH and HUM have all suggested they would leave a material number of their state Exchanges, given the structural issues outlined above

    • However, ANTM has remained committed to the Exchange business, saying it has no plans to exit

  • Concerns over ANTM remaining in the Exchanges and assuming accelerated/material losses are unjustified, given (1) ANTM has a cost advantage vs peers and (2) if ANTM found itself losing money over a long period of time, it is allowed to exit the Exchanges just like its peers

    • ANTM is the only insurer who was breakeven on the Exchanges in ‘15, while all others had negative -MSD% to -HSD% margins

    • ANTM was able to be breakeven b/c ANTM has a ~4% margin competitive advantage vs peers

      • 3% due to lower costs, given higher market share in the individual market due to its Blues brand name

      • 1% pricing advantage due to brand value

    • As others exit the Exchanges, it only improves ANTM’s chances of making the Exchange business profitable

    • ANTM would not commit long term to the Exchange if it does end up being chronically unprofitable

      • ANTM is likely only committing through ’17 b/c it wants to be viewed favorably as it attempts to win its antitrust case to purchase CI

    • ANTM’s current stock price implies ANTM is permanently committed to the Exchange business, and that losses on the Exchange will accelerate to the downside.  Given ANTM’s ability to exit the Exchange, and given ANTM’s cost advantage that historically has made ANTM’s Exchange business breakeven to slightly profitable, this implication seems exaggerated.


There is no value being ascribed to ANTM winning concessions from ESRX, which could add ~1.40 per share in earnings.

  • ANTM believes that ESRX is overcharging ANTM for their pharma purchases

    • ESRX purchased ANTM’s PBM in ’09, and at the same time penned a 10 year agreement between them.  

    • Supposedly, part of this agreement suggested ANTM would pay higher prices for its pharmaceuticals in exchange for a $5bn upfront payment.  However, ANTM argues it is paying above what was agreed.

  • Given ESRX claims that it sent proposals to renegotiate drug savings of $2bn+ for ANTM, but that ANTM rejected these proposals, I believe that ultimately ANTM and ESRX will settle on a number to avoid a costly/long legal battle b/c it shows that ESRX is willing to pay something

    • Also, ANTM accounts for 12% of ESRX’s EBITDA, so ESRX is incentivized to negotiate


There is no value being ascribed to the possibility of an ANTM/CI deal, but given the probability of the deal closing is so low, I would only account for the benefits of deal accretion in an upside case (i.e., not in a base case)

  • If ANTM is allowed to buy CI, then the deal is 20%+ accretive by ’18 (per guidance)

    • My calculations suggest 30%+ accretion by ‘18

  • Given ANTM is undervalued, even excluding this deal accretion, there is basically no value being given to ANTM for the possibility of a deal close

  • ANTM will fight the Justice Department’s antitrust lawsuit in order to close the deal, but admittedly odds of the deal closing are very slim.  I attribute no possibility for the deal closing in my base case price target


Price Target

  • Current price = 130

  • Base case = 180

    • IRR = 27%

    • Assumes P/E at 13x, and that ANTM pays the full $1.85bn breakup fee

  • Downside case = 113

    • IRR = -10%

    • Assumes P/E at 10.0x on downside case EPS, and assumes ANTM pays the full breakup fee

  • ESRX litigation in ANTM’s favor = 199

    IRR = 37%
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


  • Profitability or exit of Exchanges
  • ESRX litigation resolution
    sort by    




    ANTM trades at a discount to (1) peers and (2) EPS growth potential, given concerns over ANTM’s commitment to Obamacare’s largely money-losing Exchanges.  However, what the market is missing is that (1) ANTM has a cost and brand advantage in the individual market, and so can make Exchanges profitable even while peers may not and (2) if the Exchange is unsuccessful for ANTM in the medium term, ANTM may simply exit the Exchanges, and so possible Exchange losses should not be capitalized


    There is no value being ascribed to ANTM winning concessions from ESRX, which could add ~1.40 per share in earnings.


    There is no value being ascribed to the possibility of an ANTM/CI deal, but given the probability of the deal closing is so low, I would only account for the benefits of deal accretion in an upside case (i.e., not in a base case)


    Price Target

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.



    Subjectpublic option, other ?
    Entry08/29/2016 11:17 AM

    Do you think the absence of options on the exchanges leads to renewed look at public exchange option? My thought has been some states may roll these out - but might look to private for admin, with state taking on the MLR risk - 

    Could create a lot of noise though as process unfolds, and does pose a longer term competitive risk, if some of the public plans get better over time. Any thoughts?

    On the positive side, seems to me if ANTM is increasingly alone in certain exchange markets, it may improve both their risk pool and pricing power.

    Any thoughts on Joseph Swedish? Feels like he hasn't done the best job finessing the CI merger and ESRX dispute - feels like he overpromised on the latter.

    On CI, are they going to get stuck w big breakup fee?

    SubjectRe: public option, other ?
    Entry08/29/2016 12:21 PM

    xds + ElCid:

    I think the process will be:

    - More carrots (subsidies) and more sticks (much bigger penalties to un-insured).

    - Then public option

    Krugman agrees. See below. Unlike Krugman, I do not think it is easy to fix.

    The problem now is that to a middle-class healthy family, ObamaCare plans are irrational to buy. They offer very few benefits unless there is a catastrophe. And if there is a catastrophe, many people would be driven to bankruptcy (or at least onerous debt) via co-pays, etc. even if they had these policies. Some healthy people bought insurance out of a civic duty, but as time passes and the costs and benefits become clearer, its is becoming obvious that for many healthy people, buying insurance is not the economically rational answer. Increased subsidies will help but only so much. The real "answer" is to slap a huge penalty on un-insured people such that the subsidy + penalty almost equals the cost of the policy.

    Fwiw, I think the big "other shoe" that is going to drop (already has somewhat) is that providers are going to increasingly reject ObamaCare plans as they underpay similar group plans by quite a bit.

    From Krugman column in NYTimes last week:

    But it would be quite easy to fix the system. It seems clear that subsidies for purchasing insurance, and in some cases for insurers themselves, should be somewhat bigger — an affordable proposition given that the program so far has come in under budget, and easily justified now that we know just how badly many of our fellow citizens needed coverage. There should also be a reinforced effort to ensure that healthy Americans buy insurance, as the law requires, rather than them waiting until they get sick. Such measures would go a long way toward getting things back on track.

    Beyond all that, what about the public option?

    The idea of allowing the government to offer a health plan directly to families was blocked in 2010 because private insurers didn’t want to face the competition. But if those insurers aren’t actually interested in providing insurance, why not let the government step in (as Hillary Clinton is in fact proposing)?


    SubjectRe: public option, other ?
    Entry09/29/2016 03:41 PM

    Thanks for the response, and apologies for my late response (I missed the original e-mail notifying me of a post). 

    On the public option, I think this is relatively low fundamental risk for ANTM, but agree that it does pose a headline risk.  Key questions are (1) what are the odds that a public option will be approved at either federal or state level, (2) if approved, what are the odds that the public option will be competitive with ANTM’s product, and (3) if the public option is competitive and takes meaningful market share in ANTM’s markets, what is the financial impact to ANTM.

    On the odds of a public option being approved, I think difficult to quantify but is generally challenging.  The federal public option was too controversial to be included in Obamacare, and Obamacare frankly has only become less politically popular since then.  State funding for a public option is possible, but faces likely an even greater political challenge given 31 states are under Republican governors.  The failure of government subsidized co-ops makes these even more difficult to pass, given any public option will likely be viewed as another long term healthcare subsidy, as opposed to anything that actually generates profit.  If anything, we see states moving away from assuming healthcare payment risk, as states’ movement towards managed Medicaid (which limits state healthcare payment volatility) demonstrates. 

    Also, one challenge for the public option is that it doesn’t really fix the price issue, unless the government agrees to another massive subsidy.  Originally, the public option was pitched as a competitor that would keep private players honest.  However, lack of competition isn’t the sole reason Exchange pricing is high.  Insurance premiums are high because of a flawed insurance pool and market structure.  Unless the government has substantial cost or medical management advantages over ANTM, a public option won’t solve the fundamental problem.  The government needs to either let rates rise to induce market participants, or change the structure so that rates come down. 

    Nonetheless, Hillary Clinton has supported the public option and so there is real headline risk, but I think actually expanding Obamacare in this way will be an uphill climb.  

    I think an easier fix than a public option would be to increase the individual penalty for not getting insurance, and preventing people from signing up for healthcare after they become sick.  This would benefit ANTM because it would bring more and healthier lives onto the Exchanges.

    Even if approved, it’s unclear any federal public option will actually be competitive with ANTM plans.  One issue is that ANTM has the Blue Cross Blue Shield brand name, giving it a competitive advantage even against a government funded plan.  Additionally, any public option will have a higher cost basis than ANTM, given general government inefficiency (a good book on this is “America’s Bitter Pill” on how the government bungled the execution of the Exchange portal) and more importantly the government’s lack of any current provider network.  Therefore, the public option will either need to be heavily subsidized (making it less politically feasible), or less subsidized but an inferior product to competitors.  If the government attempts to squeeze health providers (hospitals, physicians) too much, then many may simply not offer their services to these public options, making the plans extremely narrow networks and not competitive.

    Assuming a public option is approved, and assuming the government is somehow able to provide a competitive offering and take share from ANTM, I think the bigger argument is that even in this scenario the impact to ANTM should be limited.  The reason is that ANTM currently makes no money on Exchanges, and the stock price does not have any expectation built in that these Exchanges will be profitable for them longer term.  My thesis is that even if ANTM is forced to exit the Exchange business (due to a public option, or any other reason), the stock is still cheap.  The only way the public option becomes a bigger risk to ANTM is if the government offered a public option that could compete with ANTM and others beyond the individual Exchange (i.e., offerings to small and medium sized businesses), but this would require larger networks and is not something even being contemplated.

    On Joe Swedish, I think part of the “overpromising” is actually just negotiating.  He’s starting out with a big public number to hopefully wind up with something in the middle.  This tactic doesn’t upset me.


    ANTM does get stuck with the breakup fee if CI is not completed, but this is in my price target.  

    SubjectRe: Re: public option, other ?
    Entry09/30/2016 11:29 AM
    EBITDA per covered life     
    Revenue Company Name 2014 2015
    UNH UnitedHealth Group Inc            261            274
    AET Aetna Inc            202            232
    CI CIGNA Corporation            269            261
    HUM Humana Inc            197            210
    CNC Centene Corp            145            166
    ANTM Anthem            155            160


    Do you have a view on why ANTM's EBITDA per covered life is the lowest? Given the size and scope of the business they should be at a blended level between AET and CNC... closer to $220.

    SubjectRe: Election outcome
    Entry09/30/2016 01:15 PM
    Trump’s stance on healthcare is to end Obamacare and “replace it with something terrific, for far less money… something so much better”.  Details on what exactly would replace it are hard to come by.
    Either way, I believe the impact of a Trump victory (i.e., victory in fight for the White House and fight to repeal Obamacare) is a toss up. At a high level, Obamacare is viewed as a negative for insurers, as evidenced by the stocks' depressed valuations in '12 when it became clear Obamacare would become a reality.  The negatives of Obamacare on ANTM and its peers (e.g., MLR floors, premium taxes, small group dumping to exchanges) were viewed to more than offset the benefits (e.g., Medicaid expansion, members gained on Exchanges).  Today, while all of the negative influences on the stocks ended up coming to fruition, some of the positive offsets have not (e.g., Exchanges have been unprofitable).  While EPS growth has stayed somewhat constant post Obamacare, there is a possibility that EPS growth would have been even greater without it.
    While this argues that a repeal of Obamacare would be positive for the stocks, there are some offsets that make me believe ultimately the impact is a toss up.  One big offset is that the degree to which Obamacare has been a negative on managed care's earnings power is debatable.  For example, premium taxes were largely passed through in higher premiums, and so possibly had a neutral impact.  There were so many offsetting changes, the impact of each change is debatable, and there's no easy "tell" (e.g., EPS growth didn't just dramatically decelerate), that it's not clear how much of a negative impact Obamacare actually had.  The second offset is that repealing Obamacare will likely create confusion, even if the repeal is a net positive when you tally together all of the changes.  There is no simple narrative around the impact of Obamacare on managed care (i.e., the way there exists a simple narrative on its impact on hospitals), but instead there are multiple offsetting factors, each of which is complicated.  This creates the risk that managed care simply becomes "controversial" again, and this complexity creates a temporary discount.
    The impact Trump can have on the anti-trust cases is also debatable, given the DOJ is already on record against the mergers and the cases will be in the courts by the time Trump would possibly get into office.  However, there exists an upside case where the DOJ changes course as Trump replaces its leadership.
    All that being said, if Trump wins and Obamacare begins to be repealed and the stocks sell off, this likely creates a buying opportunity b/c fundamentally any repeal will likely only increase earnings power. But, there is a chance of near term volatility.

    SubjectRe: Re: Re: public option, other ?
    Entry09/30/2016 05:28 PM
    EBITDA per life is lower for ANTM due to differences in membership mix.  For example, ANTM has the greatest exposure to the Individual market (on exchange and off exchange), relative to peers.  This exists for historical reasons, given ANTM’s Blue Cross brand enables the company a competitive advantage vs peers in the Individual market.  However, this also results in lower profitability per member, given structurally Individual has the lowest Pre-tax profit PMPM (per member per month).  Also, ANTM’s commercial business has a material exposure to the BlueCard program, which is lower profitability per member.  Under the BlueCard program, ANTM receives revenue for Blue Cross members who are from out-of-state, but receive healthcare service in ANTM’s territories b/c they are temporarily travelling.  Basically, it is like a cross insurance agreement with other Blue Cross insurers, but the net result is a low revenue/profit per member b/c you only book revenues associated with members who happen to be away from the state in which they purchased insurance.
    In addition to differences in member mix, there are also differences in business mix.  For example, UNH and CI both have businesses outside of traditional health insurance that are material portions of the total.  CNC is a much different business.  This makes the EBITDA per life comparison tricky.
    Overall, I think EBITDA per covered life is a difficult metric to look at on a consolidated basis. 

    SubjectRe: Author Exit Recommendation
    Entry08/25/2017 12:03 PM

    Nice call on this one - it was a big position for me when you originally mentioned it and I added more during period when it was weak.

    What's your thought at this point? Do you have a view on what they can realize on a new PBM deal, and how much of that will go to bottom line vs. get passed on to members? These guys would also be a big beneficiary of tax reform (as would rest of group), although that doesn't seem like a bet worth making right now.

    Also, elimination of exchange losses gives them an eps bump, whether it comes from exit or better pricing.

    My own rough estimate was the PBM renegotiation could be worth $2 per share, the absence of exchange losses about $1 per share, and lower tax rate about $2 per share. So if things went perfectly on all 3 you'd be up to $17 EPS by late decade assuming about $12 base EPS in 2018. Figure in the real world they get half that, so pro forma goes to $14 - $15. Still doesn't make it tremendously cheap relative to historical insurance multiple, but cheaper than peers.  

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