An Analysis Of Medicare Part D Market Share

|
Includes: ANTM, CI, CVS, HUM, RAD, UNH, WCG
by: Justin Dopierala
Summary

Medicare Part D is set for continued strong growth over the next decade.

Newly issued CMS guidance is a huge set-back for black box PBM's like CVS Health.

Surprisingly, Rite Aid has achieved the highest organic growth since the end of 2016.

Summary

Due to the current political discussion in America surrounding Medicare, I thought it would be prudent to take a look at which companies may benefit from additional covered lives within Medicare Part D.

According to a recent report Bernie Sanders, Elizabeth Warren, Kamala Harris, Julian Castro, Tulsi Gabbard, John Hickenlooper, Marianne Williamson, and Andrew Yang all support "Medicare for All" while Joe Biden, Cory Booker, Amy Klobuchar, Beto O'Rourke, and Kirsten Gillibrand all support expanding Medicare. While "Medicare for All" will likely never happen in America, it is certainly possible that Medicare could be expanded in one fashion or another.

This article takes a look at the top ten providers of Medicare Part D prescription drug plans. The analysis includes lives covered under stand-alone Part D drug plans as well as those that provide Part D drug coverage in addition to medical coverage.

Since 2017, there has been remarkably very little change to the ordering of the top ten; however, one company clearly stands-out for having significant organic growth: Rite Aid (RAD).

Methodology

An analysis was performed on the recently released CMS report from May 15th, 2019 as well as the reports from January 2019, 2018, and 2017. Each report includes data through the previous month which is why the January reports are being used in place of the December reports.

For each time period analyzed, totals for Express Scripts were added into Cigna's totals. The same was done for Aetna and CVS Health Corporation as well as Caidan Enterprises and WellCare Health. Lastly, Anthem, Anthem Insurance Company, America's 1st Choice Holdings, and HealthSun were also combined.

The January, 2019 CMS report, reflects the required divestiture of over 2 million covered lives from CVS Health Corporation to WellCare Health. In the January, 2019 CMS report WellCare Health has 4,442,557 lives covered compared to 1,611,467 lives covered in the December, 2018 report. Therefore, it appears that over 2.8 million lives were acquired from Aetna.

Interestingly, since that divestiture, Centene Corporation (NYSE:CNC) has announced that they will acquire WellCare Health for $15.27 billion. As of the May, 2019 CMS report, Centene had 305,624 covered lives; therefore, the combined companies will have just under 5 million covered lives going forward.

One thing is clear - this is an area where significant consolidation has been occurring which makes any organically growing provider extremely attractive to potential suitors.

Medicare Part D

Medicare Part D coverage for prescription drugs is not a mandatory selection for Medicare participants. However, the most recent report shows that 72% of all Medicare beneficiaries nationwide are enrolled in Part D plans as opposed to only 59% in 2010. Over that period of time the number of Medicare beneficiaries has also grown by just over 30%. This helps to explain why Medicare Part D membership has grown by over 60% since 2010 as more and more people join Medicare each year with a higher percentage of beneficiaries also electing to add the voluntary Part D plans each year.

Despite the growth in Medicare, as of 2017, only 14% of the US population was insured with Medicare while 49% were insured through employers. According to AARP over 10,000 baby boomers are reaching age 65 each day which is expected to continue into the 2030s which is approximately double the number of seniors that die on a daily basis.

Aside from more people reaching age 65, there has also been a trend by employers to shift retirees from self-funded offerings to Medicare Advantage Plans. This trend has accelerated since the Affordable Care Act was passed since it improved Medicare Part D benefits by phasing out the gap in coverage and introducing reforms in the Medicare Advantage plans.

Therefore, even without the assistance of politics, Medicare enrollment is set to continue growing for at least another decade. If political action ends up moving a meaningful number of non-retiree employees from employer plans to Medicare plans then the growth would be staggering.

The top ten Medicare Part D providers are UnitedHealth Group, Inc. (UNH), CVS Health Corporation (CVS), Humana Inc. (HUM), WellCare Health Plans, Inc. (WCG), Cigna (CI), Kaiser Foundation Health Plan, Inc. (Private), Anthem Inc. (ANTM), Rite Aid Corporation (RAD), Blue Cross Blue Shield of Michigan Mutual Insurance (Private), and Health Care Service Corporation (Private).

Which of these public companies have the most to gain from an increase in Medicare Part D beneficiaries?

Let us review the data.

CMS Data

Top Ten Medicare Part D Providers by Covered Lives

Parent Organization

April 2019

End of 2018

End of 2017

End of 2016

UnitedHealth Group, Inc.

11,020,609

10,939,509

10,684,217

9,982,715

CVS Health Corporation

8,304,223

8,265,017

9,907,443

8,993,458

Humana Inc.

8,302,513

8,304,228

8,445,739

8,326,356

WellCare Health Plans, Inc.

4,647,068

4,442,557

1,625,015

1,453,703

Cigna

3,752,152

3,742,137

3,685,362

4,082,361

Kaiser Foundation Health Plan, Inc.

1,640,437

1,623,855

1,571,909

1,416,497

Anthem Inc.

1,581,877

1,552,833

1,356,733

1,274,734

Rite Aid Corporation

651,417

621,990

492,228

312,218

Blue Cross Blue Shield of MI Mutual Ins

561,902

559,196

564,746

490,017

Health Care Service Corporation

402,309

410,572

481,413

497,217

Grand Total (All Providers)

48,296,167

47,888,254

46,390,957

44,484,287

Market Share: 2016 vs Present

Parent Organization

April 2019

End of 2016

UnitedHealth Group, Inc.

22.8%

22.4%

CVS Health Corporation

17.2%*

20.2%

Humana Inc.

17.2%

18.7%

WellCare Health Plans, Inc.

9.6%*

3.3%

Cigna

7.8%

9.2%

Kaiser Foundation Health Plan, Inc.

3.4%

3.2%

Anthem Inc.

3.3%

2.9%

Rite Aid Corporation

1.3%

0.7%

Blue Cross Blue Shield of MI Mutual Ins

1.2%

1.1%

Health Care Service Corporation

0.8%

1.1%

*Includes recent transfer of lives from CVS Health to WellCare.

Growth from 2017 to Present

Parent Organization

Growth in Lives

(%) Growth in Lives

Rite Aid Corporation

339,199

108.6%

WellCare Health Plans, Inc.

362,275

24.9%*

Anthem Inc.

307,143

24.1%

CVS Health Corporation

2,141,855

23.8%*

Kaiser Foundation Health Plan, Inc.

223,940

15.8%

Blue Cross Blue Shield of MI Mutual Ins

71,885

14.7%

UnitedHealth Group, Inc.

1,037,894

10.4%

Humana Inc.

-23,843

-0.3%

Cigna

-330,209

-8.1%

Health Care Service Corporation

-94,908

-19.1%

Grand Total (All Providers)

3,811,880

8.6%

* Excludes the recent transfer of lives for purposes of determining organic growth.

YTD Growth

Parent Organization

Growth in Lives

(%) Growth in Lives

Rite Aid Corporation

29,427

4.7%

WellCare Health Plans, Inc.

204,511

4.6%

Anthem Inc.

29,044

1.9%

Kaiser Foundation Health Plan, Inc.

16,582

1.0%

UnitedHealth Group, Inc.

81,100

0.7%

Blue Cross Blue Shield of MI Mutual Ins

2,706

0.5%

CVS Health Corporation

39,206

0.5%

Cigna

10,015

0.3%

Humana Inc.

-1,715

0.0%

Health Care Service Corporation

-8,263

-2.0%

Grand Total (All Providers)

407,913

3.2%

Analysis of the Data

This is a lot of data. What does it tell us?

First of all, it would appear that UnitedHealth Group, CVS, and Humana would all benefit greatly from an expansion of Medicare that resulted in more lives being covered by Medicare Part D. While their combined market share has fallen from 61.3% to 57.2% over the last several years they still constitute a significant percentage of the total market share and they have the infrastructure in place to take advantage of any major increases.

WellCare Health Plans, Anthem, and CVS Health all experienced impressive organic growth close to 25% since the end of 2016. Furthermore, the recent acquisition by WellCare Health Plans has vaulted them over Cigna to 4th place by market share.

On the other hand, Cigna has had the worst performance of any publicly traded company in the top ten for market share with covered life losses of over 8% (330,209). Early results in 2019 do not look very favorable either. It is surprising that the acquisition of Express Scripts at the end of 2018 has not led to better gains in 2019. A further review was conduct for prior years to determine if the under performance was due to Cigna or Express Scripts. The results were very similar. Cigna lost 90,550 lives from the end of 2016 to the end of 2018 for a 6.8% decline, and Express Scripts lost 249,674 lives for a decline of 9.1%.

Biggest Winner - Rite Aid

Shockingly, the data also shows that the biggest winner over the last several years has been Rite Aid. Rite Aid has experienced a 108.6% organic growth in covered lives. It could be argued that the percentage shouldn't be concentrated due to the low base of only 312,918 covered lives. That would certainly be a valid point; however, Rite Aid also went from not even being in the top ten from a market share perspective to being the 8th largest Medicare Part D provider in America.

Clearly, Rite Aid is doing something right. Furthermore, looking at YTD 2019 numbers, Rite Aid continues to grow faster than any other provider in the top ten. In fact, based on the YTD Medicare Part D growth rate of 3.2% - the only top ten providers that are growing market share in 2019 are Rite Aid and WellCare Health.

Perhaps even more interesting is the fact that Rite Aid currently has an enterprise value of only $4B. To put this into perspective, the other public companies have enterprise values as follows: UnitedHealth Group: $257B, CVS: $156B, Cigna: $93B, Anthem: $65B, Humana: $26B, and WellCare Health: $12B. As noted earlier, WellCare Health is about to be acquired by Centene which has an enterprise value of about $24B.

New Industry Guidelines and Potential for Consolidation

CMS announced new guidance last Wednesday that any price concession or discount received by a PBM, regardless of who pays for it, will now count as a prescription drug rebate. This is a large set-back for black box PBMs since medical loss ratios for Medicaid and CHIP managed care plans will now take into account spread pricing. Black box PBMs, such as CVS, were previously able to charge plans more than what they paid the pharmacy. Here is a great example of how these PBMs have benefited from spread pricing over the years.

The new guidance, combined with Rite Aid's low enterprise value and high Medicare Part D organic growth may make it a target for the much larger Medicare Part D players. One of the reasons for Rite Aid's tremendous organic growth may be that their PBM, EnvisionRX, already operates a completely transparent pricing model which is in complete contrast to the black box model that most PBM's utilize. By anticipating the future direction of the PBM industry, EnvisionRX may be set for even greater growth in the following years.

The potential for continued consolidation in the industry remains very high, and Rite Aid may very well be the next best option for potential suitors. Given the recent tie-up between CVS and Aetna, it would not be surprising to see Anthem reach out to Rite Aid. Check out the recent conversation between Anthem's CFO, John Gallina, and A.J. Rice of Credit Suisse:

A.J. Rice

Hi, everybody. I thought maybe I'd ask you about capital deployment, obviously in the last 3 or 4 months, there's sort of a shifting landscape of opportunities on the one hand with the Washington backdrop, you know stock has come in, so there is an opportunity perhaps on the buyback side and on the flip side and M&A I know traditionally looked at Medicare Advantage and care management capabilities, but there is also potential opportunities in around Medicaid and in pharmacy benefit. Would - just seeing whether you'd comment on whether you have any interest in those areas, I know you've got a lot on your plate bringing Ingenio, but would there be capability should be interested in picking up on the PBM side and perhaps?

John Gallina

Yes, so thanks A.J. and I think just based on the way you phrase the question, I think our answer, very appropriately as to say that we're going to maintain a balanced approach to capital deployment. At Investor Day, I laid out that we expect to utilize 50% of our free cash flow for either reinvesting in the business or M&A about 30% over the long term on share buyback and 20% for dividends.

However, that 50% and 30% could actually shifted at any point in time, based on current market conditions and opportunities that are out there. In terms of M&A opportunities -- absolutely we're very focused on the MA tuck-ins that either provide us a footprint or solidify our footprint in the market that we don't have by enhancing capabilities, specifically associated with our diversified business group and various other things, but we're not taking anything off the table at this point in time, but we do want to be opportunistic, we want to make sure it provides the best long-term shareholder value and we will react to market conditions accordingly.

Anthem has approximately $4.5B in cash and expects 2019 operating cash flow to be greater than $5.2B. Rite Aid may just be the perfect acquisition from both a size as well as a strategic point of view.

Conclusion

It is likely that Medicare Part D will continue to grow at a fast rate. Growth in Medicare Part D will benefit the companies with the highest market share; however, shares of Rite Aid may benefit the most. As mentioned, recent changes to CMS guidance has major benefits to transparent PBMs like Rite Aid's EnvisionRX. The deeply undervalued shares of Rite Aid as detailed here combined with Rite Aid's organic growth and transparent business model may make it the next acquisition target within a consolidating industry. Even if an acquisition does not occur, the potential future contribution to Rite Aid's earnings could significantly lift the depressed shares. On the other hand, CVS may have the most to lose since a significant percentage of their business is tied to non-Medicare customers that could potentially be forced into Medicare in the future. Less than 10% of the lives CVS covers are tied to Medicare Part D. Additionally, CVS operates a black-box PBM model that is becoming the target of both politicians as well as CMS.

Disclosure: I am/we are long RAD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: RAD currently represents the fourth largest position in the DOMO Concentrated All Cap Value Composite. More information on the composite can be found at our website. DOMO Capital Management, LLC ("DOMO") is a Wisconsin-registered investment adviser. Justin R. Dopierala is the President and Founder, and a registered investment adviser representative, of DOMO. Additional information about DOMO is disclosed in our Form ADV, which is available upon request. All information contained herein is for general informational purposes only and does not constitute a solicitation or an offer to provide investment advisory services in any jurisdiction. The investment strategy discussed herein may not be suitable for everyone. Investors need to review an investment strategy for their own particular situation before making any investment decision. We believe the information obtained from any third-party resources to be reliable, but we do not guarantee its accuracy, timeliness or completeness. The opinions, estimates, projections, comments on financial market trends and other information contained herein constitute our judgment and are as of the date of the material, are subject to change without notice at any time in reaction to shifting market conditions and other factors and should not be construed as personalized investment advice. DOMO has no obligation to provide any updates or changes to such information.