eHealth, Inc (EHTH)

[VortMax]

$40 here we come?

I listened to the conference this week. I still can't find analyst coverage of the FMV model at EHTH which was adopted by CMS in 2015. The majority of EHTH sales has essentially a COLA on it. EHTH can fail at its 20% Medicare growth rate and still get 20%. The numbers are massive. For example, Part C sales just had a 5.8% commission increase for 2019 and a 2.7% increase for Part D announced by CMS. I can't think of anything bigger that drives profits in Medicare. On top of all of this, the Part C and D they sold in the past that pays in 2019 and beyond will also get the increase. So all of a sudden the $272M in receivables they have goes up.

Medicare is a $100M+ profit generator for EHTH and there really is no way that can't happen. I can't even find EHTH itself talking about the commission expansion in Part C and D. C and D are about 75% of their sales, and the commission EHTH gets paid each year on them is set to compound. Notes below:

From someone in the Medicare business like myself this is how I summarize what they say publicly combined with public policy on Medicare. They have essentially a 3% built in margin expansion compounding annually as commission rates on most Medicare products rise, combined with company initiatives to increase enrollment and lower cost.

EHTH 20% CAGR on Medicare enrollments as new-to-Medicare recipients are more computer savy embracing online tech/enrollment/search/help in tandem with new Medicare pool partnerships like Union Plus and increased marketing.

Total Medicare Commission payable to EHTH rising by 3% Annually due to CMS allowing Annual increases based on Fair Market Value Model pegged mainly to cost of care rises for all Medicare Advantage and Prescription Drug Sales. Bottom line is as cost of care goes up the enrollments are worth more and therefore pay more commission.

Cost cutting in enrollments from company initiatives as well as EHTH being busier first 3 quarters of the year where idle workers are now busier enrolling Medicare customers due to increased business adds to margins. In Medicare, lot of idle time and low margin first 9 months, but, as the first 9 months get busier as overall strategy yields more enrollments at that time, margin increases quickly.

MEDICARE 2018 $180M rev $50M gross profit 27% margin stated by EHTH, 2019E $210M $70M profit 34% margin , 2020E $250M $95M 38% margin profit 2021 E $300M $115M profit 40% margin

Here is the white paper explaining when it all changed in 2015 for Part C and D

https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.healthcare-conferences.com/pdf/CMS2015Broker.pdf&ved=2ahUKEwis4MLV8q7bAhWwGDQIHeoPB9sQFjAFegQIARAB&usg=AOvVaw1da6g-_Uy-3WPFslkjL-4w

And here is C and D rates note what happened in 2015 and since then. Med adv commission is fmv which is just a fancy term for as the cost of care goes up the med adv plans are more valuable and thus pay more commission.

http://www.psmbrokerage.com/blog/medicare-advantage-commissions-increased-for-2018

Someone has got to get talking to them about this, and how they add it into their receivables, how it increases cashflow, and how it fits into their modeling of value. They say Part C is about an $800 lifetime value and D is about $250 lifetime value. Does this include the FMV rate increases?

For 2019, of the $272M receivable, they say 30% will pay in that year so about $75M. Of that $75M 75% is Part C and Part D sales. So, that $75M just got about $4M added to it in a flash last week when CMS raised 2019.

https://www.psmbrokerage.com/blog/medicare-advantage-contract-year-2019-agent-and-broker-compensation-rate-adjustments

My firm belief is that price targets are a good 75% too low because this is being missed.....how is EHTH not pegged to $35 to $40 based on their largest sales having a COLA on it?