eHealth, Inc (EHTH)

[VortMax]

EHTH-A New Era

hoping to get published on Seeking Alpha...

Summary


•Primarily a Medicare Broker Now.

•Record Medicare Enrollment.

•Medicare Commissions Growing Rapidly.


The company known for helping Individuals and Small Businesses find health plans is now mainly a Medicare Broker, helping seniors and disabled people enroll into various Medicare Plans. Its been this way for a few years now. The thing is, margins have been low and the company has struggled to make profits, but boy, how that is changing.


In 2015 the government changed the way it sets the commission rate that insurers are allowed to pay for Medicare C and Medicare D plans. Since then the rates are set by what they call Fair Market Value, which is fancy for we will allow the insurers to pay you in relation to the total value of the transaction. As we all know, the cost of care keeps rising, and thus, the total value of the transaction also keeps rising. The bottom line is, the government keeps increasing what it pays insurers to administer Part C and Part D, and thus what the insurers are allowed to pay brokers like EHTH keeps rising.


Part C allowable commission is up about 20% since 2015, and Part D allowable commission is up by about 30%. The insurers have historically paid the maximum allowable, though they are not required too. It's likely that will continue as insurers don't want brokers to leave them behind if they don't pay the maximum allowable.


Here's the thing, gross margin at EHTH is about 27% on Medicare today. That is small. But, the government has the cost of care rising by about 5.5% annually through 2026. Simple math says that therefore Medicare C and D commission rates will also rise by about 5.5% annually. That is a whopping 50% rate increase over the next 8 years. As anyone with any financial sense knows, if you are doing the same work for a sale, but that sale simply pays you more in the future, your margins will increase. Will EHTH's gross margin on Medicare go from 27% today to 77% in the next 8 years? No, because they will have some cost rises. But, EHTH is also actively working to lower its cost of Medicare sales. They have a target of 40% to 50% margin soon.


The kicker, and this is where you have to pay attention, is that they aim for 40% to 50% gross margin on their own initiatives and are not relying on Commission expansion. They have a deal with Union Plus to help enroll union retirees at a very low cost to them to spike their margins. Union Plus gets a small rev share. In light of this weeks Supreme Court ruling, the union bosses have been planning and deploying revenue sharing agreements for services used by union members to raise cash. The Wednesday ruling heightens the need for Union Plus to push even more of its retirees to EHTH so they can get more revenue sharing. In other words, Wednesday was a win for EHTH and all of the other services that union members use because Union Plus will push their members to these services to get revenue out of it. This is probably a better a business model for the unions going forward to raise cash, but that is another story.

Using math and the stated Medicare CAGR that EHTH has for its enrollments of 20% for the next few years, and tacking on the 5.5% commission expansion for C and D sales (about 75% of their total revenue) you come up with 40% margins within 2 years, 50% margins within 4, and 60% margins within 6. You also come up with gross profits of $50M in 2018, $70M in 2019, and over $100M in 2020. By 2026 you come up with gross profits near $300M.


With a 19M fulling diluted share count, and gross profits of $100M within 2 years, you have to think of $1B valuation or $50 price targets. In fact, I believe their Medicare portal to be worth substantially more than that because as a Medicare Broker myself, I can tell you their online platform is the easiest to use to help my customers find a plan. All they need to do is make their drug portal an app, and tack on an EHTH discount drug card every time they make a sale, and you easily blow away GoodRx and their $3B valuation.

This is just Medicare folks! I have no idea what they are going to do with their other segments. I've proffered they should dominate the subsidized market as 7M people use Healthcare.gov and pay next to nothing for a health plan. EHTH is set up to enroll folks with a subsidy for individual health. They should do more. Since many of those plans purchased with a subsidy typically have a high deductible, EHTH should offer at the point of sale a Gap plan that fills in part of that deductible. Make it guaranteed issue so there are no medical questions, and they can double their commission. Ever buy an airline ticket and you have the option to toggle on a Trip Cancellation plan? Healthcare.gov will never be able to sell those folks a Gap plan that they desperately need. I believe their subsidized market could be easily another $500M to $1B in value if they invest into it once they get cashflow rolling in Medicare, which, they are cashflow positive right about now and Launch Control is here.


Disclosure: I am/we are long EHTH.

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.

Medicare Outlook EHTH. Even put a 10% constraint on all if you want...Long Term riser here

2018 185M Gross 50M Net 10M 25% enrollment growth 3% commission rise
2019 227M Gross 70M Net 30M 20% enrollment growth 3% commission rise
2020 277M Gross 95M Net 55M 20% enrollment growth 3% commission rise
2021 313M Gross 115M Net 85M 10% enrollment growth 3% commission rise
2022 353M Gross 150M Net 115M 10% enrollment growth 3% commission rise
2023 398M Gross 175M Net 145M 10% enrollment growth 3% commission rise
2024 449M Gross 205M Net 170M 10% enrollment growth 3% commission rise
2025 507M Gross 240M Net 205M 10% enrollment growth 3% commission rise

19M O/S Net 205M 15PE $3B Value