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eHealth (EHTH)-As Medicare Commissions Grow, So Does The Company
Jul. 6, 2018 10:17 AM ET
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About: eHealth, Inc. (EHTH)
Mark Taylor
Mark Taylor
Growth, medium-term horizon
Summary
•The company is primarily a Medicare Broker Now.
•Profit margins are increasing rapidly.
•Medicare commission expansion could be as much as 50% over the next decade.
E-health (EHTH) is set to double soon and quadruple long term as profitability is back. Small caps are on fire, especially ones like EHTH who have little to no debt.
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.
Commission Rates Rising
Since 2015 the government approved changes pegged to start in 2016 in the way it sets the commission rate that insurers are allowed to pay for Medicare Advantage C and Prescription Drug Plan D renewals. Since then the renewal rates are allowed to float with 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. No matter when you make the sale, 2018 for example, if the rates are higher in 2019 or 2020, then eHealth can get paid more in those renewal years if the plan is still on the books and the insurer honors the government allowed increase. As we all know, the cost of care keeps rising, and thus, the total value of the transaction also keeps rising. Initial payments, which are usually a higher commission, are also set by fair market value. 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%. On May 25th 2018, CMS announced the 2019 C and D allowable rates which are up by almost 6% year-over-year in some cases. 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.
Table Below Source: Precision Senior Marketing
C and D Allowable Commissions
Table Below Source: CMS
C and D 2019
Margins Set To Rise
Here's the thing, gross margin at EHTH is about 27% on Medicare today. That is small. But, the government has the per capita cost of Medicare care rising by about 4.6% annually for the next 10 year stretch. Simple math says that therefore Medicare C and D commission rates will also rise by about 4.6% annually. That is a whopping 50% rate increase over that timeframe. 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%? No, some of their Medicare sales, like Medigap plans known as Medicare Supplements (about 25% of their overall Medicare revenue), are not seeing commission rate increases. 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 the recent Supreme Court ruling, the union bosses have been planning and deploying revenue sharing agreements for services used by union members to raise cash. The 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.
Big Profits Ahead
Using math and the stated Medicare CAGR that EHTH has for its enrollments of 20% through 2020 (I figure it'll slow some after that), the stated 40%+ margin by 2020 (highlighted below) on its own initiatives, and tacking on the 4.6% commission expansion for C and D sales (around 3% for their total Medicare book when you figure their Medicare Supplements sales) you come up with 50% margins within 5 years. You also come up with gross profits of near $300M by 2025 (highlighted below).
Estimates Below Source: My calculations using company 2018 data as baseline
Click to enlargeestimates
It's possible the enrollment growth or commission changes in the future could be less than opined here. There is plenty of regulation out there on Medicare C and D plans and CMS updates it's thinking annually on them. One large item that make occur is that Medicare B drugs may move into Medicare D as President Trump has tasked Health Secretary Alex Azar to do. This would surely raise the cost of Part D and alter the part D program.
With a 19M fully diluted share count, and gross profits possibly over $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.
More Than Just Medicare
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. Some Gap plans, for example, will pay up to 50% of your deductible for medical testing or a hospital stay. If you have a $4000 deductible, then the Gap plan would pay 50% or $2000 toward that deductible each year for a cost of around $40 per month. 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.
The stock recently had a Golden Cross (50MA moved over the 200MA). Its a bullish sign. Look for a break of $28, which is the high of the past 12 months, for more bullishness. Don't be afraid of Option Calls if you are not into playing the small cap space with big money. Tip-toe in with some $25 or $30 calls heading into 2019.
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.
