Woes for Obamacare and Express Scripts

President Trump last week put an end to cost sharing reduction (CSR) payments to the nation’s large health insurance companies. The executive order calls for the elimination of payments to insurance companies stating that they are nothing more than “bailouts” for already profitable insurance companies. These CSRs were agreed upon in the original Affordable Care Act legislation. They were to serve to reimburse insurance companies for subsidizing low income in terms of lower deductibles and copayments.

Trump claims when Obamacare was originally passed, congress never signed off on appropriations bills that allowed the government to pay the insurance companies. But several states have already jumped on the bandwagon and are planning to file lawsuits against the government claiming that Obamacare is the law of the land and the cost sharing reductions payments are thus legal and should be reinstated. Trump has threatened to renege on payments to insurance companies starting immediately. The amount comes to about $7 to $8 billion dollars over the next year. The pundits are making all sorts of proclamations that this will mess everything up for all Americans. Some say it will just force people into higher priced ACA plans and since 90 percent of those plans, purchased from the ACA exchanges, are under subsidies, it will further inflate the budget deficit.

You can guess what this did to health insurers like UnitedHealth Group (an ISAW portfolio holding) and Aetna and others. They plunged briefly after the announcement. Truth of the matter is, these companies, especially UnitedHealth, exited the exchanges long ago. Moreover, large hikes in premiums have also come to pass, long before Trump moved to Pennsylvania Avenue. So, when the press states that large increases are sure to result from this—they are late to the game and increases already hit the books long before Barack Obama left office.

It’s anyone’s guess as to what will happen with the ACA now that this initial shot over the bow has been taken. Twenty million people became insured as a result of the ACA. No doubt CSR legislation will force more companies to jack up premiums to offset the subsidies. I can’t see the number increasing under Trump. And if a significant number lose their insured status it’s a lose-lose situation for many. Again, let’s hope that Washington can get its act together.

On another note, we had two portfolio members that were in the dog house and about ready to be kicked out of the house completely – Illumina and Express Scripts. Illumina has rallied nicely back above our buy price after giving us fits for about a year. But Express Scripts continues to break badly. After dropping to $57 earlier in the year, it meandered in the low 60s, it’s now dropped to multiyear lows, and the decline doesn’t look like its over yet. Remember ESRX is very likely going to lose its largest customer. While that is priced into the stock, what wasn’t was the $3.6 billion-dollar acquisition announcement they made this week. ESRX bought eviCore, a medical benefits management system. The CEO said they made the purchase to help maintain their competitiveness. The street likes the deal, but investors don’t. I think that’s because previous acquisitions have not exactly gone smoothly for ESRX. So, we hit new 52-week lows, and I continue to sweat. If this stock doesn’t get back into the 60s quickly, I may have to take an extremely rare loss. I hate losses, but they come with the territory. Stay tuned

Dave Lerman and Jodie Warner

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