Weekly Health Tech Reads | 7/21/24

UHG and Elevance Q2 earnings, Headspace hires a new CEO, PWC estimates medical trend, and more

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Kevin O'Leary
July 21, 2024

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Q2 EARNINGS SEASON

UHG stock jumps as it beats Q2 earnings despite missing on MLR and a growing impact from Change

UnitedHealth stock was up 8% on the week, jumping after its Q2 earnings report on Tuesday as it beat earnings targets.

UHG missed its MLR target for the quarter, which was attributed to a handful of key factors. The biggest factors were the Change impact and some issues with a South American business they intend to sell. The Change impact was attributed to UHG turning off care management activities and seeing an increase in utilization as a result. The third raised was an acuity issue in Medicaid driven by redeterminations — a sicker population remains on Medicaid, and states haven’t adjusted their rates fast enough. United shared it expects this issue to be resolved in the coming months. Notably, UHG shared that the pressure isn’t related to Medicare Advantage rates or v28 changes, and they feel like they’re successfully negotiating that change.

The Change cybersecurity incident appears to be causing a larger lingering impact on the business than expected, with Witty noting UHG was “too optimistic” about the recovery. It sounds like the business is back on track now, but UHG now estimates the total cost of the response will be $2.3 billion, an increase of $1 billion from the previous estimate.

✍️ Going Deeper

It was interesting to see the prepared remarks on the earnings call seemingly indirectly respond to the recent criticism in the market related to Medicare Advantage, home visits, and PBMs:

  • Witty cited a recent Milliman report on Medicare Advantage, which showed that MA reduces costs to both consumers and taxpayers compared to Medicare FFS. Presumably, the study referenced is this one from April this year, commissioned by UHG.

  • Witty went on to articulate the value of home visits, which have come under scrutiny again recently (see the recent WSJ report). Among other things, he shared that within 90 days of a home visit, 75% of patients received follow-up care in a clinical setting. It seems like a direct response to the suggestion that patients don’t receive follow-up care after these visits.

  • Witty then went on to mention that Optum Rx clients “continue to appreciate the efforts we make to ensure delivery of the lowest-cost drugs in the face of drug company's sole ability to set prices.” That comment is a bit more generic but seems to be a reaction to the FTC report on PBMS increasing costs.

After this, Witty moved on to briefly discuss UHG’s strategic value drivers. It included an abbreviated mention of the success Surest is having in the commercial market and a mention of the investment in AI use cases internally. Both of these topics came up again later in the call as strengths of the business — UHG saw strong growth in the commercial markets, and it mentioned AI as a key driver of reducing SG&A spending in the quarter. UHG shared it expects to find billions in savings across hundreds of use cases over the next few years.

But coming out of this earnings call, I think it’s reasonable to wonder why UHG’s stock rose by 12% at one point during the week. I’m not sure I see any meaningful outperformance in the business. My best guess is that investors bought into this sentiment shared by Witty:

UnitedHealth Group is a nimble and adaptable enterprise, well suited to meet the challenges that come our way and the opportunities we pursue with the many and diverse capabilities available to us. In this first half, as we've done before, we navigated a complex external environment, while managing through a significant business disruption. We continue to deliver on our growth objectives and are committed to delivering on our 13% to 16% long-term growth target.

- Andrew Witty, UnitedHealth Group’s Q2 2024 Earnings Call

In the midst of the worst market environment for UHG in years — between Medicare Advantage, home visits, PBMs, Medicaid redeterminations, the Change crisis — UHG is still hitting its earnings targets. All of this while its competitors have faltered. If the first six months of this year haven’t created a drag on profitability, what will? I can see why investors would value the stability here.

Q2 EARNINGS SEASON

Elevance stock drops over Medicaid concerns

Elevance reported Q2 earnings on Wednesday, highlighting a return to growth in 2025 and beyond, as articulated in its “Long-Term Growth Algorithm” slide below.

Nonetheless, the stock fell ~6% after earnings, largely attributed to concerns over the Medicaid business.

Elevance noted that it is seeing increased acuity in the Medicaid population due to redeterminations, and the rates Elevance is getting paid by states hasn’t caught up yet. Additionally, Elevance noted it is also seeing increased utilization across the Medicaid population — seemingly in addition to the rate timing issue.

In Medicare Advantage, Elevance feels good about its positioning in 2025 and beyond — noting that while 2025 will likely remain below its long-term target margins, it feels good about how it has priced for margin for the year. Medicare Advantage and Medicaid are driving a slightly lower revenue growth outlook moving forward, but Elevance still expects to hit its EPS growth targets.

✍️ Going Deeper

It’s interesting to compare this week's Elevance and UHG earnings calls and the market reaction to them. Both companies appear to be experiencing relatively similar issues in the Medicaid book of business, driven by a timing issue related to redeterminations. Elevance also added some vague commentary that they are seeing increased utilization levels in Medicaid, seemingly adding more uncertainty to the equation. But that seems like the extent of the differences between them. Given that, it’s interesting to think about why one stock was up 7% for the week while the other was down 6%.

DATA

PWC reports that healthcare costs are expected to rise by 8% in 2025

PWC released a report exploring factors driving medical cost growth in 2025, finding that trend will be 8.0% for the group business and 7.5% for the individual business in 2025.

The article also noted key trends that payors are keeping their eye on: price transparency, GenAI, Medicaid redeterminations, the No Surprise Act, and the Inflation Reduction Act of 2022.

Other Noteworthy Headlines

  • Healthcare in Action, a non-profit street medicine model backed by SCAN Health Plan, was profiled in KFF this week. It’s interesting to note the rapid growth the model is seeing in Southern California, with revenue increasing from $2 million in 2021, to $6 million in 2022, to $15.4 million in 2023. Revenue appears to be coming primarily from Medicaid and local governments.

  • AI scribe platform Augmedix is being taken private by Commure for ~$139 million in cash. It’s a bit confusing strategically for Commure given it just launched its own AI scribe platform, Commure Scribe, publicly back in April. HCA seems to be a common thread across these companies — Augmedix and HCA launched a partnership to jointly develop AI Scribe capabilities back in April 2023. Commure’s parent backer, General Catalyst, also counted HCA Healthcare as its first “Health Assurance” ecosystem partnership back in 2021. It marks the end of a journey for Augmedix, which long-time digital health veterans will remember as an industry darling a decade ago as one of the first partners with Google Glass.

  • Sidecar Health, fresh off its recent $165 million funding round, announced that it has partnered with ProMedica. Sidecar is intending to pursue this strategy moving forward. It seems like an interesting negotiation to think about given the relatively straightforward tradeoff at hand for a provider that is presumably evaluating the volume / discount tradeoff. I.e. Sidecar can steer volume toward ProMedica, but presumably will want to do so only if ProMedica gives Sidecar a discount. For Sidecar to have the upperhand in this negotiation, it would need to convince ProMedica it is taking meaningful commercial volume in Ohio. Will be worth watching how these partnerships develop across various markets for Sidecar.

  • Teladoc and Brightline partnered to offer Brightline’s pediatric mental healthcare model via Teladoc’s virtual “front door”.

    • A move like this seems like a natural relationship as the market matures, similar to how health system service line partnerships/acquisitions. It’ll be interesting to watch the operational integration in these sorts of relationships over time as they become more common. I’d imagine they’ll run into a similar set of issues that health systems have experienced over time when working with providers accustomed to specific workflows.

  • Astrana, the California-based payor / provider / enabler partnered with primary care EHR platform Elation. Under the partnership, Astrana plans to bring Elation’s platform to the primary care practices it works with. The two parties will begin rolling out with a practice in Hawai'i with 200 providers and 20,000 Medicare patients.

  • UnitedHealth and Neighborhood Health Plan won the Rhode Island Medicaid managed care contract, estimated at about $3.1 billion in revenue in 2025. The contract previously belonged to United, Neighborhood, and Tufts Public Health Plans. Tufts and BCBS RI submitted bids but did not get awarded the contract.

  • Intermountain has partnered with mental health provider Neuroflow. Intermountain PCP’s in Colorado will integrate with Neuroflow to identify behavioral health needs.

Funding Announcements

Reads from the Community

Why Primary Care Practitioners Aren’t Joining Value-Based Payment Models: Reasons and Potential Solutions by Commonwealth Fund (Ann O’Malley, Rumin Sarwar, Cindy Alvarez, and Eugene Rich)
This is a fascinating report out on responses from interviews with 12 PCP leaders and focus groups with 17 PCPs about the state of value-based care. It provides a helpful glimpse into some of the challenges facing the adoption of value-based care models — financial barriers, workforce challenges, and quality metrics were all cited. Read more.

2024 Mid-Year Report: State of Hiring In Healthcare by Aequitas Partners
This is an interesting look into the healthcare hiring landscape and the state of the market. Read more.

Aging Populations and Actuarial Projections: Challenges and Opportunities by Julia Friedman
This post presents an interesting lens into how an actuary views the financial risk of an aging population and how it relates to health insurance, retirement, and life / long term care insurance. Read more.

Digital Health: There is No Exit by Matthew Holt
This post takes a look at the disconnect between valuations on the public and private markets, presenting a good critique of some of the recent larger private market valuations that have been reported publicly. Read more.

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