Published by clickbroker.blogspot.com
Aetna (AET) treated us to a surprise early Q2 conference call Monday morning. Medical costs on certain commercial accounts substantially exceeded expectations. Not by more admissions, but by more higher-cost events to the tune of $10K to $30K per event. COBRA medical benefits trended to between 100% and 150%*. Medicare and Medicaid startup medical loss ratios also exceeded longer term trends. All this points to an acceleration in the rate of consumers deferring medical care.
Aetna also cited suspicious medical service providers that were billing for multiple procedures for the same medical event. Aetna intends to rewrite provider agreements to eliminate payment for multiple procedures, as well as increase auditing of these providers.
First Aetna cited economic conditions for these trends, than conceded that the trends are more secular than cyclical. Therefore Aetna will be re-underwriting the employers of “abusive” employees with higher premiums and eliminating reimbursement for multiple procedures by providers Aetna deems abusive or suspicious in claims coding.
Both increasing employer premiums on commercial accounts and restricting benefits (whether abused by providers or not) points to a greater trend of medical underwriting reaching employees. Employer groups that are less healthy or dominated by chronic or high cost medical events will actually get fewer benefits as their employer premiums go up.
Continuing this trend, as employers reduce benefits for the sickest employee groups, more sick employees will defer care. This will leave a much greater population of advanced diabetic and cancer patients to Medicare and Medicaid. Therefore, it is the government’s business to regulate health insurance because the government ends up paying far more for free market deferred care.
Employees with gold-plated health insurance should beware. Without government minimum standards, Aetna is telling you your care will be rationed. If your care costs too much, one way or another your access to health services will be restricted.
Everyone (both the haves and the have nots) really does have a stake in seeing that healthcare reform becomes a reality. Unfortunately, President Obama has not done enough to scare the haves into realizing they are truly at risk.
*COBRA breeds adverse selection because medically underwritten individual policies are generally cheaper for accepted applicants.
No disclosures.
Aetna Message – Use Healthcare and Pay More or Receive Less
Swine Flu Scare – Where’s Vical?
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In the chicken, egg and pig story what is the delay in the Navy’s support for Vical’s (VICL) DNA based H1N1 swine flu vaccine?
Bloomberg’s “Swine Flu Vaccine Delays Won’t Slow October Timetable” and “First Trials of Swine Flu Vaccine Begin in Australia” report that the US has contracted with five pharmaceutical companies to stockpile swine flu (H1N1) vaccines: Novartis (NVS) 45%, Sanofi Aventis (SNY) 26%, CSL (CSL:AU) 19%, and AstraZeneca (AZN) and GlaxoSmithKline (GSK) the remainder. Of these suppliers, only Australian based CSL is ready to start clinical trials. The others are incurring delays caused by production inefficiencies.
All these companies say they will be ready to start shipping in October, but that conflicts with regular network news reports showing the virus stubbornly replicating too slowly on conveyor belts of chicken eggs. Maybe a real swine flu pandemic will force the government to finally break their addiction to traditional vaccine development and crack the egg for good.
The Wall Street Journal’s “Swine Flu Prevention Takes on New Urgency” reports that Sanofi, Novartis, Glaxo and CSL are only yielding 30% of the active ingredient typically produced with seasonal flu.
Vical’s DNA-based vaccine produced 100% protection in preclinical trials with 2 doses and 75% protection with 1 dose. Vical developed its vaccine within weeks of receiving samples and the genetic coding from the government under a Cooperative Research and Development Agreement (CRADA) with the U.S. Naval Medical Research Center (NMRC). Vical is now waiting for funding from the Navy to begin clinical trials.
The key Vical difference is its vaccine is a DNA plasmid rather than a killed or weakened virus. Production cycles are measured in weeks rather than months, and Vical already has large scale cGMP manufacturing capability.
The Vical advantage seems to have been lost in the big money politics of vaccine stockpiling. But I believe that Vical could emerge a winner if a real swine flu pandemic emerges. No other company could develop inventory as quickly.
I also believe that Navy funding will be forthcoming. Just imagine a swine flu outbreak on an aircraft carrier. In Vical’s favor is that the NIH is already funding development of their RapidResponse(tm) DNA vaccine manufacturing platform.
Disclosure: Author is long VICL.
Stories in Real Estate Recycling
Published by clickbroker.blogspot.com
The Wall Street Journal’s “Stealth Shop Is Starbucks in Disguise” reports that Starbucks (SBUX) created an experimental store located in a previous closed cookie cutter outlet. The store is signed “15th Avenue Coffee and Tea”, its location in Seattle and has no outward apparent links to its parent company. Starbucks has already begun relabeling three other Seattle stores with their street address and has even customized packaged coffee bags for each location. If the trial is successful, its format will be rolled out to other cities.
Starbucks is trying to reclaim the feeling of local coffee shops with wine, live music and poetry readings. Before the advent of MySpace and Facebook, local bookstores were a major force in social networking. Borders (BGP) and Barnes and Noble (BKS) extended the concept with cafes, events tailored to each location, and allowing uninhibited browsing and socializing. Then came the Apple (AAPL) stores as the hip place to hangout.
The book megastores and Apple have never pretended to be locally owned and operated social venues. While it’s good to see Starbucks innovate and regenerate its cool, customers will soon realize that the location labeled stores have enough in common that they are really a chain. At that point they will become un-cool again. The lesson from Borders, Barnes and Noble and Apple is that chains can be cool places to hangout if the individual store managers are entrepreneurial. No faux localization is needed.
The Journal’s “Empty Mall Stores Trigger Rent Cuts” reports that stores are now in a position to renegotiate leases based on breaches in contenancy clauses. For example, the shuttering of one or more of a mall’s anchor stores or a vacancy threshold can trigger breaches. Just like AIG’s (AIG) collateral clauses, I’m sure the mall operators never counted on these clauses being used as leverage against them.
The Journal’s “Keeping Up Appearances: London Turns Eye to Empty Mansions” reports the unoccupied hones in London’s supper-posh Mayfair district are at risk of confiscation and sale by the city council. The homes (valued at up to £50M) at risk are typically owned by foreigners as investments. These mansions are not behind in their mortgage and taxes, but are not maintained in keeping with the neighborhood.
The empty property officer can force the sale of an unmaintained home to a more caring new owner when the current owner cannot be located or refuses to cooperate. The sale proceeds are held to reimburse the previous investor.
This is how the British guard against neglectful real estate “bank accounts.” Just like gold it costs to store money in real estate.
Disclosure: Author is long AIG.
JPM CEO Jamie Dimon on the Future of Credit Cards
Published by clickbroker.blogspot.com
CEO Jamie Dimon gave us his vision of the future of credit cards during JP Morgan’s (JPM) Q2 conference call. Dimon predicted that JPM will incur a few years of credit card losses until the business is restructured. Even though the new regulatory environment is still evolving, it is clear that the old business model of credit cards as a profitable standalone product is over.
Credit cards will become a tool in the overall customer relationship, rather than a product marketed as a single service. JPM will begin issuing credit cards based on the customers’ behavior observed by their retail banking organization. Dimon sees many new credit card products evolving from this relationship model.
Most major market participants have already started the massive switch from fixed to variable rates. The new credit card law prohibits changing fixed interest rates on old balances and requires customer payments to be applied to balances carrying the highest interest rate. The few fixed rate cards that remain will have significant higher initial interest rates to compensate for the inability to ever get rid of legacy lower rates.
Dimon sees more transactional (or convenience) customers and fewer customers carrying continuing balances. But Dimon said it is difficult to determine which customers will borrow from their credit cards and when they will carry a balance. A large portion of their customers occasionally carry balances or switch back and forth between carrying balances.
The most interesting aspect of the credit card discussion focused on funding. JPM increased its credit enhancement of credit card securitization from 7% to 14%, and now has to include these securitizations in its capital ratios. Dimon said that JPM will discontinue credit card securitizations by January 1, 2010. The funding cost of securitization has gotten too high compared to bank deposits.
From an economic standpoint, variable interest rates on credit cards can enhance the Federal Reserve’s ability to manage the economy. Previously card rates operated in only one mode – high.
No Disclosures.
First Read of House Healthcare Reform Act (H.R. 3200)
Published by clickbroker.blogspot.com
The House Ways and Means Committee published H.R. 300 “America’s Affordable Health Choices Act” at over 1,000 pages. Newspapers and cable television have exhaustively instigated the class warfare, tax the rich aspects of the Act. By now everyone knows the proposed tax increases and penalties for not participating, so I won’t go there. Savings from a more enlightened approach to Medicare and Medicaid reimbursements have also been widely discussed.
I would like to focus on the consumer benefits of the Act first, and then what I see as the positive impact for the enlightened private health insurers. Most aspects of the Act start in year 1 (Y1), however certain existing individual and group insurance plans would be grandfathered for up to 5 years. While grandfathered plans might not have to include regulated essential benefits, it is not clear whether they still can rescind policies and exclude preexisting conditions in Y1.
Most regulation appears to be controlled at the federal level, but there is talk in the Act of states participating in enforcement. Federal regulators would set essential benefits including hospital, outpatient, mental health, prevention, maternity and drugs. No co-pay would be allowed for preventive care.
Three levels of benefits would be supported in the exchange, with maximum out of pocket starting at $5K for individuals and $10K for families in Y1. In subsequent years, out of pocket maximums would rise with the CPI. Private insurers could still offer higher cost plans with richer benefits outside the exchange.
All plans open to new members must be guaranteed issue with no preexisting condition exclusions, whether within or outside the exchange. Federal regulators would control premiums for exchange plans based on an actuarially determined 85% payout ratio. Private plans would have to bid to participate on the exchange. Within the exchange, regulators would redistribute premium dollars to compensate for adverse selection amongst private insurer participants.
Federal regulators would also determine the adequacy of private insurer networks. Premiums could vary by age, but not more than 2 to 1 from youngest to oldest. Area or location premium variations would be regulated by state authorities.
The controversial public plan would be modeled after Medicare, paying providers 5% over Medicare rates in years 1, 2 and 3. The public plan would have to be self sustaining following receipt of seed money from the federal government. The premiums charged would need to be high enough for an honest actuarial accounting of a going concern.
There are some interesting opportunities for both the private insurance and pharmaceutical industries to actually increase profits. The two most important provisions for private industry are that the public plan is allowed and even encouraged to contract with private insurers for administrative services, and drug benefits are part of the essential benefit package.
The commentary that risk sharing among private insurers discourages innovations to save cost is ludicrous. The history of private insurers controlling cost is nonexistent. Private insurers are primarily administrative agents now anyway as their risk business has been shrinking for decades. They have been pursuing the relatively risk free Medicare Advantage business with a vengeance, so risk sharing in the exchange and administrative work for the public plan is just an extension of their current business model.
The UnitedHealth Group (UNH) and Humana (HUN) conference calls have implied that the risk based business is dying quickly and they need to adapt. So why don’t they just capitulate and admit the government is actually giving them a lifeline?
Pharmaceutical companies might complain that the buying power of the public plan puts them at a negotiating disadvantage. My conclusion is that consumers now considering many of their most profitable blockbusters discretionary is a far bigger worry. All an investor has to do is listen to the last few Pfizer (PFE), Johnson & Johnson (JNJ) and Merck (MRK) conference calls to get the message.
I have written extensively about the healthcare industry death spiral based on their reluctance to break free from their own rhetoric. Then earlier this week Johnson & Johnson stated during its conference call that only 10% of its revenue goes to research and development. The old stories no longer carry any weight.
Disclosure: Author is long PFE.
Larry Summers and Jeff Immelt Preparing for Post-Consumer Economy
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The Financial Times interview with the National Economic Council Director “Lunch with the FT: Larry Summers” quotes Summers’ vision:
“This new American economy, Summers hopes, will be ‘more export-oriented’ and ‘less consumption-oriented’; ‘more environmentally oriented’ and ‘less energy-production-oriented’; ‘more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented’; and, finally, ‘more middle-class-oriented’ and ‘less oriented to income growth that is disproportionate towards a very small share of the population’.”
General Electric (GE) CEO Jeff Immelt’s commentary in the FT “Innovation can give America back its greatness” contends that “we need to dispel the myth that American consumer spending can lead our recovery.” Immelt comes just short of calling for an industrial policy based on technical innovation, manufacturing and exporting; a combination of Silicon Valley and China.
I like the talk; it matches the theme of President Obama’s call for the country to get back to making things. But I find both Summers and Immelt disingenuous. Summers has not tried to restrain Bernanke and Geithner’s attempts to resurrect the shadow banking system for consumer finance. And Immelt cannot give up the overdependence on the aging technology of medical imaging highlighted with healthcare reform.
To be fair GE has unsuccessfully tried to exit consumer businesses, and has been slowly delevering its finance businesses. But the company is spending political capital to mitigate the impact of healthcare reform on its big iron, while its finance arm is being nursed back to health by FDIC debt guarantees.
Continuing with the talk doesn’t match the walk, investment banks licensed as Fed bank holding companies are not changing their behavior. Bloomberg’s “Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds” reports the bank is planning to “bundle mortgage securities into new bonds that often offer investors an additional layer of protection, or collateral, from downgrades.”
Is Morgan Stanley (MS) creating triple-A from Baa2 out of thin air? Maybe not, but they just might be repeating the worst AIG nightmare by offering back CDO debt insurance with collateral. Again, are we creating the new American economy or desperately trying to hang on to what worked in the past?
Immelt is clear in his commentary that this recession is game changing and the successes of the past cannot be repeated. But at the same time, neither government nor private industry seem ready for any meaningful change.
Disclosures: Author is long AIG and GE.
GE and Best Buy face Challenges and Opportunities
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General Electric (GE) and Best Buy (BBY) were both viewed as the apple of investors’ eyes until the last few years. GE had a rock solid reputation for producing steady profits and dividends that were almost too good to believe, in the Bernard Madoff sense. Of course it’s unfair to call GE a Ponzi scheme, but the consistency of the company’s performance should have caused concern. At the opposite end of the spectrum, Best Buy grew like a rocket along with the housing and CD music booms.
Now GE’s appliance and lighting businesses have weakened with the housing bust, and financial services has become addicted to government guarantees to sell debt. The Wall Street Journal’s “Unable to Unload Limping Divisions, GE Invests in Propping Them Up” reports that GE has to renew investments to protect the survival of these consumer businesses it could not sell.
The Journal is also reporting in “GE Capital's Political Minefield” that GE is in a political fight to maintain control of its financial arm without it being declared a bank holding company. If GE’s financial business is large enough to be considered a systemic risk, it would be classified as Tier 1 and have to be spun-off. GE is trying to maintain the status quo while its earnings and assets are deteriorating.
Best Buy excelled moving upscale with ever more costly large screen TVs and complete home theater systems. Yet they did not intimidate shoppers looking for less expensive products. Now that the housing bust is dampening consumers’ appetite for new appliances, price drops are squelching margins on all home entertainment electronics and the CD music is waning.
Fear not, Best Buy is ready to breakout in a new direction. Innovative companies always have a way to apply their resources in new directions. The Wall Street Journal’s “Best Buy to Sell Green Vehicles” reports that the store has begun selling electric scooters, bicycles and even Segways in 19 California, Oregon and Washington locations.
The $11,995 Brammo Enertia electric motorcycle will be coming to Best Buy soon. This is a clear reminder of when the company created an ecosystem around the high cost flat panel HDTVs. Best Buy is preparing to just replace one electronic revenue driver with another. Electronic transports are now clean enough and cool enough for general retail. Walmart (WMT) and Target (TGT) will be next.
Both GE and Best Buy converge in their belief in the future mass appeal of electric transport. GE made its offense move by investing $70M in battery manufacturer A123Systems. This evolving emphasis on light transport has a profound effect on General Motors and the other manufacturers of heavy vehicles. It says that America will never go back to buying 10M+ traditional automobiles again.
The implications are profound for not only the automobile manufacturers, but also their dealer distribution network. General retailers will start cannibalizing the light end and the volume at the heavy end will not be enough to support even the current round of dealership trimming. I can visualize most families only owning one traditional vehicle and multiple small light electric powered 2 and 4 wheel transporters.
In a world of little barriers to entry for light vehicle assemblers and marketers, the value adding component manufacturers and general retailers are advantaged over traditional automobile manufacturers and dealerships. GE and Best Buy are well positioned for this new world.
While Tesla is expanding from an all electric $100K roadster to a $50K sedan, the real winner amongst the traditional motorcycle and automobile manufacturers should be Honda (HMC). Honda already knows the value of keeping excess weight off its cars.
Disclosure: Author is long GE.
California Printing its own Money
Published by clickbroker.blogspot.com
Watch out Ben Bernanke, the Federal Reserve now has competition in the currency game. California is planning to create its own money in the form of IOUs, just like the Fed. What is the California IOU – currency or an interest bearing note?
Officially the IUOs will be called “registered warrants”. State Controller John Chiang planned to issue $3.4 billion, maturing on Oct. 1 to replace state payments. The interest rate is set to be determined on Thursday, but cannot exceed the statutory limit of 5%.
San Jose Business Journal “California banks ponder their stance on state IOUs” reports that banks are equally perplexed about whether to accept the IOUs and how to process them. But the banks are loath to upset the state with the largest economy in the nation; the state capable of generating the largest investment banking fees.
Bank of America (BAC) issued a statement saying they will honor the IOUs through July 10. Wells Fargo (WFC) and JP Morgan (JPM) have not decided. The smaller banks were mixed.
California’s ingenuity poses an interesting dilemma for the Fed. The IOUs would be structured as short-term tax-free bills, but trade like cash. Banks are being asked to accept the IOUs and advance customers interest. Should the Fed sanction alternate forms of money?
Disclosures: Author is long BAC and WFC.
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