Morningstar Magazine - December 2017/January 2018 - 24

Dispatches

we cover (Aetna AET, Anthem ANTM, Cigna CI,
Humana HUM, and UnitedHealth UNH) have
scaled back their individual exchange membership
dramatically for 2017 and have announced plans to
further decrease their participation for 2018. Thus,
we estimate ACA exchange membership to be
a low-single-digit percentage of total membership
for the major five. Even though the impact
will be material for the exchange business for
these players, the overall downside risk is limited.
The immediate and long-term impact of the
two executive orders upon MCOs is somewhat
uncertain, but we do not expect to change
our fair value estimates, moat ratings, or moat
trend ratings. Over the near term, we expect
there to be increased medical costs and
lower earnings per share, given the elimination
of cost-sharing subsidies.
Offsetting this near-term headwind will be
the ability of these companies to underwrite with
greater variability moving forward. ACA
underwriting mandates and the unwinding of
minimum health insurance benefits should
allow insurers to drive increased profitability and
lessen price competition. However, this tailwind will not take hold until 2018 at the earliest,
because 2017 plans are already in place.
We do believe the major MCOs will remain
cautious toward this market, and any large-scale
participation will be delayed until 2019 at
the earliest, given the extreme uncertainty that the
two recent executive orders have injected into
the market and the potential for future executive
or legislative action. From our perspective,
this dynamic will limit the negative effect on
the major five MCOs.
Given the small exposure of most healthcare
facilities to exchange patients, we don't anticipate
dramatic shifts in our fair value estimates,
moat ratings, or moat trend ratings for the service
providers we cover, HCA Healthcare HCA and
Tenet Healthcare THC. However, Trump's executive
orders on association health plans and costsharing reduction subsidies would potentially lead
to marginally lower volume and higher bad-debt
expense as patients drop coverage, lose
benefits, or face higher out-of-pocket costs.

Morningstar December/January 2018

We plan to re-evaluate our longer-term
assumptions, which may lead to small reductions
in our fair value estimates depending in part on
how the executive orders are implemented,
including any changes from Congress. We
continue to place no-moat ratings and very high
uncertainty ratings on HCA and Tenet as a result
of ongoing reimbursement pressure and
uncertainty as well as high financial leverage.
The long-term effect of these actions for the overall
healthcare market is also cloudy, as we expect
there will eventually be legislation that will
address the many issues permeating the individual
health insurance market. We believe it's important
for investors to consider one dynamic: No matter
what form it takes, subsidized healthcare for
the uninsured middle class will be provided by the
federal government. As has been demonstrated
time and again, it is extremely difficult to unwind
any federal entitlement program, given the
political ramifications. We believe this is especially
the case for healthcare entitlements that affect
middle-class voters.
From our perspective, many individuals do not yet
fully understand the consequences of lower
benefit coverage and lower federal government
cost-sharing. The combination of these factors will
probably lead to lower overall healthcare
coverage and increased out-of-pocket expenses.
In reaction to this near-term dynamic, Congress
and the current (or future) administration
may revisit mandated benefit coverage levels and
federal subsidies. On balance, we believe
this legislative action would eventually lead to
increased healthcare coverage for the U.S.
population and should drive demand for the overall
healthcare market over the long term.
Vishnu Lekraj is a senior equity analyst with Morningstar
Research Services.

Indexing in Muni-Ville

fund, and is one of the cheapest funds in the
muni-national intermediate Morningstar
Category. Its 9-basis-point expense ratio, combined
with strong risk-adjusted returns and efficient
index tracking, earn it a Morningstar Analyst
Rating of Silver.
The fund's largest exchange-traded fund
competitor, iShares National Muni Bond ETF MUB,
saw net inflows of nearly $1.3 billion in
the past year and grew to $9 billion at the end
of September. Although a bit more expensive
than the Vanguard fund, fees are still
pretty cheap at 25 basis points. We rate the
fund Bronze.
Passive muni funds are still a novelty
partly because muni indexing poses challenges.
Broad-market fixed-income indexes contain
thousands of bonds, so portfolio managers use
sampling techniques to build portfolios that
represent their benchmarks. The muni market is
particularly fragmented, potentially making
the sampling process more difficult than
for taxable bonds. The $3.7 trillion muni market
includes more than 1 million bonds outstanding,
offered by more than 50,000 unique entities,
including many small and infrequent issuers.
Moreover, trading volumes are much lower
than in the taxable space because many muni
investors hold to maturity.
The Vanguard and iShares index funds have
largely mitigated these concerns by sticking to
high-quality, more-liquid parts of the market.
Both track the S&P National AMT-Free
Municipal Bond Index, a market-value-weighted
index that is designed to mirror the U.S.
investment-grade muni-bond market; it focuses on
the most-liquid issuers by setting minimum credit
rating and lot size requirements. As the
funds gather assets, they can own a larger number
of securities in the index, which should help
keep tracking errors low.
Elizabeth Foos is a senior analyst, fixed-income strategies,
with Morningstar Research Services.

Vanguard Tax-Exempt Bond Index VTEAX
turned two years old in August and had $1.8 billion
in assets as of Sept. 30. The fund remains
the market's only municipal open-end bond index

Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018