Morningstar - Q1 2021 - 32

Spotlight: Healthcare

open to people who could get their insurance
from employer-based plans. This could eliminate
a lot of the mix-shift risk for insurers.
Also, a public option based on a government-run
Medicare plan could face substantive problems if it
went through the budget reconciliation process
in the Senate. Allowing Medicare Advantage-like
plans from private insurers (that have a lot of
flexibility about what health and wellness benefits
can be offered relative to traditional Medicare
plans) could alleviate some of those concerns.
Including Medicare Advantage plans in the public
option could create an opportunity for the
private insurance industry, including top-tier
Medicare Advantage plan providers UnitedHealth
Group UNH and Humana HUM.
Overall, even at the low end of our pricing range
estimate, we think a public option would probably
only lead to major changes on the individual
healthcare exchanges and only minor changes
in the important employer-based market, assuming
it can pass through the legislative process-
something that may be difficult with such a slim
Democratic majority in Congress.
Sector by Sector

As the debate surrounding healthcare goes on,
we see a spectrum of risks and opportunities. Here
is a look at three major sectors:

Insurers
As we discussed above, a public healthcare
insurance option has the most potential to change
the insurance system. However, Democratic
plans mainly aim to increase access to insurance,
not replace private insurance. This could
actually benefit the industry, depending on the
format. Therefore, we see both upside and
downside possibilities for insurers, and in the days
after the Georgia Senate runoffs, the market
was focused more on the upside potential of the
Democratic sweep (related to the possible
increase in insurance rolls) than on the downside
risks of a public option. In our policy bull-case
scenario, policy changes fulfill Biden's goal
of increasing access to health insurance to 97% of
the population-a 6-percentage-point increase
over prepandemic levels-and insurers get a
share of that increase in insurance coverage. In our
policy bear-case scenario, a high-impact public
option is passed and steals some share from
private insurers on the individual exchanges and
the employer-sponsored market. Again, this
latter scenario is unlikely.
The most diverse managed-care organizations-
CVS Health CVS, Cigna CI, and UnitedHealth-
would see the least risk (and least upside
potential) related to any potential policy changes
involving a public option. The more focused
medical insurers-Centene, Humana, and

EXHIBIT 2

Policy Valuation Scenarios How various Biden proposals could affect the fair value
of insurers.

Current Fair Value Estimate (Base Case)

Diversified
CVS
Cigna
Health

Anthem

Focused
Centene

Humana

UnitedHealth

$370

$85

$395

$238

$92

$329

$384

$93

$420

$245

$95

$347

4%

9%

6%

3%

3%

5%

Policy Scenarios
Bull Case (Insurance Access Increased to 97%)
Difference From Base Case
Bear Case (High-Impact Public Option)

$295

$71

$325

$217

$88

$295

-20%

-16%

-18%

-9%

-4%

-10%

Market Price

$337

$70

$448

$221

$74

$365

Difference From Policy Bear

14%

-2%

38%

2%

-16%

24%

Difference From Base Case

Sources: Morningstar. Data as of 01/07/2021.

32

Morningstar Q1 2021

Anthem ANTM-face more downside risk under
a public option but also have the most upside
potential in a scenario that assumes new policies
increase access to insurance.
As of Jan. 7, the market appears to be building
in a larger discount for CVS than we think is
reasonable related to potential U.S. policy changes
in this scenario, which creates some margin of
safety for investors ( EXHIB IT 2 ). On the other
end of the spectrum, shares of UnitedHealth and
Humana both traded well above our policy
bear scenarios, with the market probably betting
that these organizations can benefit from
a Medicare-based public option. Therefore, we see
some policy risk for UnitedHealth and Humana
shares in a scenario where they cannot participate
in the expansion of the insured population
in a high-impact public option-although, again,
that policy looks unlikely, given the makeup
of the government.
Pharma and Biotech
The pharmaceutical and biotechnology sector
looks like the industry that is the next most
likely to be influenced by Biden-led policy changes,
but even then, we expect only moderate
changes ( EXHIB IT 3 ).
For example, we think reform to Medicare
Part D catastrophic phase payments is the most
likely change over the next four years. This
change would likely affect the industry by only
2% on the top line but reduce a major voter
complaint of high out-of-pocket costs for specialty
drugs and could remove the constant threat of
drug pricing reform that has weighed on
the group's valuation multiples for many years.
Also, we see the potential for inflation
caps in Medicare Part D, as well, which could
have a 3% negative effect on the top line
of this sector.
In general, though, we believe the firms we cover
would find these potential changes manageable.
Overall, the majority of Biden's policies should
have only minor impacts on the drug industry, with
the exception of drug importation, which
seems unlikely to be enacted based on the safety
challenges of importing drugs meant for
other nations.



Morningstar - Q1 2021

Table of Contents for the Digital Edition of Morningstar - Q1 2021

Contents
Morningstar - Q1 2021 - Cover1
Morningstar - Q1 2021 - Cover2
Morningstar - Q1 2021 - 1
Morningstar - Q1 2021 - 2
Morningstar - Q1 2021 - Contents
Morningstar - Q1 2021 - 4
Morningstar - Q1 2021 - 5
Morningstar - Q1 2021 - 6
Morningstar - Q1 2021 - 7
Morningstar - Q1 2021 - 8
Morningstar - Q1 2021 - 9
Morningstar - Q1 2021 - 10
Morningstar - Q1 2021 - 11
Morningstar - Q1 2021 - 12
Morningstar - Q1 2021 - 13
Morningstar - Q1 2021 - 14
Morningstar - Q1 2021 - 15
Morningstar - Q1 2021 - 16
Morningstar - Q1 2021 - 17
Morningstar - Q1 2021 - 18
Morningstar - Q1 2021 - 19
Morningstar - Q1 2021 - 20
Morningstar - Q1 2021 - 21
Morningstar - Q1 2021 - 22
Morningstar - Q1 2021 - 23
Morningstar - Q1 2021 - 24
Morningstar - Q1 2021 - 25
Morningstar - Q1 2021 - 26
Morningstar - Q1 2021 - 27
Morningstar - Q1 2021 - 28
Morningstar - Q1 2021 - 29
Morningstar - Q1 2021 - 30
Morningstar - Q1 2021 - 31
Morningstar - Q1 2021 - 32
Morningstar - Q1 2021 - 33
Morningstar - Q1 2021 - 34
Morningstar - Q1 2021 - 35
Morningstar - Q1 2021 - 36
Morningstar - Q1 2021 - 37
Morningstar - Q1 2021 - 38
Morningstar - Q1 2021 - 39
Morningstar - Q1 2021 - 40
Morningstar - Q1 2021 - 41
Morningstar - Q1 2021 - 42
Morningstar - Q1 2021 - 43
Morningstar - Q1 2021 - 44
Morningstar - Q1 2021 - 45
Morningstar - Q1 2021 - 46
Morningstar - Q1 2021 - 47
Morningstar - Q1 2021 - 48
Morningstar - Q1 2021 - 49
Morningstar - Q1 2021 - 50
Morningstar - Q1 2021 - 51
Morningstar - Q1 2021 - 52
Morningstar - Q1 2021 - 53
Morningstar - Q1 2021 - 54
Morningstar - Q1 2021 - 55
Morningstar - Q1 2021 - 56
Morningstar - Q1 2021 - 57
Morningstar - Q1 2021 - 58
Morningstar - Q1 2021 - 59
Morningstar - Q1 2021 - 60
Morningstar - Q1 2021 - 61
Morningstar - Q1 2021 - 62
Morningstar - Q1 2021 - 63
Morningstar - Q1 2021 - 64
Morningstar - Q1 2021 - 65
Morningstar - Q1 2021 - 66
Morningstar - Q1 2021 - 67
Morningstar - Q1 2021 - 68
Morningstar - Q1 2021 - 69
Morningstar - Q1 2021 - 70
Morningstar - Q1 2021 - 71
Morningstar - Q1 2021 - 72
Morningstar - Q1 2021 - 73
Morningstar - Q1 2021 - 74
Morningstar - Q1 2021 - 75
Morningstar - Q1 2021 - 76
Morningstar - Q1 2021 - 77
Morningstar - Q1 2021 - 78
Morningstar - Q1 2021 - 79
Morningstar - Q1 2021 - 80
Morningstar - Q1 2021 - Cover3
Morningstar - Q1 2021 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2024q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com