Oppenheimer is pressing their negative bet on eHealth (NASDAQ:EHTH) the internet-based insurance agency services provider, this morning.
Firm notes they can't downgrade eHealth, because they already have an Underperform on it, but they would if they could. The market has totally misinterpreted the impact of health reform on eHealth's business, in their view, specifically, the 20% cap on administrative costs and profits in the individual business that takes effect on January 1, 2011. Today, broker commissions alone account for 10-15% of individual premiums, so starting next year, health plans will have to significantly reduce the commissions offered to brokers in order to remain in compliance with the new regulation.
- This is not just a theory on their part, Opco notes. They have spoken with several of the biggest individual insurers, including some of eHealth's largest customers, and there is unanimous agreement that the cap on administrative costs and profits will cause broker commissions to fall.
- Rarely do they have such conviction in an idea, particularly when the potential downside is so significant. Opco thinks commissions will fall 30% or more next year, and they're cutting their 2011 EPS projection by over 35% (a $0.25 reduction, to $0.45). Opco's PT falls to $12, almost 30% lower than current levels, from $14.
- Opco's sense is that while no insurer wants to be the first to cut commissions, once the first step is made, other plans will very quickly follow suit. The cuts will have to start fairly soon, since commission rates are generally established when the individual policy is first sold.
- In other words, an individual policy sold today at the current commission structure will have to continue paying that same high commission in the first quarter of next year, as well as a steeper renewal commission, which will make it more difficult for plans to abide by the 20% cap on administrative cost and profits.
- Therefore, the full hit to eHealth will take a few years to completely phase-in, since the company will continue to receive above average renewal commissions. But this means earnings at the company could be down in 2012, too.
Notablecalls: I guess Oppenheimer's Healthcare/Managed Care & Other Healthcare Services team deserves extra credit for their conviction.