It’s not often you see a research report as aggressively negative as the one Oppenehimer analyst Carl McDonald issued today on the Internet-based heatlh insurance agency eHealth (EHTH). The bottom line is that he thinks the Street has “totally misinterpreted the impact of health reform on eHealth’s business.” McDonald’s rant is putting pressure on the shares.
“We can’t downgrade eHealth, because we already have an Underperform on it, but we would if we could,” he writes in a research note. McDonald said that the cap on administrative costs and profits for health insurers that takes effect January 1 is clearly going to cause broker commissions to fall.
“This is not just a theory on our part,” he writes. “We’ve spoken with several of the biggest individual insurers, including some of eHealth’s largest customers, and there is unanimous agreement” that broker commissions are heading lower. “Rarely do we have such conviction in an idea, particularly when the potential downside is so significant. We think commissions will fall 30% or more next year.”
The analyst is cutting his 2011 EPS estimate for the company to 25 cents from 45 cents; his new price target is $12, down from $14.
“Our sense is that while no insurers wants to be the first to cut commissions, once the first step is made, other plans will very quickly follow suit,” he writes. “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 make it more difficult for plans to abode by the 20% cap on administrative cost and profits.”
EHTH today is down $1.28, or 7.7%, to $15.33.
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