Muddy Waters reiterates bearish view on eHealth

Online health insurance exchange operator eHealth (EHTH -1.5%) is under modest pressure on below-average volume on the heels of a second bearish report from Muddy Waters Research (MW).

The noted short seller, who released its first report in April, cites the company’s over-aggressive accounting, booking sales years ahead of actually collecting the cash. For example, it calculates that will take about nine years for cash collections to match receivables for the 2019 customer cohort. In other words, it will collect only ~64% of booked Medicare Advantage (MA) revenue during the three-year period (average “life” for a MA customer) for which it estimates revenue.

MW also claims that EHTH is also under-reporting costs associated with member retention and revenue sharing, necessary expenses to collect the cash, adding that the cash it does collect fails to meet the initial receivable booked, exclusive of its subsequent tail revenue (revenue after the three-year period) adjustments, according to its estimate.

EHTH generates cash corresponding to tail revenue only from members who remain at least 10 years, a very small percentage of each cohort (sign-ups each year). MW estimates that tail revenue cash collections are $227 per member or 22.4% of the initial receivable booked. About 2/3 of clients leave by year 3.

MW says the company books two sources of revenue, once when an application is approved by CMS [$1,013 per member last year equal to the constrained loan-to-value (LTV) amount] and revenue in excess of the LTV via from the residual tail group and increases in MA commission rates.

In Q1, the company booked $106.4M in revenue and $3.5M in net income. Cash flow ops was $8.9M.

In 2019, it recorded net income of $83.5M on revenue of $506.2M. Cash flow ops was ($71.5M).

https://seekingalpha.com/news/3580086-muddy-waters-reiterates-bearish-view-on-ehealth