skills/full-company-analysis/references/modules/M102-managed-care-analyst-playbook.md

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<!-- Module: 102 | Title: Managed Care Analyst Playbook -->

## PART XV - SECTOR PLAYBOOKS | MODULE 102

# Managed Care Analyst Playbook

> Mission. Build a sector-specific research system for Managed Care that converts operating data into financial outcomes, highlights the accounting areas most likely to distort comparability, and selects valuation methods that reflect the sector's economics.

## Economic engine and binding constraints

Model members by product, premium yield, MLR, risk adjustment, utilization, acuity, provider rates, SG&A, Stars/quality, Medicaid/Medicare rate notices, and capital. Separate temporary utilization noise from structural medical-cost trend.

## Primary KPI stack

| KPI | Construction / analyst control |
| --- | --- |
| membership | Average or period-end covered lives/members under the health plan, segmented by product and funding type. Validation: Tie physical/operating units to company disclosures or source-system data; reconcile beginning/ending populations where applicable and test scope, ownership, and period consistency. |
| premium yield | premium yield = annualized economic output / current market value or invested base; match numerator and denominator. |
| medical cost trend | Year-over-year change in medical cost per member/procedure after utilization, unit cost, mix, and acuity effects. Validation: Recalculate price/cost from underlying dollars and physical units; test mix, rebates, FX, timing, and unit-definition effects; reconcile to reported revenue or expense. |
| MLR | Medical claims expense plus defined quality/improvement items divided by premium revenue under the applicable accounting/regulatory definition. Validation: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. |
| risk adjustment | Net risk-adjustment receivable/payable or revenue effect divided by premium revenue/member months, reconciled to program methodology. Validation: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| SG&A | Selling, general, and administrative expense divided by revenue/premiums, with acquisition, commission, and restructuring items separately identified. Validation: Tie the dollar measure to filed statements/footnotes; reconcile classification adjustments, one-time items, acquisitions/FX, and period consistency before using it analytically. |
| star ratings | CMS Medicare Advantage Star Ratings by contract weighted by membership/revenue, with the share of members in 4+ star plans highlighted. Validation: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |
| capital | Statutory/regulatory capital and surplus or risk-based capital available above required minimums, reconciled to parent liquidity and dividend restrictions. Validation: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. |



## Sector-specific accounting and comparability traps

- Ibnr reserves: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs.

- Risk adjustment: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs.

- Premium deficiency: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs.

- Regulatory capital: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs.

- Acquisition intangibles: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs.

## Valuation frameworks

- P/E: common equity value per share divided by normalized diluted EPS; normalize taxes, one-time items, dilution, cyclicality, and non-operating income.

- EV/EBITDA: enterprise value divided by normalized EBITDA; adjust leases, pensions, minorities, recurring restructuring and capital intensity before peer comparison.

- FCF yield: normalized levered free cash flow divided by equity value; reconcile SBC, working capital, maintenance capex, taxes, and cycle before comparing companies.

- DCF: forecast FCFF from operating drivers, discount at a capital-structure-consistent WACC, model terminal growth/ROIC coherently, and bridge enterprise value to common equity.

## Sector diligence questions

- What is the most important leading indicator for Managed Care, and how many months does it lead reported revenue or cash flow?

## Sector stress and falsification

- Stress membership and premium yield together in the direction most likely to break the equity story; flow the result through working capital, capex, liquidity, financing, dilution, and valuation.

- Explicitly test IBNR reserves. Determine whether it can make the reported sector comparison look better or worse without equivalent economic change.

## 99-point standalone execution extension

### Model architecture and forecast chain

Model members by product, premiums, medical cost trend, MLR, risk adjustment, pharmacy, administrative cost, stars/quality, and capital.

### Leading-indicator dashboard

Track enrollment, utilization, provider rates, drug trend, government rate notices, risk adjustment, star ratings, and policy changes.

### Primary-source map

SEC filings; CMS rate notices, enrollment and star-rating data; state Medicaid procurement/rate materials; HHS/CMS policy releases; provider and pharmacy disclosures.

### Accounting normalization test

Medical claims reserves, risk adjustment, pharmacy rebates, acquisitions, statutory capital, and government program timing are key.

### Valuation implementation

Use P/E/FCF and DCF with normalized margin by product and capital needs. Growth without adequate pricing can destroy value.

### Worked numerical mini-case

> Illustrative MLR case.

Premium revenue $20bn at 84% MLR implies $3.2bn gross margin before SG&A. A 150 bp MLR increase consumes $300m pretax. If pricing resets with a lag, liquidity and capital absorb the mismatch first.

Model enrollment, rate, utilization, provider cost, risk adjustment and stars by product. Growth at inadequate pricing is negative value.

### Monitoring and falsification cadence

Breaks include medical-cost trend outrunning pricing, reimbursement cuts, quality-rating decline, risk-adjustment change, or regulatory constraints.

At every quarterly update, rebuild the driver bridge from operating units to revenue, margin, cash flow and valuation; compare leading indicators with the prior forecast; record definition changes; and precommit the threshold that would trigger a thesis reset rather than a cosmetic estimate change.

## Sector exit standard

The Managed Care work is complete only when the analyst can explain the business in its native operating units, reproduce the KPI history, identify the binding growth constraint and marginal price setter, normalize sector-specific accounting, quantify a coherent adverse case, and translate the current market price into the operating expectations that must be met or exceeded.