Citi Gives Color On eHealth Following Earnings Disappointment

The midpoint of eHealth's

2011 GAAP EPS guidance is $0.36, about 35% below the $0.57 consensus — Even after adjusting for $0.07 of 2011 earnings that were pulled into 2010, guidance is still down considerably, as eHealth's average commission rate is dropping almost 35%, from just over 10% of premiums in 2010 to just under 7% of premiums in 2011. Unfortunately, the pressure should continue into 2012 because most plans are reducing commissions only on new business, eHealth's average commission rate should continue to decline next year as existing customers drop their current policies, and it seems unlikely eHealth's other initiatives, like Medicare, can grow fast enough to offset this trend. 2014 is still many years away, but it isn't clear eHealth's core business can survive in an exchange world. Not all individual business will be sold on an exchange in 2014, but if the exchanges pay only a modest broker stipend, it will be hard for the off-exchange plans to be price competitive if they continue to pay a big percentage of premium commission to brokers. Citi has a Sell rating and $10 PT on EHTH EHTH is trading higher at $13.14