SSR Index of Current-Quarter Healthcare Demand Growth: Final 4Q13 Estimates and Thoughts on National Health Expenditure Data

Richard

Please see the SSR Health YouTube Channel for a detailed video walk-through of this research note

We expect 3.5% (nominal) y/y growth in US health services demand during 4Q13, the product of 2.3% growth in demand intensity*, and 1.2% growth in price; these expectations are unchanged from our interim estimate. The 2.3% intensity growth forecast would be a 30bp improvement over actual 3Q13 growth of  2.0%

Independent of our quarterly growth rate models, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model suggests a very high probability of sequential acceleration in demand during 4Q13 (94%) – albeit from a very low baseline in 3Q13

Our continued expectation of modest acceleration is underpinned by slight wage growth for non-supervisory labor in healthcare settings (which we read as a contemporary indicator of health services unit demand), and slight improvement in non-farm employment (which because of its link to the availability of employer-sponsored insurance, we read as a leading indicator of health services demand)

2013 is set to be the slowest year for services price growth in recent memory. Because of the effect of ‘fiscal cliff’ sequester on Medicare pricing, national average health services y/y pricing growth fell from 1.9% in 1Q13 to a projected 1.2% in 4Q13. The bipartisan budget deal that Congress passed in December extended those Medicare payment rate cuts through 2023

The flu season is a key driver of unit demand growth during the fourth and first quarters, with the typical season beginning in late September / early October. The severity of the current flu season has risen substantially over the past 4 weeks, but remains well below last year’s comp. Current season flu trends imply a +/- 20 – 30bps headwind to unit demand during 4Q13-1Q14

CMS’ Office of the Actuary recently published its annual detailed review of Nation Health Expenditures for CY 2012. Consistent with our long-held thesis on U.S. demand, they conclude that the slowdown in spending growth is in large part a function of the economic cycle

We recommend a healthcare portfolio that balances US focused, volume levered names with selective bets on innovation (specifically innovator companies with pending or recent major new product approvals, and/or high-quality early- to mid-stage pipelines that appear undervalued)

This translates into overweight positions for Biotech; Hospitals; select Non-Rx Consumables (especially more US-focused names such as CFN and OMI); Medicaid HMOs (like WCG and MOH); Health IT; and select Dental names (particularly more US-focused names with product lines that include higher-mix items, such as XRAY and PDCO)

We recommend underweight positions in Large-cap Pharmaceuticals and Specialty Pharmaceuticals (on US real pricing power concerns); PBMs (especially ESRX), Drug Retail (especially CVS), and Drug Wholesale (especially ABC) (on the loss of AWP pricing, and risks of PBM disintermediation); Device Innovators; Medical Equipment (health capital spending will favor information technology in the near term); Diagnostic Labs; and Research Tools / Services (implied revenue growth exceeds R&D spending growth)

 

 

For our full research notes, please visit our published research site

Print Friendly, PDF & Email