SSR Index of Current-Quarter Healthcare Demand Growth: Initial 1Q14 Estimates

Richard

We expect 3.6% (nominal) y/y growth in US health services demand during 1Q14, the product of 2.6% growth in demand intensity, and 1.0% growth in price. The 2.6% intensity growth would be a 30bp improvement over actual 4Q13 growth of  2.3%; in contrast the 1.0% price growth would be a very large 30bp drop from 4Q13

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 1Q14 (92%)

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 more substantial improvement in GDP forecasts from the Philadelphia Fed’s Survey of Professional Forecasters (which we read as a contemporary indicator of health demand, and a leading indicator of employer sentiment)

2013 was the slowest year for services price growth in recent memory. The effect of the ‘fiscal cliff’ sequester on Medicare pricing lowered national average health services y/y pricing growth from 1.9% in 1Q13 to just 1.3% in 4Q13. Hospitals have fared – and January data suggests continue to fare – particularly poorly

Flu is a key demand variable during the fourth and first quarters, with the typical season beginning in late September / early October. The current flu season started slowly; got much worse very quickly; and then faded to very mild just as quickly. On net, this noisy season looks fairly typical which implies a +/- 20 – 30bps headwind to unit demand during 4Q13-1Q14 (after the very severe in 2012-2013)

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; select Non-Rx Consumables (especially more US-focused names such as CFN and OMI); Medicaid HMOs (like WCG and MOH); Health IT; Hospital RCM providers (like AH and STRM) 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

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