SSR Index of Current-Quarter Healthcare Demand Growth, Initial 2Q13 Estimate

Richard

We expect 2.9% (nominal) y/y growth in US health services demand during 2Q13, the product of 1.5% growth in unit demand, and 1.4% price growth. Unit demand growth remains very slow; the projected 1.4% rate is below the inherent rate of demand growth (1.5%) attributable to population growth and aging alone, and well below our long-term expectation of 2.8%

We expect nominal pricing to decelerate 50 bps, from 1.9% to 1.4%; this is a direct consequence of the 2% decline in Medicare payment rates brought about by the ‘fiscal cliff’ sequester. Dental services are significantly less affected by the sequester, and appear able to maintain steady price growth of roughly 3.7%

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 indicates near zero probability – <2% – of accelerating demand in 2Q13

Our models correctly anticipated that the downward trend in unit demand would persist during 1Q13 – however the fall was even more dramatic than our pessimistic view. This is directionally consistent with company reported results from the quarter – where surprises to the downside of sell-side analyst revenue consensus estimates far exceeded positive surprises

We believe demand is weak primarily because of low employment, which translates into a smaller percentage of households having the benefit of the most generous source (employer-sponsored) of health coverage. Employment gains, expansion of Medicaid eligibility, and the initiation of state health insurance exchanges all are likely to expand the availability of health coverage in the relatively near-term

We recommend a pro-US / pro-cyclical tilt to healthcare portfolios; this translates into overweight positions for Hospitals, select Non-Rx Consumables (especially more US-focused names such as CFN and OMI), and select Dental names (emphasize 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 (on US real pricing power concerns), drug trades (Retail, Wholesale, PBM)(on the loss of AWP pricing, and risks of PBM disintermediation), 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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