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

Richard

 

We expect 3.4% (nominal) y/y growth in US health services demand during 1Q14, the product of 2.4% growth in demand intensity and 1.0% growth in price. Intensity growth reflects a 10bp improvement over actual 4Q13 growth of 2.3%, but a 20bp drop from our initial 1Q14 forecast. Price growth reflects 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 indicates that sequential acceleration in demand during 1Q14 is likely (82%)

Pricing suffers from the effects of the +/- 2% reduction in Medicare payment rates as a result of  the so-called ‘sequester’; and, from a deceleration in commercial pricing growth (at least for hospitals) now that the initial ACA enrollment period is closing

Our reduced estimate for intensity growth reflects falling hospital employment QTD. Fundamentally, we believe falling hospital employment reflects decisions by hospital administrators to reduce capacity in the wake of poor ACA enrollment, rather than any weakening of the sequential demand trend. Rather than edit the outputs of our models we chose to ‘print’ the reduced 2.4% intensity figure without adjustment; however we believe actual intensity growth is more likely to reflect the original 2.6% rate computed before the February drop in hospital employment

This year’s weaker flu season reduces YoY intensity growth by roughly 40bp in 1Q14; thus ‘true’ growth in intensity is closer to a range of 2.8% (if falling hospital employment actually reflects slowing sequential demand) to 3.0% (if falling hospital employment reflects capacity adjustment in the wake of weak ACA enrollment, as we expect)

We believe intensity of demand will continue to grow as employment improves, as this serves to move a larger percentage of the population into the most generous form (employer sponsored) of health insurance. For this reason, we favor healthcare sub-sectors that are: 1) positively levered to gains in US per-capita intensity; and 2) have stable pricing, such as Non-Rx Consumables (e.g. BD, BCR, COV, CFN, OMI)

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

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