SSR Index of Current-Quarter Healthcare Services Demand Estimates Growth within 50bps, Before Earnings are Reported

Richard

‘Unit demand’ for US healthcare ties closely to underlying economic measures, including but not limited to rates of employment. A critical mass of these measures is available during or immediately after a given quarter; using these we model current-quarter unit demand growth to an average error of 43 bps, before earnings are reported

Current-quarter pricing can be even more closely estimated (average error < 10 bps) by simply aggregating and weighting monthly healthcare price indices. Combining separate unit and price growth regressions, we model current-quarter demand growth to an average error of 39 bps, again before healthcare earnings are reported

Independent of these demand rate regressions, but also using intra-quarter economic data, we can handicap the likelihood of the demand trend accelerating or decelerating. Ignoring odds and considering only whether the model points to acceleration or deceleration, we correctly predict trend changes with 80% accuracy.

Incorporating the model’s estimate of trend break odds, trend breaks handicapped with odds ≥ 0.75 were 94% accurate

We plan to offer two estimates of demand growth rate (and trend break odds) during each quarter; the first (preliminary) estimate at roughly mid-quarter, and the second (revised) roughly two weeks following the end of the calendar quarter, but before the release of (most) healthcare earnings

Our preliminary estimate of 2Q12 growth in US healthcare demand is 3.1%, the product of 1.4% growth in unit demand and 1.7% medical inflation. The odds of 2Q12 annual demand growth decelerating relative to the 1Q12 y/y rate are 11%

We continue to recommend a pro-cyclical and pro-US tilt to healthcare portfolios; favored subsectors include Hospitals, non-Rx consumables, and HMOs

Recognizing that both Hospitals and HMOs face binary risks from the pending Supreme Court decision on the Affordable Care Act (which can be largely hedged by holding both subsectors); and having greater confidence that we can more accurately time the (we believe ongoing) cyclical demand recovery, we’re more willing to consider holding other volume-sensitive subsectors on our pro-cyclical thesis. Until now we have avoided Laboratories, Drug Retail and Drug Distribution on longer-term concerns (Medicare pricing for the Labs, generic dispensing margins for the drug trades), but now see these as credible pro-cyclical bets, at least until the dust settles from the Supreme Court’s late June / early July decision

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