Healthcare’s Utilization Trade Against the Backdrop of May Jobs Numbers

Summary and Conclusion:

In making our pro-cyclical healthcare call we intended to be playing offense; however in the face of a potential slowdown in US employment and the risk of a more substantial economic deterioration in Europe, the pro-cyclical recommendation may have become defensive by default. Because the volume-sensitive, US-oriented, and ‘commodity rather than innovator’ names we favor still imply per-capita unit demand levels that correspond to very nearly trough (October 2009) employment levels, we see little immediate downside to continuing a pro-cyclical tilt. And, because the pro-cyclical portfolio is relatively less exposed to innovators’ exports to the EU (to our minds the riskiest source of healthcare earnings at the moment), a pro-cyclical tilt has considerable defensive utility if EU conditions deteriorate further. We acknowledge that our pro-cyclical call lacks as positive catalyst if US employment growth is stagnant, but hesitate to abandon the expectation of growth in per-capita unit demand on a single jobs report, particularly given the defensive utility of a pro-cyclical tilt


The US Bureau of Labor Statistics on Friday published the May 2012 Employment Situation report; the report includes a headline estimate of total non-farm hours through May, and more detailed estimates of hours worked by industry through April. Total non-farm hours for May obviously were below expectation, nevertheless aggregate healthcare work hours, and physician office hours were up significantly in April as compared to March. Y/y growth in aggregate healthcare hours (4.4%), was higher than it has been since the end of 2007; and physician office hour y/y growth (5.6%) more than recovered from the slight sequential dip in March, and is back on par with the robust y/y growth trend from November through February. Medical / surgical hospital hours were off marginally, but y/y growth fell only 20 bps to 4.1% in April and remains near the 10-yr high set in March

We’re convinced that per-capita unit demand for healthcare is highly correlated with the aggregate hours worked in healthcare settings, and accordingly believe the April data are consistent with a strengthening of healthcare demand through April. However we’re equally convinced that per-capita unit demand for healthcare ultimately is tied to national employment; therefore despite the strong April healthcare demand signal, we have to accept that healthcare unit demand eventually will follow the trajectory of employment in the broader economy – i.e. if total non-farm employment growth is weak going forward, near-term growth in per-capita unit demand for healthcare also will become weak. For a sense of scale, we showed in a research note just last week that a one percent change in employment among the civilian working age population corresponds to a (roughly) 70bp change in per-capita unit demand for this population[1]

Our recommendation since early this year to buy volume-sensitive healthcare sub-sectors has been based on 2 research findings: 1) that employment and per-capita unit demand for healthcare are closely linked; and 2) that valuations for the volume-sensitive healthcare names have implied a continuation of trailing per-capita unit demand rates, which in 2010 fell to an all-time (we believe cyclical) trough. To believe these valuations are correct we’d also have to believe that employment will remain at trough levels for several years forward, which is inherently unlikely. More succinctly, the volume-sensitive names reflect an expectation of no job recovery[2], where we have expected at least modest job recovery

It follows that even if the employment weakness seen in the May non-farm jobs report continues, we see limited downside in the volume-sensitive healthcare names, as these already imply per-capita unit demand levels that correspond to an employment trough, instead of the more likely reality of something between a stagnant job market and very modest employment growth. Despite limited downside, for our pro-cyclical call to work we need some level of employment growth; therefore as long as the near- to mid-term jobs outlook is weak, our pro-cyclical call lacks a catalyst

Our immediate conclusion is that there’s no pressing need to unwind a pro-cyclical position on a single jobs report; and, that because pro-cyclical positions are inherently pro-US and more oriented to commodities than innovators, a pro-cyclical tilt is relatively less exposed to European Union risks than positions with greater exposure to exporters and/or innovators[3]





[2] In truth, the volume-sensitive names probably reflect the market’s (we believe incorrect) conclusion that per-capita unit demand for healthcare is slow for secular rather than cyclical reasons

Print Friendly, PDF & Email