We expect 3.5% (nominal) y/y growth in US health services demand during 1Q14, the product of 2.5% growth in demand intensity and 1.0% growth in price. Intensity growth reflects a 20bp improvement over actual 4Q13 growth of 2.3%, and a 10bp increase from our prior 1Q14 forecast. Price growth reflects a very large 30bp drop from 4Q13, but is unchanged from our prior 1Q14 forecast
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 (89%)
Pricing growth remains at historically low levels, and is negative (+/- (0.4%) – 0.0%) in real terms. As Medicare pricing growth slowly recovers from the year ago +/- 2% Medicare ‘sequester’ cuts, commercial pricing is weakening
Sequential hiring within hospitals in March drove the very modest 10bp increase in our intensity estimate; however the longer-term trend of declining hospital employment remains intact. 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
This year’s weaker flu season reduces YoY intensity growth by roughly 40bp in 1Q14; thus ‘true’ underlying growth in intensity is closer to 2.9%. As context, bear in mind that demographics alone currently drive 1.5% intensity growth (80bp from population growth and 70bp from aging); and, that per-capita age-adjusted intensity has historically exceeded this baseline level of demographic demand by an additional 2.2%. Thus a reasonable estimate of ‘normal’ intensity growth is roughly 3.7%
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. BDX, BCR, COV, CFN, OMI)
For our full research notes, please visit our published research site.