SSR Index of Current-Quarter Healthcare Demand Growth, Initial 3Q13 Estimate


We expect 3.9% (nominal) y/y growth in US health services demand during 3Q13, the product of 2.4% growth in unit demand, and 1.5% price growth. Unit demand growth moved to 2.1% during 2Q13 – a sequential improvement of 60 bps. Taken together with our expectation of continued sequential growth in 3Q13, we are very cautiously optimistic that growth is slowly beginning to normalize  

The ‘fiscal cliff’ sequester had an even larger impact on nominal, national average health services pricing (via Medicare) in 2Q13 than we had anticipated, trimming 60 bps sequentially and dropping y/y pricing growth from 1.9% to just 1.3% — the slowest price growth observed in at least 20 years. Though our model projects a 20 bps recovery in 3Q13 pricing growth, even that 1.5% rate would be the lowest in the last 20 years, barring last quarter

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 suggests that continued acceleration in demand during 3Q13 is more likely than not (81%)

About 60% of our healthcare coverage universe beat sell-side consensus sales forecasts during 2Q13 – though most subsectors have seen sales forecasts fall since the beginning of this year. This is consistent with a spending environment that is positioned to move from recent historical lows

As we’ve consistently argued, we believe that 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, stimulating demand growth

We recommend a healthcare portfolio that balances US focused, volume levered names with selective bets on innovation (specifically innovator companies with pending or recent major new product approvals, and/or high-quality early- to mid-stage pipelines that appear undervalued)

This translates into overweight positions for Biotech; Hospitals; select Non-Rx Consumables (especially more US-focused names such as CFN and OMI); select HMOs (especially emphasize exposure to Medicaid, like WCG and MOH); Health IT; 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 and Specialty Pharmaceuticals (on US real pricing power concerns); the drug trades (Retail, Wholesale, PBM) (on the loss of AWP pricing, and risks of PBM disintermediation); Device Innovators; Medical Equipment (health capital spending will favor information technology in the near term); Diagnostic Labs; and Research Tools / Services (implied revenue growth exceeds R&D spending growth)

For more detail, please see The SSR Healthcare Quarterly, published June 26, 2013

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

Print Friendly, PDF & Email