We expect 3.6% (nominal) y/y growth in US health services demand during 1Q13, the product of 1.8% growth in unit demand, and 1.8% price growth; a very slight deceleration from the 3.7% actual growth rate in 4Q12. Unit demand growth remains very slow; the projected 1.8% rate is only marginally higher than the rate of health services unit demand growth (1.5 %) attributable to demographics (population growth and aging) alone, and well below our long-term expectation of 2.8%
Pricing also remains suppressed – 1Q13 will be the ninth straight quarter of price growth below 2%, more than twice as long as the last such period in 1997-1998
We estimate that flu effects drove a +/- 1% unit demand increase in 4Q12, and will raise health services unit demand by +/- 2% in 1Q13. Large apparent flu effects indicate that underlying ‘non-flu’ unit demand growth is well below the 1.5% demographic rate
We believe demand is weak primarily because of low unemployment, 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
We recommend a pro-US / pro-cyclical tilt to healthcare portfolios; this translates into overweight positions for Hospitals, Non-Rx Consumables (especially more US-focused names such as CFN and OMI), and select Dental names (emphasize more US-focused names with product lines that include higher-mix items, such as XRAY and PDCO)
Independent of our quarterly growth rate model, we handicap the odds of a trend break, i.e. a significant acceleration or deceleration in demand. The trend-break model indicates a very low probability – 10% – of accelerating demand in 1Q13
For our full research notes, please visit our published research site.