SSR Index of Current-Quarter Healthcare Demand Growth, Interim 4Q12 Estimate – Look for a Flu-Related Spike
Ignoring flu effects, we would expect 2.7% y/y health services demand growth during 4Q12, the product of 0.7% growth in unit demand and 1.9% growth in pricing. Total ‘ex-flu’ demand growth is projected to be 20bp lower than 3Q12–the combination of a 30bp drop in unit demand and a 10bp increase in price growth
Independent of our quarterly forecasts of growth rate, we model the odds of a trend break, i.e. a significant acceleration or deceleration in demand. Even ignoring flu effects, this model indicates a 92% chance of accelerating demand in 4Q12, a result that is directionally in conflict with our growth rate model’s expectation of decelerating growth. Health services unit demand growth has fallen for an unprecedented six consecutive quarters; this pattern is highly correlated with an imminent acceleration of demand, thus the trend break model’s bullish expectation
Were it not for the flu season, we’d be more likely to believe the baseline demand model’s 2.7% growth estimate and ignore the trend break model’s call for accelerating demand; job growth (which has a very large but lagged effect on demand) has been weak, and hours worked in healthcare settings (a contemporary indicator of demand) are also weak
Independent of the weakness in cyclical demand indicators, the 2012-13 flu season is very strong, and is likely to drive some level of acceleration in 4Q12 demand. The number of flu tests administered is a reasonable proxy for change in flu-related patient flow; this figure is up 46% year on year. The percentage of positive tests gives some hint as to the severity of illness and thus the average level of spending associated with each visit; an average of 12.2 pct of tests have been positive thus far in 4Q12, v. just 1.2 pct in 4Q11
This suggests upside to patient volume expectations for Hospitals for 4Q12; coupled with a reduction in the perceived risks of fiscal-cliff related pricing cuts we would expect Hospitals to outperform in early 2013
Rising medical demand because of flu is a fundamental negative for HMOs; however these stocks already anticipate tightening 2013 MLRs for other reasons. The likely flu-related effect on MLRs is smaller and of shorter duration than implied by current estimates and share prices; accordingly we still expect the commercial HMOs to outperform in 2013
For our full research notes, please visit our published research site.