Per-capita intensity (unit demand) rises and falls with the employment cycle; on an age- and health status-matched basis, privately insured households consume 2.7x the care of uninsured households. As a rough benchmark, a 1 percent change in adjusted (for labor participation) unemployment (presently 10.7%) corresponds to a 70bp gain in real per-capita demand
A return to pre-Lehman employment levels would increase US real healthcare demand by roughly 3%, or on an average annual basis by roughly 30bp across our ten-year forecast horizon. A return to the 1996 – 2008 average employment level would raise US real healthcare demand by roughly 3.8%
This estimate of cyclical demand effects (30bp on a 10-year basis) completes our 10-year forecast; we expect roughly 3.9% real demand growth over the 2012 – 2021 time period. Our ‘baseline’ forecast (defined as growth in the absence of secular, cyclical or reform effects) is 4.8%; secular and reform effects reduce baseline growth by 90bp and 20bp respectively; cyclical effects raise the forecast by 30bp
Our 3.9% growth estimate is very much on par with actual real demand growth in the two decades pre-Lehman, during which healthcare traded at a 10% average premium to the SP500, v. the current 2% discount. Healthcare as a broad industrial group warrants a higher relative valuation
We favor Hospitals, commercial HMOs, US-centered Dental Suppliers with more technically sophisticated product mix (e.g. XRAY, PDCO), and select Drug / Biotech companies with large pending product approvals (see Exhibit 3)
With the exception of names with large pending product approvals, we recommend against Major Pharmaceuticals, Device Innovators (e.g. cardio, ortho), drug trades (particularly PBMs and Drug Retail; to a lesser degree Drug Wholesale), Research Tools and Services, and innovators with heavy reliance on sales to Medicare Parts A & B (see Exhibit 4)
For our full research notes, please visit our published research site.