Intensity is Rising on ACA enrollment gains

We expect 2Q14 health services demand growth (y/y, nominal) of 7.1%, the product of 5.5% growth in intensity and 1.5% growth in nominal pricing (Exhibit 1)

Note that 1Q14 actual demand growth of 6.3% was substantially higher than our estimate of 3.5%. We define ‘actual’ demand as the health intensity figure published by the Bureau of Economic Analysis (BEA); i.e. technically, our model is geared to predicting what BEA will publish. BEA’s estimates, like any, are based on a combination of objective inputs, and judgment[1]. BEA’s 1Q14 figures appear to anticipate an additional 2% or so impact on intensity as the Affordable Care Act’s (ACA) key coverage provisions went into effect during the quarter. However based on hours worked in health care settings and providers’ quarterly reports, we believe the BEA’s 1Q14 estimate (i.e. the ‘actual’ we model to) is too high

It’s not that BEA is expecting too much additional ACA demand – in fact that 2% gain they appear to expect is exactly the gain we expect. The problem is that BEA included the full 2% ACA gain in their 1Q14 estimate, and it just looks like they expected this added demand to materialize about a quarter before we do

Using the very latest inputs from 1Q14 in our model, we believe healthcare services demand growth was in truth around 4.4%, consisting of roughly 3.5% growth in intensity (v. our 2.5% ‘final’ estimate) and 0.9% growth in price (v. our 1.0% ‘final’ estimate). The fact that the latest inputs (e.g. hours worked in healthcare settings from late in the quarter) drove our ‘final final’ estimate of intensity 1.0% higher may reflect ACA demand beginning to come on line late in the quarter. As second quarter unfolds, we would expect all of the roughly 2% additional ACA demand to come on line, putting the BEA figures back on track with what the evidence suggests is actually happening

Separate from our growth rate forecast, we run an independent model which handicaps the odds of a trend break in demand. This model indicates strong odds (96%) of continued sequential demand growth during 2Q14

Public-Payor Price Losses Stabilizing, But Now Commercial is Weakening

Weak pricing is the product of multiple underlying trends. Medicaid pricing weakened as states’ budgets came under post-financial crisis pressures, and Medicare weakened sharply as a result of the +/- 2% sequester cuts placed in effect at the beginning of 2013. Both of these public-payor effects are being anniversaried, only to be replaced by a weakening commercial pricing trend (Exhibit 2). Name brand hospitals arguably enjoyed commercial pricing power as health plans felt the need to include recognizable brands in their offerings on the Affordable Care Act’s health insurance exchanges (HIEs); however in the wake of slow initial enrollment this source of hospital pricing leverage arguably has been lost. And, because HIE based plans have substantially increased the percentage of insured persons’ claims that are paid directly by the beneficiary, hospitals’ collection rates from these insured patients are falling[2]. We have no reason to expect an improvement in hospitals’ near-term pricing power, though we do see an eventual chance of improved commercial pricing as employer-sponsored beneficiaries move to private exchanges, where the inclusion of preferred hospitals may be an important factor in capturing these newly shifted beneficiaries

Exhibits 3, 4, and 5 provide time series of actual v. projected unit demand, price growth, and total demand, respectively