We expect 3Q13 health services demand growth (y/y, nominal) of 3.5%, the product of 2.1% growth in unit demand and 1.4% growth in nominal pricing (Exhibit 1). Our nominal pricing forecast is up just 10 bps from last quarter’s multi-year low, while our estimate of y/y growth in unit demand is flat. Separate from our growth rate forecast, we run an independent model which handicaps the odds of a trend break in demand. This model calls for only slightly better than even odds (61%) of accelerating (3Q13 v. 2Q13) demand
The sequential dynamics in our 3Q13 estimate since our initial forecast last month are remarkably negative. Pricing expectations – already muted as a direct consequence of the 2% across the board cut in Medicare provider payments that began on April 1 (Exhibit 2) – fell 10 bps month/month, primarily on further deterioration in the hospital setting and new weakness in dental services. Unit demand forecasts declined 30 bps from the August report. This was almost entirely a function of a deceleration in both total hours worked and average wage for health workers – both of which are positively correlated with unit demand
Our estimates of demand dynamics for health services rely on several measures of underlying economic activity; included among these variables are measures of general economic activity and health-system specific activity, as well as forward expectations about US economic conditions
Exhibits 3, 4, and 5 provide time series of actual v. projected unit demand, price growth, and total demand, respectively
Looking ahead: 2013-2014 Flu Season
The flu season is a key driver of unit demand growth during the fourth and first quarters. Of course, less important than the absolute severity of the season is the severity relative to the prior year’s comp. 2012-2013 was a severe season – per-capita influenza related hospitalizations were 50pct higher than any year in the past decade and, coming off of the very mild 2011-2012 season, drove a +/-2.5% increase in total per-capita hospitalizations, y/y. Reverting to the 10-year trailing ‘average flu season’ in 2013-2014 would imply a headwind to flu hospitalizations of -0.6% during 4Q13, which very roughly translates to a +/-30 bps headwind for total services unit demand
Once the CDC begins tracking the 2013-2014 flu season next month, we will continue to analyze the progression of the season in the context of this monthly note so that, separate from our modeled aggregate demand dynamics (which, historically, have effectively captured flu effects through our model variables) we can also understand the underlying non-flu trend. The non-flu trend is more directly linked to cyclical (economic) and structural changes in the healthcare system (as flu unit demand is largely unaffected by them)
