S&P Industry Report
Dec 19, 2009
Our fundamental outlook for the health care services sub-industry for the next 12 months is neutral. Our outlook is based on the wide variety of services, the different prospects of each, and our view that each should be considered separately. However, we think most services, including home health care, rehabilitation services, clinical laboratory services and dialysis, will continue to benefit from favorable demographic trends.
We are optimistic on clinical labs as we see continued price gains mainly on more tests per requisition. Although we see continued softness in employee-related drug testing as weak employment markets adversely affect volume, we believe the level of decline is moderating. Meanwhile, labs have benefited from an increase in tests per requisition, and we are encouraged by the increase in esoteric/genomic tests, which, in our opinion, should spur revenue growth beyond low to mid-single digit levels. We think clinical labs will continue to seek acquisitions to supplement organic growth, but, in our view, the number of potential sizable acquisitions is limited. We also think potential health care reform would be positive for the industry as we expect increased volume, although partially offset by potentially lower reimbursement and a new tax.
We are neutral on the dialysis group, as reimbursement rates have been under pressure while increased Heparin costs could pressure margins. However, we view the proposed bundled dialysis payment rates announced in September 2009, which would result in rate cuts of about 4.1% if implemented immediately or about 3.1% if implemented over four years, as manageable and removing some anxiety surrounding the group. We are becoming more favorably inclined toward respiratory therapy services. We believe that while Medicare reimbursement issues may continue to pressure sales growth, the impact on revenues could be mitigated through expense management and market share gains.
Our positive opinion on pharmacy benefit managers (PBMs), which help managed care organizations, governments and employers control drug spending, is based mainly on valuation. While the soft economy has reduced pharmaceutical consumption, we believe it is spurring generic drug utilization, which is a positive for PBM profitability. We also think PBMs should benefit under President Obama, given his support for eprescribing, generic drug utilization and an approval pathway for biogenerics.
Year to date through December 11, the S&P Health Care Services sub-industry index rose 37.2%, following a 19.3% decline in 2008, while the S&P 1500 grew 23.0%, after dropping 38.2% in 2008.
--Phillip Seligman
