Managed Health Care

A reduction in the rate of drug price increases, and in the case of generics, outright price cuts, is a blessing for the S&P managed care industry. Cost inflation had been perking up, but should ease in the coming quarters as drug expenses abate. Health insurance premiums are growing at a faster rate than overall inflation, while job growth remains decent, underscoring that top-line growth is still outpacing that of the overall corporate sector. If cost inflation eases while revenue climbs, the index should move to at least a market multiple from its current discounted valuation. Importantly, technical readings have improved. Cyclical momentum has begun to reaccelerate from neutral levels after unwinding overbought conditions, suggesting that a breakout to new relative performance highs is in the offing. Bottom Line: the pain in drug-related shares should provide a gain to health care insurers. Stay overweight. bca.uses_in_2016_11_02_002_c1 bca.uses_in_2016_11_02_002_c1

The health care sector is poised to resume its bull market, but the character of the rally will change. Sell hospitals and buy biotech.

The previous Insight showed that broad macro conditions point to a reduction in managed care risk premiums. This outlook brightens further when considering recent cost inflation trends. The latest inflation reports showed that the cost of physician services is growing at a slower rate, and the relentless advance in pharmaceutical price inflation is also finally cooling. With health insurance pricing power likely to stay on the upswing (third panel), given that premiums are set on a trailing cost basis, there is a window for the group to show more robust profit margins. As a result, industry return on equity (ROE) should continue to handily outpace overall ROE, arguing for a better-than-market valuation multiple. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5MANH - UNH, AET, ANTM, CI, HUM, CNC. bca.uses_in_2016_06_16_002_c1 bca.uses_in_2016_06_16_002_c1

Health insurance equities are on the cusp of breaking out to new all-time highs relative to the broad market, despite the headwinds facing any net creditor, namely low running yields. The macro tide is turning decisively in favor of this non-cyclical group. The S&P managed care index outperforms when overall relative consumer spending on health care decelerates and/or contracts, as it implies that insurance claims will decelerate, reducing costs to managed care providers. When this occurs, the risk premium associated with the group diminishes. The opposite is also true. Thus, the decisive downturn in health care spending growth opens the door to a re-rating, particularly given that cost inflation appears to be ebbing, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5MANH - UNH, AET, ANTM, CI, HUM, CNC. bca.uses_in_2016_06_16_001_c1 bca.uses_in_2016_06_16_001_c1

Last week we added the overall health care sector to our high-conviction overweight list, given our confidence that defensive sectors will continue to outperform the broad market on a cyclical basis, regardless of the latter's near-term trend. As part of this move, the S&P managed care index now warrants overweight exposure. The pressure on payers of medical services relative to the providers of those services has ebbed, because overall health care outlays are no longer accelerating relative to total spending. That should open the door to another upleg in relative performance, provided costs stay under control. On this front, our medical cost proxy is still moving laterally, despite the previous increase in surgeries, procedures and sector pricing inflation. This will keep a lid on the medical loss ratio, alleviating potential downward pressure on profit margins, and by extension, relative valuations. Keep in mind that the impact of previous consolidation on cost containment has yet to be fully felt. The implication is that discount relative valuations should be exploited. Upgrade to overweight and please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5MANH - AET, ANTM, CNC, CI, HUM, UNH. Upgrade Managed Health Care Upgrade Managed Health Care

Equities are back in overshoot territory. We added the health care sector to our high-conviction overweight list, boosted managed care to overweight and put health care equipment on downgrade alert. Buy cable stocks.

Against a backdrop of defensive sector outperformance, our bearish call on the S&P managed care index has reduced odds of playing out. Our thesis was that when overall health care spending is accelerating, as is currently the case, health care services providers win out over the industries that bear the cost of these services. However, if the economy cools, as we expect, then upward cost pressure will be slow to materialize. Our managed care cost proxy, a composite of hospital, drug price and labor cost inflation, alongside several other medical expenses. Cost inflation is easing, despite the surge in prescription drug prices. If upward momentum in the latter cannot substantially raise managed care costs, then there should be little upside risk if drug inflation cools. Meanwhile, consumer spending on health insurance continues to outpace overall spending by a large margin, which is facilitating decent increases in premiums, as gauged by the employment cost index for health care insurance. The implication is that the group is more likely to move laterally than down, despite rising overall health care spending, and we are lifting our underweight position to neutral. Please see yesterday's Weekly Report for more details. The ticker symbols for the stocks in this index are: UNH, AET, CI, ANTM, HUM. bca.uses_in_2016_02_09_002_c1 bca.uses_in_2016_02_09_002_c1

Economic disappointment represents a serious obstacle for stocks. Stay with non-cyclical plays, including telecom services and health care. Upgrade the managed care group, and stay clear of banks, regardless of cheap valuations.