Our healthcare team has had a great call with their #ACATaper theme.
#ACATaper | Theme Summary: The implementation of the Affordable Care Act (ACA) resulted in a largely unprecedented influx of newly insured individuals. Because many of those formerly chronically uninsured had deferred care and carried higher acuity, their utilization rates subsequent to gaining coverage were comparably higher. The ramp in the insured base coupled with higher utilization and cost rates for the newly insured drove healthcare consumption higher and a discrete ramp in sales in earnings growth for the sector. Growth rates in healthcare relative to the S&P500 broadly and its defensive brethren (staples and utilities) decoupled, leading to marked outperformance in the related equities. The #ACATaper theme is centered on the reversal of this dynamic as the sector comps out of the benefit and growth shows a marked deceleration (email sales@hedgeye.com if you are interested in the Healthcare teams work).
Cloaked Stimulus: This past week the healthcare newsflow was headlined by the revelation that the Affordable Care Act was explicitly conceived and sold internally as a Jobs Program. The Reform Effort became a latent objective.
As Politico reported a couple weeks ago and our Health Policy team highlighted:
“Health care experts like [Bob] Kocher and colleague Zeke Emanuel wanted reforms that would increase efficiency and tamp down the sector's growth. But ‘people on the jobs team were saying we need more middle-class jobs and the best place to create them was in health care,’ Kocher says. ‘And after we lost 7 million jobs [in the recession], that argument was winning.’
Contextualizing the Benefit: From a macro perspective, the implementation of ACA has provided a clear benefited to aggregate consumption and employment growth.
That benefit becomes evident in the data concurrent with the initial enrollment deadline for ACA at the start of 2014 and builds conspicuously through 2015. The chart selection below illustrates the impact:
- Employment Impact: Healthcare's share of total employment began to ramp in mid-2014 with Healthcare payroll gains driving ~16% of total NFP growth from 2Q14-2Q16 (punching above its weight given it's 10% of total employment).
- Benefit = Past Peak? Healthcare Job Openings (JOLTS) and net monthly payroll gains peaked in late 2015 alongside peak NFP gains and have begun a modest retreat in 2016. After broadly accelerating for 2 years, Healthcare employment growth peaked in March 2016 and has now decelerated in each of the last 3 months.
- Ex-Healthcare Weakness: While trailing 3M/6M NFP gains have slowed in 2016, monthly Healthcare job gains have slowed only modestly. Should the fledgling deceleration in Healthcare employment progress, Healthcare would reverse from a relative support to a negative amplifier.
- Contribution to GDP: Over the last 8-quarters Healthcare’s contribution to GDP has seen a step function increase, contributing almost double its average contribution observed over the last 20 years.
The simple takeaway is this: ACA has proven effective as a jobs and consumption stimulus program. It served to “artificially” augment employment growth over the last two years and has helped buttress headline payroll gains in the face of ex-healthcare weakness in recent months. However, as the #ACATaper theme plays out and the benefit decays, the support to NFP will similarly diminish. In other words: #ACATaper is likely to = #NFPTaper.
Christian B. Drake
@HedgeyeUSA
