Baby Steps to Giant Steps
Health Care sector head Tom Tobin walked our institutional clients through his detailed analysis of birth trends today in a presentation titled “US Births: Is the Worst Decline in 40 Years About to Turn?” Tobin’s work indicates the US is on the verge of an upturn in the birth rate. While it’s too early to gauge the scope and intensity of the increase, even a small uptrend has implications for health care stocks, and for the broader economy.
We haven’t seen anyone else doing this kind of demographic analysis. By the time everyone else on Wall Street is reporting on increases in the birth rate, it will be old news. Today, thanks to Hedgeye and Tom Tobin, it’s fresh. Read on.
Measuring Birth Trends
Tobin and his team base their work on a proprietary survey of OB/GYN practitioners across the country. The core survey focuses on four metropolitan areas representing diverse housing and employment trends: Houston, Denver, Tampa, and Cleveland.
Houston, the most robust of the four, weathered the recent Great Recession best, suffering the least decline in employment and housing. Cleveland, at the other end of the spectrum, continues to show lackluster employment growth and weak housing demand – and correspondingly weak birth rates.
The team surveyed established OB/GYN practices who see an average of 104 pregnancies a month. Perhaps unsurprisingly, the relative strength or weakness of the local economy largely corresponds to maternity trends.
Economic cycles have had a demonstrable impact on birth trends. Tobin points to economic downturns in the 1980’s and early 2000’s that triggered declines in the birth rate. At the same time, Tobin says positive economic factors presage increased birth rates. Increased employment drives birth rates because people feel more confident about starting a family when they are earning a living; but Tobin also notes the important correlation between birth trends and private employer-provided health insurance.
As the economy grows weaker or stronger, the mix between Medicaid and private insurance fluctuates, with obvious broad implications for health care. The established OB/GYN practices in the survey had a private insurance / Medicaid mix of about 80% / 20%, meaning that employment is a critical component for most couples planning to have a baby. An improving employment picture has meaningful implications for a broad range of companies providing everything from pre-pregnancy care, to in-hospital delivery and neonatal care.
Private insurers have seen revenues suffer due to weak employment in recent years. This means private insurance has not recovered, and Medicaid dominates many areas of health care. Hospitals, OB/GYN practices, and all birth-related providers would benefit from even a modest rise in the birth rate. Certain companies stand to reap outsized profits if the birth cycle turns positive, because of increased revenues available under the Affordable Care Act (aka Obamacare).
Tobin notes that when couples plan to have babies, other businesses benefit. As part of his base demographic research, Tobin and his team also follow housing, furniture purchases, sales trends at maternity clothing stores, as well as sales figures in such categories as pet ownership and women’s vitamins. These areas not only support Tobin’s overall work on birth trends, but week-to-week shifts in buying patterns can confirm employment and family income trends, which has implications for private payer insurance.
Tobin lists 6 companies that stand to benefit from a rise in the birth rate:
- Mednax (MD) – neonatal and maternal fetal care
- United HealthCare (UNH) – private payer inpatient admissions
- Hospital Corporation of America (HCA) – inpatient admissions
- PerkinElmer (PKI) – pre-natal and newborn screening
- Hologic (HOLX) – OB/GYN practice volume
- Cross Country Health Care (CCRN) – labor and delivery nursing care
It’s About Women
The key demographic group is the 20-34 year old age group. They are the sweet spot in employment – the age range during which people build professional careers – and in household formation. It is also, obviously, the demographic group that has the most babies.
Tobin says the gap between the growth in the population of women of child-bearing age, and the decline in the birth rate in the period 2008-2012, is the worst it has been in 40 years. That’s a decline on a scale not seen for two generations – since the economic turmoil of the early 1970’s. Since the 20-34 year olds were not around in the 1970’s, they have no memory of the economic upturn of the 1980’s. Many members of this group came of age in the midst of the Great Recession and are not equipped to be optimistic. In a phenomenon known as the “Zeitgeist” – a German term meaning “the governing mind-set of the age” – when a group turns optimistic, they tend to do it in a sudden surge. Tobin’s work indicates we may be seeing that right now, with more young adults leaving their parents’ homes to strike out on their own – household formation has been improving since 2010 – improving measures of consumer comfort since the dismal lows of early 2012, and more babies being born.
Perhaps the most striking correlation is between women’s employment and births. Tobin says that, with more women employed today, the combination of employer-paid health coverage and maternity leave is a major contributor to the upturn in birth rates. Women’s employment growth has returned to pre-Great Recession levels, and a distinct pattern is emerging of women who give birth within 9-12 months after starting a new job.
Where Can This Lead?
It is too early to project the magnitude of the births recovery, as we appear to be right at the inflection point. With couples of family-formation age who have put off having a baby, due to the economic situation, Tobin says there is a “pool of deferred births” that could be between 700,000 and 1.4 million over the coming three to five years. Think of it as a concrete example of what economists call “pent-up demand.”
The US sees about 3.8 million births a year on average, with first-time mothers accounting for 40% of births. Between new families and growing ones, Tobin believes it is reasonable to predict 3%-5% growth in the average number of births.
We also note that immigration reform looks to be almost certain in the next election cycle, as the major political parties are stumbling over one another to attract the Hispanic vote. A large percentage of illegal immigrants are already employed in one job or another, and legitimizing their presence on US soil should provide a further boost to household formation and basic consumption – not to mention tax revenues. This provides a population growth wild card that could lead to a mini baby boom in the coming years.
Even a small increase in birth rates can have a meaningful impact on a broad cross-section of health care providers, as it will be a significant bounce off of a broad decline in birth rates that has prevailed for four decades. Obstetrics practices represent 25% of the metric known as “physician utilization “ – meaning that’s what people go to the doctor for perhaps more than any other type of treatment. On top of that, if 11 million US residents and their children become legitimized, we should expect a corresponding lift in consumption across a broad range of goods and services.
So babies are good for business? Says Tobin, “You bet!”