Had it not been benefited by the Affordable Care Act (ACA), the GDP growth rate of the U.S. economy in the first-quarter 2014 would have been negative 1.0%.
Per the Bureau of Economic Analysis’ advance estimate, real gross domestic product (GDP) growth rate came in at a sluggish 0.1% in the first quarter of 2014, much lower than 2.6% growth clocked in the previous quarter. Economists, on the other hand, were expecting GDP growth of 1.2%.
Real GDP, which is the mirror of true economic growth, is the sum of consumer spending, investment made by industry, excess of exports over imports and government spending, adjusted for price changes i.e. inflation or deflation.
Bad Weather Played a Spoil Sport
First quarter GDP suffered from unusually severe winter weather, which included record cold temperatures and snowstorms. Weakness in trade and inventories, lower non-residential fixed investment growth, and lower state and local government spending were the factors behind the slow economic growth in the first quarter of the year. This decline was, however, more than offset by lower imports and higher spending on personal consumption, which managed to keep GDP growth in green.
Health Care Spending Steals the Show
A surge in health care spending during the first quarter of 2014 helped the country’s GDP by 1.1%. The quarter saw a 9.9% or $43.3 billion spike in health care spending, the highest since the third quarter of 1980 when health care spending rose 10.0%.
Health care spending in the quarter was a reflection of the implementation of Obama’s Affordable Care Act (ACA), which provided coverage to nearly 8 million Americans during its first open enrollment session on public exchanges. Under the law, millions of Americans were given subsidies to purchase an array of health plan choices.
The newly-insured Americans, who had earlier restrained from spending on medical facilities due to tight budgets, started utilizing medical facilities like doctor visits and hospital services, drugs and nursing homes after gaining coverage via subsidized public exchanges, thus pushing up spending on health care.
For the past many years, spending on health care remained restrained due to a weak economy.Health care spending, however, started showing signs of growth in the fourth quarter when it rose 5.6%, the highest since 2004.
Meanwhile ACA Delivers as Expected
The increase in health care spending does not come as a surprise. It had long been anticipated that health care spending will jump with millions of Americans opting for health insurance through Obamacare. The primary goal of ACA was to ensure access to affordable health care to Americans. The first quarter trend attests that ACA has largely delivered what was expected out of it.
While health care spending saw a rise, the increase was driven by higher use of medical services rather than an increase in cost of medical services. As per the Council of Economic advisors ‘Health care prices continued to increase exceptionally slowly, growing at an annual rate of just 0.5% (0.9% on a year-over-year basis), while utilization (real health care spending) rose at a 9.9% annual rate in the first quarter.’
The Momentum Likely to Continue
After accruing to first quarter GDP, ACA is expected to boost the country’s second quarter GDP growth as medical spending continues to rise. Millions of Americans who got coverage in a special two-week enrollment period in April (which will go into calculating second quarter GDP) will spend to fulfil their pent up demand for health care services, which will ramp up medical utilization.
Stocks to Pick
Though higher health care utilization is a positive, it’s not something we can count on going forward. The support to GDP from higher health care utilization will return to more normalized levels over the long term as health insurance coverage stabilizes and the pent up demand for health care spending is met.
However, recent trends will benefit health care stocks such as medical and clinical service providers, health insurers and hospitals. Medical and clinical services companies will benefit as more people use medical services like ambulatory surgical and emergency service centers and kidney dialysis centers.
Moreover, an increase in the number of enrollments with a surge of younger people (youngers primarily cover the cost of older and sicker population) under the Affordable Care Act is favourable for health insurers. Hospitals stocks are also expected see higher revenues from millions of new insured customers and higher Medicaid patients.
Below we present three stocks, which possess the potential to grow appreciably in the new environment, each of which also has a favorable Zacks Rank:
Health insurer WellPoint Inc. looks promising with a Zacks Rank #2 (Buy) and long-term expected earnings growth rate of 9.7%. In its first quarter 2014 earnings release, the company stated that membership applications were strong and the company had enrolled over 400,000 members. Through the entire open enrollment period, which officially ended on April 15, the company added more than 600,000 members from public exchanges.
While the company was earlier concerned that subsidized health insurance through a health exchange will attract more sick and old people, driving up their claim costs and making business from exchanges unprofitable, initial results have been quite positive. The company is pleased with the mix of business coming from exchanges, which has also brought in young adults and children.
WellPoint now perceives strong growth in the newly-created health exchange market and consequently expects its earnings per share to be more than $8.40 for full year 2014 compared with its previous expectation of more than $8.20 per share announced in March.
Another player worth mentioning is Aetna Inc.
(AET - Free Report
) with a Zacks Rank #2 (Buy) and long-term expected earnings growth rate of 10.2%. Similar to WellPoint, this insurer is also witnessing profitable business from health exchanges operating in 17 states. At the end of the first quarter, Aetna had 230,000 paid public exchange members included in its reported results. The company now expects to end the year with approximately 450,000 paid public exchange members.
The company also forecasts 2014 revenue to be in a range of $56 billion to $57 billion, up from its previous expectation of $54 billion. It also raised its operating earnings per share projection to a range of $6.35 to $6.55 per share from the previous projection of at least $6.25 per share.
Our third pick is a hospital stock, Universal Health Services Inc.
(UHS - Free Report
) , with Zacks Rank #3 (Hold) and long-term expected earnings growth rate of 10.28%. During its first quarter 2014 earnings, the company beat analyst expectations and recorded above-average profit and revenue increases.
The company disclosed that the revenue increase was due in part to strengthening surgical volumes along with an improvement in the mix of customer services with less uninsured patients and more Medicaid and commercial insurance patients. Hospitals have traditionally faced huge unpaid bills from uninsured patients leading to bad debt. The situation is set to improve with more and more patients getting insurance cover, which increases their ability to pay hospital bills.