Health Care Initiation of Coverage: US Health Care Providers

We initiate coverage of the US Healthcare Providers sector with a focus on misunderstood fundamentals, under-appreciated growth, and positive earnings revisions to drive our stock picks.

Despite the strong volume recovery so far, we think it's increasingly likely that 2022 is shaping up to be a year where COVID transitions to an endemic disease (like the flu) and thus additive to the ongoing volume recovery, but not disruptive to surgery volumes. The second quarter supports that notion. COVID represented 6% of inpatient days nationally and hospitals delivered strong profits. If that's any indication of 2022, we see continued earnings strength and room for multiple expansion.

We believe the hospice segment carries elevated risk and uncertainty over the near-term. Our detailed analysis of excess mortality suggests that COVID has pulled forward close to 500k deaths in the 75+ senior population. Compared to the pre-COVID death trend, we think that 2022 deaths among the 75+ population will be approximately 70k lower, or 4% below baseline, which translates to a decline of 11% y/y. To better understand this pull-forward effect, we looked to the 1918 Spanish Flu as a case study on pandemic mortality. Deaths following 1918 averaged 7% below baseline through 1925 and paint a picture of heightened uncertainty for hospice operators today.

Our research is rich in data-driven analysis highlighted by our best-in-class volume trackers. We carefully mapped our coverage universe of hospitals to derive tremendous insights from real-time volume data. By doing so, we are able to dissect COVID and non-COVID utilization trends for each hospital in our coverage. Our census trackers are supplemented by UBS Evidence Lab's Hospital Volume Tracker, which show surgery volumes down 10% in August (vs 2019 ).