(This is the first in a series of articles covering the home healthcare industry.)
Brad Barber and Terrance Odean in 2000 demonstrated that individual stock traders in the U.S. have an average annual portfolio turnover of 75%. Various studies have shown mutual funds, in aggregate, have an approximate 100% annual turnover. Hedge funds, on average, do not appear to hold onto stocks for that much longer. Such is the short attention span of our investment community at large.
Last summer, in the article “Towards Wise Exuberance,” we briefly examined how our aging population has not played—nor will play for a while—a meaningful role in the incredible growth by home healthcare agencies (HHAs) in recent years. The reader is likely not astounded that my voice was not heard within the investment community. In this article we will dismiss, with significant rigor, the claim by a growing number of popular/published analysts that demographics have offered, and still offer, a compelling reason to invest in this industry. This claim is only meaningful to the truly rare individual whom Barber and Odean had difficulty finding. Of course, it is possible that all of these articles and recommendations pointing to demographics are being written for the 2-5% of the investing public who regularly hold stocks for a minimum of eight years.
It is actually humorous to me that these powerful and sought-after analysts continue to point to a much larger older population that simply doesn’t exist. The narrative fallacy is the friend and entertainer of the critical investor. Then again, maybe I’m being too harsh on these preoccupied pros. A more likely reality is that these virile analysts are just embarrassingly premature.
Exactly how much has this industry grown? According to the Bureau of Economic Analysis, from 2000 to 2007, the broadly defined Home Health Care Services ranks 41st among the 491 industries that make up the NAICS. During that generally expansionary economic period, it ranks higher than breweries, wineries, legal services, insurance carriers, electromedical apparatus manufacturing, and even nitrogenous fertilizer manufacturing. Amazingly, since the beginning of 2008 (inclusive of our deep recession), it has certainly moved up that chart and is likely now in the top 15 — hobnobbing with the likes of information services and petroleum refineries.
To understand the core of this industry, however, let’s focus simply on admissions, placing revenues and profits on the backburner in deference to gaining a more thorough and simple understanding of where this industry’s demands originate. We’ll further streamline our focus on the skilled nursing (VN) operations of HHAs, even though many of these companies (and each of our four public companies—AFAM, AMED, GTIV and LHCG) have other lines of business.
After debunking the demographic myth in this article, we’ll review the real growth drivers in home healthcare in the next article. I refer to those drivers broadly as systemic—that is, admission growth occurring from changes within the healthcare system. The good news—for those short- to mid-term traders—is that the momentum for systemic admission growth is far from losing steam. This industry offers solid growth, even without the help of demographics.
The following industry information comes from the National Association of Home Care and Hospice (NAHC), and is quite helpful for our focus on VN admissions growth:
| Medicare HH Clients | % Change |
1997 | 3,554,000 | |
1998 | 3,062,000 | (13.84%) |
1999 | 2,735,000 | (10.68%) |
2000 | 2,497,000 | (8.70%) |
2001 | 2,439,000 | (2.32%) |
2002 | 2,724,000 | 11.69% |
2003 | 2,888,000 | 6.02% |
2004 | 2,840,000 | (1.66%) |
2005 | 3,228,000 | 13.66% |
2006 | 3,302,000 | 2.29% |
After decreasing through 2001, admissions increased by more than a third through 2006, translating to an incredible 6.25% compounded annual growth rate (CAGR) in a mature industry.
In fairness to our analysts, it should be admitted that representatives from three of our four public companies cited demographics as a key driver (one CFO cited it almost exclusively) for that 6.25% growth. But this simply cannot be.
The only factors that affect the size of any band of population (e.g., Los Angelinos; African-Americans; or 81-years olds) are 1) birth rates, 2) death rates, and/or 3) migration. HHAs focus almost exclusively on taking care of elderly people in their homes, so the first statistic to check for relevant demographic information is the number of enrollees in Medicare. This data from Centers for Medicare and Medicaid Services (CMS) shows that total Medicare enrollees have increased from 39.7M in 2000 to 44.9M in 2008 — a 1.5% CAGR this century. But this information is of limited use because about 60% of Medicare enrollees are under the age of 75, whereas over three quarters of the patients that HHAs service are 75 years and older. There could easily be drastic growth variations among various population bands within Medicare that net 1.5% aggregate growth. I requested a more specific multi-year breakdown by age of Medicare enrollees from the helpful and information-laden Kaiser Family Foundation, but even they could not assist.
Neither are recent censuses helpful because of the incrementally greater role death plays in thinning out populations each year after mid-life. Hence, I went all the way back to the 1960 Census and sliced and diced various population bands (page 1-349 here (.pdf)). That census clearly shows the sequential changes in population size by age—which speaks directly to birth rates—only contribute about .67 points to that 1.5% Medicare enrollment increase noted above. Of course, the remainder can only come from extended life spans and or immigration. For our purposes, that census shows a sequential increase in the population predominantly serviced by this industry (aged 75 years and older) for the past several years has grown a mere .50% annually.
And immigration actually has a very slight shrinkage effect on these statistics. The percentage of immigrants in our population has shrunk consistently since the 1920s, leaving our analysts only with diminished death rates to make up some incredible amount of that 6.25% admission growth. Sorry, but there is only so much extended life spans can account for, especially considering that our elders are healthier these days.
Our population over the age of 75 has only grown between 1 and 1.5% over the past several years due primarily to a diminished death rate and secondarily to an increased birth rate, with immigration playing almost no role. Because our seniors are healthier in aggregate, I suggest that demographics have accounted for about one fifth of that 6.5% CAGR in home healthcare admissions.
A similar approach is quite helpful in looking at future demographic trends. If you take the band of population from the 1960 Census represented by the then 26- to 35-year olds, you find a proxy for our population band of 75- to 84-year olds in 2009—a very meaningful age bracket for HHAs. Let’s see what those population buckets look like in each year through 2025. Remember, this is only helpful in determining birth rates within these populations. As immigration continues to be a non-factor for these bands, we’ll be left only to estimate death rates.
| 1960 Census |
| 2009 Proxy |
| 26-35 Year Olds | Change | 75-84 Year Olds |
1960 | 23,206,414 |
| 2009 |
1961 | 22,822,095 | (1.66%) | 2010 |
1962 | 22,493,358 | (1.44%) | 2011 |
1963 | 22,204,418 | (1.28%) | 2012 |
1964 | 21,943,930 | (1.17%) | 2013 |
1965 | 21,818,178 | (0.57%) | 2014 |
1966 | 21,673,551 | (0.66%) | 2015 |
1967 | 21,672,733 | 0.00% | 2016 |
1968 | 22,006,119 | 1.54% | 2017 |
1969 | 22,691,006 | 3.11% | 2018 |
1970 | 23,454,684 | 3.37% | 2019 |
1971 | 24,090,599 | 2.71% | 2020 |
1972 | 24,694,160 | 2.51% | 2021 |
1973 | 26,101,848 | 5.70% | 2022 |
1974 | 27,526,728 | 5.46% | 2023 |
1975 | 28,806,879 | 4.65% | 2024 |
1976 | 30,103,399 | 4.50% | 2025 |
Your eyes do not deceive you. Birth rates actually subtract (almost -1% CAGR) from these population buckets until 2017, when the Baby Boomers finally make an impact. It is worth pointing out that the population growth brought about by the Baby Boomers is incredible and sustained. The tremendous growth in this population due to birth rates levels off by 2030, but there was no significant diminution in births until 1966, represented by our current 43-year olds—who turn 81 around 2047. Once we make the jump onto that population plateau, it is a long, long ride.
Going forward, immigration, again, plays only a nominal role. Death rates are likely to continue the trends we discussed earlier. There were no wars or epidemics that significantly affected the above population buckets, and our seniors are almost certain to live longer and healthier lives for the foreseeable future. As such, I suggest that demographics will contribute approximately zero towards increasing home healthcare admissions until around 2017.
For those portfolio emperors—amateurs and pros alike—who bought shares in these companies after being sold on demographics, I regret to inform you that you are currently butt-naked. And you will remain so until a) you sell; b) 2017; or c) you continue to read my articles to learn the real reasons why buying shares in these companies at current prices is wise. My next article will address the much more difficult issue of determining—with some specificity—the context behind this industry growth, which will help enable us to play the dangerous game of predicting the future.
Disclosure: Long AFAM
