Wall Street's recent fitfulness has left some fresh bruises on an already battered healthcare industry.
"It's had a depressing impact on healthcare service stocks," says A.J. Rice, a healthcare analyst with New York-based Bear, Stearns & Co.
Small-capitalization stocks -- companies with a capitalization of less than $500 million -- in general have underperformed the market for some time, says Sheryl Skolnick, a managing director and senior healthcare services analyst with BancBoston Robertson Stephens in New York. The market's recent volatility has caused many investors to bail out of small caps, a category that includes all but a handful of healthcare service stocks.
Industry yardsticks show that the sector has been slumping for months. Morgan Stanley's Healthcare Provider Index, which tracks the performance of 15 hospital management, physician practice management and nursing home stocks, is down 35.5% so far this year. On Aug. 31, the index dropped to 247.69, its lowest level in two years.
The Furman Selz/MODERN HEALTHCARE composite stock index also reflects the downward trend (Sept. 7, p. 62). As of Aug. 28, healthcare provider and services stocks had lost 16.7% year-to-date. Those losses helped depress the entire composite, down 8.2% so far this year.
"Provider stocks have been hurt by major earnings disappointments and significant reimbursement and regulatory uncertainty," says David Risinger, a vice president of healthcare research at Morgan Stanley Dean Witter, New York.
The downturn seemed to begin in late spring, he says, as companies started to report disappointing earnings and investor uncertainty increased on regulatory and reimbursement issues.
Virtually every segment of the healthcare service sector has suffered:
n The average home health stock tracked by Rice is down 62% through Aug. 31. The home-care sector is struggling through a transition to a prospective payment system, which was supposed to take effect next year. HCFA has delayed PPS implementation, setting off a firestorm of protest by providers who abhor the current interim system (Aug. 24, p. 32).
n Many physician practice management stocks have tanked, prompting some investors to question whether PPMs are a legitimate business that adds value. Shares of Birmingham, Ala.-based MedPartners, which lost $840.8 million in the fourth quarter of 1997 and $25.7 million in the first quarter of 1998, now trade in the $2.50 range, far off a 52-week high of $32. San Diego-based FPA Medical Management filed for Chapter 11 reorganization July 17.
n Nursing home stocks may not recover until approximately January, when investors begin to see some evidence of how a newly implemented PPS affects company profits.
n HMOs are hurting, too. Having lost money on Medicare risk contracts, a number of plans are dropping from the business. HMOs that lost control of price and utilization are paying for their missteps through sagging stocks and vulnerable debt ratings.
"I'd say that there is an awful lot of bad news discounted in healthcare stocks right now," says John L. Sullivan, a healthcare services analyst at Tucker Anthony, a Boston-based money manager.
Buyers of healthcare stocks also have to worry about whether the federal government will show up at a company's door with a subpoena, Sullivan says.
That's what happened to Clearwater, Fla.-based Lincare Holdings, a home respiratory company, which is cooperating with the U.S. attorney's office in Sacramento, Calif. Lincare, which denies any wrongdoing, was subpoenaed earlier this summer to provide documents related to home oxygen therapy services provided to Medicare and Medicaid beneficiaries at five Lincare locations in California and Oregon.
On news of the investigation, the company's stock dropped more than $5 to $37 per share. It currently trades in the $33 range.
If there is a bright spot in healthcare stocks, it's the performance of selected hospital management companies. Naples, Fla.-based Health Management Associates, for example, still trades at 35 times this fiscal year's earnings, Skolnick says.
Some analysts continue to make a case for investing in such hospital stocks as Columbia/HCA Healthcare Corp., Nashville; Tenet Healthcare Corp., Santa Barbara, Calif., Quorum Health Group, Brentwood, Tenn., and Universal Health Services, King of Prussia, Pa. Rice cites "compelling" multiples of 15.5 times anticipated 1999 per-share earnings for the group.
Ed Gordon, a managing director in healthcare investment banking with New York-based SG Cowen Securities Corp., predicts the market shakeup will spur another wave of mergers and acquisitions -- just as the October 1987 crash did. That will create new opportunities, he says.
Providers that have "a strong balance sheet are probably going to be the beneficiaries of the reshuffling," Gordon says.