Investor-owned hospital companies have had a rough time lately-at least with investor confidence.
During the first quarter of 1999, in fact, hospital company stocks were near the bottom of the barrel of all healthcare stocks, plunging 32.8% compared with an average industry decline of 4.7%, according to HealthCare Markets Group, a healthcare investment banking firm based in Hilton Head, S.C.
But hospital company stocks seem to be rebounding, thanks to a leveling off of the effects of the Balanced Budget Act of 1997 and the improbability of more Medicare reductions. Among the companies that saw their stock rise following their most recent quarterly earnings reports were Columbia/HCA Healthcare Corp., Health Management Associates, Quorum Health Group, Tenet Healthcare Corp. and Universal Health Services.
The latest round of earnings statements from the largest hospital companies showed somewhat improved profits, although growth outlooks were not wildly optimistic (April 26, p. 17).
As Deborah Lawson, director of healthcare equity research at Salomon Smith Barney in New York, put it, investor confidence improved not so much because hospital companies reported extremely strong earnings but because the companies met analysts' expectations, which they had been failing to do.
"The fact that expectations were met is very significant to investors," she says. "They have a handle on how to give earnings guidance, and that gives investors confidence."
In addition, there have been signals from Washington that lawmakers are loath to cut more from Medicare payments to providers, which creates a more stable investment environment.
Most hospital company stocks declined early in the year and began climbing steadily in April, regaining much of their value. Many jumped immediately after their earnings were released (See chart).
"I really think the stocks are performing better in large part due to the lack of expectation of more Medicare cuts. And coming up on the second anniversary of (the Balanced Budget Act of 1997), there's not a whole lot more to be implemented," Lawson says. "The surprise factor may be limited."
Lawson says that after several quarters of disappointments, she expects hospital companies at least to meet expectations during the next couple of quarters.
"With every quarter, confidence should increase, and valuations should increase," she says. "We don't expect earnings levels to increase that much, but we do expect confidence in those earnings to increase, and that should drive stocks up."
In a briefing following Columbia's earnings release, Senior Vice President Victor Campbell said the company's most recent quarter was a turning point of sorts. It marked the first time in years that Nashville-based Columbia's financial statement, including a $322 million profit, showed an operational focus rather than a restructuring one, he said.
"I think we clearly have now turned the corner, and I think this first quarter is not a quarter of restructuring," Campbell told reporters.
Jeff Prescott, Columbia spokesman, says the quarter's operational focus is likely to be reflected in future quarters. An exception will be the company's spinoff of two groups of hospitals, which will enable it to concentrate more on its core markets-urban facilities with highly integrated networks (See story, p. 28).
When Tenet, the second-largest for-profit hospital company, released its earnings showing a drop in quarterly profits to $124 million, its stock price climbed. Lawson attributes the seemingly irrational stock jump to relief among investors that Tenet's results were not even worse and that admissions volumes were recovering.
"I think the most important thing to look at in this situation is our stock price, which has done very well, as did the whole sector," says Tenet spokesman Lance Ignon. "Admissions are up, due to a later than usual flu season. We expect a much smaller cut from the balanced-budget act, so Medicare cuts will be far less severe. Also, our bad debt is improving."
Santa Barbara, Calif.-based Tenet, like Columbia, is shedding hospitals to streamline operations and hopes to divest about 20 before year-end.
Brentwood, Tenn.-based Quorum managed to turn around some of its operational difficulties and post an $18.4 million profit for the quarter ended March 31, which helped its stock price. James Dalton Jr., Quorum's president and chief executive officer, attributes the figure to strong admissions in March, fewer operational problems in several markets and the sale of troubled Park Medical Center, a 165-bed facility in Columbus, Ohio.
"We're very pleased by the progress we've demonstrated during the quarter ended March 31," Dalton told investors during a conference call announcing the results.
For Naples, Fla.-based HMA, a hospital company that owns primarily rural hospitals in the Southeast and Southwest, the problems caused by the 1997 balanced-budget law have created acquisition opportunities.
"It's a double-edged sword," says William Schoen, HMA chairman and CEO. "Stand-alone hospitals are having a very hard time working with those Medicare reductions. Therefore, it gives us an opportunity for acquisitions in nonurban markets."
Last year the company's acquisitions added about 600 beds, and so far this year, the company has announced deals that will add 800 beds.
Lawson views this as a sign for investor enthusiasm about the company.
"We believe HMA is in the enviable position of being one of the only active acquirers in the marketplace and expect that pricing for such acquisitions will possibly decline, further enhancing the returns that HMA can generate on acquisitions," she wrote in a recent research report about investor-owned hospital companies.
Kirk Gorman, chief financial officer at Universal, based in King of Prussia, Pa., agrees that hospital companies may be seeing some light at the end of the tunnel.
"You're seeing in the results being reported by most hospital companies that most have made adjustments and are in the process of recovering some of the financial stability they used to have," he says. "It looks like everybody has met the challenge, and the whole industry is back on its feet."