After being overshadowed by the new economy and consumed by the effects of the Balanced Budget Act of 1997, for-profit hospitals have emerged from behind the clouds with impressive earnings growth potential. And the forecast for the coming year is continued sunny skies.
With a few notable exceptions, the fortunes of most of the sector have rallied, thanks to industry trends such as improved reimbursement from the federal government and from managed-care companies that are likely to continue this year.
From an investment standpoint, the softening of the broader economy has led investors who once favored technology investments to flock to hospital companies as a safe haven in an increasingly uncertain investment world, driving stock prices of the publicly traded hospital chains up nearly 100% in the past year. If share prices continue to rise, that will help the for-profit companies complete more strategic acquisitions.
"Most hospital stocks have risen significantly, which puts them in a better position as a buyer either being able to raise capital or use their stock if they want to buy another large public company," says Stephen Monroe, a partner at Irving Levin Associates, New Canaan, Conn., which tracks healthcare merger and acquisition activity.
The environment has also grown riper for initial public offerings, and the coming year could see at least one more hospital company -- Franklin, Tenn.-based Iasis Healthcare -- go public. The company got its start by acquiring 15 hospitals in 1999 and recently shook up its top management in hopes of paving the way for a possible public offering.
While they make up a small percentage of U.S. hospitals overall, investor-owned facilities have outpaced their not-for-profit counterparts in increasing patient volumes and improving operating profits. Because they have had stronger earnings and greater access to capital than some of the not-for-profits, they have been able to invest in their existing facilities, which has solidified their market presence.
HCA-The Healthcare Co., the nation's largest hospital chain, is a prime example of a company whose strategy has shifted from growth through acquisitions to growth through investments in select strong markets. The company has largely resolved its criminal and civil charges, and Wall Street appears to be mollified by the $95 million criminal settlement it reached last month and an earlier $745 million civil settlement.
With its current portfolio of 196 hospitals, the Nashville company is well-positioned to have at least 15% earnings growth in 2001, analysts are predicting.
Perhaps the largest deal slated for completion early this year will be Dallas-based Triad Hospitals' acquisition of Quorum Health Group, Brentwood, Tenn., announced in October. The sale, if consummated as expected during the first quarter, will create the nation's third-largest investor-owned hospital company with 53 hospitals initially. Triad is likely to sell Quorum's hospital management company, Quorum Health Resources, as well as five to nine nonstrategic facilities.
The Triad-Quorum deal is probably the largest consolidation coming down the pike, but it probably will not be the only acquisition activity on the horizon. Most analysts say they expect acquisitions to continue or increase as the for-profit companies such as HCA and Tenet Healthcare Corp. of Santa Barbara, Calif., solidify their market presences. Also active will be rural hospital chains such as Health Management Associates, Naples, Fla.; HCA spinoff LifePoint Hospitals of Brentwood; and Brentwood-based Province Healthcare Co., all of which are expected to pick up not-for-profit community hospitals in need of capital.
"We will not have a return to the mid-'90s feeding frenzy," Monroe says, "but it could be more active than it was certainly in the first half of 2000."
The past year separated the strong from the weak as far as for-profit hospital chains were concerned. A few did not make it out of their slump after the Balanced Budget Act of 1997 took effect.
Those that were in weaker financial positions when the reimbursement cuts hit had a tough time of it in 1999. Brentwood-based New American Healthcare Corp. liquidated its hospitals through the U.S. Bankruptcy Court, Houston-based Paracelsus Healthcare Corp. filed for bankruptcy protection and is trying to hold onto its 10 hospitals, and NetCare Health System of Nashville sold three of its 10 hospitals and is expected to sell the rest to a newly formed subsidiary of an Atlanta-based consumer products company by the end of this month.