Long considered a laggard, healthcare emerged last week as one of the relative bright spots of the weakening economy.
Yet while analysts tout healthcare as a haven during an economic downturn, the industry was not entirely spared from a stock market slide as investors reacted to the Sept. 11 terrorist attacks.
The stock price of Nashville-based HCA, the nation's largest hospital chain, had dropped 5.9% to $42.85 late last week, compared with its closing price before the attacks. Santa Barbara, Calif.-based Tenet Healthcare Corp.'s stock dipped 1.5% to $55.90 in the same period. Compared with the 14.4% drop in the Dow Jones Industrial Average, however, these declines were treated as relatively good news. The Morgan Stanley Health Care Provider Index, which tracks 14 companies, dropped 6.6%.
Some insurers took bigger hits. Oxford Health Plans and Aetna, both of which serve the New York metropolitan market, saw significant drops. Oxford's stock price sank 15.2% to $25.49 as of midday Friday, and Aetna's stock dropped 10.6% to $25.86. Aetna announced that it expects to lose $10 million to $15 million in its group life insurance business as a result of the attacks, with no impact on medical claims. Also affected were laboratory companies that reported delivery disruptions, analysts said.
But there were some positive signs as companies moved to reassure investors.
At midweek, Tenet gave a boost to hospital stocks by announcing that it expects earnings for the quarter ended Aug. 31 to increase 35% to 40% to between 65 cents and 67 cents per share, exceeding analysts' consensus estimate of 61 cents per share. Tenet's stock rose 2.8% to $56 per share after the announcement, although like other hospital stocks, it rose and fell several times last week. "We think the fundamentals that have been driving our economic performance and therefore our stock price are basically not changed by this tragedy," said Tenet spokesman Harry Anderson.
Nurse staffing firm Cross Country, based in Boca Raton, Fla., planned to proceed this week with a road show to market its initial public offering, the date of which had not been set. The road show was to kick off the day of the attacks, said James Forbes, a managing director at Merrill Lynch & Co., the lead underwriter.
"Our feeling is that the equity markets took a bruising, (but) healthcare, defense and energy stocks have been what's held up the most," Forbes said. "The investor's appetite seems to rotate into these sectors in times of trouble."
On the not-for-profit side, the Mayo Clinic Foundation was the first to issue bonds since the attacks, with a $100 million long-term offering. Investment bankers were eager to price the deal, partly because it had been heavily marketed just before the attacks. Leading off with Mayo was also a way to set a positive tone for future healthcare issues, said Thomas Whalen, a director at Salomon Smith Barney.
"We felt if there's any issue you're going to lead with, Mayo is the one. These are gilt-edged bonds. There's no better name in healthcare," Whalen said.
In a report drafted before the attacks and released last week, Standard & Poor's said not-for-profit healthcare "is beginning to emerge" from a late 1990s decline. It cited higher federal reimbursement, managed-care rate increases, operational improvements and growing volumes as reasons for optimism. The critical eye that had been on healthcare for so long has shifted to the transportation sector for now, said Martin Arrick, a director in public finance at the rating agency.
Though some analysts said Medicare funding probably won't be affected by an economic downturn, or even the disappearance of a federal surplus, concerns linger that states will slash their Medicaid programs to fix budget shortfalls. That could affect nursing homes and not-for-profit hospitals that rely heavily on Medicaid, analysts said.
"There's still a lot of uncertainty out there," said Frank Morgan, a healthcare analyst at investment bank Jefferies & Co., Nashville, who predicted that hospital stocks will outperform the rest of the economy in coming months.
Morgan said the federal government is unlikely to change Medicare rates in the coming months because lawmakers will be preoccupied with defense matters. He called "reassuring" the fact that healthcare stocks were down less than the rest of the market.
"That's where the money flow is going," he said.