Expect consolidation

Health reform promises years of uncertainty as regulators and the industry adapt to the far-reaching law, but one trend seems all but ensured, according to analysts: hospital consolidation.

Poorly performing hospitals—often solo hospitals or small health systems—will find it that much harder to compete as changes in the newly passed law squeeze reimbursement and raise pressure to curb costs, said analysts with credit-rating agencies last week.

Large health systems that operate in multiple states, more commonly for-profit hospital chains, are more likely to be at an advantage, thanks to the scale and diversity of their operations, analysts said. Jeff Schaub, an analyst with Fitch Ratings, noted large systems are also more able to shed unprofitable services or facilities that drag down performance.

Reform adds to significant pressure on weak hospitals to consolidate from the economy, recent credit upheaval, and insurance consolidation, said Mark Pascaris, a Moody's Investors Service vice president and senior analyst.

Expanded insurance coverage under the law will reduce the expense of unpaid medical bills, credit agencies said, but the reform package also reduces Medicare hospital spending by $155 billion over a decade.

Standard & Poor's noted dealmaking among insurers may increase as companies prepare for new mandates on how much revenue must be spent on medical costs and changes to Medicare Advantage.

Investors did not appear overly worried about the industry's prospects under the sweeping reform.

Municipal markets, where not-for-profit hospitals borrow for construction and technology, were unfazed by headlines that declared the health reform law historic in reach, said portfolio managers. Kenneth Naehu, managing director and head of fixed income for Los Angeles-based Bel Air Investment Advisors, said last week it was too soon to determine who will gain or lose under the law, and too early for investors to make any decisions.

Christopher Alwine, head of the municipal bond group at investment firm Vanguard, said in an e-mail that health reform made no mark on trading and noted the law delays most changes until 2014.

Meanwhile, Wall Street gave healthcare stocks a boost early in the week as Congress put an end to a year of uncertainty for the industry, said Alex Morozov, associate director of healthcare research at Morningstar.

Gains last week underscored relief that details of health reform—though not all favorable to the industry—were finally settled, Morozov said. Pharmaceutical manufacturers, insurers and for-profit hospitals stand to gain from newly insured patients under the law's push to expand insurance coverage, he said. Benefits will be offset by new insurance regulations and fees on drug and medical-device makers, Morozov added.

Healthcare companies in the Standard & Poor's 500 index climbed 0.59% on

March 22, the day after Congress passed the bill, and rose slightly higher on March 23 before receding 0.86% on March 24 and ebbing another 0.52% on March 25.

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