Tom Gallucci, a managing director of Lazard Capital Markets, says there's probably not much more the investor-owned chains can do to trim labor costs further. That includes contract labor, which they have been able to cut because of weak volume, he says. Another factor trending against declining labor costs is the increase in employment of physicians, although this market-specific strategy may not add enough physicians to the salary expense line to be significant, he adds.
Gallucci and Darren Lehrich, a healthcare services stock analyst for Deutsche Bank, see cost-cutting opportunities in supply expense in 2011. In his 2011 outlook report, Lehrich writes that that is especially true for the four publicly traded hospital chains using HealthTrust Purchasing Group—Community Health Systems, Health Management Associates, LifePoint Hospitals and Universal Health Services.
On volume, Gallucci suggests that steady employment figures would bolster the hospital sector, as at least the number of patients covered by managed-care plans would likely hold steady, rather than continuing to fall.
“I don't see a lot of people expecting employment to get a lot better, but I also don't see a lot of people predicting that it will get a lot worse either,” he says. If the employment level is stable with 2010, then at least the companies will get to compare their results to the tough volume figures they posted in 2010—easier comparisons could make 2011's figures look better in the eyes of investors, he says. Lehrich agrees that any improvement in the jobs picture will benefit investor-owned hospitals, in results and investor sentiment.
Lehrich also expects the chains to continue to pursue a lot of hospital acquisitions. Many tax-exempt hospitals, particularly smaller ones, are looking for ways to tap into more capital to fund construction or renovation projects, physician alignment strategies and healthcare IT projects, and investor-owned hospital companies will be the primary supplier of that capital, he writes.
Most of these deals will be in suburban and rural markets rather than urban markets, Gallucci contends. There could be another big urban deal such as the ones in Boston and Detroit that grabbed headlines in 2010, but those deals are not the norm, Gallucci says.
The biggest deal on the horizon is the pursuit of Tenet Healthcare Corp. by Community Health Systems. The chain's initial offer for Tenet was valued at $7.3 billion in cash, stock and assumed debt. Gallucci says that corporate takeover drama could last six months or more.