Reform brightens for-profit outlook; chains see share prices surge

Despite worries about a storm of reimbursement cuts expected to rain on all sectors of the healthcare industry, shares of for-profit hospital operators remained buoyant in the early weeks of 2013.

The acute-care chains continued what was already a strong run last year as investors calculated that the benefit of having more insured patients would ultimately outweigh any payment squeeze.

As the closing bell sounded on Jan. 25, shares of hospital operators showed sizable gains over their performance four weeks earlier, during the last full week of 2012.

HCA, Nashville, and Tenet Health Corp., Dallas, have gained about 25% over the period, while Community Health Systems, Franklin, Tenn., is up nearly 29%.

“The primary driver has been investors thinking about 2014,” said Kevin Campbell, an analyst at Avondale Partners, pointing to when key provisions of healthcare reform go into effect. “Patient mix is going to continue to improve in 2015 and in 2016.”

Campbell also noted that Avondale's financial models for the industry have generally not included the impact of sequestration, which even if implemented, is likely to be spread out over a long term.

“In reality, I think that will be outweighed by the benefits of reform,” he said.

If payment cuts are implemented, they're likely to be felt equally across the acute-care sector, although Universal Health Services, King of Prussia, Pa., is the least exposed to Medicare because of its behavioral health division, Campbell noted.

UHS is trading up about 21% over the four-week period.

Frank Morgan, an analyst at RBC Capital Markets, similarly noted in his 2013 industry outlook that most estimates are already pricing in a 2% cut related to sequestration—so one of that size wouldn't shock the market. He also noted that it should be something that providers can absorb.

The investor optimism seemingly contrasts with a more somber report from Moody's Investor Service, which said the credit outlook is negative for not-for-profit hospitals as providers stare down the prospect of $300 billion in payment cuts over the next six years.

But Campbell noted that for-profits are better able to weather the reimbursement pressure because of their ability to access the debt and equity markets to make acquisitions. Takeover deals have been one of the major drivers of revenue growth for the investor-owned chains and one of the ongoing themes of 2012.

Not-for-profit hospitals, in contrast, have to rely on philanthropic support as well as the municipal bond market to raise capital, according to John Stein, who leads the for-profit healthcare business at Bank of America Merrill Lynch. As a result, he saw no sign of the consolidation trend slowing.

The investor-owned groups also “run a tighter ship,” Campbell said. “The real way to survive is to take costs out of the system.”