Outlook 2014: For-profit hospitals

Publicly traded healthcare companies had another positive run in the stock market in 2013, as investors continued to be optimistic about healthcare reform. But to keep up the momentum, the chains will need to continue to make bold moves, particularly around consolidation.

On 2013's last day of trading, HCA closed 58% higher than it did Dec. 31, 2012. Tenet Healthcare Corp. closed 29.7% higher, and Community Health Systems 21.7% higher. Universal Health Services rose 68% and Health Management Associates, 40.6%.

The Standard & Poor's 500 added 29.6% in that time.

It wasn't just hospital chains that enjoyed a boost. The healthcare industry as a whole—including post-acute care companies such as Amedisys (up 29.4% over the year), Gentiva Health Services (23.5%) and Almost Family (59.6%)—similarly saw their share prices increase despite downward pressure on reimbursement.

“The market has really treated (the Affordable Care Act) quite well,” said Clark Knapp, principal at Deloitte Consulting.

See a slideshow of the people to watch in 2014

But Knapp also pointed out that the goal of the ACA is to take costs out of the system and ultimately drive down reimbursement. Hospital chains already are struggling with weak inpatient volume, which has been an ongoing drag on quarterly earnings. And the threats of reimbursement cuts and payment rate rebasing have dogged post-acute care operators.

Some providers, such as DaVita HealthCare Partners, received good news on the regulatory front that helped drive up their share prices. After the CMS chose to delay a deep cut to dialysis rates, DaVita ended the year trading 14.7% higher than it was on Dec. 31, 2012.

But for companies that weren't so lucky, the response was to ramp up their cost-cutting efforts and turn to acquisitions to gain scale or diversify. And with debt expected to remain cheap, there's every reason to think that strategy will continue in 2014.

“I think the robust debt market will continue to drive mergers and acquisitions,” said James Goody, vice president and portfolio manager at Associated Bank. “It's really an opportunistic time to take advantage of low interest rates.”

Jonathan Morphett, managing director at investment bank Avondale Partners, also expects the public and private equity markets to remain open to healthcare companies. That could mean more financial buyers rolling up companies in lucrative markets including behavioral health and revenue-cycle management. It also could mean more initial public offerings such as Envision Healthcare Holdings' $966 million listing on the New York Stock Exchange.

Envision's three business units include ambulance services, physician staffing and population health offerings—all of which are expected to benefit under healthcare reform. Other notable IPOs in 2013 included Premier's debut in September and Surgical Care Affiliates' listing the following month. All three IPOs have performed strong out of the gate.

“My sense is that will continue to be robust in 2014,” Morphett said.

Private equity firms are “hungry for investments,” both for platform deals that bring them into a new sector and deals that round out their existing portfolio, Knapp said.

Follow Beth Kutscher on Twitter: @MHbkutscher