Hospital stocks should see gains in 2014, analysts predict

New insurance coverage for the patients most responsible for providers' bad debt means hospital stocks should have an even better run in 2014 than they did last year.

At the Nashville Healthcare Council's Wall Street event—where healthcare executives get to turn the table and pose questions to analysts—the outlook was unanimous: Hospital companies should be a favorite among investors.

Healthcare provider stocks gained an average of 44% in 2013, outperforming the Standard & Poor's 500, said Frank Morgan, an analyst at RBC Capital Markets, who predicted another strong year.

But he cautioned there could be volatility in share prices that parallels the highs and lows of enrollment numbers in insurance exchanges.

While the outlook is best for hospitals in states that expand Medicaid, there also was optimism that more states will do so to gain the federal match dollars they're leaving on the table. That would be good news not only for bad debt but also for volume.

“It's a huge benefit to have a state expand—I think that's an obvious statement,” said Ralph Giacobbe, an analyst at Credit Suisse. He added that Medicaid patients are three times more likely to access care than people without coverage. “The numbers certainly suggest that if someone has coverage, their utilization is higher.”

Not even the recent headlines around exchange enrollment and the relatively low numbers of previously uninsured people who are signing up could dampen enthusiasm for the sector.

“It's not really how many people get covered—it's who gets covered,” said Kevin Fischbeck, an analyst at Bank of America. “I don't care if a healthy person gets coverage as a healthcare investor,” because healthy people don't contribute to bad debt.

There was less agreement on how bad debt will be affected by the growing number of people with high-deductible health plans. On the one hand, if some of those people previously lacked insurance, some payment for hospitals is better than none.

But the plans could also dampen volume if individuals put off care—either until the fourth quarter when deductibles are met, or perhaps longer, if they don't meet their deductible in a given year.

Commercial managed-care providers are feeling the most pressure from the bumpy insurance expansion. But government contracts represent a big opportunity for health insurance companies, analysts said.

Fischbeck said he sees “huge growth” ahead for Medicare managed-care organizations as more people turn 65. Cuts to Medicare Advantage rates may give some investors pause in the short term, but “after that, it becomes one of the most interesting sectors in healthcare,” he said. “The growth story is just so compelling.”

Although moderator Wayne Smith, chairman, president and CEO of Community Health Systems, was supposed to be the one asking the questions, he was nevertheless pressed about his views on accountable care organizations, and he stuck to his guns.

A long-time critic of ACOs—previously calling them “another form of capitation”— Smith has criticized the concept for shifting financial risk from payers to providers, who don't have underwriting or risk assessment capabilities in place.

“We see people that are willing to take the risk today—but it's not real risk, it's incentive risk,” he said Wednesday. “When that converts to real risk, it'll be a new day.”

Follow Beth Kutscher on Twitter: @MHbkutscher