Wall Street still loves investor-owned hospitals
Wall Street analysts are once again betting on the publicly traded hospital sector-which means the buoyant run that the chains have had in the stock market could well continue this year.
At the Nashville Healthcare Council’s Wall Street event, which drew 550 attendees Wednesday, the city’s many healthcare executives had a chance to turn the tables and grill the financial analysts who cover them. What they heard is that there’s still room for growth for acute-care hospitals, despite lingering regulatory uncertainty.
That uncertainty includes a pending U.S. Supreme Court opinion expected mid-year in King v. Burwell, which could jeopardize the subsidies for health plans purchased through the federal marketplace.
Throughout 2014, hospitals chains continually raised their earnings projections for investors after seeing a larger-than-expected impact from healthcare reform. Roughly 50% of that benefit came from the exchanges, said Darren Lehrich, an analyst at Deutsche Bank. In a worst-case scenario, about 5% of 2016 earnings before interest, taxes, depreciation and amortization could be at risk, he estimated, with some companies such as HCA more exposed in states that are adamantly opposed to healthcare reform.
Still, he and other analysts agreed that there will be workarounds if the Supreme Court does away with the subsidies. In addition, more holdout states are likely to warm to the Patient Protection and Affordable Care Act-setting up their own exchanges and expanding Medicaid, they predicted.
A ruling against the subsidies will impact not only providers but insurers, with managed-care companies concerned about adverse selection because the people who buy insurance with subsidies tend to be healthier, said Joshua Raskin, an analyst at Barclay’s Capital.
Community Health Systems CEO Wayne Smith, who moderated the panel, asked the analysts to pick the stocks that investors should include in their portfolios this year.
Perhaps knowing their audience, they selected acute-care hospitals-and particularly the Nashville-based contingent of HCA, Community and LifePoint Hospitals-as well as behavioral health hospitals, ambulatory surgery centers and other outpatient-care providers.
But they also liked the physician services sector, naming TeamHealth and Envision Healthcare Holdings as two promising tickers.
And consolidation, they said, could create some new and unusual bedfellows among the different healthcare sectors. “I do think people are looking at combinations and some combinations that are new and different,” said A.J. Rice, an analyst at UBS, citing tie-ups in the post-acute care sector that have brought together rehab providers with home health or skilled-nursing providers with home health.
Smith, who had to do battle with Health Management Associates’ largest investor to seal the deal that made it the largest chain by hospital count last January, wanted to know why activist investors have been more likely to churn the waters than they have in the past.
One answer was that as more money flows into healthcare, activist investors get more opportunities to muckrake. And they’re making waves: 73% of activists who have pushed for new board members have been successful, Lehrich said.
“Very high batting average,” he said. “They’re having an impact.”
Smith also took a dig at his larger neighbor in the for-profit hospital belt, the Wall Street darling that typically has the strongest volumes among for-profit chains. “If our volumes don’t get better, we’ll need to buy HCA,” he quipped.
