Health Reform Act Gives Hospitals Potential Upside

By Kristina Zucchi, CFA | September 28, 2010 AAA

Underlying the healthcare debate over the past few years has been the state of the hospitals and the uninsured. Public hospital companies have faced significant pressure from investors as the levels of bad debt have increased, the number of uninsured has grown and the profitable medical procedures have moved from the hospital setting to ambulatory and specialty surgery centers like NovaMed (Nasdaq:NOVA) and Amsurg (NYSE:AMSG).

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The History
The largest hospital company, HCA, went private several years ago, in part to get away from the equity capital swings and constraints. Other hospitals, such as Community Health (NYSE:CYH) and Tenet Health (NYSE:THC), have watched their stock prices hit bottom and begin the slow climb up, while specialty and ambulatory surgery centers, like Amsurg, have been pretty consistent during the downturn. Companies like AMSG, however, are not immune to reimbursement risk, especially when Medicare announces changes as seen with AMSG's price drop from $17 to $13.60 in mid-February of 2009. Conversely, THC saw its stock fall from $6.26 to $1.21 from September 2008 to November 2008 and it remained at these low levels for over five months. Despite these risks, the surgery centers tend to recover faster and are more consistent performers. (For more, see Investing In The Care Side Of Healthcare.)

The Future
Despite the stock pressures felt by the hospitals over the past three years, these companies have several positives. The healthcare reform act goes a long way to reduce the greatest pressure facing hospital companies - the uninsured. Providing insurance to the 32 million uninsured in the U.S. should alleviate the bad debt expense that has plagued hospitals. Additionally, the law placed a ban on the creation of new physician-owned hospitals and the expansion of existing ones. As such, the specialty and ambulatory surgery centers that have been competing for and winning the most profitable procedures have just become less competitive, bringing a lucrative revenue stream back to the hospitals.

These positives may be offset by the level of reimbursement that hospitals may experience for these newly insured patients, but industry experts tend to think that since the hospitals were taking a write-off on these patients anyway, any reimbursement is a positive. While the stocks have seen significant appreciation since the bill was passed and signed, with THC appreciating over 38% and CYH over 34%, from the passage in the House to the signing of the bill on March 23, 2010, the implementation of the bill still has not occurred, so the impact is still unknown and creates investment opportunity. (For more, see Investing In The Healthcare Sector.)

Bottom Line
As we come to the beginning of the employer-sponsored renewal coverage time period, the level of newly insured should begin to slowly increase and the impact of the bill's changes should begin to be seen in the hospital setting. While these changes are projected to take effect extremely slowly, the hospitals should experience the positive impact almost immediately, giving investors a glimpse into the potential positive profit when the bill takes effect in its entirety. (For more, see Healthcare Sector: Play Or Stay Away?)

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