Analyst Sees Hospital Stocks Continuing to Rise

A Jefferies analyst recommended buying hospital stocks on Monday, saying their rally this year should continue as many uninsured patients get coverage due to the Affordable Care Act.

Jefferies analyst Brian Tanquilut noted that stocks of publicly traded hospitals already have risen this year by 32 percent as a group.

“We continue to believe that ‘reform’ will end up having a net positive impact for most hospitals as bad debt for the group should decline notably as a result of insurance coverage expansion,” he wrote in a report to investors.

Bad debt, meaning bills patients cannot or will not pay, has long been a problem for hospitals. It tends to increase during periods of high unemployment, as people lose job-related health insurance.

Under the Obama administration’s health care overhaul, roughly 30 million uninsured Americans are expected to gain coverage, either through new health care marketplaces, called “exchanges,” or through expansion of Medicaid, the state-federal program that provides health care to the poor and disabled.

In two additional reports, Tanquilut changed his ratings from ‘Hold’ to ‘Buy’ for two big hospital chains — Community Health Systems, with 135 hospitals and more than 20,000 beds in 29 states, and Health Management Associates, which has 70 hospitals with about 10,500 beds, mainly in rural areas in the South.

The analyst also nearly doubled his 12-month price targets for both those systems. He raised Health Management Associates from $7.50 per share to $14.50, and Community Health from $29 per share to $56.

The other two hospital chains cited in the report are HCA Holdings, Inc., rated as a ‘Buy’ with a $37.92 price target, and Tenet Healthcare Corp., also rated a ‘Buy’ with a $44.22 price target.

Shares of all four companies barely budged Monday. HCA fell 14 cents to $37.78 per share, Community Health dipped nine cents to $44.34, Tenet declined one cent to $44.21 and Health Management edged up 7 cents to $12.33.

For the group, Tanquilut wrote that fundamentals driven by the Obama administration’s health care overhaul “will continue to improve over the course of the year and drive incremental stock performance.”

Among the factors he cited were “recent disclosures from hospital management teams” indicating they expect to be able to charge the new health care exchanges rates for patient treatment closer to what commercial insurers pay than to the much-lower reimbursements Medicare and Medicaid pay.

Tanquilut also noted that GOP-controlled states that so far have decided not to expand their Medicaid programs might reverse course, following the example of Arkansas. That state recently worked out a compromise with the federal government to expand its Medicaid program — but by putting the new beneficiaries into private, exchange-based health plans.

“Given the significant amount of federal dollars that states would be passing up by rejecting Medicaid expansion, a GOP-friendly framework” like the Arkansas deal “should open the doors for other states” to expand in the same way, he wrote.

One other variable could have a big effect on hospitals’ profitability, Tanquilut noted. Amid negotiations in Washington to reduce the federal budget deficit, it appears that potential cuts to the rates paid to hospitals for treating Medicare patients “would be manageable for larger hospital providers,” he wrote.