More than four million previously uninsured Americans will enroll under Obamacare between October and March, one analyst estimates.JOE SKIPPER/Reuters
When the current U.S. political bun fight is over, public and private hospitals are expected to enjoy an estimated $134-billion (U.S.) increase in revenue over the next 10 years. This is good news for the five major publicly traded U.S. hospital stocks.
The money will come courtesy of the Affordable Care Act (ACA), otherwise known as Obamacare, which was passed into law in 2010. One aspect of the plan – online insurance exchanges where individuals and small groups can compare and purchase coverage plans – is now open for enrolment, with coverage beginning in January, 2014. The bipartisan Congressional Budget Office projects that 14 million Americans will receive health care insurance as a result of the plan.
Citigroup analyst Gary Taylor is unabashedly optimistic about the prospects for hospital stocks as the ACA takes effect. "We expect more than four million previously uninsured individuals to enroll between October and March," he writes, and forecasts "35-per-cent upside" over the next six months for hospital stocks such as HCA Holdings Inc. and Universal Health Services Inc., and for emergency-response stocks such as Team Health Holdings Inc. and Envision Healthcare Holdings Inc.
Bank of America analyst Kevin Fischbeck agrees there is an optimistic outlook for hospital stocks but adds an important caveat. "The benefits from reform will be more front-end-loaded than the market appreciates," he writes. "However, the benefits are eroded by Medicare and Medicaid rate cuts over time."
Short-lived or not, the added profits Mr. Fischbeck expects in 2014 as a direct result of ACA are significant. They range from a 5.5-per-cent bump for Universal Health Services, to 20 per cent for HCA Holdings and LifePoint Hospitals Inc., to a whopping 31.6-per-cent improvement for Community Health Systems Inc.
More insured Americans will mean higher levels of hospital traffic and higher billings. Less obviously, profit margins at hospitals will improve because there will be fewer uninsured patients unable to pay their medical bills. Analysts expect that stocks in the sector will eventually trade at higher price-earnings multiples as a result.
The hospital sector was already expected to benefit from demographic tailwinds before ACA became law. According to the Centres For Medicare & Medicaid Services, the U.S. hospital services industry was slated to grow by between 4 and 7 per cent per year because of the growing elderly population.
Caveats? The continuing U.S. government shutdown highlights the political risk in the sector. It is highly unlikely, however, that Republicans will succeed in their efforts to defund ACA. The legislation has already been passed in both the Senate and House of Representatives and the current battle is in many respects akin to attempting to put the toothpaste back in the tube.
The accompanying table shows the relevant statistics for the five major hospital stocks. Mr. Taylor at Citi favours HCA Holdings, but this would seem to be an outlier view in light of the low average analyst target price. The growth outlook is most positive at Tenet Healthcare Corp.
