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What Reform Means for Hospital Stocks


Why a health-care bill could be a boon for hospitals.

It's understandable to feel a bit sick when you're trying to decide whether to throw your money into a hospital stock. But many analysts believe that, despite the current turmoil around health-care reform, hospital company stocks will continue to rise as more Americans win access to insurance coverage through the legislation.

But gains will be modest, analysts say, so don't tuck all your money into one hospital bed.

This past weekend, the House passed health-care reform bill HR 3962 by a narrow margin. The bill, which faces a tough reception from the Senate and promises to bring "affordable, quality health care to all Americans," details a plan for a government-backed insurer.

It's likely that any plan that becomes law, whether it includes a government-backed entity or not, will lower the amount of reimbursements that doctors and hospitals get from government-sponsored programs like Medicare and Medicaid.

Yet many analysts are betting that the government-backed insurance program detailed in the House's plan won't stick when the bill goes in front of the Senate for a vote.

Goldman Sachs analyst Shelley Gnall calls it "unrealistic," but expects that broader insurance coverage for the 46 million Americans currently uninsured will become a reality.

That reality will mean less bad debt for hospitals because they currently have to contend with losing money when treating under-insured or uninsured patients. While health-care reform promises to lower the number of bills going unpaid from these sources, Gnall foresees some further risk from patients newly insured through the legislation because many will likely still struggle with the high cost of health care.

Gnall adds that the higher number of insured patients will be able to offset some of the declines in Medicare and Medicaid reimbursements from the government.

"We expect a very modest positive impact [to the hospital sector], based on the extensive insurance coverage expansion," says Gnall, who added that the Goldman Sachs model for the sector wasn't quite as favorable as some other models.

Industry executives agree that reform means a brighter future for the sector and its stocks.

"It is still too early to make definitive statements about the likely outcome for legislation in Washington," said Tenet Healthcare (THC) Chief Executive Trevor Fetter on a conference call with investors recently.

Yet Fetter remained hopeful that any legislation passed into law would mean an upside for the company.

"Tenet, by virtue of our geographic footprint, especially with our major exposures to Florida and Texas with their significant uninsured populations, has borne a disproportionate burden from the costs of providing health care to the uninsured. From this perspective, if health-care reform succeeds in providing coverage to a large segment of today's uninsured population, this could be very helpful to us."

Hospital stocks like Tenet and its competitors, Universal Health Services (UHS), LifePoint Hospitals (LPNT), and Community Health Systems (CYS), have been gaining ground since the second quarter of 2009, despite lower profits year-over-year.

Tenet and LifePoint both reported mixed third-quarter results last week that squeaked past analysts' expectations and gave the stocks a boost as trading began for the week.

For more on the health-care sector, see Digging for Deals in Health Care.
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