Hospital Trends Perk Up

The long-suffering hospital industry is feeling some relief.

While clearly still on the mend, the sector has seen its vital signs grow stronger during the current quarter. Patient volumes are rising. Bad debts from the uninsured appear to be stabilizing. And further complications -- such as draconian cuts to Medicare -- seem to be less likely.

Sensing a possible near-term recovery, one industry bear has now upgraded the group. Banc of America analyst Gary Taylor on Friday raised his recommendation on the sector from underweight to market weight -- and lifted both LifePoint (LPNT) and Triad (TRI) to buy -- on the basis of recent signs of strength within the industry.

For starters, Taylor said, many hospitals are reporting a jump in February admissions caused only in part by a spike in typically low-margin flu-related business. He also said physicians have been writing more new prescriptions, a trend that often signals a rise in hospitalizations. Finally, he added, fresh data indicate that Medicare looks solvent enough to delay any major cuts for the time being.

Even so, Taylor stopped well short of providing the sector with a clean bill of health.

"Despite this positive near-term stock call, we still have difficulty constructing a positive two-to-three-year view for the sector," Taylor wrote on Friday. "We do not suggest overweighting the group into a forward environment of softening commercial pricing yields, near-term Medicaid risk, still-fragile Medicare outlook, accelerating capacity/capital competition and rebounding labor costs."

Recovery Room

Still, Taylor at least sees reason for hope. In a recent survey of nonprofit hospitals, he said, 64% reported a rise in February admissions despite the longer month (due to leap year) in 2004. Moreover, he said, 52% posted higher volumes even after subtracting out flu and upper-respiratory cases. Importantly, he added, many of those hospitals attributed at least part of the jump to patients with commercial insurance.