Price Cuts Are Hammering Hospitals

The health care sector could face another year of pain.

Already, financial experts have kicked off 2005 by warning that current wounds -- especially for hospital companies -- may continue to fester. Piper Jaffray analyst Darren Lehrich on Tuesday downgraded the nation's two largest for-profit hospital chains, HCA (HCA Quote - Cramer on HCA - Stock Picks) and Tenet (THC Quote - Cramer on THC - Stock Picks), due to both industry and company-specific concerns.

Lehrich worries that "two critical issues" -- politics and pricing -- could wound the hospital sector in the future. He warns that Congress may cut back on both Medicare and Medicaid spending in an effort to balance the budget. Meanwhile, he says, private insurance companies may also scale down their payments as they grow more powerful through consolidation and begin rolling out high-deductible consumer-driven health plans.

Even now, Lehrich notes, hospitals are already hurting. He points out that patient volumes have softened, bad debt expense has worsened and competition has heightened over time. Going forward, he believes that even industry leader HCA faces clear challenges as a result.

"While we continue to view HCA as having some of the best-positioned acute-care assets in the industry, we simply believe stiffer competition in several of its faster-growing, higher-profit markets will make it difficult for HCA to produce meaningful upside," Lehrich wrote on Tuesday.

Lehrich cut HCA from outperform to market perform and introduced a new target price of $43 for the stock. Shares of HCA slipped 39 cents to $39.65 after the downgrade.

Still, Lehrich clearly views Tenet -- which has spent more than two years in intensive care -- as the far sicker patient. After reviewing the company's vital signs, he decided that Tenet is even weaker than he once thought.

When downgrading the company's stock from market perform to underperform on Tuesday, Lehrich warned that Tenet could face "an extremely challenging 12 to 18 months." Moreover, he also questioned whether the company will ever recover enough to deliver the kind of margins he once expected.