Hospitals Face a Baby-Boom Bust

"Medicare officials have become experts in reading Wall Street research to determine the profitability of each type of Medicare service," Villwock cautions. "Medicare can -- and will -- figure out how to price services to insure that providers stay in business but don't make money ... If the first major cuts are enacted in 2010 and the second major cuts are enacted in 2014, investors need to be positioning today to exit healthcare in 2009 and 2010."

Big hospital chains, such as Community Health and Tenet (THC Quote), have long counted on aging Baby Boomers to help their business instead. In fact, hospitals have made bundles replacing joints and clearing arteries for this huge population already.

Once those Boomers hit retirement age, however, they will rely on cash-strapped Medicare -- rather than employer-sponsored coverage from the likes of WellPoint (WLP Quote) or UnitedHealth (UNH Quote) -- to cover their hospital bills.

At one point, experts figured that Medicare would go broke after covering Baby Boomers for a single year. While current projections look more promising, they still assume that Medicare can pay for about a decade of Boomer care at best.

"At some point, this will have to be fixed," acknowledges Sheryl Skolnick, senior vice president of CRT Capital Group. "But I don't see a massive fix coming today. Congress never does anything before it has to."

Yet Villwock doubts that the new Democrat-controlled government, led by a President who swept into office on a powerful message of change, will continue to drag its feet. On the contrary, he looks for a full-blown Medicare reform bill by the first quarter of next year.