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Buy Insurers Like UnitedHealth, Sell Hospitals Like HCA

Stocks in this article: HCA UNH

Hospitals are like hotels. The profits come from utilizing their capacity. The incentives under the Affordable Care Act are geared toward keeping people out of hospitals as much as possible, by guaranteeing wellness services and using data to make sure best practices are followed.

For-profit hospitals like HCA also face competition from nonprofits such as Mayo that deliver complete care solutions. Control over the money, and the patients, moves from doctors to insurers, who have incentives to keep costs down.

This is already affecting HCA's results. From 2009 through 2012, its annual revenue rose just 10%, from $30.05 billion to $33.01 billion. Net income for 2012 was $1.60 billion, down about one-third from $2.47 billion in 2011.

Hospitals don't go away under the Affordable Care Act. By buying front-line clinics, by using automation so that data can deliver integrated care, and by maintaining best practices to limit mistakes, they can still make money.

In Massachusetts, where something like Obamacare has been the law since 2006, Steward Health Care's hospitals regularly lose money, but they make up for it with front-line doctors' practices, outpatient clinics and insurance units. (Steward is owned by Cerberus Capital Management.)

The aim of their turnaround is to build the brand and limit "leakage" to more-expensive teaching hospitals, according to the Macadamya blog, which follows the space. They're trying to become an ACO, in other words, but finding it difficult with patient control.

Cost controls change the incentives in the health space. That was their intent. By marrying the companies that provide care to those that collect money, you create a virtuous rather than a vicious cycle. The place to invest is with companies that marry these incentives best, the insurance companies.

At the time of publication, the author owned no stock in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.
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