Hospital Rally Looks Shaky
Hospital companies still lack a clean bill of health.
Granted, they seem to be recovering. They complain less about pain caused by the uninsured. They feel pretty good about recent admission trends. And they have seen their share prices rise on brighter hopes for the future.
But some health care experts doubt that the sector is truly on the mend. Indeed, UBS analyst Kenneth Weakley -- who called the industry downturn early -- this week reiterated his dark prognosis for the group. He listed several symptoms of trouble.
"The combination of federal budget pressure, HMO growth into Medicare, falling occupancy trends, weak admission growth prospects and employer pressure to institute cost-containment strategies is not the foundation of a sustainable long-term rally in the group," he wrote on Monday.
To be fair, Weakley did acknowledge that hospital stocks have enjoyed a nice rebound in recent months. He noted, for example, that both
HCA
(HCA) - Get Report
and
Community Health Systems
(CYH) - Get Report
have posted gains of more than 20% in an otherwise flat market. But he doubts those rallies signal a true recovery for the sector.
Moreover, he believes that hospital investors feel the same.
"Most investors admit to us that the economic profile of the sector is indeed poor," Weakley wrote, "but that return benchmarks demand that one be 'in' groups that are rallying regardless of long-term prospects."
Weakley suspects that health care investors have been rotating out of pharmacy stocks -- due to the Vioxx recall -- and into hospital names as concerns about bad debt from the uninsured have abated. But he questions whether hospitals have cured their bad debt problem at all.
Indeed, he is still trying to figure out how uninsured patients suddenly crippled the sector in the first place. He says the uninsured population has been growing for two decades but, for some reason, only began seeking hospital care in large numbers in recent years.
"The key public policy issue with the uninsured has always been that these individuals do not receive health care when they in fact need it -- not that they receive care but then choose not to pay for it," Weakley noted. "Why is it in this cycle that the uninsured feel less restricted to receive very expensive hospital services?"
Ultimately, Weakley raises more questions than he answers. Most notably, he wonders when the sector's glory days might return.
Faded Glory
In retrospect, the past doesn't look all that glorious.
Weakley points out that hospital admission growth actually fell every year -- except one -- between 1983 and 1994. After that, he says, hospital demand finally picked up with the booming economy in the late 1990s. But he wonders whether that pattern will repeat itself in the future.
"It is our steadfast opinion that the seven solid years of 1997 through 2002 -- in terms of volume, occupancy and pricing -- do not represent the 'normalized' trend," Weakley wrote. "Nor should one expect a return to those specific dynamics anytime soon."
In the meantime, Weakley pointed to lingering signs of weakness across the sector. He noted that same-store admissions -- even excluding the results from troubled
Tenet
(THC) - Get Report
-- fell more than 2% in the fourth quarter. He said that
Universal Health Services
(UHS) - Get Report
weathered the smallest decline. Even so, he said, the company has still seen admissions fall for six quarters in a row.
In addition, he said that both Universal and
Triad Hospitals
(TRI) - Get Report
posted weak pricing gains in the quarter. He also questioned whether pricing improvements at
Health Management Associates
(HMA)
will prove sustainable.
Weakley did spot pockets of strength, however. He said that Community Health reported solid pricing growth and that
LifePoint Hospitals
(LPNT)
delivered "blowout results." He singled out LifePoint's margin improvement as the best in the sector. He also applauded the industry's overall improvement in cash flow.
Still, Weakley voiced far more caution than hope. He remains clearly worried about the group. And he is far from alone.
Peter Young, a business consultant at HealthCare Strategic Issues, shares Weakley's long-term outlook for the sector.
"Large investors not in tune with detailed hospital operations will likely find, as Ken pointed out, some short-term upward value," Young said. "But by June, the rosy outlook will pale as the continued industry pot of problems simmer."