The wounded hospital sector is enjoying some long-awaited -- if temporary -- relief from its pain.
Aided by recovering patient volumes and a reprieve from the uninsured, the group is poised to beat Wall Street expectations for the first time in years. Indeed, industry leader
already preannounced first-quarter earnings that were a full 30% ahead of the consensus estimate. Thus, some believe that other hospital companies will follow suit with upside surprises of their own.
Banc of America analyst Gary Taylor points to
as the most likely candidates. He estimates that both companies could top analyst expectations by a nickel or more. And he suspects that the industry, as a whole, may continue to rally for a little while longer.
"Our 1Q05 EPS bias has clearly swung to the positive in recent months," Taylor wrote last week. And "we believe recent strong hospital stock performance could continue at least through 2Q05 reporting in late July/early August."
Taylor has based his positive outlook, in part, on recent monthly surveys of nonprofit hospitals reporting an uptick in their business. Moody's has also issued a study showing improvements in the nonprofit group. But many experts, including Taylor, have stopped well short of declaring the industry cured.
Notably, Taylor views bad debt from the uninsured -- which has pressured hospital results for two years -- as a lingering problem. So does UBS analyst Kenneth Weakley, who has been cautious on the group for some time.
Meanwhile, Fitch points to bad debt expense as just one of many challenges facing the hospital sector. The ratings agency acknowledges that it did upgrade more hospitals than it downgraded in the most recent quarter. But it views that development -- which reverses a five-year trend -- as temporary in nature.
"The acute-care sector forecast is supported by sound management and business strategies, the continuation of a relatively low cost of capital and stable near-term Medicare funding," Fitch wrote last week. "However, mounting capital needs, increased competition, labor shortages, upcoming revenue constraints from Medicare, Medicaid and managed care, and rising bad-debt expense are likely to lead to stress and instability throughout the sector beginning in 2006."
The hospital stocks, which escaped last week's market punishment, did undergo a correction on Monday. But they were faring relatively well on Tuesday. HCA rose 25 cents to $53.49. Triad jumped 67 cents to $50.92. And Universal inched up 6 cents to $52.80.
Taylor offers evidence of at least a partial recovery for the group.
Of the 90 nonprofit hospitals that responded to his recent survey, he says, 58% reported higher March admissions than they did a year ago. Moreover, he noted, they credited a spike in typically low-margin flu cases -- which nearly tripled from a year ago -- for only part of that growth. Even after excluding flu cases, he said, nearly half of the hospitals reported higher patient volumes.
A large majority did post a jump in Medicare business, he said, which was probably helped by the rise in flu cases. But he added that some 57% of the hospitals treated more patients with commercial insurance as well. For hospitals, commercial business tends to be more lucrative than most.
"The survey appears to validate our March call that an uptick in commercial demand is percolating," wrote Taylor, who has a market-weight rating on the sector. And "we've long argued that secular growth in demand would be one factor leading us to a more positive stance on the group."
Still, Taylor has yet to see clear improvement in the bad debt trend. Rather, he believes that some companies are simply classifying more accounts as charity cases upfront instead of declaring them as bad debt expenses down the road.
"Higher charity care write-offs are expected to lend the appearance of a material sequential decline in bad debt," he wrote this week. But "we urge investors to recast the income statement as though the charity care was reported in the net revenue line before drawing conclusions relative to operating trends."
Meanwhile, Weakley believes that
Health Management Associates
-- which has posted high charity write-offs for some time -- could be in for a near-term hit.
Even after classifying many accounts as charity cases, Weakley notes, HMA still saw its bad debt expense rise in the fourth quarter. Going forward, he says, the company could post yet another increase this time around.
Thus, he believes HMA could lag behind the group this earnings season.
Ultimately, however, Weakley sees a long-term problem for the industry as a whole. He points out that
, a major health policy journal, recently predicted that the uninsured population would swell by 11 million -- or nearly 25% -- by 2013. Quite simply, he says, the study found that health insurance continues to grow too expensive for more and more people.
"Investors may be expecting a meaningful improvement across the group in terms of the uninsured and in light of the HCA preannouncement," Weakley wrote. "While quarterly trends may change, for both the positive and negative -- in this regard for a variety of reasons -- it would seem logical to assume that the long-term bias on the uninsured is still working against the sector."
has accurately warned of a jump in the uninsured before.
Four years ago, the journal predicted that the uninsured population would surge as health insurance premiums grew more rapidly than personal income. Between 1999 and 2002, the journal noted, health care costs grew by a whopping 9.8% annually. At the same time, the journal said, personal income inched up by just 2.2% a year.
Thus, the journal concluded, millions of people found themselves unable to afford health care coverage and joined the ranks of the uninsured.
expects that trend to continue. Specifically, it predicts that health care spending for insured adults will jump by 7.4% annually through 2013. Yet it forecasts that personal income will climb by only 4.6% a year during that same time frame. Those figures, therefore, suggest that growth in the uninsured population will simply slow down rather than stop or even reverse.
Moreover, those projections could actually prove conservative.
"If the estimated growth rates for health care prices and income are wrong -- as they almost certainly are -- it seems much more likely to us that affordability will decline more quickly than expected rather than more slowly, and it seems more likely that the number of uninsured people will increase more quickly than projected rather than more slowly,"
In the end,
offers a simple explanation for its pessimistic view:
"Regardless of whether health care benefits are being paid out of the employer's or the employee's pocket, and without regard to the amount of premium contribution that employees are required to make, there is a remarkably tight relationship between affordability and coverage rates," the journal said. So "the main message is simply this: It's the premiums, stupid."