Given the huge push for hospital pricing transparency -- and its potential to drive hospital prices down -- health care investors might want to avoid hospital companies and instead focus on the insurers who pay for their services. In recent weeks, government demands for hospital pricing transparency have escalated, exploding into full-blown congressional hearings on Wednesday. Quite simply, government leaders say, hospitals should be required to disclose their prices just like other companies that wish to sell their products to consumers. Hospitals have resisted such calls, going so far as to suggest that their prices -- deeply discounted for most payers -- don't matter very much, anyway. But those arguments have lost some power in recent years. For one thing, hospital giant Tenet ( THC) has already shown that high list prices can in fact translate into outsize payments from Medicare. For another, new "affordable" health plans have left consumers picking up more of their health care tab but -- so far -- without the pricing information they need to effectively shop for their services. Sheryl Skolnick, a veteran health care analyst at CRT Capital, sees major changes on the horizon. "It's inevitable," Skolnick told TheStreet.com on Wednesday. "Hospitals are going to have to tell us how much they are charging. ... I'm very concerned about the hospital group in general, for all of the obvious reasons." Skolnick lists a number of risks that could worsen with so-called consumerism -- including falling volumes and rising bad-debt expense -- when explaining her stand. She mentions the strong possibility for Medicare cuts, beginning in 2007, as well. At the same time, Skolnick believes that strongly positioned health insurers could fare well in the changing environment. She favors UnitedHealth ( UNH) the most, saying that the company has made "very, very significant investments" in consumer-friendly offerings. She also shoots down recent arguments from a competing analyst who has suggested that UnitedHealth's long rally could soon come to an end.
Skolnick has yet to initiate coverage on the hospital sector but recommends buying UnitedHealth shares. Her firm makes a market in UnitedHealth securities. UnitedHealth rose 1% to $57.47 on Wednesday. Meanwhile, HCA ( HCA) -- the nation's largest for-profit hospital chain -- actually posted gains as well, as the government hearings got under way this week. The shares rose 1.1% to $46.62 on Wednesday. No. 2 player Tenet, reeling since its pricing games were exposed more than three years ago, slipped a penny to $7.18.
Heated ExchangeThis month, in particular, the call for change has grown increasingly loud. Just last week, the Federation of American Hospitals -- a for-profit hospital trade group -- came under fire at its own annual meeting. During that session, the FAH reported, President Bush's key health care adviser said he found it "indefensible" that hospitals have refused to share their prices with consumers. "I can't understand. I just can't understand," Bush adviser Allan Hubbard said, according to a recent FAH press release. "I don't see how you can look at yourselves in the mirror and say, 'I should not provide pricing and quality information to prospective customers.'" The Hill, a nonpartisan weekly covering Congress, has since gone on to describe a "heated public exchange" between Hubbard and Tenet's vice president of government relations that allegedly took place at that same meeting. The Hill said the Tenet executive, later identified as Daniel Waldmann, "took the offensive" by suggesting that the government was seeking proprietary information that should be protected in a private marketplace. However, The Hill said, Hubbard cut Waldmann off to defend a Bush agenda that calls for pricing transparency in a shift toward consumer-driven health care. "I hope you all will think about this," Hubbard said, according to The Hill. "And I hate to use ... a threat. But if you don't, it is going to be imposed."
'Failure to Act'Since that meeting, Rep. Bill Thomas (R., CA.) -- who chairs the powerful Committee on Ways and Means -- has gone on to attack an agency of the government itself. In a letter sent out last Friday, Thomas warns the secretary of the Department of Health and Human Services about a "serious problem" within the agency that has been hindering efforts to increase health care pricing transparency. Back in 1988, Thomas says, Congress gave the Office of Inspector General the power to bar companies with "excessive" prices from participating in the Medicare and Medicaid programs. But instead of exercising that authority, he claims, the OIG on two separate occasion simply proposed -- and then withdrew -- regulations addressing the matter. Since then, he adds, the OIG has proposed still another rule, which has yet to be finalized three years later. "Recently, President Bush proposed to control health care costs and to better inform consumers through transparent pricing," Thomas continues. "This is difficult to accomplish, however, because hospital charges have become so grossly inflated above their private market rates so as to be almost meaningless. (And) absent a market-based benchmark, a broad transparent pricing initiative that includes hospitals will fail before it starts." Thomas goes on to urge the OIG to finally exercise the power it has to bring about transparent pricing in the hospital industry. He closes by saying that "a failure to act should never be tolerated" and strongly hinting at budget cuts as a potential consequence.
Favorite PickThe current sentiment, while clearly negative for hospitals, could bode well for some health insurers. "Companies that are really focused on skinnier benefits and more flexible products are best positioned" to capitalize on emerging trends, Skolnick says. "And UnitedHealth has the broadest and most flexible product offerings" of all. In the meantime, Skolnick feels that recent investors' concerns about UnitedHealth -- triggered by a negative report this week -- seem unwarranted. She blames a rise in medical costs at PacifiCare, a company recently acquired by UnitedHealth, on one-time events. In addition, she attributes any weakness in cash flow to simple timing issues. Finally, she portrays integration risks -- posed by a series of recent acquisitions -- as nothing more than old news.
"Altogether, the stock appears to be holding around $55 for now, a very compelling valuation," Skolnick wrote on Monday. "That said, we reiterate our buy rating and $70 price target and would be very aggressive buyers at this level." To be fair, Skolnick likes some other health insurers right now as well. Although she has no formal rating on them yet, she applauds both Aetna ( AET) and Coventry Health ( CVH) for the accomplishments they have pulled off so far and the opportunities that still lie ahead.