Hospital Stocks: This Rally Can't Continue

|
Includes: CYH, HMA, LPNT, THC, UHS
by: Donald Johnson

Since early July, most hospital companies’ stocks have been rallying in anticipation of relief from uncompensated care costs under proposed health insurance reform bills. On Wednesday, however, profit taking hit the stocks in a small way.

The rally got an added boost in the last week from positive earnings reports and guidance by Community Health Systems (NYSE:CYH) and Universal Health Services (NYSE:UHS).

Tenet Health Care (NYSE:THC) Tuesday reported a small loss on increased revenues. Lifepoint Hospitals (NASDAQ:LPNT) reports Friday.

In its conference call with securities analysts, Tenet said the health care reform bills before Congress would relieve it of the cost of uncompensated care of the uninsured and of the cost of charity care. Tenet didn’t say any more about the health insurance reform debate and how the legislation would affect the company.

Some Democrats are pushing for better Medicare reimbursements for most of the hospitals in rural areas, many of which are owned by publicly-owned hospital companies. This could help their bottom lines.

But one has to wonder whether cuts in overall Medicare and Medicaid payments to hospitals would cost them more than the uncompensated care currently costs them. And if Medicare and a public government health plan sharply curtail access to care, what will happen to hospitals’ revenues and profits?

Also, we’re still in a recession, and Tenet told analysts that it saw significant declines in business with commercial HMOs. If unemployment continues to rise, as many expect, or if it just stays at 9.5%, more unemployed people will drop their COBRA insurance and become uninsured. This means commercial insurance business will continue to be weak for hospitals.

Thus, while some hospital companies have been cutting costs and improving margins, it’s hard to see how that can continue.

Disclosure: I don’t have positions in these stocks.