Two weeks ago, I wrote an article suggesting that uncertainty in reimbursement trends has created unique opportunities among some hospital and home health names. Since then, every name mentioned in the article has reported third quarter financial results. The financial information provided, in addition to the conference calls, has given investors a greater look into recent admissions and reimbursement trends.
Starting with the hospitals, while some companies reported better quarterly admissions than others, the overall trend was a continuation of the weakness seen in recent quarters. Multiple factors have contributed to weaker admissions, including people moving to plans with higher deductibles and patients putting off elective procedures. On the reimbursement front, hospitals continue to struggle with a high level of bad debts as a result of a weak economy.
In spite of these headwinds, all of these companies reported at least a 10% increase in EPS and are projected to produce the same level of earnings growth in 2012. This is the result of multiple factors, including share buybacks, the implementation of computer systems that increase efficiency (and the government incentives that accompanied the spending), better supply management and overall process improvements. As mentioned in my most recent article, the hospital group is currently reaping the benefits of running large care organizations, including buying leverage with suppliers and back office efficiencies when companies are acquired. If the hospitals are putting up 10% EPS growth in a challenging environment, one can imagine what the results would look like in an improving economy.
Hospitals | Forward PE Ratio |
Community Health Systems, Inc. (CYH) | 5.6x |
HCA, Inc. (HCA) | 7.4x |
Universal Health Services (UHS) | 9.5x |
Health Management Associates, Inc. (HMA) | 9.8x |
Tenet Healthcare Corp. (THC) | 10.6x |
LifePoint Hospitals, Inc. (LPNT) | 11.0x |
In contrast, the home health companies all saw earnings decline over
