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 the prior year in the most recent quarter, largely due to stricter admissions requirements and lower reimbursement. While the management teams at these companies knew the lower reimbursement would affect profitability, they largely maintained their infrastructure in hopes that the reimbursement environment would improve, or at least stabilize, in the coming year. However, with recent news that reimbursements will be cut over 2% for 2012, companies have begun to take drastic cost-cutting actions, including closing up to 10% of home health centers, resulting in thousands of layoffs. On the other hand, some companies, including Gentiva (GTIV), Almost Family (AFAM) and LHC Group (LHCG) were able to increase admissions through enhanced sales initiatives.
Home Health Providers | Forward PE Ratio |
Gentiva Health Services, Inc. (GTIV) | 2.3x |
Amedisys, Inc. (AMED) | 7.5x |
Almost Family (AFAM) | 7.5x |
LHC Group, Inc. (LHCG) | 7.7x |
With another quarter of insight, the health services space still appears to provide compelling investment opportunities. With potential headline risk around reimbursement changes in coming months, it would be best to dollar-cost average when buying into this space.
