Politically Favored Hospital Stocks

Includes: HCA, LPNT, UNH
by: Peter Geschek

Obamacare favors big hospitals. Big Hospital was one of the powerful lobbies, along with Big Pharma and Big Insurance that supported Obamacare to become a law. Big Hospital lobbied hard for Obamacare's insurance mandate and for steering more business to big institutions.

President Barack Obama's re-election means his overhaul of the U.S. healthcare system, opposed by most Republicans, will move ahead in all 50 states, with or without the cooperation of their governors.

Obamacare assumes that improvements in the delivery of medical care come from shifts in market power. The assumption is that once providers are grouped into larger networks, they will make wider use of things like information technology to better coordinate the care of patients, and in turn lowering costs.

Under Obamacare the pool of paying hospital patients will increase. It is estimated that currently about 30 million Americans are uninsured. The increase in the number of paying patients is expected to be huge.

By current law, hospitals have to serve all patients who show up at their emergency rooms including those with no insurance. Hospitals also have difficulty collecting from low income Americans who may have no insurance or are underinsured. Some hospitals are not able to collect as much as 30% of their billings. The earnings of some hospitals may increase by as much as 25%.

The health law is not entirely clear of potential challenges. Obama and Congress face a combination of tax increases, spending cuts and a federal debt-limit that will require negotiated legislation.

It will be difficult for the president to keep the health law out of those discussions, said Mike Tuffin, an APCO Worldwide (a global communications firm) managing director who used to be a vice president at America's Health Insurance Plans, the industry's main lobbying group in Washington.

Hospital chains like HCA Holdings Inc. (NYSE:HCA) and insurers including UnitedHealth Group Inc. (NYSE:UNH), the biggest private provider of health benefits, have spent millions on technology, marketing and plan development to prepare for the new business.

Among the leading hospital stocks are HCA Holdings, Tenet Healthcare (NYSE:THC), Health Management Associates (NYSE:HMA), Vanguard Health Systems (NYSE:VHS), Community Health Systems (NYSE:CYH) and LifePointHospitals (NASDAQ:LPNT).

HCA Holdings, Inc.

Approximately 4 percent to 5 percent of all inpatient care delivered in the country today is provided by HCA's 163 hospitals.

Third-quarter revenue increased 11.1 percent to $8.062 billion from the same quarter in 2011.

Revenue for the nine months totaled $24.579 billion.

Net income was $1.291 billion, or $2.81 per diluted share.

In October the Board of Directors declared a special dividend of $2.50 per share. Also in October the company issued $2.5 billion of public notes with 10.5 year maturities at a historically low interest rate.

The share price's 52-week range was $19.86 - $34.32.

Health Management Associates

HMA operates 66 hospitals with a total of 10,330 licensed beds in 15 states.

In the third quarter revenue increased 18.1% to $1.440 billion.

For nine months Health Management reported an 18.9% growth in revenue to $4.397 billion.

The chain is participating in the industry trend of moving toward outpatient surgeries. While surgeries were up by .8%, outpatient surgeries were up almost 3.5 %.

Procedures in orthopedics, hips, knees, and shoulders were up about 10% for the quarter, spine surgeries were up by 8%.

The stock's 52-week range: $4.81 - 8.69.

Universal Health Services

UHS operates 25 acute care hospitals and 198 behavioral health centers located in 36 states.

Revenue increased 1% to $1.68 billion during the third quarter, compared with $1.66 billion during the third quarter of 2011 and revenue increased 2% to $5.20 billion during the first nine months from the comparable period in 2011.

UHS will pay a cash dividend of $0.05 per share in December 2012.

The share price's 52-week range: $35.71 - 46.93

LifePoint Hospitals

LPNT operates 54 hospital campuses in 18 states, having a total of 6,048 licensed beds.

In the third quarter revenue was $820.2 million, up 11.0% from $739.2 million from the year before.

For nine months revenue was $2,498.5 million, up 11.3%. Net income however decreased 7.6% to $115.4 million, or $2.38 per share.

The company experienced a downtrend in one-day stays but an uptrend in the observation business. The company gets paid less for outpatients and observation patients from all payors, especially from Medicare.

The DRG (diagnosis related group) method of payment means that the hospital is reimbursed a fixed fee per case in a given category regardless of the actual costs incurred, therefore the hospital gets to bear all the management risks.

52-week range: $34.32 - 43.87

Vanguard Health Systems

VHS operates 28 acute care and specialty hospitals with 7,064 beds with outpatient facilities and related businesses.

Operating revenue for the third quarter totaled $3.2 billion, a 9.0 percent increase from $2.9 billion in 2011.

In the nine months the revenue was $9.8 billion, a 9.6 percent increase. Income from continuing operations decreased to $260.6 million, or $2.27 per share.

52-week range: $6.92 - 12.79.

Community Health Systems

CHS operates 135 hospitals in 29 states with a total of approximately 20,000 licensed beds.

Operating revenue for the third quarter totaled $3.2 billion, a 9.0 percent increase compared with $2.9 billion for the same period in 2011.

Operating revenue for nine months totaled $9.8 billion, a 9.6 percent increase. Net income decreased to $260.6 million, or $2.27 per share.

CHS has a favorable payor mix: Medicare, 25.9%, Medicaid, 9.9%, managed care and other, 51%, and self pay, 13.2%.

Every couple of years the chain reevaluates the discount given to self paying customers and this year it has decided to increase the discount throughout the company.

52-week range: $15.97 - 32.70.

Tenet Healthcare Corporation

THC operates 50 hospitals, including four academic medical centers and a critical access hospital, with a total of 13,453 licensed beds in 11 states.

In the third quarter operating revenue was $2.221 billion, an increase of $121 million, or 5.8 percent, from $2.100 billion from 2011.

Total outpatient visits grew by 4.9% and the company is actively acquiring additional outpatient centers, 15 in total for the year.

Tenet also opens 14 new outpatient centers this year built from the ground up. That's more than one newly built center opening each month.

At year-end the company will operate 124 freestanding outpatient centers, which is double the number of centers it had 4 years ago.

Fast growing service lines are cardiovascular medicine, nephrology, Cath/EP and neurological medicine.

Operating revenue for 9 months was $ 6.788 billion, which translates to an earnings per share of $0.86.

52-week range: $16.20 - 27.60

The loser: Private practice

For all its public attacks on wealth and Big Business, the Obama Administrations has been a boon to the politically-connected rich.

In recent years, healthcare innovation has moved away from hospitals to smaller, less bureaucratic outpatient clinics. For example, most patients who need long-term dialysis, no longer get it in hospitals but go to less costly, more convenient outpatient clinics. Many specialized surgeries are also done in small centers that have the expertise and can do it cheaper.

But due to Obamacare's paperwork nightmare, the playing field is now tilting back towards the big hospital chains..

ObamaCare actively promotes medical corporatism, writes The Wall Street Journal editorial page. The reason is not to encourage business efficiency but for political control. Liberals believe in healthcare consolidation because fewer giant corporations are easier to control, and more amenable to central orders.

According to a Accenture Health survey, by 2013, less than a third of physicians will still be in private practice. Most will be salaried employees of Big Hospital.

Investor's conclusion

Big Government is comfortable dealing with Big Business.

So far new government spending on Obamacare-related programs, like the expansion of Medicaid and the new subsidized insurance exchanges, has not been substantial. But by 2017, it is estimated that the federal government will be spending an additional $206 billion a year on Obamacare programs, on top of the $1.1 trillion spent elsewhere. And these figures don't count the hundreds of billions of dollars that state and local governments spend on healthcare, Medicaid in particular.

A good chunk of that money will flow into the large hospital chains.

If you have ever contemplated investing in hospital stocks, maybe now is the time to do it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.