Companies Look to Profit From Changes in the Healthcare Industry

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Stocks of publicly traded hospitals have gone up since the Supreme Court deemed the Affordable Care Act, commonly referred to as Obamacare, constitutional last year, according to the Economist. Hospitals stand to profit from the flood of newly insured people entering the market and seeking treatment for a variety of ailments.

And more change is in the air, as hospitals merge and change their business models to stop the runaway costs the industry is famous for. In 2011, hospitals spent $851 million, or 31% of total healthcare spending in the U.S. To try to deal with the current dysfunctional system, hospitals are becoming larger as for-profits merge with non-profits while some are directing patients to lower cost clinics and are applying to become accountable care organizations, or ACOs.

Hospitals designated as ACOs are rewarded for keeping the cost of treating Medicare patients below a designated level. This should help counteract the reduced Medicare reimbursement rates the law puts into effect. There are also incentives to promote quality of care and discourage quantity of care promoted by the current fee-for-service model, where a higher number of procedures mean greater profit for hospitals and doctors alike.

Medicare also plans to penalize hospitals that discharge patients who later return within 30 days. The President is encouraging greater transparency of hospital costs and recently made public the price lists used by hospitals, which showed major disparities among facilities. Some rates remain private because they are negotiated between the hospitals and insurers.

So, how are hospitals like Tenet Healthcare (NYSE: THC), Vanguard Health Systems (NYSE: VHS), HCA Holdings (NYSE: HCA), and HealthSouth (NYSE: HLS) dealing with the challenges in the industry that call for greater efficiency and transparency while providing patients with quality care?

Tenet and Vanguard join forces

On June 24, Tenet acquired Vanguard for $21 per share in an all cash transaction valued at $4.3 billion, including the assumption of $2.5 billion in debt. The buyout was unanimously approved by both boards of directors and the range of annual growth benefits expected is $100 million to $200 million.

According to Tenet CEO Trevor Fetter, the acquisition moves the company into new markets -- the company will now have a presence in 16 states, including two new markets in Texas -- and expand the number of facilities owned by Tenet to 79 hospitals and 157 outpatient centers.

The deal also allows Tenet to expand its service offerings and provides the company with additional revenue sources, increasing the benefits to be realized from Obamacare. Vanguard operates 28 hospitals in Texas, Detroit, Phoenix, Chicago, and Massachusetts. When Obamacare goes into effect, Fetter told CNBC he sees opportunities in Texas, where 30% of residents are uninsured and will eventually be covered by some form of insurance.

After the deal was announced, Tenet’s share price went up about 11% and Vanguard shares rose 68%. The transaction should be finalized by the end of 2013, but don’t expect this to be Tenet’s only deal since the company plans to be more aggressive in acquisitions.

HCA Holdings showing interest in Health Management

HCA is another for-profit hospital that could follow in Tenet’s footsteps and make its own acquisitions, recently showing interest in Health Management Associates, a $4 billion hospital operator. HCA owns and operates 162 hospitals and 113 independent surgery centers in 20 states and across the pond in London, England.

The company reported first-quarter 2013 revenue of $8.44 billion, up 0.4% over last year, and net income of $344 million, or $0.74 per diluted share. According to CEO Richard M. Bracken, the results showed slower growth in admissions and outpatient volumes across facilities. HCA’s EPS estimate for 2013 is $3.12 and for 2014 it is $3.74. Expected annual growth for the next five years is about 12%. With the stock trading at 10 times 2014 earnings, the current stock price appears reasonable.

HealthSouth fueling growth by building and acquisitions

HealthSouth owns and operates the largest network of inpatient rehabilitation hospitals in the U.S. Despite the challenges the industry is facing, the company grew in 2012 by building new facilities and making strategic acquisitions. HealthSouth also implemented electronic medical records at 13 of its hospitals and plans to continue the deployment at a rate of 20 hospitals per year. The system is expected to help the company provide better care and contain costs.

The company reported positive results in the first-quarter of 2013 with net operating revenue of $572.6 million, 6.3% higher than the first quarter of last year. HealthSouth’s increase in revenue and expense management led to an increase in operating cash flow to $121.4 million from $81 million in the first quarter of 2012. The company estimates 2013 EPS to be between $1.50 and $1.56. Annual growth for the next five years is estimated at 10% and the stock trades at 15 times 2014 earnings.

Conclusion

With Tenet trading at 12 times 2014 earnings and a projected five-year annual growth rate of 9%, investors should consider buying shares when they dip in price. If Tenet makes additional acquisitions that will give the company access to more markets and a greater number of patients, this should benefit the stock price.

It’s also a good idea to watch if HCA or HealthSouth shop around for rivals to acquire, since the industry appears ripe for consolidation. Consolidation with the right health partners can help these hospital operators manage the incoming flux of patients expected next year and the challenges presented by the healthcare reform. 

Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more. 


Eileen Rojas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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