UPDATE:US Hospitals' Overhaul Deal May Help Industry Longer Term
09 July 2009 - 8:26AM
Dow Jones News
The U.S. hospital industry's agreement to provide $155 billion
of savings on health care over 10 years may carry near-term risks
but could benefit the sector in the longer term.
Hospital groups, which negotiated with the Senate Finance
Committee, agreed to reduced Medicare and Medicaid payments while
apparently receiving promises about the proposed federal overhaul
to the health-care system that made the pill easier to swallow.
While $155 billion in cuts over a decade may spell real trouble
for many struggling hospitals - particularly trauma centers and
smaller stand-alone facilities - analysts expect the deal could
bring positive results, notably the addition of millions of paying
patients, to the industry.
"In the short run, it makes me nervous," said Sheryl Skolnick, a
health-care stock and bond analyst at CRT Capital Group. "I am
concerned there will be cuts [to hospitals] before [they benefit
from expanded] coverage. In the long run, I think it's probably a
pretty good deal."
The deal is certainly better than the estimated $220 billion in
hospital cuts the Obama administration earlier proposed, Skolnick
said.
Hospital stocks rose Tuesday on reports of a deal, then
retreated a bit Wednesday. The exception was urban hospital
operator Tenet Healthcare Corp. (THC), whose shares rose 6.64% to
$3.05. Shares were up more than 15% over the past two days. Other
major hospital stocks slipped or closed up only slightly.
U.S. Vice President Joe Biden announced the agreement Wednesday,
calling it a step toward achieving deficit-neutral health-care
overhaul legislation. That change aims to expand health coverage to
more than 45 million uninsured Americans, a goal that should
benefit hospitals, which for years have cared for high numbers of
nonpaying patients.
However, the deal remains tricky to analyze because many
specifics have yet to be revealed.
Skolnick said it appears hospitals agreed to the deal if $40
billion to $50 billion in payments they receive for caring for the
poor are phased out over time, as more Americans become insured.
The industry groups that negotiated the agreement said these
payments for care for the disadvantaged wouldn't be reduced until
2015 and would occur only if coverage is actually expanded, and
that more than half of such payments would be preserved to support
the nation's "safety net."
Skolnick said, however, that another big chunk of the cuts might
occur before hospitals benefit from expanded health coverage.
The industry appeared to win assurances that, should there be a
public health plan option of some sort, payments to hospitals under
such a plan would be higher than Medicare rates, Skolnick said.
Much of the savings are expected to come from reductions in the
inflation-related increases hospitals receive each year for
treating Medicare patients, and other funding cuts. Historically,
those increases have been in the 3% range, and some analysts
believe they will now be closer to 1%. Skolnick said, if these
yearly rate changes cut total hospital Medicare reimbursements
rather than reduce the increase in payments, hospitals would take a
bigger hit.
A.J. Rice, Soleil Securities health-care services analyst, said
he believes there is a general sense the agreement "will be
positive on the market for hospitals," that with this amount of
cuts and the addition of newly insured patients, they will come out
ahead.
As for Tenet's stock spike, Rice speculated investors may
believe that in the long term, the health overhaul will benefit
urban hospitals by mitigating the economy-related volatility in
uninsured patients.
Skolnick expects Tenet to become more profitable once
significantly more Americans are insured, although she sees another
possible factor at work in the stock price.
A national health-care overhaul, she speculated, should set the
stage for industry bellwether HCA Inc. to become public again and
pay down its debt through an initial public offering. Should that
happen, debt-burdened Tenet and other publicly traded hospital
companies should be able to recapitalize as well through follow-on
offerings, she said.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
dinah.brin@dowjones.com