As hospitals continue to struggle with fewer inpatient admissions, lower reimbursements and potential increases in uncompensated care, investors are growing wary.
Although stock fluctuations are beginning to smooth out as attention on Capitol Hill starts turning away from healthcare, plenty of general uncertainty for the industry remains. And with an increase in bad debt caused by cost-sharing and high-deductible plans, hospital stocks are being approached more cautiously.
Not too long ago, hospitals were seen as a great investment. The Affordable Care Act (ACA) added nearly 20 million newly insured Americans. The thought at the time was that more insured Americans would mean less uncompensated care, which would be a win for hospitals.
However, while hospitals have benefited from more insured Americans, there are other forces working against them — namely, lower reimbursements from private and public payers, prohibitive out-of-pocket costs for patients and payers emphasizing more care through outpatient services.
Many hospitals have tried to pivot by adding outpatient services and ambulatory care centers. Other healthcare organizations, however, are responding to the trend by opening more urgent care centers and freestanding emergency rooms, which is further eroding hospital finances.
Spencer Perlman, managing partner and director of healthcare research at Veda Partners, told Healthcare Dive that investors who were once bullish on healthcare stocks have soured on the industry because of admission growth issues.
Perlman added that a shift in cost-sharing toward high-deductible health plans, which put more financial responsibility on the individual, is resulting in people not seeking healthcare services as much. This is particularly true for elective procedures, which are usually strong business for hospitals.
Plus, trying to collect payments from patients is harder for hospitals than dealing with payers. Perlman said studies show that anything over 5% of household income is basically uncollectable for hospitals. So, more patients with $5,000 and $10,000 deductibles mean more bad debt for hospitals.
All of this has created an unstable hospital market, and instability is something investors don’t like. Investors are responding by looking at more cross-sector involvement and watching how hospitals and health systems are preparing for the value-based reimbursement models likely to become more prominent.
A tough year for many hospitals
The current environment caused disappointing second quarters and lower earnings projections for major for-profit systems like HCA, Community Health Systems (CHS) and Tenet Healthcare.
Tenet, which is going through board and leadership changes, reported a $56 million net loss in the second quarter, CHS reported a 10% drop in operating revenue and HCA missed second-quarter estimates. The results led stock prices to tumble.
Moody’s Investors Service also downgraded CHS, one of the largest for-profit systems, on its corporate family rating, probability of default rating and senior unsecured notes, while affirming the company’s speculative grade liquidity rating and giving the for-profit system a “stable” outlook.
While for-profits reported tough quarters, Perlman said large nonprofit systems like Geisinger and Kaiser Permanente are performing better. Perlman gave three possible reasons:
Nonprofits don’t have to meet quarterly targets
Some of the nonprofits are closed systems
Some large nonprofits are integrated systems, so their insurance side helps offset losses on the hospital side.
Having both hospitals and a payer side under one roof allows integrated systems to buffer hospital losses with potential insurance gains, he said
Some bright spots in the landscape
Though healthcare stocks have cooled overall, some experts believe investors will dip back into healthcare “particularly as ACA headwinds dissipate to a degree,” according to Raymond James, a wealth management company.
Sumesh Sood, managing partner at Veda Partners, told Healthcare Dive that healthcare stocks overall have rebounded since healthcare legislation stalled in the Senate. He said this is because investors now have more clarity about the business environment.
Lower utilization has led to disappointing numbers for hospitals this year, but not all healthcare stocks are performing poorly. Managed care stocks like Anthem, Aetna and UnitedHealthcare are all benefiting from a healthcare environment of less inpatient care and more cost-sharing with members.
“They are basically the opposite of hospitals,” said Sood. “They benefit from the low-utilization environment.”
Though healthcare stock fluctuated during the healthcare debate on Capitol Hill this year managed care continued to perform well, Sood said. One reason is that much of the proposed healthcare changes would not have affected payers — or at least not hurt their main lines of business. For instance, even if Congress decided to scrap Medicaid expansion, that line is minor for most payers if they even offer Medicaid managed care plans.
Investors choose multiple sectors
Another healthcare investment trend is that investors are avoiding the bumps, twists and turns that happen in one healthcare sector by investing in multiple areas.
A recent study in Health Affairs found that investors in healthcare aren't just sticking with one or two sectors of the industry. The report found “an influx of commercial corporate investment” has led to “more complicated and fragmented ownership structures.”
The authors found the percentage of acute care hospitals with common investor ties to the post-acute or hospice sectors increased from 25% in 2005 to 49% in 2015. The move to common investors has antitrust, payment and regulatory impacts. Cross-sector integration in healthcare is especially prevalent in acute care, post-acute care and hospice.
Historically, ownership in healthcare was a single entity serving as a provider’s sole owner and operator. However, in recent years, healthcare has seen more dual investment, which has led to “more complicated and fragmented ownership structures,” according to the study.
The report said “common investor ownership” could reduce incentives because the profits are returned to common investors. It could “lead to patterns in patient referrals that reduce price and quality competition. However, if cross-sector ownership leads to clinical or financial integration, it could result in better patient care coordination across health care sectors.”
Future of hospital and healthcare stocks
The move from fee-for-service to value-based contracts may play a role in which healthcare companies — and which stocks — thrive in the coming years. Private payers and the CMS are involved in payment programs that reimburse based on quality and outcomes rather than strictly the volume of services.
While the CMS recently announced it at least temporarily plans to scale back or cancel bundled payment models, private payers are focusing more on contracts that focus on quality and partnering with providers on value-based payment programs.
For instance, UnitedHealth earlier this year announced an accountable care organization (ACO) program with Aledade in Arkansas, Kaiser Permanente and other healthcare leaders recently called for a value-based system and major payers, such as Humana, Aetna and Cigna, have all created value-based models.
Sood said there is a “fork in the road” moment for healthcare in regard to changing from volume to quality. The population is aging and there are more insured Americans, but reimbursement pressures mean hospitals can’t rely on volume alone.
Perlman expects the move to quality will be a major driver of healthcare stocks. No longer can hospitals rely on volume. Now, they will need to show insurers that they are offering high-quality and value to payers. Hospitals that show quality of care will do well moving forward.
“Those who are just tied to volume are going to continually struggle,” said Perlman.