Hospital Stocks No Longer a Defensive Play for Investors

When the stock market heads south, investors traditionally have considered hospital stocks a safe haven. However, the industry’s rising bad debt expense, broader economic trends and the growing number of underinsured Americans will likely cause investors to look elsewhere for stability in the near term, says a healthcare service analyst.

Ann Hynes of Leerink Swann & Company says the uninsured population always has been an issue for hospitals, and investors take that into consideration. But hospitals’ bad debt expense is being driven by the move by many employers to cut back on their employee insurance coverage, which translates into hospital customers paying for more of their own medical expenses.

“That impacts pricing and utilization,” said Hynes, who covers healthcare industry firms Community Health Systems, Health Management Associates, LifePoint Hospitals, Tenet Healthcare, and Universal Health Services.  

Hynes said the 1990s was a good time for the industry as the tech boom drove the economy and healthcare providers saw a shift away from Health Maintenance Organization (HMO) insurance products to Preferred Provider Organization (PPO) insurance plans.

“For a hospital, that’s more profitable,” she said.

But in 2003, two years after the 9/11 terrorist attacks, employers began to shift back to HMOs, which require patients to get a doctor’s referral and pre-approval for most care. Additionally, the plans employers began offering required employees to pay higher deductibles and co-pays.

Hynes said hospital stocks would be considered more attractive if federal legislation were passed that mandates coverage for more Americans. However, that won’t happen until 2009 at the earliest, said Hynes. In the meantime, hospitals could see their bad debt expense continue to rise, if payment isn’t made at the time of service.

“Once a (patient) walks out of the hospital, the chances of collecting (payment) decreases by 80 percent,” Hynes said. 

Boston-based Leerink Swann & Company is an investment banking firm specializing in healthcare equity research, corporate finance, and asset management services for institutional and high net-worth clients.