Friday, July 10, 2009
On Wednesday, Vice President Biden bragged that the government had extracted a pledge from the nation's hospital industry to cut $155 billion in costs over the next decade.
That might sound like terrible news for hospital investors... But as I'll show you, the hospitals – and their shareholders – are set to come out way ahead on President Obama's health care reform.
Obama's concept of health care reform is almost entirely focused on extending coverage to the 50 million uninsured Americans. As the number of uninsured shrinks, the amount of health care spending goes up. All sorts of health care providers – doctors, drugmakers, hospitals – win.
The only problem is, who's going to cover the estimated $1 trillion cost over the next 10 years? Back in May, Obama hosted a Kumbaya campfire session at the White House with the major health care stakeholders. The collective lot pledged $2 trillion in savings over the next decade. Now, one by one, the various players in the medical industry are unveiling their specific cost-saving plans.
First up were the drugmakers. Big Pharma recently pledged $80 billion over 10 years to extend drug discounts to Medicare patients who fall into a coverage gap. But as my colleague George Huang pointed out, the extended coverage helps patients stay on their brand-name drugs instead of switching to generics... or stopping their prescription all together. So the "cost-cutting" deal is actually a big positive for Pfizer, Merck, and the other big players.
Just like Big Pharma, hospitals are set to cash in on the pending health care reform. Here's why the hospitals' $155 billion, 10-year "concession" actually works to industry's benefit:
First, hospitals have joined drugmakers in building goodwill with influential allies as the final health care reform bill hits the House and Senate floors. It's a classic "can't beat 'em, join 'em" move.
Second, the final $155 billion figure is down from the $220 billion the White House proposed. Score one for the hospital lobbyists.
Third, the Medicare and Medicaid hospital reimbursement cuts will be phased in over time, with larger cuts back-loaded as uninsured patients gain coverage to become "paying customers."
Finally, and perhaps most important, if a government-sponsored insurance plan emerges from the reform to compete with private plans, hospitals will be reimbursed at rates higher than current Medicare and Medicaid payments.
Right now, for example, the uninsured population adds $120 billion to our annual health care costs. Hospitals directly absorb about $40 billion of that. So as the uninsured gain medical coverage, hospital earnings inevitably improve. And as investors get excited about the idea, these stocks will soar.
The five largest publicly traded hospital chains are Universal Health Services (UHS), Community Health Systems (CYH), Lifepoint Hospitals (LPNT), Tenet Healthcare (THC), and Health Management Associates (HMA). Now, before you jump in with both feet, you should know all these guys are highly leveraged. The hospital business is enormously capital-intensive. And the margins are notoriously unreliable.
But with all the news about Obama's plans, each of these stocks has jumped. And over the next few months, as health care reform continues to march from campaign pledge to reality, you can expect these stocks to move up at least another 25% from here.
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