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Analysis: Hospital investors wary of slow rampup for Obamacare

By Lewis Krauskopf

NEW YORK (Reuters) - Investors in U.S. hospital companies are counting on the Obama administration to pull off its national healthcare reform for 2014 to drive earnings growth, but a series of delays to the program has some questioning how strong the launch will be at its start.

The stakes are particularly high for hospital operators, whose financial performance has been weighed down by poor and uninsured patients being unable to pay their bills. The healthcare law aims to expand health coverage to millions more Americans, who will be able to sign up beginning on October 1.

Next year, earnings before interest, taxes, depreciation and amortization - a commonly used metric for hospital financial performance - for six major publicly traded hospital companies are expected to rise by 10.6 percent on average, according to an analysis of analyst estimates compiled by Thomson Reuters I/B/E/S. That compares to a decline of nearly 1 percent this year. The companies include HCA Holdings Inc, Community Health Systems Inc and Tenet Healthcare Corp.

About half to three-quarters of 2014's projected earnings increase is due to the reform, depending on the company, according to CRT Capital Group analyst Sheryl Skolnick.

"Investor expectations and the stock prices have cooled off a lot recently," said Jeff Jonas, a portfolio manager of Gabelli Funds whose funds own shares of Tenet and HCA. "There's a realization that it's going to be a slow, gradual enrollment period and not quick out of the door."

Federal and local authorities are racing to meet deadlines for building new online insurance exchanges in each state ahead of the October 1 start for enrollment. About 7 million people are projected to obtain government-subsidized coverage on these exchanges next year, while an additional 9 million people are expected to get insurance through an expansion of the government's Medicaid program for low-income Americans.

The administration earlier this summer put off until 2015 a requirement for large employers to provide insurance for their workers and more recently nudged back a deadline to sign contracts with insurers operating on the exchanges. Some states have indicated the need to work out technical issues, with Oregon delaying full public access to its online marketplace for a few weeks.

"To the extent there was enthusiasm and confidence the hospitals would do well because we'd get enrollment...now we're concerned that the enrollment may not happen to the same extent," Skolnick said. "I think that pessimism is building."

COMING OFF STOCK HIGHS

Shares of hospital chains tallied huge gains in the first half of the year, lifted partly by hopes about the new healthcare law.

Stock prices have still outpaced the S&P 500 index this year, but they have pared back those gains since their respective mid-summer peaks: Tenet slid 23 percent, LifePoint Hospitals Inc is off 15 percent, while HCA, the largest operator, dropped 7 percent.

Analysts said several factors fueled the declines, including weaker-than-expected quarterly reports and the announcement of two mergers that reduced the chance for further consolidation. In an example of the pressure, hospital stocks fell on Monday after a Citigroup analyst said admissions weakened in July and August.

But, they said, news of the delays also chipped away at confidence in the stocks.

"You need it to work reasonably well to achieve the estimates for the hospitals," Susquehanna Financial Group analyst Chris Rigg said of the Obamacare launch. "If there was a more meaningful delay...hospital shares would have to come off."

Skolnick said the stocks could be particularly volatile in the first weeks after October 1, related to headlines charting the progress of enrollment.

"The real issue is the ability of these plans to offer insurance by January 1," when benefits are supposed to start, said Tim Nelson, a healthcare analyst with Nuveen Asset Management, which has a small position in the hospital sector. "Most people assume that, despite all the noise, that there are bumps in the road, but it will get done."

Despite the recent declines, Nelson and others said the stocks could swing should Wall Street sense enrollment coming in well below - or above - projections.

The fluctuations would be more dramatic if the Obama administration pushed back the opening of the exchanges for a year - a scenario that is seen as unlikely, but is nonetheless on investors' minds.

"Broadly, I'd say that none of these delays are really significant yet, but I don't think we are going to see the big news till the last minute," Jonas said.

Publicly traded health insurers, such as UnitedHealth Group Inc and Aetna Inc, have hedged against the potential risks of the law by deciding to limit their offerings on the new exchanges for 2014. So their share prices stand to be less affected by news related to the new marketplaces. One exception is WellPoint Inc, which projects that healthcare reform will boost its revenue by $20 billion by 2016.

These decisions have relieved some investors, who were worried that insurance companies may wind up with sicker customers through the exchanges that drive up their expenses.

"The for-profit managed-care companies are kind of staying away from the exchanges," Nelson said. "For the most part, Obamacare is a risk for the managed care companies and an advantage to the providers...particularly in the short run when you don't know what the risk pool is."

(Additional reporting by Caroline Humer; Editing by Michele Gershberg and Leslie Gevirtz)

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