Moody's Lowers Outlook on For-Profit Hospital Sector to Stable (HCA) (THC) (CYH)

The outlook for the US for-profit hospital industry has been revised to stable from positive, Moody's Investors Service says in a new report. Over the next 12 to 18 months hospitals' earnings will continue to grow, but ultimately at a slower pace as the benefits of expanded coverage under the Affordable Care Act begin to wane.

"We expect same-facility earnings growth to remain strong through the next quarter, but then to return to normal as the benefit from the reduction in the uninsured population continues to decline," says Senior Vice President, Dean Diaz. "Hospitals' results in the second half of this year will compare less favorably with their 2014 numbers, which led us to change our outlook for the industry."

With fewer uninsured, for-profit hospitals will see a further reduction in bad debt expense, Diaz says in "Outlook Returns to Stable as the Benefits of Expanding Insurance Coverage Begin to Recede." But the benefit will not be as pronounced as in 2014, the first year of expanded Medicaid programs and the availability of insurance products on the government exchanges. The impact will vary among institutions, depending on their location, since only 28 states and the District of Columbia have elected to expand Medicaid.

Acquisitions will boost the for-profit hospital sector's performance throughout 2015, says Moody's new report. EBITDA will increase modestly as a result of additional synergies from these combinations. These include CHS/Community Health Systems Inc.'s (NYSE: CYH) acquisition of Health Management Associates in January last year and Tenet Healthcare Corp.'s (NYSE: THC) purchase of Vanguard Health Systems in 2013.

Outpatient volumes are likely to grow faster than hospital admissions. "Volume growth will remain slow as individuals make more active decisions about their use of healthcare services due to higher deductibles and co-payments," Diaz says. "Growth in outpatient services will outpace inpatient services and account for the bulk of the expected increase in patient volumes."

Threats remain, and include the possibility of further cuts in reimbursement rates, the development of new payment models and the upcoming Supreme Court decision on subsidies under the Affordable Care Act, Moody's says. In addition, for-profit hospitals could be required to fund a portion of the costs associated with a permanent fix to the Sustainable Growth Rate formula that remains under debate.

Stocks on watch include: Quest Diagnostics (NYSE: DGX), DaVita (NYSE: DVA), Fresenius Medical Care Ag & Co. Kgaa (NYSE: FMS), HCA Holdings (NYSE: HCA), and TeamHealth Holdings (NYSE: TMH), among others.

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