ObamaCare: Bad For Insurers, Great For Hospitals

     (Bloomberg) — HCA Holdings Inc. and other hospitals will get more paying customers while insurers like UnitedHealth Group Inc. will see profits squeezed as President Barack Obama moves to preserve the health care overhaul he championed.

Obama’s re-election rallied shares of HCA Holdings Inc., the largest for-profit hospital company, while Community Health Systems Inc. and Tenet Healthcare Corp. also gained on prospects for millions of newly insured patients being added to their admission rolls. UnitedHealth, the largest U.S. medical insurer, fell last week, and WellPoint Inc. and Humana Inc. declined as the industry faces profit limits and new taxes to help pay for the coverage expansion.

“Volumes of business will improve for hospital companies and bad debt will go down with the reduction in the uninsured” as the law moves forward, says Frank Morgan, an analyst with RBC Capital Markets in Brentwood, Tenn. While a Mitt Romney win might have benefited insurers, the Republican would have brought “a cloud of uncertainty” for hospitals, he says.

Obama’s signature achievement during his first term expanded health care coverage to as many as 30 million uninsured people starting in 2014 through a sweeping law that Romney had pledged to overturn. That made this election as significant as the 1964 race, where Lyndon Johnson’s win over Barry Goldwater led to the enactment of Medicare and Medicaid, says David Blumenthal, a professor at Harvard Medical School in Boston.

“The next president will have his hand on the health care lever,” Blumenthal, who was Obama’s first national coordinator for health information technology, said in an interview before voting ended.

The Bloomberg Industries hospitals stock index increased 6.1% following the vote.

The health overhaul will be a positive driver for earnings over the next few years, Trevor Fetter, president and chief executive officer of Dallas-based Tenet, told analysts on an earnings conference call last week.

“Last [week’s] election results are encouraging for the full implementation of the Affordable Care Act,” Fetter said. “Based on our model of expanded coverage under the act, all of our hospitals are in markets that will see an increase in covered lives, and in virtually all our markets, that growth exceeds the rate for the country as a whole.”

‘Modest negative’

The Patient Protection and Affordable Care Act is the biggest change to the U.S. health care system since Medicare and Medicaid began providing taxpayer-funded services for the poor, elderly and disabled in 1965. Traders bought hospital stocks and sold off commercial insurers after Obama’s overhaul passed Congress in 2010, a scene repeated when the law survived a challenge at the Supreme Court.

The law’s survival “represents the status quo and means that the industry will undergo significant change and new regulations beginning in 2014,” said John Sullivan, a health care strategist at Boston-based investment bank Leerink Swann & Co., in an Oct. 23 note to clients. It’s a “modest negative” for managed-care companies, he said.

The health law bans insurance plans from keeping more than 85% of the premiums they collect for profit or administrative expenses. It also imposes about $84 billion in taxes and fees, according to a September analysis by Bloomberg Industries. Plans will have to compete for the new customers on state-by-state exchanges where consumers can comparison-shop.

On the exchanges, “product standardization and transparency will pressure margins, which we believe will more than offset the upside from an increase in the number of people with health insurance,” Sullivan said.

While the largest insurers declined, shares are rising for companies that focus largely on Medicaid, the joint state-federal program for the poor. The health law includes an expansion of the system, accounting for half of the new people to be covered, and cost-conscious states are expected to turn to private contractors to handle much of the growth.

Best performer

For hospitals, PPACA will extend coverage to 92% of the population, from 82%, according to the Congressional Budget Office. The law includes a reduction in payments to private Medicare Advantage insurance plans, and curtails growth in reimbursement rates for medical providers other than doctors. It also encourages consolidation among hospitals and doctor practices, with physicians leaving independent practice to become hospital employees.

Preservation of the overhaul helps most hospitals, which had already moved ahead with implementing aspects of the law despite the election. Samuel Hazen, president of operations for HCA, told analysts on a Nov. 1 conference call that the Nashville, Tenn.-based company had started to prepare for health system changes, many of which begin to kick in by 2014.

Romney’s plans would have pressed hospitals to find new ways to deliver care at a lower cost, Wayne T. Smith, chief executive officer of Franklin, Tenn.-based Community Health, the second-largest U.S. hospital chain, said Oct. 31.

Hospitals would have continued to migrate toward more incentive-based pay that lowers costs even if the mandate for universal health care coverage was repealed under Romney, says Frederick Isasi, senior health policy adviser and managing director at Advisory Board Co., a research and consulting company based in Washington.

Hospitals have been paid each time they do a procedure, in arrangements known as “fee for service.” The law shifts them to incentive systems where the focus is on more efficient care.

They may get a set amount of dollars to spend on a patient, for example, and can keep surplus if they can provide care for less.

Republicans have said they wouldn’t seek to undo the transition to the newer payment models, Isasi says. That would mean continued hospital consolidations and hiring of doctors, since those cost savings are accomplished through economies of scale.

“The ball has already dropped,” James Weinstein, chief executive officer of the Dartmouth-Hitchcock health system in Lebanon, N.H., says. “It’s like New Year’s when the ball is rolling. Provider organizations need to take the lead in creating a sustainable health system.”