Tenet Healthcare Corp. (THC) may have surprised Wall Street by
predicting a fourth-quarter profit, but its lack of further
earnings visibility highlights the toll an ailing U.S. economy and
tough credit markets are taking on the hospital industry.
Hospitals have struggled for years with tepid volumes of
commercially insured patients and large numbers of uninsured
patients who can't pay their medical bills. Now, the credit crisis
has prompted many hospitals to delay capital spending and the
recession threatens to further erode business.
While Tenet's preliminary report Thursday may ease some of Wall
Street's concerns about the final quarter of 2008, the overall
prognosis for the industry isn't encouraging.
"We definitely are hearing from the field that as this economic
slowdown gets longer and deeper, that hospitals are hurting," said
Caroline Steinberg, vice president for trends analysis at the
American Hospital Association, in an interview this week.
A broad survey released Thursday by the American Hospital
Association shows that 45% of hospitals have postponed capital
projects that were planned to start within the past six months and
some have stopped projects already in progress.
"While things out there may not be as bad as they could have
been, they're still pretty bad out there," CRT Capital Group
hospital analyst Sheryl Skolnick told Dow Jones Newswires.
Tenet shares are getting a slight bounce Thursday, up 3 cents at
$1.27, but have lost more than three-quarters of their value since
the end of August. Other stocks of publicly traded hospitals have
struggled during that time, although not as badly. Health
Management Associates Inc. (HMA) is down 71%, Community Health
Systems Inc. (CYH) has fallen 49% and Universal Health Services
Inc. (UHS) is off 41%.
Lifepoint Hospitals Inc. (LPNT) has lost 35% but is the only
hospital stock to do better than the S&P 500, which has
declined 36% during that period.
Beyond hospitals, shares of many companies that make medical
devices, including pricey capital equipment that hospitals are
finding it harder to buy, have also suffered in recent months amid
signs the recession has slowed spending.
Lawmakers are so concerned about the fiscal health of the
nation's hospitals that they have asked President Barack Obama to
remember them in his job-stimulus plans, according to a letter from
about 130 members of Congress on AHA's Web site.
Lawmakers called for policy moves to help support investment in
hospital renovation and upgrades in health-care information and
technology systems, as well as federal support of hospital debt to
enable refinancing.
Since Medicare and Medicaid represent about half of hospitals'
business, "what government does will have a huge impact on how
hospitals fare," the AHA's Steinberg said.
For investors, low valuations could present an opportunity to
buy shares of hospital companies operating in areas with relatively
stronger economic pictures.
"We expect all the hospital companies to see pressure. We expect
volume and bad debt pressures to be greatest in markets facing
economic deterioration," Goldman Sachs analysts said in a research
note this week, citing "growing disparity in local market economic
health."
Unemployment and mortgage foreclosure rates in Tenet and
Universal Health's markets deteriorated more late last year than
those in Community Health and LifePoint's markets, according to a
Goldman analysis. Health Management's markets were in the
middle.
Hospital Volumes
While hospital volumes likely were down in the fourth quarter,
it now appears - as Tenet's preannouncement suggests - they may not
be as "absolutely dreadful" as some had feared during the period,
CRT Capital's Skolnick said. Industry chatter suggests hospital
admissions in January may not be as low as expected either, even
with an unusually mild flu season, she said.
And while Tenet provided investors relief on its fourth quarter,
the company neither confirmed nor revised its 2009 outlook, citing
lack of clarity into demand for health-care services or patient and
payor mix.
Hospital executives, in recent appearances, have given some
insight into admissions trends and spending expectations.
HMA expects fourth-quarter admissions to be flat to down 1%,
numbers that would represent an improvement over the previous two
quarters, when admissions were down more than 3%.
Meanwhile, volume at Universal Health Services' acute-care
hospitals was relatively flat in 2008, Chief Financial Officer
Steve Filton said. Universal Health's Las Vegas market was one of
the fastest growing markets in the country until one or two
quarters ago, he said.
Starting in the third quarter, "we started to feel the pinch of
a weakening economy a little bit more in the Vegas market, mostly
because the gaming industry started to suffer." Profits in the Las
Vegas market were roughly flat in the third quarter after years of
growth, Filton said, "and again, I think we're likely to see that
trend continue."
Credit Crisis
Apart from patient volumes, there is the credit crisis. Because
of it, Skolnick said, an "almost irrational nuclear arms race"
among hospitals to have the most advanced facilities "came to a
screeching halt." Some hospitals truly needed upgrades, others
spent because they had the cash, she said.
Hospitals that the AHA surveyed cited uncertainty about the
economy, a decline in operating performance, lack of access to
capital, high interest rates and bond rating downgrades in their
decisions to delay projects.
HMA, for example, expects capital expenditures of roughly 4.5%
of revenue, or $200 million, this year. The hospital operator had
started 2008 targeting 6% of revenue for capital spending, then
decided to exercise some caution.
"Toward the end of the year we made some conscious decisions to
delay some purchases in light of the economic conditions," HMA
spokesman John Merriwether told Dow Jones Newswires last week.
The AHA, which surveyed 639 hospitals, said significant numbers
of them are finding it difficult to obtain access to capital from
bonds, banks, philanthropy or private equity.
Hospital delays of upgrades are rippling to other health
industry players, such as medical-equipment supplier Cardinal
Health Inc. (CAH), which recently lowered its 2009 forecast because
of hospital spending delays.
Cardinal joined a list of companies that sell medical products
to hospitals, including Stryker Corp. (SYK) and Intuitive Surgical
Inc. (ISRG), which have recently said a capital spending slowdown
could - or already is - pinching sales. A lack of visibility
regarding future spending trends also continues to dog device
makers.
Intuitive, which makes costly surgical robots, will issue its
official fourth-quarter report later Thursday.
-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285;
dinah.brin@dowjones.com
(Jon Kamp contributed to this report.)
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