March 23, 2017
In anticipation of expected tax reform and financial deregulation under the new presidential administration, the stock market surged to an all-time high. Hospital stocks, however, have not fared well, primarily due to the great uncertainty surrounding the potential “repeal and replace” of the Affordable Care Act (ACA). Throughout his campaign, then-candidate and now President Donald J. Trump stated that he would repeal the ACA and replace it with a better reform package, although specifics of any replacement legislation have not been offered. Not surprisingly, hospital stock prices fell dramatically the day after the election, as many in the industry feared that the ACA would be repealed without an immediate replacement. Tenet Healthcare’s stock price dropped 25% on the Wednesday after the election, while HCA Holdings’ stock price fell almost 11% and LifePoint Health’s stock price dropped 14%.
As the likelihood of repeal without immediate replacement has waned, hospital stock prices have begun to recover. In fact, most hospital stocks are now trading either at or above their pre-election levels. However, with the release of the Republican replacement plan on March 6, hospital stocks dipped once again, with Tenet Healthcare falling 7% the day after the release and HCA Holdings dropping a little over 1%.
Hospitals have already experienced a decline in Medicare reimbursement
While the current replacement plan will more than likely undergo substantive changes over the next several weeks, there are three elements to monitor that could have severe impact on hospitals: the elimination of the individual mandate and Medicaid expansion. Hospitals have already experienced a decline in Medicare reimbursement, which was predicated on the assumption that these reimbursement declines would be offset by a reduction in the burden of the uninsured and indigent population on hospitals. However, if the individual mandate and Medicaid expansion are repealed, the number of uninsured patients will undoubtedly increase. Also, it is unlikely that the Medicare reimbursement declines will be reversed, leaving hospitals with all the downside effects of the ACA.
To compound these issues, the rise in popularity of high-deductible health plans among insured patients is increasing the financial strain on hospitals. Many patients delay or forgo necessary procedures due to high out-of-pocket costs. Additionally, hospitals are burdened with the task of collecting more of the costs from individual patients, which leads to increased overhead and higher bad debt expense.
Even if the GOP can successfully navigate all the legislative hurdles to repeal the ACA, many elements of the healthcare reform package may remain in place. The ACA built upon the momentum surrounding value-based initiatives and alternative payment models, and these initiatives are expected to continue. Many smaller hospitals will be actively seeking affiliations with larger systems that have the resources and capabilities to weather the effects of the transition from the traditional fee-for-service model to value-based reimbursement.
What does this mean for hospital valuation? In the short term, we will most likely see a decrease in the number of hospital mergers and acquisitions, as healthcare systems may delay transactions until more specifics are known about any potential “replace” or “repair” healthcare legislation. The high degree of uncertainty may also create a downturn in valuation multiples until more is known about future legislation. However, long-term trends of consolidation and high levels of merger and acquisition activity will continue. The past couple of years have represented high-water marks of merger and acquisition activity in the hospital sector, and these trends are expected to continue, as providers look to pool resources to successfully navigate the new healthcare frontier.