| Hospital
Stocks Poised to Benefit from an Aging Population |
Published: May 17, 2005
Every year there are about 108
million visitors to America's hospital emergency rooms. That works out
to about 37 visits each and every year for every 100 persons. And this
number is up substantially over the past decade -- the U.S. Department
of Health and Human Services estimates growth of over +16% between 1991
and 2001, and only about a quarter of that growth was due to the
increase in population.
But if you think that this
number seems high, think again. The number of hospital admissions is set
to explode in the U.S. over the next 30 years, and there is absolutely
nothing that can stop that trend.
The reason is simple: The
summary statistics quoted above don't tell the whole story. Americans 65
years and older are more than twice as likely as those under 65 to visit
the emergency room in a given year. And that's just data on emergency
room visits -- older persons are more likely to visit outpatient or
other hospital-based service centers than the young too.
Simple
demographics tell us that demand will keep rising. As you can see in our
chart, the U.S. Census Bureau is projecting an explosion in the over 65
segment of the population between now and 2050. In fact, that segment of
the population is set to double from about 12% of all Americans in 2000
to 21% in 2050.
So, given that fundamental
backdrop, why have hospital stocks only recently begun to outperform the
broader market? The reason has traditionally been bad debts.
Specifically, hospitals are
required to admit patients to the emergency room without checking first
to see that they're able to pay. As anyone who's ever spent a night in a
hospital can attest, stays are expensive -- some of those admitted never
manage to pay the bill and are uncovered by insurance.
But the best in the business
have found ways to get around and reduce the impact of that problem.
Some have started a policy of charging reduced rates for the uninsured
-- this allows the hospitals to garner at least some income, even from
poorer and uninsured patients. And most are classifying uninsured
patients as charity cases up-front rather than waiting several quarters
to re-classify unpaid debts as bad debts -- this gives investors more
certainty over the future course of earnings.
Even better, the government
appears to be coming to the industry's rescue in some not-so-subtle
ways. First, Medicare reimbursements for many hospital procedures remain
generous. And with the elderly likely to make up an increasingly
important facet of hospitals' patient base, we expect pricing growth to
be strong in the years ahead. But even more importantly, a bill has
recently been introduced that could limit or put a moratorium on the
growth of so called "specialty" practices.
Specialty practices are
designed to treat very specific illnesses -- not to be general-purpose
facilities. These offices carry higher profit margins and a lower
incidence of uninsured patients than the big primary care hospitals.
Some major hospital companies have complained that these facilities also
skim off their best clients. Congress has already acted to limit their
growth, as primary care facilities are normally viewed as a necessary
public service.
What's more, despite all the
talk of a rising class of Americans not covered by health insurance,
hospital stocks have continued to see good patient growth and falling
bad debts over the past few quarters.
In the table below, my staff
and I outline some of the major players in the hospital business. And in
the analysis that follows, we examine two of our favorite hospital
stocks.
| Company
(Symbol) |
Enterprise
Value |
2006
P/E |
LT
Growth |
Debt/Equity |
| HCA
(HCA) |
$33.2
Bill |
15 |
12% |
185% |
| Tenet
Healthcare (THC) |
$8.9
Bill |
76 |
12% |
273% |
| Health
Mgmt. Assoc. (HMA) |
$7.0
Bill |
14 |
15% |
50% |
| Triad
Hospitals (TRI) |
$5.4
Bill |
15 |
15% |
66% |
| Community
Health (CYH) |
$4.7
Bill |
16 |
16% |
140% |
| Universal
Health Services (UHS) |
$4.0
Bill |
16 |
14% |
55% |
| LifePoint
(LPNT) |
$2.4
Bill |
15 |
18% |
39% |
Important:
To view the remainder of this article, in which StreetAuthority.com
founder Paul Tracy and his staff provide
in-depth profiles of their two favorite stocks in the hospital industry, you'll need to
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