Trump Puts Hospitals in the ICU
Hospital companies are just as miserable about the election of Donald Trump as pharma companies are ecstatic.
Obamacare repeal is one Trump's few proposals amounting to more than a detail-free promise of something Yuge. It's also one of the few areas of wholehearted agreement between him and GOP congressional leadership. If and when it will actually happen, to what degree, and the structure of any replacement are all unknown. But just about any move in this direction will hurt health-care providers that have benefited from the law's efforts to make health care more accessible.
It spells the likely end of a growth boom for these companies, and years of uncertainty to come. Big health-care providers need to start preparing for the worst, and quickly.
Hospitals have had a pretty stellar run with Obamacare, outperforming the market for years. Sales tend to go up when millions of previously uninsured people gain access to affordable health care. The once-inconceivable reality of a Trump presidency has evaporated those gains and more.
It's early days, but it's not looking good for the ACA. The GOP has already shown it can use the budget reconciliation process to hit at the law's core health-care expansions without having to rely on a super-majority in the Senate. Their only impediment has been Barack Obama, who only has a few months left in the Oval Office.
Democrats will fight a repeal, but it's uncertain how much they can do. Trump will have a fair amount of latitude to mess with the law without even needing Congress. The big question is whether the law will be killed entirely, stripped of its least-popular provisions while keeping the parts everyone likes, or stitched with GOP favorites into a Frankensteinian health-care-policy monster.
The first option is tough to imagine. Just stripping millions of vulnerable people of health insurance is politically problematic, and people like the ability to get insurance despite having pre-existing conditions, among other protections granted by the law. That doesn't mean it's not possible -- we are in uncharted territory, after all -- but you'd hope there would be at least some degree of moderation and focus on the human cost of these moves.
It will be a difficult and messy balance to strike; keeping the law's less-controversial features and removing unpopular ones, such as the individual mandate, just can't work. It's just math. Proposed replacement options, such as encouraging investment in health-care savings accounts, interstate shopping for insurance, and block-granting Medicaid, are unlikely to be adequate, and likely to leave millions uninsured.
Regardless of which flavor of repeal or replace emerges, a heaping helping of corporate pain will fall on hospitals and health-care services companies.
According to Bloomberg Intelligence, Obamacare accounted for about 10 percent of Ebitda for Tenet Healthcare and Community Heath in 2015, a number that might be higher this year. Whether that source of revenue erodes rapidly or over the course of a few years, both companies will suffer.
If the Medicaid expansion gets rolled back, then Quorum Health should watch out below; 68.1 percent of its beds are in expansion states. LifePoint and Universal Health both have more than 40 percent of their beds in these states.
None of these firms has so much organic sales growth that this won't be a blow. Want an indication of Obamacare's impact? Check out 2014 revenue growth in the chart below; that was the year that the program became eligible for many more low-income and vulnerable Americans. HCA Holdings only has 17.1 percent of its beds in expansion states, so may be slightly less exposed to that part of a repeal, but has the most exposure to the public exchanges, at about 6 percent of its Ebitda in 2015.
An added concern? A spate of deal-making has led to some pretty substantial leverage in the sector. Tenet and Community Health both have net debt-to-Ebitda ratios of 5.7 and 6 respectively, according to Bloomberg Intelligence, and the average in the sector is 4.65. A major decline in free cash flow might start to make investors anxious.
Most industries can look at Trump's election and find a glimmer of silver lining, or at least investors seem to be finding them, given the behavior of broad indexes. Health-care providers are definitely not in that camp, and need to begin shoring up their balance sheets accordingly.
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Max Nisen in New York at firstname.lastname@example.org
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