A Better Prognosis for Health Care Stocks

S&P's Robert Gold likes home health care, rehab and other specialty service providers

By Robert Gold

Standard & Poor's thinks the recent decline in specialized health care services will prove short-lived and has a positive outlook for this slice of the industry. The S&P Heath Care (Specialized Services) Index fell 16.7% year-to-date through April 10, vs. an 11.2% decline in the S&P Super 1500 Index and a 17.8% drop for the consolidated S&P Health Care Index.

A revised Medicare prospective payment system (PPS) for health care providers hurt many stocks in the group due to uncertainty surrounding revenues and operating margins. Washington took note in 1999 and passed the Balanced Budget Refinement Act, which will shell out close to $18 billion more in Medicare provider payments through 2004. Congress also boosted Medicare spending by $31 billion through 2004. Combined with the leaner operating cost structures and rising private pay rates, S&P sees a bullish earnings outlook for many service providers.

However, S&P still is bearish about contract research organizations that provide third-party services to assist in drug development and other medical products. Specifically, S&P is concerned about industry-wide R&D overcapacity that has resulted from merger and acquisition activities, and believes that the large drug manufacturers will continue to move their R&D programs in-house rather than outsource.

As the market stumbles and earnings warnings persist, S&P would use the weakness to buy in home healthcare, rehabilitation services and dialysis and other specialty services.

Standard & Poor's has a 5 STARS (buy) ranking on HEALTHSOUTH (HRC ), an outpatient surgery and rehabilitative facility provider, Lincare Holdings (LNCR ), a provider of home therapy and IMPATH (IMPH ), a cancer diagnostics firm.

The following stocks carry an S&P ranking of 4 STARS (accumulate): management-service provider Orthodontic Centers of America (OCA ) and laboratory testing company Quest Diagnostics(DGX ).

Gold is Standard & Poor's Health Care Services analyst

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