For-profits: tougher times
In 2010, investor-owned hospitals will be hard-pressed to maintain the cost-cutting, particularly on labor costs, that boosted their results so strongly in 2009, healthcare stock analysts say. As Kemp Dolliver, a managing director with Avondale Partners, points out, their not-forprofit competitors are starting to bounce back, albeit from a very depressed base, so the competition for skilled employees should heat up. For example, 19-hospital Intermountain Healthcare in Salt Lake City has restored its matching contributions to employee retirement accounts, Dolliver says. Overall, Dolliver expects labor costs will remain in check.
Darren Lehrich, a healthcare stock analyst for Deutsche Bank, says his research team expects labor costs to return to a more normal increase of 3% to 3.5% on a volume-adjusted basis, rather than the basically flat performance in 2009.
“We still have very high unemployment nationally, so large employers like hospitals don’t need to be very aggressive with bringing back big salary increases or getting too far ahead of themselves with regard to hiring,” Lehrich says. “But, at the same time, the economic environment has stabilized, and I think that will lead to some merit increases and some return to slightly higher pay.”
Other factors continue to favor investorowned hospitals, Dolliver says. They continue to benefit from caps on medical malpractice awards in some of their key states, such as Texas, and most of the chains are well-positioned now to do small or mediumsize acquisitions, he says. Capital spending might rise a bit, but not-forprofit competitors still are far from restarting the medical arms race.
Lehrich says he agrees that acquisitions will be more prominent over the next two years, but he adds that companies will be selective, preferring larger hospitals in markets with steady population growth, and will pass on the smaller hospitals in the more remote rural markets. To be convinced that the medical arms race is truly over, Lehrich adds, capital expenditures will have to remain tempered through 2011 and 2012.
Factors to watch out for, Dolliver adds, are whether the federal government will give more help to state Medicaid budgets and whether COBRA subsidies will be extended. Regarding healthcare reform, he says, whatever final shape it takes, there will be tighter underwriting rules for insurers, and that is likely to lead to consolidation that hospitals will have to reckon with.
Lehrich says he will be watching payer mix very closely in 2010, as that continued to deteriorate throughout 2009, and also will keep an eye on physician strategies. The chains are employing more physicians and being more aggressive in recruiting. Those strategies can drive up labor costs, but they also can fill gaps in service lines that can boost volume, he says.
Generally speaking, investor-owned hospitals should fare a bit better than not-for-profit hospitals from healthcare reform, Lehrich says.
“I expect them to have a much more sophisticated approach to a new regulatory regime,” Lehrich says. “I think they’re pretty well-positioned.”
Dolliver: Competition for skilled workers likely to heat up.