For-prof­its: tougher times

Modern Healthcare - - Special Report -

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.”

—Vince Gal­loro

Dol­liver: Com­pe­ti­tion for skilled work­ers likely to heat up.

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