Wall Street Looks at Healthcare Industry

KELLY PRICE
Posted: Wednesday, February 25, 2009 4:33 pm

Wall Street Looks at Healthcare Industry | healthcare financing, Nashville Health Care Council, Harry Jacobson, Thomas Carroll, Gary Lieberman, Robert Mains, John Ransom, A.J. Rice, hospitals, Medicaid, behavioral health, Medicare Advantage, healthcare REIT, assisted care, nursing home

Some of the nation's foremost healthcare analysts told Nashville's local industry leaders that, despite the backdrop of an uncertain economy, our city's $45 billion healthcare industry may see opportunities in 2009. Pictured at the Nashville Health Care C

NHCC Hosts Panel Discussion

A group of prominent analysts who study the financial ups and downs of the healthcare industry discussed Wall Street's View on Prospects for the Health Care Industry at a recent Nashville Health Care Council luncheon and thought they saw a flicker of light at the end of the tunnel for the year 2009.

The topic drew an overflow, waiting-list crowd of 450 executives to the NHCC's annual future-gazing financial luncheon on Jan. 28, eager to hear forecasts for Nashville's $45 billion healthcare industry.

The luncheon was sponsored by Harwell Howard Hyne Gabbert & Manner, P.C., First Tennessee, Jarrad Phillips Cate & Hancock, and Mede.

Moderator Harry Jacobson, MD, vice chancellor for health affairs at Vanderbilt University Medical Center pointed out the world had changed dramatically since last year's Wall Street luncheon.

"We've been amazed to watch what's been happening in markets, not only in this country, but worldwide," he said, adding, "Out of what's going on, there will be challenges and great opportunities... and, hopefully, we in Nashville, as investors and as entrepreneurs, will be able to take advantage of the opportunities that come with such change."

Jacobson introduced panelists Thomas Carroll, managing director at Stifel Nicolaus Capital Markets; Gary Lieberman, managing director at Stanford Group Company; Robert Mains, senior healthcare equity research analyst at Morgan Keegan (parent of Shattuck Hammond Partners); John Ransom, managing director, healthcare equity research for Raymond James & Associates, and A. J. Rice, senior healthcare services analyst at Pomeroy Research (the provider for Soleil Securities).

The panelists prescribed a healthy dose of the old medical standby "tincture of time" in dealing with inevitable healthcare reform legislation and the agenda the Obama administration will put in place along with its economic stimulus plan, changes to Medicaid and Medicare eligibility, and payment issues.

Panelists urged local healthcare industry leaders to aggressively insert themselves into the healthcare reform debate, showing that they have earned a place at the table by the innovations, quality and positive outcomes that they have achieved.

Confessing that analysts are a "different breed" in the financial world, especially in the hospital sector, Rice said "company CEOs see a glass that is half full; accountants and financial types see the same glass as half empty; and analysts think the design of the glass is flawed -- otherwise it would be full."

He pointed out that the hospital sector stock has been very volatile, last year outperforming the broad market for the first nine months but seeing prices collapse under the combined weight of investor concerns about economic worries and a frozen credit market. Actually, the hospital sector outperformed the broad market, and 2008 was an average year in hindsight.

This year, his company is advising clients to reduce their forecast by about 2 percent, but sees bright spots for 2009: labor expense is moving in the right direction and there are no earth-shattering new drugs or their equivalent on the expense side. A focus on what's happening on the government side and the current philosophy of the new administration makes Rice believe that it is good to have a number of non-profit competitors for company in the non-profit sector. He remains very cautious about the overall market and is building forecasts believing that the market will continue to struggle.

Lieberman, who promised that his analysis was not swayed by the fact that most of the audience was armed with baseballs (provided by a luncheon sponsor), predicted that for hospitals, it will be a challenging 2009 with bad debts at the forefront of investor concerns, although the picture is brightened somewhat by the $87 billion in Medicaid money that will be coming down the pipeline. He feels that investor concern with overall bad debt levels combined with reduced credit levels will continue. Lieberman said that the volume growth in demand will prove to be more elastic, although volumes are still on a relatively tight band. The dialysis industry is in a relatively favorable position at the top of the list since there is no elasticity in demand and absolutely no substitute for the procedure. DaVita and Fresenius, the two biggest players in this industry sector, have market share that remains close to 80 percent in combined markets, although there is concern for the very disproportionate share of profits –– less than 15 percent from commercial patients.

John Ransom, speaking about the behavioral health sector, said the area is seeing a credit crunch like it has never seen before. Investors are obsessed with debt markets and continue to hear extremely pessimistic forecasts as the sector begins the process of unwinding heavily leveraged private equity participation. Commercial utilization pressure is expected to be more magnified. Having been braced for an Armageddon last year, he said that healthcare can't be complacent in the political arena and must strongly defend the industry to politicians. For-profit healthcare has to reestablish itself, mainly by taking the lead from the dialysis industry and starting to talk about quality and outcomes to insulate against growing political hostility. Ransom added, "Going forward the for-profit world will have to restate its case to Washington as a value added option in the healthcare field. Until for-profits can differentiate themselves with consumers based on quality, they are unlikely to see volume growth better than the overall industry and could potentially lag it"

Analysts' Picks

Moderator Harry Jacobson, MD, asked each panelist to name a healthcare stock or two that they would recommend in 2009. Below are their answers:
Carroll:United Healthcare (UNH)
Healthways (HWAY)
Mains:Alliance Imaging (AIG)
Rice:Community Health (CYH)
Odyssey Health Care (ODSY)
Omni Health (OCR) /td>
Lieberman:HealthSouth (HLS)
Psychiatric Solutions (PSYS)
DaVita (DVA)
Ransom:AmericSourceBergen(ABC)
Service Corp. (SCI)
Psych Solutions (PSYS)
Health Management Associates (HMA)

Wholeheartedly agreeing with Ransom's "sermon" about defending the industry, Carroll said it applies to the managed care sector, as well. Going into 2008, there was a backdrop of talk about reform and early in 2008, companies started to see downward revisions. He feels the market will "muddle through" 2009, which will look better than 2008, and at current evaluations, might not be a bad place to go. Carroll's belief is that government is going to become a much larger customer of managed care, and having seen Medicare Advantage morph into "Advantage 3.0," companies that are going to survive are going to have to grow into larger vendors to government with Medicare as the cornerstone. Companies that can manage chronic illness need to get consolidated, he said, "or wither on the vine," a process that has already started.

Mains, assigned to speak on post-acute care and REITs, said that post-acute care had a "surprisingly bad year." He pointed out that nursing homes are usually pretty defensive but concerns about payment haven't dissipated. Mains noted 2009 will see continued concern in the payment arena, while assisted living facilities have justified worries about occupancy levels, although they didn't lose a lot of ground in the last year. Corporate balance problems hung over the entire industry; he feels that stock prices depend on getting some resolution of balance sheet issues, although at the facility level, things are not terrible.

REITS through September 2008 outperformed the REIT index by 37 percent and have continued to outperform the index since September. However, it has still been a bad time for healthcare REITs, which are going to have problems with any company related to financial services, although not access to capital or underperformance. The four largest REITs had, as of their last announcement, $3.1 billion in available, well-priced credit. Mains said, "They've got the money to spend but are not doing it because they are worried about sluggish performance, although they are still outperforming their counterparts in non-healthcare sectors."

Jacobson asked each panelist to name a company that "you see as doing something innovative that might change the game." Rice selected Community Health, Lieberman named HealthSouth, Ransom suggested Americus Health Systems, Carroll picked United Health, and Main chose Brookdale Senior Living as companies that could bring inventive thinking to the table.