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Analysts: Outlook appears brighter for health stocks (The Tennessean)

Analysts: Outlook appears brighter for health stocks (The Tennessean)
by Getahn Ward, The Tennessean | Feb 02, 2012

NASHVILLE – Expect a slightly better year for hospital chains financially as consumers use more medical services and patient volumes stabilize, a panel of Wall Street analysts agreed here Wednesday.

But what happens in Washington and in the broader U.S. economy are also likely to be key factors in determining the direction of the health-care industry.

“Everything else will turn on that,” said Wayne T. Smith, chief executive of the Franklin-based Community Health Systems hospital chain. Smith was moderator of a Nashville Health Care Council panel discussion on Wall Street’s outlook for health-care stocks.

Going into last year, optimism was high for a rebound in consumer use of medical services. Those expectations didn’t fully materialize, though, and uncertainty about reimbursement cuts, including a joint committee of Congress looking for ways to reduce the federal deficit, weighed on investors.

“The big question mark is volume trends,” said Adam Feinstein, an analyst at Barclays Capital in New York, who expects more stability this year.

Overall, analysts expect fewer headwinds out of Washington. But with the U.S. Supreme Court expected to hear a legal challenge to the health-care reform law and the upcoming U.S. presidential elections, executives and analysts say they intend to keep a close eye on developments in the nation’s capital.

Analyst A.J. Rice of Susquehanna Financial Group in New York said the Supreme Court’s ruling could have a significant impact on November’s presidential elections.

“If the Supreme Court upholds it, it gives (President Obama) tremendous momentum going into the fall – it enhances his prospects a lot,” Rice said. “If it gets voted down, then all the Republican arguments of overreaching are going to come to bear, and they can point to the Supreme Court as well.”

Pharmacy benefits managers should be among beneficiaries of the health-care reform law as more Americans become insured with drug benefits. More well-known branded drugs going generic also should help that sector, said analyst Frank Morgan with RBC Capital Markets in Nashville.

On mergers and acquisitions, analysts see more deals in the hospital sector because of an availability of capital and some not-for-profit hospitals struggling financially. That should push some nonprofits to pair with larger chains.Nashville-area startups and new players such as RegionalCare Hospital Partners and Acadia Healthcare should also play a role in consolidating their respective niches, analyst Rice said.

Rice sees consolidation in the managed care sector ahead because of regulatory changes pushing some players to reduce their administrative costs. He cited as an example Cigna closing its $3.8 billion acquisition of HealthSpring this week.

Feinstein of Barclays Capital expects fewer initial public offerings by hospitals and other health-care companies compared to 2011 when the Nashville-based HCA hospital chain returned to being publicly traded and Vanguard Health Systems made its publicly traded debut.

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