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January 26, 2017

CHS Chief Leads Discussion on Wall Street’s Healthcare Outlook

CHS Chief Leads Discussion on Wall Street’s Healthcare Outlook

Philip Betbeze | HealthLeaders Media

Wayne T. Smith’s company had a terrible, horrible, no good, very bad 2016.

That’s the main reason that Smith, the CEO of embattled hospital operator Community Health Systems, was glad to see the calendar reach 2017.

“I’ve had a number of inquiries about whether I’m alive and well,” he told a capacity crowd last week as moderator of the Nashville Health Care Council’s annual event featuring Wall Street analysts last week. “You wouldn’t know it from our stock price, but I am,” he joked.

Last year, healthcare as a whole didn’t do too much better than CHS. In 2017, market analysts say they expect a better investment climate in many healthcare sectors.

The Dow broke the 20,000 milestone on Wednesday, and overall, the healthcare sector has recovered somewhat after the surprising election results that swept Donald Trump to the White House. But the narrower hospital sector has continued its 2016 decline since the election.

The four Wall Street analysts who joined Smith on stage at the Health Care Council event see the industry, especially the hospital sector, as “oversold.”

So said panelist Whit Mayo, managing director at Robert W. Baird, a Milwaukee-based investment and private equity firm. “The election threw a curve ball into acute care hospital valuations…. I do think the group is oversold and there are pockets of opportunity,” he said.

On repealing and replacing the Affordable Care Act, a key promise of Trump and the Republicans who control both houses of Congress, Mayo expressed doubt that here will be drastic changes in any immediate timeframe.

‘Valuations Have Contracted’
“We’re in for a much softer landing,” he said. “We’ll see something [legislative] because the Republicans made a commitment to their voting base, but the chassis around the ACA today may look a helluva lot similar” to what Republicans ultimately replace it with.

His firm is also positive on behavioral health and physician practice management sectors.

When it comes to investing in healthcare overall, Paula Torch, senior research analyst with Nashville-based investment bank Avondale Partners, expressed cautious optimism, but said she expects some sectors will perform better than others.

“Valuations have contracted. My coverage list was down about 31% for 2016,” she said.

Torch expects pockets of outperformance in some sectors that would likely be “immune” from any tinkering with Obamacare, such as behavioral healthcare and outpatient services. She says the fragmented industry could experience high single-digit to low double-digit growth over the next several years.

A.J. Rice, managing director at UBS in New York, expects to continue to see nontraditional partnerships between acute care operators and other healthcare sectors, from home health to imaging to other post-acute care services, to proliferate.

Some of those vertical integrations may eventually take the form of innovative mergers, such as the recently announced deal between United Healthcare and Surgical Care Affiliates that would unite a payer and provider of healthcare services. It’s not the first such unusual merger, and it certainly won’t be the last, according to Rice.

‘More Nontraditional Partnerships’
“We’re watching people do things with partners they would not traditionally do things with,” he said, mentioning revenue cycle management outsourcing as an example of how companies are leveraging niche operators to eke out incremental efficiency gains.

“We’ll see more nontraditional partnerships,” he said.

Chris Rigg, senior managed care and healthcare facilities analyst with Deutsche Bank, expects consolidation to continue to accelerate in the specialist physician practice arena, especially in anesthesiology and radiology. Other areas of consolidation might take place in medical management or back office functions that wouldn’t be recognizable to consumers, he said.

Smith asked all what their best picks were for 2017, suggesting that a certain Franklin, Tenn.-based hospital company might be poised for a comeback.

“We had a challenging 2016—we were ill with a serious case of HMA-itis,” he joked, referencing his company’s 2013 acquisition of a competitor that saddled the combination with high debt and operating problems in HMA legacy hospitals. “Don’t worry, it’s not contagious.”

Other names dominated the analysts’ recommendations, however, including hospital operator HCA, payer United Healthcare, addiction treatment provider Acadia Healthcare and healthcare services company Envision Healthcare. 

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