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Ailing Hospitals Face Reckoning as Investor Agitation Grows

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President Donald Trump has slammed health insurers for the “fortunes” they’ve made under the Affordable Care Act. For hospitals, the law hasn’t delivered the same sort of returns.

Insurance stocks have almost tripled in value since the health law took full effect in 2013, helped by an expanding economy and growing demand for care for seniors. But those forces haven’t helped hospitals. A Bloomberg index of U.S. hospital stocks is near its lowest level in four years and the prognosis is grim for two of the largest for-profit chains.

Tenet Healthcare Corp. and Community Health Systems Inc., which run or lease more than 200 hospitals and employ more than 250,000 people around the United States, have seen their shares plunge almost 40% in the past year. Both are mired in debt, with restless shareholders pushing for changes.

(Related: Muni Hospital Bonds Resume Winning Run as the Affordable Care Act Fight Lags)

Hospitals are struggling with rising costs and empty beds. Millions of people gained coverage under the Affordable Care Act, but many were enrolled in Medicaid, which is less lucrative for hospitals, said John Morrow, a managing director at Franklin Trust Ratings who analyzes the industry. Insurers and government programs are also pushing patients toward cheaper doctor’s offices and clinics.

Investors “are losing faith,” said Morrow. Tenet and Community “are probably past their day. I don’t think the Street is going to put up with them any longer.”

Against that backdrop, investors are bracing for yet another weak quarter from the companies after bellwether HCA Healthcare Inc.’s preliminary results trailed expectations largely thanks to the effects of this year’s hurricanes.

Debt Hangover

Tenet and Community are straining under the weight of an acquisition binge that saddled each with about $15 billion of debt and poorly performing facilities.

Tenet spent billions to buy Vanguard Health Systems Inc., do a joint venture with United Surgical Partners International Inc., and acquire facilities in the U.K. Community purchased Triad Healthcare Corp. and Health Management Associates Inc., which it has struggled to integrate.

Tenet shares on Wednesday fell less than 1% to $14.17, while Community shares were off 2.5% to $6.17.

Rival HCA, by contrast, has been “much more disciplined,” doing no major deals in the past 15 years, according Bloomberg Intelligence’s Jason McGorman. Despite facing many of the same challenges as its sicklier foes, the largest U.S. for-profit hospital chain has been able to better preserve shareholder value.

Tenet and Community “don’t really generate a lot of cash flow, so a lot of that cash has to go service debt and they can’t invest a ton back into their hospitals,” McGorman said. “That gives HCA even more of an advantage because they have more cash to reinvest and attract new talent.”

Investors in Tenet and Community are pinning their hopes on activist shareholders who are agitating for changes at the companies.

Tenet shares rallied in August after its largest holder, Glenview Capital Management L.L.C., ended a pact that prevented it from taking a more active stance. The hedge-fund firm is weighing its options and may seek to replace Tenet’s board as soon as January, a person familiar with the matter have told Bloomberg News. Tenet Chief Executive Officer Trevor Fetter left the company this week, earlier than a planned 2018 departure date.

Analysts have cautioned that the Dallas company will struggle to find a buyer given its high debt. A breakup of its businesses may be a more plausible scenario, but there’s little agreement on whether such a move would unlock much value for investors.

Tenet declined to comment ahead of its earnings release next month.

Community also gained after its top shareholder, Shanda Media Limited, boosted its stake to 22% in August. The Singapore-based investor may want seats on the board, analysts said. Shanda recently provided suggestions on nominations at the company’s request, according to a filing.

“At this point, most investors would expect that there’ll be some change on the horizon,” Leerink analyst Ana Gupte said by phone. Tenet and Community “cannot improve their share price by doing what they’re doing currently.”

Shanda declined to comment through an outside spokesman. Community spokeswomen didn’t return multiple calls and emails seeking comment.

Subsidy Squeeze

Meanwhile, Trump’s order to cut off some Obamacare subsidies is poised to deepen their woes. The effect is likely to be “profoundly destabilizing” to the hospital industry, Mizuho analyst Sheryl Skolnick wrote in note Oct. 13.

Hospital shares and bonds rallied after Senators from both sides of the aisle last week reached a deal that would allow the subsidies to start flowing again. The Trump administration has made conflicting statements on whether the president would sign the bill.

The administration is “doing its best to destroy health care,” Vicki Bryan, an independent credit analyst, said in a telephone interview. “Hospitals are on the front line of that damage, and the hospitals that perform the weakest” see the most pressure, she said.

—-Read Hospitals Are Vanishing and Undoing the ACA May Make It Worse on ThinkAdvisor.

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