Hospital Industry Outlook: High Cost, Shift of Care Pose Concerns

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The Zacks Medical-Hospital industry comprises for-profit hospital companies that provide healthcare facilities through different types of hospitals such as acute care, rehabilitation and psychiatric.

These hospitals are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, mental health care, diagnostic and emergency services among others.

Hospital companies receive payments for patient services from the federal government under the Medicare program, state governments under their respective Medicaid or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.

Let us take a look at the industry’s three major themes:

• A growing baby boomer population, rising prevalence of chronic diseases, increase in penetration of health insurance and low unemployment should continue driving demand for the hospital industry services. A research by IBISWorld shows that the industry has grown annually by 3.5% during 2013-2018, with $1 trillion of total revenues expected in 2018. This growth is expected to continue in the coming years on a surge in healthcare spending.

• The industry is witnessing increased investments in health technology and concerted efforts to harness the power of big data in testing methodologies, discovering trends and providing information to support physicians and clinicians in enhancing quality of care. This should ultimately lead to lower costs and higher patient admissions, thus aiding both revenues and margins. Over the past few years, the industry has also started consolidating mainly due to the pressures of healthcare reform. Players are continuing to resort to mergers and acquisitions in order to create operational, strategic and financial value for their operations. Numerous deals have lead to economies of scale, helping the industry to efficiently manage costs and improve productivity and outcomes through higher business volumes, and enhance bargaining power with payers.

• However, the industry continues to face shortage of labor specially relating to nurses. A decline in the number of nurses has led to an increase in hospital readmissions and stretches the length of stay, which has a negative impact on companies. In order to better face the nursing shortage, which is expected to persist through 2025 (according to the Bureau of Labor Statistics), companies are designing their employee benefits to attract and retain nurses. Despite efforts to retain and expand its nursing staff, players will feel financial pain, as turnover among nurses remains high and there are not enough new nurses entering the workforce. It should be noted that salaries and benefits constitute nearly 50% of the total operating expense for the industry. Also, growing efforts to reduce unnecessary hospitalization, greater use of chronic disease management programs and a shift toward outpatient treatment are partial dampeners to the industry’s growth.

Zacks Industry Rank Indicates Dull Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates sluggish near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #213, which places it in the bottom 18% of more than 250 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2018, the industry’s earnings estimate for the current year has gone down by approximately 1.5%.

Despite the industry’s gloomy near-term view, we will present a few hospital stocks that one can hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

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