MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
With new 2016 AHD volume data in hand, we built and analyzed a same store hospital data set from 2013 through 2016 and did a deep dive into those volume trends. We confirm our initial 11/2016 work, i.e., discharges down a lot despite reform. The danger: high margin managed care dropped again despite the coverage expansion from the ACA. Combined with still-slowing ER visit growth rates and results from managed care ACO initiatives, we think we paint a compelling picture of an industry in long-term structural decline. But in the short run, the stocks appear poised to break out of their recent ranges, potentially propelled by a Senate GOP health care bill that's less worse than the House. Our call: near-term upside, especially for credit-sensitive stocks for those who trade, but we think the commercial volume declines continue, driving FCF and stock prices down longer-term.
Key Points
MSUSA's proprietary analysis of a custom data set of same hospitals for each of 2013 through 2016 shows a (7.4%) decline in Commercial & Other (C&O) discharges versus pre-reform 2013 levels, worse than the 2015 decline of (5.8%). But as this category also includes newly insured exchange lives versus 2013, commercial volumes should have risen even as uninsured fell. Medicaid growth can't explain the difference. Combined with our understanding of managed care plan's drive to reduce ER and hospital utilization, presented at least in part herein, we reiterate our concern that the hospital industry is in the early stages of a long-term structural decline in volumes....and as volumes go, so go stock prices.
June 30 may be an important date for hospital stocks: The stocks have been stuck in a trading range as we await the Senate AHCA revision. We note that Sen. McConnell has said he wants to bring the bill to the floor, or at least to the GOP membership by the July 3 break, which means by Friday June 30. We think that's the catalyst for a break-out. As for direction, whatever the Senate comes up with, it will probably be less worse than the House version. If the bill isn't better, we think the Street will see the status quo prevailing. So either way, the stocks could go up & the credit sensitive stocks likely have stronger S-T upside: CYH could see $10 again and THC $20, but we expect those gains to be short lived, even with decent 2Q results a possibility. Longer term, volumes matter (Skolnick's rule #7) and commercial managed care volumes matter a lot. We reiterate our ratings and PTs with renewed concerns of a long-term structural volume decline supporting our generally cautious to negative sector view.
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