Hedge Hospital Pricing Risks with Non-Rx Consumables
Hospitals’ share price performance (v. SP500) is highly correlated with changes to real revenue; Hospitals tend to outperform on accelerating revenue, and vice versa. On this basis, pending volume gains (rising employment, reform-related expansion coverage) argue for owning Hospitals
Hospitals’ aggregate pricing is the wildcard; if prices fall as volumes increase share price performance arguably will be muted
If the 2 pct Medicare rate cut (sequester) were the only change to hospital payment rates, pricing would be more or less stable through the first years of the reform-related expansions; the Medicare cut and the dilutive effect of lower Medicaid rates would be offset by reduced costs for charity care
More realistically, disproportionate share (DSH) reductions, discretionary reductions to Medicaid rates by states, discounts to exchange-based plans following the initial enrollment period, and rising bad debt exposure as average plan generosities fall will lead to falling aggregate prices for Hospitals
Given current low valuations and the high likelihood of accelerating unit demand we continue to recommend an overweight position in Hospitals. However because Non-Rx Consumables (e.g. CFN, OMI) see very nearly all the benefit of rising admissions, but have more stable pricing; we recommend pairing Hospitals and Non-Rx Consumables rather than a more concentrated position in Hospitals alone
For our full research notes, please visit our published research site.