No Bargains for No-Moat Health Service Providers
No-moat health service providers are most challenged by industry uncertainty.
Recent Medicare payment reductions and further potential Medicare cuts associated with the debt ceiling legislation have reignited fears over reimbursement pressure in the health-care industry, and as a result, health service providers have faced some of the most severe stock price declines among the sector. Tenet Healthcare (THC) and Select Medical (SEM) have witnessed nearly a 20% stock price reduction since July, while HCA Holdings (HCA), Kindred Healthcare (KND), and Skilled Healthcare (SKH) saw over 45% declines during the same period. We have long viewed reimbursement pressure as particularly troublesome for the no-moat health-services industry, which supports our belief that these businesses face slim chances of creating economic profits. Although not completely immune to industry trends, we think undervalued wide and narrow moat health-care companies like Pfizer (PFE), Abbott (ABT), Novartis (NVS), Medtronic (MDT), Covidien (COV), and WellPoint (WLP) can navigate health-care industry headwinds with less difficulty and provide greater investor opportunity.
Reliance on Government Payments Quashes Economic Moats for Health Service Providers
We think health service providers, including hospitals, skilled nursing facilities, and home health agencies, have not been able to carve out moats. High levels of market share fragmentation in these industries keep these operators relatively powerless against consolidated bases of payers and suppliers. As seen in Figure 1 below, a large portion of health service provider revenue stems from government payments through Medicare and Medicaid. Higher-margin private insurance payments result primarily from the large managed care organizations, such as United Health and WellPoint. For health service providers, facing a large consolidated base of payers makes negotiating favorable reimbursements difficult. Acute hospital operators HCA and Tenet focus on building market share in key urban markets, primarily in Florida and Texas, creating greater negotiating leverage with payers in these fast-growing Sun Belt states, which typically see less government oversight of insurance premium hikes. Additionally, the size of these larger operators increases economies of scale and purchasing power. However, non-profit operators, which receive tax advantages in addition to dedicated donors, comprise a large portion of this industry. While HCA, Tenet, and other larger private operators may gain certain competitive advantages, they still face a tough road ahead from all payers, especially from Medicare and Medicaid.
Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.