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Patient Trends Improving, but Reimbursement Outlook Remains Bleak for Health Service Providers

Greater accountability creates a new level of operating uncertainty.

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While the volume picture for health service providers is still slowly improving as macroeconomic conditions ease, the reimbursement pressure story, regardless of the election outcome, remains a headwind for the mostly no-moat industry.

We think the health service providers we cover are fairly valued. Our outlook for tepid reimbursement growth, margin pressure, and rising capital expenditures leads us to believe that current share prices reflect a similar view by the market. We think the high level of financial leverage and consistent threat of Medicare and Medicaid payment litigation at many of these companies justify a high level of uncertainty and the need for a high margin of safety. However, occasionally these companies offer somewhat compelling valuations for high-risk-tolerant investors.

Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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