MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
When the right answer to the question, "What will happen to the ACA, Medicaid and Medicare?' is we don't and can't know, we see it as dangerous ground for investing. To explain, we explore how the GOP can eliminate the 60 vote rule, jam repeal without replace and get Medicaid block grants and Medicare premium support/privatization through Congress in a very big hurry. We use a custom AHD dataset and our companies' data to show the impact of reform, but also a more disturbing and continued downward trend in volumes and EBITDA that would make us worry about hospitals absent the Trump Triumph. Finally, we show that as bad as repeal would be, a shift to 'Caid mgd care and Medicare Advantage would have a much more severe negative impact on EBITDA. THC trades at a premium to HCA, which seems inappropriate given FCF and risks: we retain our other ratings/PTs, but lower THC to Underperform, $13PT.
Even though we don't and can't know what will happen to health policy, we believe that we can help investors to understand the politics and process that could unfold from here, and give investors things to watch for and worry about: Congress can do anything it wants to on the first day, and if we led the GOP, we'd reset cloture at a simple majority and jam legislation through the Senate as fast as we could. Otherwise, the GOP risks becoming Obama-like and frittering away any political momentum and capital it has and may not be able to push repeal or replace through. So watch for a vote on the filibuster rule, if it goes, repeal alone may happen.
We think investors are missing the bigger picture: Medicaid Block grants
that shift to mgd care and Medicare privatization are far more dangerous for hospitals than the loss of the ACA. We estimate that there is a 48% reduction in rev per admit between the 'Caids and 17% decline from FFS 'Care to MA for HCA using its own data. Watch for block grants and premium support and sell if they are enacted.
But the AHD data & hospitals' own ER visit volumes showed a more disturbing sharp downward trend. In our view, fee-for-value patient-centered care only augments this trend and won't go away even if there's full repeal. This is what should worry hospital investors the most: no matter what happens with the ACA, hospitals are emptying out - and hospital investing is always and ever about the volumes.
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