1. Widespread distress overshadowing the bright spots. “We’re seeing a lot of distressed activity in the hospital sector; it seems as though every other week there’s another announcement of a hospital with serious issues,” he says. A key recent example is Lincoln Park Hospital, which is in danger of closing. “I would estimate that as many as 50 to 75 percent of hospitals are losing money. However, some groups are doing quite well by comparison. For example, UHS’s stock price actually was up year-to-date until Monday. Despite weak industry fundamentals, there are some bright spots.”
2. From bad to worse? Acute distress among weaker players in the hospital industry should not come as a surprise, says Mr. Sullivan.
“It’s difficult enough to find financing when you’re losing money due to increased competition, rising core expenses, and bad debt,” he says. “When you add a credit crunch and a weakening economy to the mix, you have a recipe for disaster.”
Mr. Sullivan believes the confluence of negative factors may lead to abrupt and large issues over the next one to two years.
“Many sectors of the economy are just now starting to shown signs of weakness,” he says. “As the chaos in financial markets works its way into the broader economy, Medicaid funding shortfalls and rising unemployment will put additional pressure on many hospitals.”
Traumatic results may be on the horizon, such as layoffs/hiring freezes and closings, for more of the market.
However, the silver lining may be the hospital industrys political clout and strong fundamental value proposition.
“Never count the hospital industry out; with the FAH, the AHA, and Congress on its side, its never out of the game,” says Mr. Sullivan. “Given the critical role hospitals play in our communities, good operators will find their way through this storm, whether alone or with a partner.”
3. Increased mergers and acquisitions. “We will no doubt see more M&A in the sector,” says Mr. Sullivan. “Many under-performing hospitals will be forced to sell to better-capitalized groups. Also, healthy hospital companies are pruning their portfolios and focusing on improving profitability in their core businesses and markets.”
