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Hospital Stocks Tenet Healthcare Corp. and Community Health Systems Are Surging — Here's Why

Image source: Getty Images.

What happened

Shares of some of the nation's largest hospital operators, including Tenet Healthcare (NYSE: THC) and Community Health Systems (NYSE: CYH), are surging. Shares of Tenet were up as much as 14% during Monday's trading session, while Community Health Systems spiked higher by as much as 11%. The culprit for the move appears to be comments made by President-elect Trump over the weekend about the future of Obamacare (officially the Affordable Care Act) and healthcare in America.

So what

Trump made a number of pledges during his campaign, but few stood out more than his call to repeal and replace Obamacare. Estimates have suggested that if Obamacare were rolled back, up to 21 million people could lose their insurance. This includes consumers who are receiving the Advanced Premium Tax Credit and cost-sharing reductions, those who have received free medical care from the Medicaid expansion in 31 states, and consumers with pre-existing conditions who've been insured thanks to a mandate that denies insurers the right to pick and choose their members.

The potential loss of millions of enrollees is worrisome for hospital providers such as Tenet and Community Health, since uninsured people are far less likely to be able to pay for services renders. This, in turn, could increase their doubtful account provisions.

However, following Trump's meeting with President Obama at the White House, Trump suggested that a full repeal may now be off the table. Trump favors keeping two of Obamacare's provisions. Namely, he wants to allow children under age 26 the ability to stay on their parents' health plan, and secondly, he wants to keep the mandate in place that requires insurers to accept new members regardless of whether they have pre-existing conditions. This second point is critical, since people with pre-existing conditions can be particularly costly to treat. If more remain insured, then hospitals may not have to set much aside for doubtful account collection after all, meaning less impact to the top and bottom lines.

Image source: Disney-ABC Television Group via Flickr.

Now what

It's important for investors to understand that there's a lot left to be hashed out with regard to the future of healthcare in this country (and I can't emphasize the italics here enough). Trump's vision of healthcare will probably need some modification, given that it'll need the support of Congress as well. But, it's pretty clear with a Republican-led Congress and a Republican president that the Obamacare we know now probably isn't going to be around much longer. What the future of healthcare looks like is still very much up for debate.

If the mandate requiring insurers to accept all members does stick, then Tenet Healthcare and Community Health Systems are sure to benefit. The big question, though, is whether these hospitals can eke out enough growth to continue servicing their enormous debt levels that came about because of M&A activity in recent years. Tenet has a debt-to-equity in excess of 415%, while Community Health is in even more dire shape, with a debt-to-equity in excess of 620%. Tenet seems to have the best shot at a genuine turnaround of the two, but I'd encourage investors to tread cautiously around this industry for the time being, until more concrete details of Trump's health plan are known.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle 


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