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As Congress looks less likely to pass a health-care bill, hospital stocks have dropped as much as 20 percent from their January peaks.

February 9, 2010

As Congress looks less likely to pass a health-care bill, investors are steering clear of hospitals, a recent article in the Wall Street Journal reports.

The article reports the news is positive for some parts of the health-care industry as it has pushed up shares in many insurance companies in recent weeks. However, hospital stocks have dropped as much as 20 percent from their January peaks.

Why?

1. Health-care overhaul had aimed to increase the number of insured Americans. Uncompensated care amounts to more than 20 percent of revenue for hospital operators such as Health Management Associates and Community Health Systems, John Ransom of Raymond James told WSJ. Part of that treatment simply is administered free, but the rest relates to bad debt from uninsured patients.

2. Hospitals are likely to have missed their chance to negotiate a deal with lawmakers providing more certainty on government payments. Federally-run Medicare and state-administered Medicaid account for 40 to 45 percent of hospital revenue, Mr. Ransom says.

It seems there may be no way to escape the squeeze. Hospitals have large fixed costs, and variable expenses can’t be trimmed much more. Health Management already instituted a salary freeze last year and soon will be pressured to resume wage increases.

Further, debt is increasing in hospitals. Community Health has $8.5 billion of net debt, nearly three times its market capitalization. Health Management's $2.8 billion of net debt equates to a multiple of 1.7 times.   For the full Wall Street Journal article on this issue, click here

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