A Year in Review: Hospital Companies and 1 to Watch in 2013

As the year winds to a close, one of my favorite reflective activities to do is look back upon some of the year's best and worst performers in each sector to see if there were any lessons to be learned. Investing is a never-ending learning process, and reflecting on 2012's performance is yet another way we can enhance our investing knowledge.

Specifically today, I want to look at the hospital sector. Stripping out some very thinly traded microcaps, here's a quick glance at how hospital stocks performed in 2012:

Source: Finviz. Data as of Dec. 9, 2012.

What worked
As you can see, it was a pretty good year for hospital companies all the way around, with only one of nine finishing the year down. At the forefront of the broad-based move higher was the upholding of the Patient Protection and Affordable Care Act by the Supreme Court in late June.

This bill is seen as extremely important for hospital companies as they lose millions of dollars annually on account of bad debt from patients who are uninsured and unable to pay their medical bills. With the ACA set to go into effect in 2014, between a mandate requiring Americans to carry health insurance and the soon-to-be expansion of the Medicaid program, hospitals should begin to see these bad-debt accounts dwindle to practically nothing. With fewer dollars set aside for bad account provisions, more of these hospital providers' cash flow could be used on ordering new equipment or even paying out substantial dividends.

Earnings growth was another factor that helped drive hospital companies higher in 2012. HCA's third-quarter report, released in early November, showed an 11% increase in revenue as profits rose sixfold for the year-ago period (although that was mainly because of a one-time debt extinguishment charge in 2011). Tenet Healthcare also received a nice earnings boost, with total revenue up 5.8% in its latest quarter, although it did see a 20 basis-point uptick in bad debt expenses to 8.5% of revenue. 

What didn't work
Bringing up the bottom of the barrel was Lifepoint Hospitals, whose 2% drop will hardly cause investors to cower under their bed sheets. Considering that Lifepoint cut its full-year outlook in late October because of higher acquisition costs and lost business from Hurricane Isaac, shareholders should be counting their blessings that it only fell 2%.

Vanguard Health Systems also had a lackluster year, gaining just 6%, despite showing glimpses of strong growth. Net patient service revenue has increase 5.9% and 0.6% in the past two quarters, but a 21.5% decrease in health plan premium revenue in its most recent quarter put a kibosh on any rally optimists may have dreamed up.

One factor that can't be discounted, though, as we head into 2013 is the effect that a fiscal cliff compromise might have on the health care sector. Pressures are mounting for lawmakers from both sides of the aisle to meet in the middle and avoid what's seen as a calamitous drop in GDP growth as spending cuts and higher taxes kick into effect on Jan. 1. However, meeting in the middle -- while great news for a majority of Americans -- might mean bad news for the hospital sector, which could suffer even further cuts to its Medicare insurance program. If seniors are forced to pay more out of pocket, it could simply mean fewer visits to the hospital, plain and simple!

1 hospital stock to watch in 2013: AmSurg
This is actually a trick answer because AmSurg is an ambulatory surgical center, or ASC, and not a traditional hospital, but for the sake of argument, it's the one that I feel has the best chance of heading higher in 2013.

I strongly suspect that with the government purposefully getting involved in the health-care industry in an effort to drive down and/or curb cost inflation, that an ASC like AmSurg is going to see an increase in surgical procedures as it can more effectively manage costs than a large hospital.

Of course, AmSurg will face costs pressures of its own, as it did see an 18% increase in operating expenses in its latest quarter. Still, with strong cash flow and a history of making steady, earnings-accretive  acquisitions, I can see AmSurg having a particularly strong 2013.