It's "one of the best health care systems in the world ... because they do some smart things."
President Obama sang the praises of Cleveland Clinic in October 2012. Now the renowned health-care organization has announced budget cuts as high as $300 million, with layoffs likely. Why such large cutbacks? Cleveland Clinic CEO Dr. Toby Cosgrove cited the Affordable Care Act, commonly known as Obamacare, as one of the key reasons behind the move.
Cleveland Clinic isn't alone. Other hospitals across the nation are tightening their belts. BJC Healthcare in St. Louis cut 160 jobs -- the first layoffs in the organization's history. MetroHealth Medical Center in Cleveland eliminated 450 positions. Memphis-based Baptist Memorial Health Care laid off 61 employees. Cone Health Plans in Greensboro, N.C. cut 300 jobs.And there are many more.
Some, like Cleveland Clinic, listed Obamacare as a primary reason for the job cuts. Others cited "reimbursement changes" as a significant factor. Cleveland Clinic spokesperson Eileen Shiel called the budget pressures "the new normal" for hospitals.
Hospitals have been viewed as one of the biggest beneficiaries of Obamacare. Publicly traded hospital operators such as Tenet Healthcare (NYSE: THC ) and HCA Holdings (NYSE: HCA ) racked up huge gains over the past couple of years as investors anticipated positive results from implementation of health reform. Why are they seemingly reeling as a result of Obamacare now?
A big part of the issue stems from lower Medicare reimbursement increases that were implemented as part of the Affordable Care Act. A 2010 memo from actuaries with the Centers for Medicare and Medicaid Services, or CMS, predicted that 15% of hospitals could even have to discontinue serving Medicare patients to remain in business by the end of this decade if the lower reimbursement levels remain in effect.
Of course, Obamacare isn't the only driving force behind hospitals' financial woes. The sequestration deal agreed to by the White House and Congress cut Medicare reimbursements by 2% on top of the spending slowdown enacted with health reform. Several hospital chains, including Tenet and HCA, also cite sluggish admissions as a key problem.
Storm before the calm?
All of this could just be the "storm before the calm." It wasn't a fluke that the hospital industry's lobbying group, the American Hospital Association, pushed for Obamacare's passage and even filed an amicus brief in support of the individual mandate when the Supreme Court reviewed the legislation's constitutionality.
That support for health reform came because the industry saw the prospects of millions of newly insured individuals as a boon to bottom lines. Hospitals frequently must write off costs of providing care to uninsured individuals in the current environment.
Some big hospital chains have headed down the acquisition path in anticipation of reaping more of those hoped-for benefits. Tenet made a $1.73 billion offer for Vanguard Health Systems (NYSE: VHS ) in June. Community Health Systems (NYSE: CYH ) announced plans to buy Health Management Associates (NYSE: HMA ) the following month for $3.9 billion. In both deals, positioning to take advantage of Obamacare was specifically mentioned as a motivating factor.
Investors have enjoyed nice gains from hospital stocks from all of this expectation of Obamacare rewards. However, not everyone agrees that hospitals will actually emerge as winners in the long run.
Bob Kirby with Fitch Ratings stated last year that the incremental revenue and potential lower write-offs from uninsured patients might not outweigh the reduced margins for most hospitals. A study by Deloitte even questions whether those lower write-offs will be obtained. Paul Keckley, executive director with the firm's Center for Health Solutions, bluntly stated that "there is no scenario, looking forward, where bad debt goes down."
Right now, many hospitals are facing serious financial headwinds coming partially from Obamacare. They're hoping that the health insurance exchanges scheduled to start up next week usher in a wave of insured patients that help those headwinds die down. If the pessimists are right, though, more hospitals could feel the pressure to follow Cleveland Clinic's example and slash spending.
On the other hand, the optimistic view could unfold over the next few years -- with millions of Americans gaining health coverage and many health-care companies reaping the benefits. If that scenario plays out, investors have a tremendous opportunity to reap benefits themselves. How? By investing in a handful of specific health care stocks. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit them. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.