Will This Obamacare "Emergency" Lead to Big Profits For One Sector?

Looking back on the first enrollment campaign for the Patient Protection and Affordable Care Act, known also as Obamacare, shows that it was both a bumpy, but ultimately success ride based on initial enrollment estimates.

For the open enrollment period, which spanned Oct. 1 through March 31 (and allotted extensions for those who couldn't complete their applications on time), more than 8 million people signed up for health insurance between state-run exchanges and This surpassed projections in September from the Department of Health and Human Services whose initial goal was to enroll 7 million people by March 31.

Generally speaking, the higher the enrollment number, the fewer uninsured people there are, and the more spread out medical costs should be across all citizens in this country. It remains to be seen if this higher-than-expected enrollment will work to curb premium inflation in 2015, but based on initial proposals from 13 returning insurers from my home state of Washington it would appear that the increases are pretty reasonable, with one insurer actually requesting a premium decline of nearly 7%. This is understandably a learning curve for the insurers as much as it is for the consumers, so we should expect some kinks to be worked out in the coming years.

However, one somewhat unexpected consequence of the Affordable Care Act is creating the opportunity for huge profits for hospitals and potentially big bottlenecks for consumers, at least in the early going. This boom is none other than a surge in emergency room visits.

The emergency room boom
According to a survey conducted by the American College of Emergency Physicians, or ACEP, nearly half of all emergency room doctors have reported an increase in ER visits since the beginning of the year with 86% expecting a rise in visits within the next three years.

What's the primary reason for this surge? As FierceHealthcare pointed out this week, it's a combination of two major factors.

First, more people are carrying health insurance and taking advantage of that coverage in the form of more hospital visits. Unfortunately, with millions of newly insured persons covered by Medicaid, and a number of physicians simply not accepting Medicaid as a form of payment since the reimbursement rate is sometimes viewed as too low, these individuals in need of medical care are simply turning to emergency departments more often.

Secondly, our population is getting older and living longer. Since older adults are considerably more likely to have chronic conditions in need of treatment, emergency rooms are a common stop for the elderly.

Source: MilitaryHealth, Flcikr.

What this means for hospitals
For hospital operators like HCA Holdings (NYSE: HCA  ) , Tenet Healthcare (NYSE: THC  ) , and Community Health Systems (NYSE: CYH  ) this surge in emergency department visits could be a gigantic moneymaker, if the patient breakdown works in their favor.

For HCA, Tenet, and Community Health nothing is more valuable than the privately insured individual. Based on a survey conducted by Health Affairs in 2009, before the PPACA was even passed into law, it was determined that hospital emergency departments produced profit margins just shy of 8%, or $6.1 billion. That may not sound like a lot, but that's an astronomically high figure considering that 18% of all persons visiting the ER are uninsured, and the profit margin for treating uninsured patients is a ghastly minus 54.4%.

The good news is privately insured individuals are the most frequent visitors of ERs, representing 35% of all cases according to Health Affairs. With an average profit margin of 39.6%, these privately insured individuals more than cancel out the negative margins sometimes associated with Medicare, Medicaid, and uninsured persons. In total, Health Affairs' study authors project that hospital emergency departments could witness a better than 4% bump in margins due to an emergency room surge caused by Obamacare.

With hospital operators expected to see a simultaneous dip in uncollected revenue due to fewer admitted patients being uninsured as well this could work as a double-whammy of good fortune for the sector. Keep in mind most hospital stocks don't pay a dividend, so this extra capital could be used for a number of ventures including rapid expansion to meet higher demand, purchasing state-of-the-art equipment to provider better quality care, paying down debt, and yes, even possibly paying a dividend to shareholders.

Source: Francisco Osorio, Flickr.

But there's a possible dark side to this boom
However, while hospital operators might be licking their chops at the sudden rise in emergency department visits, consumers could be left biting their nails in anticipation... of being seen that is!

One of the biggest concerns commonly associated with the implementation of the Affordable Care Act has been whether or not there will be enough physicians around to handle the surge in preventative care and emergency room visits. Data from the Kaiser Family Foundation shows that between 2002 and 2011 the number of medical school graduates has risen just 10.8% from 15,676 in 2002 to 17,364 in 2011. In other words, the physician increase needed to maintain the quality of care that's needed to run a successful emergency room may not be there. For the consumer this could mean a longer wait time to be seen that'll only get worse before it gets better.

The jury's still out
The truth of the matter is the jury's still out on whether hospitals will see a sizable ER profit jump since the abnormally cold weather earlier this year adversely affected the number of hospital visits by citizens (i.e., we really weren't able to get a good read on ER visits). By the end of this year, however, we should have a better bead on just how many more people are visiting the ER, whether or not that's providing a tangible profit boost to hospitals which may work in the favor of shareholders, and if consumers are seeing a decline in their quality of care due to overcrowding. Circle your calendars folks, because this is an issue worth revisiting in a few months!

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  • Report this Comment On June 01, 2014, at 4:29 AM, JIMTYPES wrote:

    The upcoming big investment in health care will not be in America. But rather in what I call "off shore" medical. Doctors will be opening clinics in countries like Costa Rica. This will be showcase for expert doctors and new technology as American healthcare failsits citizens.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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