As coronavirus cases reach more than 1,700 in the U.S., and the pandemic escalates worldwide, investors might wonder if hospital stocks will benefit from the influx of patients. So far, stocks such as HCA Healthcare (NYSE:HCA) and Universal Health Services (NYSE:UHS) have not. The hospital operators have each posted a decline of about 43% this year, and that downward pressure is likely to continue as hospitals limit more expensive procedures -- and face unexpected costs -- to ensure coronavirus care.
Hospitals have already begun postponing elective surgeries to prepare for patients suffering from COVID-19, the illness caused by the new coronavirus. Last week, the American College of Surgeons recommended minimizing, postponing, or cancelling elective procedures until the outbreak is considered manageable by healthcare facilities. That was reinforced by U.S. surgeon general Dr. Jerome M. Adams in a message on Twitter.
Contribution to revenue
The postponement or cancellation of elective surgeries is bad news for hospitals, considering those procedures' contribution to revenue. According to Kaiser Health News, hospitals make about $700 more on an elective admission compared with an admission to the emergency room.
Other statistics point to the importance of surgical procedures for a hospital's revenue. An Agency for Healthcare Research and Quality report showed that stays involving surgery represented about 48% of 2011 hospitalization costs. Surgeons are the top sources of revenue among hospital doctors, with cardiovascular surgeons bringing in the most for their hospitals, according to a Merritt Hawkins survey. Orthopedic surgeons, who often perform elective procedures like knee arthroscopy or carpal tunnel release, generated $3.3 million for their hospitals annually, for the fourth spot in the ranking.
The American Hospital Association and other organizations sent a letter to the surgeon general on Sunday after the recommendations to halt elective surgeries. They expressed concern, indicating that some procedures must be prioritized to meet the needs of seriously ill patients. What will actually happen once the crisis deepens remains to be seen.
Aside from the problem of canceling procedures, hospitals face the challenge of managing the influx of COVID-19 patients. In a note last month, Moody's said that if the outbreak deepened, hospitals may face higher costs. While losing revenue through the cancellation of more expensive procedures, hospitals might simultaneously have to hire contract workers to handle increasing urgent-care demand, according to the report.
These problems are compounded by other challenges. The American Hospital Association showed underpayments by Medicare and Medicaid to U.S. hospitals totaled more than $76 billion in 2018. Hospitals received 87 cents and 89 cents for Medicare and Medicaid patients, respectively, for every dollar they spent to care for those patients, the report showed. While hospitals with outpatient services may benefit to a certain degree from these procedures, they and their smaller peers still face the challenge of fewer or shorter hospital stays. Outpatient visits and surgeries have grown steadily from 1995 through 2016, according to American Hospital Association data.
At the same time, hospital shares, like the rest of the market, have taken a hit as the coronavirus expanded from outbreak to pandemic. HCA Healthcare and Universal Health are both trading at their cheapest in relation to earnings since 2012. During its last earnings report, HCA Healthcare predicted 2020 full-year revenue may gain as much as 8% to reach $55.5 billion. Universal Health's guidance indicated 2020 revenue could increase as much as 6.1% to $12.1 billion. Both companies have reported revenue increases for at least the past three years.
More weakness ahead
HCA Healthcare, Universal Health, and peers may face headwinds in the coming weeks as the coronavirus outbreak plays out -- and resulting costs could weigh on the current quarter's earnings. That means more share-price weakness ahead.
For the long term, however, the story is brighter. Both HCA Healthcare and Universal Health are major players in the industry with a track record of growing revenue, and both should bounce back. Healthcare investors should keep an eye on the progression of the coronavirus outbreak and add both stocks to their watchlists. Once we have an idea of how long hospitals will be submerged in this crisis, we can start to make buying decisions.