Since the financial crisis in 2008, the health care sector has been one bright spot in the economy. During this time hospital management companies were a good choice for investors. But recent consolidation in this sector is creating uncertainty which makes the investment prescription harder to read.
Consolidation in the hospital management sector
While there are many forces driving consolidation, gaining access to capital and maximizing efficiency are key factors. By merging, hospitals and hospital systems can readily find synergies to make their operations more efficient. Moreover, larger organizations have more power to negotiate reimbursement rates with insurance companies.
Meanwhile, insurance companies have been eliminating medical service providers from plans while seeking to lower reimbursement rates. Whether the insurance companies are acting in response to the implementation of the Patient Protection and Affordable Care Act is arguable.
One would think hospitals and management outfits would benefit from more individuals obtaining health insurance coverage. This is because access to health insurance would theoretically bring more consumers into the health care system, allowing more people to seek hospital care. In any event, consolidation in this sector is on the rise and will continue.
Hospital management companies in play
For instance, Tenet Healthcare (NYSE:THC) has performed better in the second half of 2013 year as the share price hovers at $43; this is still below the 52-week high of $49 and change, however. This is due in part to the company's acquisition of Vanguard Health Systems for $1.8 billion -- the deal closed in October.
Tenet Healthcare intends to continue targeting other struggling hospital service providers. In fact, CEO Trevor Hetter recently said the hospital management sector is a "buyer's market" ripe for acquisitions as weaker companies contend with higher costs and admissions declines. He also anticipates a wave of smaller health systems closing operations or curtailing services.
Then there's the case of Health Management Associates (NYSE:HMA). The hospital management company's recent third-quarter results showed an adjusted loss of $0.01 in the third quarter of 2013, compared to earnings of $0.22 in the same quarter of 2012.
However, the share price bounced back since the hospital management company's merger announcement with Community Health Systems. The contemplated agreement calls for Community Health to acquire Health Management for about $7.6 billion in cash and stock while assuming debt of $3.7 billion. In the end, shareholders of Health Management will own roughly 16% of the new entity once the deal is done.
How the Community Health Systems/Health Management Associates transaction plays out remains to be seen, but Tenet appears to be in a good position to capitalize on consolidation going forward.
Health care REITs are an alternative remedy
One way for investors to buy into the health care market place despite the uncertainties that may be the result of consolidation is through health care real estate investment trusts. These entities invest in a variety of health care facilities like hospitals, nursing homes, and clinics.
Health Care REIT (NYSE:HCN) is a real estate investment trust with a multibillion-dollar portfolio. The outfit invests in a broad array of senior housing facilities and other health care real estate while offering property management and development services. The company has had a good run this year before the stock price tapered off.
The current share price of $63 and change is off its 52-week high, but Health Care REIT still has a market cap of more than $17 billion. Moreover, the REIT has a strong history of dividend payouts. Management noted in its financial report for the third quarter that it anticipates solid dividends to continue being paid to share holders in 2014.
The bottom line
If and when more people are eventually brought into the health care system because of the Affordable Care Act, hospital admissions should reverse. Meanwhile, consolidation of hospitals and hospital management companies will continue. And the same holds true for health care real estate acquisitions by investment trust outfits. So, Health Care REIT and other similar real estate investment trusts could rise with that tide regardless of the consolidation in this sector.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.