Community Health Systems (CYH), Hospitals Aren’t Done Collapsing Yet

How does the old saying go? Nothing lasts forever?

Community Health Systems Still Not Done Falling (CYH)That’s a harsh reality investors of Community Health Systems (CYH) are learning today — the hard way. CYH shares are down a stunning 35% on Thursday alone, and that’s on top of a 30%-plus pullback from June’s highs.

Perhaps worse, the demise of Community Health Systems has prompted a steep selloff (though none as dramatic as the one CYH is dishing out) for many healthcare stocks in the S&P 500 today, and for stocks of other hospitals in particular.

All told, the S&P 500 Healthcare Sector Index is down nearly a full percentage point on Thursday, while the S&P 500 Healthcare Facilities Index has tanked to the tune 10% today.


What Happened to Community Health Systems?

The official third-quarter numbers haven’t been filed yet, but knowing they’re going to be rough, Community Health Systems went ahead and warned investors that net profits for Q3 fell short of current analyst estimates … by a country mile.

The specifics: After stripping out all the one-time expenses, Community Health Systems expects to post a profit of 56 cents per share for the recently completed quarter, on revenue of $4.85 billion. Analysts had been expecting income of 89 cents per share of CYH and $5 billion in revenue.

In retrospect, it can’t be too surprising it happened to Community Health Systems, nor should investors be terribly surprised if we hear similar warnings and disappointing earnings results from other hospital names.

The bad news from Community Health Systems follows equally alarming news that HCA Holdings (HCA) announced just a few days ago, warning investors that it, too, was hitting a serious headwind that was impacting earnings. Rather than earning the expected $1.22 per share for the prior quarter, it projected it would only post per-share profits of $1.17.

With not one but two hospitals issuing warnings, investors also dumped peers like Tenet Healthcare (THC), Universal Health Services (UHS) and LifePoint Health (LPNT) today — each was down by double-digits.

It Was Bound to Happen Sometime

The underlying problems are clearly not unique to Community Health Systems, but rather, are impacting hospitals as an industry. What gives?

Though details were scant, Community Health Systems did make mention of the fact that the overall volume of patients served was seen as weak, while the payor (health insurers) was less lucrative than in the recent past; each insurer negotiates their own reimbursement rates for hospitals. Ergo, relative (to revenue) payroll and supplies expenses were up.

It sounds a great deal like the reason HCA Holdings gave last week, citing higher labor costs and an unexpected rise in the number of uninsured patients it treated.

In a bigger-picture sense, however, this is the inevitable result of the slowdown in the number of new enrollees that are gaining insurance coverage via the Affordable Care Act. As Goldman Sachs analyst Matthew Borsch put it, after a little more than a full year of growth in the number of insured patients, we’re now seeing the “big chill” of that trend.

Or, perhaps Mizuho Securities’ Sheryl Skolnick said it more poignantly, explaining “The nightmare of health care continues and we’re now convinced it is time to get out of the way” as she downgraded CYH from a “buy” to a “neutral” rating.

Simultaneously, the reeled-in outlook reflects the fact that the ACA has given slightly more negotiating leverage to insurers than it has hospitals.

Bottom Line for Healthcare Stocks

As tempting as it may be to see today’s big stumbles from healthcare stocks like CYH, HCA and other hospitals as finished, the worst may not be over yet.

Though we’re now seeing the first evidence that last year’s big-time growth in hospital earnings was largely driven by the advent of Obamacare, many investors may not see it yet, or want to see it. This same story may need to be recycled for a few more quarters before this cycle of disappointment and relative weakness has fully run its course and investors have made the mental adjustment.

At the same time, while hospitals haven’t been explicitly targeted by presidential hopefuls the way some specialty pharmaceutical companies have, it’s not out of the realm of possibility that a potential wave of healthcare reform could still end up putting hospitals in the crosshairs.

In other words, for the time being, CYH and other healthcare stocks aren’t falling knives you want to try to catch.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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