For-Profit Healthcare Providers Could See $15 billion in Bad Debt

Patience is the buzzword for investors this year when it comes to the for-profit healthcare sector, according to a Lehman Brothers analyst.

Adam Feinstein, who is neutral on the sector, said the rising uninsured crisis will continue to plague the industry in 2008, resulting in more bad debt expense and lower operating margins.

“Uninsured volume is increasing at faster rates than overall volumes, leading to the higher bad debt,” Feinstein wrote in his 2008 industry outlook to investors. “Thus, companies are struggling from higher debt expense.”

As a whole, Feinstein is predicting that bad debt and charity care expense for the for-profit hospital industry will rise 15 percent to 17 percent in 2008. He says the industry’s total bad debt will reach $14.6 billion in 2008, compared to $12.4 billion last year. The highest expenses will occur in the latter half of the year, he said.

Feinstein covers Community Health Systems, HCA, Health Management Associates, LifePoint Hospitals, Tenet Healthcare and Universal Health Services. He said bad debt and health care reform rhetoric will be the two key themes driving the sector’s stock performance.

Although Lehman Brothers is not looking for any improvement in operating trends in 2008, “we do anticipate a positive catalyst in big time rhetoric about the healthcare reform and helping the uninsured,” said Feinstein. Still, he said, “as we enter 2008, we don’t see an opportunity for the fundamentals to improve in the coming year.”

One potential “out of the box event” that could lead to improved bad expense trends is several large states, including Florida and Texas, passing meaningful legislation to provide insurance for the uninsured.