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Analyst sees overhaul-driven hospital margin help

Hospitals stand to gain a meaningful boost to profitability from the health care overhaul if President Barack Obama wins a second term this November, according to a Susquehanna Financial Group analyst.

Analyst Chris Rigg estimated in a recent research note that profit margins on earnings before income taxes, depreciation and amortization, or EBITDA, will climb more than 2 percent in 2014 for hospital operators Community Health Systems Inc., Tenet Healthcare Corp. and Health Management Associates Inc.

The healthcare overhaul, a massive law enacted in 2010, aims to cover millions of uninsured people. In 2014, more people will become eligible for Medicaid, the state-federal program that provides coverage for the needy and disabled. Tax credits also will become available that year to help middle-class Americans buy coverage if they don't have it through an employer.

That translates into more insured patients for hospitals.

"Under any scenario, the hospital industry will benefit significantly from the (overhaul's) coverage expansions," Rigg wrote. "The expansion of Medicaid and insurance subsidies more than fully offsets the commercial pricing pressure we expect in the individual and small group insurance segment."

WellPoint Inc., the nation's second largest health insurer, said during a recent investor presentation that it expects commercial operating margins from health insurance exchanges to range between 3 percent and 5 percent. Rigg said he used that to help estimate the overhaul's impact on publicly traded hospitals.

Rigg said Franklin, Tenn.-based Community will benefit the most, with its 2014 EBITDA margin climbing 260 basis points, followed by Dallas-based Tenet with a 240 basis points increase and Naples, Fla.-based Health Management at 210. His estimates assume the overhaul will be implemented as it is written.

Overall, he estimates that the average hospital EBITDA margin will rise about 175 basis points compared to where margins might be without the overhaul.

Shares of Community fell 21 cents to $28.32 in Monday morning trading. Tenet stock dropped 16 cents, or 2.8 percent, to $5.60, and Health Management shares slipped 4 cents to $8.39. Meanwhile, the Standard & Poor's 500 index fell slightly.

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