Morgan Stanley: Health Care M&A Means Headwinds For Hospitals

Hospital stocks are in line to profit off potential tax reform, but that might be where the good news ends.

Morgan Stanley expects a potentially radical shift in health care services toward payer vertical integration to shake the industry and strain traditional competitors.

The Rating

Analyst Zack Sopcak upgraded Quorum Health Corp QHC to Equal Weight and raised the price target from $3.50 to $6.

Sopcak downgraded HCA Healthcare Inc HCA and Tenet Healthcare Corp THC to Underweight and raised their respective price targets from $79 to $84 and from $14 to $15.

The Thesis

The ratings changes are largely justified by exposure to vertically integrated payers, a field expanding with the UnitedHealth Group Inc UNH-Davita Inc DVA Medical Group and CVS Health Corp CVS-Aetna Inc AET mergers, Sopcak said. (See the analyst's track record here.) 

The resulting “new world order” of low-cost health care is expected to divert dollars from traditional hospitals and compound mid-term growth concerns, particularly for sites competing for Medicare patients, according to Morgan Stanley. 

HCA and Tenet are considered most exposed with 73 percent and 81 percent, respectively, of their hospitals being located within two miles of a CVS and 52 percent and 42 percent of beds, respectively, representing Aetna or UnitedHealth patients.

“While we are not suggesting that inpatient hospitals are becoming obsolete, we do view the hospitals’ mid- to longer-term opportunity set to be more limited, focusing on a smaller number of higher acuity procedures not addressable in outpatient settings,” Sopcak said in a Wednesday note. 

These challenges are compounded by sector-wide headwinds in low Affordable Care Act enrollment, rising rates of uninsured Americans and the issuance of high deductible plans, the analyst said. 

Price Action

At the time of publication, Quorum was trading up 15.69 percent, HCA down 2.32 percent and Tenet down 3.06 percent. 

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