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Obamacare Approval Results In Variety Of Outcomes For Hospital And Laboratory Stocks: Lazard Capital Managing Director Shares His Views In This Interview

67 WALL STREET, New York - August 6, 2012 - The Wall Street Transcript Online has just published its Medical Real Estate Report offering a timely review of the sector to serious investors and industry executives.

Topics covered: REIT Access to Capital - Hospital Consolidation - Affordable Care Act and Reimbursements - Hospitals, Senior Housing, Skilled Nursing and Acute Care

Companies include: HEALTHSOUTH Corp. (HLS), Universal Health Services Inc. (UHS), and many others.

The following excerpt is from an interview in the Medical Real Estate Report:

TWST: Politics, the regulatory environment and the economy are all big macro issues. What other trends do you see affecting the hospital operators and clinical labs?

Mr. Gallucci: A lot of the commentary I just offered was directed more toward the hospitals. I think for the labs, they are not quite as levered to reform. I think it's a positive for them to the extent it goes through, but I don't think they have as much fundamental dependence on it as the hospitals do. Those stocks are up a bit, but not as extensively as the hospital stocks. And when it comes to reimbursement, they don't have as big a share of their revenue that's government reimbursed as the hospitals do, so again, there is a little less exposure there than the hospitals have.

In terms of other issues to consider, starting with the hospital group, over and above the economy and the legislative and regulatory environment, back to the fundamentals, there are three things I would highlight. First, cost cutting, or improved efficiencies, continues to be a major theme. It started a few years ago as the economy began to weaken, but it remains a significant focus for the not-for-profit and for-profit hospitals. I think it's been a way to drive earnings in the absence of consistent topline fundamentals. Supplies have probably been one of the key areas under the greatest amount of focus of late. Initially, they trimmed some labor here and there, but labor to some degree has been cut as much as it can be whereas supplies still offer an area of ongoing opportunity.

Next, I would point to the outlook from a reimbursement standpoint. Over and above government reimbursements specifically, which may be at more or less risk depending on how we tackle our nation's deficits, I think that there is a bigger picture evolution on the reimbursement landscape. We are slowly moving away from a fee-for-service type of marketplace and toward one where reimbursement is ultimately based more on episodic care and where some portion of payment is dependent on outcomes and efficiency. So I see a shifting landscape from a reimbursement standpoint over time. I don't think it happens very quickly, nothing in health care does, but I believe it will happen over time, which may imply, depending on how things progress, that hospitals will ultimately bear a little bit more of the risk for care in the long run than they do today, as opposed to just getting paid on a fee-for-service type basis. This is also another reason why I think in addition to the weaker economy and some of the uncertainties on the regulatory front, hospitals are very focused on how they can be more efficient and also how they can drive better outcomes. For-profit hospitals, frankly, given that they are better capitalized than average, are probably in the best position to capitalize on this evolving reimbursement trend in the long run.

Finally, the third thing that I would mention over and above cost cutting and the changing reimbursement environment would be consolidation. In a difficult macro environment, in an environment where reimbursement systems may be evolving, I think it increasingly leaves the less sophisticated and less well-capitalized hospitals in a weaker position, and that generates consistent acquisition opportunities, in particular for the for-profits.

TWST: I was going to ask you about M&A activity and growth opportunities. What do you expect to see in the midterm?

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