Hospitals will face reimbursement challenges that include pressure from government programs like Medicare Advantage, but the business they gain from the health care overhaul's coverage expansion still supports strong 2014 earnings growth, according to BMO Capital Markets analyst Jennifer Lynch.
Lynch raised her rating on shares of Community Health Systems Inc. to "market perform" from "underperform" and also hiked 12-month price targets for that stock and several others in the sector.
The analyst said in a research note she expects earnings before interest, taxes, depreciation and amortization to climb 9 percent on average next year, after the overhaul expands to offer health insurance coverage to millions of uninsured people.
The state and federally funded Medicaid program will cover more people in many states, and the government will start offering income-based tax credits to help people who don't get health insurance from a large employer.
Analysts and investors expect hospitals to reap sizeable gains from these coverage expansions because it will reduce the number of uninsured patients they care for and, consequently, the unpaid bills they face.
Lynch said the value of hospital stocks continues to climb despite the possibility of rate reductions from the government-subsidized Medicare Advantage program and strained federal budgets.
The analyst raised her price target on Community Health Systems shares to $49 from $35. She also raised her target on HCA Holdings Inc., the largest U.S. hospital chain, to $42 from $39, on Tenet Healthcare Corp. to $51 from $38 and on LifePoint Hospitals Inc. to $50 from $41.
Community Health shares finished at $46.57 on Tuesday, while HCA ended the day at $40.19, Tenet at $47.57 and LifePoint at $48.43.