Trump Effect: Leerink Says Buy Hospitals As Anthem Exits Ohio ACA Exchange

Shares of hospital operators are in focus after Anthem (ANTM) announced it is pulling out of the Affordable Care Act health-insurance exchange in Ohio next year.

BACKGROUND: Anthem said it would exit the ACA market in Ohio in 2018 as uncertainty over federal operations and rules, including federal “cost-sharing” payments, make it increasingly difficult to set prices and make decisions. The uncertainty comes as GOP lawmakers and the Trump administration seek to repeal the “Obamacare” law and implement new health care legislation. The move is the first withdrawal for Anthem and will leave at least 18 counties with no available marketplace plans, The Wall Street Journal has reported. The withdrawal follows announcements by Humana (HUM) and Aetna (AET) that they will exit all of their current exchanges next year. 

HOSPITAL UPGRADES: Following the announcement, Leerink analyst Ana Gupte upgraded hospital operators HCA Holdings (HCA), LifePoint (LPNT) and Tenet Healthcare (THC) to Outperform from Market Perform. She raised her price target for HCA to $100 from $90, for LifePoint to $74 from $73 and maintains a $27 price target for Tenet. The targets offer upside of 21%, 20% and 62% respectively. Anthem’s exit from the key swing state of Ohio’s healthcare exchange could bring further attention to the need for stabilization funding through legislation, Gupte tells investors in a research note. She believes improving policy under the Trump Administration could drive upside to 2018 and 2019 consensus estimates. Further, the analyst thinks medium-term downside risk from Republican’s repeal and replace healthcare bill is likely better than feared as publicly traded hospitals are “heavily weighted to non-expansion states,” which lessons the impact of Medicaid expansion funding cuts.

MORGAN STANLEY LESS BULLISH: Meanwhile, Morgan Stanley analyst Zack Sopcak initiated coverage of HCA, LifePoint, and Tenet with Equal Weight ratings. Following the passage of the Affordable Care Act, the managed care and facilities markets became “land grabs” for the newly or soon to be covered individual lives, but the number of insured lives is now likely to pause or decline regardless of the final plan out of Washington, leaving him “incrementally less positive on hospitals,” he tells investors. Sopack put a price target of $90 on HCA, $65 on Lifepoint and $19 on Tenet. Sopcak also initiated Community Health (CYH) and Quorum Health (QHC) with Underweight ratings, contending that the valuations of those stocks are “ahead of necessary rightsizing which is underway.”