Bank Of America Says Healthcare Reform Boosting Profits Within Hospital Sector

Improving profits at hospital companies is one likely outcome of the Affordable Care Act, according to an analyst who boosted price targets of a raft of stocks in the sector Tuesday.

The biggest ramp-up is expected during the second quarter. Fewer bad debts and charity cases constitute important gains for hospitals, Bank of America analyst Kevin Fischbeck said in a note.

Top picks for Fischbeck: Community Health Systems CYH and HCA HCA. He boosted his price target for HCA to $65 a share, from $62, and maintained a target for Community Health of $63 a share.

"Reform benefits were clear and immediate in the first quarter," when hospital companies posted big drops in self-paying patients and uninsured admissions, with corresponding gains in those with Medicaid insurance.

"This indicates that once people get insurance, there is an immediate change in how payments flow through the sytem," Fischbein said, noting that first-quarter results were hurt by a relative lack of influenza and bad weather.

Much of the first-quarter improvements came through Medicaid expansion, with the benefit of the more controversial insurance exchanges lagging. Fischbeck, however, expects as insurance coverage from the exchanges continues to ramp up dramatically, especially during the second quarter, benefits to hospital companies should be substantial.

Likewise, a boom in Medicaid enrollment should peak at a more than 90 percent gain in the second quarter.

Other companies singled out by Fischbein include LifePoint Hospitals LPNT, Tenet Healthcare THC and Universal Health Services UHS.

All the shares mentioned by Fischbeck were up slightly in late-morning trading except HCA, which was down by less than one percent.