Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Tenet Healthcare Corp (THC), HCA Holdings Inc (HCA): Why Buy Hospitals?

HCA Holdings Inc (NYSE:HCA) has been doing deals, just smaller ones than its smaller rival. This month, for instance, it agreed to buy three community hospitals in Florida,  bringing its total there to 42.

When the latest hospital consolidation trend began, it was assumed the reason was health reform. The idea was that hospitals would be in a better position to negotiate high rates of reimbursement if insurers had fewer choices.

But what if there was another motivation?

Insurers Are Buying Facilities

While hospital chains have consolidated, insurers have been slowly buying health care facilities, and facility managers.

Most of these deals involve groups that serve Medicare and/or Medicaid patients. Aetna Inc (NYSE:AET) bought Coventry Health last year. UnitedHealth Group Inc. (NYSE:UNH) bought XL Health.  Cigna bought a collection of plans in selected markets. Those are just three deals — there have been others.

At the same time insurers are buying facilities, hospital chains are getting into insurance. Spurred by the lower costs of groups like Kaiser and Intermountain Health, which both provide care and handle insurance funds, other non-profit hospitals are preparing to offer their own health plans.

It’s this kind of integration, on both sides, that is the real story here. Consider that HCA Holdings Inc (NYSE:HCA) carries a market cap of $17 billion, and Tenet just $4.5 billion. By contrast, UnitedHealth Group Inc. (NYSE:UNH) is worth $73.5 billion, and Aetna Inc (NYSE:AET) $24.8 billion. The insurers, not the hospitals, are the likeliest survivors as consolidation accelerates.

The idea of owning both facilities and financing makes sense under health reform. If you own facilities you can control costs, and the market attitude of health reform is to give insurers reasons to control costs.

What large insurers are learning in owning Medicare and Medicaid providers, in terms of automation and best practices, delivered to high-risk patients and under government payment, are the same lessons they will need to prosper in the private market under health reform.

Why buy hospitals? So you can sell them to insurers. Watch for small deals, from companies like UnitedHealth Group Inc. (NYSE:UNH), the purchase of individual hospitals in areas where they have a high concentration of customers. Since the pre-reform market usually had just one or two insurers controlling the bulk of each state’s market, this is the likely first move.

It won’t be the last. Buy when the buying starts, and be ready with shares in the low-value big players, like HCA Holdings Inc (NYSE:HCA). Because their time will come.

Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group (NYSE:UNH). Dana is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why Buy Hospitals? originally appeared on Fool.com is written by Dana Blankenhorn.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.