Beyond the noisy ramp-up to last week's presidential debate,
investor Warren Buffett was quietly placing his bets in the
health care field.
Buffett's companyBerkshire Hathaway (BRKA) in September
boosted its stake in dialysis chainDaVita (
), regulatory filings show, to more than 10% of the company. The
diversifyingWashington Post Co. (
), in which Buffett is a shareholder, bought privately held home
care provider Celtic Healthcare.
The moves highlight the level of investor interest directed at
the outpatient and home-health care segments, despite
uncertainties tied to the election outcome. The Patient
Protection and Affordable Care Act -- ObamaCare -- is a policy
juggernaut hotly contested in the race. But whether it stays or
goes, a transition is under way in the outpatient and home care
Big money pouring into the space has driven IBD's
Outpatient/Home Care group index up 35% so far this year, putting
it in the top 10% of 197 industries. Analysts say buyers are
interested in these companies for several reasons, but partly
because the price is right.
Many of the stocks had been beaten up by uncertainties over
health care reform or the elections, William Blair analyst Ben
Andrews told IBD.
"With some clarity emerging on some of those points, combined
with a 'risk on' mentality around the Fed, you're just seeing
people buying stocks that have lagged," Andrews said.
Buffett's interest in DaVita is a bet on a larger, longer-term
trend in health care. The Denver-based company announced in May
it would pay $4.4 billion to acquire Healthcare Partners, the
largest U.S. operator of medical groups and physician
The advantage is twofold. It takes DaVita beyond dialysis and
into more general practice. It also hedges against a
much-discussed move by Medicare and other payers toward an
"integrated care" model of reimbursement.
In this model, a single provider or team of providers oversees
and coordinates all the facets of treatment. They are also paid
in a unified manner. In the standard fee-for-service billing
model, even the most simple treatments or procedures can lead to
a score of independent claims, and waves of paperwork.
DaVita's buyout not only broadens DaVita's footprint within
the industry, but also offers investors "the opportunity to own
one of the largest and most well-respected integrated care
providers in the country," Andrews wrote in a Sept. 4 note.
The 17 stocks in the Outpatient/home care group have a
combined market capitalization of only $43 billion.
Most offer specialty services: physical therapy, obstetrics,
prosthetics, psychiatry, surgery and (as mentioned) dialysis.
These companies have benefited from a decades-long effort in the
industry to avoid lengthy hospital stays, effectively acting as
Because they serve fairly narrow markets they don't have a
chance to get huge, though DaVita andFresenius (
) so dominate the dialysis business that they have become the
group's big caps.
Several companies do offer in-patient care, but their degree
of specialization distinguishes them from hospitals.HealthSouth (
), for instance, offers rehabilitative services on both an
in-patient and outpatient basis.
The home care providers, such asAmedisys (
) andGentiva (GTIV), offer a broad range of services in a home
setting, but also provide basic nursing and custodial care for
the elderly, infirm and dying. In that respect they overlap not
only with hospitals, but also with nursing homes and
assisted-living facilities. For many terminally ill people and
their families, home care can provide an appealing alternative to
dying in an institution.
One trait shared among many companies in the group: their
market is largely American. Even Fresenius, based in Germany with
global operations, draws more than three-quarters of its revenue
from the U.S.
According to the Centers for Medicare & Medicaid Services
(CMS), overall U.S. health spending is expected to increase about
4% this year and next, then kick up to 7% in 2014 as the
Affordable Care Act unfolds.
The CMS' 2011 National Health Expenditure report points out
that while ObamaCare is expected to bring about 22 million
previously uninsured people into the payer system, most of them
will be younger, healthier people who've previously gotten by
without coverage. As a result, this is not greatly affecting the
specialists in conditions like kidney failure and old age.
In the nearer term, however, the Act has brought the industry
considerable pain in the form of Medicare reimbursement cuts.
Home health care has been a particular target, not only in
trimming payments but increasing regulations.
The industry, which was booming three or four years ago with
high margins and relatively little oversight, faced accusations
of corruption and fraud. A succession of new rules has created an
environment that rewards companies with the best cost controls,
The companies offering facility-based services mostly haven't
been suffering these kinds of cuts, so their business has been
much steadier. Outpatient facilities have even benefited from
efforts to control health costs, says Piper Jaffray analyst Kevin
Managed-care companies have been trying to reduce "inpatient
utilization," Ellich told IBD. That means they are cutting costs
by using outpatient treatments where possible, and avoiding
costly hospital stays.
"After talking to companies likeUnitedHealth (UNH), for
example, they've had four straight years of their inpatient
utilization declining," Ellich said. "It tells you that there's
definitely a shift to the lower-cost settings."
Depending on their specialty, the outpatient providers also
tend to be less dependent on Medicare, which makes them better
able to take advantage of America's aging and fattening
population. This is also evident in home care's sister group,
According to William Blair analyst Ryan Daniels, privately
paid facilities have lifted off with the real-estate recovery, as
seniors are finding it a good time to sell their homes and move
into assisted living.
Health Care REIT 's (HCN) decision last month to buySunrise
Senior Living (SRZ) for $845 million also excited interest in
Consolidation remains a central theme of the industry.
HealthSouth has accumulated 96 locations across 26 states, and
continues to make tuck-in buyouts.
Size, for these players, acts as a bulwark against the
uncertainties of Medicare. In their April initiation report on
Fresenius, HSBC analysts pointed out that a cutback in CMS
dialysis payments would likely trigger shutdowns among some
operators. The "consequent closing of facilities could trigger
capacity shortages, which could even benefit the large dialysis
operators like (Fresenius)."
DaVita's acquisition of HealthCare Partners, however, is
unique and transformational, analysts say. The deal was
controversial on Wall Street when first announced. Analysts saw
the price as high and HCP as too reliant on Medicare Advantage,
whose reimbursement rates are set to be trimmed back to parity
with other Medicare programs by 2016.
Medicare Advantage hinges, however, on the integrated-care
model that many believe is the future of health care. Instead of
paying fee-for-service, CMS pays private insurers a fixed rate
per enrollee per month to cover all the patient's needs. In his
Sept. 4 report, Andrews wrote that this is also a feature of a
reimbursement model shifting toward outcome-based payments, for
which HCP is very well positioned.
"HCP has among the highest clinical outcomes and a phenomenal
track record that gives it leverage when contracting rates with
insurers," he wrote. "HCP, in our opinion, is a part of the
long-term solution to health care."
CMS has been contemplating expanding the integrated-care
model. Both DaVita and Fresenius, in fact, have participated in
pilot projects using that approach with dialysis patients.
Results showed that it reduced hospitalization and death.
Analysts expect it will take some years for those projects to
turn into actual policy changes, however, and see no near-term
impact from integrated care. The presidential election remains
the most immediate catalyst. It will determine whether ObamaCare
proceeds as planned, and affect future CMS decisions on
Matthew Gillmor, an analyst with Robert W. Baird, says the
next year or two should see a continuation of current trends.
Home care providers will probably still be targeted for cuts,
while the large outpatient providers should keep growing in a
steady though not spectacular fashion. HealthSouth probably faces
more reimbursement risks than the dialysis providers, but
"they've been able to communicate their value proposition to
policymakers, so we're hopeful that will limit the appetite to