Winter Hospital Quarterly
SUMMARY
We are issuing our Winter Hospital Quarterly, in which we track the financial and
operating performances of the public and private hospital companies on an
individual and composite basis to monitor trends in the group's results. We believe
this is a useful part of any healthcare investor's library.
KEY POINTS
n In this piece, we examine the trends in unemployment rates in the public
providers' markets. We think this can be useful in understanding fundamental
issues such as volume growth and bad debt. While the rates tend to move
mostly in conjunction with the overall national average, there are differences
among the public competitors in terms of exposure. Our analysis shows that
CYH, our top pick in the space, appears relatively well-positioned to deal with
the challenging economy due to its higher quality markets.
n Our current trend analysis shows that volumes and bad debt both remain
fundamentally weak, and continue to be pressured by a deteriorating economic
environment. However, it's possible that admissions growth could pick up in '09
aided by easy comps (with the exception of 1Q). Furthermore, the recent
passage of COBRA subsidies in the economic stimulus legislation could
eventually alleviate some pressure on bad debt through increased coverage of
the uninsured.
n Due to the high degree of leverage in the industry, we have also updated our
review of hospitals' financial positions. We continue to believe the larger public
players are on relatively stable operational footing and balance sheets should
strengthen in 2009. Furthermore, the group as a whole has generated fairly
strong free cash flow in recent periods, which should allow them to meet any
near-term debt repayment obligations that could arise.
n Although concerns surrounding unemployment, heavy debt loads, and
deteriorating fundamentals continue to plague the public hospital companies, we
think much of this negative information is already priced into the names. While
hospital stocks have bounced off their recent lows in the past few weeks, we still
see some upside over the next 12 months. 4Q results could alleviate some
near-term concerns, and positive rhetoric surrounding increased coverage for
the uninsured should continue in '09.

This piece is our Winter Hospital Quarterly, in which we track the financial and operating performances of the public and
private hospital companies on an individual and composite basis to gauge trends in the group’s results. We believe this
piece is a useful part of any healthcare investor’s library.
Traditionally, investors have considered healthcare companies somewhat of a safe haven during recessionary times. While
this may be true for many providers in our universe, hospitals are certainly not immune to the effects of a difficult economic
environment. In particular, investors seem to be concerned about the sector’s highly leveraged business model, as well as
the effects of a rising unemployment rate on bad debt. Fundamental issues, most notably weak volume growth, also persist
for most of the public players and could be exacerbated by the deteriorating economy. However, much of this negative
information appears to already be priced into the names. While hospital stocks have bounced off their lows in recent weeks,
we still see some upside over the next 12 months. Results coming out of 4Q earnings could alleviate some near-term
concerns about the group, while the positive rhetoric surrounding increased coverage for the uninsured as part of major
health care reform should continue throughout 2009.
Below we look at some of the current issues surrounding the hospital space, such as health care reform, the financial
position of the larger players, and the effects of the economy and unemployment on the industry. We then examine more
fundamental issues such as volumes, pricing, and margin components in more detail.
Health Care Reform: Addressing the Uninsured Population
In general, we expect a lot of noise around healthcare legislation this year. While it is too early to say what the ultimate
outcome of these discussions will be, we believe issues such as coverage for the uninsured will be a major topic in the
coming months. More recently, the decision by former senator Tom Daschle to withdraw his nomination for Secretary of the
Department of Health and Human Services (HHS) has led some in the health care industry to question the likelihood of
reform legislation emerging this year, as Daschle was going to be the Obama administration’s point person in that regard.
However, the White House insisted that health care reform will in fact move forward despite Daschle's decision. Other
influential health care figures also said the reform effort should continue, namely Senate Finance Committee Chair Max
Baucus (D-MT) and Senate Health, Education, Labor, and Pensions Committee Chair Ted Kennedy (D-MA). All in all, we
believe the rhetoric surrounding this issue of health care reform should be a positive catalyst for hospital stocks in the near
term.
In particular, the debate over how to tackle the problem of a rapidly rising uninsured population is clearly a key issue for
hospital companies. Based on its most recent data, the CDC has reported that almost 44 million U.S. residents were
uninsured at some point during 2007, which has directly led to a rise in the amount of uncompensated care that hospitals are
forced to provide. By all anecdotal accounts, this number appears to have risen in 2008 as unemployment has increased
and more and more workers are losing their health insurance.
To that end, several influential Democrats, including newly elected President Barack Obama, have been fairly vocal about a
health care overhaul that would attempt to expand coverage to the uninsured. In addition to President Obama, Senate
Finance Committee Chairman Max Baucus (D-MT), Senate Health, Education, Labor and Pensions Committee Chairman
Ted Kennedy (D-MA), and House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) have all discussed
their visions for major health care reform legislation. Although the ultimate timing and shape of these plans is still somewhat
unclear, below are some more specifics:
• President Barack Obama: During his campaign, President Obama discussed a reform plan that would create a
new government-run plan as well as an "exchange" in which private companies would offer insurance to compete
with the government plan. In addition, new rules would require that insurance companies provide coverage to
everyone, even those with existing ailments. A study done by The Lewin Group found Obama’s plan could reduce
the number of uninsured residents by roughly 27 million people, while earlier studies pegged the number at around
34 million.
• Sen. Max Baucus (D-MT): Sen. Baucus released a reform plan that is largely consistent with President Obama's
views. However, a key difference is that Baucus' package would require all Americans to have health insurance,
while Obama's proposal would not have that mandate. Under Baucus’ plan, companies would be expected to either
offer their employees coverage or contribute to a fund that would help cover the remaining uninsured. In addition,
Baucus’s plan would set up a nationwide insurance pool, or Health Insurance Exchange, where those without
employer-based coverage can select from different plans, including those from private insurers and a new