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Chips Are Down for Hospitals on Coronavirus-Led Business Woes

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Like other sectors, the hospital space has also not escaped the onslaught of the coronavirus outbreak. As a consequence, the Zacks Medical Hospital industry comprising some of the biggest hospitals in the United States has declined 44.5% this year so far. Meanwhile, the Zacks Healthcare Sector and the S&P 500 composite have declined 21.6% and 25.8%, respectively, year to date.

One of the top U.S. surgeons General Jerome Adams directed hospitals to halt their elective procedures in a bid to keep adequate number of hospital beds available in case of a potential surge in coronavirus-afflicted hospital admissions.

Management at the American College of Surgeon recently stated that hospitals, health systems and surgeons should "thoughtfully review" all their scheduled operations and consider canceling or postponing the same "until we have passed the predicted inflection point" in the disease spread and "can be confident that our health care infrastructure can support a potentially rapid and overwhelming uptick in critical patient care needs”.

New York City Mayor Bill de Blasio on Sunday confirmed that he would sign an executive order to postpone all elective surgeries at the city hospitals so that doctors and nurses can only focus on treating patients infected with the virus.

The latest CDC statistics show 3,487 coronavirus cases including 68 deaths. As of now, the Seattle area and the New York City have been the worst hit.

If cases of coronavirus persistently shoot up, hospitals might experience a spike in admissions, diagnostic requests, drug prescriptions and an urgent need for ICU capacity and staffing.

However, the cancellation in elective surgeries in order to accommodate coronavirus patients in greater numbers will hurt revenues of hospital companies, which are already reeling under heavy debt burdens. Notably, Community Health Systems, Inc. (CYH - Free Report) is the most leveraged of the public hospitals with 2019 net Debt/EBITDA of 8.1x compared with 5.7x for Tenet Healthcare Corporation (THC - Free Report) and 3.4x for HCA Healthcare, Inc. (HCA - Free Report) .

With the corona virus outbreak, fears of recession also loom large. Such an economic downslide may cause job cuts, inducing fewer people to be covered under private insurance and higher insurance from the government health insurance schemes of Medicare and Medicaid. Since profitability of the government-sponsored health insurance plans is lower than those falling under employer-sponsored plans, the margins of the hospital companies are likely to take a hit. Most individuals without sufficient health insurance covers might signal bad debts for hospitals from unpaid medical bills.   

Year to date, shares of hospital companies, namely Tenet Healthcare, Community Health Systems, Universal Health Services, Inc. (UHS - Free Report) and HCA Healthcare have lost 60.6%, 12.4%, 43.1% and 42.9%, respectively.

However, any setback in earnings from the coronavirus episode will put pressure on the price performance of the companies, which would create a good opportunity for investors to buy on dips for Community Health and Tenet Healthcare, which carry a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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