Hospital shares climbed on Tuesday as investors focused on expectations that patients newly insured under the Affordable Care Act will make plans for doctor visits in 2014.
Hospitals have been expected to get a boost in business from the healthcare reform law, but a slow signup on the new insurance exchanges muddied the outlook.
On Monday, Community Health Systems Inc (CYH.N), the No. 2 U.S. hospital operator, said it expects the healthcare reform to provide a slight boost to 2014 earnings, rekindling investor hopes that the sector will see a pickup in demand after a weak finish to 2013.
Community Health's 2014 outlook includes a benefit to adjusted EBITDA from healthcare reform of between 0.5 percent and 0.8 percent of net operating revenue.
"The challenging environment has continued to plague the hospitals, but the positive '14 outlook highlights the significant upside the group could see under the ACA," Oppenheimer analyst Michael Wiederhorn said in a note to clients.
Jefferies analyst Brian Tanquilut said Community's positive view of 2014 overshadowed its disappointing fourth-quarter patient volume numbers.
Community Health's "reform assumption for 2014, in our view, is better than most expectations," Tanquilut said.
While disappointing patient admissions are bad news for hospitals, insurance stocks rose on the view that weaker-than-expected hospital admissions in the fourth quarter could mean fewer medical claims for insurers to pay.
Shares of UnitedHealth Group Inc (UNH.N), the nation's largest health insurance company, gained more than other insurers because it is more dependent on the corporate health plan business and has not planned to expand through the new individual exchanges, whose medical service use remains an unknown cost, said CRT Capital analyst Sheryl Skolnick.
Community Health can also point to the increased patient volumes it will see from its planned acquisition of smaller chain Health Management Associates Inc HMA.N, Skolnick said.
HMA shareholders are expected to vote on Wednesday on whether to approve the $3.6 billion takeover by Community Health.
Shares of Community Health rose about 3 percent to $43.15. Tenet Healthcare Corp (THC.N) was up 4 percent at $45.70, HCA Holdings up 2.6 percent at $49.80, and Health Management up 1.1 percent at $13.47.
UnitedHealth's stock gained 4 percent to $77.21, WellPoint Inc WLP.N rose 1.9 percent to $90.99 and Aetna Inc (AET.N) climbed 1.3 percent to $68.41.
(Reporting by Susan Kelly in Chicago; additional reporting by Caroline Humer in New York; Editing by Leslie Adler)