Hospital Stocks’ Rally Points to Post-Covid Growth

The financial turmoil of the past year in some respects has added to the urgency of changes that already were under way at publicly traded hospital operators. Many have been focused on boosting margins by shifting services to lower-cost outpatient centers, selling off less-profitable assets and cutting costs from their businesses.

These efforts are winning support from investors. They have helped the shares of big hospital operators such as

Tenet Healthcare Corp.

THC -0.56%

and

Community Health Systems Inc.

CYH -1.71%

significantly outperform the broader market this year. Tenet is up around 70% year-to-date while the shares of Community Health Systems have more than doubled so far in 2021.

HCA Healthcare Inc.

HCA -1.76%

has also jumped.

What began as a recovery rally for hospital stocks could now prove to be longer lasting, say analysts and industry investors. Rebounding patient volumes are combining with longer-term initiatives to squeeze more profits out of hospitals.

“There is generally a sense that volumes have rebounded but that there is still further room to run,” said

Credit Suisse

analyst A.J. Rice.

Lower Covid-19 cases are one part of the story. Another part is Washington, where the Biden administration’s support of the Affordable Care Act stands in contrast to the Trump administration. The program is generally viewed favorably for hospitals because it helps it helps provide coverage for patients who might otherwise struggle to pay medical bills. The Supreme Court upheld the law last week following challenges from several Republican-leaning states.

Uncertainties remain that could still undermine the sector’s recovery. Elevated stock prices reflect a view that the worst of the pandemic is over and that even if cases flare up, it won’t lead to the stringent lockdowns seen in 2020. An outstanding question is how the companies will control costs as patient volumes further increase, especially if hospitals struggle to find workers.

“The big red flag is labor,” said Raymond James analyst

John Ransom.

The next year could see a tightening supply of nurses and other hospital workers as some shift careers or take a break after the intensity of the pandemic, some analysts said.

But those risks haven’t dampened the enthusiasm for the sector, even as the broader market has wobbled this year amid questions over the pace and nature of the economic rebound.

Improving company fundamentals have boosted investor support. In HCA’s case, strong cash flows late last year led the company to authorize $6 billion of new share buybacks. Community Health Systems, which operates hospitals in many smaller cities, has worked to refinance its debt to push back maturities and lower interest expenses.

Some of the most significant moves are happening at Tenet. The Dallas-based company has chosen to shed some traditional acute-care hospitals in favor of growing outpatient surgical centers. The company said last week it was selling five Miami area hospitals to privately held Steward Health Care for $1.1 billion.

“They’ve been focusing on core markets where they have a strong presence,” said

Larry Robbins,

chief executive of Glenview Capital Management, a top Tenet shareholder.

The focus on outpatient surgery centers, which handle procedures such as knee and hip replacements and can offer lower costs than traditional hospitals, is one reason why some analysts believe Tenet’s current momentum can be sustained.

“It is getting no recognition in our view that a third of the business and the fastest-growing part of the business is in surgery centers,” said Credit Suisse’s Mr. Rice.

Write to Brian Spegele at brian.spegele@wsj.com