After enduring their share of economic pain for the past few
years, acute care hospitals are seeing some sharp gains.
In the second quarter, hospital operatorHCA Holdings (
) saw earnings jump 67% -- a fourth straight quarter of
double-digit profit leaps. Smaller peerVanguard Health Systems (
) saw EPS growth slow to 71%, after three quarters of powerful
But patient traffic for the seven publicly traded acute care
hospitals, measured in same-facilities admissions, were down an
average of 2.3% in the second quarter, vs. a year ago, according
to analysts' reports. Those admission levels, driven by high
unemployment and cautious spending by health care consumers, are
keeping pressure on the hospital group's earnings, says
Susquehanna Financial Group analyst Chris Rigg.
"But the companies have done an effective job at controlling
costs, which has allowed them to grow or maintain earnings,
despite difficult admissions head winds," he said.
Analyst consensus outlooks for HCA, Vanguard and others slow
sharply in the next two quarters as they run up against difficult
year-over-year comparisons. The group has seen uneven traffic
improvements as the economy slouches ahead. But the big prize
hangs in the result of the November presidential election.
"The biggest tail wind for the industry remains the expected
increase in the number of insured lives once provisions of the
Affordable Care Act go into effect in 2014," said Jefferies &
Co. analyst Brian Tanquilut.
The Patient Protection and Affordable Care Act -- ObamaCare --
mandates that all Americans maintain a minimum level of health
care coverage. To meet that objective, it expands Medicaid
coverage, provides federal subsidies to assist low-income
individuals when they obtain health insurance and establishes
insurance exchanges through which individuals and small employers
can purchase health insurance.
The acute care hospitals are seen as the primary beneficiaries
of the Affordable Care Act. The Medicaid provision and individual
mandate are expected to reduce the uninsured population by
approximately 30 million, says Tanquilut, which should then
translate into reduced bad debt for hospital providers.
Hospitals are required to give everyone care. They collect
only 7 cents on the dollar for uninsured patients, says analyst
Whit Mayo of Robert W. Baird & Co. So the Affordable Care
Act's increased coverage would, theoretically, lower the amount
of uncompensated care.
Other than HCA and Vanguard, IBD's Medical - Hospitals group
is home to other acute care hospital operators includingTenet
) andCommunity Health Systems (
). The group ranked No. 30 on Friday out of 197 industry groups
tracked by IBD.
The group's index is up 25% so far this year, putting it in
the top 15% among industry gains. Much of that performance has
hinged on election expectations, as the group moves almost in
"lock step" with President Obama's performance in the polls, says
HCA is the nation's largest acute care hospital provider in
number of facilities, sales and market cap.
It also boasts the group's highest cash operating margin at
During the past three quarters, HCA was also the only company
in the group to see a year-over-year increase in same-facilities
HCA has 163 hospitals, with 157 general, acute care hospitals;
five psychiatric hospitals; and one rehabilitation hospital. In
addition, it has 108 free-standing surgery centers.
Its strengths are its management and operational expertise,
HCA's focus on fast-growing urban markets has worked to its
advantage, says Tanquilut, buffering it from the volume weakness
plaguing many of its peers the past few years. HCA has also
aggressively acquired physician practices, as well as leveraged
its size and scale into competitive technology and price
advantages, says Mayo.
Vanguard's 28 acute care and specialty hospitals and related
facilities are in several large urban and suburban markets. But
it operates on a different model than some of its peers.
It's focused on acquiring large facilities that have had
challenges in hopes of turning them around. One recent
acquisition was the roughly $365 million cash purchase of Detroit
Medical Center, which it completed last year. Detroit Medical was
losing money at the time of the buy, but Vanguard turned it
around, says UBS analyst A.J. Rice. He figures Detroit Medical
now accounts for about 35% of Vanguard's revenue.
The types of facilities Vanguard acquires, like Detroit
Medical, have a high percentage of Medicaid and uninsured
patients, Rice says. That helps explain why Vanguard's cash
operating margin of 9.2% is the lowest of its peer group, says
Select Medical Holdings (
) operates specialty hospitals. It has 111 long-term acute
care hospitals -- with a length of stay 25 or more days -- and 12
acute medical rehabilitation hospitals.
Its earnings per share rose a hefty 75% in the second quarter
on a revenue gain of 17%.
Mayo says Select's volume growth rebounded and its
debt-related costs dropped as the company substantially trimmed
its leverage in the past 24 months. There remains a high degree
of uncertainty regarding the regulatory environment for the
long-term, acute care industry.
But "Select is probably one of the best managers of long-term
acute care hospitals," he said. "They have among the best assets
in the marketplace."
The general acute care hospitals like HCA and Vanguard are not
depending on a windfall in 2014, when the incremental coverage of
the uninsured is scheduled to take place under the Affordable
Care Act, Rice says.
"If that happens, they come out ahead," he said. "But if it
gets repealed, it's not going to make things worse for them."
The current environment for acute care hospitals is a
"relatively steady state," he says. Apart from a rebound in the
economy and implementation of ObamaCare, he's not forecasting any
major change in the environment.
Acute care hospital providers are benefiting from other
trends. Consolidation has been very important for the industry,
says analyst Rigg.
With the exception of HCA, most of the other companies in the
group would have had much lower top-line growth without the
benefit of acquisitions, he says.
Consolidation brings scale, and scale is important in the
industry, adds Tanquilut. It's a way to maintain and improve
margins and get better pricing with managed care outfits.
Now, with many smaller single hospital operators struggling
with soft volumes, there's an opportunity for the larger players
to make acquisitions, he says, and the prices are cheaper than
they were four or five years ago.
Hospital services are the largest component of health care.
They represent roughly 33% of total spending in 2011, or $849
billion, according to the Centers for Medicare and Medicaid
Services. Hospital spending increased 4.3% in 2011, slower than
the 4.9% growth in 2010 and 6.4% growth in 2009, tallies the
An aging population should drive steady demand for hospital
services over time, notes Rice in a report.
CMS projects the annual growth rate in hospital spending to be
below the trend line at 4.2% in 2012 and 4.1% in 2013, writes
Rice. The CMS sees the rate accelerating to 6.7% in 2014 -- or
5.7% in the absence of health reform -- and to grow an additional
6.2% per year during the period 2015-20.
Medicare spending growth, notes Rice, is outpacing private
health insurance spending growth, reflecting the shift of baby
boomers onto the Medicare rolls. According to the U.S. Census
Bureau, in 2005 there were an estimated 36.8 million people aged
65 and older in the U.S., representing 12.4% of the total
population. By 2020, this age group is expected to increase to
54.8 million people, or 16.1% of the population.
All eyes are on the presidential election results. Analysts
see a win by President Obama as a huge positive for the hospital
group. And they see the possibility of a repeal of the act or
some of its provisions if Gov. Romney wins.
Rigg says valuations are low for the hospital group.
"If President Obama prevails, it will be a meaningful positive
for the group because of the Affordable Care Act," he said.
The Affordable Care Act would meaningfully improve the
earnings power of most hospital companies. Mayo estimates health
care reform may be accretive to hospital earnings by 15% to 20%
going into 2014.
That's the upside. But regardless of what happens with the
election, Rigg says, the admissions environment and core industry
fundamentals appear to be stabilizing.
"As long as we stay in a slow, steady rebounding situation,
there's probably not a lot of downside to earnings," he said.