ObamaCare giveth. ObamaCare taketh away. That is the takeaway
among for-profit hospitals as the Affordable Care Act delivers a
rising number of insured patients and admissions, but also cuts
back on major government health payment systems.
The landmark health insurance overhaul, signed into law in
2010, has resulted in more Americans getting health insurance and
visiting hospitals for treatment. An estimated eight million
people signed up for insurance under ObamaCare's exchanges, and
Medicaid has taken on 5 million new enrollees.
The increase in patient volume has led to surging revenue for
some of the industry's major players.Tenet Healthcare 's (
) Q2 '14 revenue soared 67% from a year earlier to $4.042
billion.Community Health Systems (
), based in Franklin, Tenn., saw its revenue grow 48% to $4.78
"In Q2, the admissions rate for Medicaid patients grew
dramatically," said Jeffrey Loo of S&P Capital IQ. "That's a
big benefit for the hospitals."
The Dallas-based Tenet saw total hospital admissions increase
61%, emergency-department admissions rise 76% and surgeries rise
60% year over year. Investors have taken notice. Tenet shares are
up 46% so far this year, well into new high territory.
Community Health Systems is up 39% year to date, also breaking
new highs. In Q2, its earnings per share more than doubled year
over year to 74 cents.
Like Tenet, increased hospital admissions -- driven by
Medicaid expansion -- are in part responsible for Community
Health's boosted financial performance. Total Medicaid admissions
rose 17% in Q2 from a year earlier to more than 12,500.
The company estimated an accrued benefit of $40 billion to $45
billion in earnings (before interest, taxes, depreciation and
amortization) stemming from the Affordable Care Act as of the end
One player sitting out at least part of the ObamaCare bonanza
is Nashville-basedHCA Holdings (
). Its second-quarter revenue rose 9.2% year over year to $9.23
billion. But HCA's growth has come from setting its sights on the
southeastern and southwestern portions of the nation, where
larger numbers of retirees are residing, said Julie Coffman, a
partner at Bain.
"HCA has been quite brilliant in being thoughtful about
markets -- Dallas, Las Vegas, Nashville -- with enough market
density to have good relationships with the physicians," she
The Sun Belt Effect
The strategy has been successful, but it also gave HCA a large
presence in states -- such as Florida, Texas, Tennessee,
Louisiana and Kansas -- that haven't participated in the Medicaid
expansion. Florida and Texas comprise 50% of HCA's business
operations, according to Michael Waterhouse, an analyst at
Still, shares of HCA are easily on par with its peers -- up
47% so far this year. Earnings rose 51% in the second quarter.
HCA also got a boost from more traffic, although not primarily
from Medicaid expansion. Same-facility revenue per equivalent
admission, a general measure of combined inpatient and outpatient
volume, rose 5.4% from a year earlier due to increased Medicaid
admissions. Emergency-room visits rose 5.7% in Q2, and
same-facility inpatient surgeries rose 1%.
Front-Loaded For Profits
While the environment is good among for-profit hospitals,
their nonprofit brethren aren't doing as well. Nonprofit
hospitals suffered declining income for the second straight year
in 2013, Moody's Investors Service said on Monday.
Revenue growth in the nonprofit sector slowed to 3.9%, well
below the typical 7% pace. Nonprofits have had a tough time
curbing expense growth as payments from the U.S. government
dropped. They're also having difficulty squeezing higher payment
rates from insurance companies, according to Moody's.
But for the industry in general, a higher number of insured
patients means that hospitals are likely to see money for their
services, at least eventually, instead of being forced by law to
treat uninsured patients and then being left holding the bag.
The latter situation has traditionally led to hospitals
spreading the incurred costs of the unpaid bills across the rest
of their patient population, driving up the overall price of a
"We kind of see the benefits of the Affordable Care Act kind
of front-loaded for the hospital industry," said Morningstar's
Waterhouse. "The pain points are coming later."
Those pain points include pending government rate cuts in
Medicare and Medicaid, as well as continued employer hostility to
rising health care costs.
Also on the horizon: the introduction of accountable-care
payments -- penalties that the Affordable Care Act will force
hospitals to pay if their medical aid falls short of
presentations and a patient is readmitted to a hospital for
treatment of the same illness or from complications within a
Once that provision goes into effect, Medicare will no longer
reimburse hospitals for unnecessary readmissions. It's one of the
statute's anti-fraud and anti-negligence provisions, designed to
encourage hospitals to manage chronic conditions better and
actually keep patients out of the hospital.
"It's a huge opportunity for those who get it right, but it's
a very different business model to what hospitals are used to,"
Bain's Coffman said.
An Uncertain Future
Looking ahead, analysts see more mergers and acquisitions.
Last year, Tenet completed its $4.3 billion purchase of
Nashville-based Vanguard Health Systems. Community Health Systems
struck a $3.9 billion deal, expanding its network to 206
hospitals by acquiring Health Management Associates.
The common factor in all the deals: the aim to generate
economies of scale plus increased market leverage as the later
stages of ObamaCare take effect.
Also ahead for the industry: cost pressures, more
accountability enforced on hospitals and the increasing
computerization of medical data are three major factors on the
horizon, Coffman said. While ObamaCare didn't create this
environment or these factors, it has accelerated them, she
The fragmented nature of the U.S. health care system -- with
patients, insurers and physicians interacting but never quite on
the same page -- also makes it difficult to navigate.
"There are a lot of duplicative costs," Coffman said. "The
whole health care system is going to push to a more integrative
experience. It's definitely happening in many parts of the
When several of these important new provisions take effect in
2017, there will be a new president in the White House. Their
effects will be varied: compressed margins, a larger number of
insured patients and a tighter government purse for
"Overall, the entire hospital industry is really facing a
great deal of challenge and uncertainty over the next five to
seven years," said Paul Ginsburg, a professor of medicine and
public policy at University of Southern California.