Tenet, HCA Lead Hospitals Facing Longer-Term Tests

By
A A A

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 ( THC ) Q2 '14 revenue soared 67% from a year earlier to $4.042 billion.Community Health Systems ( CYH ), based in Franklin, Tenn., saw its revenue grow 48% to $4.78 billion.


"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 of Q2.

One player sitting out at least part of the ObamaCare bonanza is Nashville-basedHCA Holdings ( HCA ). 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 said.

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 Morningstar.

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 hospital stay.

"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 30-day period.

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 added.

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 country."

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 hospitals.

"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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: THC , CYH , HCA

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Top Home Financing Myths
Top Home Financing Myths            

Stocks

Referenced

Most Active by Volume

64,655,493
  • $17.88 ▼ 1.38%
53,363,101
  • $18.51 ▼ 6.98%
42,789,793
  • $94.01 ▼ 1.26%
40,818,762
  • $121.30 ▼ 0.87%
38,086,152
  • $23.28 ▼ 9.17%
36,103,930
  • $14.20 ▼ 0.77%
31,870,696
  • $14.83 ▼ 1.79%
29,019,850
  • $46.70 ▼ 0.38%
As of 7/31/2015, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com