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Feeling the outpatient pinch
Lower demand squeezes chains' quarterly earnings

By Beth Kutscher
Posted: April 27, 2013 - 12:01 am ET

The first quarter of 2013 looked like it might be a big one for hospitals as the New Year opened with an early, severe flu season that led to a rush for services.

But in the end, not even the flu could withstand economic uncertainty, rising taxes and increasing healthcare costs. And patients stopped showing up for care.

As investor-owned chains begin to report their earnings results, a common and unwelcome theme is likely to be an overall decline in demand, not just on the inpatient side but also for outpatient services.

Although inpatient admissions have been falling for some time, outpatient volumes continued to be a bright spot for hospitals, often helping to boost financial results in a big way.

But publicly traded systems are reporting a reversal of that trend, and if it persists, it could be a sign that this year will be a particularly challenging one for the hospital industry.

Health Management Associates, Naples, Fla., was the first chain to preview its first-quarter results, bracing investors for an 8.8% decline in same-facility admissions and a 5.7% drop in adjusted admissions, which also take into account outpatient care. Yet HMA's recent public relations and legal challenges have been well documented, and analysts disagreed over whether its results were the canary in the coal mine

Six days later, however, HCA, the country's largest for-profit chain, previewed results that also were below expectations. The Nashville-based company performed 2.6% fewer inpatient surgeries and 4.3% fewer outpatient procedures compared with the first quarter of the previous year. Its same-facility admissions increased a scant 0.1%, compared with 3.2% during the same period in 2012.

“When they start saying they're seeing some weakness, that's when you begin to think everyone else will too,” said A.J. Rice, an analyst at UBS.

Of the two systems that reported first-quarter earnings last week, Universal Health Services, King of Prussia, Pa., recorded a 1.5% decrease in adjusted admissions at its acute-care hospitals compared with the first quarter of 2012. LifePoint Hospitals, Brentwood, Tenn., said same-facility admissions declined 5.9% and adjusted admissions dropped 4.9% compared with the same quarter last year.

HCA and HMA are scheduled to report their full first-quarter results this week, as are Community Health Systems, Tenet Healthcare Corp. and Vanguard Health Systems.

In UBS' March hospital survey, executives reported that outpatient visits decreased 0.1% in February, and while the drop was modest, it marked the first negative result since at least December 2011, the earliest month for which data was recorded. The trend held true even when the data was adjusted to take into account differences in the number of workdays between months.

On a conference call to discuss the company's preliminary results, Robert Farnham, HMA's senior vice president of finance, said weaker volume on the outpatient side “is a trend that we hadn't seen in the past.”

In fact, HMA said, it staffed facilities expecting the usual seasonal increase in patients, and then found itself paying nurses to cover empty beds.

Whether the reversal is a blip or the new normal remains to be seen.

Last year was not only a leap year—adding an extra day to the first quarter—but also included an Easter holiday that fell in April. The holiday this year fell on March 31, and many doctors and patients took an early spring break the previous week.

“That week tends to be pretty slow,” Rice said. “The tricky thing this year is we're all trying to figure out how much the calendar helped (last year's) results.”

If that's the case, second-quarter results could certainly rebound. To the extent that the first week and a half of a quarter can be predictive, HMA's Farnham said, April is already seeing greater volume in admissions and surgeries.

But there may be other factors at play, ones that could be harder to shake.

Health plan actuaries are no longer projecting growth in outpatient services, said Allan Baumgarten, an independent consultant on market trends. Nor do they think that declining inpatient volume is merely a reflection of more procedures being done in an outpatient setting.

HMA President and CEO Gary Newsome, during the conference call, blamed negative employment trends, increasing health insurance costs—including the popularity of high-deductible plans that reset in the New Year—as well as rising gas prices and payroll taxes that squeeze disposable income and lead would-be patients to delay care.

And if that weren't enough, the first quarter also saw the threat of sequestration and furloughs for government workers.

“You've seen this before where people get a little bit frozen,” Rice said. “You've sort of had that perfect storm in February and March as well.”

Follow Beth Kutscher on Twitter: @MHbkutscher

Lower demand at HCA hospitals, such as TriStar Centennial Medical Center, Nashvillle, left, has the nation's largest for-profit hospital company anticipating lower-than-expected earnings.

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