Healthcare Business News
Megan Neuburger

Q2 earnings outlook positive for publicly traded hospital companies

By Beth Kutscher
Posted: July 2, 2014 - 3:00 pm ET

Second-quarter earnings for publicly traded hospital companies are expected to please investors thanks to the initial bottom-line impact of healthcare reform and Medicaid expansion in various states where the companies operate, analysts agree.

Earnings also will benefit in comparison to a first quarter in which bad weather impacted hospital utilization rates. Also, open enrollment in insurance exchanges technically had ended before the quarter began, so the full impact of that process should start being seen in results. And chains with operations in Michigan should see a benefit from the April 1 Medicaid expansion in that state, as have those in other expansion states.

Indeed, in the first quarter, chains were already seeing some reduction in uncompensated care while open enrollment was still ongoing and without Michigan's expansion.

“I think volumes will be better in the second quarter compared to the first,” said Brian Tanquilut, an analyst at Jefferies & Co. “Based on the checks that we've done, it seems like the exchanges are working in some key states.”

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One encouraging sign is that utilization is picking up even for elective and non-urgent procedures such as MRIs and ultrasounds, he said.

As of April 19, a total of 8 million people had selected a plan from a health insurance marketplace out of a total of 13.5 million eligible individuals, or 59%, according to the Kaiser Family Foundation. In some states, such as California, as many as 74% of eligible residents purchased a health plan from its state-run exchange.

In contrast, only 53% of eligible Texas residents and 49.5% of those in Tennessee signed up for health insurance through the federal exchange. Florida, which has a high uninsured population and a heavy concentration of for-profit hospitals, saw 61% of eligible residents buy coverage through the federal exchange.

The volume boost, therefore, is likely to depend on where each chain's hospitals are located.

“Sentiments for Q2 are positive, but the results could come out a little bit choppy,” said Paula Torch, an analyst at Avondale Partners. “Volumes are still uncertain.”

The bulk of the benefit from the Patient Protection and Affordable Care Act will come from reductions in charity care or bad debt, said Megan Neuburger, an analyst at Fitch Ratings. “From our perspective, we never expected the ACA to be a volumes story,” she said.

Moreover, the most significant financial boost is coming not from exchange enrollment, but a state's decision on whether to expand Medicaid for low-income adults. “That's really where you could see that the difference was very dramatic,” Neuburger said. “As we go down the road, it's going to be hard to ignore the financial incentives for expansion.”

HCA, the largest chain by revenue, last quarter reported that healthcare reform had only a minimal impact on its financial results. But only four of the 20 states in which the Nashville-based company operates elected to expand Medicaid.

Still, investors like the company's prospects. Just weeks before earnings results are anticipated, shares of HCA are trading at their all-time high, topping $57. The company has not yet set a date for its second-quarter earnings release.

Tenet Healthcare Corp., which has a similar urban focus to HCA, has been particularly bullish on healthcare reform, and expects a 15% reduction in uncompensated care volume this year.

The Dallas-based chain saw its uninsured and charity-care admissions drop by a third in the first quarter with four of its 14 states expanding Medicaid. Tenet also has the most to gain from Medicaid expansion in Michigan, a state it entered last year through its acquisition of Vanguard Health Systems.

In the lead-up to earnings season, its shares have rebounded to the high $40s after dipping under $40 in March and April.

The story has been similar at Community Health Systems, which in January became the largest chain by hospital count when it absorbed Health Management Associates. The Franklin, Tenn.-based chain has a rural focus, but also forecasted a 15% decrease in uninsured volumes for 2014.

It's already seen a 15% drop in self-pay patients in the first quarter, but still reported a net loss after it was severely impacted by the winter storms that walloped much of the eastern half of the country.

Its shares have gained about $11 since reaching their 52-week low of $34.55 in mid-April.

Follow Beth Kutscher on Twitter: @MHbkutscher

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