For a year now, investor-owned hospital chains have been trying to score a knockout against rising bad-debt expense. The second quarter of 2004 is shaping up to be no better than a split decision.
As a percentage of revenue, bad-debt figures reported by four major chains last week were higher than they were in the second quarter of 2003. But HCA, the largest investor-owned hospital company, and its 5-year-old spinoff, LifePoint Hospitals, reported bad-debt expense that was a bit lower than in the first quarter.
Analysts often study comparisons of like quarters year to year to remove seasonal factors that may affect results, but consecutive quarter analyses are more meaningful now "because the bad-debt issue really cropped up in the second half of last year," said Darren Lehrich, a senior analyst with Piper Jaffray & Co.
Community Health Systems and Universal Health Services last month also reported small improvements in bad-debt levels for the second quarter compared with the first, Lehrich said, but there were some one-time items related to previous quarters that mitigated some of those gains.
Other chains, including Tenet Healthcare Corp., Ardent Health Services and Iasis Healthcare Corp., are scheduled to report earnings this week.
"The postmortem on the second quarter is there really isn't any definitive conclusion in the investment community that the bad-debt issue is getting better just yet," Lehrich said.
Despite the improvement, Nashville-based HCA said its bad-debt expense would improve only when more patients have insurance. The company earned $352 million, or 72 cents per share, in the quarter ended June 30, compared with $240 million, or 47 cents per share, in the year-ago quarter. Revenue was up 6.7% to $5.83 billion.
As HCA said a week before releasing its earnings report, its profits benefited from a $59 million reduction in its professional liability-insurance reserves prompted by an actuarial review of claims trends and malpractice tort reform in Florida and Texas. The 2003 second-quarter results also were hurt by a noncash asset impairment charge of $130 million.
For the six months ended June 30, HCA earned $697 million, or $1.41 per share, compared with $709 million, or $1.37 per share, in the year-ago period. HCA recently completed a $1.5 billion share repurchase program that boosted the per-share earnings figure. Revenue rose 9.6% to $11.77 billion.
The company's equivalent admissions were up 1% and 3.7% for the second quarter and first half of 2004, respectively. Outpatient surgery volume was up 0.9%, with a shift away from HCA's 190 hospitals. Volume was up 4.1% at its 91 ambulatory surgery centers and down 0.4% for hospital-based outpatient surgeries.
Investors want to see HCA complement those surgery gains with better volume at its hospital outpatient departments, in services such as diagnostic imaging, Lehrich said. "Everybody focuses so much on the inpatient business, and there's no question that the quality of their hospitals and networks is really good," he said, "but it will be hard for them to show patient volume growth if they don't win back some of that outpatient business that they've been losing."
Uncompensated care and debt refinancing pushed Triad Hospitals, Plano, Texas, into a second-quarter loss, despite rising patient volumes at its 50 hospitals. Triad lost $5.2 million, or 7 cents per share, for the quarter, compared with profits of $38 million, or 51 cents per share, in the year-ago quarter. Revenue was up 21.7% to $1.09 billion, helped by across-the-board increases in same-hospital volumes, including a 3.4% rise in adjusted admissions and a 2.7% rise in inpatient surgeries.
"Their strategies are starting to really pay dividends," Lehrich said. In the five years since HCA spun off Triad, Lehrich said, the company has steadily improved the quality of its hospital portfolio.
Bad-debt expense grew to 10.6% of revenue, compared with 8.2% in the second quarter of 2003 and 10.2% in the first quarter of 2004. Triad said it would implement a discount program for self-pay patients by the fourth quarter. It expects the policy to lead to a decline in bad-debt expense and a roughly equal decline in net revenue.
Triad incurred an after-tax cost of $47.5 million when it refinanced $600 million in senior notes, lowering their interest rate to 7% from 8.75% and securing more favorable covenants.
For the six months, Triad's profits were up 8.6% to $92.6 million, or $1.22 per share, on revenue of $2.2 billion.
LifePoint Hospitals and Province Healthcare Co., both based in Brentwood, Tenn., reported profit growth of about 22% and 88%, respectively, in the second quarter ended June 30, thanks in part to rising surgical volumes. LifePoint earned $18.7 million, or 48 cents per share, for the quarter, compared with $15.3 million, or 40 cents per share, in the year-ago quarter. Revenue was up 11.2% to $246.4 million. LifePoint said same-hospital equivalent admissions were up 0.1%, but same-hospital inpatient surgeries rose 7.8% compared with the year-ago quarter. For the six months, LifePoint said profits rose nearly 30% to $42.6 million, or $1.08 per share, on revenue of $503 million. LifePoint owns or operates 30 hospitals.
Province, which owns or operates 20 hospitals, earned $18.2 million, or 34 cents per share, for the second quarter, compared with $9.7 million, or 20 cents per share, in the year-ago quarter. Revenue was up 13.4% to $208.5 million.