Some hospitals may be laying off employees, but the three for-profit chains that reported earnings last week are restoring healthcares reputation for being strong when the economys weak.
HCA, Community Health Systems and Universal Health Services all reported stronger patient volume for the second quarter (See chart). Compared with 2007s second quarter, HCA and Universal also recorded higher profits for the quarter, while Communitys results were depressed by changes in Indianas Medicaid program.
The positive results from the three large investor-owned companies came amid hospital job cuts approaching nearly 2,000 workers in recent months (June 2, p. 6). Their results arent similar, however, to what Moodys Investors Service is seeing from not-for-profit hospitals, said Lisa Martin, senior vice president with Moodys.
We are continuing to see pretty flat volume trends, particularly in states that are under more economic stress, Martin said. Moreover, hospitals also seem to be treating more patients who qualify for charity care and more self-pay patients, Martin added.
Another concern is the forecast for Medicaid payments as state budgets come under pressure from a slowing economy, Martin said. Californias Medi-Cal rate cut is the first big example of that, Martin said, but some states, such as Ohio, have funded Medicaid at the same level as last year. Other states have been restructuring their Medicaid programs by putting Medicaid patients into managed-care plans. To date, that hasnt led to a large reduction in Medicaid payments, she added.
All of these factors are hitting revenue, so hospitals are turning to cost-cutting, Martin said. Besides a spate of layoffs, hospitals are doing a better job of controlling the cost of malpractice insurance and supply costs, she said. They are also looking at ways to trim labor costs without shedding employees, such as restructuring employee benefit packages, including health coverage, ironically, Martin said.
Martin pointed to Michigan and Ohio as being especially weak economic performers. Not only have for-profit providers largely avoided those two states, but their size and geographic reach insulates them from weakness in one or two markets, said Frank Morgan, a healthcare stock analyst and managing director in the Nashville office of Jefferies & Co.
Theyre not just in one city. These companies are diverse and operate across a number of states and a varying range of local economies, Morgan said. If youre in several different markets instead of just being in Michigan, your numbers are probably going to look better.
All three of the for-profits noted that a weakening economy was something to watch in the months ahead, but so far, they have not seen a large impact from it.
Steve Filton, senior vice president and chief financial officer of Universal Health Services, King of Prussia, Pa., even found a silver lining: In a weaker economy, weve seen some pressure come off our wage rates. Universal has a big presence in Las Vegas, which has drawn news coverage for the slowdown after its long boom, but Filton said that economic conditions there havent affected its volume much. He noted that some gaming operators are laying off workers, but others are hiring and huge casino-hotel projects are still on the drawing board. Some markets in Florida are a bit soft, Filton added, but he noted that, at 5.7% in July, the national unemployment rate was relatively low for a downturn.
Universal surprised with earnings per share 16 cents higher than stock analysts expected, on average. The company recorded net income of $52.2 million and net revenue of $1.28 billion for the second quarter.
While lower than a year ago because of changes in Indianas Medicaid program, Franklin, Tenn.-based Community still earned $47.9 million for the second quarter. The companys net revenue more than doubled to $2.69 billion in the quarter thanks to last years acquisition of Triad Hospitals, Plano, Texas.
I dont know of any major layoffs in any of our markets. So far, we dont seem to have had any, said Wayne Smith, chairman, president and chief executive officer of Community. It would have to be a pretty substantial layoff in a market to have an impact in that market, and it still wouldnt affect the company as a whole.
Community tracks unemployment in the counties it serves, and this company-specific unemployment rate has risen by 70 basis points in the year to May 2008, while the national rate has risen by 90 basis points, said Larry Cash, executive vice president and chief financial officer for Community.
Nashville-based HCA reported its strongest gains in same-facility patient volume since the first quarter of 2004. HCA said same-facility admissions increased 1.3% and equivalent admissions increased 2%, in both cases comparing the second quarters of 2007 and 2008. Same-facility surgeries, however, declined 0.6%, with cosmetic surgeries down 9%. The company noted that cosmetic procedures are largely discretionary and may have slipped because of the weakening economy.
The company also reported that it reached a settlement with the Internal Revenue Service regarding certain tax issues from 2001 and 2002. As a result of the settlement, HCAs income tax provision fell $38 million in the second quarter. That reduction helped HCA boost its second-quarter net income to $141 million, up from $116 million in the year-ago quarter. Revenue increased 3.6% to $6.98 billion.