Most of the investor-owned companies that reported second-quarter earnings last week stayed true to the script: With a weak economy, patients are delaying elective and less-urgent procedures, so the cases that remain have higher acuity. Volume is weak, but the business that remains is more profitable.
Exception to the rule
HCA's earnings show decline in surgeries
When the exception to the rule is HCA, however, everyone takes notice, especially when the Nashville-based giant isn't quite sure itself what to make of the drop in acuity it reported for its Medicare business.
HCA reported volume increases of 1.8% in admissions and 1.9% in equivalent admissions comparing the quarter with 2010's second quarter on a same-facility basis. But the company's mix of business shifted to lower-intensity cases, as surgeries declined by 1% and the additional medical admissions the company reported were of lower acuity too, according to Milton Johnson, HCA's president and chief financial officer. HCA's Medicare case-mix index declined 1.2% comparing the quarters; Johnson said it's the largest decline he can remember.
Sam Hazen, president of operations, said some possible explanations include the soft economy, technology and drug enhancements that reduce the need for more complex care and changes in physician relationships because of moves by competing hospitals to lock up those physicians. Hazen added, however, that the company has gained physicians in many markets too.
Jeff Villwock, managing director of Atlanta-based Genesis Capital, said he has heard that some tax-exempt providers are experiencing a similar decline in acuity, but those results are counterintuitive. The other investor-owned companies that reported last week saw increases in their case-mix index and mostly lower volume, especially on the inpatient side, and that makes sense, Villwock said. In a weak economy, with employment still not growing and with other prices rising for things like gas and food, it makes sense that the less-urgent procedures are being delayed, he said.
Equity investors hammered HCA's shares, with the stock dropping nearly 20% on the date earnings were released, July 25, and then drifting down a bit more through the end of the week closing at $26.68, according to Commodity Systems. Bond investors, however, greeted two new issues that HCA announced last week with open arms. Originally planning to borrow $1 billion in two note issues due in 2020 and 2022, HCA sold $5 billion in notes, according to securities filings. The proceeds will be used to pay off two issues due in 2016 with higher interest rates than the new notes.
Also closely watched last week were the second-quarter results of Community Health Systems, its first quarterly report since Tenet Healthcare Corp. filed a lawsuit against Community on April 11. Community, Franklin, Tenn., spent about $6.2 million in the second quarter on legal fees and other costs associated with the Tenet lawsuit, government investigations and other lawsuits based on similar allegations, said Larry Cash, executive vice president and CFO.
Community reported a decline of 5.6% in second-quarter same-facility admissions compared with the year-ago quarter. Nearly half of the decline, representing about 2.6 percentage points, was related to a shift of one-day inpatient admissions into outpatient visits. Tenet's lawsuit alleges that Community artificially drives up the rate of one-day inpatient admissions through the emergency room to improperly boost revenue. About 1.6 percentage points of the shift to outpatient visits involved emergency-room cases, according to Community. One-day admissions for chest pain declined about 20% comparing the quarters, for example, in what Cash described as a natural reaction by emergency-room physicians to the publicity surrounding the lawsuit and investigations. About 1 percentage point of the decline involved direct admissions that bypass the emergency room.
Wayne Smith, Community president, chairman and CEO, said the lawsuit and investigations have been no more than a modest barrier. “As long as our detractors don't do other kinds of things that stir up the markets, I think we're on track,” Smith said. “We believe that we have a good, solid acquisition pipeline. We think that we can continue to acquire and also get our operating results.” Community announced the acquisition of a Texas hospital last week and another acquisition in Pennsylvania the prior week.
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