Investor concerns about government reimbursements and patient volumes have largely explained the poor performance of hospital stocks this year. Reimbursements remain highly uncertain as the measures established by this summer's debt-ceiling deal play out this month and, if a proposal is agreed on by the so-called supercommittee, next month, when the plan would be taken up by Congress.
Poor stock performance
Debt-ceiling talks stir reimbursement uncertainty
With most of the major hospital companies having reported results for the quarter ended Sept. 30, it's clear that the volume picture is not just how many patients come through the door, but how intense their treatment is and who is paying the bill.
Two of the biggest chains, HCA and Tenet Healthcare Corp., set the tone for the quarter with their warnings in September that their volume in July and August had been for lower-acuity patients who bring lower revenue (Sept. 19). Nashville-based HCA, which first reported the acuity decline in its second-quarter results (Aug. 1), said the third quarter was similar, but overall volume growth and strong cost-cutting efforts limited the impact on earnings. Dallas-based Tenet said September provided some offset to the weakness of the two earlier months, and it, too, said that cost-cutting efforts have picked up.
HCA and Tenet reported volume gains, unlike the volume weakness that has plagued other hospital companies in the third quarter, but the profitability of that business was compromised by acuity and payer shifts, the companies said.
Uncertainty about reimbursements (including the shift of patients to less-profitable Medicaid coverage), volume growth and acuity all have weighed on hospital stocks this year, which declined 21.3% for the year through Oct. 28, according to RBC Capital Markets.
For the second quarter in a row, more medical admissions and fewer surgical admissions led to HCA's Medicare case-mix index falling, this time by 1.8% after a 1.4% decline in the second quarter. Same-facility admissions increased 3.2%, and equivalent admissions increased 3.8%, comparing the most recent quarter with 2010's third quarter. Inpatient surgeries declined 0.9%, and outpatient surgeries declined 1.2%.
Cost management, especially on supplies, helped offset a decline in revenue per equivalent admission of 0.1%, Milton Johnson, HCA's president and chief financial officer, said during a conference call. Supplies declined 3.5% per equivalent admission, Johnson said.
Case-mix index in Tenet's Medicare fee-for-service business declined, too, and, unlike previous periods, increases in acuity in its commercial and Medicaid patients were not enough to offset this softness, said Trevor Fetter, Tenet's president and CEO. Tenet reported same-facility volume increases of 1.5% for admissions and 2.3% for adjusted admissions, comparing the quarters.
Fetter said he is unsure whether these results will form a trend, then added: “Not to be flip, but it's not as if there's some epidemic of wellness sweeping the nation.”
The company saw much of this growth in lower-margin Medicaid patients, accounting for 78% of its inpatient growth and 28% of its outpatient growth, Fetter said. Tenet said its overall estimate for the impact of Medicaid cuts across its portfolio increased from an upper limit of $60 million to $100 million.
HCA increased its estimates of the impact of Medicaid cuts in Florida and Texas—two big states for Tenet, too. In Florida, changes that went into effect July 1 were expected to cost the company $50 million over the
next 12 months, but the estimate now is $70 million, Johnson said. In Texas, Medicaid changes as of Sept. 1 that were expected to cost in the range of $25 million to $30 million are now estimated at $80 million, Johnson said.
HCA reported net income of $61 million, down sharply from $243 million in 2010's third quarter, thanks to a $406 million pre-tax loss on the refinancing of $7 billion in debt in 2011's third quarter, according to the company's earnings release. The refinancing is expected to cut the company's interest costs by $350 million annually, said Richard Bracken, HCA's chairman and CEO. Net revenue increased 5.5%, to $7.31 billion.
Tenet reported net income of $6 million, after recording $932 million in net income in 2010's third quarter, according to its earnings release. The year-ago quarter included a $1 billion credit from the recognition of the tax benefit of losses in previous years offsetting future income tax liabilities. Revenue increased 3.5%, to $2.34 billion.
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