Investor-owned hospital chains are enjoying momentum under healthcare reform that isn't sweeping along their not-for-profit counterparts. Analysts expect another strong year from the for-profit operators because they've cut costs and adopted new initiatives to bring in more patients.
Companies like HCA and LifePoint Hospitals have shown that they're well-positioned to weather operational challenges and have benefited from increased patient volume under the Patient Protection and Affordable Care Act, according to a report from Fitch Ratings. The report contrasts with the negative outlook Fitch and other credit-rating agencies have placed on not-for-profit hospitals.
Management teams at investor-owned chains kept a tight rein on expenses over the past year and were conservative with how they managed capital, said Megan Neuburger, an analyst at Fitch who covers the for-profit sector.
Although the financing markets were wide open in 2014, investor-owned chains opted to make small buys in adjacent sectors, like technology, and refinance higher-interest debt instead of pursing blockbuster mergers—which had a positive effect on credit ratings. “We definitely expect to see more of that in 2015,” Neuburger said.
The Patient Protection and Affordable Care Act also provided a boost in the form of a better payer mix. Bad debt expense declined 518 basis points year over year to account for 21.5% of revenue in the third quarter of 2014, according to Fitch.
For-profit providers also saw higher volumes, and their patient load is expected to continue to grow this year. The publicly traded hospital operators rated by Fitch posted same-hospital admission growth that averaged 0.7% in the third quarter of 2014, or 3.5% when adjusted for outpatient activity.
Fitch's report follows a similar one last month from Moody's Investors Service, which also forecast a positive outlook for investor-owned hospitals. The acquisitive chains have been able to reap the benefits of consolidation, Moody's said. The agency predicted same-facility growth in earnings before interest, taxes, depreciation and amortization of 6.5% to 7% over the next 12 to 18 months.
For the second year in a row, all three credit-rating agencies have a negative outlook on the not-for-profit sector. At Standard & Poor's, for instance, downgrades of not-for-profit hospitals and systems outpaced upgrades in both 2013 and 2014.
But surprisingly, Neuburger said, Fitch was able to upgrade the ratings on two investor-owned chains, HCA and Universal Health Services, by one notch. HCA's corporate family rating also received a one-notch upgrade from Moody's last October.
The optimism surrounding for-profit chains also has been reflected in their buoyant run in the stock market over the past 24 months, as equity investors also rewarded their financial performance.
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