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.
Follow Beth Kutscher on Twitter: @MHbkutscher
