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October 15, 2015 12:00 AM

Investors fear ACA's boost to hospitals is waning

Beth Kutscher
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    Acute-care hospital stocks took a hit Thursday after HCA previewed third quarter earnings results that were below expectations.

    Nashville-based HCA, the largest hospital chain by revenue, typically has the strongest performance in its peer group, and its quarterly earnings previews are closely watched as a bellwether for the sector.

    HCA reported after market close Wednesday that its pretax income declined 1% as rising labor costs ate into higher revenue. It also previewed earnings per share of $1.17 that similarly came in below analyst projections.

    While labor costs were the primary drag on earnings, investors also focused on another metric, a small increase in the number of uninsured admissions, said Frank Morgan, an analyst at RBC Capital Markets.

    Same-hospital uninsured admissions made up 8% of the total in the third quarter, compared with 7.3% during the same period last year. Managed-care admissions declined to 28.5% of the total, down from 28.9%.

    “The increased labor cost can be isolated to short-term, company-specific issues in managing to the level of business in its facilities, and as HCA improves on this, we would expect to see the benefits in coming quarters,” Morgan wrote in a note to clients. “However, the unfavorable (payer) mix shift is more concerning from a group perspective and will likely cause fallout in other stocks as we wait out the next two weeks.”

    HCA shares were trading down more than 7% in mid-day trading. Shares of Tenet Healthcare Corp. had lost 4.7% and Community Health Systems was trading down about 4.9%, underperforming both the broader market and other healthcare sectors.

    Yet HCA is still showing strong patient volume trends, with same-hospital adjusted admissions increasing 3.6% and emergency room visits up 5.8% year over year, Morgan noted.

    The chain sees about half its revenue from Florida and Texas, neither of which are Medicaid expansion states, which could account for the increase in uninsured as emergency room volumes increased, he added.

    HCA also narrowed its full-year earnings projections, which it expects to be in the range of $5.20 to $5.25 per share. Its previous guidance for 2015 earnings per share was in the range of $4.90 and $5.30.

    Against their strong 2014 results, hospital chains have a tougher comparison this year to demonstrate higher volumes as well as upside from the Affordable Care Act, which is beginning to moderate, said A.J. Rice, an analyst at UBS.

    Moreover, the third quarter is typically the weakest of the year, he added.

    “Q3 is shaping up to be one of those quarterly reports that investors just want to get past,” he said on a conference call with investors. “For our part, we think we're setting up like we do in many years for the group to bottom out … and gradually rally post-earnings for the six months into the spring of 2016.”

    More patients will begin to hit their out of pocket maximum, and insurance companies will cover a higher percentage of the bill. Enrollment in the public exchanges is going well, and there is evidence that this flu season could be severe, given how some foreign countries like Australia have gotten hit to date.

    All of those factors signal a strong outlook for the sector.

    But for now, he said, the third-quarter results should be “good enough.”

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