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October 27, 2015 01:00 AM

HCA downplays third-quarter spikes in labor costs, uninsured

Beth Kutscher
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    HCA's shares popped briefly this morning as the Nashville-based chain reassured investors on an earnings call that its third-quarter challenges are one-time issues.

    As the company signaled in a preview of its results, HCA reported a decrease in net income as its labor costs and uninsured volume grew and it grappled with higher drug prices. It also incurred legal costs associated with a lawsuit in Kansas City, Mo.

    HCA's net income declined to $449 million on nearly $9.9 billion in revenue during the third quarter, compared with $518 million in net income on $9.2 billion in revenue during the same period last year.

    The company blamed rising contract labor costs for its higher expenses in the quarter. On the call, executives said nursing turnover increased to 19%, which necessitated contract labor to fill the gaps.

    HCA's hospitals also required more nurses to handle higher volume and ran into recruitment challenges in emergency rooms and other departments. As a result, the company saw a 36% increase in its contract labor costs.

    “We do have an improving economy … and we think it's having some effect on our overall labor equation,” said Samuel Hazen, HCA's chief operating officer. “And we've been indicating that as a potential issue.”

    The chain is tackling the higher labor costs by focusing on ways to reduce turnover, including better “on boarding” of new graduates and better training of nurse managers, Hazen said.

    HCA reported an increase in patient volume in all but one of its 14 domestic divisions, and its 10th consecutive quarter of growth in inpatient surgeries. The chain said its composite market share is now 24.6%.

    Same-hospital admissions increased 2.9% year over year, or 3.6% when adjusted for outpatient activity. Same-hospital emergency room volume increased 5.8%.

    However, HCA's hospitals also saw a 13.6% increase in uninsured admissions. About 75% of those came from Florida and Texas, two of its largest states that have not expanded eligibility for Medicaid.

    But HCA also said some previously-insured exchange patients reverted to self-pay as they neglected to pay their premiums.

    Still, executives stressed that the benefit from healthcare reform is in line with its expectations and contributing just under 6% of its earnings before interest, taxes, depreciation and amortization.

    The quarter also included $77 million in legal costs arising from its ongoing dispute with the Health Care Foundation of Greater Kansas City. The foundation sued HCA in 2009, alleging that the chain did not fulfill its promised charity care and capital commitments at the hospitals it acquired from Health Midwest in 2003.

    HCA settled the uncompensated care dispute for $15 million earlier this year but plans to contest a judgment against it on the issue of capital expenditures. HCA has already set aside more than $250 million in legal claims costs. But on Oct. 21, a circuit court judge in Kansas City ruled that HCA is liable for pre-judgment interest from the date the lawsuit was filed.

    Despite its challenges, HCA said its revenue growth points to a strong fourth quarter. It now expects its full-year adjusted earnings per share range to be in the range of $5.20 to $5.25, after previously forecasting a wider range from $4.90 to $5.30.

    It also plans to continue repurchasing its shares and plans to buy back another $3 billion in common stock after already authorizing a $1 billion share buyback in May.

    HCA shares gained more than 2.5% during the earnings call before coming down to trade in line with the broader market.

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