Spike in financial metric identifies strengths in for-profit hospital chains

Move over, earnings and cash on hand. Revenue per admission is the financial metric that's making a splash lately.

And the strategies hospital chains are enacting to boost that metric—hiking prices and attracting sicker patients—appear to be paying off.

First-quarter results from the country's largest investor-owned chains—Tenet Healthcare Corp., HCA Healthcare, Community Health Systems, Universal Health Services and LifePoint Health—show they're finding success in squeezing more money out of each patient encounter. Same-hospital revenue per admission increased by 3.5% on average during the quarter.

"It was uniformly so high, so it surprised everybody," Ana Gupte, senior analyst and managing director of healthcare services with Leerink Partners, said of the patient acuity that hospitals saw at the outset of 2018, reported as revenue per admission. "I think we're all trying to figure out why it was so good."

Increases in revenue per admission are driven largely by two factors, experts say: higher prices and sicker patients. It makes sense that as patients increasingly migrate to lower-cost, more convenient outpatient settings, hospitals will see the most severe cases. Hospital chains are actively working to capitalize on that by adding high-acuity service lines in some markets to ensure they'll rope in those sicker patients.

Dallas-based Tenet reported the strongest increase in revenue per adjusted admission in its hospital sector, 4.1%, a positive metric that executives attributed to higher acuity. Eric Evans, Tenet's president of hospital operations, said during the company's first-quarter earnings call on May 1 that its acuity growth is particularly strong in the cardiovascular and trauma sectors, service lines the chain recently expanded.

"We do think it's sustainable," he said.

HCA saw the second-highest increase in same-hospital revenue per admission in the quarter, 3.9%. Sam Hazen, chief operating officer of the Nashville-based chain, attributed the increase to several factors during the company's May 1 earnings call: higher prices, a better payer mix and the expansion of high-acuity service lines, including burn and trauma units, neurosciences and stroke care. HCA also recorded more surgeries in other high-acuity service lines like cardiovascular and orthopedic services, he said.

"We've been talking about this being a core element of our strategy for the last four or five years," Hazen said. "This is some of the yield from that."

Still, the strength seen in that number was noteworthy to some. Brian Tanquilut, a healthcare analyst with Jefferies & Co., said he expected to see lower revenue per admission in the first quarter, as the beginning of the year is typically saturated with flu cases, which tend to be lower acuity and, thus, lower revenue per admission. "That was probably the biggest surprise," he said of the growth in revenue per admission.

Tanquilut thinks there might be another factor at work. Over the past few years, people have put off elective procedures because of enrollment in high-deductible health plans or other financial reasons, a trend that's translated into weak hospital volumes until now.

"There is only a certain amount of time that you can delay those procedures," he said. "At some point, that rotator cuff is going to get worse, and if you don't get it done, the pain is going to get worse. There is a certain point where you will be forced to get it done."

Along with that, pricing strength also is playing a role. Paul Hughes-Cromwick, co-director of sustainable health spending strategies for consultancy Altarum, believes the positive first-quarter earnings were largely a reflection of hospitals managing to get higher prices for their services. The Bureau of Labor Statistics' Producer Price Index for hospitals has been picking up steam this year, rising from 2.2% growth in December 2017 to 3.3% in January, 3.8% in February, 3.7% in March and 3.6% in April.

The last time the PPI for hospitals hit 3.7% was in 2010, Hughes-Cromwick said. The metric has hovered in the 1% range for years.

Having watched hospital prices for years, Hughes-Cromwick said they tend to rise and fall in waves. There was massive cost constraint, for example, after a sweeping federal healthcare reform plan failed in the 1990s. After that, private companies realized they were being watched.

Intense cost scrutiny in recent years and calls for price transparency from lawmakers and consumers alike have had an effect. But Hughes-Cromwick thinks people have let their guard down, which has again allowed prices to creep up. It's also because the U.S. economy is experiencing an unusually long expansion, so he thinks insurers and providers are being less aggressive in their contract negotiations. "Why isn't there more pushback to some of those price increases given that, in general, hospitals are doing quite well?" Hughes-Cromwick said.