HCA's focus on booming markets where the population is growing, unemployment is low and thus, the demand for healthcare is rising—places like Houston, Nashville, Florida, and Ashville, N.C., where it recently struck a deal to acquire market leader Mission Health—have helped it grow admissions from paying customers even as other hospitals suffer from softer volumes. Its net revenue per adjusted admission has averaged between 2.5% and 2.7% over the past several years, driven by the local markets' growing population and aging seniors' demand for services, said CEO R. Milton Johnson, who is retiring at the end of this year to be succeeded by HCA President and Chief Operating Officer Sam Hazen.
When expanding into new territories, HCA eyes areas where it will dominate in terms of market share, which it can leverage into negotiating power to secure better rates from insurers.
“They want to be the No. 1 or No. 2 player in every market they go into,” said Brian Tanquilut, a Nashville-based equity analyst at investment firm Jefferies & Co. “They are very methodical, and they stick to a strategic playbook.”
That approach also means HCA generally steers clear of communities with less-than-favorable payer mixes.
“They tend not to open hospitals in impoverished neighborhoods and in states that pay poorly,” said Scott Phillips, managing director for Healthcare Management Partners.
Before 2017, HCA hadn't entered a new market since 2003. In the years prior it invested in facilities, doctors and capabilities in areas where it already operated, taking share from its competitors. In Nashville, for instance, HCA expanded its pediatric services and is siphoning customers away from the renowned Monroe Carell Jr. Children's Hospital at Vanderbilt, which has the higher prices typical of academic systems, Tanquilut said.
Under the direction of Johnson and Hazen, HCA has aggressively added outpatient clinics, urgent-care centers, free-standing emergency departments and ambulatory surgery centers to complement its hospitals. The company ended 2017 with 72 free-standing EDs and 123 urgent-care centers with plans to add more. Hazen said the company now has roughly 2,000 facilities providing outpatient care, which makes up 38% of HCA's revenue.
“They were buyers of outpatient businesses and imaging clinics at the right time of the cycle, and now with the inpatient hospital being out of favor, they've been able to take advantage of the market,” said Nephron Research analyst Joshua Raskin.
He noted that HCA also empowers its hospital leaders with the tools necessary to drive change in their markets, such as the technologies needed to understand what staffing levels are necessary and what patient volumes will look like.
Those investments were possible because HCA generates a lot cash. Through its internal revenue-cycle management business, a service it also sells to other hospitals, HCA is adept at collecting payment from patients for services and making sure health plans pay up, Tanquilut said. In 2018, HCA will have generated $2.4 billion in free cash flows after investments, while other hospitals are pulling back on investments to pay off debt.
“They are operationally savvy,” said Paul Keckley, an industry analyst in Nashville. HCA leadership understands where to build its hospitals, how many beds to allot, how to staff and how to buy supplies. And their financial, operational and clinical decisions have been backed by hard data that HCA collected before it was necessary for compliance standards, Keckley said.
Importantly, HCA's executives and managers are trained to demand and use that information, and are held accountable for producing results, said Dr. Mike Schatzlein, former CEO of Ascension Health's St. Thomas Health who has also worked for HCA-owned hospitals. “Their operators know their numbers, and so they can react in real time and operate efficiently,” he said. “If you operate efficiently, that means you have reduced variation, waste and rework—and that results in higher quality.”
Analytics also gives HCA an edge in setting prices.
“They are the absolute leaders in maintaining discipline with their cost structure, but they also have world-class analytics to know where and when they can successfully raise prices, down to the smallest unit,” Paul Hughes-Cromwick, co-director of sustainable health spending strategies for consultancy Altarum, said in an email.
HCA's aggressive pricing, enabled by its market share and patient volume, is a major factor in its financial success. Researchers have found that HCA's negotiating power with insurers allows it to set high prices for its healthcare services. The high cost of healthcare in the U.S. is in part attributed to high prices, not the actual cost of services, experts say.
“They're out to maximize profit, and one of the ways you can do it is by raising prices,” said Gerard Anderson, a health policy professor at Johns Hopkins University who has studied HCA's prices.
Anderson and Johns Hopkins associate professor Ge Bai's 2015 Health Affairs study found that HCA owned more than one-quarter of the top 50 U.S. hospitals with the highest ratio of charges to Medicare-allowable costs in 2012. Those 50 hospitals marked up charges by 1,000% on average. For-profit competitor Community Health Systems owned more than half of the hospitals. While charges don't reflect the payment rates that most patients pay, uninsured patients often do end up paying full charges, Anderson said. About 28 million people were uninsured in 2016.
In another Health Affairs study published this month, Anderson and Bai found that the 20 hospitals in Florida with the highest prices for auto, workers compensation, liability and travel insurers in 2016 were all owned by HCA. Oftentimes, these nontraditional insurers pay for consumers' medical expenses when an accident occurs, for example. But such insurers are smaller than giant HMO and PPO payers, and so have less negotiating power with big health systems.
The 20 HCA hospitals with the highest prices set them at 7.8 to 14.1 times the rate of Medicare, with a median price twice that of the other 124 hospitals operating in Florida that year, researchers found. Those 20 HCA hospitals received about a quarter of their commercial net revenue from such insurers—twice that of other payers—despite treating a small number of patients covered by them. The stakes are high for patients, because policies such as an auto insurance plan often have low coverage limits and high out-of-pocket spending.
HCA's prices for HMOs and PPOs were largely in line with the other hospitals in Florida, the researchers said. The 20 highest-priced hospitals set prices at 1.7 to 4.1 times Medicare rates.
An analysis using the Modern Healthcare Metrics database, which relies on Medicare cost reports, found that HCA hospitals were docked $38.3 million in readmissions penalties and $9.1 million in value-based purchasing penalties in 2017.
