Hospitals poised to report weak third-quarter admissions
Hospitals' upcoming earnings season is shaping up to be dominated by company-specific deals and turnaround plans rather than the usual broad industry trends.
Analysts predict that HCA Healthcare, the darling of the hospital investor community, will have outperformed its peers in the third quarter of 2018, and they're eager for updates on turnaround plans and pending deals at chains like Community Health Systems, Tenet Healthcare Corp. and Universal Health Services.
"HCA continues to deliver, with strong results for the year to date and EBITDA growth ahead of its long-term target, driven by accelerating demand in its markets and successful execution of management's strategy including ongoing investments in high-acuity service lines and expanded access points in its key markets," Frank Morgan, an analyst with RBC Capital Markets, wrote in a report previewing third-quarter earnings.
HCA, which unveils its third-quarter earnings Oct. 30, recently signed a definitive agreement to acquire six-hospital Mission Health, based in Asheville, N.C., for $1.5 billion. The deal is being reviewed by the state's attorney general. The chain also completed the purchase of 139-bed North Cypress Medical Center in Houston in September. Those deals, further improvement in HCA's other Houston-area hospitals and at Memorial Health in Savannah, Ga., and the company's solid organic performance could generate growth in earnings before interest, taxes, depreciation and amortization of nearly 8% in fiscal 2019, according to RBC Capital.
Despite Community Health Systems' progress toward selling hospitals, RBC Capital expects it will take two to three quarters before the company's refined portfolio generates a volume rebound. A consensus estimate prepared by Zacks Investment Research predicted the company's earnings per share will decline by $1 in the quarter. CHS will release earnings Nov. 7.
Looking more broadly at the sector, a survey by the investment bank Barclays found hospital admissions declined slightly by 0.5% year-over-year in the third quarter, which the bank's report said is "essentially unchanged" from a big picture perspective given previous admissions trends.
The Barclays survey respondents, which span 30 health systems in 18 states, expect their volumes to accelerate by 1.8% in fiscal 2019, which, the bank wrote, "would represent a notable acceleration from trends witnessed so far in 2018." There is a history of survey bias when it comes to longer-term projections, the report noted.
Barclays is betting on UHS to lead the pack with a 4% year-over-year bump in same-facility acute-care admissions, followed by HCA at 2.5%. Barclays predicts CHS, Tenet and LifePoint will see declines in that metric. UHS is scheduled to release its earnings Oct. 25.
Barclays' survey found that outpatient volumes improved 2.2% year-over-year during the third quarter, while surgeries also saw a boost: growing 0.8% year-over-year. Wages across hospitals grew 1.2% year-over-year in the third quarter, slightly below 2017's 1.5%.
Tenet's performance has been weighed down by volume pressure at the Detroit Medical Center and its Illinois hospitals, but Ana Gupte, managing director of healthcare services with Leerink Partners, doesn't expect those headwinds will affect third-quarter performance. Analysts will closely watch for an announcement on a potential sale of Tenet's revenue cycle subsidiary, Conifer, which has performed well in recent quarters. Tenet reports its earnings Nov. 5.
Gupte expects UHS will achieve its goal of 5% top-line growth on the behavioral side by year-end. The company has struggled to hire enough providers in those facilities, but its chief financial officer told Modern Healthcare in July he believes the labor market is stabilizing in some of its regions.
Leerink Partners wrote in a report that it expects hospitals' revenue per admission to grow 2.3% on average during the quarter. That metric, driven by a combination of higher prices and sicker patients, grew an average of 3.5% on a same-facility basis among investor-owned hospitals in the first quarter.
It's unclear exactly what is driving this year's higher than usual revenue per admission, Gupte said. In addition to higher prices, it may be the shifting of lower acuity patients into ambulatory surgery centers, which drives sicker patients to hospitals, Gupte said.
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