Can HCA Healthcare Weather The Normalization?

 | Sep 29, 2022 02:39AM ET

  • Normalization is a fact despite HCA Healthcare’s massive scale
  • The slowdown from the post-pandemic slingshot recovery has begun
  • Medicare sequestration reimbursement cuts will affect earnings moving forward

    • Hospital and healthcare facilities operator HCA Healthcare (NYSE:HCA) stock has fallen (-25%) this year underperforming the payors. Apparently, not all healthcare stocks are a safe haven in a falling market fueled by recession fears. The payors including health insurance companies like Humana (NYSE:HUM), Aetna (NYSE:CVS), UnitedHealthcare (NYSE:UNH), and Cigna (NYSE:CI) are all still trading up for 2022. This could be due to the vertically integrated healthcare evolution as payors merge with providers to create their own self-contained healthcare ecosystems. HCA is the world’s largest hospital owner and operator with 182 hospitals, and nearly 2,200 ambulatory sites of care including surgery centers, freestanding emergency rooms, urgent care facilities, and physician clinics.

    h2 HCA Kryptonite Operator/h2

    HCA is not only a pureplay healthcare provider, but it happens to dominate in the one area that integrated healthcare systems don’t want to own, hospitals. Hospitals are the Kryptonite of the healthcare industry from a profitability standpoint. Most hospitals in the U.S. are classified as non-profit organizations because they are notorious for losing money. They write off about 70% of what they bill out. However, the massive scale and a world class management has made HCA Healthcare one of the most profitable healthcare providers on the planet. Despite the bite of inflationary pressures and labor costs, HCA managed to generate nearly $1.15 billion in net income in its latest quarter. However, growth is starting to wane after the post-pandemic recovery period as rising inflation also hits hospital costs. Additionally, the Medicare sequestration cuts rose to (-2%) on July 2022 which essentially reduces provider reimbursements as hospitals are estimated to lose (-$3 billion) according to the America Hospital Association (AHA).

    h2 Thriving after the Pandemic /h2

    During the pandemic, hospitals faced steep drops in revenues as inpatient and elective surgeries were put on hold due to the spread of COVID-19. Covid patients were moved to the top priority for emergency rooms which quickly ran out of space. The federal government subsidized some of the losses, but many community hospitals went bankrupt. As the reopening got underway and social distancing mandates were lifted, hospitals saw a spike in business as those previously delayed surgeries and treatments once again resumed. The pent-up demand made the financially fortified hospitals even more money on the slingshot like recovery. The reversion back to normal has kicked in for 2022.

    h2 The Slowdown Has Begun /h2

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    On July 22, 2022, HCA Healthcare reported its fiscal Q2 2022 earnings for quarter ended June 2022. The Company reported an earnings-per-share (EPS) profit of $4.21 excluding non-recurring items versus consensus analyst estimates for a profit of $3.71, a $0.50 beat. Revenues grew 2.7% year-over-year (YoY) to $14.82 billion beating analyst estimates for $14.73 billion. Adjusted EBITDA totaled $3.042 billion in Q2 2022, falling from 2021 adjusted EBITDA of $3.219 billion. Net income fell to $1.155 billion or $3.90 per diluted share from $1.450 billion or $4.36 per diluted shares in the year ago quarter. Same facility admissions fell (-1.2%) in the quarter, but same facility emergency room visits rose 7.3% YoY. Same facility inpatient surgeries fell (2.3%) and outpatient surgeries fell (-1.4) YoY. HCA Healthcare CEO Sam Hazen commented:

    “Many aspects of our business were positive considering the challenges we faced with the labor market and other inflationary pressures on costs.”

    The Inflation Reduction Act benefits hospitals as more patients continue to keep their Affordable Care Act (ACA) coverage plans. HCA has also managed to sequentially lower its contract labor costs. It expects volumes to return to pre-pandemic seasonal trends with a more modest growth in inpatient admissions.