CHS sees massive Q3 net loss amid weak volume, aftershocks of HMA settlement

https://www.healthcaredive.com/news/chs-sees-massive-q3-net-loss-amid-weak-volume-aftershocks-of-hma-settlemen/540868/

Credit: Rebecca Pifer / Healthcare Dive, Yahoo Finance data

 

Dive Brief:

  • Community Health Systems reported third quarter net operating revenues of $3.5 billion, a 5.9% decrease compared with $3.7 billion from the same period last year but slightly higher than analyst expectations.
  • In its earnings release after market close Monday, the Franklin, Tennessee-based hospital operator also disclosed a massive shareholder loss in the quarter of $325 million, or $2.88 per diluted share. CHS had a net loss of $110 million, or $0.98 per diluted share, in Q3 2017.
  • Lower volume was partially to blame, as the quarter saw a 12.4% decrease in total admissions and a 12.2% decrease in total adjusted admissions compared with the same period in 2017. The report also pointed the finger at the financial aftershocks of its troubled purchase of Health Management Associates (HMA), along with loss from early extinguishment of debt, restructuring and taxes.

Dive Insight:

CHS, one of the largest publicly traded hospital companies in the U.S., reported its highest operating cash flow since the second quarter of 2015, according to Jefferies. The third quarter figure of $346 million is also significantly higher than the $114 million from the same quarter last year.

Similarly, volume and revenue didn’t tank as heavily on a same-store basis as they did overall. Same-facility admissions decreased just 2.3% (adjusted admissions by 0.8%) compared with a year ago. Net operating revenues actually increased by 3.2% during the quarter compared with last year, beating analyst expectations.

But declining admissions show how hospital operators continue to struggle under the fierce headwinds 2018 has blown their way so far. CHS is clearly not immune, as the 117-hospital system faces ongoing operational challenges, bringing in financial advisers earlier this year to restructure its copious long-term debt.

The 20-state hospital operator continues to deal with the fiscal fallout from its roughly $7.6 billion acquisition of Florida hospital chain HMA in 2014. The Department of Justice accused the 70-facility HMA of violating the Stark Law and the anti-kickback statute for financial gain between 2008 and 2012, activities CHS reportedly was aware of prior to the merger.

Just last month, CHS announced a $262 million settlement agreement ending the DOJ investigation into HMA’s misconduct. However, that liability was adjusted during the third quarter and, taking into account interest, now totals $266 million. The fee will reportedly be paid by the end of this year.

The settlement also slapped an additional $23 million tax bill on the 19,000-bed system under recent changes to the U.S. tax code.

But that’s not the only regulatory brouhaha CHS has dealt with this quarter.

Since August, CHS has been under civil investigation over EHR adoption and compliance. Annual financial filings show that the company received more than $865 million in EHR incentive payments between 2011 and 2017 through the Health Information Technology for Economic and Clinical Health Act, payments that investigators believe may have been overly inflated.

To deal with the burden, CHS has continued its portfolio-pruning strategy into the third quarter (although a recent Morgan Stanley report notes the system has a very high concentration of weak facilities, and those at risk of closing, relative to its peers). 

During 2018 so far, CHS has sold nine hospitals and entered into definitive agreements to divest five more. The earnings report also divulged CHS is pursuing additional sale opportunities involving hospitals with a combined total of at least $2 billion in annual net operating revenues during 2017, taken in tandem with the hospitals already sold.

The ongoing transactions are currently in various stages of negotiation, the report notes, but CHS “continues to receive interest from potential acquirers.”

CHS is cast in a better light when balance sheet adjustment and non-cash expenses are discarded, as well. Adjusted EBITDA was $372 million compared with $331 million for the same period in 2017, representing a 12.4% increase and suggesting the company can still generate cash flow for its owners in a more friendly atmosphere than the one Q3 provided.

But, though Q2 results were a bright spot in an otherwise gloomy year for the massive hospital operator, its shares have lost about 30% of their value since the beginning of the year (compared to the S&P 500’s decline of roughly 0.5%).

Jefferies believes that CHS should improve its balance sheet and drive positive same-store volume growth, along with speeding up divestitures to raise cash to pay down debt, in order to improve its stock performance.

 

 

DIALYSIS GIANT DAVITA DEFENDS ITSELF IN COURT AND AT THE POLLS

https://www.healthleadersmedia.com/finance/dialysis-giant-davita-defends-itself-court-and-polls?utm_source=silverpop&utm_medium=email&utm_campaign=ENL_181029_LDR_BRIEFING_resend%20(1)&spMailingID=14518965&spUserID=MTY3ODg4NTg1MzQ4S0&spJobID=1502250658&spReportId=MTUwMjI1MDY1OAS2

Dialysis, The Courts, and The Polls

Proposition 8 would wipe out DaVita’s earnings in California, according to recent investment firm reports. Passing the initiative ‘would be so devastating,’ to the tune of $450 million a year, that DaVita ‘would likely walk away from the state altogether.’

It’s been a year of playing defense for DaVita Inc., one of the country’s largest dialysis providers.

A federal jury in Colorado this summer awarded $383.5 million to the families of three of its dialysis patients in wrongful death lawsuits. Then this month, the Denver-based company announced it would pay $270 million to settle a whistleblower’s allegation that one of its subsidiaries cheated the government on Medicare payments.

But its biggest financial threat is a ballot initiative in California that one Wall Street firm says could cost DaVita $450 million a year in business if the measure succeeds.

Despite these recent hits, the company continues to rake in profits and receive favorable ratings from stock analysts. Its shares are trading at about $65 a share, only about 19 percent below a 52-week high set in January. That’s largely because DaVita controls about one-third of a growing market, health experts say.

“They don’t really have many rivals, and they perform a necessary, lifesaving service,” said Leemore Dafny, a professor of business administration at Harvard Business School. “If you’re producing something people want to buy and you’re the only one making it, people are going to buy it.”

Patients with chronic kidney failure often need dialysis to filter the impurities from their blood when their kidneys can no longer do that job.

And as Americans live longer and get heavier, more people become diagnosed with kidney disease and possibly need dialysis. In 2015, 124,114 new patients received dialysis, up from 94,702 in 2000, a 31 percent increase, according to the U.S. Renal Data System.

DaVita is one of the largest dialysis providers in the country, operating more than 2,500 clinics nationwide. In California, the company operates 292 clinics, half of all chronic dialysis clinics in the state.

Its parent company, DaVita Inc., reported $10.9 billion in revenue last year and $1.8 billion in profits, almost all of which came from its dialysis business.

This year, company officials project the dialysis group will bring in $1.5 billion to $1.6 billion in profits. It’s a big turnaround for a corporation that could barely make payroll in 1999, when it was under review by the Securities and Exchange Commission for questionable accounting practices. Its success has largely been credited to CEO Kent Thiry, a colorful personality who has dressed up as a Musketeer and ridden a horse into corporate meetings to rally workers.

Now those big profits — generated from treating sick patients — has put a target on the company’s back, as well as that of its biggest competitor, Fresenius Kidney Care.

The Service Employees International Union succeeded this year in placing Proposition 8 on California’s Nov. 6 ballot, which would limit dialysis center commercial revenues to 115 percent of patient care costs. The ballot fight pits a well-funded industry against labor and the California Democratic Party.

DaVita declined to make anyone available for this article, but in a statement said Proposition 8 “will limit patients’ access to life-saving dialysis treatments, jeopardizing their care.”

Last year, roughly two-thirds of DaVita’s dialysis revenue came from government-based programs, such as Medicare and Medicaid. But that isn’t enough to cover its costs, according to the company’s 2017 annual report, which states that DaVita loses money on each Medicare treatment it provides. (Medicare covers dialysis for people 65 and older, and for younger patients after private insurance has provided coverage for 30 months.)

Instead, DaVita generates profits from commercial health plans, which it acknowledges pay “significantly higher” rates than government programs. The ballot measure targets those higher rates, which Dafny describes as “their bread and butter.”

The prospect of the measure passing led DaVita to delay or cancel plans to open new clinics in California despite growing patient demand, Javier Rodriguez, chief executive officer of DaVita Kidney Care, told investors on a call in May, according to the online equity research website Seeking Alpha.

A few months later, Rodriguez declined to provide a dollar amount when asked how the initiative would impact the company. Rather, he warned investors that it would become “unsustainable” for the industry to treat the estimated 66,000 dialysis patients in California, should the measure succeed.

Wall Street analysts agree that Proposition 8 would wipe out DaVita’s earnings in California, according to recent reports issued by investment firms J.P. Morgan and Baird. Passing the initiative “would be so devastating,” to the tune of $450 million a year, that DaVita “would likely walk away from the state altogether,” according to a March Baird report.

DaVita has poured $66.6 million into the opposition campaign as of Oct. 25, and rival Fresenius has contributed $33.6 million. That dwarfs $17.3 million in union contributions in support of the measure, according to campaign records filed with California’s secretary of state office.

Both Wall Street firms conclude that Proposition 8 is likely to fail, citing the industry’s massive spending and the union’s record of failure at the polls on other issues.

The company’s legal troubles don’t worry stock analysts, either; Baird’s October report on DaVita’s financial performance dedicates just two sentences to them. It notes that DaVita “is subject to numerous ongoing government investigations and inquiries, similar to most large-scale, high-profile Medicare providers.”

There are no specific references to the Colorado jury award this summer, which the company is appealing, over the death of three patients who died of cardiac arrest after treatment at DaVita clinics. Nor was there concern about this month’s $270 million settlement over Medicare billing.

That’s because those incidents are seen by investors as the cost of doing business — one-time hits that don’t affect a company’s earnings power in the future, said Matthew Gillmor, a senior research analyst at Baird.

“Almost all companies I follow, at some point, have had to pay a fine to the government,” Gillmor said.

Thiry, DaVita’s CEO, acknowledged that settlements, which aren’t good public relations, are a reality for large corporations, when The Denver Post asked him last year about the company’s previous legal battles.

“If, in a trial, you are found to be wrong on even a small part of the case, it could mean that you are excluded from Medicare, which typically would mean bankruptcy for your company,” Thiry said. “So, you are essentially forced to settle.”

 

 

Universal Health Services Q3 income spikes 22%

https://www.healthcaredive.com/news/universal-health-services-q3-income-spikes-22/540697/

Dive Brief:

  • Universal Health Services reported net income soared 22% to $171.7 million during the third quarter this year compared to a year ago. Net revenue experienced a 4% bump to $2.65 billion during the same period. 
  • The King of Prussia, Pennsylvania-based hospital chain also said it put $90 million aside for civil matters related to the Department of Justice’s investigation into the company’s behavioral health facilities. Nearly $50 million was added to the fund during the third quarter, the company said Thursday.
  • UHS narrowed its full-year earnings guidance to be between $9.25 and $9.60 per diluted share compared to the previously range of $9.25 to $9.90. The upper range of the guidance was narrowed by 3%.

Dive Insight:

Mizuho analysts said that despite the softness, UHS “handily” beat its earnings expectations, largely driven by the hospital operator’s acute care unit. Both admissions and patients days increased in the company’s acute care facilities by 1.5% and 4.1%, respectively.

The DOJ is investigating whether some UHS facilities submitted false claims related to services allegedly provided at the sites. For Q3, behavior health facilities experienced admissions increases of nearly 5% and patient days barely increased — by 0.6%.

Net income for the first nine months increased nearly 26% to $674.3 million, or $7.16 per diluted share, as compared to $535.8 million, or $5.53 per diluted share, during the previous time period.

During the third quarter, UHS repurchased about 940,000 shares for a total of about $117.9 million. During the first nine months of the year, the company has repurchased 2.1 million shares for a total of $252 million, or about $120 per share.

UHS shares were down slightly to $121.50 for Thursday’s close, about 52 cents lower than Wednesday’s $122.02 close.

Community Health Systems and HCA both report third quarter earnings next week.

 

 

CHS sees net loss narrow to $110M, pursues $2B hospital divestiture plan

https://www.beckershospitalreview.com/finance/chs-sees-net-loss-narrow-to-110m-pursues-2b-hospital-divestiture-plan.html

Image result for CHS sees net loss narrow to $110M, pursues $2B hospital divestiture plan

Franklin, Tenn.-based Community Health Systems, which operates 119 hospitals, saw its net loss shrink in the second quarter of 2018 as the company continues to refine its hospital portfolio.

CHS said revenues dipped to $3.56 billion in the second quarter of 2018, down 14 percent from $4.14 billion in the same period of the year prior. The decline was largely attributable to CHS operating 24 fewer hospitals in the second quarter of 2018 than in the same period of 2017. On a same-hospital basis, revenues climbed 3.3 percent year over year.

After factoring in operating expenses and one-time charges, CHS ended the second quarter of 2018 with a net loss attributable to stockholders of $110 million. That’s compared to the second quarter of 2017, when the company recorded a net loss of $137 million.

“Our second quarter results reflect progress in our key areas of strategic focus, most notably improvements in same-store operating results, progress on divestitures and successful refinancings,” said CHS Chairman and CEO Wayne T. Smith in an earnings release.

As part of a turnaround plan put into place in 2016, CHS announced plans in 2017 to sell off 30 hospitals. The company completed the divestiture plan Nov. 1. To further reduce its debt, CHS intends to sell another group of hospitals with combined revenues of $2 billion. The company has already made progress toward that goal.

During 2018, CHS has completed seven hospital divestitures and entered into definitive agreements to sell five others. CHS said it continues to receive interest from potential buyers for certain hospitals.

“As we complete additional divestitures this year, we believe our portfolio will become stronger, and more of our resources can be directed to markets where we have the greatest opportunities to drive incremental growth,” Mr. Smith said.

CHS’ long-term debt totaled $13.67 billion as of June 30, a decrease from $13.88 billion as of the end of last year.

 

Can A Community Hospital Stick To Its Mission When It Goes For-Profit?

http://radio.wpsu.org/post/can-community-hospital-stick-its-mission-when-it-goes-profit

Proponents of hospital mergers say the change can help struggling nonprofit hospitals "thrive," with an infusion of cash to invest in updated technology and top clinical staff. But research shows the price of care, especially for low-income patients, usually rises when a hospital joins a for-profit corporation.

Mission Health, the largest hospital system in western North Carolina, provided $100 million in free charity care last year. This year, it has partnered with 17 civic organizations to deliver care for substance abuse by people who are low-income.

Based in bucolic Asheville, the six-hospital system also screens residents for food insecurity; provides free dental care to children in rural areas via the “ToothBus” mobile clinic; helps the homeless find permanent housing and encourages its 12,000 employees to volunteer at schools, churches and nonprofit groups.

Asheville residents say the hospital is an essential resource.

“Mission Health helped saved my life,” says Susan ReMine, a 68-year-old Asheville resident for 30 years who now lives in nearby Fletcher, N.C. She was in Mission Health’s main hospital in Asheville for three weeks last fall with kidney failure. And, from 2006 to 2008, a Mission Health-supported program called Project Access provided ReMine with free care after she lost her job because of illness.

After 130 years as a nonprofit with deep roots in the community, Mission Health announced in March that it was seeking to be bought by HCA Healthcare, the nation’s largest for-profit hospital chain. HCA owns 178 hospitals in 20 states and the United Kingdom.

The pending sale reflects a controversial national trend in the U.S. as hospitals consolidate at an accelerating pace and the cost of health care continues to rise.

“We understand the business reasons [for the deal], but our overwhelming concern is the price of health care,” says Ron Freeman, chief financial officer at Ingles Markets, a supermarket chain headquartered in Asheville with 200 stores in six states.

“Will HCA after a few years start to press the hospital to make more profit by raising prices? We don’t know,” Freeman says.

And the local newspaper, the Citizen Timeseditorialized in March: “How does it help to join a corporation where nearly $3 billion that could have gone to health care instead was recorded as profit? … We would feel better were Western North Carolina’s leading health-care provider to remain master of its own fate.”

Across the U.S., the acquisition of nonprofit hospitals by corporations is raising concern among some advocates for patients and communities.

“The main motivation of for-profit companies is to grow so they can cut costs, get paid more and maximize profits,” says Suzanne Delbanco, executive director of the Catalyst for Payment Reform, an employer-led health care think tank and advocacy group. “They are not as focused on improving access to care or the community’s overall health.”

Merger mania across the U.S.

From 2013 to 2017, nearly 1 in 5 of the nation’s 5,500-plus hospitals were acquired or merged with another hospital, according to Irving Levin Associates, a health care analytics firm in Norwalk, Conn. Industry analysts say for-profit hospital companies are poised to grow more rapidly as they buy up both for-profits and nonprofits — potentially altering the character and role of public health-oriented nonprofits.

Nonprofit hospitals are exempt from state and local taxes. In return, they must provide community services and care to poor and uninsured patients — a commitment that is honored to varying degrees nationwide.

Of the nation’s 4,840 general hospitals that aren’t run by the federal government, 2,849 are nonprofit, 1,035 are for-profit and 956 are owned by state or local governments, according to the American Hospital Association.

In 2017, 29 for-profit companies bought 18 for-profit hospitals and 11 not-for-profits, according to an analysis for Kaiser Health News by Irving Levin Associates.

Sales can go the other way, too: 53 nonprofit hospital companies bought 18 for-profits as well as 35 nonprofits in 2017.

A recent report by Moody’s Investors Service predicted stable growth for for-profit hospital companies, saying they are well-positioned to demand higher rates from insurers and have less exposure to the lower rates paid by government insurance programs such as Medicare and Medicaid. In contrast, a second Moody’s report downgraded — from stable to negative — its 2018 forecast for the not-for-profit hospital sector.

‘We wanted to thrive, and not just survive’

Ron Paulus, Mission Health’s president and CEO, says he and the hospital’s 19-member board concluded last year that the future of Mission Health was iffy at best without a merger.

HCA declined to make anyone available for an interview but provided this written statement: “We are excited about the prospect of a transaction that would allow us to support the caliber of care they [Mission Health hospitals] have been providing.”

Driving Mission Health’s decision, Paulus says, were strained finances and the board’s strong feeling that the hospital needed to invest in new technology, modern data management tools and top clinical talent.

“We wanted to thrive and not just survive,” he says. “I had a healthy dose of skepticism about HCA at first. But I think we made the right decision.”

During the past four years, Paulus says, the company has had to cut costs — from between $50 million and $80 million a year — to preserve an “acceptable operating margin.” The forecast for 2019 and 2020, he says, saw the gap between revenue and expenses rising to $150 million a year.

Miriam Schwarz, executive director of the Western Carolina Medical Society, says many physicians in the area were surprised by the move and “are trying to grapple with the shift.”

“There’s concern about the community benefits, but also job loss,” Schwarz says. Still, she adds, the doctors in her region “do recognize that the hospital must become more financially secure.”

Weighed against community concerns is the prospect of a large nonprofit foundation created by the deal. Depending on the final price, the foundation could have close to $2 billion in assets.

Creation of such foundations is common when for-profit companies buy nonprofit hospitals or insurance companies. Paulus says the foundation created from Mission Health could generate $50 million or more a year to — among other initiatives — “test new care models such as home-based care … and address the causes of poor health in the community in the first place.”

In addition, HCA will have to pay upward of $10 million in state and local taxes.

Mixed results

Industry analysts say the hospital merger and consolidation trend nationwide is inevitable given the powerful forces afoot in health care.

That includes pressure to lower prices and costs and improve quality, safety and efficiency; to modernize information technology systems and equipment; and to do more to improve overall health.

But academics and consumer advocates say hospital consolidation yields mixed results. While mergers — especially purchases by for-profit companies — provide much-needed capital and financial stability, competition is stifled, and that’s often led to higher prices.

Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University, and colleagues examined 366 hospital mergers from 2007 to 2011 and found that prices were, on average, 12 percent higher in areas where one hospital dominated the market versus areas with at least four rivals. Another recent study found that 90 percent of U.S. cities today have a “highly concentrated” hospital market. Asheville is one, and Mission Health is dominant there.

“The evidence is overwhelming at this point,” Gaynor says. “Mergers solve some problems for hospitals, but they don’t make health care less expensive or better. In fact, prices usually go up.”

Mission Health CEO Paulus says he believes HCA is committed to restraining price increases and the growth in costs.

If no obstacles arise, Paulus says, HCA’s purchase of Mission Health would be formalized in August and finalized in November or December, pending state regulatory approval.

 

 

 

Rising Uninsured Rate Expected to Stress Margins of Nonprofit Providers

https://www.healthleadersmedia.com/finance/rising-uninsured-rate-expected-stress-margins-nonprofit-providersImage result for Uninsured

More than 4 million people have lost coverage in the past two years, including many lower-income adults. That could prove problematic for safety net hospitals in the near future.

The ongoing efforts to destabilize the Affordable Care Act will adversely affect the operating margins of not-for-profit healthcare providers, according to a new analysis from S&P Global.

S&P analyst Allison Bretz said that over time, “a growing uninsured population could be a credit negative for not-for-profit hospitals and health systems, as these facilities would likely see an uptick in self-pay patients, charity care and bad debt.”

Two years into the Trump administration’s efforts to roll back the ACA, the uninsured population has risen from about 12.7% in 2016 to 15.5% in 2018.

A study by The Commonwealth Fund estimates that 4 million people have lost health insurance since 2016, and that the uninsured rate among lower-income adults rose from 21% in 2016 to 25.7% this spring.


“This will be most acute at safety-net providers and other providers with a high concentration of Medicaid patients, as that population is most vulnerable to many of these changes,” Bretz said in remarks accompanying the report.

Beth Feldpush, senior vice president of policy and advocacy for America’s Essential Hospitals, said the report “underscores concerns we’ve had since last year’s attempts to repeal the ACA and, now, with piecemeal changes that have weakened the law.”

“Many of the people who lose coverage seek care at our hospitals, which adds to uncompensated costs and puts more pressure on our members’ already low operating margins,” Feldpush said. “Because essential hospitals, by their mission, turn no one away, this could prove financially unsustainable for some.

Although active efforts to repeal the ACA in Congress have slowed in the past year, it is facing one of its greatest threats, as a federal judge in Texas hears a lawsuit brought by 20 states that challenges the constitutionality of the sweeping healthcare law.

For-profit, Payer Outlook Stable

While the rising uninsured rate could prove challenging for not-for-profit providers, S&P analyst David Peknay said it should have little effect on for-profit providers.

“The for-profit companies we rate have been reporting some increase in uninsured patients, consistent with national trends, but the impact on ratings is also currently immaterial,” he said.

The losses in covered lives for health insurance companies is offset by other factors, said S&P analyst Joseph Marinucci.

“A key contributing factor is the sustained migration of the government-sponsored insurance segments toward coordinated care (Medicare Advantage and managed Medicaid), which is expanding the market opportunity for health insurers,” Marinucci said.

“We expect ratings in the insurance sector to remain relatively stable in the near term despite the growth in the number of working-age uninsured individuals,” he said.

 

 

 

 

 

What does “profit” mean for U.S. hospitals?

http://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2015.1193?journalCode=hlthaff

Image result for hospital profitability

The issue: More than half of U.S. hospitals lose money, at least on patient care. But some hospitals are very profitable, with the top 10 earning more than $163 million, the authors report. Crunching the data points to some important factors in whether hospitals make or lose money, including whether they are part of a large hospital group, enjoy market or regional dominance, and have a higher proportion of patients covered by private insurance.

The takeaway: A hospital’s status as a nonprofit or for-profit has virtually no significance when it come to the question of making money—but other factors, like local market power, make a big difference.

To identify the characteristics of the most profitable US hospitals, we examined the profitability of acute care hospitals in fiscal year 2013, measured as net income from patient care services per adjusted discharge. Based on Medicare Cost Reports and Final Rule Data, the median hospital lost $82 for each such discharge. Forty-five percent of hospitals were profitable, with 2.5 percent earning more than $2,475 per adjusted discharge. The ten most profitable hospitals, seven of which were nonprofit, each earned more than $163 million in total profits from patient care services. Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals. Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics. These findings can inform policy reforms, while providing a baseline against which to measure the impact of any subsequent reforms.