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

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

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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.

A nation of McHospitals?

https://www.politico.com/agenda/story/2017/11/08/hospital-chains-dominate-health-care-000574

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For years, the nation’s hospital chains worked to get bigger, bigger, bigger. In the 1980s and 1990s, for-profit companies like HCA and Tenet emerged as juggernauts, snapping up local hospitals and opening clinics in one town after another. Their ambitious not-for-profit cousins, the big academic medical centers like Harvard-affiliated Partners Healthcare, scooped up smaller rivals in response. Just four years ago, the Tennessee-based Community Health Systems spent $7.6 billion to buy a competitor and become the nation’s largest for-profit hospital company, with more than 200 hospitals in 29 states.

Today, in any town or city, in any region of the country, you’ll almost certainly see the same scenario: Only a handful of hospitals, sometimes owned and operated by a company thousands of miles away.

As the pace and scale of consolidation picked up, the outcome long appeared inevitable: an American future in which a handful of hospital chains dominate American health care, with brands like Tenet and Catholic Health Initiatives and the Mayo Clinic competing for patients the way Panera and Chipotle and the Olive Garden compete for diners.

But something happened on the way to becoming a nation of McHospitals. That ambitious growth, driven by dreams of dominating a transformed health care landscape and recently fueled by Obamacare revenues, hit a wall.

In the past year, two of the nation’s three largest for-profit hospital systems, Tenet and Community Health Systems, began selling off dozens of their hospitals while entertaining bids to break up their entire companies. Prominent not-for-profit chains like Partners Healthcare are reporting nine-digit losses. Even Mayo Clinic is pulling back from some rural locations in the Midwest.

In part, the shift is just a typical business cycle working its way through the health care industry. “There are these testosterone-driven waves of deal making” in health care, said Jeff Goldsmith, a hospital consultant. “And then there are waves of post-coital regret that follow.”

But in part, the change is driven by policy decisions being made in Washington — how health care is paid for, and who has access to it. And as that shift unfolds, it’s raising questions that will shape American health care for a generation: What will the future of hospital ownership look like? What should it look like?

Even at the height of merger mania, no one could quite agree on whether the McHospital trend was a good thing or not. Some people — mostly in the hospital industry — argued that consolidation was long overdue, and that large companies’ deeper pockets and economies of scale would keep costs down and improve the quality of care for patients. Obamacare gave hospitals financial incentives to manage entire populations, rather than just get paid patient-by-patient — an effort that required building big data sets and buying up other services too, like physician practices.

But others were concerned about the growing concentration of ownership of the nation’s hospitals by a shrinking number of companies. It put local hospitals’ decades-long relationship with their communities at risk, as important local institutions started reporting to shareholders or distant nonprofit boards. These worriers foresaw a future in which just a handful of chains competed to carve out the most lucrative segments of health care, like cardiac procedures and orthopedic surgery, and offered substandard care for everyone else. And despite the chains’ promises, years of reports have shown that when hospitals combine, their prices tend to go up.

Providers’ growing market power has “been the leading reason for the [rise] in health care spending” for decades, Bob Berenson, a former Carter and Clinton administration official said in 2015. (“And in conventional political circles,” he added, “it’s still being overlooked.”)

But the changes underway are starting to transform the nature of the hospital itself — and could open the door to a landscape even more different than we imagine.

Radical shifts

The direction of the American hospital has shifted radically over time. Initially, hospitals were charity wards where the poor went to die. But as cities grew, and health care became more expensive and capital-intensive, hospitals became destinations for wealthier patients: Top hospitals were the ones that could afford the latest medical technologies and perform the most complex surgeries. The creation of Medicare in 1967 fueled new revenue and attracted more competitors, leading to the birth of major chains.

Today, about two-thirds of the nation’s 5,000 hospitals are parts of chains, up from about half of hospitals just 15 years ago, and the share of for-profit hospitals has steadily climbed — more than one in five hospitals are now owned by investors, rather than run as a not-for-profit or by the government. Established hospitals are grappling with how to balance institutional advantages like high-end facilities and expensive technologies with the need to stay nimble and adapt to health care’s changes. It’s a hard balance to strike, and after a few boom years, the industry is experiencing its worst financial performance since the great recession.

It’s always been expensive to own and operate a hospital. Preparing for possible emergencies requires round-the-clock staffing and immense sunk costs. Most major hospitals also try to offer dozens of different business lines, from cardiac surgery to behavioral health care — but that’s only gotten harder as niche competitors chip away at the most lucrative high-end services. It also got pricier thanks to the latest merger mania, as hospital chains collectively took on billions of dollars in debt to buy up their competitors and acquire other services, like physician offices.

An industry that had already consolidated in the 1980s and 1990s — seeking new efficiencies and to get bigger when negotiating with insurance companies — received new incentives under Obamacare, as millions of newly insured patients entered the market and hospital chains raced to capture the new customers. But the Affordable Care Act also accelerated changes to health care payments in ways that made hospitals seem a little outmoded.

Medicare, other federal programs and insurance companies are increasingly shifting away from fee-for-service reimbursement — in which doctors and hospitals are rewarded for the number of procedures they perform — toward “alternative payment models” with more incentives for follow-up care and improved long-term outcomes. That’s encouraged hospitals to make new investments, like buying up nursing homes and hiring more workers to deliver home-based and long-term care. Some hospital leaders are actively talking about trying not to fill their beds, which would’ve sounded like heresy in the industry just a decade ago.

Charlie Martin, a legendary health care investor who founded two hospital companies, said the old model is doomed as new technologies allow care to be delivered outside of the hospital — leaving behind large, costly facilities that are better suited to 1990 than 2020.

“Half the business that’s in there is going to go away,” Martin said. “This is going to be a beatdown like we’ve never seen before.”

Martin said he’s now investing in services like post-acute care and home health, which are more agile and positioned to take advantage of the changes in payment. In this emerging world, a low-cost aide who can keep an elderly patient out of the hospital may end up being more profitable for Martin than paying a team of doctors when that patient breaks a hip and needs days of hospital care.

“The hospitals of today are too expensive to be health care facilities” in the long run, Martin said. “I can’t carry the carcass around.” (He added that consolidation’s benefits are overrated. “There are other ways to get scale now, like purchasing groups” that allow hospitals to get bulk discounts despite not having a common owner, Martin argued. “A lot of the advantages that came through the multihospital systems are now available for anybody.”)

Too big to fail?

So, are big hospitals — and big hospital chains — destined to go the way of Sears, an institution decimated by smaller and nimbler competitors? Not necessarily. There’s still a viable path — and often a need — for big hospitals themselves, typically the largest employers in their cities and towns. While fee-for-service payment is slowly getting phased down, it isn’t going away overnight, if ever. A decade after policymakers began pushing hospitals to adopt alternative payment models, those models still represent less than 30 percent of payments to the average health care provider. Fee-for-service remains the most common way of getting paid.

And local hospitals have an advantage that many businesses don’t: They’re often so important to their towns and cities that lawmakers and other local leaders don’t want to let them fail, even if their margins suffer. And in markets where there isn’t much competition, hospitals continue to charge huge rates that have very little connection to quality of care. Yale researcher Zack Cooper and colleagues have found that hospitals with effective monopolies have prices more than 15 percent higher than hospitals in markets with four or more competitors.

What that all means: The hospitals that Martin and others see as lumbering dinosaurs don’t all need to evolve to virtual campuses just yet. No one’s forcing them to. The old model of going to a hospital for surgery and other intensive services will persist for years or decades, barring major technological leaps ahead, and it may stay lucrative for the most prominent, dominant facilities. There’s no easy, obvious disruptor that wants to start building hospitals and compete for these services, at least for these now.

So then the question is: Who’s going to own them? Many experts think the near future, at least, will belong to regional health systems. They’re able to take advantage of local monopolies that allow them to raise prices, while not being burdened by the debt and expenses that can go along with aggressive acquisitions of national chains. And from North Carolina to California, many of these local chains continue to thrive and edge out national competitors with better financial performance. Indiana University Health System last month announced it’s expanding into Fort Wayne, the state’s second-largest city, even as Community Health Systems – a national chain that operates a hospital network in the city – has seen local profits fall and anger rise, as doctors and employers claim the chain has neglected its facilities and should sell hospitals that have become dirty and dingy. (Community’s president told doctors in 2016 that the chain would pull out of Fort Wayne, Bloomberg reported, although the company rejected a subsequent buyout offer and now says it’s committed to staying.)

What’s good for these regional chains may not be good for patients or the insurance system that pays for their care, though, as lower levels of competition mean higher prices. Martin Gaynor, an economist at Carnegie Mellon and former FTC official who studies consolidation, points to UPMC’s decision this month to spend $2 billion to build three new specialty hospitals in the Pittsburgh area, further cementing its control of the local market — even if experts question whether large, specialty facilities are needed at all. “Don’t forget that residents of Western Pennsylvania are the ones who will mostly pay for this,” Gaynor tweeted after the announcement.

“There’s a near-stranglehold on these markets by dominant health systems,” said Gaynor, noting that many regions get carved up between two or three major chains. “Some means need to be developed to free that up.”

It’s not clear how that would happen or who wants to do it. The Trump administration has gestured toward unlocking those markets, with a few lines in a recent executive orderpromising to limit “excessive consolidation.” The Federal Trade Commission under the Obama administration also jumped in to aggressively block hospital mergers, too. But taking on the hospital industry has been viewed as a political nonstarter for years. And hospitals don’t have much reason to loosen their own monopolies, at least in the short run.

There’s an intriguing possibility that some consultants are wrestling with: What if a company like Walmart or Apple decides to go for the health care market — and really go for it, as executives from each company have hinted in the past — and set up outpatient centers in their stores around the country. Hospitals would suddenly face new pressures from a well-capitalized competitor that already gets a lot of foot traffic, like Walmart, or has been ruthlessly committed to growth, like Apple. Patients frustrated with the traditional medical system might start opting for these retail alternatives, disrupting the entire chain of how Americans get care.

A dramatic move like that would shake up how health care is delivered. It would also flip the paradigm. Rather than hospitals desperately trying to expand and establish themselves as a national brand, an existing national brand — not a health care brand, but a big consumer brand — could suddenly have a health care presence in many major markets.

But a move like that remains some distance off. Walmart’s effort to quickly scale up small retail health clinics has stalled. Apple has publicly flirted with investing in a health care facility for so long, it raises the question of why the company hasn’t.

And that points to the most likely outcome for hospitals in the next 30 years. Boring as it may be, many of them aren’t going anywhere. No one else is competing for the expensive, high-end services that only hospitals can offer. They’re still too big to fail — just so long as they don’t get any bigger.

 

CHS to sell additional hospitals worth $2B in revenue

https://www.beckershospitalreview.com/hospital-transactions-and-valuation/chs-to-sell-additional-hospitals-worth-2b-in-revenue.html

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Franklin, Tenn.-based Community Health Systems completed its 30-hospital divestiture plan Nov. 1. Now, the company expects to sell another group of its hospitals with combined revenue of $2 billion, Chairman and CEO Wayne Smith said during a third quarter earnings call.

To improve its finances and reduce its heavy debt load, CHS put a turnaround plan into place last year. As part of the initiative, the company announced in early 2017 that it intended to sell off 30 hospitals. In August, CHS extended its divestiture plan. The company said it would sell a group of hospitals with combined revenue of $1.5 billion in addition to the 30 hospitals already announced.

With the sales last week of Highlands Regional Medical Center in Sebring, Fla., and Merit Health Northwest Mississippi in Clarksdale, Mr. Smith said the 30 hospital divestitures are complete, and the company is once again expanding its divestiture plan.

“We are now pursuing sale transaction of hospitals accounting for at least $2 billion of net revenue, which has increased from $1.5 billion last quarter,” Mr. Smith said.

Mr. Smith said the company has signed several letters of intent for the hospitals in the next group of divestitures, accounting for more than $1.2 billion in net revenue.

“Our goal is to emerge from this process with a sustainable group of hospitals that are positioned for long-term success and growth,” he said.

With the help of proceeds from the hospital sales, CHS brought down its long-term debt load to $13.9 billion in the third quarter of this year, from $14.8 billion in the same period of 2016.

The company ended the most recent quarter with a net loss of $110 million on revenues of $3.67 billion. That’s compared to the third quarter of 2016, when the company posted a net loss of $79 million on revenues of $4.38 billion.

Moody’s: Shareholder pressure may lead Tenet to make drastic changes

https://www.beckershospitalreview.com/finance/moody-s-shareholder-pressure-may-lead-tenet-to-make-drastic-changes.html

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Dallas-based Tenet Healthcare has sufficient liquidity and plenty of flexibility from a debt covenant perspective to give the company time to improve its operations or change its strategic direction before it needs to undertake material refinancing, according to a Moody’s Investors Service report.

While Tenet’s leverage is high, its next maturity is $500 million in March 2019. “We believe Tenet can repay this with a combination of cash, which will be increasing due to proceeds from anticipated asset sales, and use of its $1 billion revolving credit facility,” said Moody’s.

The company has no amortizing debt requiring periodic payments, and its bond indentures include no financial maintenance covenants or debt incurrence covenants, according to Moody’s.

Moody’s also noted Tenet’s earnings have longer-term growth potential. Although Tenet’s facilities are generally located in highly competitive urban areas, these areas have growing populations. Across all service areas, Moody’s views Tenet’s ambulatory surgery center business as having higher growth prospects than its acute care hospitals.

Despite financial flexibility, Tenet is facing increasing shareholder pressure, which Moody’s said may lead the company to take more drastic measures, such as larger asset sales or even the sale of the entire company.

CHS reports $110M net loss, completes 30-hospital divestiture spree

https://www.beckershospitalreview.com/finance/chs-reports-110m-net-loss-completes-30-hospital-divestiture-spree.html

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Community Health Systems, a 127-hospital chain based in Franklin, Tenn., posted a net loss of $110 million in the third quarter of 2017, compared to a net loss of $79 million in the same period of the year prior.

CHS said revenues dipped to $3.67 billion in the third quarter of this year, down from $4.38 billion in the same period of 2016. The decrease in revenue was attributable, in part, to lower patient volume. On a same-facility basis, admissions were down 14.8 percent in the third quarter of this year. When adjusted for outpatient activity, admissions decreased 15.5 percent year over year.

The company’s financials also took a $40 million hit from hurricanes Harvey and Irma in the three months ended Sept. 30. CHS said the hurricanes caused it to incur additional expenses and miss out on revenues.

Although CHS’ operating expenses declined in the third quarter, one-time charges took a toll on the company’s bottom line. CHS said its third quarter financial results included $33 million in impairment charges and losses related to the sale of some of its hospitals.

To improve its finances and reduce its heavy debt load, CHS put a turnaround plan into place in 2016. As part of the initiative, the company announced plans this year to sell off 30 hospitals. With the sale this week of Highlands Regional Medical Center in Sebring, Fla., and Merit Health Northwest Mississippi in Clarksdale, CHS Chairman and CEO Wayne T. Smith said Wednesday the 30 hospital divestitures are complete.

“Looking forward, we remain focused on strategic initiatives that we believe will yield positive results in the future,” said Mr. Smith. “Our goal is to emerge from this process with a sustainable group of hospitals that are positioned for long-term success and growth.”

CHS brought down its long-term debt load to $13.9 billion in the third quarter of this year, from $14.8 billion in the same period of 2016.

HCA’s net income tumbles to $426M in Q3

https://www.beckershospitalreview.com/finance/hca-s-net-income-tumbles-to-426m-in-q3.html

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Nashville, Tenn.-based HCA Healthcare, which operates more than 170 hospitals, saw revenue increase in the third quarter of 2017, but the company’s net income declined year over year.

HCA’s financial results were in line with the third quarter preview the company issued in October. HCA ended the third quarter of this year with net income of $426 million on revenues of $10.7 billion. That’s compared to the same period of 2016, when the company recorded net income of $618 million on revenues of $10.3 billion.

On an earnings call Tuesday, HCA Chairman and CEO R. Milton Johnson said the company took an estimated $140 million hit from hurricanes Irma and Harvey. HCA has a total of 18 hospital campuses, eight freestanding emergency rooms, five surgery centers and one freestanding cancer center in the Houston and Corpus Christi, Texas, markets, which were two areas significantly impacted by Hurricane Harvey. The company has 50 hospital campuses, 32 surgery centers, 17 freestanding ERs and 10 diagnostic imaging centers in Florida, where several facilities felt the impact of Hurricane Irma.

The Texas Medicaid Waiver program also took a toll on HCA finances. The company said it took a $50 million hit related to the program in the third quarter of this year.

Mr. Johnson said the hurricanes and the Texas Medicaid waiver reduction make evaluating the third quarter results more complex. “However, if you look at the broad trends to normalize with the destruction in the hurricane affected markets, we believe many of the trends are comparable with the first half of 2017,” he said.

In addition to releasing its third quarter financial results, HCA announced the board approved a new $2 billion share repurchase program. Including this newly announced program and the company’s share repurchase program announced in November 2016, HCA has approximately $2.15 billion authorized for share repurchases.

These Hospital Bonds Are on Life Support

https://www.bloomberg.com/gadfly/articles/2017-10-27/a-49-billion-hospital-emergency-heads-toward-junk-bonds

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Junk-bond buyers appear to have a blind spot when it comes to for-profit health care companies.

They’ve snapped up bonds of Tenet Healthcare Corp. and Community Health Systems Inc. despite the drastically souring outlook for both hospital operators. Some of this may be idiosyncratic or the result of specific investors’ strategies (or unwillingness to sell). Franklin Resources Inc., for example, now owns nearly 20 percent of Community Health’s total debt and more than half of its $1.9 billion of bonds maturing in 2019, according to recent filings compiled by Bloomberg.

In general, however, as credit investors plow into broad indexes of riskier assets, it appears they’re simply turning a blind eye to the ugly balance sheets of hospital operators amid an increasingly difficult backdrop. Federal programs like Medicaid are clamping down on costs. And the Trump administration’s various efforts to weaken the individual insurance market will potentially put hospitals on the hook for more uncompensated care as fewer people sign up for health care coverage.

Meanwhile, Tenet and Community Health made some questionable decisions in recent years to borrow billions of dollars to make acquisitions that now look pricey. These companies don’t generate a ton of cash at the best of times, and much of what they do have now goes to debt service rather than much needed hospital improvements.

CIRCLING THE DRAIN

It’s hard for companies to confront mountainous piles of debt when they don’t generate consistent cash flow.

These hospital operators have a narrowing field of options right now. Tenet recently tried, and failed, to sell itself, which sent its shares plunging on Thursday. Both hospitals report earnings within the next few weeks. If HCA Healthcare is any guide — the company pre-announced worse-than-expected third-quarter earnings last week — they won’t be pretty.

But still, no one in the bond market seems to care. Tenet’s bonds have soared 7.8 percent so far this year, even though its stock has fallen 13.3 percent. Community Health debt has gained 16.5 percent, four times the 4.1 percent gain in its shares.

DIVERGING FATES

Bond investors seem to be turning a blind eye to difficulties recognized by stock investors

This seems sort of ludicrous. One hedge fund manager, Boaz Weinstein of Saba Capital Management, sees this as an opportunity to short some of these companies’ junior bonds. Weinstein pointed out at a conference this month that Community Health’s $14 billion pile of debt is 20 times the value of its equity.

Unless the company’s fortunes turn around, it will be forced to reckon with its debt in painful ways for its business as well as the returns of creditors. It’s hard to see how the business could get better with President Donald Trump’s continuing attempts to torpedo health care insurance subsidies, which is widely expected to hurt hospital profitability.

Credit investors at some point are going to have to come to grips with this. Community Health and Tenet, along with HCA, account for $49 billion of debt in a broad U.S. high-yield bond index. This pile is looking increasingly vulnerable to a day of reckoning.