HCA second quarter results show positive impact of healthcare reform

Fewer uninsured and charity-care patients, more admissions and emergency room visits, and a higher acuity and longer stays for admitted patients — these are just a few of the effects of healthcare reform that are lifting revenue for HCA Holdings, the nation’s largest publically traded hospital operator say company officials.

On the call with investors following the release of HCA’s second quarter earnings report and updated guidance for fiscal year 2014, William “Bill” Rutherford, the company’s chief financial officer, principal accounting officer and executive vice president, noted that HCA had positioned itself for success in the healthcare reform era, but there was a lot of uncertainty going into the first two quarters after the Affordable Care Act’s health insurance exchanges were launched and Medicaid was expanded in many states. Three things surprised them. First, enrollment through the health insurance exchanges was higher than expected. Second, use of healthcare services by the newly insured was greater than expected, even though HCA had foreseen that there would be a certain amount of pent-up demand for healthcare. “It happened a lot faster than maybe we anticipated,” he said. Finally, in the four Medicaid expansion states where HCA operates, the decline in uninsured patients and increase in Medicaid patients happened even quicker than company officials had predicted.

As a result of this and strong performance in its core operations, HCA decided to update its 2014 guidance. It now expects 2014 net revenue to be somewhere in the range of $36 billion to $36.5 billion. This is at least half a billion more than its original bottom estimate of $35.5 billion. For investors, earnings per share should be between $4 and $4.25, up from HCA’s original 2014 guidance of $3.45 to $3.75.

Following the release of the second quarter results and the updated 2014 guidance, HCA stock hit a new 52-week high of $66.52 and analysts continue to rate it a buy.

For those watching the impact of healthcare reform, there were some additional notable takeaways from HCA’s second quarter results and earning call with investors. Rutherford noted that among the just under 5,500 exchange admissions HCA saw during just the second quarter, 40 percent were patients who were newly insured. The acuity of the case mix among these patients was also 10 percent higher than for managed care patients, a trend Rutherford attributed mainly to there being fewer OB admissions in this group compared to managed care.

Focusing on treating higher acuity patients instead of fighting the losing fight of trying to keep the low-acuity business that under healthcare reform is transitioning to the outpatient setting is part of HCA’s strategy, company officials said. Therefore having more potential high-acuity patients become insured is a good thing for HCA. The company also saw revenue per admission and length of admission increase as acuity of the case mix went up.

ER volume also went up considerably for HCA, a trend other hospitals have seen as well as newly insured exchange patients and Medicaid expansion patients who may be unfamiliar with how insurance works or simply accustomed to coming to ERs for care seek treatment there first.

“Same facility emergency room visits increased 5.7 percent in the quarter compared to the prior year,” Rutherford noted. “This represents the highest rate of growth in our ERs in five quarters.”

Notable financial points from HCA’s second quarter earnings report include:

• Revenues increased 9.2 percent to $9.230 billion for the quarter
• Net income attributable to HCA Holdings, Inc. totaled $483 million, or $1.07 per diluted share
• Adjusted EBITDA increased 18.5 percent to $2.0 billion
• Cash flows from operations increased 53.6 percent to $1.250 billion
• Same facility equivalent admissions increased 2.2 percent while same facility admissions increased 1.2 percent
• Same facility revenue per equivalent admission increased 5.4 percent

A full transcript of the earnings call with investors is available at SeekingAlpha.