HCA Holdings, Inc. (HCA -1.54%) is one of the nation's largest hospital operators. It runs more than 165 hospitals and employs more than 200,000 people, but despite its size, HCA endured its fair share of struggles during the recession as cash-strapped consumers put-off discretionary procedures and surging unemployment forced the company to write off more health-care services for the uninsured.
However, recession-era cost-cutting and a demand growth tied to an improving economy and health-care reform appear to have hospital operators like HCA back on track. As a result, shares have climbed by more than 85% in the past year. Given the big move, investors are right to wonder whether HCA's winning streak can continue, so let's consider five key quotes from HCA's second-quarter earnings conference call and what they may mean for investors.
1. Fewer uninsured patients
"In our second quarter of health care reform, we experienced continued growth in exchange and Medicaid volume, with fairly noticeable reductions in our uninsured volume," CEO R. Milton Johnson said.
There are two important drivers of hospital sales and profit that are a direct result of the Affordable Care Act. The first is the expansion of Medicaid, and the second is the creation of the health care insurance exchanges. Those two provisions are helping millions of uninsured people get insurance, and that should increase the number of patient visits to HCA hospitals and physician networks and reduce the the amount of uncompensated care the company provides.
That appears to already be happening, given that HCA's self-pay and charity admissions fell 14.7%, while equivalent admissions declined 4.9% during the second quarter.
2. Shareholder-friendly cash flow
"We repurchased $750 million of our stock or 14.555 million shares at a net offering price of $51.53 per share. And during the past nine months, we have repurchased $1.25 billion of our stock," Johnson said.
The ability to turn cash into earnings per share is critical to higher share prices, and one of the ways HCA is doing that is by buying back shares. The company's aggressive buyback program is thanks to the jump in second-quarter cash flow to $1.25 billion, up $436 million from a year ago. Importantly, free cash flow (cash remaining after capital expenses) totaled $627 million in the quarter. If HCA can continue to generate that kind of cash flow for shareholders, investors should continue to benefit from share repurchases.
Source: HCA Holdings.
3. Aging America = rising demand
"During the second quarter, same facility Medicare admissions and equivalent admissions increased 1.6% and 2.3%, respectively," Executive Vice President William Rutherford said.
One of the biggest drivers of health care spending over the next two decades will be maturing baby boomers. Boomers are turning 65 at a rate of roughly 10,000 per day, and that pace is expected to continue until 2029. Since demand for in- and out-patient care increases with age, aging Americans should support revenue and profit at HCA for the foreseeable future.
If Medicare insurance reimbursement rates increase, providing care to Medicare members should become more profitable. Next year, Medicare plans to boost reimbursement by 1.7% for outpatient services and 1.4% for inpatient care. That's a solid move in the right direction, given that Medicare accounts for roughly 40% of all revenue collected by hospitals.
4. Continuing trends
"We continue to see favorable mix trends in our four states that initially expanded Medicaid. New Hampshire is now our fifth state that recently expanded coverage as well," Rutherford said.
The continued adoption of Medicaid expansion offers tailwinds throughout the hospital industry.
Although just 25 states chose to opt in to Medicaid expansion heading into 2014, increasingly more states are considering it. For example, New Hampshire became the 26th state to expand Medicaid earlier this year, and last week regulators approved Pennsylvania's plan to buy low-income residents private insurance, making it the 27th state. Other states that are thinking about expanding Medicaid include Tennessee, Utah, and Indiana. Virginia and Wyoming are looking at their options, too.
If those states follow through, uninsured admissions at hospitals should continue to fall. That's good news for investors, but it's not just expansion states that may help lift HCA. Uninsured admissions are down 2% this year in non-expansion states, too, as overall Medicaid enrollment has grown thanks to increased awareness of the program.
5. Slowing ambulatory surgeries
"Hospital-based outpatient surgeries were up slightly, while surgeries in our ambulatory surgery division were down 1%," President of Operations Samuel Hazen said.
The pick-up in hospital outpatient activity is encouraging, but investors worried about the drop in ambulatory surgeries may want to wait before assuming that trend will continue into the future. After all, one quarter doesn't make a trend, and ambulatory surgery volume has shown some signs of seasonality in the past.
Since HCA has made a big push to increase the number of outpatient facilities in its key markets, those investments should pay off over time as patient volume grows and those facilities become a bigger source of surgery referrals.
Fool-worthy final thoughts
Since its IPO in 2011, HCA has produced $12.5 billion in cash flow, fueling $6 billion in reinvestment, $2.4 billion in acquisitions, $3.2 billion in special dividends, and $2.8 billion in share repurchases.
The ability to ramp future growth and return more money to shareholders appears significant, given that HCA is seeing admissions climb and bad debt expense fall. If that continues, investors are right to keep an eye on HCA, particularly if the Affordable Care Act's second open enrollment, which begins in November, goes off without a hitch and more states adopt Medicaid expansion.
