At first glance, operating hospitals and surgical centers doesn't seem like a particularly attractive business. Constant cost pressures from drugs and supplies coupled with pricing pressure from insurers and The Centers for Medicare and Medicaid Services squeeze profits from both ends. Yet one publicly traded company has flourished.
Shares of HCA Healthcare (HCA -2.37%) have delivered an almost 900% return over the past decade. And those following the company know that it has a model built to continue performing for investors over the next 10 years.
Image source: Getty Images.
Care at scale
HCA is the largest health system in the U.S., with 175 hospitals. At one point, the company owned as many as 360 hospitals. It slimmed down after paying a $840 million fine for Medicare fraud in 2000. It is much more focused now. Recently, the Ethisphere Institute named it one of the world's most ethical companies for the 12th consecutive year.
Its size allows HCA to spread fixed costs across a larger portfolio of assets than its competitors can. It also provides a strong negotiating position with suppliers in an industry that has been consolidating for years. HCA's outperformance goes beyond just scale. It also boasts the highest revenue per employee of any publicly traded hospital operator. It all adds up to industry-leading profitability. That's best demonstrated by comparing operating margins.
HCA Operating Margin (TTM) data by YCharts
Changes in latitude
HCA also benefits from a stark trend in population growth. Americans are going south in droves. And the company has the majority of its U.S. facilities in Florida and Texas. Those are two of the fastest-growing states. In fact, its four largest markets are all southern and all experiencing population growth that outstrips the rest of the nation.
| State | Population Growth 2010-2020 | Company Hospitals |
|---|---|---|
| Florida | 14.6% | 46 |
| Texas | 15.9% | 45 |
| Tennessee | 8.9% | 14 |
| Virginia | 7.9% | 11 |
| 16 other states | *5.4% | 59 |
Data source: HCA Healthcare. *Median.
Those numbers were from the 2020 census. The trend actually accelerated during the pandemic, with Tampa, Miami, Dallas, and Houston making the list of fastest-growing metro areas. It's a trend that is expected to persist.
Getting back to normal
With a large portfolio of hospitals in many of the fastest-growing areas in the country, you would expect HCA to be doing well. You would be right. Revenue grew 14% year over year in 2021, and earnings per share almost doubled.
But there is still ground to cover before everything is back to normal. While outpatient surgeries rebounded to 2019 levels last year, inpatient surgeries still lag.
Data source: HCA Healthcare. Chart by author.
The picture isn't quite so black and white, though. On the latest earnings call, CEO Sam Hazen pointed to a few drivers in the fourth quarter. Lingering COVID waves were one. Another was a shift in mix. Thanks to advances in medical techniques and pressures from insurers, some procedures that used to be inpatient surgeries are now being performed on an outpatient basis. Finally, the normal seasonality of people who optimize the benefit of insurance plans before the end of the year didn't materialize in 2021. That makes it hard to say what "normal" is in 2022 and beyond.
The diagnosis
In an ever-changing healthcare landscape, HCA has delivered for shareholders. It has the scale and operating track record to keep generating industry-leading returns regardless of the regulatory regime. Management is also in a great position to adapt, should the "new normal" require it.
As the pandemic's direct effect on the healthcare system finally begins to wane -- COVID hospitalizations began April at an all-time low -- the company may soon get back to steady-state operations. Anyone who has followed HCA knows that's a good thing for shareholders.
