Hospital operators such as HCA Holdings (NYSE:HCA) are enjoying a renaissance as they expand into new markets and benefit from rising demand tied to an improving economy and healthcare reform.
Although there's no way to predict the future share price of the company, as any number of events could cause stock to falter, let's look at three factors that may make HCA Holdings worth owning.
1. Invigorating its business model
Outpatient facilities offer HCA an important growth opportunity as aging and increasingly insured Americans look for more convenient and less-costly healthcare alternatives.
HCA is positioned to capture its fair share of the outpatient market given that it's one of the nation's biggest hospital operators and maintains significant market share in states with rising demand for such services, including retiree-heavy Texas and Florida.
In the past three years, HCA has spent more than $5.5 billion to open 200 new facilities, including stand-alone ERs, urgent care centers, surgery centers, and provider clinics. The company expects to spend another $2 billion this year on initiatives that are likely to include opening more urgent care centers. If those investments help the company capture more patient visits, HCA will get a larger share of its revenue from higher-margin outpatient operations, as well as benefit from rising referrals to its hospitals for acute care.
2. Shrinking bad debts
The launch of the Affordable Care Act's healthcare insurance exchanges, along with Medicaid expansion in 26 states, is dramatically reducing the number of patients unable to pay for care.
During the law's first open enrollment period, more than 8 million people signed up for insurance through the exchanges and another 7 million people were approved to join Medicaid.
Previously, many of those patients often sought treatment in emergency rooms and couldn't pay for care, and writing off that care reduced hospital earnings. Going forward, however, more of that care is being reimbursed either by private insurers or government programs.
In its second quarter earnings call, HCA reported that in the four markets in which it operates that chose to expand Medicaid eligibility, Medicaid admissions were up 32% year to date in 2014, resulting in uninsured admissions falling by 48%. That led to companywide Medicaid admissions growth of 7.8%.
But it's not just expansion states that are helping to lower HCA's charity care expense. Nonexpansion states also saw uninsured volume fall 6.6% year to date versus last year thanks to increased awareness of the program due to the launch of Obamacare.
As a result, HCA delivered second-quarter earnings per share of $1.07. That was nicely above Wall Street's consensus analyst forecast for $0.92 and may have led to analysts boosting their forecast for HCA's 2015 EPS from $4.32 to $4.74.
If the trend in uninsured care continues lower and other states opt into Medicaid expansion, HCA's profit could head nicely higher. That's particularly true if strong opposition to expansion in Texas and Florida softens. Those two states accounted for 65% of HCA's uninsured admissions during the second quarter.
3. Improving Medicare payments
HCA and hospital industry efforts to increase Medicare reimbursement rates appear to be paying off.
The industry has long struggled to turn a profit on care provided to Medicare patients. According to the Medicare Payment Advisory Commission, the average hospital had a negative 5.4% average margin on Medicare patients in 2012.
HCA's Medicare margin may improve now that the program approved a 1.7% bump in Medicare reimbursement for outpatient services in 2014 and may increase payments by 2.1% in 2015. Medicare will also increase payments for inpatient care by 1.4% next year.
Although those increases may not sound like a lot, Medicare spent more than $37 billion on outpatient care in 2013. That suggests that the 2014 and 2015 increases -- all things being equal -- could translate into another $1.4 billion heading to HCA and other hospital operators.
Given that Medicare accounts for roughly 40% of all revenue collected by hospitals, reimbursement growth for both inpatient and outpatient care could have a significant impact.
Fool-worthy final thoughts
Outpatient services like those provided by surgery centers and urgent care centers make up as much as 85% of the hospital industry's operating profit and account for 40% of the industry's revenue. Since outpatient facilities are more profit-friendly, HCA's investments in such operations should add earnings tailwinds. And more patients enrolled in private and public insurance, along with rising reimbursement for older patients, could mean HCA's earnings growth will continue next year.