Hospitals have taken their fair share of hard knocks in the past. Bloated administrative costs, flagging demand for elective surgery, and payer push-back on prices have all weighed down industry profitability.
However, those concerns may be a thing of the past, at least based on the sales and earnings results of industry leader HCA Holdings (NYSE:HCA).
In the third quarter, HCA reported that higher hospital and urgent care admissions helped its sales climb 9% year over year to $9.22 billion. Importantly, that rising revenue resulted in net income of $518 million, or $1.16 per share, up from $365 million, or $0.79, a year ago.
Those are impressive numbers, but given that shares in hospitals have rallied sharply in the past year, investors are right to wonder if HCA's results suggest there could be more room to run. So, is HCA a buy? Let's take a closer look.
By the numbers
Hospital revenue is primarily driven by admissions trends and while hospitals are somewhat insulated against economic fits-and-starts, admissions for elective surgery and discretionary care slumped during the great recession.
However, admission volume is growing again thanks to an increasingly insured population that's being supported by both job growth and healthcare reform.
The positive impact of rising insurance enrollment helped HCA's same facility equivalent admissions grow 4.1% in the past year and while that growth was partially offset by payer's jaw-boning prices lower, same facility equivalent admission revenue still grew 3.8%.
HCA admissions growth was led by emergency room visits, which may seem somewhat counterintuitive given the rising prevalence of urgent care and pharmacy in-store healthcare clinics like those operated by CVS Health. But instead of newly insured patients abandoning the ER for those alternatives, they're continuing to rely heavily on the ER.
During the third quarter, HCA's ER same facility admissions increased by 7.3% year over year, which lifted year-to-date ER visit growth to 4.3%. And it's not just ER's that are seeing volume growth; HCA also reported that inpatient and outpatient volume increased in the past year by 1.9% and 3.3%, respectively.
HCA's top-line growth, however, is only one reason its shares may remain attractive to investors. Historically, expenses tied to salaries, supplies, and other day-to-day operating items have been a major headwind, but signs suggest that the company may be getting better at trimming fat.
In the third quarter, HCA's operating expenses dropped from 82% of revenue last year to 80.7% and that helped HCA deliver operating cash flow of $1.13 billion, up $228 million from last year.
As cash flow increases, HCA is putting its newfound financial flexibility to work in the form of reinvestment, expansion, and shareholder friendly buybacks. In a bid to capture a greater share of rising demand from an increasingly older patient population, HCA acquired CareNow, a privately held operator of 24 urgent care clinics in Texas, and to reward investors, HCA announced a $1 billion share buyback program this week.
HCA will still need to navigate revenue headwinds tied to lower Medicare and Medicaid reimbursement rates and Medicare reimbursement penalties for hospitals with poor readmission rates and infection rates. But those hurdles appear to be more than offset by the tailwinds associated with rising insurance enrollment.
Since previously uninsured patients are increasingly being covered through the ACA's healthcare insurance exchange or government programs, hospitals are finding that the amount of their write-offs are dropping. In the third quarter, HCA reported it had set aside just $758 million of its revenue for doubtful accounts, down from $955 million a year ago.
Thanks to better cost controls, rising admission volume, and lower bad debt expense, HCA boosted its full year EPS guidance this week from its prior forecast of between $4 and $4.25 to between $4.40 and $4.60 per share.
HCA may find that its able to continue boosting its earnings outlook next year, too. That's because while the ACA exchanges signed up more than 7 million people for healthcare insurance, surveys suggest that as many as 40 million more Americans still remain without coverage. As that coverage gap closes, HCA should be able to drop even more of its revenue to profit -- making it potentially a great stock to own now.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.