Slow or­ganic growth puts M& A pres­sure on hospi­tal chains

Modern Healthcare - - NEWS - By Dave Barkholz and Shelby Liv­ingston

In­creased merger-and-ac­qui­si­tion ac­tiv­ity among for-profit hos­pi­tals is be­ing driven in part by the kind of slower or­ganic growth seen in the first round of sec­ond-quar­ter earn­ings an­nounce­ments.

Ad­mis­sions have been damp­ened as the num­ber of newly in­sured has flat­tened na­tion­ally, and the num­ber of new ex­change pa­tients and those in­sured un­der Med­i­caid ex­pan­sion has topped out.

Hospi­tal ad­mis­sions have slowed to a “new nor­mal” of 1% to 2% year-over-year growth, the earn­ings an­nounce­ments in­di­cate.

That has left hospi­tal com­pa­nies such as HCA, Uni­ver­sal Health Ser­vices and Com­mu­nity Health Sys­tems strug­gling to sus­tain the rev­enue growth and earn­ings per­for­mance that their in­vestors de­mand.

As an­nounced in April, HCA is buy­ing into a new hospi­tal mar­ket for the first time since 2003. The $710 mil­lion deal to pur­chase 604-bed Memo­rial Uni­ver­sity Med­i­cal Cen­ter in Sa­van­nah, Ga., is one of eight hospi­tal ac­qui­si­tion deals that HCA has made this year since April, a mini-binge for the na­tion’s largest hospi­tal chain.

Nash­ville-based HCA’s reach into a new mar­ket for the first time in 14 years speaks to the need of HCA and other hospi­tal com­pa­nies to sup­ple­ment slow­ing or­ganic growth with se­lect ac­qui­si­tions, said Jeffe- ries & Co. health­care an­a­lyst Brian Tan­quilut. If the deal for Memo­rial Uni­ver­sity is com­pleted by year-end, it will make Sa­van­nah the 15th ma­jor mar­ket for 170-hospi­tal HCA.

Ad­mis­sions and emer­gency room growth at hos­pi­tals are at about half the rates seen when Oba­macare was crank­ing the newly in­sured into the health­care sys­tem, Tan­quilut and other an­a­lysts note. The nega- tive con­se­quences of that slow­down are start­ing to show up in hospi­tal and health in­sur­ers’ earn­ings.

HCA posted flat net in­come in the sec­ond quar­ter on rev­enue of $10.7 bil­lion and it low­ered ex­pec­ta­tions for the rest of 2017.

UHS was in the same boat. The acute-care and be­hav­ioral hospi­tal gi­ant low­ered its guid­ance for all of 2017 when its sec­ond-quar­ter earn­ings came in flat on slow­ing be­hav­ioral health vol­ume.

CHS, the na­tion’s sec­ond-largest in­vestor-owned hospi­tal chain, has been shed­ding lower-mar­gin hos-

As an­nounced in April, HCA is buy­ing into a new hospi­tal mar­ket for the first time since 2003. The $710 mil­lion deal to pur­chase 604-bed Memo­rial Uni­ver­sity Med­i­cal Cen­ter in Sa­van­nah, Ga., is one of eight hospi­tal ac­qui­si­tion deals that HCA has made this year, a mini-binge for the na­tion’s largest hospi­tal chain.

CHS, the na­tion’s sec­ond-largest in­vestor-owned hospi­tal chain, has been shed­ding low­er­mar­gin hos­pi­tals but not fast enough to re­turn to the black in the sec­ond quar­ter.

pitals but not fast enough to re­turn to the black in the sec­ond quar­ter. The Franklin, Tenn.-based com­pany posted a net loss of $131 mil­lion as ad­mis­sions at the 150 hos­pi­tals it has owned at least a year fell 2.5% in the quar­ter vs. the year-ear­lier pe­riod.

CHS is in the process of sell­ing 30 hos­pi­tals and other as­sets to re­duce $15 bil­lion in debt and fo­cus on its health­ier mar­kets.

Oba­macare vol­umes also in­flu­enced the earn­ings of man­aged-care com­pa­nies in the quar­ter.

Unit­edHealth Group ben­e­fited from ex­it­ing nearly all of the 34 states where it sold Af­ford­able Care Act ex­change plans in 2016. The Min­netonka, Minn.-based in­surer’s rev­enue grew 7.7% year over year to $50.1 bil­lion, while profit surged 33.5% to $2.4 bil­lion as the com­pany pulled in more rev­enue from its Medi­care seg­ment. Still, the in­surer said it lost out on $1.8 bil­lion in rev­enue largely be­cause of its ex­change pull­back and a pause in a health in­sur­ance tax.

But Cen­tene Corp.’s re­sults were buoyed by its grow­ing ex­change foot­print. The St. Louis-based in­surer’s ex­pe­ri­ence man­ag­ing low-in­come Med­i­caid mem­bers has given it a leg up over com­peti­tors in the ACA mar- ket­place, where en­roll­ment has been dom­i­nated by sicker-than-av­er­age cus­tomers.

Cen­tene saw rev­enue in­crease 10% to $12 bil­lion thanks to en­roll­ment gains on the ex­changes. It now cov­ers 1.1 mil­lion mar­ket­place mem­bers and is poised to add more when it en­ters three ad­di­tional ex­change mar­kets in 2018 and ex­pands in six ex­ist­ing mar­kets. Cen­tene’s net in­come to­taled $254 mil­lion, up from $170 mil­lion dur­ing the same quar­ter in 2016.

An­them, how­ever, con­tin­ues to lose money from its ACA busi­ness and plans to exit ex­changes in three states next year.

Even so, Med­i­caid and Medi­care mem­ber­ship growth helped boost the com­pany’s rev­enue in the quar­ter to $22.4 bil­lion, up 4.4% over the year­ago pe­riod, while its profit rose 9.6% to $855.3 mil­lion.

AP PHOTO

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