Bloomberg News

HCA’s Declining Surgery Rates May Signal Slowdown for Hospitals

July 26, 2011

July 26 (Bloomberg) -- HCA Holdings Inc.’s report of a drop in expensive surgeries may signal a broad slowdown for hospitals because of rising unemployment and tepid consumer spending.

Patients at HCA, the biggest U.S. hospital chain, sought less-expensive procedures during the quarter, according to the company. Per-patient income from Medicare, the government plan for the elderly, also fell. Until more hospitals report earnings, the possibility of a wider decline in spending will weigh on the industry, said Arthur Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee, where HCA is based.

“What I’m particularly worried about is that this could be another systemic issue related to the economy that could spell trouble going forward,” Henderson said in a telephone interview. HCA “can fix a company-specific issue, but they’re going to have a lot tougher time fixing a macro systemic issue.”

It’s not clear whether the economy was responsible for the shift in procedures among Medicare patients or whether HCA lost customers to competitors, Henderson said. Investors will be watching Health Management Associates Inc.’s report on July 27 and Dallas-based Tenet Healthcare Corp.’s on Aug. 2 to see if they have similar results. Positive reports could lift all hospital stocks, Henderson said.

HCA tumbled 19 percent to $27.97 yesterday for the biggest decline since its March initial public offering. The company reported second-quarter profit and sales that missed analysts’ estimates. Community Health Systems Inc. fell 4.8 percent, Tenet dropped 3.8 percent and Health Management dropped 5 percent.

Surgeries Decline

Surgery admissions at HCA’s hospitals fell 1.6 percent for the quarter, on a same-facility basis, while total admissions rose 1.9 percent. Medicare revenue per admission declined 1.3 percent. Cardiovascular surgeries declined 3.7 percent and general surgeries were down 2.5 percent, Chief Financial Officer Milton Johnson said in a conference call yesterday.

At HCA, Medicare patients make up about 42 percent of customers, the highest rate among publicly traded acute-care hospitals, according to data compiled by Bloomberg Industries. The company also has the lowest revenue per patient, adding to the impact from fewer high-cost surgeries.

“We didn’t like the quarter, clearly,” said Richard Bracken, chairman and chief executive officer at HCA, in a conference call with analysts. “We are looking to continue to manage expenses appropriately.”

Lower costs of services would be good news for managed care companies, according to David Windley, an analyst at Jefferies & Co. UnitedHealth Group Inc. and WellPoint Inc. are the largest U.S. health insurers.

Good for Insurers

“HCA missed their numbers, but that’s good news for managed care companies, who will be more profitable as utilization of medical services fall,” Windley said in a telephone interview.

HCA reported second-quarter profit, excluding $75 million to pay off debt, of 51 cents a share, 9 cents less than the average estimate of 23 analysts surveyed by Bloomberg. Revenue climbed 4 percent to $8.06 billion, also missing estimates.

Admissions of uninsured patients increased 11 percent in the second quarter from a year earlier and accounted for 7.4 percent of same-facility admissions, the company said.

HCA operated 164 hospitals and 111 freestanding surgery centers as of June 30.

HCA’s $1.25 billion of 7.875 percent notes due in February 2020 fell 0.6 cent to 109 cents on the dollar at 3:53 p.m. yesterday in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Credit-Default Swaps

The cost to protect the debt of HCA from default surged by the most since May 2010. Credit-default swaps on HCA rose 32.7 basis points to 425 basis points at 3:01 p.m. yesterday in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

A group including KKR & Co., Bain Capital LLC and Bank of America Corp. invested about $5 billion in private equity in 2006 to acquire HCA in a $33 billion takeover. Including debt, the transaction was the largest leveraged buyout at that time.

--With assistance from Pierre Paulden, Mary Childs and Pat Wechsler in New York and Michael Manns in Skillman, New Jersey. Editors: Angela Zimm, Stephen West

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.


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