Fitch: Health care plan could help for-profit hospital sector

Chicago-based Fitch Ratings issued Monday (Aug. 24) a report on for-profit hospitals outlines what the proposed health care reform might mean for hospital companies like Health Management Associates — the company seeking to acquire Fort Smith-based Sparks Health System.

The Sparks Health System board of directors announced Aug. 14 it had signed a tentative agreement to sell the hospital to Naples, Fla.-based Health Management Associates. HMA is a publicly held company that recently reported $78.6 million in net income on total revenue of $2.34 billion for the first six months of 2009. HMA operates Summit Medical Center in Van Buren and two Van Buren clinics — Cornerstone Family Clinic and Internal Medicine & Associates. (Repeated attempts over several days to contact John Merriwether, vice president of financial relations for HMA, were unsuccessful.)

In its second-quarter 2009 report on the for-profit hospital sector, Fitch noted that the sector “reported another strong performance” with “free cash flows at the highest level recorded in several years.” (Sparks Health System and St. Edward Mercy Medical Center in Fort Smith are not classified as for-profit hospitals.)

Fitch also noted that patient admissions in the sector grew 2.7%, with growth also seen in surgeries and emergency room visits. HMA saw its admission growth reach 5.15% at the end of June, a considerable improvement over the 6.11% decline as of June 2008. On the downside, Fitch said the increase in the overall sector volume came with an increase in uninsured patients.

“It is not clear what caused the increase in volumes, although Fitch believes it could be related to increased investment in physician recruiting over the past couple of years or even increased utilization tied to the economic downturn (e.g., accessing health care before benefits run out),” Fitch analysts Lauren Coste and Robert Kirby noted in the report.

The number of licensed beds for the six largest players in the for-profit sector finds HMA on the low end (Table provides perspective on size of the companies).
HCA
June 2009: 38,817
June 2008: 38,419

Community Health Systems
June 2009: 18,130
June 2008: 17,108

Tenet Healthcare
June 2009: 13,411
June 2008: 13,829

Universal Health Services
June 2009: 13,322
June 2008: 13,246

HMA
June 2009: 8,121
June 2008: 8,100

LifePoint Hospitals
June 2009: 5,585
June 2008: 5,637

Another potential problem facing the for-profit sector is an increase in uncompensated care and a “weakening” in collection rates of co-pays and deductibles from insured patients.

“Fitch believes this trend will likely continue given the continued weakness in the labor market, with uncompensated care trends likely to lag the overall economy,” Fitch explained in the report.

However, Fitch noted that cost cuts (job and wage cuts) and reductions in capital spending have allowed the for-profit sector to improve its financial position by reducing debt and increasing cash flow.

HEALTH REFORM IMPACTS
Prior to outlining the potential impacts of health care reform as outlined in the plan proposed by Democrats in the U.S. House and the White House, Fitch issued a clear caveat.

“However, given the scope of the proposed legislation, the significant costs potentially involved, and the vocal opposition that has surfaced during the August recess among many Congresspersons’ constituents, Fitch believes finding a bipartisan agreement might be difficult,” Fitch noted.

Key factors in the Fitch report included:
• “Fitch believes that increased coverage of the uninsured would be positive for the sector as a result of decreased bad debt expense and increased utilization. At the same time, bad debt expense associated with illegal immigrants, managed care companies, and insured patients’ co-pays and deductibles (Fitch estimates the average industry collection rate at approximately 50%) would likely remain.”

• “Fitch believes that providers could see declining profitability if on is not sufficient to offset reimbursement declines or if reimbursement declines occur well before expansion is realized.”

• “One potential outcome of health care reform would be a change in the nature of competition in the hospital industry. Fitch notes that the House legislation includes a ban on self-referrals to physician-owned hospitals (with limited exceptions), which could ease competition on for-profit operators in certain markets where physicians have actively invested in competing facilities.”

• “In addition, Fitch notes that the majority of the hospital industry comprises non-profit
institutions, which typically have lower operating margins and may thus be more susceptible to any reimbursement pressures. This could result in reduced competition and reduced capital spending within the industry.”

• Fitch also suggests passage of the Democratic plan will result in more mergers and acquisition (consolidation) in the health care sector.