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Katerina Semida

LPNT AT A GLANCE

P/E ► 12.3 AVG EV/EBITDA ► 6.32 AVG ROA ► 6.1% AVG ROE ► 7.6% AVG Debt to Equity ► 1.14 AVG Current Ratio ► 2.62 AVG Interest Coverage Ratio ► 3.20 AVG

 

 

 

 

 

 

LifePoint owns and operates 48 general acute-care hospitals located throughout the United States, usually in rural areas. Lifepoint's revenues have grown over the past five years, driven primarily by acquisitions such as the 2005 merger with Province Healthcare, which doubled the firm's size.^[1] Operating income has been much more volatile, affected by the seasonality of earnings (dependent on the winter flu season), increasing numbers of uninsured patients, and employee turnover among qualified specialists.

The demand for LifePoint's services is affected by demographic trends such as the aging of the US population and the number of people moving into and out of the rural markets where it operates. The firm's profitability suffers from the need to treat growing numbers of uninsured patients, which contributed to LifePoint's slower 9.7% growth rate in 2007.

Since its facilities, like most rural hospitals, usually have virtual monopolies in their markets, LifePoint does not compete with other large national hospital operators. Instead, it faces challenges from physician-owned hospitals and surgery centers. These specialized centers often draw off patients for the most profitable procedures, such as implanting pacemakers, leaving hospitals with less profitable patients and procedures.

Business Financials

LifePoint's 49 hospitals operate in five divisions, which are organized based on geographic location and size and complexity of the hospitals in them. All hospitals provide general inpatient services such as internal medicine, obstetrics, psychiatric care and emergency room care. The firm has also moved to provide more specialized services such as open-heart surgery and neurosurgery (to compete with nearby urban hospitals) and outpatient services such as laboratory, x-ray, and sports medicine (to compete with independent or physician owned centers). As most of its hospitals are in rural areas, LifePoint's hospitals generally do not carry out medical research or run medical schools.^[2]

^[3]

LifePoint has traditionally grown through acquisitions, which account for the 32% Compounded annual growth rate - CAGR of its revenues over the last five years. A series of large deals, most notably the 2005 purchase of competitor Province Healthcare, more than doubled the company's size. However, after acquiring so many hospitals so fast, LifePoint faced some problems with integration. In response, the firm has decided to minimize acquisitions and focus on increasing organic revenue growth through better physician recruitment and retention and a wider array of services for patients. Revenue growth has slowed as a result, but continued at a steady pace in 2007.^[4]

Operating income, on the other hand, has been quite volatile, alternately rising (sometimes as much as 75%) and falling 2-4%. LifePoint's earnings have also been highly seasonal - they typically rise in the first and fourth quarters of the year because illnesses are more common during the winter months. On average, however, operating income has experienced an upward trend during the last five years, increasing at a CAGR of 16%. ^[5]

In 2007, revenues grew at 9.7%; the slowing pace reflects the firm's strategic shift from acquisitions to organic growth. LifePoint did acquire two hospitals from former parent HCA, which is reflected in its revenue growth. A 4.5% increase in revenue per admitted patient and growing numbers of both emergency room visits and outpatient procedures have also contributed to revenue growth.^[6]

Operating income, on the other hand, fell 12%, weakened by decreases in patient numbers in many markets, a slow flu season, and the departure of referring doctors. Increases in uncollectible debts from uninsured patients also contributed to the drop.^[7]

Key Trends, Risks, and Forces

Aging Baby Boomers Require More Health Care, Raising Demand for Hospital Services

The retirement of the baby boomers, who make up slightly over than a quarter of American's population, is having a significant impact on the demographic makeup of the US population.^[8] This rapid increase in the number of elderly Americans (Medicare expenditures comprise 3.1% of the U.S. GDP as of 2008) provides an opportunity for hospitals such as LifePoint, since people older than 65 generally need more medical care. At the same time, the aging of the population may indirectly hurt LifePoint through its effect on Medicare. The Medicare system is becoming more saturated as more baby boomers reach the eligible age and need the program's care, and so the reimbursement levels provided to hospitals may decrease.^[9]

Trends in Urbanization Impact Potential Number of Patients

After a decades-long nationwide trend of urbanization, 75% of the US population currently lives in an urban area. ^[10] However, since the year 2000 there's been a reversal in this trend, with city residents in all demographics leaving cities and suburbs. In fact, 18 of the 25 largest metropolitan areas in the country lost population between 2000 and 2004 according to the latest census.^[11] Since the population in rural areas puts a limit on the potential number of patients LifePoint's hospitals can serve(and thus the potential revenues it can earn), population demographics are an important factor in evaluating the company's prospects for earnings growth.

Ability to Attract Patients Depends on Availability of Qualified Physicians

In order to increase or even maintain the breadth of specialized services available to patients, LifePoint must be able to hire qualified physicians. This has become a challenge for hospitals as the nation begins to experience a shortage of physicians, particularly surgeons and family doctors. American physicians are getting older - in the last twenty years, the percentage of doctors over 55 years old has risen from 27% to 34%, meaning that many of them will be retiring in the coming years. In rural areas, where less than 10,000 of 212,000 physicians are surgeons, specialists are especially scarce. Rural doctors generally receive smaller salaries than their urban counterparts, adding to the challenges faced by LifePoint in its recruitment practices.^[12]

A Rising Number of Uninsured Patients Increases Costs

The number of uninsured patients has been rising throughout the nation, growing nearly 5% in 2006 to reach 47 million.^[13] Since hospitals are legally required to provide care to anyone who needs it, whether they are insured or not, LifePoint faces high expenses (specifically bad debt expense) from this trend.^[14] Uninsured patients make up 13% of LifePoint's revenues, a number which has grown in the last few years.^[15]

^[16]

Caps on Government Reimbursements for Medicare and Medicaid Patients Restrict Freedom to Raise Prices

The US government limits the amount that hospitals will be reimbursed for treating Medicare and Medicaid patients, putting a ceiling on the prices LifePoint can charge for services it provides to such patients.^[17] These limits have an especially significant effect on revenues because about 42% of the firm's patients are on Medicaid and Medicare.^[18] As the number of patients using Medicare and Medicaid grows in future years, stretching federal resources, the government is likely to make changes to these programs, possibly limiting LifePoint's revenues further. For instance, Medicare's Inpatient Prospective Payment System is up for revision in 2008 - proposed changes include a clause that reimburses a hospital more the higher the severity of a patient's diagnosis, which is a disadvantage for rural hospitals like LifePoint, which generally treat simpler conditions.^[19]

Competition

LifePoint holds a virtual monopoly in most of its markets simply because its hospitals are the only providers of general acute-care services in the vicinity. This is common to most American rural hospitals and reflects years of industry consolidation.^[20] Thus, the firm's primary competition is not other area hospitals, but rather urban hospitals, where patients are increasinly moving towards specialized care.^[21] The firm competes by recruiting more specialists and investing in new technology in order to widen the range of services available to patients.

In the past several years, new types of competitors have been entering LifePoint's markets and decreasing patient volume: physician-owned hospitals and stand alone surgery and diagnostic centers New technologies have made it possible for physicians to perform procedures that earlier had to be done in a hospital.^[22] LifePoint is addressing this challenge by attempting to partner with physicians.^[23] For instance, the firm began a joint venture with physicians in Lake Havasu, Arizona, in response to the formation of a stand alone surgery center. LifePoint's hospital and the stand alone center pooled their assets and LifePoint got control of 96% of the venture.^[24]

Market Share

The hospital industry is fragmented, with hundreds of providers of various sizes spread throughout the country. No provider holds more than 1% of the total market. Competition is limited by geographic constraints (there are never more than a few hospitals in one geographic area). LifePoint is smaller than all of the other large national hospital operators, accounting for only .5% of the market. The firm's market share by number of hospitals is only a little larger, its facilities accounting for .8% of the 6013 total hospitals in America. ^[25]

^[26]

References

1. ↑ LifePoint Hospitals, Inc. Completes Acquisition of Province Healthcare Company. Business Wire. April 15,2005
2. ↑ LifePoint 2007 10-K. Item 1 - Business. p. 1
3. ↑ LifePoint 2007 10-K. Item 6 - Selected Financial Data. p. 33
4. ↑ Moore, Roy. "New CEO Will Shift Focus of LifePoint." Nashville Business Journal.June 30,2006
5. ↑ LifePoint 2007 10-K. Item 6 - Selected Financial Data. p. 33
6. ↑ LifePoint 2007 10-K. Item 7 - Management's Discussion and Analysis. p. 56
7. ↑ LifePoint hospitals sees 30% profit drop for '07.
8. ↑ Growing Old, Baby-Boomer Style
9. ↑ "Aging Baby Boomers" Wikinvest Article
10. ↑ Facts about Urbanization in the USA
11. ↑ "Census:Americans Leave Big Cities". USA Today. April 20, 2006
12. ↑ Davis, Robert. "Shortage of surgeons pinches U.S. hospitals." USA Today. February 26, 2008.
13. ↑ Kaiser Daily Health Policy Report
14. ↑ Emergency physicians treating more uninsured patients, survey finds
15. ↑ LifePoint 2007 10-K. Item 7 - Management's Discussion and Analysis. p. 56
16. ↑ LifePoint 2007 10-K. Item 7 - Management's Discussion and Analysis. p. 56
17. ↑ American Health Organization - 2006 Hospital Trends
18. ↑ LifePoint 2007 10-K. Item 7 - Management's Discussion and Analysis. p. 56
19. ↑ US Department of Health and Human Services
20. ↑ 5 stocks with surprisingly healthy prospects
21. ↑ Effects of market position and competition on rural hospital closures
22. ↑ Bradwell, Michael. "CEO: Hospital's presence here truly a community endeavor." Observer-Reporter. March 29, 2008
23. ↑ LifePoint 2007 10-K. Item 1 - Business. p. 10
24. ↑ LifePoint Hospitals to Acquire Havasu Surgery Center
25. ↑ U.S. Department of Health & Human Services: April 2005
26. ↑ American Hospital Association - 2006 Health and Hospital Trends; Revenues data from company profiles at www.hoovers.com