MedCath is a hospital operator focusing on cardiovascular procedures. Cardiovascular surgery is one of the most profitable medical specialties,, and the number of potential patients is growing as the US population ages, since victims of cardiovascular disease are typically 55 or older.
In many aspects, MedCath's facilities operate like independent surgery centers - the firm shares ownership with the physicians staffing its hospitals and saves costs through specializing in the most lucrative procedures. As a result, MedCath, along with other operators of specialty hospitals, has found itself competing for market share and waging legal battles with traditional hospital operators, which argue that specialty facilities take the most profitable patients, making it impossible for their facilities to remain profitable. A moratorium by the federal government on the development of specialty hospitals hindered the development of new facilities from 2003-2006, and more recent bills have attempted to reinstate the limits, threatening MDTH's growth.
Despite their distinction from traditional hospitals, MedCath's facilities are officially licensed as hospitals, and this creates certain restrictions that can create costs and limit the company's earnings. For instance, they must still operate emergency rooms, which are some of the most expensive procedures provided by hospitals. MedCath's hospitals also treat an above-average proportion of Medicare patients, and stand to lose out as the US government considers cutting reimbursements to deal with rising Medicare expenditures.
MedCath owns an interest in and operates 11 hospitals and 25 diagnostic and therapeutic centers throughout the United States, with a concentration in the Southeast and Southwest. Although the firm's hospitals are licensed as general acute care facilities and offer patients a range of services, they primarily focus on providing cardiovascular care. MedCath receives revenue from private insurers, including managed care plans, the federal government (under the Medicare program), state governments (under their respective Medicaid programs), and directly from patients.
In 2007, MedCath's total revenues rose 1.8% to $719 million, driven by growth in the hospital segment, where revenue on a same facility basis increased 4.2% from the prior year. The growth is attributable both to an increase in admissions (2.6% annually) and higher net revenues per admission resulting from renegotiations of several managed care contracts. Revenues at MDTH's diagnostic and therapeutic centers, on the other hand, fell $2.9 million.
MDTH's net income fell 8.3% to $11.5 million in 2007. While operating expenses held steady, and medical supplies and bad debt expense actually fell 2% and 3% respectively when compared to 2006, MDTH faced sizable non-operating losses. First, the firm sold its equity interests in two facilities (Tucson Heart Hospital and Heart Hospital of Lafayette) at a loss; also, a recapitalization of a third facility (Harlingen Medical Center) contributed to a $9.9 million loss on the early extinguishment of debt.
|Hospital revenue ($mm)||$616.0||$648.9||$665.9|
|Patient Days (thousand)||139.1||136.5||132.9|
|Occupancy Rate (% of beds in service)||69.8%||66.4%||80.8%|
|Average Length of Stay (days)||3.49||3.30||3.43|
As the number of specialty hospitals in the United States reaches approximately 200, concerns have arisen that these facilities are detrimental to the profitability of the hospital industry as a whole. Critics believe that specialty hospitals cherry-pick the most profitable patients, performing exclusively lucrative, low-risk surgeries and leaving lower margin treatments to generalist hospitals. Because generalist hospitals use the income provided by high-margin operations to finance certain unprofitable services and procedures, losing these operations can completely erase profits. To address these concerns, opponents of specialty hospitals have made great efforts to limit their growth. In 2003, Congress passed a moratorium on the opening of new specialty facilities that lasted until 2006. While that moratorium has been lifted, as recently as June 2008, Congress considered a bill that would have again blocked the opening of new specialty hospitals, as well as the expansion of existing facilities. The bill is now under consideration by the Senate; if it becomes law, MDTH's growth prospects will be seriously handicapped, as the firm receives the majority of its revenues from specialty hospitals. Even if it does not, the likelihood of legislation blocking the firm's development will rise if a Democratic president is elected in November, since Democrats tend to oppose specialty hospitals.
Medicare expenditures have grown swiftly in the past several years, reaching 5.3% of U.S. GDP in 2006. To stem this growth, the federal government is taking steps to decrease the rates at which it compensates healthcare providers such as MedCath. Since the likelihood of cardiovascular disease increases with age, more of MDTH's patients are 55 and older than is typical for the hospital industry as a whole. As a result, the firm derives a higher proportion of revenues from Medicare than most other hospitals, and stands to lose more from any changes in reimbursement policies. However, MDTH has decreased the proportion of Medicare patients at its hospitals during the past few years, mitigating the potential impact of this trend - the percentage has fallen from 49% in 2005 to 45% in 2006 to 42% in 2007.
Historically, the hospital industry has been characterized by low levels of competition, with most communities home to only a few hospitals. However, the number of new facilities for delivering hospital services, such as physician-run outpatient surgery centers and diagnostic centers, has grown rapidly. For instance, in 2007, there were 4900 registered outpatient surgery centers alone, accounting for 31% of the 50 million surgeries performed each year. These centers are able to offer patients identical procedures at lower costs than traditional hospitals for several reasons: they are not required to operate emergency rooms and intensive care units, some of the most expensive services that a healthcare facility can provide; they see fewer uninsured patients, since the same physicians who own stakes in the centers are responsible for referring patients to them; and they selectively choose which types of surgeries to perform, typically focusing on a small number of high-margin procedures. MedCath has responded to this competitive threat by emulating independent centers in its hospital operations and even operating therapeutic and diagnostic centers of its own. Despite these steps, however, the facilities that account for over 90% of its revenue remain licensed as hospitals, legally required to operate emergency rooms and treat uninsured patients, making outpatient surgery centers a threat for the firm.
The retirement of the baby boomers, who make up slightly over a quarter of American's population, has had an economic as well as demographic impact on the nation. A rapid increase in the number of elderly Americans provides an opportunity for hospital owners like MDTH. People 65 and over account for 40-50% of total spending on healthcare; the per capita healthcare spending in this age group is 3-5 times higher than for people under 65. As a result, healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion. While all hospitals will benefit from this trend, MDTH is better positioned to do so than many competitors. Over 90% of the firm's patients live in markets where the number of people 55 and older (the primary victims of cardiovascular disease) is expected to rise 17.6% in the next five years, higher than the national average of 16.1% expected growth.
MedCath's competitors consist of all providers of cardiovascular care, a group comprised primarily of other general acute care hospitals. In addition to for-profit facilities, MDTH has to compete with nonprofit hospitals, which benefit from government support and tax exemptions that MDTH does not receive. Finally, the firm's facilities compete for outpatient procedures with independent diagnostic and therapeutic centers located in their markets. Most of MDTH's facilities have two to three competitors located in their geographic area. Texas, where three of the firm's hospitals are located, is a particularly competitive market, as many of the nation's specialty hospitals are located in the state.
MDTH's specialty focus is a primary competitive advantage for the firm - cardiovascular procedures are some of the most profitable surgical specialties, accounting for as much as 35% of a typical hospital's revenue. By focusing on these procedures alone, MDTH maximizes its revenues per procedure.
Furthermore, as specialty hospitals, MDTH's facilities benefit from many of the operational efficiencies that have proved successful in ambulatory surgery centers, thus equipping them to compete more effectively with these firms. For instance, operating rooms do not need to be refitted with different equipment for each surgery, since the same types of procedures are performed there over and over. This, in turn, allows the hospitals to invest in technologically advanced tools for cardiovascular operations.MedCath has also emulated ambulatory surgical centers' practice of partnering with physicians by giving them minority stakes in the facilities they work in. All of the firm's hospitals and many of its diagnostic and surgery centers are partially owned by physicians, which has served as a valuable recruitment tool. Industry operating metrics show that MDTH, despite owning a relatively small number of hospitals, extracts higher profits from them; for instance, the firm has one of the highest occupancy rates in the industry, while average patient stays are some of the shortest.
Operating 25 of its own diagnostic and therapeutic centers allows the firm to maintain a foothold in that market as well; the facilities enjoy higher margins than hospitals - they account for only 7% of MDTH's revenue, but comprise 11% of its income.
|Hospital revenue ($mm)||$665.9||$143.6||$3,478|
|Patient Days (thousand)||132.9||35.6||1,170|
|Occupancy Rate (% of beds in service)||80.8%||24.2%||58%|
|Average Length of Stay (days)||3.5||3.6||4.5|
The hospital industry is fragmented, with hundreds of providers of various sizes spread throughout the country, none holding 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). Specialty hospitals are a small sector of this market, accounting for about 3% of the 6013 hospitals in the United States. With only 11 facilities, MedCath is one of the smaller firms in the industry, holding about 5% of the specialty hospital market by volume.