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Katerina Semida

HMA AT A GLANCE

P/E ► 11.9 AVG EV/EBITDA ► 8.05 AVG ROA ► 7.1% AVG ROE ► 38.7% VERY HIGH Debt to Equity ► 13.5 VERY HIGH Current Ratio ► 2.20 AVG Interest Coverage Ratio ► 1.90 AVG

 

 

 

 

 

 

Health Management Associates, Inc. operates 59 general acute care hospitals in rural areas across the Southeastern United States. All of its hospitals provide basic services such as general surgery and diagnostic care, and some of its facilities provide specialized services like cardiology and neurosurgery. Revenue growth has slowed over the last five years (2003 to 2007), and years of flat and even negative growth contributed to a -3% Compounded annual growth rate - CAGR in operating income over the same period.^[1] As U.S. demographics change - and trend toward urban or rural relocations - so do HMA's revenues. Population size and economic cycles help determine the number of potential patients living close to HMA's hospitals and the amount of healthcare they need.

Medicare and Medicaid laws also impact the company's operating income, and the growing quantitative gap between insured and uninsured and/or underinsured patients are concerns as more private clinics and physician-owned hospitals attract the most expensive and specialized medical procedures funded by private insurance. To stave off competition from these smaller, more nimble providers, the firm often forms partnerships with them. In 2007, for example, HMA the firm formed a joint venture with local physicians at the Riverview Regional Medical Center in Alabama; the firm maintains a majority stake in the facility while allowing its partners a say in major decisions.

Business Overview

2007 Revenues by Payor^[2]

HMA's hospitals receive revenues by providing inpatient and outpatient services including emergency room care, surgery, and diagnostic imaging. Although they typically collect a portion of revenues from patients directly through insurance copayments or deductibles, their primary revenue sources are private insurance firms and government programs Medicare and Medicaid. The former has been increasing in importance, rising from 47% of revenue last year to 50% in 2007. The share of revenues from Medicare and Medicaid, on the other hand, has fallen from 44% to 40%.

Business Financials

HMA's revenues have grown steadily over the past five years, though at a slowing pace (for instance, 26% growth in 2004 compared with 12% the following year).^[3] Acquisitions have been the primary source of this growth, though the firm has scaled back this strategy since 2006, which accounts for the slowing of revenue growth. HMA is now focusing on streamlining its operations, which have historically been very decentralized, with each hospital's head making decisions for that facility. This prevented the firm from achieving cost savings when acquiring new hospitals, and reflected negatively on operating income growth, which averaged -3% during the previous five years. To improve this situation, the firm reorganized into a more central structure in 2007, creating positions such as "Chief Nursing Officer" to oversee specific areas across all of the company's hospitals. ^[4]

Revenues grew 8.4% in 2007, due primarily to the opening of a new hospital in the large Florida market, a higher proportion of patients with higher margin health problems, and higher reimbursement rates from all payors. Emergency room visits were the strongest in several years, increasing 3.7%. Attempts to bolster the availability of outpatient services to better compete with independent physicians offices and centers also paid off in a 1.6% increase in these services. However, the number of hospital admissions and surgeries fell .5% and .7% respectively, underscoring the increased importance of outpatient services to the firm.^[5]

Operating income in 2007 rose nearly 20%, buoyed by a decrease in bad debt expense and a moderate increase in salaries, the firm's largest annual expenditure. HMA also sold several underperforming hospitals, including two facilities in Virginia and a Mississippi hospital that it had acquired only two years prior.^[6]

Revenues and Operating Income 2003-2007^[7]

Key Trends, Risks, and Forces

Independent Surgery and Diagnostic Centers Are Entering the Marketplace, Increasing Competition

Historically, the hospital industry has been characterized by low levels of competition, with most communities home to only a few hospitals, especially in the rural areas where HMA operates. However, the number of new facilities for delivering hospital services, such as independent and physician-run outpatient surgery centers, specialty hospitals focusing on only one branch of medicine, and diagnostic centers, has grown rapidly. For instance, in 2006, there were 4618 registered outpatient surgery centers alone; they account for 31% of the 50 million surgeries performed each year.^[8] As a result of this jump in supply, for-profit hospitals are left with an excess of beds and not enough patients.^[9] Furthermore, independent competitors frequently have lower costs due to their smaller size and simpler infrastructure, so they can provide the same services cheaper than traditional hospitals.^[10] Because hospitals use the income provided by high-margin operations to finance certain unprofitable services and procedures, the increased competition may completely erase profits by eliminating these margins.^[11]In fact, only 500-1000 of the nation's more than 6000 hospitals are consistently profitable.^[12]

Physician-Hospital Joint Ventures Provide a New Way to Compete

Over the last few years, hospital operators have increasingly turned to joint ventures with local physicians to run the facilities they own or lease. A joint venture is a partnership in which a hospital is co-owned by a group of physicians and a hospital operator, with both sides having a financial stake in the facility and a say in decisions about key issues such as equipment purchases and staffing. The increasing popularity of this structure has been largely driven by physicians themselves, with the goal of combating the bureaucracy and lack of control they face in more traditional ownership models.^[13] HMA uses joint ventures as a tool to improve physician relationships, which in turn grows patient volume. The firm has started joint ventures for entire hospitals, as well as ambulatory surgical centers, medical office buildings and other health care service businesses.^[14]

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

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 US population.^[15] A rapid increase in the number of elderly Americans provides an opportunity for hospital owners like HMA, since people older than 65 generally need more medical care.^[16] In fact, healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion.^[17] At the same time, the aging of the population will indirectly hurt HMA through its effect on the Medicare system, which is becoming saturated as more baby boomers become eligible to participate. Healthcare expenditures already comprised 5.3% of the U.S. GDP in 2006^[18] and current reimbursement levels are not sustainable, suggesting that per-patient Medicare revenues for hospitals will decrease in the near future.^[19]

HMA serves rural customers - a population which has been migrating to cities

Since HMA's hospitals only serve rural communities with about 30,000 to 40,000 residents, urban-rural migration trends directly determine the potential number of patients the firm's hospitals can serve and the potential revenues it can earn.^[20] After a decades-long nationwide trend toward urbanization, 75% of the US population lived in an urban area by 2006. ^[21] Urban areas are adjoining census blocks with a population density of at least 1,000 people per square mile and surrounding census blocks with a population density of at least 500 people per square mile.^[22] 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.^[23]

Ability to Attract Patients Depends on Availability of Qualified Physicians

In order to increase or even maintain the breadth of specialized services available to its patients, HMA has to hire qualified physicians. This has become a challenge for US hospitals as the nation faces 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 HMA in its recruitment process.^[24] In response, the firm has increased its focus on physician recruitment, hiring 372 physicians in 2007; HMA attempts to attract physicians by offering modern medical equipment, convenient hospital locations, and relocation assistance.^[25]

A Rising Number of Medicare/Medicaid and Uninsured Patients Increases Costs

The number of uninsured patients has been rising throughout the nation, growing nearly 5% in 2006 to reach 47 million.^[26] Since hospitals are legally required to provide care to anyone who needs it, insured or not, HMA faces high expenses (specifically bad debt expense) from this trend.^[27] While uninsured patients make up only 10% of HMA's revenues, this percentage has increased over the past few years, raising the firm's exposure to the risk of high bad debt expense. ^[28] Furthermore, the US government limits the amount that hospitals will be reimbursed for treating Medicare and Medicaid patients, putting a ceiling on the prices HMA can charge for services it provides to such patients.^[29] These limits have an especially significant effect on revenues because about 40% of the firm's patients are on Medicaid or Medicare.^[30]

Competition

Health Management Associates holds a virtual monopoly in many of its markets simply because its hospitals are the only providers of emergency care services in the vicinity. This is common to most American rural hospitals and reflects years of industry consolidation.^[31] In these markets, the firm's primary competition is not other area hospitals, but rather urban hospitals, which patients often choose to travel to for specialized care.^[32]

The firm competes with urban hospitals by recruiting specialists and investing in new technology in order to widen the range of services available to patients. HMA also aims to gain a competitive advantage when acquiring hospitals by searching for facilities that are monopolies in their geographic locations, have a growing population of elderly residents, and are not dependent on one employer to remain economically viable..^[33] HMA's rural hospitals also have several operational advantages that help them achieve higher margins than their urban counterparts. A rural location gives hospitals the benefit of less competition, since many are monopolies in their communities. In addition to making more flexibility in pricing possible, this type of market power can bolster a hospital's reputation, encouraging positive relationships with patients and local physicians.^[34] Furthermore, patients treated at rural hospitals often have less complex health problems, as those with more advanced illnesses tend to travel to urban hospitals to receive care. This results in a lower cost structure, as more common medical issues can be treated with fewer expenses.

At the same time, rural markets have higher percentages of uninsured patients, increasing the risk of bad debt expense. Potential revenue growth is also limited by the lower concentration of residents in rural areas: rural hospitals inevitably have fewer potential patients than comparable urban facilities. Furthermore, as a rural hospital operator, HMA cannot offer the same level of equipment and specialized care as urban hospitals, leading it to lose potential patients. It also lacks teaching and research facilities, which are common to urban hospitals.

In the past several years, new types of competitors have been entering HMA's markets and decreasing patient volume: physician-owned hospitals and stand alone surgery and diagnostic centers.^[35] New technologies have made it possible for physicians to perform procedures that earlier had to be done in a hospital.^[36]Although it has traditionally been hostile to these competitors, the firm has begun entering into joint ventures with physicians who might otherwise become competitors. For instance, in 2007, the firm established joint ventures in two markets: the Riverview Regional Medical Center in Alabama, and the Williamson Memorial Hospital in West Virginia. Local physicians partially own and help run both facilities, while HMA maintains a majority stake and has the final say in major decisions.

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). HMA is one of the largest for-profit national hospital operators, accounting for about 1% of the market (the chart below breaks down the market share of national for-profit hospital operators by revenues). The firm's market share by number of hospitals is the same - its facilities account for 1% of the 6013 total hospitals in America. ^[37]

Market Share of Major Hospital Operators, 2007^[38]

• Universal Health Services (UHS) owns or leases about 30 acute care hospitals in as many states, as well as outpatient surgery centers, radiation therapy centers, and surgical hospitals. UHS also runs more than 100 psychiatric and substance abuse hospitals. Most of the firm's facilities are located in rural areas.^[39]
• Community Health Systems (CYH) owns or leases 100 hospitals in 28 states, all in rural areas. After the 2007 acquisition of Triad Hospitals, which doubled the size of the CYH network, the firm is the largest publicly traded hospital operator chain in the country. CYH follows an acquisition-based growth strategy, growing at a 30% Compounded annual growth rate - CAGR during the 2003-2007 period. ^[40]
• LifePoint Hospitals (LPNT) owns 48 hospitals located throughout the United States, primarily in rural markets. The firm's revenue growth over the past few years has been driven primarily by acquisitions, as well as its 2005 merger with Province Healthcare, which doubled the firm's size. While the rural locations of its hospitals provide LifePoint with several competitive advantages, the firm's operating income has remained volatile, affected by the seasonality of earnings (dependent on the winter flu season), increasing numbers of uninsured patients, and employee turnover among qualified specialists.^[41]
• Tenet Healthcare (THC) manages 59 hospitals in both urban and suburban areas. The firm's facilities are primarily clustered in three states - California, Florida, and Texas; as a result, demographic shifts in these states strongly affect the company's revenues and profitability.^[42]

References

1. ↑ HMA 2007 10-K Section 1 - Business. Pg. 4
2. ↑ HMA 2007 10-K Section 1 - Business. Pg. 8
3. ↑ HMA 2007 10-K Section 7 - Management's Discussion and Analysis. Pg. 36
4. ↑ HMA Hoover's profile
5. ↑ HMA 2007 10-K Section 7 - Management's Discussion and Analysis. Pg. 34
6. ↑ HMA 2007 10-K Section 7 - Management's Discussion and Analysis. Pg. 36
7. ↑ HMA 2007 10-K Section 6 - Selected Financial Data. Pg. 27
8. ↑ Brophy Marcus, Mary. "The spotlight grows on outpatient surgery." USA Today. July 29, 2007.
9. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
10. ↑ Sutter Health Forms New Joint Venture to Operate and Develop Surgery Centers. June 8, 2007
11. ↑ FTC Testifies on New Entry into Hospital Competition. May 24, 2005.
12. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
13. ↑ Krizner, Ken. "Physician-hospital joint ventures evolve medical practice." Managed Healthcare Executive. August 1, 2007
14. ↑ HMA 2007 10-K Section 1 - Business. Pg. 4
15. ↑ Growing Old, Baby-Boomer Style
16. ↑ "Aging Baby Boomers" Wikinvest Article
17. ↑ Statistics, Trends and Reports.
18. ↑ National Health Expenditure Accounts 2006 Highlights
19. ↑ "Hospitals, Insurers Still Expected to Feel Long-Term Squeeze From Medicare Funding Deficit". AP. March 26,2008
20. ↑ HMA 2007 10-K. Item 1 - Business. p 3
21. ↑ Facts about Urbanization in the USA
22. ↑ Missouri Census Data Center
23. ↑ "Census:Americans Leave Big Cities". USA Today. April 20, 2006
24. ↑ Davis, Robert. "Shortage of surgeons pinches U.S. hospitals." USA Today. February 26, 2008.
25. ↑ HMA 2007 10-K. Item 1 - Business. p. 7
26. ↑ Kaiser Daily Health Policy Report
27. ↑ Emergency physicians treating more uninsured patients, survey finds
28. ↑ HMA 2007 10-K. Item 1 - Business. p. 8
29. ↑ American Health Organization - 2006 Hospital Trends
30. ↑ HMA 2007 10-K. Item 1 - Business. p. 8
31. ↑ 5 stocks with surprisingly healthy prospects
32. ↑ Effects of market position and competition on rural hospital closures
33. ↑ HMA 2007 10-K. Item 1 - Business. p 3
34. ↑ HMA 2007 10-K. Item 1 - Business. p 3
35. ↑ Palank, Jacqueline. "Hospitals Face Financial Squeeze." Wall Street Journal. April 30,2008.
36. ↑ Bradwell, Michael. "CEO: Hospital's presence here truly a community endeavor." Observer-Reporter. March 29, 2008
37. ↑ U.S. Department of Health & Human Services: April 2005
38. ↑ American Hospital Association - 2006 Health and Hospital Trends; Revenues data from company profiles at www.hoovers.com
39. ↑ UHS Wikinvest Article
40. ↑ CYH Wikinvest Article
41. ↑ LPNT Wikinvest Article
42. ↑ THC Wikinvest Article