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Community Health Systems (CYH)Stock (Hospital Industry Industry, Hospitals Industry, Hospitals Industry Industry, Pharma & Healthcare Industry)
 While the Triad acquisition helped CYH double its revenues in 2007, the company spent more as it added resources and integrated Triad’s facilities and staff into Community Health’s network; as a result, operating income rose only 26% in 2007. As U.S. demographics change - and trend toward urban or rural relocations - so do CYH's revenues. Population size and economic cycles help determine the number of potential patients living close to CYH'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. [edit] Business FinanacialsCommunity Health Systems’ 116 hospitals operate throughout 28 states with a strong presence in Texas, Tennessee, Alabama, and Pennsylvania.[1] The hospitals provide general and specialized services that include acute and critical care, general and specialized surgery, specialty care, diagnostic services, and emergency room care. This diversity of services is provided both directly and via numerous partnerships with physicians, physician groups and specialty care centers. The medical services are supplemented by home attendant services and hospital management consulting services by home health agencies and Quorum Health Resources, LLC, respectively.[2] The firm receives its revenue from government programs Medicare and Medicaid, private insurers, and directly from uninsured patients. Private insurance accounts for a little over half of revenues, an amount that has increased over the past two years from 45%. Revenues from Medicare, Medicaid and self-pay patients, on the other hand, have been decreasing. This last trend especially is encouraging, since self-pay patients account for the majority of late and unpaid accounts. Revenues over the past five years have grown at a 30% Compounded annual growth rate - CAGR. Since its IPO in 2000, Community Health Systems has traditionally grown through acquisitions, consistently achieving its target of completing 2-4 acquisitions a year. The company's stated criteria for acquisitions includes: the hospital must be the sole healthcare provider of its size in a community; have a client base in a stable or growing population of at least 200,000; and be in a community whose economic vitality is not tied to one large employer. [4] Not to be overlooked is the flip side of the acquisition process, namely the disposition of hospitals, sometimes those acquired as a part of a deal just months before. Such sales provide the firm with cash and help finance many of its purchases.[5] As of December 31, 2007, the company classified 12 hospitals with 1,690 licensed beds as held for sale.[6] Operating income growth over the past five years has been slower than that of revenues, rising at a Compounded annual growth rate - CAGR of 15%. Acquisitions have accounted for the bulk of the increase. Specifically, Community Health has attempted to acquire hospitals where management can be significantly improved and worked to grow their operating efficiency. The firm then invests in new technology in such areas as surgery, critical care, and diagnostics. An especially key area for development is emergency room operations, which account for 55% of hospital admissions and often are the initial point of a patient’s stay in a hospital. During the past three years, Community expanded or renovated 13 emergency rooms (3 in 2007).[7] Continued standardization of billing, training, procurement, and facilities management procedures supplements physical improvements. The 2007 purchase of Triad Hospitals was Community Health’s largest single acquisition, effectively doubling its size. The integration of Triad’s 50 hospitals, while adding 70% to revenue, slowed the chain’s income growth.[9] Organic growth, on the other hand, accounted only 2.8% of the increase, as Community Health raised prices, lowered the proportion of self-pay patients, and provided more higher-margin services in its hospitals.[10] [edit] Key Trends, Risks, and Forces[edit] Independent Surgery and Diagnostic Centers Are Entering the Marketplace, Increasing CompetitionHistorically, 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 independen, physician-run outpatient surgery centers and specialty hospitals focusing on only one branch of medicine, has grown rapidly in the past decade. For instance, in 2006, there were 4618 registered outpatient surgery centers alone; they account for 31% of the 50 million surgeries performed each year.[11] As a result of this jump in supply, for-profit hospitals are left with an excess of beds and not enough patients.[12] Furthermore, independent competitors frequently have lower costs due to their smaller size and simpler infrastructure, so they can provide the same services more cheaply than traditional hospitals.[13] 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.[14]In fact, only 500-1000 of the nation's more than 6000 hospitals are consistently profitable.[15] [edit] Aging Baby Boomers Require More Health Care, Raising Demand for Hospital ServicesThe 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.[16] A rapid increase in the number of elderly Americans provides an opportunity for hospital owners like Community Health, since people older than 65 generally need more medical care.[17] In fact, healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion.[18] At the same time, the aging of the population will indirectly hurt Community Health through its effect on Medicare. The Medicare system is becoming saturated as more baby boomers reach the eligible age and need the program's coverage (Medicare expenditures comprised 5.3% of the U.S. GDP in 2006), [19] and as current reimbursement levels are not sustainable, per-patient Medicare revenues will decrease.[20] [edit] Trends in Urbanization Impact Potential Number of PatientsAfter a decades-long trend toward urbanization, 75% of the US population lived in an urban area in 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] Since the population in rural areas puts a limit on the potential number of patients CHY's hospitals can serve (and thus the potential revenues it can earn), population demographics are an important factor in the company's prospects for earnings growth. [edit] Ability to Attract Patients Depends on Availability of Qualified PhysiciansIn order to increase or even maintain the breadth of specialized services available to its patients, Community Health has to hire qualified physicians. This has become a challenge for 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 Community Health in its recruitment process.[24] In response, the firm has increased its focus on physician recruitment; the number of Community-affiliated physicians grew by 440 in 2007 (50% of them specialists).[25] [edit] A Rising Number of Uninsured Patients Increases CostsThe 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, whether they are insured or not, Community Health faces high expenses (specifically bad debt expense) from this trend.[27] However, uninsured patients make up only 10% of the firm's revenues, a number that has remained relatively steady in the last three years, which mitigates the potential negative impact of this trend on the firm.[28] [edit] Caps on Government Reimbursements for Medicare and Medicaid Patients Restrict Freedom to Raise PricesThe US government limits the amount that hospitals will be reimbursed for treating Medicare and Medicaid patients, putting a ceiling on the prices Community Health can charge for services it provides to such patients.[29] These limits have an especially significant effect on revenues because about 39% of the firm's patients are on Medicaid and Medicare.[30] 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, adding to the decline in the rates of reimbursement for both programs. [31] For instance, Medicare's Inpatient Prospective Payment System is up for revision in 2008 - proposed changes include a clause that escalates a hospital's reimbursement based on the severity of a patient's diagnosis. This would disadvantage rural hospitals like Community Health's which generally treat simpler conditions.[32] Through 2007, however, Medicare provisions have helped Community Health, as many of its hospitals benefit from extra reimbursements that the program allocates to hospitals that are the sole providers of healthcare services in their area (26 Community Health hospitals qualify) and hospitals serving areas with an especially high percentage of low income patients (a majority of Community Health hospitals qualify, and these extra benefits add 1.8% to the firm's revenue).[33] [edit] CompetitionCommunity Health holds a virtual monopoly in most 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.[34] Thus, the firm's primary competition is not other area hospitals, but rather urban hospitals, which patients often choose for specialized care.[35] The firm competes by recruiting more specialists and investing in new technology in order to widen the range of services available to patients. Compared to its urban counterparts, Community Health's hospitals have several operational advantages that help them achieve higher margins. 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. 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. Finally, Community Health maximizes the revenues it receives from private insurance providers by avoiding contractual relations with them and shunning and risk sharing agreements[36] Instead, they negotiate payments with these institutions on a case by case basis. Because private insurers have a smaller presence in rural areas, they are essentially not interested in penetration of rural clients and thus offer fewer discounts and special promotions to them, which results in higher reimbursement for hospitals.[37] At the same time, CYH 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.[38] In the past several years, new types of competitors have been entering Community Health's markets and decreasing patient volume: physician-owned hospitals and stand alone surgery and diagnostic centers.[39] New technologies have made it possible for physicians to perform procedures that earlier had to be done in a hospital.[40] Community Health is addressing this challenge by attempting to partner with physicians and other independent facilities. [edit] Market ShareThe 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). Community Health is the largest for-profit national hospital operator, accounting for about 2% 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 2% of the 6013 total hospitals in America. [41]
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