Judging by its nearly invisible public presence, you’d never know that this is prime time for HCA, the nation’s largest hospital chain. A former HCA regional VP, Marilyn Tavenner, runs the nation’s Medicare and Medicaid programs. Former CMS Head and Obama White House health policy chief Nancy Ann DeParle, sits on the HCA Board. Its longtime investor relations chief, Vic Campbell, is immediate past Chair of the highly effective trade group, the Federation of American Hospitals. And its Chief Medical Officer, Jonathan Perlin, MD, is Chair Elect of the American Hospital Association.
This astonishing industry leadership presence is something most health systems would be trumpeting, perhaps even placing ads in Modern Healthcare. But not HCA, the bashful giant of American healthcare. Most hospital systems make a show of “branding” their hospitals with the company logo. Yet in its corporate home, Nashville, and the surrounding multi-state region, HCA’s 15 hospital network is called TriStar. Everyone in Nashville’s tight knit healthcare community knows who owns their hospitals, but you have to read TriStar’s home page closely to find the elliptical acknowledgement of HCA’s ownership.
Despite a nationwide merger and acquisition boom, HCA hasn’t done a major deal in twelve years (Health Midwest in Kansas City joined HCA in 2002). The company has not participated in the post-reform feeding frenzy, continuing a long-standing and admirable tradition of refusing to overpay for assets. For the moment, owning 160 hospitals is plenty.
There is nothing bashful about the company’s operating performance, however. It will generate nearly $36 billion in revenues, and $7 billion in EBIDTA (earnings before interest, depreciation, taxes and amortization), a rollicking 19.2% EBITDA margin in FY14. It is by double the largest non-public hospital operator in the world (VA and the British National Health Service are both larger).
While its non-profit competitors are gasping, HCA is firing on all twelve cylinders. At $68 a share, some analysts believe it is significantly undervalued. In reaffirming his “buy” rating on the stock in early August, CitiGroup’s Gary Taylor, who follows the entire publicly traded health services sector, set a price target of $84 for HCA.
One reason for the remarkable financial performance is HCA’s gravity defying utilization trend. In a shrinking national hospital market, HCA has somehow managed to grow its admissions and, thus, revenues and earnings over the past five years. HCA’s performance relative to its investor owned peer group (Tenet Healthcare and Community Health Systems) is particularly striking.
Though the company does have more than a quarter of its hospitals in hard-hit Florida, its strongest markets are states like Virginia, Colorado and Texas that were barely grazed by the recession. HCA divested a lot of marginal franchises after 1997, when the company owned over 360 hospitals. In its remaining markets, it retained dominant market positions. Further, it chose to remain in markets with stable and healthy diversified economies. David Dranove recently showed that health cost growth subsided most in states hardest hit by the recession.
But something else besides geographic market selectivity is clearly at work. HCA may have one of the most effective senior operations executives in the industry in Sam Hazen, their President of Hospital Operations. Hazen saw early that as primary docs withdrew from hospital practice, the hospital emergency room was becoming the focal point of hospital operations. Over 70% of today’s Medicare admissions come through the ER, a number that has steadily risen over the past decade. While competitors dithered, tolerated substandard ER performance, and saw large numbers of their ER patients diverted into low pay observation status, Hazen made improving emergency room operations and finances a core HCA strategy.
Though it’s difficult to say definitively without access to internal company communications, HCA’s ER strategy appeared to include: reworking clinical work flow, rigorously separating urgent care visitors from true emergencies, markedly improving coding and documentation to justify hospital acute admissions for the latter if needed, dramatically reducing patient waiting times and, crucially, advertising ER wait times in real time not only on ubiquitous billboards in its markets, but also social media and iPhone apps.
Another innovation: assiduously coding the name and contact information of an admitted patient’s community-based primary care physician, and building a customer relationship management system to report on their patients’ conditions. Community docs who call in to HCA hospitals can get more or less instantaneous updates on their patient’s condition without multiple interludes on hold listening to elevator music. These innovations, executed at scale across the company’s 160 hospitals, almost certainly increased HCA’s ER market shares, reduced diversions into observation status and improved relations with community docs who had multiple options for referring their patients.
More controversially, HCA also began charging significant “response fees” on top of its normal emergency room charges in its six Level II trauma centers in Florida, and made itself the subject of a Tampa Times investigation for the resulting high charges. See
Nor is the emergency room the only place for chargemaster aggression. A colleague recently had his knee replaced at a Richmond HCA hospital. The surgeon’s fee was $4000. The hospital charge for the procedure and a three-day “recovery care” stay was $165.8 thousand (perhaps as remarkably, Humana paid them $115.6 thousand after applying their “network discount”)! This is not likely to be sustainable pricing for essentially outpatient care in an era of increasing transparency.
After the deeply embarrassing Rick Scott Columbia/HCA period of wheeling and dealing, which ended abruptly in 1997 when the Frist family regained control of the company, HCA returned to an extremely conservative posture relative to owning physician practices. This conservatism has cost HCA market share in Richmond, north Dallas and a few other markets. But it also saved the company from massive practice losses and contentious relations with the rest of their medical staffs that are now coming home to roost among their competitors.
It has also gambled on health reform bringing relatively minimal change in Medicare and commercial insurance payment models. Unlike many of their regional non-profit competitors, it has not participated actively in ACOs or other payment demonstrations nor has it launched its own health plan. If the ACO “movement” continues to sputter, this inherent conservatism might end up paying off. However, if payment policy swerves sharply in the direction of providers having to assume more economic risk, HCA will have a lot of catching up to do.
These challenges aside, the company’s combination of operating discipline and geographic focus make it a formidable actor in many important regional healthcare markets. Its stellar economic performance stands in sharp relief against a distracted industry in the first stages of a significant retrenchment. HCA has done a remarkable job of weathering the first four years of post-health reform market turbulence.