HCA: The Bashful Giant

Screen Shot 2014-09-24 at 1.25.29 PMJudging 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.


14 replies »

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  2. Well put,Barry.
    If the average revenue per discharge is just $8-$13K, this makes me wonder if hospitals ever even collect on those $120K chargemaster bonanza cases.

    Part of the problem is that Americans in our daily lives almost never encounter haggling when we buy something.Americans will run to a Walgreen’s or a
    Walmart because the prices are posted honestly in the store aisles, and when you go to the cash register you do not have to bargain with the cashier.
    Car dealers also have moved away from the old haggling model.
    Whereas hospitals operate on what feels like a Middle Eastern bazaar model, where the ignorant tourist is charged a ludicrous price but anyone with savvy or the right relatives can get a reasonable price.
    This has happened as an unintended consequence of having multiple payers and no federal price regulation outside of Medicare. Only Maryland has kept up the regulation of hospital prices at a state level.
    It is hard to imagine that a single payer program for hospitals could be worse than what we see today.

  3. Bob,

    In Massachusetts, the most expensive state in the country for healthcare on a per capita basis, Boston academic medical centers generate revenue per discharge ranging from $8,500 to $13,600 with the dominant Partners Health System hospitals at the high end. If I remember correctly from HCA’s IPO prospectus, roughly 70% of hospital inpatient bed days are medical and only 30% are surgical. The most profitable inpatient cases for hospitals tend to be surgeries and, perhaps, cancer treatment. Mental health is a loser. So is trauma and maternity isn’t very profitable either.

    About 60% of hospital revenue is consumed by compensation and benefits. Another 15% goes for supplies and equipment. Then you have utilities, insurance including malpractice insurance, and bad debts. The AMC’s also have an education and research mission which I think should be paid for with separate revenue streams. Most of the research is probably covered by NIH grants and philanthropy. Some but probably not all of the cost of education is paid for by a separate pot of money from Medicare.

    I don’t know what the actual costs are for NYU or any other hospitals but medical input costs, mainly for wages, are higher in NYC than most other places. We all know that the chargemaster rates are ludicrous and arbitrary though 40-50 years ago they did reasonably reflect the cost of providing services. Assuming a relatively efficient 80% occupancy rate and decent management, Medicare rates probably cover 90%-100% of costs on average. Medicaid is closer to 65%-70%.

    I think the long term solution is to drive more and more care out of hospitals, get medical disputes out of the hands of juries in favor of health courts, give us price transparency coupled with incentives for patients to choose the most cost-effective high quality providers, reset patient expectations by convincing them that more care isn’t necessarily better care, and sharply increase the number of elderly people who execute living wills and advance directives to reduce the amount of unwanted futile care at the end of life. I also like bundled prices for surgical procedures and reference pricing. As I often say, there is no silver bullet here but lots of silver pebbles.

  4. If a patient spent 21 days in the NYU hospital, which is very understandable, and the allowable fee per day was $1,500, the payment to the hospital would have been about $40,000.

    The surgeons would normally have been paid $5000 to $10,000.

    Our discussion should be focused on why the NYU hospital needs anything more than $1500 a day for care that is mainly rehabilitative.

    If they need more more money because they provide free care to the poor, this is a clumsy way to fund free care for the poor.

    If they need more money because their administrators make $1 million a year and their residents make $400,000 a year, well, don’t let me run national health care. I would cut them all off at the socks at about 25% of their current salaries.

    (for the residents, I favor total public funding of medical school — so that doctors would owe nothing.)

  5. Bob,

    My preference would be to require hospitals to provide a BINDING estimate of out-of-pocket costs to the patient for any care that can be scheduled in advance. If there are complications, hospitals and insurers should negotiate any additional payment that might be appropriate but the member should have no liability beyond the binding estimate. As I understand it, a binding estimate rule is about to take effect in Massachusetts next week (10/1).

    To mitigate the issue of out-of-network providers treating patients in hospitals, more and more hospitals are requiring doctors who practice within hospitals to join the same insurance networks the hospital participates in. Next March, a new rule will take effect in New York state that will limit charges billed by non-network providers for emergency care in hospitals to the in network rate. This is the toughest rule of its type in the country so far. More states should follow New York’s lead, in my opinion.

    Finally, hip and knee replacements sometimes are provided on an emergency basis. A few years ago, a colleague of mine fell on the ice on her way to work in Manhattan. The ambulance took her to NYU Langone Medical Center, one of the most expensive AMC’s in NYC. The total bill came to over $134,000 including rehab and insurance paid about half that amount which was accepted as full payment.

  6. The consumer credit ratings agencies did just what you suggest recently.
    They markedly reduced the effect of hospital debt on a consumer’s credit score because it is so ubiquitous and, apparently, the collection rates are so low.

  7. The knee replacement was almost certainly not an emergency.

    In that case, how about a law that lets a patient and/or an insurer deny payment for any procedure whose cost is not disclosed in advance (with some legal language about unforeseen complications during anesthesia, et al).

    At first there might be great disruption of the normal flow of treatments for commercial patients.

    And therefore a disruption of cash flow for hospitals.

    If and when we got through these disruptions, we would have cheaper health insurance. We might also have a lot of hospital layoffs. Here’s hoping that the cure is not worse than the disease.

  8. Actually, the charges are about 8 X and what Humana paid are perhaps 5.5X what Medicare pays in the same market for the same bundle of services.

  9. Could this be a case where if Humana refused to pay a ludicrous bill,that the HCA hospital would then go after the patient?
    And perhaos a legal assault on the patient would make Humana look cruel in the eyes of a big employer? So that Humana decided that sending one ugly check was in the long run cheaper than fighting the case?

    The solution is not that complex. Allow patients to submit crazy chargemaster bills to a neutral arbitrator. The patient and the insurer would owe what the arbitrator decides.

    John Graham who is a conservative has pushed this idea.

    What must be done immediately is to blow up the savage idea that a medical bill is a real debt.

  10. It could be that HCA doesn’t want to amend their contract. Both parties have to agree and if there is no agreement then it becomes a chicken race on who wants to terminate who.

    If HCA is large enough and Humana needs them in their networks, then Humana will give in all the time. I

  11. These rates are roughly 9X what Medicare pays for a knee replacement in our area. I haven’t had the heart to call the Humana Regional VP for our area and ask him about this. The details of these contracts are usually secret and subject to NDAs.

  12. I thought all large insurers have long since moved to negotiating hospital reimbursement rates as a percentage of Medicare rather than a discount from chargemaster. Why hasn’t Humana done that with HCA?

    If I remember correctly, during HCA’s roadshow luncheon prior to its IPO following the earlier LBO, I asked the CEO about average payment rates for commercially insured patients as compared to Medicare patients. The response was that HCA was paid about 40% more than Medicare on average for the commercially insured patients and their average acuity was lower. Nice work if you can get it.

    I think we need disclosure of actual contract reimbursement rates, binding estimates of out-of-pocket costs for medical care that can be scheduled in advance, and strict limits on how much can be charged for care that must be delivered under emergency conditions. When hospitals aren’t killing us with infections, they’re killing us financially. We need to push back.

  13. I share the bafflement. Humana has the reputation as one of the nation’s toughest payers. Providers large and small are organized to take what they can get from the payment system. Here, the payment system was very generous indeed.

    If I recall, when my friend registered for the service, they basically charged out the rest of his $6000 annual deductible, so the procedure actually cost him about $5400, which isn’t a bad value for him.

    The other part that’s remarkable is that the surgeon and anesthesiologist together probably got maybe $5500 for actually doing the work, and the facility and supporting cast got 21X that amount. HCA has a very effective revenue cycle function. The clinicians, not so much. . .

    HCA is either the largest or the second largest provider in Virginia. They are all over the state. . .

  14. The anecdote about Humana paying $115,000 for a 3 day knee replacement baffles me. (See also the recent Eliz. Rosenthal article in the New York Times for more examples.)
    I am not baffled that hospitals try to get away with these charges. There is no penalty to them for trying to do so. The more you charge, the more you make in most aspects of health care.
    What does baffle me is why health insurers agree to what sure seems to be
    “paying a per cent of charges”. That is ludicrously passive, given all we know from the last 40 years of billing conflicts.
    Could not a rational insurance company come up with a fee schedule for knee replacements?

    It is no wonder that some insurance companies exclude expensive hospitals from their networks. But why don’t the insurers gang up and all of them exclude HCA?