hca financail paper for financial managment

RUNNING HEAD: Financial Paper on Hospital Corporation of America (HCA)

Financial Paper on Hospital Corporation of America (HCA)

James Nichols

In Partial Completion of Master of Science in Nursing

NURS 6513 Fiscal Management in Health Care Systems

Arkansas Tech University

Russellville, AR

Financial Paper on Hospital Corporation of America (HCA) 2

Abstract

Hospital Corporation of America (HCA) remains one of the largest urban based for profit

operators of hospitals and surgical hospitals in the United States. With 4.4 billion in cash flow

from operating activities and 2.2 billion in capital spending the company is focused on increasing

efficiency by lowering uninsured admissions and increasing Medicare and Medicaid

reimbursements. The hospitals present focus is the surgery centers, clinics and non-hospital

patient interface points (HCA, 2014).

HCA with its primarily metropolitan locations is increasing its investment in standalone

surgical centers. Over thirty eight percent of HCA’s profits come from outpatient services and

this will in the future allow it to continue its strategic growth. Also, the new health care

legislation does not allow competition from new physician owned surgical hospitals and surgical

centers as they will not qualify for Medicare or Medicaid reimbursement (HCA, 2014).

HCAs years of management experience and ability to use economies of scale and

effective information management to increase patient outcomes and company profitability allow

HCA to attract the best talent in the Medical Field and negotiate Win Win agreements with

insurance companies and health management organizations (HCA, 2014).

HCA’s access to capital is a twin edged sword allowing HCA to expand and improve

operations in the company’s area of operations but exposing the company to interest rate risk

should the interest rate take an unexpected upturn. HCA also has limitations on its ability to

operate freely because of its multiple agreements with its creditors. (HCA, 2014).

HCA is a power in the medical industry that should not be underestimated.


Introduction

Hospital Corporation of America (HCA) was formed in 1968 by Thomas Frist SR. MD;

Thomas Frist Jr. MD, and Jack Massey. Thomas Frist SR. was the father of former U.S. Senate

Majority leader Bill Frist. Dr. Frist built Park View Hospital in Nashville with a group of

physicians and created HCA to manage and expand the hospital. From 1968 -1972 HCA was

managed from a small white frame wooden house near the hospital. In 1972 HCA moved to its

current location at 1 Park Plaza in Nashville (HCA, 2014).

Recent history- In 1993 HCA merged with Columbia Hospital Corporation becoming

Columbia/HCA. In 1997 a federal investigation into fraud allegation involving increasing the

level of services for Medicare/Medicaid reimbursement and physician kickbacks was initiated

the then chairman Rick Scott, The present Governor of Florida, resigned the fraud case was later

settled in 2002 for two billion dollars. In 2006 Bain Capital, Kohlberg Kravis Roberts and

Company, Merrill Lynch and Frist family members completed a leveraged buyout of HCA for

roughly 33 billion dollars. The company went public again in 2010 with a 46 Billion initial

public offering. At the present time the private equity firm of Bain Capital, created by Mitt

Romney the former presidential candidate, Merrill Lynch and Kohlberg Kravis Roberts and Co

have all been repaid their initial investment of 1.5 billion each and still remain the largest

stockholders in the company (HCA, 2014).

HCA in its present form is one of the largest health care services companies in the United

States. HCA operates 162 general acute care hospitals, three psychiatric hospitals and one

rehabilitation hospitals. Also, the company operates 113 freestanding outpatient surgery centers.

HCA operates hospitals in Florida (42), Texas (36), Tennessee (13), Virginia (10), Utah (8),


Colorado (7), Georgia (7), California (5), Missouri (5), Kansas (4), Louisiana (5), South Carolina

(3), Oklahoma (2), New Hampshire (2), Nevada (2), Idaho (2), Kentucky (2), Mississippi (1) and

Indiana (1). HCA focuses mainly on metropolitan markets unlike its primary competitors CHS

and Life point which focus on rural hospitals. 85% of HCA hospitals were included in the Joint

Commission’s 2014 list of Top Performers on Key Quality Measures. 38% of HCA profits for

2014 came from outpatient services. HCA also provides management consulting and operations

services to other hospitals wishing to benefit from HCA’s years of experience in efficient

operations of hospitals. HCA also has branched off into imaging, radiology, supply chain

management and other areas where they feel their economies of scale can provide more

efficiency (HCA, 2014).

Strength Weakness, Opportunity and Threats Analysis (SWOT)

The primary strength of HCA is its access to capital. This year HCA will put 2 Billion

into capital expenditures. This will allow for increased efficiency in either the remodeling of

hospital facilities in order to more effectively utilize personnel; salaries/ payroll are the largest

portion of the HCA budget. Leveraging also is HCA’s biggest weakness as it is exposed to

interest rate risk beyond most of its competition because of its high level of debt with substantial

portions of debt becoming due each year and requiring refinancing (HCA, 2014).

The other strength is its primary placement in the urban environment while other major

competitors are primary focusing on the rural environment. The strength is lack of a large scale

competitor in their home market, the weakness is the potential that civil strife / unrest could

affect operations in urban areas (HCA, 2014).


Another strength is the efforts by the company to automate more effectively its

Medicare / Medicaid coding system. The associated negative is that the company will be

involved in yet another justice department suit involving overbilling (HCA, 2014).

Another strength is the company’s expansion focus on free standing surgery centers.

These provided a large portion of HCA’s outpatient sales which accounted for 38% of net patient

revenue for 2014. This area is also an advantage for HCA as the health care reform bill of 2009

made all new free standing surgery centers owned by physicians ineligible for Medicare /

Medicaid reimbursement effectively eliminating start up competition in this area where lower

amounts of capital would be required to enter the market. 85 percent of HCA’s eligible hospitals

were listed in the Joint Commission’s 2014 list of Top Performers. Also, the uninsured

admissions declined by 58% in 2014, while Medicaid reimbursement/revenue increased by 40%

in 2014 (HCA, 2014).

The company is an industry leader in the consolidation of the administration and

management function which allows for better patient outcomes and lower cost of operations. The

company also has a strategic advantage in management of emergency departments. Emergency

departments while feeding hospital admissions have traditionally been a problem for hospitals as

wait times and uninsured patients hurt hospital productivity. HCA has focused on eliminating the

patients who do not need emergency services by either charging them a flat rate for services or

sending them to after hour’s primary care or free clinics for regular primary care services. Also,

the company advertises HCA emergency departments in the metropolitan areas serviced with

large billboards on surrounding interstates that show the real time wait time in the Emergency

department promoting the quick and efficient availability of these services.


HCA also list as one of HCAs major strength as a superior ability to attract the best physicians

because as a for profit and highly capitalized organization it can provide superior resources and

compensation. HCAs also promotes its ability to negotiate effective win – win agreements with

group health care service providers such as health maintenance organizations (HMO) and

insurance companies (HCA, 2014).

HCA is highly leveraged with over 29 Billion in debt making it less competitive and flexible

with competitors who have more ability to borrow and are not hampered by restrictive

agreements with lenders (HCA, 2014).

Changes in the reimbursement by Medicare and Medicaid could negatively affect profitability of

the corporation. With the dynamic situation in congress as demonstrated by the changing of the

leadership role from Speaker Boyner To Speaker Ryan the emergence of power of the Tea Party

fraction in the republican party who as part of the Tea Party platform wishes to overturn present

health care legislation enacted under President Obama this possibility has become more likely.

Also, the declining economic situation could lowered the number of individuals covered by

private health insurance (HCA, 2014).

A weakness of HCA is the past history of negative litigation with the Medicare / Medicaid

program and state regulatory agencies. One settlement for over 2 Billion with Medicare and

Medicaid services was the biggest recorded at the time (HCA, 2014).

Another weakness is that an epidemic such as flu or a far more remote possibility of an emergent

virus such as Ebola that could affect the company’s ability to continue operations; this would

disproportionately affect HCA versus its competitors as infection rates would be higher in urban

versus rural areas (HCA, 2014).


HCA is also exposed to data loss scenario which could involve them in a HIPPA compliance

issue that could substantially affect company operations. The company could also have issues

with compliance of the new coding requirements (ICD-10). Or the overall failure of the

accounting systems and management systems due to an unforeseen event such as an increase in

sun storm activity that could negatively impact operations. (HCA, 2014).

Another weakness of HCA is the concentration of operations in the states of Texas and Florida

which could lead to a disproportionate effect on operations in the case of hurricanes, economic

downturns in the oil industry or civil unrest in the highly urbanized population’s center of Texas

and Florida (HCA, 2014).

Overall the primary opportunities for HCA are in the economies of scale, access to capital and

the extremely efficient management expertise of the company which sells its expertise in

managing hospitals as a consulting firm (HCA, 2014).

The Risk for HCA is in the changing environment in regards to legislation, social dynamic and

the overall economic situation in the United States (HCA, 2014).

Financial Analysis of HCA

While income increased by 18.2% between 2013 and 2014 revenue increased by only 8.2%.

Salaries increased by 8% in the same time frame. Depreciation, supply cost and interest remained

relatively constant.

2014 2013 2012

Revenues $36,918 $34,182 $33,013

ExpSalaries $16,641 $15,646 $15,089


supplies $6,262 $5,970 $5,717other operating expenses $6,755 $6,237 $6,048depreciation and amortization $1,820 $1,753 $1,679Interest $1,743 $1,848 $1,798 Income $3,481 $2,946 $2,894

% Change from prior year 8% 4% 11%Income 18% 2% -19%Sal Exp 6% 4%

(HCA, 2014)

HCA does not give dividends every year. The companies earning per share and diluted earnings

per share has averaged $3.84.

HCA EPS2014 2013 2012 2011 2010

Basic earnings per share $ 4.30

$ 3.50

$ 3.65

$ 5.17

$ 2.83

Diluted earnings per share $ 4.16

$ 3.37

$ 3.49

$ 4.97

$ 2.76

Cash dividends declared per share $ -

$ -

$ 6.50

$ -

$ 9.43 (HCA, 2015)

Despite substantial expenditures for free standing surgical centers the outpatient revenue

percentage has remained flat for the last five years. The occupancy rate overall has not increased

in the past five years. ER visits have increased by 10% in the last year. Also the revenue in

accounts receivable has not improved in the last five years.


2014 2013 2012 2011 2010

Number of Lic beds 2014 43,356 42,896 41,804 41,594 38,827

Admissions 1,795,300.00

1,744,100.00

1,740,700.00

1,620,400.00

1,554,400.00

average length of stay 4.80 4.8 4.7 4.8 4.8

occupancy rate 55% 54% 54% 53% 53%

er visits 7,450,700

6,968,100

6,912,000

6,143,500

5,706,200

outpatient surgeries 891,600

881,900

873,600

799,200

783,600

days revenue in accounts rec 54 54 51 52 49

outpatient rev as % of pat rev 38% 38% 38% 37% 37%(HCA, 2014)

Industry Analysis

HCA’s debt to equity ratio is -4.88 which when compared to the industry average of

50.00 puts the company at substantial risk of increases in interest rate (Zacks, 2015). Despite the

increased leverage the net profit margin for HCA of 5.2% is only marginally above the industry

average of 4.2%.

HCA’s price earnings ratio of 12.90 is substantially underperforming the industry rate of

20.73 despite a negative adjustment of stock price of 30% since July of this year (Zacks, 2015).

The Price / Cash Flow for HCA is 7.12 compared to the industry average of 11.98 this is also

concerning for a company that is so heavily leveraged (Zacks, 2015).

HCA’s focus on the metropolitan areas in comparison with its primary competitors such

as Acadia and Lifepoint expose it to increased risk of extraordinary events such as epidemic and

civil unrest (HCA, 2014).


Ratio Analysis

Debt to equity = Total contractual obligations / Total Equity

42,535/-6,928= - 6.13 (Note Zacks states -4.88)

The debt to equity ratio determines how much actual equity the stockholders have in the

company, how much future borrowing power the company might have in the future and how

much flexibility the company might have in a crisis. HCA as noted in its financial statements has

little borrowing power left in relation to its size and because of the fact that 2.2 billion of the debt

is current in this year alone the company has a great deal of interest rate risk. If an unforeseen

substantial increase in the interest rate occurs such as it did in 2008 during the equity crisis the

company may have going concern issues (HCA, 2014). Industry average is 49.97.

Short term debt to Equity = Short term debt / Equity

2,280/-6,498 = -.35 Due to the negative equity in this company this ratio which basically

is concerned with going concern issue in the case of a financial downturn or crisis of some sort

only reinforces how exposed the company is. The good thing is the company has financial

backers in the form of KKR, Meryl Lynch and Bain Capital with deep pockets and a close

operating relationship with them but as stated in the financial statements in a financial crisis

these companies may either not be able to assist or may be more concerned with their own

financial survival leaving the company exposed (HCA, 2014).

Price Earnings Ratio=Current Price of stock / Current earnings per share

$65.00/ 4.3 = 15 (Zacks has 12.9) In short it will take 15 years for the company to make

enough income per share to pay for one share of stock. This combined with a dividend rate that

would be less than 2.5% (6.50 dividend over last 4 years / 4 years - average dividend of 1.62 per


year (65.00 / 1.62 = .025 return per year on investment)) on the investment means that those

investing in stock are speculating on an increase in the stock value rather than substantial

increases in the profitability of the company. Industry average is 20 (HCA, 2014).

Profit Margin

Income/ Revenues = 3,481/36,918 = 9.4% before tax

1,108/36,918 = 3.0% after tax (Zacks states it’s 5.22%)

This show how much profit it produced for the amount of money spent or used. In most

cases the after tax amount is what is relevant as it is the safety margin for the business. In this

case with a 3% profit margin with an 18% increase in revenue the company is working without

much room for error. Industry standard is 4.9% but they majority of those corporations have far

less debt at an average debt to equity ratio of 50 (HCA, 2014).

Recommendations

Placement of HCA stock in a properly diversified portfolio is an unacceptable practice.

Including the stock of a competitor such as Life point with a more rural focus might be

preferable.

Hospital Corporation of America (HCA) remains one of the largest urban based for profit

operators of hospitals and surgical hospitals in the United States. With 4.4 billion in cash flow

from operating activities and 2.2 billion in capital spending the company is focused on increasing

efficiency by lowering uninsured admissions and increasing Medicare and Medicaid

reimbursements. The hospitals present focus is the surgery centers, clinics and non-hospital

patient interface points (HCA, 2014).


The stock has suffered a substantial adjustment in value since July when its stock was

over $90.00 currently the stock is approximately $60.00. Whether this is due to market

fluctuation or a weakness in HCA remains to be seen.

HCAs continued expansion within the existing markets that it operates in is logical. HCA

uses economies of scale and expansion into peripheral areas of operations in order to improve

efficiency and lower operating cost.

This is in conflict with HCA’s heavy debt load, high stock price despite a 30%

adjustment since July and an average profit margin only comparable to the industry (Zacks,

2015).

HCA uses its knowledge of the legislative and political environment to position itself in

order to limit risk and increase profitability. HCA uses its information system and management

expertise to not only increase and guarantee the success of its own operations but it has also

created a consulting operation which allows for the development of industry wide intelligence in

order to determine trends, risks, benefits and insights that may not be seen in their own operation

and in the process eliminating the risk of “group Think” and the errors that it can cause.

HCAs years of management experience and ability to use economies of scale and

effective information management to increase patient outcomes and company profitability allow

HCA to attract the best talent in the medical field and negotiate Win Win agreements with

insurance companies and health management organizations (HCA, 2014).

HCA with its primarily metropolitan locations is increasing its investment in standalone

surgical centers. Over thirty percent of HCA’s profits come from outpatient services and this will

in the future allow it to continue its strategic growth. Also, the new health care legislation does


not allow completion from new physician owned surgical hospitals and surgical centers as they

will not qualify for Medicare or Medicaid reimbursement (HCA, 2014).

HCA’s access to capital is a twin edged sword allowing HCA to expand and improve

operations in areas of operations but the increased leverage also exposes HCA to interest rate

risk should the interest rate take an unexpected upturn as substantial amounts of debt mature

each year and require refinancing or retirement. Also management is limited in its ability to

freely operate as it has multiple agreements with creditors designed to protect creditor’s rights

and collateral (HCA, 2014).

It is the opinion of this writer that while not the best ran company in the medical services

industry HCA is the most interesting. HCA is a power in the medical industry that should not be

underestimated.


Reference

Hospital Corporation of America (HCA) (2014). Annual Report. HCA. Nashville, TN. Retrieved

from: http://investor.hcahealthcare.com/

Zacks (2015) HCA Holdings Comparison to Industry. Zacks.com. New York. N.Y.

Retrieved from: http://www.zacks.com/stock/research/HCA/industry-comparison

http://investor.hcahealthcare.com/

hca financail paper for financial managment

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