‘A Lift Across All Aspects of Our Business’ — Hospital Firms Share Big Q2 Numbers, Positive Outlooks

For a company raising its financial guidance for the second consecutive quarter, the numbers from Tenet Healthcare Corp. were striking:

Same-store hospital admissions grew 5.2 percent from a year earlier and revenue per adjusted admission jumped 5.7 percent
Adjusted EBITDA from Tenet’s USPI surgery center division popped 21 percent as same-facility revenues rose more than 7 percent
Chairman and CEO Saum Sutaria was able to tell investors that Tenet leaders have added $300 million to the midpoint of their full-year adjusted EBITDA target

Sutaria and his team aren’t alone among hospital operators in their ebullience. Their peers at HCA Healthcare Inc. and Community Health Systems Inc.—combined, the companies run about 320 hospitals and more than 4,000 other sites of care—also reported strong second-quarter numbers and said there’s more to come.

The main cause: “Uncharted territory for growth in demand in a normal environment,” HCA CEO Sam Hazen said, as more consumers re-engage with the healthcare system with COVID-19 just about out of the picture.

Here are some nuggets on those trends, pulled from the conference calls with analysts each management team held the week of July 22:

• Volumes have come back in force. In addition to Tenet’s numbers above, HCA rang up same-facility admissions growth of 5.8 percent and CHS saw growth of 3.0 percent. None of the executive teams think it’s blip, either: Sutaria and his team have hiked their 2024 forecast for inpatient admissions to a range of 3 percent to 4 percent—a large increase of 1.5 percentage points.

Hazen made it a point to tell analysts that HCA’s good first-half numbers weren’t influenced by any one-time factors but instead reflected “a solid operational performance supported by strong volume.” At CHS, CEO Tim Hingtgen credited his team’s numbers to work done in recent years to recruit doctors, invest in capacity expansions and improved efficiency.

“We believe the fundamentals are solid and something we can build upon in upcoming quarters,” Hingtgen said.

Among the solidifying fundamentals driving demand growth is the record number of people with health insurance: The U.S. Census Bureau reported last year that only 7.9 percent of Americans didn’t have coverage in 2022, matching the all-time low from 2017.

“The fundamental attributes of coverage help support demand growth,” Hazen said on HCA’s call. “When you start looking across […] the different payer classes, it’s broad-based. It’s broad-based across the different payers. It’s broad-based across our services […] We have seen just sort of a lift across all aspects of our business.”

Another key to executives’ longer-term optimism are basic demographics: Sutaria said the growth in the number of people entering the later years of their lives, which require more care from the system, will be a fundamental tailwind “at least into the early part of the next decade” that is helping Tenet step up its capital spending per available hospital bed.

“I don't see the utilization dropping over time,” he said. “I just see it kind of reaching steady state at some point. And then, we build from there, mostly just on the population growth side.”

Outpatient activity also is strong. CHS’ Q2 surgical volumes hit a record and Sutaria pointed out that the growth Tenet is seeing has changed from a year ago. Then, it was more about one-time recovery cases that had been deferred during the depths of COVID. Now, “the actual organic growth is just making up for that one-time recovery. We’re seeing new cases, new patients, new doctors perform activity.”

• Perhaps the biggest financial pain point of the COVID era appears to have become a relative non-issue. Spending on contract labor at all three companies fell to less than 5 percent of total labor costs—it was only 2.6 percent at Tenet—and still trending down at a fast clip.

In early 2022, HCA executives needed to spend about 10 percent of their salaries, wages and benefits budget on contract workers. In the second quarter, that number checked in at 4.8 percent of total labor costs—which also was below the company’s pre-pandemic norm.

“We’re continuing to see the improvements from all the work we’re doing around recruiting and around retention and that’s paying the dividends in contract labor,” HCA CFO Mike Marks said, reflecting the sentiment of the group on this topic. “Wage inflation was stable and continues to run where we expected it to run.”

• With the labor and supply-chain headaches of the COVID era fading, the three companies have been better able to focus on general operating efficiencies. CHS’ investment in a centralized patient transfer center is beginning to show up in lower lengths of stay and, thus, more capacity.

At HCA, Hazen said the company’s emergency departments have been able to grow their commercial patient volumes 18 percent thanks to process improvements that have lowered the time it takes to see a patient to nine minutes from 11 and also cut the time it takes to discharge or admit people.

One potential cloud on the horizon for HCA, Tenet and CHS as well as other providers: The planned expiration at the end of next year of some of the most generous subsidies for consumers shopping for health insurance on exchanges. Asked about contingency plans should that source of patient volume take a hit, Hazen told analysts it’s premature to forecast anything given this fall’s election.

“We’re hopeful that, in 2025, we’ll have some sense of the policies that might be put forth a better sense of the economics around the exposure if the subsidies go away,” Hazen said.