The New Health Care for Profit Doctors and Hospitals in a Competitive Environment (1983) / Chapter Skim
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Wall Street and the For-Profit Hospital Management Companies
Wall Street and the For-Profit Hospital Management Companies
Pages 35-50
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From page 35... ...
in addition to these so-called sell side analysts, hundreds of portfolio managers, investment analysts, and retail stockbrokers keep in close touch with the performance of the for-profit hospital companies. This paper will explore why the investment community's interest in the for-profit hospital companies has burgeoned and will address some basic questions about the hospital management industry: 1.
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From page 36... ...
, and Lifemark. Together they own approximately 6 percent of the acute care beds in the United States and represent about half of the beds owned by all for-profit hospitals.2 Their growth in only the last five TABLE 1 Size of the Five Largest Hospital Management Companies Net Revenue (millions)
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From page 37... ...
The most important written sources of information are publications from the companies themselves, industry periodicals, and government statistics. As publicly held corporations, the hospital management companies must prepare annual reports (reports to shareholders that contain audited financial statements and other financial and nonfinancial information)
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From page 38... ...
Although they perceive some slight differences among the five major companies in the quality of information and accessibility of management, the analysts believe that all of the major for-profit hospital management companies are very responsive to their needs. The openness of these companies may stem from the newness of their industry and their desire to increase investor recognition of the industry and interest in the companies' stocks.
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From page 39... ...
An analysis of the overall situation of the hospital industry entails an examination of changing demographics, general economic conditions, business attitudes toward health care costs, and government regulation both on the national and state levels. This broad industry examination is supplemented with detailed financial statement analysis of the hospital management companies.
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From page 40... ...
A company's dividend policy also can affect its stock price. In general, the hospital management companies have Tow dividend payouts in comparison with other industries.
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From page 41... ...
Reasons for Success of the Hospital Management Companies The sell side analysts cite four primary reasons for the remarkable success of the hospital management companies: access to capital, a favorable environment, economies of scale, and quality of management. The most commonly stated reason for success is the for-profit chains' access to capital, especially in comparison with the nonprofit hospital sector.
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From page 42... ...
This predictability results from the steady demand for hospital services, the fact that the Medicare and Medicaid programs represent a virtual governmental guarantee of half their revenue, and the companies' ability to pass on increases of expenses through the cost-based reimbursement mechanism. It appears that the hospital management companies have convinced the analysts and investors; there has been a substantial increase in institutional ownership of the stock of these companies, and HCA, the largest company, has been the most highly leveraged "A"-rated industrial corporation in the country, as determined by both Moody's and Standard and Poor's credit rating services.7 The speed with which the investor-owned hospital firms have been able to mobilize funds has allowed them to capitalize on opportunities for growth and quickly arrange acquisitions.
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The hospital management companies have linked hospitals together to obtain economies of scale in financing, operations, and management systems. The combined earnings power and cash flow of the hospitals owned by the hospital management companies allow access to sources of financing that are not available to individual hospitals.
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, and their ability to control their environment and plan for the future effectively. Some analysts, however, are not convinced of the importance of management in explaining the past success of the hospital management companies.
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From page 45... ...
These services include laboratory, dietary and pharmaceutical services, respiratory therapy, mobile CAT scanners, and alcoholism recovery centers as well as the typical management services offered by most of the companies. Lifemark is appreciably smaller than the other hospital chains and has only recently been recognized as one of the major hospital management companies.
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From page 46... ...
All of the five major hospital chains seem to have good reputations regarding quality of care. Service expertise is another aspect of reputation where the chains do not differ significantly.
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Making Hospitals Healthier Once having completed acquisitions, the hospital management companies have demonstrated a remarkable ability to rejuvenate distressed hospitals and turn them into profitable operations. The analysts believe that several factors contribute to this success: economies of scale, financial sophistication, selection of services, marketing, and strategic planning.
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They expect a continued consolidation of the hospital industry, which will provide the hospital chains with the chance for increased market penetration. The analysts also foresee an opportunity for the companies to improve
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Whatever form regulation takes is expected to make it tougher for the hospital companies by forcing them to concentrate on cost control and possibly to subsidize the costs of other hospitals for teaching programs and for medical care for the poor. The analysts feel, however, that even with some form of strict prospective reimbursement the hospital management companies will be in the best position to cope of anyone in the hospital sector.
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From page 50... ...
14. Company Annual Reports, lOKs, and Prospectuses.
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