In the present US Deficit debate, the focus has principally been on reducing the staggering health care costs. The Republican Plan is to eventually kill Medicare as it presently works for many elderly US citizens, and to require these older Americans to instead obtain and pay for a good chunk of their own private health insurance.
In an earlier post on Big Health Insurance Corps, I showed how unwise this Republican plan is because these older Americans, after they retire, would be paying health insurance premiums to Big Health Insurance Corps that have generated clearly windfall profits for many years.
And in that same past post, I also showed that total health care costs could be reduced by roughly $2.0 trillion over the next 20 years, if the US went to a single-payer system, where the estimated total profits of all Health Insurance Corps would be eliminated, and thus future health care costs would be reduced by a like amount.
And in that same past post, I further showed that roughly half of that $2 trillion in future estimated total health care costs over the next 20 years could be eliminated if the US kept the current Affordable Health Care Plan, but the US Government and State Governments, as well as the State Insurance Bodies, adopted wise initiatives which would cut in half the present Health Insurance Industry 12% annual profit increase, which equates to a clearly windfall 22% annual EPS increase. This 50% annual profit growth cut for the Health Insurance Industry from 12% to 6% would eliminate roughly $1 trillion in future health care costs over the next 20 years.
But to wisely take cuts in future health care costs to a completely different level, it is necessary to study thoroughly the past financial statements of all US hospital systems….the For-Profit Publicly Held Ones, the For-Profit Private Ones, the Governmental Ones, and by far the largest hospital types of them all: the “Non-Profit” Ones.
The salient questions that need to be answered are…
…..Just how profitable have each of these hospital organization types been?
…..What has been the profit trend?
…..How will these past profits change in the future, once the Affordable Health Care Plan totally kicks in?
.....And just how financially strong are these hospital organizations?
If designed wisely, any excessive profits eliminated from any of these hospital organizations should directly reduce US future health care costs. This will not only dramatically reduce the US Deficit, but will also boost US economic growth, and thus private sector job creation.
In this first post on hospital profits, I am studying the publicly-held, For-profit Hospitals, which file with the SEC.
Here are the 7 hospital organizations, which are publicly-held:
…………………………………………….…………...............# of
……………………………………………...............HQs…Hospitals.
Hospital Corp of America (HCA)……….....TN……..164(1)
Community Health Systems (CHS)………..TN……..130
Health Management Associates (HMA)….FL……….59
Lifepoint Hospitals (LPT)………………….....TN……....52
Tenet Healthcare (THC)…………………........TX……….49
Universal Health Services (UHS)…………...PA………32(2)
Iasis Healthcare (IHC)…………………….......TN……….16
Total Number of Hospitals………………………….......502
(1) In addition, HCA also operates 106 free-standing Surgical Centers.
(2) In addition, UHS also operates 206 Behavioral Health Centers.
Here’s the Total Core Pretax Income for all seven of these hospital organizations for the most recent four years:
2010…..$4,207 mil, up 16% over 2009, and up 141% over 2007
2009…..$3,642 mil, up 59% over 2008
2008…..$2,285 mil, up 31% over 2007
2007…..$1,749 mil
Yeah…..just an incredibly strong earnings track record.
And here’s the Total Operating Revenues for all seven of these hospital organizations for the most recent four years:
2010…..$69,341 mil, up 5% over 2009, and up 26% over 2007
2009…..$66,258 mil, up 7% over 2008
2008…..$61,969 mil, up 12% over 2007
2007…..$55,240 mil
And here’s the resultant Core Pretax Income Margin Percentages in these four years (i.e. Total Core Pretax Income divided by Total Revenues):
2010…..6.07%
2009…..5.52%
2008…..3.69%
2007…..3.17%
When you review the above three charts, you have to conclude the following….just an incredibly strong operating trend.
But on the downside, a very significant portion of the Total Revenues of these hospitals came from two customers: Medicare and Medicaid, with both of these government programs being under severe financial pressure, and adding much to the US Debt load.
But you need to look further in these financial statements.
All seven of these hospital organizations are aggressive aquirors of other hospital organizations. Thus, they have a lot of Goodwill on their balance sheets, as well as an incredibly high amount of Total Interest-bearing Debt.
In fact, the Total Interest-bearing Debt Level of these seven hospital organizations is $50.9 bil. And their Total Equity is a negative $1.6 bil. Also, their Total Property, Plant and Equipment is $30.7 bil, yeah that is only 60% of their Total Interest-bearing Debt. So clearly, these are highly leveraged hospitals, nothing like the huge “Non-profit” hospital category.
These 7 hospitals organizations generated a strong $4,207 mil in Total Core Pretax Income in 2010, despite an imbedded burdensome interest expense of $3,638 mil. Just think what their earnings will look like when they get to a much more modest Debt/Equity mix.
They also generate substantial cash flow from operations, which totaled $6,319 mil in 2010, or precisely 50% more than their 2010 Total Core Pretax Income. These hospital organizations can use this very healthy amount of cash flow from operations to reduce their high level of debt, and thus future interest expense, to modernize their hospital infrastructure, and/or to grow their hospital organization, and their future earnings, by making additional prudent hospital acquisitions.
Bad Debt Expense of a massive $6,794 mil is imbedded in their 2010 Core Pretax Income as a charge. Thus Bad Debt Expense is 61% higher than their 2010 Core Pretax Income. And this Bad Debt Expense doesn’t include Charity Care and Uninsured Discounts they granted, which are also both substantial in amount.
When the Affordable Health Care Plan totally kicks in, many of the presently uninsured will get insurance. Thus, a very significant portion of these Bad Debt Expenses will be eliminated from the income statement. Also, the amount of Revenues generated will be increased significantly by the current Charity Care given and the Uninsured Discounts granted, where presently, in both cases, the revenue is foregone.
Thus, I think there will be a significant uptick in future earnings for all hospital organizations due to much lower Bad Debt Expenses, and the reduction of Charity Care and Uninsured Discounts.
In addition, there will be a significant uptick in future earnings for all hospital organizations due to the increase in the number of hospital patients, who will have insurance when the new Affordable Health Care Plan totally kicks in.
Granted, the hospital industry agreed to pony in some money in its highly successful negotiations with the Obama Administration and the US Congress over health care. But I think it was a mere pittance in comparison to its above earnings enhancers.
Here’s the individual hospital organization Core Pretax Income (PTI) for the most recent four years:
…………………..Core Pretax Income (Loss)…........Three Year
……………...2010……2009…..2008……2007…....% Increase
………….………(millions of dollars)………..
HCA (1)…..2,354….2,002…..1,170……927………....154%
CHS (2)……..508……..446……..359…….134………....279%
UHS (3)……..481……..475……..357…….319…………...51%
HMA(4)…….287……..228……..147…….192…………...49%
LPT ….……...241……..222……..209…….202…………...19%
THC (5)……..215……..139……...(44)……(96)………....324%
IHC (6)……...121……..130……….87……...71…………...70%
Total……...4,207….3,642…..2,285….1,749………....141%
(1) HCA 2010 Core PTI excludes asset impairment charges. Its 2007 Core PTI excludes gains on sales of facilities.
(2) CHS 2007 Core PTI excludes loss on debt extinguishment.
(3) UHS 2010 Core PTI excludes transaction cost charges.
(4) HMA 2009 Core PTI excludes gain on debt extinguishment. Its 2008 Core PTI excludes both gain on asset sales and gain on debt extinguishment.
(5) THC 2010 Core PTI excludes loss on debt extinguishment. Its 2009 Core PTI excludes both gain on debt extinguishment and litigation charges. And its 2008 Core PTL excludes both gain on sale of investments and litigation charges.
(6) IHC 2009 Core PTI excludes goodwill impairment charge.
Five of the seven hospital organizations disclosed all of their Uncompensated Care items: Charity Care Given and Uninsured Discounts Granted, and Bad Debt Expense. Here is the Total Uncompensated Care (TUC) amounts, and as a percentage of Total Core Pretax Income (PTI), for these five hospital organizations for the most recent four years:
………..Charity Care
…………....Plus…………...Bad………....Total…………...TUC
………...Uninsured……..Debt…Uncompensated…as % of
………....Discounts…...Expense….Care (TUC)………PTI
…………......……(millions of dollars)
2010……10,203……….6,152….…....16,355………..425%
2009……..7,873……….6,498…….....14,371………..437%
2008……..6,368………..6,214…….....12,582………..633%
2007……..5,336……….5,480…….....10,816………..733%
The reduction in Bad Debt Expense in 2010 is due to HCA granting much higher uninsured discounts in 2010. This policy change significantly increased uninsured discounts, while at the same time, lowering Bad Debt Expense.
These five hospital corps increased their Total Core Pretax Income by 161% in the last three years (from 2007 to 2010), while they also increased their Total Uncompensated Care (TUC) by 51% over the same period. When the new Affordable Health Care Plan totally kicks in, rather than increasing, as it has in the past, the Total Uncompensated Care should decline sharply.
Frankly, it just doesn’t seem right to me for these publicly-held, for-profit hospitals to have already increased their earnings so sharply in the most recent three years, and to also be able to increase them even more sharply, after the new Affordable Health Care Plan totally kicks in, while at the same time, their main customers, Medicare and Medicaid, are suffering so severely.
I think the fair thing for the US Government to do is to remove the excessive profits on the books of all hospitals by requiring a like amount of lower Medicare and Medicaid fees to be charged by all hospitals.
Just how much excessive hospital profit is there over the next 20 years? I think it’s much more than the roughly $1 trillion of excessive profits of the Health Insurance Industry in the next 20 years, that I explained in my past post on the Health Insurance Industry robust profits.
Next I will be studying the gargantuan Hospital organization category called “Non-profit”. This study will take awhile, because there are so many of them, and also because their audited financial statements aren’t that easy to find. The State of Indiana is way ahead of the curve here on audited financial statement disclosures of its hospitals. The rest of the country, including the US Government, would be wise to follow Indiana’s prescient lead here.
From my quick review so far of some of their most recent financial statements, that “Non-profit” label is clearly inaccurate…..and many of them have boosted their operating earnings substantially in the most recent year or in the most recent two years.
Also, mostly due to wise Obama Administration and also wise Fed actions, which have created a US economic environment that permits businesses to flourish, the “Net Assets” of these Non-profit hospitals have truly gone to the moon, from where they were only two years ago. This recent upward jolt of "Net Assets" results from the recent superb return on the massive treasure chest of Investments held by Non-profit Hospitals, which were accumulated primarily from decades of untaxed investment and operating earnings.
And when the Affordable Health Care Plan totally kicks in, just like the Health Insurance companies, the operating earnings of the “Non-profit” Hospitals will also increase even more markedly.
But I have to ask…..why all of this government action to make the already financially strong Health Insurance and Hospital Industries both so much financially stronger…..especially since it is all done on the backs of US citizens, on the backs of all US non-health care businesses, and on the back of the US Debt level?
