healthcare facilities industry

Compustat® Data Navigator White Paper: Healthcare Facilities IndustrySpecific Data June 2008 Data Navigator: Healthcare Facilities Industry-Specific Data When analyzing healthcare facilities companies, it is important to look beyond some of the standard line items found on the face of cash flow, balance sheet and income statements. There are several important healthcare facilities metrics to that are unavailable on standard cash flow, balance sheet or income statements. While metrics such as EBITDA and debt-to-capital are highly important, there are other items unique to the industry that are key to analysis: statistics on admissions and same-facility revenues are some of the best indicators of growth for hospitals. These items are often buried in a particular company’s 10-K or 10-Q; they might be found in the Management’s Discussion and Analysis or they might be found in a separate table or note, depending on how a company reports its financial data. To take the legwork out of locating these important items, Compustat offers its healthcare facilities industry-specific data set. We collect a number of data items from healthcare facilities based on their importance in analysis and standardize them so they are immediately useful in analytic comparison. The data set covers the GICS sub-industry of Healthcare Facilities (35102020) and includes categories covering admissions, same-facility statistics, payor mix, expense mix and company size. This paper will walk through each of these categories and describe the significance of the data items and how they might be used in analysis. A complete listing of the data is available at the end of this paper. A Brief Look at the Industry The US heathcare facilities industry is comprised of a number of providers including acute care hospitals (general hospitals), rehabilitation hospitals, psychiatric hospitals, nursing homes, assisted-living facilities and home healthcare services. Among the publicly traded companies, there are a handful that comprise a large share of the market: Community Health Systems Inc. (CYH), Health Management Associates Inc. (HMA), LifePoint Hospitals Inc. (LPNT), Tenet Healthcare (THC), and Universal 1 Health Services (UHS). These companies operate mostly acute care hospitals, but also offer an array of services covering areas such as physical therapy, specialized surgeries, outpatient care, pediatric care and behavioral health. Universal Health Services, for instance, has an extensive network of behavioral health centers. The revenues of healthcare facilities flow from three sources: MCOs, Medicare and Medicaid. The revenues of healthcare facilities largely flow from three sources: MCOs (Managed Care Organizations—HMOs and PPOs), Medicare, and Medicaid. Hospitals, and particularly those that operate in urban environments, have come to increasingly rely on MCOs as one of their biggest payors. MCOs wield great power in the amount of pressure they can place on hospitals to lower costs; they often push hospitals towards lowering charges and providing certain kinds of services that cost less. Medicare and Medicaid pay a large portion of industry revenues. According to National Health Expenditure (NHE), government sources financed 46% of all healthcare spending in 2006. In for-profit hospitals, the average patient revenue breakdown is approximately Medicare, 41%; Medicaid, 13%; private, 36%; self-pay, 6%; and other, 4%. Federal and state legislation determine the amount Medicare and Medicaid will pay for various visits, procedures and drugs. State and federal governments additionally regulate the industry by licensing, certifying and accrediting facilities that participate in Medicare and Medicaid. The regulatory and funding environments, particularly state and federal budget levels, therefore have a significant effect on the operating outlook of the industry. Analysts do well to keep a pulse on these environments as they greatly influence the prospects of individual healthcare facilities companies. Admissions Data When beginning analysis, it is important to consider statistics on the number of patients admitted. Hospitals traditionally drive the bulk of their revenues by increasing patient volume, and analysts consider several metrics that Compustat 2 provides. Admissions (HFADM) represents the number of inpatient admissions over a period, with an inpatient defined as a patient whose stay is 24 hours or longer. Hospitals draw greater revenues from inpatients as opposed to outpatients, and investors and management closely watch this number over time as an indicator of growth or shrinkage. Average Daily Census / Average Patient Days (HFAVGDAY) is also a measure of inpatient admissions: it indicates the average number of inpatients, excluding newborns, that receive care on a given day during a period. Outpatient Visits (HFOPV), while not as profitable as inpatient admissions, have come to represent a larger portion of revenues for many healthcare facilities. In recent years, Medicare, Medicaid and MCOs have pressured hospitals to turn inpatient stays into outpatient visits in order to reduce costs. This push, along with advances in technology that enable more outpatient surgeries, has resulted in increasing outpatient visits to the point where they drive revenues for many hospitals. To factor in outpatient visits into total admissions, Compustat provides Equivalent admissions is a good representative of total growth, accounting for both outpatient and inpatient admissions. Equivalent Admissions (HFEAD). Also termed adjusted admissions, this is calculated by adding inpatient admissions to an outpatient visits figure adjusted to reflect equivalent inpatient admissions. Equivalent admissions is a good representative of total growth for healthcare facilities, particularly those that capitalize on outpatient visits. In addition to growth being looked at in terms of headcount, hospitals report data on days of care, occupancy rates and number of surgeries. Patient Days (HFDAY) is the total number of days of inpatient care provided in a period and can be looked at in conjunction with admissions as an indicator of growth. Because longer patient stays lead to greater revenues, inpatient length of stay is reported through the data item Average Length of Stay (HFSTAY). The higher the average length of stay, the greater the facility utilization and the more revenues are generated per inpatient. Occupancy Rate (HFOCPY) is a utilization figure 3 calculated by dividing the average daily census by the average number of beds in service. This percentage figure measures how efficiently hospitals are using their resources. Because hospitals generate much of their revenue from surgeries and procedures, Number of Surgeries and Procedures (HFSURG) is also considered a growth metric. Hospitals will attempt to boost the number of surgeries and procedures over time to increase revenues. Same-Facility Data Items To give analysts a more accurate picture of admissions and revenues, Compustat provides several “same-facility” figures: Revenues – Percentage Change (HFREVCHG), Admissions Percentage Change (HFADMCHG), Equivalent Admissions – Percentage Change (HFEADCHG), and Revenues per Equivalent Admissions – Percentage Change (HFREACHG). Same-facility data provides the yearly change in revenues or admissions for hospitals at least a year old. Each of these represents the percentage change from the previous year of revenues or admissions for same-facilities—only those hospitals and centers that the company has managed for at least one year. These items exclude recently acquired facilities and so discount rapid changes in revenues or admissions due to expansion. In addition to admissions, revenues are one of the most important things to consider on healthcare facilities’ financials, and Revenues – Percentage Change (HFREVCHG) gives analysts a key indicator of gains in same-facilities revenue over a year. Revenues per Equivalent Admissions – Percentage Change (HFREACHG) is calculated using total revenues divided by equivalent admissions. This figure provides valuable insight into changes in a hospital’s revenue per patient. Payor Mix Because Medicare, Medicaid and MCOs have such an impact on revenues, investors would also do well to understand what’s termed the “quality mix” or “payor mix” of revenues. This is 4 the percentage revenue breakdown of each kind of payor, which Compustat provides in four payors: Medicaid – Percentage of Revenues (HFMCD), Medicare – Percentage of Revenues (HFMCE), Managed Care – Percentage of Revenues (HFMGD), and Other Healthcare – Percentage of Revenues (HFO). Other healthcare includes all private-pay sources. Considering the percentage mix of each kind of payor, analysts can assess how sensitive a company will be to changes in legislation and state budgets shifts that directly affect Medicare and Medicaid payment amounts. State budget cuts often result in Medicaid cuts; such legislation may signal trouble for a company that relies heavily on Medicaid payments. If a company receives a high percentage of managed care revenues, they will be more affected by changing MCO premium trends and by pricing pressure to lower costs. Companies that operate hospitals in rural areas typically have a much higher Medicare and private-pay mix, while those that operate in urban areas draw a higher percentage of revenues from MCOs. Significant changes in payor mix will signal analysts to determine why those changes have occurred. Expense Mix To track expenses, Compustat provides expense mix as a percentage of revenues. Each of the expense categories gives insight into significant hospital expenses: Salaries and Benefits – Percentage of Revenue (HFSAL), Supplies – Percentage of Revenue (HFSUP), Bad Debt – Percentage of Revenue (HFBD), and Outpatient Services – Percentage of Revenue (HFOPS). These figures can be tracked over time and used to compare Salaries and Benefits represent a hospital’s greatest expense at about 40% of revenue. companies to see how expenses are managed. Salaries and benefits are a hospital’s single greatest expense, consuming about 40% of revenues on average. Salaries have seen a steady increase in recent years. One of the reasons for this is a nation-wide shortage of nurses, and in some rural areas, of doctors. As the shortage of trained medical workers is 5 predicted to heighten, it has the potential to accelerate rising labor costs into the future. Overall costs for supplies remain at historic highs, driven by advances in medical technology that necessitate more expensive, and sometimes life-saving, equipment. Some hospitals have been able to moderate supply costs through economies of scale and negotiating better supply agreements. Bad debt as a percentage of revenue reflects the amount hospitals write off from uncollectible accounts. Bad debt accounts typically come from low-income patients that do not have health insurance. Hospitals have recently struggled to control increases in bad debt, which has grown steadily in consequence of the rising number of uninsured. Outpatient services as a percentage of revenue can be tracked to determine how much a company emphasizes outpatient services as opposed to inpatient care. Successful hospitals have been able to increase outpatient services to compensate for poor inpatient admissions. Company Size An area to consider that is related to expenses is the size of a healthcare facilities company. In light of the pressure that MCOs have placed on hospitals to lower costs, many companies have relied on expanding their facilities in order to increase economies of scale and lower supply expenses. As such, size has Company size has become a driver of profitability in the industry. become a key driver of profits and revenues in the industry. Compustat provides three data items on the relative size of a healthcare facilities company: Hospitals and Facilities – End of Period (HFFAC), Beds in Service – End of Period (HFBED), and Beds – Licensed – End of Period (HFBEDL). The number of facilities and beds can be tracked to see company growth in terms of acquisitions and newly-built facilities. Beds in service are those beds made available for use, while licensed beds represent beds that the appropriate state agency has licensed the facility for use (regardless of whether they are made available). A general 6 overcapacity of beds in the U.S. has caused many companies to expand by selectively acquiring existing facilities in a particular geographic region in order to dominate that market. For instance, a company might buy the largest facilities in a rural region and then update the facilities, attracting new doctors and gaining an absolute market share. Case Study Lets take a look at an example of Compustat data. Table 1 represents the last three fiscal years for two of the largest healthcare facilities providers, Tenet Healthcare Corp. (THC/ NYSE) and Community Health Systems (CYH/NYSE). Both ended their fiscal year in December. 7 Table 1 In addition to industry-specific data, we’ve included two important income statement items, EBITDA and EBITDA margin. Looking at Tenet Healthcare’s earnings, we can see that their EBITDA has increased in the last three years (significantly between 2005 and 2006, while only slightly, 2%, between 2006 and 2007). Their EBITDA margin has remained stable at 7.6% in both 2006 and 2007. Despite increases in earnings, the data on admissions tells another story, showing declines in the last three years. Between 2006 and 2007, admissions declined 4%, equivalent admissions by 3%, and patient days by 4%, likely reflective of the fact that they dropped four facilities and several hundred beds. In the same period, admissions for same-facilities has shown a drop of 1%, and equivalent admissions a very small increase of .2%. Comparing Tenet to Community Health, we see a 8 different pattern. Community Health shows a significant jump in earnings from 2006 to 2007, in large part due to building or acquiring approximately 38 new facilities. Their EBITDA margin was consequently watered down, though their overall margin remains much higher than Tenet Healthcare. Expansion has caused admissions, equivalent admissions and patient days to jump, though we see that same-facility admissions (being unaffected by expansion) shows a consistently slow decline across the three years. Community Health shows a slower decline in same-facility admissions and same-facility equivalent admissions over the three years compared to Tenet. In terms of expenses, for both salaries/benefits and supplies, Community Health has historically spent less on both as a percentage of revenue compared with Tenet Healthcare. Tenet averages spending 45% of revenue on salaries across the three years, while Community Health averages about 40%. Community Health does show marked higher spending on bad debt compared with Tenet. Investors would do well to examine Community Health’s 10K and look at industry and peer averages to further examine their level of bad debt. Summary Compustat provides a number of significant figures on healthcare facilities companies that give analysts valuable insight into companies. The healthcare facilities data has been selected according to its significance—the items are widely meaningful within the industry, and companies report them in 10K’s, 10Q’s, newswires or website data sources. Compustat’s data has been further standardized to remove discrepancies in the way companies report items; as a result, the data is immediately comparable across companies and time, and is a reliable indicator of trends in the industry. We hope that this guide has served as a primer to understanding the healthcare facilities industry and how our data might be used in analysis. For more information on analyzing 9 companies and understanding the industry, see Standard & Poor’s Industry Survey: Healthcare Facilities. Industry surveys are available with a subscription to Standard & Poors Market Insight. Healthcare Facilities Industry-Specific Data Items Mnemonic Data Item Name Units Admissions Stats HFADM (Q) Admissions Actual HFOPV (Q) Outpatient Visits Actual HFEAD (Q) Equivalent Admissions Actual HFDAY (Q) Patient Days Actual Average Daily Census / HFAVGDAY (Q) Actual Average Patient Days HFSTAY (Q) Average Length of Stay Actual HFOCPY (Q) Occupancy Rate Percentage Number of Surgeries HFSURG (Q) Actual and Procedures Same-Facility (% Change) Stats Revenues HFREVCHG (Q) Percentage Percentage Change Admissions HFADMCHG (Q) Percentage Percentage Change Equivalent Admissions HFEADCHG (Q) Percentage - Percentage Change HFREACHG (Q) Revenues per Equivalent Admissions - Percentage Change Payor Mix Medicaid - Percentage of Revenues Medicare - Percentage of Revenues Managed Care Percentage of Revenues Other Healthcare Percentage of Revenues Percentage HFMCD (Q) HFMCE (Q) HFMGD (Q) Percentage Percentage Percentage HFO (Q) Percentage 10 HFSAL (Q) HFSUP (Q) HFBD (Q) HFOPS (Q) HFFAC (Q) HFBED (Q) HFBEDL (Q) Expense Mix Salaries and Benefits Percentage of Revenue Supplies - Percentage of Revenue Bad Debt - Percentage of Revenue Outpatient Services Percentage of Revenue Company Size Hospitals and Facilities - End of Period Beds in Service - End of Period Beds - Licensed - End of Period Percentage Percentage Percentage Percentage Actual Actual Actual (Q) next to mnemonic signifies the item is available quarterly as well as annually. 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