3 Major Themes from Public Healthcare Firms during the Third Quarter of 2020 – Part 2: Expense Management and Cost Savings

Contributors: Madison Whyde, Alex Malin, Chris Madden

Among the companies covered for Q3 2020, there was a continued emphasis on expense management and cost savings strategies. As mentioned in Part 1, COVID-19 restrictions began to ease up in many markets with patient volume reapproaching normalized levels. While many companies are still experiencing increased costs related to PPE, COVID-19 testing, and COVID-related operational inefficiencies, a majority of the companies praised their management teams’ ability to tightly manage and control variable costs. As a result, a significant amount of the incremental revenue attributable to volume and reimbursement tailwinds in Q3 was dropped to the bottom line.

The following earnings call excerpts provide additional detail from executive and operational management:

Imaging

“I think coming out of this year, we have created a lot of operational efficiencies, both from the staffing standpoint and the number of facilities that we need to operate. And I believe the combination of those will create some improvement in our performance, which we mentioned. And I think perhaps the best way to look at this brand would be that the margin expansion that we saw in the third quarter is what we’re going to focus on to try to replicate in forward-going quarters. So — of course, that’s subject to perhaps some of the cuts in the Medicare reimbursement should they go through, which would hurt those margins a little bit. But I think the additional cost savings that have not been fully implemented that we anticipate in 2021 will help mitigate that along with sustaining what I think is better workflows and efficiencies in our staffing.”

Howard G. Berger, Chairman, President, CEO & Treasurer, RadNet Q3 2020 Earnings Call Transcript


Behavioral Health

“We are realizing measurable improvement in our cost management efforts and operating efficiencies that we’ve implemented in 2019 and 2020. We continue to proactively manage staffing and other costs.”

David M. Duckworth, Chief Financial Officer Acadia Healthcare Company, Inc. Q3 2020 Earnings Call Transcript


Post-Acute Care

“Within home health, our continued focus on labor productivity combined with compensation structure changes implemented earlier this year drove a 270-basis point reduction in cost of services for Q3. Visits per episode declines from 17.3 in Q3 2019 to 16.4 in Q3 2020 and cost per visit declined to $75 from $78 in the prior year period. This effective cost management led to segment adjusted EBITDA in Q3 of $51.8 million, an increase of 2% over Q3 2019.”

Douglas E. Coltharp, Executive VP & CFO, Encompass Health Corporation Q3 2020 Earnings Call Transcript

“We continue to make great progress in deploying PDGM cost levers. In the third quarter, we achieved an LPN RN ratio of 46.7%, up from 40.6% in Q3 ’19 and a PTA PT ratio of 49.6%, up from 43.7% in Q3 ’19. As you can see, we are well on our way to our ratio goal of 50-50 by the end of this year which has — will continue to provide significant positive impact to margin and will improve our care as well.”

Scott G. Ginn, CFO, Chemed Corporation Q3 2020 Earnings Call Transcript


Hospitals

“Our teams continue to do an excellent job managing our cost structure during these pandemic cycles, which benefited our performance in the quarter. And our labor, supply and other operating costs as a percent of revenue all showed improvement as compared to the prior year period.”

William B. Rutherford, Executive VP & CFO, HCA Healthcare, Inc. Q3 2020 Earnings Call Transcript

“With respect to managing operating costs, which has been a key part of our solid results this year, we have continued confidence in our team’s ability to hold many of the gains they have made across the different expense categories. In those areas where we anticipate some pressure, we believe we have future resiliency actions that can help offset some of these challenges.”

Samuel N. Hazen, CEO & Director, HCA Healthcare, Inc. Q3 2020 Earnings Call Transcript

“Our continued tight control of costs mitigated the impact of incremental expenses from the pandemic, including higher temporary labor, premium pay and PPE costs.”

“… Before the pandemic occurred, that we have been focused on, over the past several years, realizing about $450 million of cost efficiencies since we started this back in 2018. And we’re fully on track for that for this year. And what we — as we talked about last quarter, too, as a result of the pandemic, we’ve dug deeper, we’ve identified more efficiencies that we’ve been realizing or realize into the future. And it’s really across all the cost elements of our cost
structure, whether it’s labor management supplies or other operating expenses.”

Daniel J. Cancelmi, CFO & Executive VP, Tenet Healthcare Corporation Q3 2020 Earnings Call Transcript

“On the expense side, we managed variable costs down during the second quarter as volumes were negatively impacted by restrictions on elective procedures and shelter-in-place orders. As volumes and net revenue returned in the third quarter, our hospital leadership teams managed variable costs very well. This combined with savings from our strategic margin improvement program drove improved EBITDA and EBITDA margin performance during the third quarter. Overall, we were pleased with our third quarter performance, and I’m excited about the strategic progress we have made during the year. While the management of COVID-19 has certainly garnered much of our attention and focus, we have also continued to effectively execute our strategic plans”

“In terms of contract labor trends, I think we did a good job of limiting contract labor, obviously, in the latter part of the first quarter and in the second quarter when our inpatient volumes were suppressed. So, we actually had a pretty significant decrease in contract labor utilization. We have seen the need for contract labor to go back up over the last several weeks, in particular, as we’ve had COVID cases surge …  And in terms of the rate, we have seen some increase in rates in the contract labor space. Working very hard with all the other margin improvement initiatives to offset those, of course. But it is somewhat of an emerging headwind that we’ll be mindful of.”

Tim L. Hingtgen, President, COO & Director, Community Health Systems, Inc. Q3 2020 Earnings Call Transcript

“As we have managed through with lower volume, we have certainly done, I think, an exceptional job of managing our labor costs. So we’ve been able to flex labor consistent and according to the lower volume. The margin improvement program work that we really started late in 2019, a lot of those initiatives are focused on non-patient facing expenses. They deal with how we contract purchase services, how we’re contracting for supplies. And we believe those to be very sticky, so to speak. So we believe those expense reductions will continue going forward as volumes come back. And so that margin lift will be more permanent.”

Wayne T. Smith, Chairman & CEO, Community Health Systems, Inc. Q3 2020 Earnings Call Transcript

Executing Expense Management and Delivering Margin Expansion

Interestingly, a majority of the public companies reviewed reported year-over year increases in EBITDA margins (i.e. Q3 2020 vs. Q3 2019). Although there was a surge in volume levels during Q3 2020, as noted in Part 1, the healthcare system has not completely returned to normalcy as volume remains slightly depressed compared to historical levels. Therefore, it is reasonable to assume that companies are benefitting from expense management strategies implemented throughout the year. Some of these strategies include, but are not limited to, identifying staffing inefficiencies, lean staff management, more prudence as it relates to third-party service and lease agreements, and refining contract labor usage. As a result, the continued focus on expense management is expected to drive greater financial and operational efficiency with volume increases. Based on the Q3 earnings calls, executive management appears to indicate that the COVID-19 pandemic is becoming more manageable from both a financial and operational perspective.

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