Pulse on the Public Market: 2023 Q1 Takeaways From Health Systems and ASCs

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In this episode, host and VMG Health Chief Commercial Officer Jen Johnson has a discussion with Valuation & Transaction Managing Director Colin McDermott, CFA, CPA/ABV, and Valuation & Transaction Manager Savanna Ganyard, CFA to provide the latest market dynamics and valuable insights from publicly traded healthcare operators in Q1 2023.

These insights come from VMG Health's Pulse on the Public Market tool, a free resource available on the VMG Health website. This tool is overseen by McDermott and Ganyard and is created by a team of over 20 experts who listen to, analyze, and summarize earnings calls from 15 public healthcare companies every quarter.

This month's dose of practical insight on the business side of healthcare covers what we have learned from the 2023 Q1 earnings calls with a specific focus on health systems and the ASC sector.

Topics covered in this conversation include:

  • What information is included in the Pulse on the Public Market tool and how it can be useful
  • Overview of insights from 2023 Q1 earnings calls for HCA, Tenet, Universal Health Systems, Community Health Systems, and Surgery Partners
  • Analysis of positive volume trends and what we can learn from this data
  • Expectations for M&A with health systems and predictions for the ASC sector
  • Future outlook for these companies as we move forward to the next quarter

Want to learn more about this topic?

Access the earnings call summaries discussed in this episode and the full Pulse on the Public Market tool linked here: VMG Health's Pulse on the Public Market

Access VMG Health's full M&A Report here: 2023 Healthcare M&A Report.


Intro 0:00: Welcome to the Healthcare Download with VMG Health. We are the leaders in strategy and transaction advisory dedicated to finding solutions for the healthcare industry. In each episode, we will leverage our expertise to provide trends and timely updates about what is happening on the business side of healthcare so you can move your strategy forward.

Jen Johnson 0:33 In this episode, “Pulse on the Public Market: 2023 Q1 Takeaways from Health Systems and ASCs,” we will be interviewing two leaders who oversee VMG Health’s Pulse on the Public Market. For those of you who aren’t familiar with the Pulse, VMG Health has a team of over 20 professionals tasked with listening to, analyzing, and summarizing earnings calls every quarter on 15 public healthcare companies. Subsequently, this team publishes one-page summaries for each company which can all be found on our web-based tool, and it’s free. I love this tool because it allows us to be up-to-date on what’s going on in the market while providing the industry with great easy-to-read insight. So now I’d like to introduce the experts behind this incredible resource, Savanna Ganyard, CFA is a manager and Colin McDermott, CFA, CPA/ABV is a managing director in VMG Health’s Valuation and Transaction Advisory division. Both Savanna and Colin assist clients around the country with navigating and valuing healthcare transactions. I’m Jen Johnson, VMG Health’s Chief Commercial Officer, and I’m ready to get us started with a dose of some practical insight on the business side of healthcare. So, Savanna and Colin, welcome. We’re all here in Dallas today which is pretty awesome we get to be in the same city, in the same office doing this together. I’m glad to have you. How are you doing?

Savanna Ganyard 1:48 Doing well, how are you?

Jen Johnson 1:49 Very good.

Colin McDermott 1:50 Jen, I’m just glad to be here. I never thought when I went to school to be an accountant, that I’d be doing a podcast.

Jen Johnson 1:56 I know, it’s pretty crazy, isn’t it? I know, we’re all getting used to it. It’s the new world. Yeah. Well, I’m really happy to have you. And what I’d like to do first on this is really just take a moment to talk about the Pulse on the Public Market. I mean, this is something you guys both have put a lot of work into and I want to make sure everyone knows what it offers. So, I’m going to go ahead and start with Savanna. Can you tell listeners a little bit more about this resource, like what would be helpful, what you guys look for when putting these summaries together, and really how clients are using it?

Savanna Ganyard 2:23 Yeah, of course, happy to. VMG Health has always followed the publicly traded healthcare operators in order to provide our clients with the highest level of expertise in the healthcare industry. So as you mentioned Jen, each quarter we produce a one-page high-level earnings call summary coupled with interesting quotes on major operational themes for the 15 companies that we follow. Historically, this has been an internal resource at VMG Health. But about a year ago, we made this resource available to the public, to the clients on our website. Especially in today’s environment, and over the past couple of years, you hear a lot of our clients focused on labor pressures, volume trends, sites of service shifts, and other similar industry trends. And when it comes to the economy or their business, often a lot of our clients or people will spend a lot of time analyzing information that’s backward-looking, which of course has its place. But it can be worth spending time listening to companies that have a lot of resources and data to answer questions like, “When will these industry trends stop? Or continue? How might we expect to move forward in this type of environment? And what are other management teams in similar industries doing to adapt to these changes?” So we find it helpful to pay attention to these earnings calls because this commentary from CEOs about their company’s future can help shape our understanding and our client’s understanding of what the economy or sector may look like in the future.

Colin McDermott 3:47 Yeah, what I really like too is the equity research community that follows these companies, they ask great questions, sometimes hard questions, of the management team. And it really does provide some insight into where the industry is going and what equity analysts are focused on.

Jen Johnson 4:02 Yep, perfect. It really is an excellent resource, we’ve had nothing but fantastic feedback. So, thank you both for that. What I’d like to do now is get into really the heart of this podcast, I’d like to give listeners an overview of what we’ve learned from the 2023 first-quarter earnings calls. But first, I want to cue it up by really narrowing down our focus. For this podcast, we decided just to cover the health systems and ASC sector. So we’ve analyzed HCA, Tenet, Universal Health Services, Community Health Systems, and Surgery Partners. We’re gonna go ahead and cover what’s happening with volume and labor, as well as M&A and outpatient trends, but I’d like to get started with the market reactions. So, I always find this part really fascinating to see changes in stock prices after these earnings calls. For this particular quarter and these five companies, we saw day-of stock prices that were really fairly moderate, just ranging from 2%-6%. But there was one exception which was Community Health and that fell by nearly 40%. So Colin, can you tell listeners just a little bit about what factors you think might be behind this extreme market reaction?

Colin McDermott 5:09 Yeah, of course, Jen. I think there are a few things that Savanna and I talked about. The first is Community released after HCA, and HCA had a good quarter and we’ll talk a little bit more about that. So, the other publicly traded hospital operators all saw a bump in their stock price, because of HCA’s positive results. The assumption from the market was it was going to carry through, and Community Health Systems specifically increased by almost 16% on the day that HCA released just from that news alone.

Jen Johnson 5:38 Okay, so that’s not so bad, then, huh?

Colin McDermott  5:40 No, so that’s a 16% percent bump. And then Jen, the second thing that we really talked about was that Community missed analysts’ consensus estimates. And Community Health System’s Management indicated the miss between their actual results and consensus is bigger than the miss between their actual results and what management anticipated. So really, indicating that I think management has some faith in their guidance, and the miss for Q1 is not as big as they anticipated, or the analysts committee anticipated.

Jen Johnson 6:10 Yeah. Consensus missing, it’s always such a big, I mean the market always overreacts and we all know that.

Colin McDermott 6:15 Yeah. And with analysts’ consensus specifically, Community did not give Q1 guidance, so this is their estimates on Q1. Second, and I think this is probably the biggest contributing factor, is Community is highly levered. We’ll talk about that a little bit later, but as of the day of their earnings release, their net debt to EBITDA ratio was 8.3 times, so significant leverage. So, small changes in enterprise value with debt that’s a static, results in big increases in underlying equity value. So really those are the three factors, the correction from the increase experienced after the other operators, the analysts’ consensus earnings miss, and then three, their cap structure and the impact on equity.

Jen Johnson 7:01 Okay that’ll do it, right? Those are three big ones and a really good explanation. We all do know the market overreacts, and so we’re just going to go ahead and keep an eye on this one for next quarter. It’ll be interesting to see what happens. So let’s, on that note, switch over to some more positive news and move on to HCA. They showed a 4% increase in stock price the day of their earnings call. So, I’d like to move over to Savanna, I understand you all have seen some good volume trends across most of these companies when comparing Q1 2023 to Q1 2022. Could you comment on what you learned from HCA’s earnings call to give insight into what really worked for them?

Savanna Ganyard 7:38 Sure, happy to. So as you mentioned, it was a positive quarter for the five companies that we are talking about today. Most of their metrics from a volume standpoint were high single-digit growth year over year. The one asterisk I’ll put on it to keep in mind was last Q1 was impacted by Omnicron, so we need to be aware of that when considering this metric. Although, Surgery Partners did note that their Q1 was a stable comparable, and the companies did note that there were strong volume growth trends from Q4. So, still overall really positive even considering that. HCA, as you mentioned, boasted some of these strong volume metrics, their same-facility equivalent admissions was up 7.5%. And they mentioned a lot of this obviously increase in ED, increase in non-COVID admissions, but they especially highlighted their outpatient surgeries being up 10% helped contribute to this. I think another interesting stat that Colin and I were looking at was the outpatient cardiology procedures increasing by 7%. So, there were some high volume expectations heading into the quarter. But I think that 7.5% is what the analysts had been looking at that beat their expectations and kind of has driven that positive market reaction for them. HCA management said that their volumes were strong throughout the quarter, and they feel good, they continue to seek good demand in the markets they serve. And that’s probably a major factor that we’ve identified with HCA and something that’s worked well for them. They have a strong presence and plans to grow in some of the fastest-growing states, Florida, Texas. So, those trends coupled with a strong management team, strong capital expenditure plans, and consistent execution has helped propel them and given them a strong quarter and hopefully strong quarters to come.

Colin McDermott 9:24 Yeah, I think the increase in outpatient volume and admissions is really a positive kind of readout for Q1. It just kind of, you reflect back on volumes, going back to the pandemic, obviously, volumes were depressed. And then we started seeing COVID-related admissions going to the hospital that kind of helped kind of cover up maybe some of the volume softness that was being experienced at a hospital level. And then seeing this recovery in Q1, and as Savanna pointed out, with a year-over-year comparable with Omicron, I think is a positive sign.

Jen Johnson 9:58 Yeah, thank you both. That was an excellent overview. I noticed you mentioned some outpatient increases, and this has obviously been a huge trend that most of us think will continue. So, I’m going to turn it back over to Colin on this. Can you provide some commentary on what these public companies are saying related to this outpatient trend?

Colin McDermott 10:15 Yeah, of course, Jen. It’s obviously it’s positive, right? I mean, that’s first and foremost, it’s no secret that volume is shifting from the hospital-based setting and moving into an outpatient or ambulatory-based setting. Over the last few years, that’s been readily apparent, particularly in orthopedics. I mean, across the specialties, that’s all the public operators are really focused on where orthopedic volumes are going. Kind of moving away from the hospital operators for just a minute and talking about a payer, United Healthcare, you might have heard of them. They’re not small. Yeah, they had something really interesting in their earnings call, and they commented that inpatient trends continue to reflect the growing long-term movement towards ambulatory sites of care, and went on to say nearly two-thirds of orthopedic procedures are performed in outpatient or other ambulatory settings, compared to under 1/4 of the procedures just five years ago. Pretty dramatic shift. So, if you think about it, you’re comparing baseline volumes, and you’re comparing baseline volumes when there’s been a fundamental shift of cases out of a hospital-based setting into another site of service. So it’s really, you know, it’s just something to bear in mind as you think about volumes and volume-related trends.

Savanna Ganyard 11:32 And HCA had a similar quote related to total joints specifically, they said pre-pandemic about 80% of their total joints were done inpatient, 20% outpatient, post-pandemic, they’ve seen that flip as well. So, similar notes to United.

Jen Johnson 11:47 Dramatic is the word, this is a lot.

Colin McDermott 11:49 Yeah, yeah, and one of the things that HCA went on to say, is on kind of attributing some of their growth trends and some of the positive trends that they’ve experienced, was that they have a multifaceted offering for both patients and physicians. So, they have outpatient services within their facilities, I think they’re talking about their hospitals, along with ambulatory surgery centers. So, one of these two settings is right for about every patient, and they attributed their growth to this multifaceted offering and that was one of the reasons they indicated they saw positive year-over-year total joint growth.

Jen Johnson 12:25 Okay. Yeah, I think this is, you know first of all, really great for the financial feasibility of health systems. And not to mention pretty good for patient care, I would think. So, I like this trend. Now, that’s all good news, but I know a lot of these companies are also having to work really hard in this economy to keep costs down. One of the major trends that keeps popping up as a challenge is labor. So, Savanna back to you, can you give us some examples of what these companies are facing and how they’re trying to handle labor issues?

Savanna Ganyard 12:54 Sure. And if I had $1 for every time I heard “labor” or “wage pressures” over the past year, I would be pretty well off. And, unfortunately, that trend has still continued this quarter. I don’t think we’re back to where we used to be. Many of the operators commented on that, UHS specifically noted that the acute care staffing has been slower to recover than they initially thought. So, a lot of times when these operators have been talking about staffing, they’ve looked at the contract labor metric. So over the past year, and in this quarter, we’re continuing to see downward trends, but not back to pre-pandemic levels. And Tenet even commented that they don’t expect to get back to normal this year. So, not as great of news. I know we would all like to be back to normal and everything going well, but positive trends moving downward, getting closer. I think the one thing that the operators are kind of thinking about now in terms of staffing is, we talked about all of this great volume demand, and now making sure that they have the staffing to meet that demand. HCA commented as we increase our staffing capacity, it also affects our surgical capacity, because we do have instances when we’re not able to open all of our operating rooms as efficiently as we would prefer. So definitely something that we’re keeping our eye on, and hopefully something that continues to improve throughout the quarter. But still, definitely, a struggle for some of the operators.

Jen Johnson 14:26 Yep, it’s still a major trend. So, we kind of hit the big ones, right? Volume and labor, we’ve set the stage pretty well here. So, let’s turn to how this is all impacting M&A for these companies. And I’d like to move to Colin, are you expecting to see more M&A with health systems and any predictions for the ASC space?

Colin McDermott 14:46 Perfect, thanks, Jen. Let’s start with the hospital sector, and then we’ll move to the ASC sector. As we reflect on Q4 of 2021 through calendar year of 2022, we’re all aware it’s been challenging financially, Savanna touched on the labor issues. And while the for-profit sector is working through these issues, there continue to be challenges for the smaller, independent operators. The financial pressures that these health systems are feeling have to continue to drive some consolidation. We talked about Community Health Systems and their leverage ratios a little bit. They’re pretty open about continuing to evaluate interest from outside parties related to potential divestitures. They sold their hospitals in West Virginia, they’re in the process of selling the North Carolina assets subject to regulatory approval, and I think have a potential transaction pending in Arkansas. Community Health Systems indicated they remain engaged in continuing discussions about other potential transactions, which if they happen, could provide opportunities to help them pay down their debt, or potentially reinvest in what they perceive as their core markets.

Jen Johnson 15:52 Okay, so they’ve got activity coming.

Colin McDermott 15:54 Yeah, there’s definitely activity, there’s going to be consolidation, continued consolidation. It’s not a secret. Talking a little bit about the ASC sector, we talked about the migration of cases from a hospital-based setting into an ambulatory base setting. That’s going to drive investment into the sector, hands down. Tenet indicated that they intended to invest 250 million in M&A and they have a robust pipeline to support that level of M&A. Surgery Partners indicated, I think they spent 60 million during Q1, and have $200 million of total spend that they’re planning for the year. So, significant investments by both Surgery Partners and Tenet.

Savanna Ganyard 16:36 And that 200 million is just for acquisitions, I believe.

Colin McDermott 16:40 Yeah, that’s right, meaning they both are also considering de novo opportunities. Yeah, Tenet is doing a really great job with how they communicate to the market around their ambulatory strategy. They put out a quarterly management presentation that is posted on their website. And they put a lot of information around their ambulatory division in that document. One of the things that is really interesting is they put their attractive returns in the ASC sector, indicating what they pay for an ASC on a multiple, what their effective multiple is after they bring in some synergy being a sophisticated operator, and then they event have what the returns look like on de novo opportunities.

Jen Johnson 17:22 That’s a lot of data they’re putting out.

Colin McDermott 17:24 Yeah, they’re putting out a lot of information really on ambulatory. And I think some of this reporting is really new in the last quarter or two.

Jen Johnson 17:30 Okay, I love that. That’s a dream for us, right? Being able to see all that stuff. That’s great. So, lots of activity is likely coming, right? And will continue to come. So, this is a good time to plug the M&A Report by VMG Health, which just came out about a month ago. And that covers everything from multiples, notable deals, and we actually cover nine major healthcare sectors, including a deep dive on the ASCs. So, I just had to plug that. But let’s go ahead and finish off this topic and we’ll end with management’s guidance and analysts, what they were saying about the future when you were listening to those earnings calls. And I’ll go ahead and turn this over to Savanna.

Savanna Ganyard 18:08 Yep, perfect. So, interestingly, and not surprisingly, HCA and Tenet at this quarter raised their revenue and EBITDA guidances for the remainder of the year, primarily due to the strong results of the quarter in favorable factors that they expect to continue. UHS reaffirmed their revenue and EBITDA guidance, although management did note that they haven’t raised guidance in however many years and they’re not going to start it now, but they feel very comfortable that they’ll achieve those levels. Community reaffirmed their revenue and EBITDA guidance, and they still feel comfortable that they can achieve those even after their first quarter. Analysts’ reactions to that, from what we’ve been able to gather, so after HCA raised their guidance, consensus did increase, although not at the same proportion. For Tenet, consensus estimates remained relatively flat after they raised guidance, but they were previously slightly above the high end of the range. So, that’s kind of how we’ve seen consensus react to HCA and Tenet. And then UHS, even though they didn’t change the guidance, consensus did raise, so positive going into the next quarter, into the remainder of the year I think we’ve got a lot to look forward to.

Jen Johnson 19:20 Okay. Oh, it’s always nice to hear something positive. All right. Well, thank you. And that was really just overall such a good way to get up to speed on these five major healthcare companies and the trends out there. I think it’s worth noting at this point that following these companies so closely provides such important insight to the healthcare market overall. And you guys, all of us internally at VMG Health, and our clients really appreciate the work that’s been put into this resource. So big thank you to both of you and your team. So what I’d like to do, which I always do, is recap our episodes. So, pretty easy. First, we’ve got health systems and ASCs are definitely starting to recuperate as we sit here post-pandemic, based on the volume data we’re seeing. Second, labor challenges are still a main area of concern. Third, the trend and building strategy around the outpatient space seems to be strong, and fourth M&A activity seems to be strong. So, Savanna and Colin, again, we appreciate you both for the excellent insight and want to make sure listeners know they can reach out to either of you anytime with questions, and be sure to check out the Pulse on the Public Market through the VMG Health website. Everybody take care.

Savanna Ganyard 20:25 Thanks, Jen.

Colin McDermott 20:26 Yeah, thanks, Jen.

Outro 20:36 Thank you for listening to the Healthcare Download with VMG Health. Make sure you subscribe to the show wherever you listen to podcasts to receive new episodes when they release the first Wednesday of each month. You can also go to vmghealth.com or visit the episode notes to follow VMG Health’s monthly newsletter and to learn more about this conversation.

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