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2022 Not-For-Profit Health System Performance Trends
Written by Quinn Murray and Ed McGrath
Not-for-profit health systems nationwide are experiencing material financial pressures as the industry recovers from the impact of the COVID-19 pandemic. Now providers are faced with the difficult task of adjusting to the new challenges that healthcare systems are experiencing in 2022. The VMG Health Strategic Advisory Services team works primarily with not-for-profit systems, which is one of the reasons we decided to complete this report and the associated analytics. A consistent theme in this study finds that few organizations have been immune to material declines in financial and operational performance in 2022. This performance is not sustainable for the long term.
In addition to the costs associated with labor, supply, purchased services, and other inflation pressures, not-for-profit healthcare systems are also experiencing increased competitive threats. These threats are coming from niche players supported by private equity and other financially backed organizations that are typically focused on more profitable commercial business instead of serving all, which is the historical tradition of not-for-profit healthcare systems.
This report is based on data from publicly available sources and represents a statistical sample size of various organizations across the nation, but with that said, our findings may not be applicable in all markets. However, the organizations reviewed for this report represent a large cross-section of not-for-profit health systems in the country. The composition of these systems is summarized below.
On a combined basis, the 21 systems analyzed as part of this study represent $184 billion in total operating revenue for fiscal year 2021. A significant portion of this total was generated from the systems operating 560+ hospitals with approximately 100,000 beds across 32 states.
Other advisory firms have also noted recent declines in industry performance. The contributing factors identified by other firms are wide-ranging, some of which are consistent with the findings of this report.
For example, KaufmanHall reported in September 2022 that for the first six months of CY 2022, hospital operating margins declined 100% compared to 2019 before the pandemic. In addition, KaufmanHall noted the number of hospitals with negative margins in 2022 is projected to be greater than pre-pandemic levels since hospital margins continue to be consistent with, or worse than, 2020 levels.
Another example from RevCycleIntelligence from July 2022 cited survey results from over 200 CFOs of health systems and large physician groups. The results indicated that only 8% reported they were on track to exceed 2022 goals. Additionally, RevCycleIntelligence noted hospitals and health systems are experiencing increases in volumes and patient revenues. Research completed for this report is consistent with the findings noted in the RevCycleIntelligence article.
As noted, the factors driving poor financial performance in 2022 are wide-ranging. Discussions with management for purposes of this report have indicated that some of the issues include the following:
- Contract Labor – Many VMG Health clients have been successful in managing contract labor costs due to reductions in hourly rates. Others are reducing clinical capacity, including beds, to minimize travel and agency staff needs.
- Employed Staff Labor Costs – In order to attract and retain staff during increased market pressures and demand, systems are implementing pay raises well above traditional industry norms. Based on our research, this is expected to continue going into 2023. Conversations with the management of various systems included in this report indicate planned salary increases of 4% to 8% in 2023.
- Medical and Other Supplies – Recently, systems have experienced material increases in the cost of goods purchased and services purchased by these systems. The calendar year 2023 expectations from VMG Health clients indicate planned increases of approximately 6% or greater, which would be materially higher than traditional industry norms.
- IT and Other Support Services – Beyond clinical staff, market competition also exists for IT and other support staff who are in short supply. This is another contributing factor driving up the cost for health systems.
- Medical Malpractice – As a result of cases being delayed for the greater parts of 2020 and 2021, clients are beginning to experience increased malpractice activity from cases during this time period. This is leading to increased malpractice costs which are rising to levels that may have not been anticipated.
Key Findings & Conclusions
The findings and forecast based on this report do not necessarily paint a pretty picture for not-for-profit systems. While our research is focused on healthcare systems, VMG Health’s experience with standalone hospitals in 2022 also indicates, in most cases, financial performance is weaker than what is being reported for several other systems.
Of the 21 systems analyzed for this report, in calendar year 2022, 16 are reporting negative operating margins (75+%). The other five are reporting breakeven or very minimal operating margins. Each of these systems reported positive FY 2019 operating margins before the pandemic.
The range of the operating margin declines in 2022 as compared to 2021 and/or pre-pandemic levels approximates from 4.0% to 7.0%. In other words, if the operating margin was a positive 2.0% in 2021, then the 2022 operating margins will likely approximate between -2.0% to -5.0%. Likewise, operating EBIDA for these systems has deteriorated materially to approximately 3.5% of total operating revenue in comparison to 8.0% in 2021 before the pandemic.
Similarly, these systems have experienced a significant decline in days cash, specifically in 2022, approximating -18% from 2021. The systems have also experienced material losses from investment income in 2022. Recognizing this mostly includes unrealized losses, these systems reported investment losses of approximately negative -$22 billion on a combined basis.
Summary Performance Results from FY 2021 to Annualized FY 2022
Negative operating margins in addition to poor investment performance (and other non-operating activity for certain organizations) are driving declining cash balances. 2022 performance indicates systems reporting somewhat material declines in days cash on hand. These 21 systems are reporting a 15% to 25% decline in days cash with an average of an 18% decline from fiscal year-end 2021.
As an additional consequence of the material losses, especially for smaller systems, debt service coverage ratio (DSCR) covenants may not be met. Most of the systems included in this report have the cash reserves necessary to avoid procedural requirements relative to the days cash covenant in their bond agreements, and this includes taking into account the poor 2022 performance.
Organizations in 2023 may be required to develop a financial improvement plan outlining the recovery path to fulfilling the DSCR covenant in a subsequent fiscal year. In many cases when a bond covenant such as DSCR is not met, systems are required to hire management consultants to report on their opinion relative to the likelihood the system can meet the DSCR threshold in the near term.
VMG Health recently completed one of these assignments for a large hospital in the northeast. Based on this assignment and discussions with others, based on 2022 performance it appears other organizations will unfortunately need this type of study completed by experts such as VMG Health.
Areas of Consideration – Initiatives to Address the Impact of 2022 and Beyond
It is clear most organizations will not be able to shrink their way to success, and over time, strategic growth is imperative to long-term success. The following are example actions either undertaken or being contemplated by VMG Health clients to address recent performance:
- Addressing care management issues to better utilize limited clinical care resources.
- Increased focus on APP utilization to the max of their skill levels.
- Enhance utilization of scarce clinical staff resources.
- Digital care to increase patient access at a lower cost.
- Expansion of remote monitoring and other vehicles to reduce more expensive utilization.
- Expansion of hospital-at-home services.
- Assessment of the value proposition of employed/aligned medical groups.
- Identification of how best to maximize the group size, strength, and the system’s investment in the group.
- Contract negotiations with managed care payors.
- Will likely be difficult to obtain increases that will address inflation pressures.
- Strategic assessments of existing operating assets/investments.
- Reevaluation of the continuation of existing service lines.
- Closure and/or sale of hospital assets in non-strategic markets.
- Disposition of unprofitable ventures that are no longer strategically imperative.
- Reassessment of the need for existing real estate and/or MOBs.
- Evaluation of the potential sale of other non-core assets.
- Operational improvements.
- Reducing bed and other capacities to match available non-agency/travel staff.
- Identifying opportunities to improve revenue cycle efficiency.
- Staff modifications, primarily in non-clinical areas.
- Acquisition of organizations that are struggling.
- Based on discussions with VMG Health clients, systems are being more diligent relative to making investments in new facilities.
- Partner/affiliate with other systems for non-clinical services.
- Example areas include IT, revenue cycle, cybersecurity, analytics, and others to improve cost efficiency and reduce potential future investments.
- Price transparency.
Not-for-profit healthcare systems are experiencing extreme challenges in 2022. Based on conversations with many of these organizations and other clients, this is unlikely to improve materially in 2023. Not-for-profit hospitals and systems need to explore other innovative avenues to work smarter and more efficiently so they can be well-positioned for success in the future. VMG Health has a history of experience developing long-term relationships with clients through providing assistance across a variety of areas. These areas primarily consist of financial and strategic related assistance, which has prepared and positioned VMG Health to provide support and insight to not-for-profit hospitals and health systems. As we continue to assess the not-for-profit landscape, VMG Health has the experience to add value and help systems address some of the issues outlined in this report.
The assistance VMG Health’s experts are able to provide can take many forms. Some examples are:
- Medical Group Transformation
- Bond Covenant Repair Reports
- Financial Projections
- Service Line Planning
- Revenue Cycle
- Performance Improvement
- Mergers and Acquisitions
- Muoio, Dave. (August 29, 2022). July’s hospital margins were among the worst of the pandemic, Kaufman Hall says. Fierce Healthcare.
- LaPointe, Jacqueline. (July 7, 2022). Healthcare Revenue Falling Short of 2022 Goals for Many Providers. RevCycleIntelligence.
- Kaufman, Kenneth. (September 21, 2022). The Sobering State of Hospital Finances. KaufmanHall.
Public Healthcare Operators: Valuation Trends Summary
By: Jordan Tussy and Colin McDermott, CFA, CPA/ABV
While the valuation of a public company is dependent on macroeconomic, industry, and company-specific factors, VMG Health has attempted to isolate key drivers of the recent market pullback of public healthcare operators. Specifically, VMG Health has isolated two variables:
- Change in equity analyst consensus EBITDA estimates for FY 2022.
- Change in the implied forward EBITDA multiple utilizing current enterprise value.
VMG Health reviewed the change in enterprise value, EBITDA, and the implied forward multiple, as defined below, of 17 publicly traded healthcare operators from December 31, 2021, to June 10, 2022. We then quantified the impact on enterprise value for each of the identified companies in Exhibit A resulting from fluctuations in EBITDA as compared to the implied forward multiple over the observed period.
- EBITDA: Equity analyst consensus EBITDA estimates for FY 2022 as of the observation date per S&P Capital IQ .
- Enterprise Value: Defined as the market value of equity plus interest‐bearing debt (excluding right-of-use liabilities) and minority interest less cash and cash equivalents.
- Implied Forward Multiple: [Enterprise Value] ÷ [FY 2022 Consensus EBITDA Estimates].
Based on a review of 17 publicly traded healthcare operators, aggregate total enterprise value declined by approximately $46.1 billion, or 15.0%, from December 31, 2021, to June 10, 2022. While 10 of the 17 companies now have lower consensus EBITDA estimates, this appears to account for only 10.9% of the enterprise value decline. The overwhelming reduction in the total enterprise value is due to multiple contraction with 13 of the 17 companies currently trading at a lower implied multiple.
Furthermore, 14 of the 17 public operators experienced a decline in enterprise value over the last six months, whereas Acadia Healthcare Company, Inc., LHC Group, Inc., and U.S. Physical Therapy, Inc. were the only three companies that saw an enterprise value increase over the same period . Unsurprisingly, these companies also did not experience multiple contraction.
The two publicly traded diagnostic laboratory businesses, Laboratory Corporation of America Holdings and Quest Diagnostics Incorporated, experienced the most significant enterprise value decline because of multiple contraction. On average, the implied forward EBITDA multiples decreased by approximately 4.0 turns of EBITDA, from around a 13.0x to approximately a 9.0x.
Select Medical Holdings Corporation (“Select”) saw the most significant enterprise value decline due to a decrease in consensus EBITDA estimates. Select’s EBITDA has declined by almost $150.0 million over the last 6 months, which has resulted in a 15.6%, or $1.2 billion, reduction in enterprise value. Overall, the trading multiples for public operators within the post-acute care sector have remained relatively flat, but consensus EBITDA estimates have declined by approximately 6.7% with an approximately $2.6 billion impact on enterprise value.
Among the publicly traded acute-care hospital operators, HCA Healthcare, Inc. experienced the most significant dollar reduction in enterprise value, decreasing $19.6 billion, or 17.0%, from $115.3 billion to $95.8 billion. Of this change, approximately 62.6% was due to multiple contraction and 37.4% was due to consensus EBITDA decline. Collectively, enterprise value for the acute care hospital sector decreased by approximately 14.2%, or $24.0 billion, driven primarily by a contraction in trading multiples of nearly 1.0 turn of EBITDA.
Of the other publicly traded healthcare operators observed, Surgery Partners Inc. experienced the most significant impact on enterprise value, on a percentage basis, due to the contraction in implied multiple. The company’s multiple declined by almost 5.0 turns of EBITDA from December 31, 2021, to June 10, 2022, resulting in a $1.9 billion, or 21.8%, reduction in enterprise value. Overall, declines in consensus EBITDA estimates did not have as significant of an impact on enterprise value as implied multiple contraction for the other companies with two of the five operators experiencing growth in their consensus EBITDA estimates over the observed period.
The equity markets continue to react to macroeconomic factors, such as interest rate fluctuations, as well as industry-specific information, including rising labor costs. While many of the public companies currently have lower consensus EBITDA estimates for FY 2022, the market seems to have also pulled back on valuations, as evidenced by the decline in the implied forward multiples. It is yet to be determined if this reduction is short-term in nature, and VMG Health will continue to monitor the public markets.
 VMG Health relied on S&P Capital IQ for the FY 2022 consensus EBITDA estimates as of December 31, 2021, and June 17, 2022. The consensus EBITDA as of December 31 is primarily based on analyst estimates following companies’ Q3 2021 earnings calls through December 2021. Similarly, the consensus EBITDA as of June 17 is largely comprised of analyst estimates following the Q1 2022 earnings calls through June 2022.
 While VMG Health’s analysis focuses on the effect of two variables on enterprise value, we understand there are additional factors impacting public company valuations. For example, following the March 29, 2022 announcement of UnitedHealth’s plan to acquire LHC Group, LHC’s price and forward multiple increased and have remained elevated based on the market expectations of this transaction.
Five Key Takeaways From the Public Healthcare Operators in 2021
By: Olivia Chambers, Savanna Dinkel, CFA, Madison Higgins, Madeline Noble, and Ayla Saglik
As we enter 2022, we look back to reflect on the major trends that shaped the healthcare sector over the past year. COVID-19 continued to be a major player throughout 2021, forcing healthcare systems to adapt to new variants, rising labor pressures, financial activity, and new regulations. Despite these challenges, the sector remains optimistic and ready to adapt.
Here are five key takeaways we believe defined the healthcare sector over the past year:
Financial Recovery From Pandemic
After the Q2 earnings season, VMG Health released an article analyzing post-COVID healthcare operator guidance. Generally, we found that healthcare operators were optimistic about the recovery of their revenue and adjusted EBITDA metrics over pre-pandemic levels, with most operators increasing their FY 2021 guidance with each subsequent reporting period.
While optimism for recovery to pre-pandemic levels remains, it appears that the post-acute operators have tempered some of their recent growth expectations. Based on disclosures of the public operators, the recent resurgence of COVID-19 through the Omicron variant has caused additional strain on the post-acute sector. During the J.P. Morgan Healthcare Conference, Universal Health Services (“UHS”) CFO, Steve Filton noted that the company was struggling to find providers who can accept COVID patients once they are ready to be discharged from the hospital.
Post-acute providers appear to have been hit especially hard by the recent labor shortages in the healthcare industry (discussed further below). As compared to the hospital operators, the financial performance of these post-acute providers has been affected disproportionally by the labor shortages. While hospital operators have been receiving additional reimbursement for COVID patients, helping to offset a portion of the increased staffing costs, the post-acute care providers have not received a similar subsidy.
Due to these recent pressures, Select Medical Holdings Corporation (“SEM”) released an expected earnings announcement in advance of the actual results, in which it noted “the unpredictable effects of the COVID-19 pandemic, including the duration and extent of disruption on Select Medical’s operations and increases to our labor costs, creates uncertainties about Select Medical’s future operating results and financial condition.”
While we have seen increasing optimism by healthcare providers over the past few quarters, the recent disclosures from the post-acute sector illustrate that the effects of COVID continue to ripple through the healthcare sector. With the fourth quarter results being released over the coming weeks (HCA and Encompass recently released), it will be interesting to hear if other sectors report similar headwinds.
Rising Labor Expense: Potential Impact to 2022 Performance
Healthcare labor expenses continued to exceed historical levels with a 12.6% year-over-year increase based on a recent analysis of over 900 hospitals. Labor expenses grew at a faster rate than the number of clinical hours worked, which supports the notion that rising labor costs were not due to increased staffing levels but rather due to labor shortages driving higher pay to improve employee retention. Part of the labor shortage can be credited to the surge of Delta and Omicron variants in the second half of 2021 that resulted in high volumes of quarantined staff and a reliance on costly contract labor and travel nurses. At the Bank of America December 2021 Home Care Conference, LHC Group announced a decrease in quarantined staff throughout Q4 from a high of 4% down to 1% in December. This indicates that the labor market issues will see some improvement as health systems’ dependence on pandemic-related contract labor declines as COVID-19 surges dissipate going into 2022.
A more concerning challenge faced by all sectors was the shrinking workforce, coined the “Great Resignation.” The Bureau of Labor Statistics reported healthcare and social assistance workers had the second highest quit rate in November 2021 at 6.4% due to increasingly high levels of professional burnout. The waning labor force has prompted companies to offer additional incentives such as shift and retention bonuses. For example, HCA reported during Q3 a 10-12% annual increase in FTEs being in the premium pay categories. Many large public players have voiced an anticipation of continued high levels of premium pay, competitive bases, and higher annual wage inflation to attract and maintain adequate staffing levels in 2022.
Leaders in the industry have announced initiatives to decrease labor pressure primarily by focusing on recruiting and retention to bounce back to pre-pandemic levels of employment. With a heightened focus on attracting and maintaining adequate levels of hired staff as opposed to contract labor, it appears the overall industry expectation for 2022 is that labor costs will likely decrease compared to 2021 although not to pre-pandemic levels. The chart below shows the percentage change in employment across the healthcare sector from the Bureau of Labor Statistics Job Openings & Labor Turnover Survey from February 2020 to November 2021. This highlights the steady recovery toward pre-pandemic staffing levels for outpatient care and physician offices, the continued employment challenges in home health and hospital settings, and the notable struggle for community and nursing care facilities to return to a state of normalcy.
Robust M&A Activity
Deal activity within the healthcare sector was strong in 2021 with industry-specific multiples that reached or in many cases exceeded 2019 levels. Experiencing a noticeable rebound from 2020, volume and value of deals grew by substantial margins on a year-over-year basis. Deal volume in the health services industry rose by 56% while value rose 227% in the TTM 11/15/21 period. Long-term care led all sectors with the highest volume of deals, as seen historically, and continues to remain a hot spot in the transaction space. Similarly, physician medical groups and the rehabilitation sector experienced the largest growth transaction volumes year-over-year.
Physician medical groups have received vast interest in physician employment from private equity firms, new-age value-based care organizations, services arms of managed care giants (Optum, Neue Health), and health systems. This, coupled with independent physician group operating challenges from COVID-19 related volume impact and looming Centers for Medicare and Medicaid Services (CMS) cuts, is creating a robust transaction environment that is expected to continue during 2022. For the rehabilitation sector, strong demographic tailwind, along with the lifted CON moratorium in Florida and continued joint venture interest between health systems and strong rehabilitation operators (Select, Kindred, Encompass), has resulted in material deal volume in the space.
Hospitals and health systems were the only sector to see a decline in volume of deals, down 26% from the previous year. Despite the decline, the total transaction size of deals only dropped slightly year over year, indicating larger deal-size on a per-transaction basis. The acceleration of megadeals taking place, the shifted focus on scale, and the diversification of their business models all drove average total size per deal higher than seen before in 2021.
Effective January 1, 2021, the Centers for Medicare and Medicaid Services (CMS) implemented a price transparency rule requiring hospitals in the United States to provide accessible pricing information to patients about the cost of the care they may receive. Hospitals must display negotiated rates for all items and services, in a machine-readable format, so that patients can compare prices before arriving at the hospital.
Though, in July 2021, a study was published by PatientsRightsAdvocate.org detailing that a vast majority of hospitals were not compliant with the new rule. At the release of the study, the penalty for non-compliant hospitals was $300 per hospital, per day. While many patients advocate for CMS to stiffen penalties for non-compliant hospitals, healthcare professionals argue against the rule, stating CMS did not provide enough clarity on what the rule should entail.
A vice president of a large U.S. health system discussed the ambiguities around the rule with Fierce Healthcare. “One interpretation is you simply publish your rate schedule – whatever your rate exhibits are in your contracts, publish that and that’s compliant. Another one is to summarize these [CMS] packages [and] what your negotiated charges are.” For many health systems, the resources required to implement their rates in a machine-readable format far outweigh the penalty of remaining non-compliant. The VP stated that he believes many hospitals already provide their rates in a clear, understandable way, but the rule’s lack of clarity and the requirement for a machine-readable format make compliance difficult and costly.
In November 2021, CMS released the 2022 Outpatient Prospective Payment System (OPPS)/Ambulatory Surgery Center (ASC) Payment System final rule (OPPS Final Rule). Within this rule, CMS increased penalties for hospitals that are not compliant with the price transparency rules and removed barriers for patients accessing online pricing information.
While the Final Rule may be beneficial for patients, Stacey Hughes, Executive Vice President for the American Hospital Association (AHA), states that they “are very concerned about the significant increase in penalties for non-compliance with the hospital price transparency rule, particularly in light of the many demands place on hospitals over the past 18 months, including both responding to COVID-19, as well as preparing to implement additional, overlapping price transparency policies.”
The new penalties, visible in the chart above, went into effect on January 1, 2022.
IPO and SPAC Stock Price Performance
A record number of health and health services companies went public during 2021 by way of SPAC or IPO. Rebecca Springer, a private equity analyst with PitchBook noted, “The multiples in public markets are very, very strong right now, so you can get, all else equal, a better return on your investment if you go public with your company rather than selling it to a strategic investor.”
Unfortunately, while the stock market might be performing well, the recently public healthcare operators have not faired as well since their initial offerings. The Healthy Muse Health Tech Index (“HTI”) generally underperformed the overall performance of the stock market, with the majority of the players finishing in red; the HTI declined 35% as opposed to the 27% gain for the S&P 500 during 2021. The public markets seemed like a perfect place for an exit strategy given the multiples observed in the public markets. All recent entrants finished the year below the original IPO price and while the reasons for the price declines varied it is clear the public markets are less forgiving with valuations if an organization does not achieve expectations.
Overall, the healthcare sector experienced highs and lows during 2021 as it continued to navigate a post-COVID world. As pandemic pressures continue into 2022, healthcare institutions will have to keep a close eye on staffing costs and abide by new regulations. Despite these challenges, the appetite for M&A transactions and market participation in the sector remains strong. We look forward to a new year of challenges, wins, and continued changes in this interesting industry.
Post-COVID Healthcare Operator Guidance: Comparing recent guidance figures from the public healthcare operators to levels estimated prior to the COVID-19 pandemic
By: Savanna Dinkel, CFA, Madi Whyde, Grayson Burchard, Alex Whitley, and Colin Geraghty, Colin McDermott, CFA, CPA/ABV
Contributors: Blake Madden, Chris Madden, Alex Malin, Eric Noyer, and Olivia Wilson
In March 2020, the coronavirus (“COVID-19”) pandemic began reshaping the world economy. At the time, many factors about the disease were unknown and impossible to predict. Some of these factors include the evolution of the disease, timeline to produce a vaccine, and the economic effects of worldwide lockdowns. The healthcare industry was uniquely affected, and many healthcare operators felt that they were not in the position to forecast future financial performance. After a year of operations in a COVID-19 impacted world, operators resumed the disclosure of earnings guidance. VMG analyzed guidance figure trends from publicly traded acute care hospitals, post-acute providers, home health and hospice companies, and a variety of other operators to better understand how the industry is recovering and evolving as the pandemic continues.
Please see below for a list of the companies examined, as well as further detail regarding the various metrics considered.
Acute Care Hospitals
The pandemic’s grip on acute care moderated through Q2 2021 resulting in significant revenue increases for the public hospital operators. Management, often with a tone of surprise, cited strong demand for services as the primary driver of the revenue upticks and reports of double-digit volume growth frequented earnings call highlights.
Samuel N. Hazen, CEO of HCA noted, “On a year-over-year basis, revenues grew 30.0% to $14.4 billion… To highlight a few areas, outpatient surgeries were up 53.0%, emergency room visits grew 40.0%, cardiology procedures increased 41.0%, and urgent care visits were up 82.0%.”
Similarly, Tim L. Hingtgen, CEO and Director of CYH revealed, “For the second quarter, on a same-store basis, net revenue increased 30.2% year-over-year… For the full quarter, year-over-year, same-store admissions increased 17.0%, while adjusted admissions were up 28.5%. Surgeries increased 43.7% and ER visits were up 39.2%.”
As a result of the performance of Q2 2021, public hospital operators further increased their guidance for CY 2021. Still, 2021 revenue guidance remains relatively in-line with pre-COVID 2020 estimates indicating revenue stagnated in 2020. The outlier, CYH, completed a planned divestiture program at the end of 2020, making it difficult to compare post-COVID revenue guidance to the pre-COVID figures.
Adjusted EBITDA and EBITDA Margin
In terms of profitability, HCA and THC were the earliest Acute Care Hospital operators to predict CY 2021 adjusted EBITDA to exceed the figures estimated at the beginning of CY 2020 and CY 2019, which they publicly estimated as early as Q4 2020. In light of the positive results reported during Q2 2021, CYH and UHS joined their peers in predicting favorable improvements in profitability. As of Q2 2021, the public hospital operators were unanimous in their guidance for the full year in terms of exceeding pre-COVID CY 2020 adjusted EBITDA.
Steve G. Filton, CFO and Secretary of UHS noted, “This robust recovery in volumes exceeded the pace of our original forecast and drove the favorable operating results even in the face of continuing labor pressures in both of our business segments.”
On a margin basis, all Acute Care Hospital operators have estimated CY 2021 adjusted EBITDA margins to exceed CY 2019 and 2020 levels. The pandemic has forced Acute Care Hospitals to take a closer look at their expense structures and streamline operations, leading to the predicted EBITDA margin growth.
The management teams have all reacted positively to a successful first half of 2021, as all four operators expect CY 2021 revenue and adjusted EBITDA levels near or above their initial CY 2021 estimates. However, although the guidance figures seem positive, CY 2021 levels are only at or slightly above pre-COVID CY 2020 expectations, proving that these operators are remaining cautious when providing forward-looking estimates. The Acute Care Hospital industry, while showing signs of recovery after the initial peak of the pandemic, is still experiencing the effects of the COVID crisis, and the recent rise of the Delta variant could further exacerbate the impacts that the COVID-19 pandemic had on the Acute Care Hospital providers.
During UHS’ Q2 2021 earnings call, Steve G. Filton, CFO and Secretary of UHS, cautioned, “During the past 4 to 6 weeks, many of our hospitals have experienced significant surges in the number of COVID patients, and it is not evident that this surge has yet reached its peak. Given the uncertain impact of this most recent surge on non-COVID volumes and on labor shortages, we based our guidance for the second half of the year, primarily on our original internal forecast.”
In CY 2021, Post-Acute Care operators expect growth above both CY 2019 revenues and expected pre-COVID CY 2020 revenues. Most notably, when these operators released their original CY 2020 guidance, they projected mid-single digit growth. Looking at their CY 2021 guidance as a percentage of CY 2019 levels and as a percentage of CY 2020, it appears that they expect to still achieve mid-single digit growth on a compounded annual basis from CY 2019. These data points suggest that the Post-Acute Care operators’ growth trajectory was likely not hindered or set back a year by the COVID-19 pandemic.
Additionally, both Post-Acute Care operators have continued to raise their CY 2021 guidance over the past two quarters. During EHC’s most recent earnings call, management highlighted that the return of elective procedures has been fueling inpatient rehabilitation facility (“IRF”) discharge growth. In addition, EHC is experiencing growth in IRF revenue per discharge due to strong reimbursement rates, continued suspension of sequestration, improved discharge destination, and cost report adjustments. These tailwinds, along with the improvement of home health and hospice volumes and IRF M&A activities, resulted in the continued increase of revenue guidance for EHC.
Similarly, SEM has experienced a rebound in volumes in all four segments (i.e., IRFs, long-term acute care hospitals (“LTACHs”), occupational health, and outpatient rehabilitation) at levels well above pre-pandemic levels, resulting in the continued increase in CY 2021 guidance figures. As stated in SEM’s Q1 2021 earnings press release, “In March 2021, both Select Medical’s outpatient rehabilitation clinics and Concentra centers experienced patient visit volume approximating the levels experienced in January and February 2020, the months preceding the widespread emergence of COVID-19 in the United States.”
Adjusted EBITDA and EBITDA Margin
Similar to their CY 2021 revenue guidance figures, EHC and SEM have continued to raise their CY 2021 Adjusted EBITDA guidance ranges. According to EHC’s Q1 2021 earnings release, EHC increased CY 2021 guidance “to reflect Q1 performance and the extension of suspension of sequestration.” Similarly, in Q1 2021, SEM cited revenue growth as the primary driver of adjusted EBITDA growth, with revenue growth resulting from favorable pricing, a new joint venture, a higher acuity patient mix, increased reimbursement rates, and the suspension of sequestration.
Even with the COVID-19 pandemic affecting performance in CY 2020, SEM beat its original CY 2020 midpoint guidance figures by approximately $57.0 million, primarily driven by revenue growth in its inpatient segments. As SEM’s outpatient segments return, SEM’s Adjusted EBITDA performance continues to improve in CY 2021. During SEM’s Q2 2021 earnings call, the Co-Founder & Executive Chairman, Robert A. Ortenzio, stated, “In addition to the volume growth, the inpatient and outpatient rehabilitation hospitals and clinics posted their highest quarters for adjusted EBITDA in the history of the company.”
On the margin side, although EHC has continued to increase its expected CY 2021 Adjusted EBITDA margin throughout the past two quarters, management has cited pressures in nursing staffing across the country that may result in “a little bit of cost climb as we move into 2021 and throughout the year.” On the other hand, SEM has projected Adjusted EBITDA margins at levels well above those expected pre-pandemic. As SEM continues to raise their expected Adjusted EBITDA margin, management has noted that their expenses are being managed well, resulting in current Adjusted EBITDA margins that are “the highest in the history of the company.”
Overall, both Post-Acute Care operators have reacted positively to successful performances over the first half of CY 2021. To this point, Mark Tarr, CEO and President of EHC, noted “the combination of the return of our former market, along with new referral sources we’ve added throughout COVID, leave us very encouraged about the strong organic growth opportunities beginning in the back half of the year.”
Home Health & Hospice
Since the end of CY 2019, AMED and LHCG have both steadily increased their observed revenue estimates, until the most recent quarter. In fact, AMED lowered its CY 2021 guidance during its most recent earnings call citing more conservatism due to the “prolonged, and now, resurgent impact of COVID on our hospice business.” More specifically, the pandemic has resulted in a continued decline and suppression of occupancy rates in senior living facilities (a major referral source), a decrease in length of stay, and an increase in hospice staff turnover. AMED’s management noted that when previously releasing CY 2021 guidance, they had not expected the continuation of COVID impacts during the second half of the year. LHCG discussed similar headwinds but did not adjust the projected guidance figures.
Adjusted EBITDA and EBITDA Margin
During Q4 2020 and Q1 2021, the Home Health & Hospice operators expected to significantly improve upon their CY 2019 and pre-COVID CY 2020 adjusted EBITDA guidance levels. Keith Myers, CEO of LHCG, discussed the company and overall industry’s success, stating “We are also benefiting from an improved legislative and regulatory outlook as legislative initiatives from Congress, innovation from CMS and stated budget and stimulus priorities of the Biden Administration are all emphasizing the need for at home care.” In addition to improved expected adjusted EBITDA levels since the pandemic, the adjusted EBITDA margin for the Home Health & Hospice operators has also increased compared to CY 2019 and pre-COVID expected CY 2020 levels.
While these Home Health & Hospice operators expected strong performance as they emerge from the pandemic, referrals from senior housing have remained low since the pandemic. Kevin McNamara, CEO and President of Chemed, a company in the space that does not provide guidance for its Home Health & Hospice subsidiary, stated, “The most complex issue still facing [our subsidiary] is the disruptive impact that the pandemic has had on traditional hospice referral sources and low occupancy in senior housing. This disruption continues to impact our admissions and traditional patient census patterns.” This sentiment was reflected in AMED’s Q2 2020 earnings call, where they decreased guidance to reflect the headwinds discussed previously.
Despite the recent concerns related to the continuation of COVID, operators remain optimistic about the future of the space, specifically the demographic tailwinds. During the Q4 2020 earnings call, Paul Kusserow, CEO and President of AMED stated “[Demographics are] in our favor with the baby boomers creating a potential surge of patients in the coming year, with more people turning 65 years old than ever before. The burgeoning 75-plus population, coupled with ever-increasing unsustainable health care costs puts us in a very advantageous position.”
Outpatient & Other
Revenue projections for Outpatient and Other operators are varied as they represent a variety of industries and markets that have been affected by COVID-19 in different ways. RDNT, which provides diagnostic imaging services, and SGRY, which runs ambulatory surgery centers, expect growth above both CY 2019 revenues and expected pre-COVID CY 2020 revenues. RDNT increased their revenue guidance as volume, in virtually all areas of the business, has increased as the states in which they operate have loosened COVID-19 restrictions. While still higher than CY 2019 and CY 2020, SGRY has decreased their CY 2021 revenue guidance as low acuity cases are expected to represent a larger portion of the case mix than previously thought.
On the other end, ACHC, a behavioral health company, expects growth below both CY 2019 revenue and expected pre-COVID CY 2020 revenues. However, ACHC is an outlier as they sold UK operations to a private equity firm in December 2020, making it difficult to compare going forward guidance estimates with historical estimates. ACHC increased CY 2021 guidance as patient volume increased due to the mental health crisis that evolved during the pandemic as well as an increase due to the societal acceptance of mental health services.
DVA, which performs dialysis services, did not provide CY 2021 guidance during the most recent earnings call. Additionally, MD, a physician-led medical group that partners with hospitals, health systems and health care facilities to offer women’s and children’s care, has still not resumed guidance since they announced in their Q1 2020 earnings report that they would no longer provide guidance due to the rapidly evolving nature of the COVID-19 pandemic.
Adjusted EBITDA and EBITDA Margin
During the most recent earnings calls, every entity that provided guidance increased their CY 2021 guidance figures. ACHC increased adjusted EBITDA guidance due to a rise in patient volume and the expectation that the demand for mental health services is expected to increase. ACHC also expects their adjusted EBITDA margin to increase as more cost synergies are realized with the addition of new beds and facilities.
While DVA did not provide adjusted EBITDA guidance, the CFO & Treasurer, Joel Ackerman, stated “we’re also expecting an uptick on costs related to testing, vaccinations and teammate support as a result of the Delta variants” during the company’s Q2 2021 earnings call.
During the most recent earnings call, RDNT raised their CY 2021 EBITDA guidance from $192m to $205m. According to Mark D. Stolper, the Executive VP & CFO, RDNT’s adjusted EBITDA margins have improved due to regional cost efficiencies and an increase in reimbursement due to previous investments in new equipment. Howard G. Berger, President & CEO of RDNT, recently stated in the company’s Q2 2021 earnings call that “with patient volume returning to more normal levels and through implementing aggressive cost-cutting and cost containment programs, our same-store growth and performance model has returned.”
Like RDNT, SGRY has increased their most recent CY 2021 adjusted EBITDA guidance due to the expectation of volume increases due to seasonality and a rise in higher-acuity procedures. J. Eric Evans, CEO & Director of SGRY, stated in the Q2 2021 earnings call that margins “are projected to increase in the back half of 2021, consistent with historical performance as seasonal commercial mix intensifies.”
The entities in this section represent a variety of sub-industries that were all affected by the pandemic in a unique way. Overall, it appears that the companies that were able to create cost efficiencies and see a notable recovery in volume increase their guidance figures, while those who dealt with increasing expenses and continued volume variability decreased or did not provide guidance.
Although each industry and operator reacted to the pandemic uniquely, the overall outlook among these operators remains positive. Comparing the most recent guidance figures to CY 2019 performance, eight out of eleven operators with sufficient guidance data expect higher revenue in CY 2021 according to their most recent Q2 2021 earnings reports. Furthermore, nine of the same eleven operators estimate similar performance with adjusted EBITDA.
Comparing Q2 2021 guidance to the CY 2020 estimates released before the pandemic can provide additional insight on which companies not only survived but continued to grow throughout the COVID-19 pandemic. Eight out of the eleven operators expect CY 2021 revenue to exceed estimated revenue levels at the beginning of CY 2020. Additionally, ten out of eleven predict similar trends with adjusted EBITDA. However, it is interesting to note that some of these operators, specifically in the Acute Care Hospital sectors, expect CY 2021 estimates to outperform CY 2020 estimates only by a slim margin. Since these operators are only predicting a small amount of revenue and adjusted EBITDA margin expansion from 2020 to 2021, it appears they might not have experienced normal levels of development throughout the pandemic. The Post-Acute Care and Home Health & Hospice operators, on the contrary, expect to significantly outperform pre-COVID CY 2020 estimates in 2021, illustrating that these two sub-industries may not have experienced a “lost year” of growth in 2020 as a result of the COVID-19 pandemic.
Lastly, to understand how these operators’ performance has trended throughout CY 2021, we have compared the most recent CY 2021 guidance figures to those released during the Q4 2020 earnings calls. Nine out of eleven companies have adjusted revenue guidance to levels at or above the initial figures, and ten out of the eleven have either increased adjusted EBITDA estimates or left them equal. Based on these statistics, it appears operators have successfully started CY 2021.
Despite the lingering COVID-19 pandemic, it appears healthcare operators are optimistic about the recovery of their revenue and Adjusted EBITDA metrics over pre-pandemic levels. Further, many healthcare operators have taken the past year and a half to implement new strategies that will allow them to become more efficient long-term. Overall, it appears the healthcare operators have adapted during these times and are optimistic about their future performance despite the lingering COVID-19 pandemic.
Post-COVID Hospital Guidance: Comparing Full-Year Guidance from Public Hospital Operators before the COVID-19 Pandemic and One-Year Later
Last March, the United States declared a national emergency related to the coronavirus (“COVID-19”) pandemic. At the time and throughout the beginning of the pandemic, meaningful economic factors were unknown including the evolution of the disease, the extent of its economic impact, and the results of steps taken and yet to be taken by the federal government, financial institutions, and market participants. As a result, many healthcare operators suspended the disclosure of earnings guidance. Now, after a year of experience with the COVID-19 pandemic, operators have resumed sharing their expectations of future financial performance. VMG Health analyzed select guidance figures from the four main public hospital operators to better understand the industry’s perspective on operations in a post-COVID world.
Please see below for a list of the public hospital operators examined, as well as further detail regarding the various metrics considered.
Except for CYH, initially and most recently, the hospital operators expect CY 2021 revenue levels at or above those estimated at the beginning of CY 2020, and well above their CY 2019 performance. Please note, CYH completed a planned divestiture program towards the end of 2020, making it difficult to compare CY 2019 performance to the forward guidance figures.
At the end of 2020, when the hospital operators were once again comfortable providing guidance figures, the management teams anticipated continued COVID volumes during the first half of the year, with a return to more normal levels by the second half of the year. HCA noted that they expected 2021 volumes to grow above 2020 levels but trend slightly below 2019 levels, while THC believed their 2021 volumes would improve on 2019.
A few months later, during the Q1 2021 earnings calls, the operators noted strong first quarter results and tailwinds from the extension of sequestration through the end of the year. As a result, HCA tightened their CY 2021 revenue guidance and THC increased their CY 2021 revenue guidance. Although UHS kept their CY 2021 guidance figures flat, they noted that they “remained comfortable” in their ability to achieve the projected revenue levels and viewed sequestration as a “cushion” not currently factored into their guidance figures.
Except for UHS, initially and most recently, the hospital operators expect CY 2021 adjusted EBITDA levels near or above those estimated at the beginning of CY 2020 and their CY 2019 performance.
As mentioned previously, the operators pointed towards a strong first quarter performance as rationale for tightening or raising their CY 2021 EBITDA guidance ranges. Additionally, HCA, CHS, and THC discussed the continued focus on cost saving initiatives throughout 2021 to combat expense pressures related to the COVID-19 pandemic.
During the Q4 2020 and Q1 2021 earnings calls, UHS management cited similar expense pressures, primarily related to labor, associated with the COVID-19 pandemic. Generally, the UHS team expects the labor pressures to ease as the volume of COVID patients declines, but at a slower pace.
Although uncertainty remains, with a full year of COVID-19 operations under their belts, hospital operators have become more comfortable discussing go-forward performance. As Daniel Cancelmi, CFO and Executive VP at THC said during the Q4 2020 earnings call, “Although there are various uncertainties as to how the pandemic will impact us this year, we believe we have sufficient visibility and confidence as to how our business will perform during the ebbs and flows of the pandemic to enable us to provide investors an outlook of our projected results this year.” Additionally, Kevin Hammons, Executive VP and CFO at CYH, noted that although uncertainty remains, there are multiple ways to achieve the guidance figures. After a hard year for the healthcare industry, it is encouraging to see the hospital operators look forward again and provide a generally positive outlook related to the recovery from the COVID-19 pandemic.