HCA Healthcare, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

HCA Healthcare, Inc., is one of the largest for-profit hospital operators in the United States, managing a network of hospitals, surgery centers, and other healthcare facilities, with a focus on providing a wide range of medical services to patients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

HCA Healthcare operates 186 hospitals, and 123 freestanding surgery centers, as of December 31, 2023.

Business Overview:

HCA Healthcare, Inc. (HCA), is a healthcare juggernaut that provides services through its vast network of hospitals, ambulatory surgery centers, and other care facilities. Their revenue streams can be segmented by service offerings (primarily inpatient and outpatient care), payment source (Medicare, Medicaid, commercial insurance, uninsured), and geography (National, American, and other).

  • Revenues:
    • The vast majority of HCA’s revenue is generated from patient services, which is classified as inpatient and outpatient care.
    • Key payers include government programs (Medicare and Medicaid), commercial insurers, and patients themselves through direct payments.
    • Medicare and Medicaid make up the majority of HCA revenue.
    • Revenue has been steadily increasing and the third quarter of 2024 saw a 11.2% increase in revenue from the same period in 2023.
  • Industry Dynamics:
    • The healthcare industry is undergoing constant change, driven by technological advancements, regulatory modifications (like the Affordable Care Act), demographic shifts, and the prevalence of chronic diseases and complex conditions.

Medicare is a key part of HCA’s revenue but CMS recently proposed new regulations that may have a negative effect on margins. * There is a consolidation among payers as insurance companies are becoming larger and more prominent, which are becoming price makers. * The industry is highly competitive and influenced by reimbursement policies, government regulations, and technological innovation.

  • Margins:
    • HCA’s margins have faced pressure in recent years from rising labor costs and inflation.
    • Margins decreased during COVID-19, as well, but as of late 2023, margins have improved but are still lower than prepandemic margins.
  • Competitive Landscape:
    • HCA operates in a fragmented market that includes nonprofit health systems, other for-profit hospital operators, and government-funded facilities.
    • The main competitors include companies like Tenet Healthcare, Community Health Systems, and academic health systems.
    • Competition is based on factors including the range and quality of services, location, payer contracts, and brand recognition.
  • What Makes HCA Different:
    • HCA has a vast network of hospitals, which gives the advantage of scale and a larger reach of the customer.
    • HCA does not just depend on one geography, and has hospitals and other facilities in several different states and also other countries.
    • HCA is very focused on using technology for better efficiencies and patient care.
    • HCA has a good operating leverage which lets them scale efficiently.
  • Recent Concerns:
    • HCA, like other hospital operators, has been affected by the staffing shortages and increasing labor costs, which were exacerbated by COVID-19 and is an ongoing issue.
    • HCA has also been dealing with increased input costs due to inflation.

Financial Analysis:

HCA’s financials provide a good perspective on the company’s financial health and performance. Based on the latest 10-Q and 10-K filings, the following can be said:

  • Revenues:
    • Revenue has been consistently increasing over the last decade, and that is expected to continue in the future.
    • The revenue growth has been somewhat supported by acquisitions made over the last few years, however most of it is organic.
  • Profitability:
    • HCA is profitable and has consistent profits year on year.
    • Operating profit has been inconsistent and fluctuates, but net profits have been more consistent.
    • Profit margins have been impacted by higher labor and operating costs.
  • Balance Sheet:
    • HCA has a big amount of debt which is around $30 billion.
      • A positive sign is that the majority of the debt is long-term debt, rather than short-term debt that is riskier.

Despite long term debt being manageable, HCA has a huge amount of goodwill and intangible assets on its books, which are $14 billion. This will make the company look a lot more overleveraged if such assets are discounted. Also, some of these intangibles are related to acquisitions, which has been shown to not always create value.

  • HCA’s cash flows have shown a good recovery after the pandemic, where they were badly hit.

  • The cash flows are a little irregular because of the seasonality of the business.

  • Capital Expenditures: * Capital expenditure is still elevated due to the need to maintain their existing facilities and to expand.

  • Share Buybacks:

  • HCA has continued to conduct sizable share buybacks which will help increase earnings per share.

HCA’s financials show a strong recovery from COVID-19 downturns, however, current economic conditions still pose a threat and affect profitability. The long-term sustainability of these metrics need to be kept in check by seeing their financial statements at the end of each year.

Moat:

HCA Healthcare has a narrow moat, rating of 3 out of 5, based on the following points:

  • Economies of Scale: HCA benefits from its large scale, which creates efficiencies in procurement and operations. However, due to geographical nature of its operations, it cannot really achieve nationwide economies of scale.
  • Network Effect: The number of hospitals and medical facilities does not create a strong network effect. It is more of a geographic moat, where a company may dominate a local market but that advantage will not expand much outside that area.
  • Switching Costs: Patients don’t have very high switching costs, but hospitals and insurance companies have higher switching costs that favor HCA.
  • Intangible Assets: HCA does have brand recognition but has mostly been acquired through acquisitions and not inherently generated, and it also does not generate a lot of pricing power compared to specialized products.
  • Barriers to Entry: There are high initial costs for building new hospitals and for getting all the necessary licenses and approvals.

Risks:

HCA is facing the following key risks:

  • Regulatory Risks: The healthcare industry is heavily regulated, and changes in government policies and reimbursements can have a major impact on HCA’s revenue and profitability. Recent regulatory proposals for Medicare and Medicaid, if implemented, may affect profitability.
  • Pricing Risk: The negotiation of contracts with insurance providers often determines the price HCA can charge. Larger insurance providers are gaining negotiating power over the past few years, threatening profits.
  • Technological Risk: The healthcare industry is evolving rapidly due to technological changes. HCA must constantly invest in new technology. Also, a new product that offers a better or cheaper alternative can disrupt the market quickly.
  • Operational Risks: The company faces the risk of accidents or errors in its operations.
  • Competition: Highly competitive industry, companies such as Tenet Healthcare can hurt HCA’s pricing power.
  • Macroeconomic Factors: HCA faces macroeconomic factors like inflation and rising input costs that can impact profitability.

Business Understandability:

The business is of average understandability, rating of 3 out of 5, for the following reasons:

  • The healthcare industry is complex and has many different moving parts.
  • The regulatory environment surrounding the industry adds extra complexity.
  • It is hard to accurately estimate revenue for healthcare companies, as there are a lot of factors in play.
  • Some operational metrics like patient length of stay and utilization are not easily understood.
  • However, for an average person, understanding a hospital chain should be understandable and easy to comprehend.

Balance Sheet Health:

The balance sheet health is of average quality, with a rating of 3 out of 5, based on:

  • HCA has a lot of debt on its books, which has increased due to acquisitions.
  • The long-term debt is high, but it is a more manageable form of debt than short-term debt.
  • High levels of goodwill and intangibles pose a risk.
  • Cash flows are very irregular, especially in Q1 and Q4, which can be challenging to manage.
  • Working capital is manageable and does not seem to be stretched.
  • However, HCA is a well-established company, which will be able to get access to capital markets whenever needed, and has a large cash balance on hand.