THE HEDGEYE EDGE
Hospital Corporation of America has developed into the most consensus long safe haven in the Hospitals sector. Revenues increased $363M year over year in 1Q17, yet Adjusted EBITDA increased only $2M, for 0.55% of incremental margin. HCA's Medicare business continues to be robust, but we fail to see how volume growth among these patients provides support for the current EV/EBITDA multiple given the lack of accretion delivered in 1Q17.
The Medicare population in HCA markets is growing nicely at 3.0% and driving Medicare admission and adjusted admission growth of 3.5% and 4.3% respectively. Unfortunately, the high margin Managed Care business is doing poorly by a similar degree, falling -3.2% and -1.9% for admissions and adjusted admissions, respectively. Adjusting for declines in Exchange volume, Managed Care admissions fell -2.8%, consistent with the pattern of the last several years and the underlying demographic and ESI growth trends.
HCA continues to sound like a company that has under-invested, rather than one that is capacity constrained with high expectations for "in-flight capital." The 1Q17 earnings call featured commentary on continuing market share losses to "formidable systems" in "competitive markets."
We believe HCA's results will continue to underwhelm and miss expectations for the balance of 2017. There was far more confirmation of our thesis than we expected in 1Q17 and we continue to forecast $8.2 B in EBITDA for 2017 compared to the reiterated guidance of $8.4B to $8.7B. While management commentary sounded clearly negative, except for the fact that compares get easier, the questions seemed to ignore the deteriorating margin profile for 2017 and the incremental risks to the downside apparent to us. While there was not clear evidence of nursing cost pressure, we do see this as a material risk in 2017 for a host of US providers.
INTERMEDIATE TERM (TREND)
Healthcare Exchange volume has been a driver of Managed Care volume overall and margin expansion since during the ACA expansion years. On a year over year basis, HIX volumes declined for the first time, contributing -0.40% of growth to same facility Managed Care growth of -3.2%, and when excluded, revealed Managed Care same facility admissions growth of -2.8%, in line with our pro-forma calculations for 2014-2016.
We believe HIX volume is likely to continue to decline for the balance of 2017 while demographics for the working age and Managed Care population stagnate, even in HCA markets. Same facility Medicaid grew modestly and in line with the state-weighted Medicaid population for HCA, but at a sub-Medicare margin, the contribution is negligible. In addition, we are expecting the current over-enrollment in Medicaid to reverse in the coming months through greater CMS oversight and redeterminations, adding incremental volume and bad debt pressures on the margin.
LONG TERM (TAIL)
We continue to see downside for HCA as investors adjust to declining Managed Care volumes, ACA disenrollment in both Medicaid and Exchanges, and rising Medicare mix, while their poor competitive positioning we discussed in our December 2016 presentation positioning is leading to more explicitly negative commentary regarding share losses and the need for greater defensive capital investment.
Overall, Health Care employment trends continue to weaken year-over-year, which is in line with our negative view of medical consumption. We believe hospital employment will continue to slow in response to deteriorating admissions trends. The slowing growth supports our short thesis on HCA, and the Health Care Sector more broadly, as we continue to see further downside to growth. The upcoming #ACA2.0 policy changes under repeal and replace, and, to a less extend, tax reform, are largely negative for medical spending and for providers specifically.
ONE-YEAR TRAILING CHART
