HCA Healthcare Implied Upside: Valuation - Stern IAG
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HCA Healthcare
Implied Upside:
Valuation
9/20/19
Srikar Alluri, Liam Coohill, Cody
Fang, Simran Korpal
1
Agenda
1 Company Overview
2 Healthcare in the US
3 Investment Thesis
4 Catalysts and Mispricing
5 Valuation
2
Meet the Team
Pitch Team
Srikar Alluri Liam Coohill Cody Fang Simran Korpal
Junior Analyst Junior Analyst Junior Analyst Junior Analyst
Class of 2022 Class of 2021 Class of 2022 Class of 2022
Company Industry Thesis Catalysts Valuation 3
Company OverviewValuation
4
Company Overview
Industry leading size and scale
Business Description 12 Month Stock Performance
150
145
HCA is an operator of both in patient and 140
out-patient facilities based in Tennessee. It is 135
the largest hospital provider in the United 130
125
States with over 47,000 beds in 21 states and 120
has been in operation since 1968. Roughly 5% 115
110
of all US hospital visits in the HCA system. 105
100
9/18/2018 10/18/2018 11/18/2018 12/18/2018 1/18/2019 2/18/2019 3/18/2019 4/18/2019 5/18/2019 6/18/2019 7/18/2019 8/18/2019
Largest Markets by Market Share (%) Revenue Breakdown Distribution of Facilities
39% Other,
38% 6.70% Hospitals 179
Medicare,
36% 32.90% Ambulatory and Surgery Centers 142
34% 34% Free Standing ER Rooms 84
Urgent-Care Clinics 130
Insurance,
Austin Nashville Richmond Myrtle San Antonio
52.40% Medicaid,
8%
Physician Clinics 1,120
Beach
Company Industry Thesis Catalysts Valuation 5
Company Overview
Vertical service offering and wide scope provides competitive advantages
Comparable Hospital Systems Market Share by Geography
76
Hospitals
45
Hospitals
37
Hospitals
188
Hospitals
74
Hospitals
Company Industry Thesis Catalysts Valuation 6
Company Overview
An example of HCA’s industry leading scale: TriStar Health, Nashville, TN
Nashville, TN Market Services Offered
Hospitals 10
Ambulatory and Surgery Centers 6
Imaging Centers 21
Health Parks 9
TriStar Medical Group Locations 68
Free Standing ERs 4
CareNow Urgent Care Centers 14
Transfer Center 1
Why Does it Matter?
• In the Nashville market, HCA has approximately 38%
market share, making Nashville one of HCA’s most
consolidated metropolitan area.
• Consolidation within one market enables greater pricing
power for hospital systems to insurance companies.
• Widespread scale allows for network effects amongst
different service offerings.
• Within the same TriStar Health System one can visit
physicians, see specialists, and undergo surgery.
Company Industry Thesis Catalysts Valuation 7
Valuation
Healthcare in the US
8
Healthcare in the U.S.
A majority of Americans have private Hospitals
Private
insurance sponsored by employers
• In the US, 80% of Hospitals are non-profit. Many of
Medicare
Government sponsored health insurance these are run by charitable organizations and the
for those over 65 government
Medicaid
Government sponsored health insurance
for people of low socioeconomic status Physicians’ Offices
People who don’t have health insurance are • About 60% of physicians' offices remain private, the
Uninsured
forced to self-pay rest are owned and affiliated by hospitals. There has
been a trend in recent years for hospitals to acquire
U.S Insurance Mix HCA Insurance Mix
Other, theses offices
Uninsured, 9% 6%
Medicaid,
Medicare, Urgent Care Centers
33%
21%
• Alternative to ER rooms, patients with insurance can
visit these and seek quicker treatment for less serious
issues and generally less expensive
Private,
Private 53%
Medicare, Insurance, Medicaid,
14% 56% 8%
Company Industry Thesis Catalysts Valuation 9
Hospital Industry Overview
Trends How Reimbursement Works
• Many hospitals in rural areas today are struggling as
they face low reimbursement rates as well as less Help!!! I’ve
occupancy. fallen and I
• The industry is maligned with regulatory pressure can’t get up
and rising costs.
• The trend in recent years has been consolidation as it
can help with costs and negotiating power with
insurers. Insurers have been doing the same on their Hospital bills
end. for rest and is
• Hospitals have been going after ancillary services rewarded
such as physicians' offices as they see this as a better some amount
Cody covers Co-Pay
way to build a network.
Non-Profits
• Most hospitals are non-profit run as in example with
universities or religious organizations.
• About 20% are for profit, despite this non-profits
charge just as aggressively as for-profits. `
• Non-profits have unique costs on their own to serve
as well.
Company Industry Thesis Catalysts Valuation 10Investment Thesis Valuation
11Pricing Power through Consolidation
Strategy of consolidation within targeted cities is effective at increasing margins Announced Hospital Consolidations
• Hospital consolidation is most effective at growing top-line revenue 112 115
when the acquisition is within-market, with price increasing 20-40% 98 102 102
on average, with a high watermark from 55-65% 86
91 90 Significant
74 Consolidation
• As networks increase, the negotiating leverage that a conglomerate 57 58 60 Activity in the
like HCA has over insurance providers increases more quickly than
50 Hospital Sector
their quality of care in Recent Years
• HCA has focused their business on Texas and Florida, with over
50% of beds being located in these markets 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Average Annual Profit Margin (U.S.) HCA Geographic Distribution
Bed Distribution by State States with Highest Medicare
Compensation
Other, Texas,
15,982 13,252
Tennessee,
2,544
Florida,
Virginia,
12,057
3,284
Company Industry Thesis Catalysts Valuation 12Texas and Florida: Compelling Position for HCA
Strong placement in two states showing positive hospital trends
Texas Florida
• HCA’s largest exposure is the Texas metropolitan market • After Texas, HCA is most tied to Floridian cities
• Texas has been experiencing population growth at rates twice • Florida has also been experiencing strong population growth,
the national average tracking 60 bps above the national average
• Texas hospital spend has been tracking at 70 bps above the • Hospital spend has only been slightly above the national average,
national average, 18% higher than nationwide spending but with population growth materializing, there is potential for
significantly higher spending looking forward
Trailing 5 Year Hospital Spend Population Growth HCA % of Total Beds
27.90%
4.60%
1.70%
1.40%
4.00%
3.90% 26.90%
0.80%
Florida Texas National Florida Texas National Florida Texas
Company Industry Thesis Catalysts Valuation 13Leading Where it Counts: High Margin Surgeries are Strong
HCA is #1 or 2 in the highest margin surgeries, compounding with their operational efficiencies
Efficiencies Cardiovascular Oncology
1.50%
• HCA commands a strong position in the major high 5.15%
4.90%
margin surgery categories, highlighting their leadership 4.20% 4.10%
1.25% 1.23%
1.08%
in various specialties 3.50%
0.75%
• HCA is recognized as one of the efficiency leaders in 2% 0.50%
the for-profit hospital space
• Combined, these factors contribute to strong margins
from surgeries, contributing to the bottom line THC HCA UHS CYH LPNT QHC HCA THC UHS CYH LPNT QHC
Neurosurgery Orthopedic
“They are operationally savvy,” said Paul Keckley, an 11.40%
0.71% 0.70% 10.60%
industry analyst in Nashville. HCA leadership 9.05%
0.60% 9%
understands where to build its hospitals, how 8.40%
8%
many beds to allot, how to staff and how to buy
supplies. And their financial, operational and clinical 0.28%
decisions have been backed by hard data that HCA collected
0.15%
before it was necessary for compliance standards, Keckley said.
0.05%
HCA THC UHS CYH LPNT QHC CYH HCA THC UHS LPNT QHC
Company Industry Thesis Catalysts Valuation 14ASC’s vs Hospitals
Significant acquisitions of ASCs provides a pricing power advantage
Ambulatory Surgery Centers Reimbursement in Healthcare
ASC’s only treat patients that have already seen a health
care provider and have selected surgery as their course of Cataracts Surgery Medicare Fee Beneficiary Fee
treatment. ASC’s are extremely dedicated to specific surgeries ASC $ 780.00 $ 195.00
in a specialty.
Urology Other HOPD $ 1,396.00 $ 349.00
Pain/Neurology
4% 3% 17%
Dermatology
3% Orthopedics Ambulatory Surgery Centers only receive 55% of the
7% Medicare Reimbursement that Hospitals receive
GI
34%
Hospitals vs ASC
Since any ASC will offer fewer services than both Hospital
Opthalmology
32%
A and B, those ASCs will have less negotiating leverage
with commercial carriers and, therefore, often will receive
Specialization of field allows for decrease in expenses
Pros lower reimbursement rates than either Hospital A or B if
and more expertise. As well as better results
they want to be included in the insurer’s network
Less overnight stays. No need for overnight nurses
Pros and round clock monitoring Due to the 55% reimbursement rate, ASC are being acquired
by larger hospitals and being added to their networks.
Smaller Facilities and more central to towns. Increase This will increase their Medicare reimbursements while
Pros supply of physicians and nurses keeping costs low.
Company Industry Thesis Catalysts Valuation 15HCA Acquisition Spree
Best in class ROIC shows superior acquisition strategy
Mission Health Acquisition Return on Invested Capital
Company ROIC
Tenent Healthcare 7.98%
HCA Healthcare 18.56%
Universal Healthcare 9.88%
HCA currently has 123 Ambulatory
Community Healthcare 3.35%
Surgery Centers
Management
“We have and will continue to pursue outpatient acquisitions. We've HCA is moving into a lower cost business and
recently made a large ambulatory surgery center acquisition in Austin, acquiring these hospitals with a mixture of Free Cash
Texas. We have other markets where we are looking at acquisition Flow and Debt. HCA is able to get a much higher
of ambulatory surgery centers.”
Return on Investment
"The second component of our spending is around building our
network in our outpatient capabilities so that we are very convenient
and easy to access. So we've added surgery centers; we've added three
standing emergency rooms, urgent care centers, clinics and other
Why is Return on Invested Capital Important?
diagnostic capabilities to really support a comprehensive opportunity
for patients to access an HCA Healthcare system."
Company Industry Thesis Catalysts Valuation 16ROIC Explained and Come to Wednesday Workshops!!!!!
NOPAT
Total Capital Invested
17Industry-wide Labor Shortage
HCA is best positioned with the entire industry facing labor shortages
Current Nursing Situation Individuals Age 65+ of Total US Population (%)
21.4% 21.6% 21.7% 22.0%
• There are currently approximately one million 20.6%
18.9%
registered nurses older than 50 years, meaning one- 16.9%
15.2%
third of the workforce could be at retirement age in
the next 10 to 15 years
• Currently, the national average turnover rate is
between 8.8 % to 37.0% depending on geographic
location and nursing specialty.
• HCA has a turnover rate of 16.0-16.5%, down from
22% at the beginning of 2018 2016 2020 2025 2030 2035 2040 2045 2050
The US Bureau of Labor Statistics (2018) projects that 1.1 million additional nurses are needed to avoid a further shortage
HCA Nursing Strategy
Company Industry Thesis Catalysts Valuation 18Nursing School Acquisitions
HCA Acquisitions
• Current Pipeline of Nurses is roughly 6,000
• Acquisition of Galen Nursing School, and school being
acquired in Tennessee
• The scholarships offered heavily recommend nurses
to work in HCA hospitals for the few years proceeding
their graduation
• While competitors have to use temporary nurses which
have higher wages, HCA has more flexibility with these
acquisitions
Increase Customers • HCA locks in a set wage before nurses graduate, who Increase Labor
Gain Market Share
have no price negotiation power Decrease Wages
Move into New Markets Advantage over Competitors
Company Industry Thesis Catalysts Valuation 19Valuation
Catalysts and Mispricing
202020 Election Fears
Unsubstantiated fear of Democratic President and Democratic Senate is resulting in significant mispricing
Current Medicare for All Candidates
Senator Bernie Sanders Mayor Bill De Blasio Senator Elizabeth Warren Yang Gang
Effect on HCA Democratic Primary Polling
35% 33%
• Medicare for All is a proposal that would create a 30%
single, national health insurance program that 25%
21%
would cover everyone who lives in the United States 20%
• HCA would suffer as current average Medicare 15%
16%
reimbursements are 10% lower than that of private
10% 7%
health insurance and Medicaid is 40% lower 5%
5% 3% 3% 3%
• As a result of the recent democratic debates, HCA 1% 1%
0%
stock has slipped Biden Bernie Warren Harris Buttigieg O'Rourke Booker Yang Klobuchar Castro
Company Industry Thesis Catalysts Valuation 212020 Election Fears – Senate
In the GOP controlled Senate, Dems need to win 4 seats
Maine Colorado
Susan Collins – 4 term Sara Gideon - Speaker of Cory Gardner – 1 term John Hickenlooper –
Incumbent House of Representatives Incumbent Former Governor
July AARP poll: Collins leads Gideon 52% to 35% Mid-August Emerson College poll: Hickenlooper leads
Gardner 53% to 40%
Arizona Alabama
Martha McSally – Mark Kelly – Retired Tommy Tuberville – Former Doug Jones– 1 term
Incumbent (Appointed) NASA Astronaut Auburn Head Coach Incumbent
OH Predictive Insights poll: Kelly leads McSally 46% to 41% 2016 Election Results : Trump won 62.1% to 34.4% (Clinton)
Company Industry Thesis Catalysts Valuation 22Valuation Valuation
23Discounted Cash Flow Analysis
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