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HCA unnerves investors with health care reform outlook


Shares of hospital giant HCA are rebounding after investors digested their disappointment with the chain's conservative outlook on health care reform for the remainder of the year.

HCA shares dropped about 7% Wednesday after the company's earnings call, when executives implied that some of the early benefit from treating a greater number of insured patients may have hit its peak. Investors have been closely watching to see whether there's still room for financial improvement from the Affordable Care Act or whether the initial boost from higher volume and insurance coverage was a one-time deal.

The Nashville, Tennessee-based hospital giant, the largest in the country by revenue, said its uncompensated care represented 30.1% of revenue in the first half of 2015, compared with 30.3% in the first half of 2014.

“So there's still some improvement on the year-to-date, but we do believe some of those trends are beginning to sunset on us as we see not as much lift on year over year,” William Rutherford, the company's chief financial officer, said on the call.

The financial uplift will likely continue for at least the next year, he added, but it's unclear what will happen after that.

Health care reform added $120 million, or about 6%, to the company's adjusted earnings before interest, taxes, depreciation and amortization in the second quarter.

Investors had high expectations for HCA going into earnings season. The chain previewed an 8.8% increase in pretax income and a 7.2% increase in revenue for the second quarter.

It also highlighted a strong 4.1% increase in admissions, and a 4.9% increase in adjusted admissions, which executives attributed on the call to an improving economy and market share gains.

Investors were “spooked” by the comments about health care reform, wrote RBC Capital Markets analyst Frank Morgan in a note to clients. However, he called the share selloff a “misinterpretation and an over-reaction.”

Last year had an unusually long open enrollment period that extended into April, Mr. Morgan pointed out. That meant the ramp-up and eventual plateau of new patients seeking care happened later in the year, he wrote. That timeline was moved up in 2015.

“We believe this is what management was articulating,” he added. “There was no suggestion whatsoever that the long-term impact of the ACA has plateaued — just the seasonal pattern for 2015, and which is contemplated in guidance.”

The sentiment was shared among other analysts who cover the hospital sector. “We believe strong fundamentals are intact and management is acting cautiously with its guidance,” wrote Paula Torch of Avondale Partners.

HCA executives also pointed out that exchange volumes represent only 2% of its business compared with closer to 30% for commercial insurers.

In total, the company reported $507 million in net income on $9.9 billion in revenue for the second quarter compared with $483 million in net income on $9.2 billion for the prior-year period.

Beth Kutscher writes for Modern Healthcare, a sister publication of Business Insurance.

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