America’s largest for-profit health systems reported higher-than-anticipated revenues this quarter, driven by rebounding admissions and increased demand for elective surgeries.
HCA and Tenet, which both posted revenues that surpassed Wall Street estimates, raised their full revenue forecasts for the year in light of their second quarter performance, and UHS raised its lower-bound revenue guidance. CHS was an outlier, posting a net income loss of $38 million, which analysts said was still an improvement compared to the health system’s net loss of $326 million in the same period last year.
Hospitals said normalizing labor conditions post-pandemic and proactive cost-cutting initiatives helped keep operating margins stable, even as expenses rose year over year.
The reported revenues and cost-cutting initiatives for for-profit hospitals is a contrast to last year, when operators struggled to meet targets during the second quarter amid lower admissions and challenging labor market conditions.
Strong admissions, surgical demand projected to continue
Health systems reported higher admissions and surgical demand compared to this time last year, with many patients seeking elective procedures deferred during the COVID-19 pandemic.
Tenet’s admissions grew 3% this quarter compared to the same period in 2022 and same-facility systems-wide surgeries rose by 6.6%. HCA’s admissions grew by 2.2% and UHS’ adjusted admissions grew by 7.7%. CHS’ same-store adjusted admissions increased 4.9% and surgeries increased 6.2%.
Hospital executives first noted an uptick in admissions last quarter. UHS reported a 10.5% increase in adjusted admissions, and Tenet CEO Saum Sutaria told investors that “a wider range of acuity” had begun to return to hospitals, including deferred gastrointestinal procedures.
Investors pressed executives during earnings calls this quarter on whether the trend of admission growth would continue.
UHS’ adjusted admissions growth remained high this quarter at close to 8%, with CFO Steve Filton conceding such back-to-back quarterly growth was “historically unprecedented.” Still, Filton said he expects to continue seeing “mid-single-digit level of topline growth” in admissions moving forward.
Tenet, which grew ambulatory surgical offerings by nearly 7% this quarter compared with the year prior, is also betting on sustained demand for medical services post-COVID. The health system upwardly revised its predictions for total surgical volumes through the end of 2023.
“The tailwinds that support ambulatory surgery demand recovery and growth are evident in the current environment,” including “an active but aging population” and “patients proactively seeking more convenient access to procedural care,” Sutaria told investors.
HCA CEO Sam Hazen said the operator expects equivalent admissions to grow 5% to 6% in 2023 compared to 2022, driven by population growth in HCA markets and “solid demand.”
HCA said it hasn’t seen any fallout in demand due to the Medicaid redetermination process, which kicked off in April.
However, UHS is keeping an eye on possible impacts in the back half of the year, Filton said.
Hospitals target high costs, labor expenses
Despite improving admissions, operating expenses rose in the quarter, prompting questions from investors about labor costs and expanse-saving efforts.
Executives noted progress on bringing down sky-high staffing costs by reducing their reliance on contract labor. Hazen said HCA cut contract labor costs by 20% year over year, in part by decreasing turnover by 17% and increasing nurse hiring by 9%.
Likewise, Tenet reduced contract labor costs to 4.3% of salaries, wages, and benefits, down from 6.2% in the second quarter of 2022, CFO Daniel Cancelmi said.
CHS is targeting a 50% reduction in contract labor spending compared to 2022. The operator said it’s on track to meet that target, in part because CHS was forced to hire 500 clinicians after one of its main contract labor providers filed for bankruptcy last month.
In addition, HCA, Tenet and CHS have benefited from higher recruitment metrics this quarter compared with this time last year, executives said.
CHS said 2023 has been its best recruitment year in the past five years, with physician recruitment up 13.1% year over year and nurse recruitment up more than 5%, according to CEO Tim Hingtgen.
Similarly, HCA is seeing “strong hiring” and “turnover is approaching pre-pandemic levels” after investing in recruitment, Hazen said.
The rosy recruitment outlook is in line with this month’s job report, which found the healthcare sector added 63,000 jobs in July, including 35,000 jobs in ambulatory health care services, 16,000 in hospitals and 12,000 in nursing and residential care facilities. Experts say it’s a sign that the historically hot labor market may be cooling.
UHS, however, reported sustained high labor costs. Filton noted the company is spending roughly twice the $55 million to $60 million it expected to spend on physician contract expenses this year.
Contract service provider bankruptcies, also discussed by CHS, were a factor in the elevated spend, Filton said.
Even as labor costs improved for some hospital operators, total expenses continued to rise.
Operating expenses for HCA, Tenet, UHS and CHS rose 7.6%, 7.3%, 5.8% and 1.9% respectively compared to the second quarter of 2022.
Hazen said HCA’s margins were “healthy,” but other systems’ executives discussed an array of cost-cutting measures on earnings calls.
CHS has prioritized streamlining expenses after a challenging financial performance in 2022, announcing plans to divest from underperforming markets, including the recent sale of three Florida hospitals. The operator will also launch an initiative to redesign workflows, reduce administrative burden and enable faster decision-making, Hingtgen said.
Tenet is also evaluating its real estate footprint to make strategic investments, including investing more resources into high-performing ambulatory centers after opening 12 new centers this quarter. The company also plans to lean into digital solutions for workflow management and offshoring to cut down on expenses, Sutaria said.
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