February 26, 2011 / 12:08 AM / 8 years ago

IPO VIEW-Healthcare reform poses risks for HCA's future

* 41 pct of HCA’s 2010 revenue from Medicare, Medicaid

* Medicare, Medicaid cuts to roll out over next few years

* Health investors squeamish on hospitals’ unclear future

By Alina Selyukh

NEW YORK, Feb 25 (Reuters) - HCA is gearing up for a $3.7 billion initial public offering that could see solid demand from the strong momentum for IPOs, but investors should be wary of longer-term risks the hospital operator may face from the U.S. healthcare overhaul.

Almost 41 percent of HCA’s 2010 revenue came from Medicare and Medicaid health insurance programs. Government cost-cutting in those programs would chip away at the company’s bottom line.

The fact that HCA relies so much on the programs facing a murky future with uncertainties surrounding the contentious healthcare reform should give investors pause, investors said.

“A lot of investors tend to look at the healthcare reform as being positive for hospitals, but now I’m not so sure that holds true,” said Craig Miller, vice president of healthcare trading at Stifel Nicolaus in Baltimore.

HCA has 164 hospitals in the United States and England. After its IPO, expected on March 9, it would be the sixth and biggest of major public for-profit hospital operators.

HCA is selling 88 million shares in the IPO and its private equity owners are selling most of the remaining 36 million shares to be sold in the IPO.

The flotation comes on the heels of another large, private equity-backed IPO — Kinder Morgan (KMI.N), which drummed up enough interest to increase its IPO size.

HCA has yet to set terms to its IPO. It has so far cut the expected size 19 percent to $3.7 billion and lined up a roll call of Wall Street banks and firms to back the IPO.


When President Barack Obama’s landmark health law passed in March 2010, if any healthcare sector was seen as benefiting from the reform, it was hospitals.

Under the law, all Americans must have insurance coverage by 2014 or face fines — a move expected to curb the flood of uninsured people now coming to hospitals for costly, acute care. The newly insured would be a new source of revenue and also cut the cost of emergency care for uninsured patients, which hospitals are legally bound to provide.

But healthcare reform could really hurt hospitals. Under the new law, hospitals will get lower payments from Medicare and Medicaid than they received previously. Those payments are already less than what they receive for similar services and procedures from private insurers.

Also, Medicaid payments are determined by state budgets, reeling from heavy deficits and looking for cost-cutting opportunities. One of those states, Texas, accounts for almost a third of HCA’s revenue.

Furthermore, some people may see the fines as a cheaper alternative to getting the required insurance — so hospitals may end up with shrinking government payouts but still not see as many insured patients as they had hoped.

More people could also switch from higher-paying private insurance or employer-provided benefits to federal programs, also pressuring hospitals’ revenue.

To top it off, of roughly 47 million uninsured people in the United States, the healthcare reform would extend health insurance coverage only to about 30 million.

“The sell-side analysts, they’re optimistic,” said Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust Co in Greenville, Delaware, with $7 billion in assets.

“We just thought it was too dicey an area,” he said of why he has avoided hospital operators.


The core changes to the healthcare system don’t go into full effect until 2014, but cuts to federal programs have started to roll out, chipping away at hospitals’ bottom lines.

And the battles over the law itself continue to heat up on Capitol Hill. Earlier this month, the Republican-controlled House of Representatives voted to deny funding for the law, raising further questions of the rates the government would eventually be able to offer for medical services.

In the meantime, too, the slow economic recovery continues to hurt hospitals. In fact, Wayne Smith, CEO of now-largest publicly traded for-profit hospital operator Community Health Systems (CYH.N), said the jobless rate would need to fall to 6 or 7 percent before patient volumes improve significantly.

“People are sitting on the sidelines and are cautiously optimistic about the space, because there are still a lot of unknowns and that’s the bottom line,” said Stifel’s Miller. “You expected a lot of clarity and it’s not there.” (Additional reporting by Susan Kelly in Chicago; Editing by Susan Heavey, Dan Wilchins, Gary Hill)

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