What Can HCA Tell Us About the Healthcare Sector?

When HCA Inc. was acquired in 2006 by a private equity consortium including Bain Capital, KKR, and Merrill Lynch (now of course Bank of America), it was the biggest leveraged buyout in history.  For that reason, the announcement a couple of weeks ago that HCA was pricing its IPO at around $3.7 billion piqued my interest.  The company is the largest private healthcare provider in the US, providing 4-5% of all hospital services with 156 hospitals, not to mention 97 freestanding surgical centers.  Just because of HCA’s sheer size and influence on management practices, it is an interesting company to analyze a bit more closely to understand trends in the US healthcare sector.

As is usual with private equity deals, HCA has been fairly heavily loaded with debt.  The IPO won’t give it too much additional financial flexibility since proceeds are expected to go primarily to the current private equity owners.  So pursuing large-scale consolidation, which was Columbia/HCA’s original claim to fame, seems unlikely.  Instead, HCA plans to selectively extend its services in major markets.  The company also just reorganized to offer its shared services, like revenue cycle management and supply chain management, to other healthcare providers.

It’s not clear yet how interested investors are in the IPO, but HCA reduced the fundraising target for its IPO from $4.6 billion initially to the current price.  This suggests less than unbridled demand for shares.  One area of concern may be the impact that healthcare reform will have on HCA’s business.  The government has been making more efforts to contain the growth of Medicare and Medicaid spending, which makes up about 40% of HCA’s revenue.  Overall, it seems unlikely that shaving part of a percentage point off government healthcare reimbursements will make a big difference to HCA, but maybe investors are easily spooked these days.

HCA’s results for the fourth quarter of 2010 included a 31% jump in net income, although most of that appears due to miscellaneous accounting adjustments.  Surely just a coincidence with an upcoming IPO, right?  From a top-line revenue perspective, growth slowed down considerably in 2010.  The reason is unlikely to be the economy considering that revenue did grow well in 2008 and 2009.

In many ways, HCA is a pretty straightforward company.  I’m going to spend some time digging into HCA’s latest 10-K and their IPO prospectus and see if I can find out anything interesting about the company, or perhaps even about the healthcare industry these days.


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