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Daniel, who holds a BA from Tufts University, an MA from New York University, and an MBA from The Kelley School of Business at Indiana University, was most recently an associate covering health care services at Collins Stewart LLC in NYC and before that, at FTN Equity Capital Markets in Boston.... More
  • Accretive Health IPO Is On the Way
    In SEC filings last week, Chicago-based Accretive Health, a revenue cycle management company serving the acute care industry, said it would sell roughly 7MM shares of stock while some of its biggest shareholders, including insiders and customer Ascension Health sell roughly roughly another 7MM. In total, at a price of ~$15/sh, this would represent an offering of more than $210MM. However, using price to sales comps for peer ATHN, which trades b/t 4-5x sales, I would expect Accretive to reach much higher market value longer-term. Note that 2009 net service revs for Accretive in '09 were > $510MM and the company works on a ~20% EBIT margin.

    This IPO should be well-received, even with the weak macro backdrop and concerns that Europe is blowing itself with mountains of debt and a devalued currency. Rival MDAS and ECLP both floated stock in the last couple of years and both names shot up b/t +12% and +28% after their shares were offered to the Street.



    One thing that could drag on Accretive is an overhang on shares given that Ascension wants to sell more stock within a year if the IPO goes well. That said, with acute care titan HCA also going public soon in a $4B+ deal, I'd imagine investors who were shunning other pockets of healthcare service stocks b/c of reform risk will take another look at these stories and drive up valuations beyond what has been printed on paper.

    If I had my pick, I would go with the HCA flotation, as acute care is an obvious beneficiary from the Medicaid population pop in 2014 and greater number of insureds. Yes, reimbursement cuts to the industry will hurt like bamboo sticks on a bare back, but the industry is smart enough to shrink costs and preserve EBITDA margins, as well as roll up weaker players (non-profits especially), not unlike what we have seen in the retail pharmacy space (chains and systems get bigger, independents fold). THC and HCA recently reported poor commercial admissions, but pricing has not been nearly as horrendous and trends in volumes should normalize once the economy regains its footing (but I'll be the first to admit that this is a tailwind that is far out in my thinking).  

    Important Disclosure: No long/short positions in any stocks cited. No formal coverage on any of stocks mentioned. Views of author are strictly his and do not reflect on that of his employer at any time whatsoever.
    May 12 11:35 PM | Link | Comment!
  • HCA Mulls IPO: Acute Care Space Should See More Momentum
    Leading hospital chain HCA is looking to raise ~$3B through an IPO in the near-future, reported Bloomberg late Wednesday. You will recall that HCA, which has over 160 inpatient facilities in the US, went private about four years ago. The price tag of the LBO was about $33B, but less than 15% of that was actual equity put up by the PE shops and fellow sponsors. If HCA floats stock, the capital will be used to pay down debt. HCA’ debt/EBITDA is roughly 5x, which would put it closer to the high end of hospital operators, like THC and CYH. Given the thawing credit markets, HCA, like other acute care operators, used 2009 and H1:10 to refinance and extend debt maturities.

    I think the HCA IPO would be well-received. Looking at HCA’s Q409 numbers, bad debt and same-store admissions seemed within the neighborhood of industry peers. EBITDA climbed +8% and outpatient admits were also strong. HCA is at a $31B revenue run-rate for 2010E, approximately.  More notably, I believe acute care should see an interest among investors, even as many of the names that are publicly traded have soared to 52 week highs. The health-reform risk overhang is past us and the group should benefit from the lower number of uninsured entering the system beginning in 2014E. Arbitrarily using an example of an operator that was opearting in parts of the US that were hard hit by the economic downturn (HMA, which operates in Florida, for example), I highlight how nasty bad debt got in the back half of '09. Thankfully, HMA, like others, was able to axe op ex aggressively to help the botom-line.

     

    Estimates on the Street are about 32 million more people getting insurance. Roughly half of that 32 million will fall into Medicaid and the others will likely become part of the state exchanges. The first bucket of that 16 to 17 million or so will represent the number of uninsured adults living under the 133% federal poverty level threshold. These are the poorest of the poor and the bucket that ends up in the ER incurring significant hospital bills that they cannot pay (you will often hear that hospitals “overcharge” uninsured, making them pay more than commercial admissions pay – while this may occur, collection rates on the uninsured are quite low). Getting more people in the US covered should help acute care operators lower their uncompensated care levels, as well as lower volatility in their earnings streams – investors like visibility and this may help hospital EBITDA multiples over the long-term.

    In the last downturn, the group lost roughly 3-4 turns on its historic EBITDA multiple. I also expect the acute care group to benefit from restrictions on physician-owned hospitals as this gradually wipes out another level of competition from the playing field. This last data-point is not being discussed much on Wall Street, but it is a trend to consider.If the HCA IPO is well-received by the buy-side, the group as a whole should generate more retail interest. I believe institutions have long played the space and were smart in doing so as the stocks tend to move sharp and hard, usually before bad debt peaks and admissions normalize.

    Disclosure: Author holds no position in securities mentioned and the author's firm does not cover the securities mentioned. Authors views are STRICTLY his and do not reflect that of his employer whatsoever.
    Tags: hospitals
    Apr 07 8:11 PM | Link | Comment!
  • Acute Care and Obamacare: Now What?

    On March 25, private equity giant Cerberus announced a deal to acquire Catholic non-profit health system Caritas Christi for $830 million. The deal would turn Caritas into a for-profit, unload its pension liabilities onto Cerberus, and enable the struggling non-profit to keep its staff levels intact. More importantly, I think the deal could be seen as a canary in the coal mine that suggests more non-profits will pursue consolidation opportunities with larger players who are less vulnerable to the major changes that will befall the acute care industry now that health reform has been passed.

    As a reminder, the biggest changes to acute care coming from Obamacare, on the downside, will be roughly $155B in Medicare cuts, which includes roughly a $35B haircut in DSH payments to hospitals that see a disproportionate share of indigent patients. On the plus side, beginning in 2014, the insured pool in the US will significantly expand. Estimates on the Street are about 32 million more people getting insurance. Roughly half of that 32 million will fall into Medicaid and the others will likely become part of the state exchanges. Getting more people in the US covered should help acute care operators lower their uncompensated care (and help collection rates), as well as lower volatility in EPS. You will recall that uncompensated care for a hospital is essentially bad debt (funds the hospital planned to collect but did not) + charity care (care it provided but never expected to get paid for). As you can see, it’s essentially a major trade-off for the group and its essential that those insurance expansion projections materialize over the next decade, since the market basket cuts in reform will hurt and have no offset if the insured pool doesn’t materialize. 
     
    I also expect the acute care group to benefit from restrictions on physician-owned hospitals as this gradually wipes out another level of competition from the playing field.  Since the insurance pool doesn’t widen until 2014E – but the cuts begin right away – I expect non-profits that operate on low margins and are overexposed to one geographic region to look for exits.



    To sum it up, expect more consolidation in the acute care industry and expect the larger (publicly traded and private) health systems to benefit since they have more scale, diversity, and better access to capital. One thing is for certain: every hospital system in the US will have to find ways to creatively work around the challenges health reform will usher in beginning now. The names have run up ahead of reform so it's up to readers to pick apart the street models and see what a realistic earnings power run rate will be now that health reform is in the rear-view mirror. One name I prefer, at least from a viewpoint of expsosure to crowded ERs and levels of uncompensated care, is THC. Further, THC is deleveraging nicely and commercial admissions should pick up once the economy can start adding jobs at a sustainable level.
     
    Stocks impacted: LPNT HMA THC CYH UHS KND PSYS

    Disclosure: Author holds no position in securities mentioned and the author's firm does not cover the securities mentioned. Authors views are STRICTLY his and do not reflect that of his employer whatsoever.  
    Apr 05 12:28 AM | Link | Comment!
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