Two weeks ago, we reported that U.S. Healthcare companies, for the most part, have plateaued (in terms of growth) since 2015. Since that year, there have been many creative efforts by providers to attempt to re-ignite the growth engine. One of those creative efforts was the entry by U.S. healthcare providers, through acquisitions, into the United Kingdom's healthcare system.
However, Brexit looms, no free trade deal with the U.S. exists, and the enmeshment of the U.S. Healthcare system with that of Britain has undoubtedly led to problems. The British government, despite Prime Minister Theresa May's hesitance, is considering a Brex-odus from contracts with the U.S.
According to BBC, in 2017, over £140 billion was spent on health across the U.K., with U.S. providers galvanizing a large chunk of that pie.
In February 2016, The Guardian reported that U.S. healthcare companies were entering the U.K. market due to an increased amount of NHS (National Health Service, the U.K.'s single-payer system) contracts granted to private health care providers.
So, as President Trump gears-up to represent U.S. interests in a state visit to our grandest sovereign ally in June, no doubt health care and free trade will adorn the agenda.
The world's leading publicly traded healthcare provider, HCA Healthcare Inc. (NYSE: HCA), or "Hospital Corporation of America" as it is commonly known, entered the British market around 2006. They quickly became the largest provider of private healthcare services in the U.S., the U.K., and the world for that matter.
Since 2016, many have followed in the industry leader's footsteps. Tenet Healthcare Corp (NYSE: THC) bought Aspen Healthcare, Universal Health Services, Inc. (Nasdaq: UHS) bought Cygnet and has continued to expand its British footprint, and Acadia Healthcare Co., Inc. (Nasdaq ACHC) bought the Priory Group.
UnitedHealth Group Inc. (NYSE: UNH) Inc.(Optum) has also been offering a range of services to the U.K. for several years now, including contract negotiations and medication management. Some tech companies, notably IBM, have entered the market as well.
Now, many are calling for the halt of privatization. British Prime Minister Theresa May tasked the Chief Executive of NHS England, Simon Stevens, with beefing up the system, along with curbing privatization. On January 7th, 2019 the Guardian reported that Stevens, a former United HealthGroup executive, suggested:
the widespread fragmentation of care delivery brought about by privatisation had to end because it ran contrary to NHS England’s drive – backed by the government – to integrate health and care services over the next few years so that patients receive a simpler, more streamlined service.
Since the U.S. providers (especially mental health providers like Acadia and Universal Health Services) stormed into the market between 2014 and 2016, the system has in many ways mirrored that of the U.S. health care system. The system has allowed competition to enter a market predicated on very limited-competition.
So, ironically, President Trump's criticism (from February 2018) of the NHS troubles (as seen in the tweet below) could be a result of U.S. provider entries to the U.K. market.
At year's end 2018, the largest private NHS contractor, HCA, had a market cap of $43 billion and a total enterprise value of $76 billion. Book value of equity is negative ($11 billion in the red), so any market-to-book comparisons are nonsensical. Debt to total assets exceeds 80%, and they have a highly levered balance sheet. Virtually all key metrics had stagnated, year-over-year from 2016 to 2017; however, growth and an ambiguous price run-up occurred in 2018...
Free cash flow sits at roughly $3.16 billion (after a minor dip year-over-year from 2016 to 2017). Cash from operations was flat in the previous year too. Before a $1 billion boost in 2018, pre-tax income was also flat at $4.5 billion.
HCA saw an increase in admissions of 1.7% year over year, but inpatient surgeries dropped 0.6%, and ER visits dropped by 1.8%. HCA leadership believed volume and admissions were crucial to growth while tax reform also improved margins.
Bob Herman, Axios' blunt and objective healthcare reporter, stated that:
HCA's "same facility revenue per equivalent admission," an important industry metric that shows how much hospital and clinic prices increased, went up by 3.9% in 2018. That was the highest rate for HCA since 2014, meaning higher prices and medical codes helped fuel the company's big 2018 — in addition to the $551 million in tax savings the company reaped from the Republican tax overhaul.
While the most recent HCA 10K is somewhat vague as to exactly how much its U.K. operations contribute to their top line, there is in-depth research out of the University of Mississippi from 2015 that stated:
HCA’s private hospitals are recognized by all of the major UK insurance companies. England’s public health service, the National Health Service, provides the majority of healthcare in England. London, the location of HCA’s English facilities, generates more than 22 percent of the total UK economy. The number of active businesses in London grew by 11.5 percent from 2007 to 2011 while the rest of the UK averaged 1 percent growth. 2,800 consultants, over 64,000 inpatients, and over 434,000 outpatients at these London facilities indicate success and efficiency.
It's still not completely clear if its UK operations are an outlying contributor to HCA‘s melt-up, even though the value boost has coincided with an increased volume of contracts inked by the NHS for the benefit of U.S. providers. The Guardian and The Nashville Post have noted, however, that HCA has, since 2016, focused heavily on the NHS contracts as means for increased revenue and expansion opportunities.
HCA's UK beds amount to about 1.8% of the company's total bed count. However, the U.K. business produces roughly 5% of the total revenue. So, in terms of bed-for-bed revenue, the U.K. wins.
To provide a frame of reference as to corporate health: $42 billion of liabilities are on the books. The most recent filing with the U.S. Securities and exchange commission classifies them into seven different categories with an average life of 6.4 years and a weighted average rate of 5.3%. $9.7 billion is unsecured; the remainder ($22+ billion) is secured (assume it is AR, PPE pledged as security, which means almost all of those assets are guaranteed, and the unsecured might as well be called “equity”). Two interesting facts that stood out are:
- The rate on the senior unsecured notes (6.4%) is only 100 bps higher than the price in the senior secured notes (5.4%). Now, we do not know the issuance dates of the debt instruments and other relevant risk factors, but it does not seem like investors place a high-risk premium on being unsecured at HCA.
- Per disclosures at Q2, $1.7 billion of debt was coming due within 12 months, and as of 2018's 10K filing, it appears tax reform allowed them to make that payment, preserving growth in free cash flow as well.
ATUs or "Assessment and Treatment Units" owned by UHS and Acadia are alleged to have profiteered from long-term seclusion of children and adults suffering from learning and spectrum disorders. However, the bulk of ongoing seclusions date back to the time in which U.S.-based providers entered in 2016. In further research, at the request of parliament, we found that many other local providers may have caught on to the concept that garners provisions upward of £13,000 GBP per week, capping out at £15,000 GBP per-week. All of this is paid by the NHS, despite some being actual NHS facilities, and the upside is always: "heads in beds." Volume metric-based success measurements are due to margins and employees hoping for full-time staffing. The latter (NHS facility abuse) occurs because a low census can lead to fewer hours per-staff, per week. "Slash and burn" is a practice, apparently provoking staff to inflate the census inorganically.
UHS generated a whopping $505 million in revenues from its U.K. operations. According to their annual report for 2018, UHS operates 133 inpatient behavioral health care facilities and two outpatient behavioral health care facilities. They've also faced scrutiny for patient abuse in the U.S. with, most notably, the death of Joelly Clements in Arkansas, who died in the home of a nurse from the facility she was discharged from--just days after discharge. We mentioned this in our December 18, 2018 account.
Acadia Healthcare is the leader in the mental health community across the pond; in terms of private contractors of mental health services. Their most recent 10k filing with the U.S. Securities and Exchange Commission stated that they're the U.K.'s leading provider.
Acadia recognized just over $1 billion in revenue from British taxpayers in 2018. Last week, City A.M. reported that Acadia is considering a full exit of their British operations in the wake of severe allegations of patient abuse.
Ian Birrell who has championed the movement that provoked action and subsequent inquiry into abuses by the Priory, Cygnet, and other providers is making headway. Many media outlets, as well as the Parliamentary Joint Committee on Human Rights, have continued to dig into the evidence.
This past weekend the Telegraph and various other news outlets reported that Acadia's subsidiary, The Priory (in regards to criminal charges related to the death of a 14-year-old girl):
indicated a guilty plea after being charged under health and safety legislation with being an employer failing to discharge its duty to ensure people were not exposed to risk.
...The company was fined £300,000 at Lewes Crown Court today. Prosecutors had previously warned the penalty could be as much as £2.4 million.
The ruling in the British court makes Acadia the second major U.S.-owned healthcare company criminally charged for actions surrounding the end of a patient, the other being AAC Holdings (NYSE: AAC), but Acadia is the first to be found guilty.
Tenet Healthcare, according to the fourth page of their 2018 10K filing with the SEC, indicated they recently exited all UK operations.
Ultimately, the troubles that have faced the U.S. healthcare system appear to have duplicated themselves in Britain. The assets gained in the ramp-up have proven to be helpful in the short term. However, their future is in jeopardy.
Investors in healthcare should, no doubt, keep a close eye on Brexit. A no-deal Brexit could jeopardize reimbursements for the approximately 3 million EU migrants living in the UK and could further swell the current shortage of over 100,000 essential medical providers including doctors, nurses and care staff. Hospitals face the triple threat of revenue cuts, supply shortages and rising costs. If there are severe funding cuts, a cataclysmic shock could derail U.S. providers altogether.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.