When HCA Holdings Inc. (NYSE: HCA) came public again in March, the shares priced at $30, and the company raised about $3.79 billion, and set a record for a private-equity backed IPO. HCA did have a few problems, though, and given events of the past day or so, it’s reasonable to ask if some of the warnings about the company shouldn’t have gotten a little more respect.

Yesterday HCA posted second-quarter EPS of $0.43, down -35% from the same period a year ago, and badly missing forecast earnings of $0.59. Revenue rose, but still missed estimates. The report weighed down other stocks in the health care sector, included Tenet Healthcare Corp. (NYSE: THC), Health Management Associates Inc. (NYSE: HMA), Universal Health Services, Inc. (NYSE: UHS), LifePoint Hospitals, Inc. (NASDAQ: LPNT), and Community Health Systems Inc. (NYSE: CYH).

The HCA IPO came after it was quite clear that the brunt of the health care reforms passed into law last year would fall on insurers, not providers. But the fee-for-service system, on which hospital profits are based, are going to be revamped as well over the next several years. Because HCA employs relatively few physicians, it will have to begin hiring doctors in order to take advantage of some of the reform act’s new payment structure.

The company’s structural inadequacies were known and even referred to in the IPO prospectus. Perhaps they were not sufficiently considered by investors, but that’s a long term story.

HCA’s earnings report does note a drop in the complex surgeries that the company has relied on to boost revenues and profits. Instead, hospitals treated less severe cases that are not as costly.

The company also lowered its forecast for growth-adjusted earnings to a range of 3% to 5%, down from a prior estimate of mid-single-digit growth.

HCA should have been able to forecast that its business was going to undergo some change as a result of the health care reforms enacted last year. If insurers are going to pay less, then patients are going to forgo anything except critically needed treatment. It doesn’t take a rocket scientist to figure that out.

HCA, and its underwriters, could have been more explicit in describing the risk related to HCA’s business. Here’s what the prospectus claims:

“During periods of high unemployment, governmental entities often experience budget deficits as a result of increased costs and lower than expected tax collections. These budget deficits at federal, state and local government entities have decreased, and may continue to decrease, spending for health and human service programs, including Medicare, Medicaid and similar programs, which represent significant payer sources for our hospitals. Other risks we face during periods of high unemployment include potential declines in the population covered under managed care agreements, patient decisions to postpone or cancel elective and non-emergency health care procedures, potential increases in the uninsured and underinsured populations and further difficulties in our collecting patient co-payment and deductible receivables.”

That description is so generic that it resembles placebo. Inpatient and outpatient surgeries have been declining slowly since 2006 and reached their lowest point in 2010.

Another weight on HCA is the end of its lock-up period in September, when 383 million more shares of stock will be eligible for re-sale. The company issued around 124 million shares at its March IPO.

Health Management Associates reports earnings tomorrow, and if it has the same issue with surgeries that hit HCA, the whole hospital sector is in for another beating. If HMA avoids the issue, then HCA may fall even further on its own.

HCA shares posted a new post-IPO low of $26.96 in early trading today, but the shares have come back to around $27.89 at mid-day. The post-IPO high is $35.37.

Paul Ausick

 

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