HCA financail paper for Financial Managment

RUNNING HEAD: Financial Paper on Hospital Corporation of America (HCA)
Financial Paper on Hospital Corporation of America (HCA)
James Nichols
In Partial Completion of Master of Science in Nursing
NURS 6513 Fiscal Management in Health Care Systems
Arkansas Tech University
Russellville, AR

Financial Paper on Hospital Corporation of America (HCA) 2
Abstract
Hospital Corporation of America (HCA) remains one of the largest urban based for profit
operators of hospitals and surgical hospitals in the United States. With 4.4 billion in cash flow
from operating activities and 2.2 billion in capital spending the company is focused on increasing
efficiency by lowering uninsured admissions and increasing Medicare and Medicaid
reimbursements. The hospitals present focus is the surgery centers, clinics and non-hospital
patient interface points (HCA, 2014).
HCA with its primarily metropolitan locations is increasing its investment in standalone
surgical centers. Over thirty eight percent of HCA’s profits come from outpatient services and
this will in the future allow it to continue its strategic growth. Also, the new health care
legislation does not allow competition from new physician owned surgical hospitals and surgical
centers as they will not qualify for Medicare or Medicaid reimbursement (HCA, 2014).
HCAs years of management experience and ability to use economies of scale and
effective information management to increase patient outcomes and company profitability allow
HCA to attract the best talent in the Medical Field and negotiate Win Win agreements with
insurance companies and health management organizations (HCA, 2014).
HCA’s access to capital is a twin edged sword allowing HCA to expand and improve
operations in the company’s area of operations but exposing the company to interest rate risk
should the interest rate take an unexpected upturn. HCA also has limitations on its ability to
operate freely because of its multiple agreements with its creditors. (HCA, 2014).
HCA is a power in the medical industry that should not be underestimated.

Introduction
Hospital Corporation of America (HCA) was formed in 1968 by Thomas Frist SR. MD;
Thomas Frist Jr. MD, and Jack Massey. Thomas Frist SR. was the father of former U.S. Senate
Majority leader Bill Frist. Dr. Frist built Park View Hospital in Nashville with a group of
physicians and created HCA to manage and expand the hospital. From 1968 -1972 HCA was
managed from a small white frame wooden house near the hospital. In 1972 HCA moved to its
current location at 1 Park Plaza in Nashville (HCA, 2014).
Recent history- In 1993 HCA merged with Columbia Hospital Corporation becoming
Columbia/HCA. In 1997 a federal investigation into fraud allegation involving increasing the
level of services for Medicare/Medicaid reimbursement and physician kickbacks was initiated
the then chairman Rick Scott, The present Governor of Florida, resigned the fraud case was later
settled in 2002 for two billion dollars. In 2006 Bain Capital, Kohlberg Kravis Roberts and
Company, Merrill Lynch and Frist family members completed a leveraged buyout of HCA for
roughly 33 billion dollars. The company went public again in 2010 with a 46 Billion initial
public offering. At the present time the private equity firm of Bain Capital, created by Mitt
Romney the former presidential candidate, Merrill Lynch and Kohlberg Kravis Roberts and Co
have all been repaid their initial investment of 1.5 billion each and still remain the largest
stockholders in the company (HCA, 2014).
HCA in its present form is one of the largest health care services companies in the United
States. HCA operates 162 general acute care hospitals, three psychiatric hospitals and one
rehabilitation hospitals. Also, the company operates 113 freestanding outpatient surgery centers.
HCA operates hospitals in Florida (42), Texas (36), Tennessee (13), Virginia (10), Utah (8),

Colorado (7), Georgia (7), California (5), Missouri (5), Kansas (4), Louisiana (5), South Carolina
(3), Oklahoma (2), New Hampshire (2), Nevada (2), Idaho (2), Kentucky (2), Mississippi (1) and
Indiana (1). HCA focuses mainly on metropolitan markets unlike its primary competitors CHS
and Life point which focus on rural hospitals. 85% of HCA hospitals were included in the Joint
Commission’s 2014 list of Top Performers on Key Quality Measures. 38% of HCA profits for
2014 came from outpatient services. HCA also provides management consulting and operations
services to other hospitals wishing to benefit from HCA’s years of experience in efficient
operations of hospitals. HCA also has branched off into imaging, radiology, supply chain
management and other areas where they feel their economies of scale can provide more
efficiency (HCA, 2014).
Strength Weakness, Opportunity and Threats Analysis (SWOT)
The primary strength of HCA is its access to capital. This year HCA will put 2 Billion
into capital expenditures. This will allow for increased efficiency in either the remodeling of
hospital facilities in order to more effectively utilize personnel; salaries/ payroll are the largest
portion of the HCA budget. Leveraging also is HCA’s biggest weakness as it is exposed to
interest rate risk beyond most of its competition because of its high level of debt with substantial
portions of debt becoming due each year and requiring refinancing (HCA, 2014).
The other strength is its primary placement in the urban environment while other major
competitors are primary focusing on the rural environment. The strength is lack of a large scale
competitor in their home market, the weakness is the potential that civil strife / unrest could
affect operations in urban areas (HCA, 2014).

Another strength is the efforts by the company to automate more effectively its Medicare
/ Medicaid coding system. The associated negative is that the company will be involved in yet
another justice department suit involving overbilling (HCA, 2014).
Another strength is the company’s expansion focus on free standing surgery centers.
These provided a large portion of HCA’s outpatient sales which accounted for 38% of net patient
revenue for 2014. This area is also an advantage for HCA as the health care reform bill of 2009
made all new free standing surgery centers owned by physicians ineligible for Medicare /
Medicaid reimbursement effectively eliminating start up competition in this area where lower
amounts of capital would be required to enter the market. 85 percent of HCA’s eligible hospitals
were listed in the Joint Commission’s 2014 list of Top Performers. Also, the uninsured
admissions declined by 58% in 2014, while Medicaid reimbursement/revenue increased by 40%
in 2014 (HCA, 2014).
The company is an industry leader in the consolidation of the administration and
management function which allows for better patient outcomes and lower cost of operations. The
company also has a strategic advantage in management of emergency departments. Emergency
departments while feeding hospital admissions have traditionally been a problem for hospitals as
wait times and uninsured patients hurt hospital productivity. HCA has focused on eliminating the
patients who do not need emergency services by either charging them a flat rate for services or
sending them to after hour’s primary care or free clinics for regular primary care services. Also,
the company advertises HCA emergency departments in the metropolitan areas serviced with
large billboards on surrounding interstates that show the real time wait time in the Emergency
department promoting the quick and efficient availability of these services.

HCA also list as one of HCAs major strength as a superior ability to attract the best physicians
because as a for profit and highly capitalized organization it can provide superior resources and
compensation. HCAs also promotes its ability to negotiate effective win – win agreements with
group health care service providers such as health maintenance organizations (HMO) and
insurance companies (HCA, 2014).
HCA is highly leveraged with over 29 Billion in debt making it less competitive and flexible
with competitors who have more ability to borrow and are not hampered by restrictive
agreements with lenders (HCA, 2014).
Changes in the reimbursement by Medicare and Medicaid could negatively affect profitability of
the corporation. With the dynamic situation in congress as demonstrated by the changing of the
leadership role from Speaker Boyner To Speaker Ryan the emergence of power of the Tea Party
fraction in the republican party who as part of the Tea Party platform wishes to overturn present
health care legislation enacted under President Obama this possibility has become more likely.
Also, the declining economic situation could lowered the number of individuals covered by
private health insurance (HCA, 2014).
A weakness of HCA is the past history of negative litigation with the Medicare / Medicaid
program and state regulatory agencies. One settlement for over 2 Billion with Medicare and
Medicaid services was the biggest recorded at the time (HCA, 2014).
Another weakness is that an epidemic such as flu or a far more remote possibility of an emergent
virus such as Ebola that could affect the company’s ability to continue operations; this would
disproportionately affect HCA versus its competitors as infection rates would be higher in urban
versus rural areas (HCA, 2014).

HCA is also exposed to data loss scenario which could involve them in a HIPPA compliance
issue that could substantially affect company operations. The company could also have issues
with compliance of the new coding requirements (ICD-10). Or the overall failure of the
accounting systems and management systems due to an unforeseen event such as an increase in
sun storm activity that could negatively impact operations. (HCA, 2014).
Another weakness of HCA is the concentration of operations in the states of Texas and Florida
which could lead to a disproportionate effect on operations in the case of hurricanes, economic
downturns in the oil industry or civil unrest in the highly urbanized population’s center of Texas
and Florida (HCA, 2014).
Overall the primary opportunities for HCA are in the economies of scale, access to capital and
the extremely efficient management expertise of the company which sells its expertise in
managing hospitals as a consulting firm (HCA, 2014).
The Risk for HCA is in the changing environment in regards to legislation, social dynamic and
the overall economic situation in the United States (HCA, 2014).
Financial Analysis of HCA
While income increased by 18.2% between 2013 and 2014 revenue increased by only 8.2%.
Salaries increased by 8% in the same time frame. Depreciation, supply cost and interest remained
relatively constant.
2014 2013 2012
Revenues $36,918 $34,182 $33,013
Exp
Salaries $16,641 $15,646 $15,089

supplies $6,262 $5,970 $5,717
otheroperatingexpenses $6,755 $6,237 $6,048
depreciationandamortization $1,820 $1,753 $1,679
Interest $1,743 $1,848 $1,798
Income $3,481 $2,946 $2,894
% Change fromprioryear 8% 4% 11%
Income 18% 2% -19%
Sal Exp 6% 4%
(HCA,2014)
HCA does not give dividends every year. The companies earning per share and diluted earnings
per share has averaged $3.84.
HCA EPS
2014 2013 2012 2011 2010
Basic earningspershare
$
4.30
$
3.50
$
3.65
$
5.17
$
2.83
Dilutedearningspershare
$
4.16
$
3.37
$
3.49
$
4.97
$
2.76
Cash dividendsdeclaredpershare
$
-
$
-
$
6.50
$
-
$
9.43
(HCA,2015)
Despite substantial expenditures for free standing surgical centers the outpatient revenue
percentage has remained flat for the last five years. The occupancy rate overall has not increased
in the past five years. ER visits have increased by 10% in the last year. Also the revenue in
accounts receivable has not improved in the last five years.

2014 2013 2012 2011 2010
Numberof Lic beds
2014
43,356 42,896 41,804 41,594 38,827
Admissions 1,795,300.00 1,744,100.00 1,740,700.00 1,620,400.00 1,554,400.00
average lengthof stay 4.80 4.8 4.7 4.8 4.8
occupancyrate 55% 54% 54% 53% 53%
er visits 7,450,700 6,968,100 6,912,000 6,143,500 5,706,200
outpatientsurgeries 891,600 881,900 873,600 799,200 783,600
daysrevenue inaccountsrec 54 54 51 52 49
outpatientrevas% of pat rev 38% 38% 38% 37% 37%
(HCA,2014)
Industry Analysis
HCA’s debt to equity ratio is -4.88 which when compared to the industry average of
50.00 puts the company at substantial risk of increases in interest rate (Zacks, 2015). Despite the
increased leverage the net profit margin for HCA of 5.2% is only marginally above the industry
average of 4.2%.
HCA’s price earnings ratio of 12.90 is substantially underperforming the industry rate of
20.73 despite a negative adjustment of stock price of 30% since July of this year (Zacks, 2015).
The Price / Cash Flow for HCA is 7.12 compared to the industry average of 11.98 this is also
concerning for a company that is so heavily leveraged (Zacks, 2015).
HCA’s focus on the metropolitan areas in comparison with its primary competitors such
as Acadia and Lifepoint expose it to increased risk of extraordinary events such as epidemic and
civil unrest (HCA, 2014).

Ratio Analysis
Debt to equity = Total contractual obligations / Total Equity
42,535/-6,928= - 6.13 (Note Zacks states -4.88)
The debt to equity ratio determines how much actual equity the stockholders have in the
company, how much future borrowing power the company might have in the future and how
much flexibility the company might have in a crisis. HCA as noted in its financial statements has
little borrowing power left in relation to its size and because of the fact that 2.2 billion of the debt
is current in this year alone the company has a great deal of interest rate risk. If an unforeseen
substantial increase in the interest rate occurs such as it did in 2008 during the equity crisis the
company may have going concern issues (HCA, 2014). Industry average is 49.97.
Short term debt to Equity = Short term debt / Equity
2,280/-6,498 = -.35 Due to the negative equity in this company this ratio which basically
is concerned with going concern issue in the case of a financial downturn or crisis of some sort
only reinforces how exposed the company is. The good thing is the company has financial
backers in the form of KKR, Meryl Lynch and Bain Capital with deep pockets and a close
operating relationship with them but as stated in the financial statements in a financial crisis
these companies may either not be able to assist or may be more concerned with their own
financial survival leaving the company exposed (HCA, 2014).
Price Earnings Ratio=Current Price of stock / Current earnings per share
$65.00/ 4.3 = 15 (Zacks has 12.9) In short it will take 15 years for the company to make
enough income per share to pay for one share of stock. This combined with a dividend rate that
would be less than 2.5% (6.50 dividend over last 4 years / 4 years - average dividend of 1.62 per

year (65.00 / 1.62 = .025 return per year on investment)) on the investment means that those
investing in stock are speculating on an increase in the stock value rather than substantial
increases in the profitability of the company. Industry average is 20 (HCA, 2014).
Profit Margin
Income/ Revenues = 3,481/36,918 = 9.4% before tax
1,108/36,918 = 3.0% after tax (Zacks states it’s 5.22%)
This show how much profit it produced for the amount of money spent or used. In most
cases the after tax amount is what is relevant as it is the safety margin for the business. In this
case with a 3% profit margin with an 18% increase in revenue the company is working without
much room for error. Industry standard is 4.9% but they majority of those corporations have far
less debt at an average debt to equity ratio of 50 (HCA, 2014).
Recommendations
Placement of HCA stock in a properly diversified portfolio is an unacceptable practice.
Including the stock of a competitor such as Life point with a more rural focus might be
preferable.
Hospital Corporation of America (HCA) remains one of the largest urban based for profit
operators of hospitals and surgical hospitals in the United States. With 4.4 billion in cash flow
from operating activities and 2.2 billion in capital spending the company is focused on increasing
efficiency by lowering uninsured admissions and increasing Medicare and Medicaid
reimbursements. The hospitals present focus is the surgery centers, clinics and non-hospital
patient interface points (HCA, 2014).

The stock has suffered a substantial adjustment in value since July when its stock was
over $90.00 currently the stock is approximately $60.00. Whether this is due to market
fluctuation or a weakness in HCA remains to be seen.
HCAs continued expansion within the existing markets that it operates in is logical. HCA
uses economies of scale and expansion into peripheral areas of operations in order to improve
efficiency and lower operating cost.
This is in conflict with HCA’s heavy debt load, high stock price despite a 30%
adjustment since July and an average profit margin only comparable to the industry (Zacks,
2015).
HCA uses its knowledge of the legislative and political environment to position itself in
order to limit risk and increase profitability. HCA uses its information system and management
expertise to not only increase and guarantee the success of its own operations but it has also
created a consulting operation which allows for the development of industry wide intelligence in
order to determine trends, risks, benefits and insights that may not be seen in their own operation
and in the process eliminating the risk of “group Think” and the errors that it can cause.
HCAs years of management experience and ability to use economies of scale and
effective information management to increase patient outcomes and company profitability allow
HCA to attract the best talent in the medical field and negotiate Win Win agreements with
insurance companies and health management organizations (HCA, 2014).
HCA with its primarily metropolitan locations is increasing its investment in standalone
surgical centers. Over thirty percent of HCA’s profits come from outpatient services and this will
in the future allow it to continue its strategic growth. Also, the new health care legislation does

not allow completion from new physician owned surgical hospitals and surgical centers as they
will not qualify for Medicare or Medicaid reimbursement (HCA, 2014).
HCA’s access to capital is a twin edged sword allowing HCA to expand and improve
operations in areas of operations but the increased leverage also exposes HCA to interest rate
risk should the interest rate take an unexpected upturn as substantial amounts of debt mature
each year and require refinancing or retirement. Also management is limited in its ability to
freely operate as it has multiple agreements with creditors designed to protect creditor’s rights
and collateral (HCA, 2014).
It is the opinion of this writer that while not the best ran company in the medical services
industry HCA is the most interesting. HCA is a power in the medical industry that should not be
underestimated.

Reference
Hospital Corporation of America (HCA) (2014). Annual Report. HCA. Nashville, TN. Retrieved
from: http://investor.hcahealthcare.com/
Zacks (2015) HCA Holdings Comparison to Industry. Zacks.com. New York. N.Y.
Retrieved from: http://www.zacks.com/stock/research/HCA/industry-comparison

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