Recent reports have raised concerns about the financial stability of hospitals amid disruption caused by the COVID-19 pandemic and the looming prospect of an economic recession. Large amounts of government relief helped support hospital margins in 2020 and 2021. However, industry reports suggest that the outlook for hospitals and health systems has deteriorated in 2022 due to the continued effects of the pandemic (such as labor shortages), decreases in relief and broader economic trends that have resulted in higher prices and investment losses. According to at least one account, 2022 could be the worst financial year for hospitals in decades. These challenges could require hospitals to take steps to increase efficiency, but could also lead to price increases or cost-cutting measures that impair patient access or quality of care. Against this backdrop, industry stakeholders have called on Congress to provide additional tax relief to hospitals and halt planned reductions in Medicare payments.
To provide context for these policy discussions, we assessed the financial performance of the nation’s three largest for-profit health systems: HCA Healthcare (“HCA”), Tenet Healthcare Corporation (“Tenet”), and Community Health Systems (CHS ). — which collectively accounted for approximately 8% of community hospital beds in the United States in 2020. All three of these systems are publicly traded, which means that we were able to acquire timely financial data on these systems through their reports to the Securities and Exchange Commission (SEC), as well as data on their stock prices (see Methods for more details).
Results
Operating margins for the Big Three Health Systems have been positive and above pre-pandemic levels for most of the pandemic, including most recently in the third quarter of 2022. Operating margins reflect profit margins earned on patient care and other operations of a given health system, such as gift shops, parking lots, and cafeterias, and incorporate government relief funds for COVID-19. Our definition of operating margins excludes income taxes and non-recurring income and expenses, such as the sale of facilities. HCA and Tenet had positive operating margins throughout the pandemic, and CHS had positive operating margins in all but two of the pandemic quarters (one of those quarters being at the very start of the pandemic). pandemic). HCA posted operating margins of at least 10% for most of the pandemic (9 out of 11 quarters). In other words, HCA’s revenues from patient care and other operations exceeded operating expenses by at least 10% for most of the pandemic. Tenet posted operating margins of at least 5% for most of the pandemic (9 out of 11 quarters), while CHS operating margins were lower (less than 5% for 9 out of 11 quarters ). CHS also had lower margins than other systems before the pandemic.
For all three systems, operating margins exceeded pre-pandemic (2019) levels for most of the pandemic (9 out of 11 quarters), including the last quarter of our analysis (the third quarter of 2022 ), despite recent declines in operating margins . HCA and Tenet fell below their 2019 operating margins in two quarters of 2020, and CHS fell below their 2019 operating margins in the first quarter of 2020 and the second quarter of 2022 before increasing again. In Q3 2022, operating margins were 11.4% for HCA, 8.4% for Tenet and 1.2% for CHS.
Stock prices rose and then fell during the pandemic; HCA and Tenet stock prices have generally increased since January 2020, while CHS stock prices have declined. Stock prices generally reflect investors’ assessment of a given company’s future earnings potential. Stock prices rose dramatically in the first 1.5-2 years of the pandemic. At their peak, HCA stock prices were up 87.9%, Tenet stock prices were up 153.8%, and CHS stock prices were up 383.1% from January 2020.
Share prices have also declined significantly in 2022 – in line with broader economic trends – and particularly between Tenet and CHS. As of November 8, 2022, HCA and Tenet stock prices have increased overall compared to January 2020 (by 44.6% and 12.6%, respectively). CHS share prices have declined by 11.5% since January 2020, although CHS has also experienced long-standing financial difficulties that predate the pandemic. For comparison, HCA stock prices rose much more than the S&P 500 during this period (44.6% vs. 16.8%), while the S&P 500 slightly outperformed Tenet stock (16 .8% vs. 12.6%) and clearly outperformed the CHS share (16.8% vs. -11.5%).
As of December 2, 2022, the majority of market analysts tracked by MarketWatch are bullish on HCA and Tenet stocks (with 18 buy recommendations, 3 overweight and 5 hold recommendations for HCA stocks and 14 buy recommendations, 2 overweight and 4 hold recommendations for Tenet stock) and neutral on CHS stock (with 8 hold and 4 buy recommendations); none of the analysts rated these stocks as “sold” or “underweight”.
Discussion
Industry reports suggested that hospitals had high margins in 2020 and 2021, but faced significant financial challenges in 2022. Our analysis adds nuance to this discussion. So far this year, operating margins for the nation’s three largest for-profit health systems have met or exceeded pre-pandemic levels. HCA and Tenet in particular had high operating margins. CHS posted negative operating margins in the second quarter of 2022 and its share price declined overall from January 2020 to November 2022, but its financial difficulties predate the pandemic. While some hospitals are struggling in the current environment – with high inflation and the ongoing burdens posed by COVID-19, influenza and respiratory syncytial virus (RSV) – our results indicate that the largest for-profit systems have had operating margins that exceed pre-pandemic levels.
| We obtained financial data from each health system’s filings with the Securities and Exchange Commission (SEC). We relied on unaudited 10-Q quarterly returns for the first three quarters of a given calendar year. For the fourth quarter of a given calendar year, we subtracted the sum of the first three quarters from the annual value reported in the audited 10-K documents. Health systems tend to provide conservative estimates of their financial performance in unaudited quarterly statements, which means that our operating margin data may be biased downward for the first three quarters of any given year. and up for the fourth quarter (which we obtain by subtracting the unaudited quarterly values from the audited annual values). Operating margins reflect the difference between operating revenue and operating expenses (also referred to as “net operating income”) divided by operating revenue. Our definition of operating margins excludes income taxes and non-recurring income and expenses, such as the sale of facilities. Our definition includes, among other things, equity in the profits of affiliated businesses, such as outpatient surgery centers, in which the system has a significant but not controlling interest. It also incorporates government COVID-19 relief funds. Receipt and repayment of loans, such as through the Medicare Accelerated and Advance Payment Programs, are not considered in determining operating margins.
Each health system in our study used a unique approach to reporting revenues and expenses, which therefore required adding and subtracting different lines when calculating operating margins. Further details are available on request. |
This work was funded in part by Arnold Ventures. We value our funders. KFF maintains full editorial control over all of its political analysis, polling and journalism activities.
Nancy Kane, independent consultant, reviewed the methodology of this analysis.
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