June 20, 2024


Let's Live Healthy

How HCA Healthcare’s ‘Conservative’ Covid Strategy Reaped Dividends

8 min read

Under the leadership of CEO Sam Hazen, the 54-year-old company recorded higher revenue and profits in 2021 than before the pandemic.

By Katie Jennings

Sam Hazen has dealt with his fair share of natural and man-made disasters. Floods. Tornadoes. Mass shootings. As the CEO of HCA Healthcare, which operates 182 hospitals across 20 states and the U.K., he’s in the business of handling regional crises. In January 2020, the Nashville, Tennessee-based company had its emergency preparedness team start investigating news of an undetermined virus out of China. “A pandemic, to be perfectly candid, was my worst nightmare,” says Hazen, 61. “Because I knew it would have an implication for the company largely and really be an at-scale event.”

By mid-March, as the first state lockdown orders went into effect, Hazen and HCA’s executive team zeroed in on two key priorities: “We’ve got to figure out a way to protect our people, that’s our employees. And then we’ve got to find a way to protect the organization,” he says. “If we can do both of those, then we would be in a position to take care of patients and take care of the community.”

It’s been a bumpy two years for many of the nation’s hospitals. The Covid-19 pandemic filled intensive care units with severely ill, ventilated patients, but operating rooms and outpatient clinics went dark. The shutdown of elective procedures, like knee replacements and cataract surgeries, saw hospital surgical volume drop nearly 50% in spring 2020, costing U.S. hospitals between $16.3 to $17.7 billion per month in revenue, according to one analysis. A federal bailout in the form of provider relief grants and paycheck protection loans, which now total around $278 billion, helped stem the tide of hospital closures that had started before the pandemic. Forty-six hospitals closed in fiscal year 2019, according to the Medicare Payment Advisory Commission. That shrunk to 25 closures in 2020 and 10 in 2021.

While other hospital systems relied on federal cash to limit the red ink and keep the lights on, HCA not only survived the pandemic but thrived. The company, which has 283,000 employees, recorded higher revenue and profits in 2021 than before it all began in 2019. In 2021, HCA reported $7 billion in net profit on $58.8 billion in revenue, a margin of 11.8%, up from 6.8% in 2019. (If partnership arrangements where HCA has a noncontrolling interest are included, profits increase to $7.7 billion with a margin of 13.1%.) After closing at a low of $68.13 per share on March 18, 2020, HCA’s stock has been on a steady rise, up more than 290% and trading at $267 a share at Friday’s close, giving the nearly -year-old company an $81.1 billion market cap. And the federal dollars that other hospitals needed? Hazen gave HCA’s $6 billion in aid back to the government.

Hazen, a 39-year company veteran who was named to the top role in 2019, credits a “very conservative philosophy” as the key to HCA’s financial success during the pandemic. It’s a strategy as old as the profit-and-loss statement itself: in the face of uncertain and declining revenue, cut expenses and conserve cash. That sounds easy but it can be difficult to execute, especially for large hospital systems that might be bogged down with bloat and bureaucracy. Unlike some of its peers, “HCA is running very efficiently,” says Ge Bai, an accounting professor at the Johns Hopkins Carey Business School. “They shrunk their costs in the face of a reduction of revenue. That’s how they survived the pandemic.”

“We felt it was the right thing for us to give the money back to the government,” says Hazen.

HCA Healthcare was originally founded in 1968 by father and son physicians Thomas Frist, Jr. and Sr., and Kentucky Fried Chicken owner Jack Massey, as the Hospital Corporation of America. The company has gone through many iterations over the past five decades from publicly traded to privately held and back again with its third IPO in 2011. Forbes estimates 83-year-old Frist, Jr. and his family are worth $21.8 billion.

The company recognizes how diversification can help it grow. It went from one to nearly two dozen facilities by its second year of operations. So is driving efficiency by consolidating hospital operations management within the larger corporation. That consolidation gave HCA an advantage in negotiations with suppliers, winning the company discounts thanks to its size. “Don’t underestimate the value of volume,” HCA’s then-CEO Richard Scott told Forbes Magazine in 1994, in reference to both suppliers and patients.

In addition to hospitals, HCA operates more than 2,300 other sites of care, like surgery centers, urgent care, rehab and behavioral health facilities, which keeps patients within the system to treat their various health needs. The company focuses on high-growth markets in cities like Fort Worth, Austin and Denver, and also tends to operate multiple hospitals in each market, which creates more leverage to negotiate prices with insurance companies and suppliers. But geographic market share and higher negotiated rates aren’t worth as much when all non-essential medical procedures are canceled by government decree and patients stop coming because they’re afraid to get sick, as was the case in spring 2020.

HCA already saw the pandemic’s impact by its first-quarter earnings in April 2020. The year before it’d seen revenue growth of nearly 10%, but that quarter it was less than 3%. At that time, Hazen announced cost-cutting initiatives: suspending quarterly dividend payouts, pausing its share buyback program, slowing down capital spending and taking a $2 billion term loan to increase liquidity. In hindsight, that was not an over-reaction. HCA saw its revenues decline over $1.6 billion in second quarter 2020 compared with 2019, and for the full year 2020 revenues were basically flat–a big change for a company accustomed to consecutive years of growth.

One part of the business spared from cost-cutting was its staff. Hazen promised that no one would be laid off or furloughed on account of the pandemic. Since a majority of HCA’s employees are hourly workers, the company instituted a pandemic pay program to cover wages for workers who weren’t getting their hours on account of lockdowns. Hazen says more than 150,000 employees participated at a cost of more than $250 million.

Despite the declines in anticipated revenue, the cost-cutting measures HCA instituted helped ensure cash flow, and so by the fourth quarter of 2020, HCA said it planned to “return, or repay” around $6 billion in federal assistance it received as part of the Covid relief package. “It was an extraordinarily bullish statement from an investor perspective,” says Gary Taylor, senior equity analyst at Cowen and Co. Patient visits were still down across the board and the FDA had yet to authorize a Covid-19 vaccine. “We felt it was the right thing for us to give the money back to the government,” says Hazen. “Because as an organization that should stand on its own, we felt we had enough confidence and ability to adjust – even with the uncertainty.”

By the end of the fourth quarter 2020, Hazen says the company had a better handle on its cost trends. Having successfully navigated the worst of the pandemic, HCA could now start looking ahead to growing the business and increasing spending. The company reinstated its quarterly dividend program declaring 48 cents per share and the resumption of its share buyback program. “As long as we weren’t completely shut down [again] … we felt as, as an organization, we could take the learnings that we had just gained from the early part of the pandemic and apply that to whatever scenario developed in 2021.”

In each of the four quarters of 2021, HCA declared dividends of 48 cents, repurchased a combined $8.2 billion worth of shares and in the fourth quarter authorized an additional buyback program for up to $8 billion. In November, HCA said it would build three new hospitals in Florida, and a few months later announced five new hospitals in Texas. “HCA really began to lean back into a lot of incremental initiatives to drive top line, drive volume and reinvest back into their facilities,” says Whit Mayo, a senior research analyst at SVB Leerink.

“We’ll probably be the largest educator of nurses in the country in five years,” Hazen says.

As the pandemic recedes (barring any new, wildly contagious variants), 2022 presents its own challenges from the fallout of Covid. Ben Hendrix, an equity analyst at RBC Capital Markets, describes it as a “transition year.” Demand will continue to be strong, he says, as hospitals continue to recapture some of the deferred elective procedures that patients put off during the height of the pandemic. At the same time, some other government support programs, like a 20% premium for hospitalized Medicare patients with Covid and a freeze on 2% Medicare cuts across the board, will come to an end as the public health emergency ends. The add-ons and delay in cuts totaled around $900 million in support in 2021 that is expected to shrink to $150 million in 2022.

But the biggest concern is the healthcare labor supply. There was already a growing shortage of nurses before the pandemic, which has become even more acute as people leave the profession due to burnout. To fill the gap, hospitals are having to turn to contract agencies rather than hiring directly. This sometimes means having to pay rates nearly 8 times the $38.47 the Bureau of Labor Statistics estimates as the mean hourly wage for a registered nurse. “There’s a certain amount of labor inflation that’s probably here to stay,” says Hendrix. “But the premium component for agencies and contract work should normalize over time.”

SEIU, the labor union that represents around 23,000 HCA employees, including nurses, techs, maintenance and clerical workers, disputes the idea that labor costs are a challenge for a company that made $7 billion in profit last year while paying custodial and cafeteria staff $12.50 an hour. “That wage is not enough for workers to keep up with the cost of food, childcare, health insurance, housing, transportation and other basic necessities,” says Joe Lyons, research coordinator at SEIU.

Wages aren’t the only contentious issue between labor and management. In February, the union released a report alleging its analysis of HCA’s higher-than-average emergency room admissions suggested the company was engaging in Medicare fraud. HCA has previously denied similar claims, stating it “found nothing” to suggest its ER admits are “based upon anything other than [physicians’] independent medical judgment.”

Hazen says the company is focused on retaining existing employees, recruiting new ones and better managing capacity. The company is also using technology and data to streamline some of its processes and care delivery models. “We’re not going to solve all of our problems in 2022 with the labor market, because there are certain macro things that are going to take time,” he says. One of the company’s longer plays is its majority stake in the Galen College of Nursing, which has campuses in Kentucky, Texas, Florida and Ohio, completed in January 2020. “We’ll probably be the largest educator of nurses in the country in five years with the expansion that we’re going through,” says Hazen.

Looking back on the past two years, in addition to its financial success, HCA was overall able to grow its market share, says Hazen: “[It] gives us confidence that we can work our way through the next set of challenges or opportunities in a productive way, and keep pushing the organization forward.”


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