HCA Healthcare's newly consolidated physician staffing venture is bleeding $50M per quarter, execs tell investors

An otherwise strong third-quarter performance across HCA Healthcare’s businesses was marred by news that the for-profit's recently integrated physician staffing joint venture will be bleeding tens of millions of dollars per quarter for the foreseeable future.

In 2011, HCA entered into a 50-50 joint venture with physician practice management services firm EmCare, which was later purchased and rolled into the now bankrupt Envision Healthcare, to help fill ER and hospital-based physician roles.

Earlier this year, HCA closed on a transaction that increased its ownership interest in the joint venture, Valesco Physician Services, to 90%. HCA began assimilating the venture in the second quarter and said at the time it anticipated an additional $1 billion in annual revenues but no material impact on adjusted EBITDA.

Now that claims are being paid out, HCA executives are warning of major revenue shortfalls compared to their original projections and an approximate $50 million per quarter loss tied to Valesco.

During Tuesday morning's quarterly investor call, HCA Chief Financial Officer Bill Rutherford said that the venture had a roughly $100 million negative impact on the company's third quarter and year-to-date adjusted EBITDA, a portion of which he attributed to revised second-quarter revenue estimates as claims began to be paid. 

The disclosures around Valesco dominated the call's question-and-answer session as analysts sought to make sense of the performance gap. 

“I’ve never seen a business kind of be off this far,” Justin Lake, a healthcare services analyst with Wolfe Research, said during the call. “You guys are obviously very, very good at what you do. I know this is a new business, but to be $50 million of revenue on a, let’s say, $250 million baseline, 20% … what did you think was going on?”

The executives noted Valesco is "a really large-scale business" with about 5,000 physicians across roughly 200 different programs and about $380 million per year in revenue. They acknowledged that the "very complex" integration "happened very quickly" and that they were operating "on some incomplete historical data." 

Though HCA has plans in place to reduce Valesco's expenses, the executives were clear that low payments are the venture's primary issue. Rutherford said the company is now "in a much better position to assess and address some of these revenue trends" because it is now able to manage the entirety of the revenue cycle and adjust contracts going forward. 

Throughout the questioning, HCA CEO Sam Hazen stood firm by the company's decision to consolidate Valesco due to the immediate and long-term staffing demands of its core business.

“It is important to understand that we believe that decision to consolidate Valesco was strategically imperative in maintaining the overall competitive positioning and capacity offerings of the company," he said. "As has been the case historically with our teams, I'm confident that we will find a pathway forward to mitigate the impact it has had on our results."

Rising volumes, sustained demand bolster HCA's core business

Valesco hurdles aside, the Nashville-based for-profit still notched over a billion in net income during the third quarter thanks to rising volumes in its markets and expenses that only slightly outpaced revenue growth.

HCA reported total revenues of $16.21 billion and expenses of $14.58 billion for the quarter, representing year-over-year increases of 8.3% and 9.9%.

Net income attributable to the company landed at $1.08 billion ($3.91 per diluted share), down slightly from last year’s $1.13 billion ($3.91 per diluted share).

On a same-facility basis, admissions increased 3.4% year-over-year while equivalent admissions rose 4.1%. Same-facility emergency room visits were up 3.5%, same-facility inpatient surgeries rose 1.6% and outpatient surgeries inched up by 0.9%.

These visits brought more money into the organization with same-facility revenue per equivalent admission rising by 3.6% over the third quarter of 2022. Executives also noted that the volume increases were relatively consistent across all of the company's geographical markets.

HCA is also digging itself out of labor issues that have weighed down the hospital sector in recent years, executives said. 

"Turnover was stable in the quarter, and nurse hiring was the strongest it has been all year," Hazen said. "These positive results help reduce contract labor costs 12.5% as compared to the third quarter last year, and 11% sequentially."

Responding to questions about the labor market, Rutherford noted that a recently passed minimum wage law in California will have a "very minimal impact on our company" as "most of our compensation was already in line with that."

Meanwhile, widespread unionization pushes in healthcare and other industries "is an issue, as everybody understands, but we have been successful in pushing through those issues organizationally and have landed in a spot that we think is not going to put too much pressure on our business in the near-term." 

Year-to-date, HCA now sits at $47.67 billion in total revenues and $3.64 billion in net income. These are up from $44.74 billion and $3.56 billion from the same time in 2022.

The company holds $891 million in cash and cash equivalents as of Sept. 30. It spent $1.15 billion in capital expenditures, excluding acquisitions, during the quarter and bought back 4.2 million shares of its common stock at a cost of $1.14 billion. Tuesday’s report included word of a quarterly cash dividend of $0.60 per share.

The company also homed in its full-year guidance ranges, which now predict revenues between $63.5 billion and $64.5 billion as well as net income between $4.94 billion and $5.13 billion. Executives directly attributed lowering of the guidance's higher end to the Valesco shortfalls. 

HCA Healthcare operates 183 hospitals and about 2,300 other ambulatory sites of care. The company reported $60.2 billion in total revenue across 2022.

Editor's note: Updated at 12:15 p.m. Oct. 24 with commentary from HCA Healthcare's third-quarter earnings call.