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Big IPO for HCA Hospital Chain, But Buyers' Remorse Remains a Distinct Possibility

HCA Holdings, which operates the largest for-profit hospital chain in the country, finally went public last week in the biggest private-equity-backed initial public offering in history.

The IPO raised $3.79 billion with 126 million shares selling at $30, the top of the expected range. The equity investors, which include KKR, Bain Capital, and Bank of America (BAC), had a huge payday, as did several top HCA executives. Butthose who purchased the stock may not do as well in the long run.

The market favored HCA for several reasons: It's one of the few major hospital companies with publicly available shares; healthcare is among the few sectors that has survived the economic tsunami in relatively good shape; and HCA throws off a lot of cash.

Things aren't as rosy as they look
But the big hospital's financial prospects may not be as rosy as they seem on the surface. To begin with, HCA's revenues actually declined to $3.09 billion in 2010 from $3.16 billion in 2005, just before the equity firms bought it out. After inflation is factored in, that's a substantial drop.

Just before the IPO, HCA touted its earnings jump in the fourth quarter of 2010. True, HCA net income for the period did increase 31 percent to $283 million. But, more than half of that increase was due to lower "impairments of long-lived assets" and higher revenues from the sale of facilities.

In the big picture, a greater concern is HCA's debt level, which ballooned from $22 billion a year and a half ago to $28 billion at the end of 2010. Of that additional debt, $2.25 billion was taken on to help pay off the investors. The Tennessean reports that most of the $2.6 billion that HCA itself (as opposed to the equity firms) realized from the IPO will be used to pay down the corporate debt. So in other words, the investors robbed Peter to pay Paul -- that is, themselves.

Don't count on healthcare reform to save HCA
Perhaps none of this matters because healthcare reform will bring hospitals millions of new customers. On the other hand, reform is also likely to lead to sharply reduced reimbursements, especially from Medicare.

The analysts who advised people to buy HCA have an answer for that, too. They point out that for-profit hospitals have a greater ability than their not-for-profit brethren to skew their payer mix toward commercial insurers, which pay better than Medicare and Medicaid. That's correct, but I haven't seen a study showing that for-profit hospitals necessarily have higher margins than not-for-profits. In fact, if such a study were done, it would probably be full of holes, because of the byzantine way hospitals run their accounting.

I wish HCA and its investors well; but as the skeptical say of love, the wild success of the HCA IPO seems to represent the triumph of hope over experience.

Image supplied courtesy of Flickr.

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