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HCA's IPO: A Vote of Confidence in Hospitals, Post-Healthcare Reform

The private investors who took HCA private in a $33 billion leveraged buyout four years ago must feel that the god of finance is smiling down on them. First they extracted a $1.75 billion dividend from the nation's largest for-profit hospital chain. And now, with the wind of healthcare reform at their backs, a public offering they're planning is expected to bring in at least $3 billion that will be used to pay down debt.

That public offering, which would be the biggest in the U.S. since 2008, has been in the works for some time. But analysts say that the timing of the IPO, which comes on the heels of the reform law's passage, is no accident. By expanding coverage to 32 million of the uninsured, reform will benefit HCA and other hospitals because it will reduce their bad debt and charity care. Hence the IPO should be attractive to investors.

The infusion of cash into the hospital chain will come none too soon. Although HCA's net income was up in 2009, it's not throwing off enough cash from operations to pay down its $25.7 billion in debt significantly. The company has sold $4.46 billion in bonds over the past year and recently offered a higher interest rate to extend the maturity of $1 billion in existing bank debt. Of course, none of that stopped HCA's owners -- Kohlberg Kravis Roberts and Co., Bain Capital Partners, Merrill Lynch Global Private Equity, and members of the Frist family, who founded HCA -- from borrowing more money to get their payday.

HCA is managing its hospitals fairly well, to judge by its third quarter 2009 10Q statement. The company reported a 7.7 percent gain in revenues on a same-facility basis, which it attributed to a 2.8 percent gain in revenue per admission combined with a 4.8 percent increase in admissions. On the other hand, the number of uninsured ER visits rose 12 percent and uninsured admissions were up 8.2 percent in the third quarter, compared with the prior-year period. So investors who buy HCA's new stock will be looking for an increase in profitability starting in 2014, when the government expands Medicaid and starts requiring all individuals to buy insurance.

Hospital associations supported reform -- even the American Hospital Association came out in favor at the last minute -- and hospital stock prices rose after Congress passed the legislation. HCA's public offering is yet another indication that government action will help ensure healthcare providers' fiscal stability in years to come.

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