LifePoint Hospitals... Not Healthy for Your Portfolio
One company in particular, Lifepoint Hospitals (LPNT), is a publicly traded entity that operates and manages acute care hospitals and outpatient facilities. However, based on current conditions, and pending legislation, it is recommended to hold off on Lifepoint Hospital until the road to the future with respect to healthcare management is more solidly paved.
As an entity, Lifepoint Hospital manages 54 facilities in 18 states, with a total of 6,048 beds under care. Simply stated, their goal is “making communities healthier” by serving as a beacon of the community in which “patients choose to come for care.” Nonetheless, their business model relies heavily upon the talent of their clinical staff, and the deployment of modern technologies to diagnose and treat their patients.
For the fiscal year ending Dec. 31, 2011, Lifepoint Hospitals saw revenues exceeding $3 billion, which translated into a bottom line income of $162 million, a razor-thin margin of 5%. Currently, Lifepoint Hospitals does not pay a dividend and is trading at approximately 11 times earnings.
What actually encompasses the “industry,” per se? Healthcare in itself is a highly competitive industry, with the initial struggle occurring at both the local and national level. In addition, the industry is heavily regulated by the government, and scrutinized for any traces of misconduct or fraud. The ultimate source of revenue, the patients themselves, generally has numerous options when choosing a health care provider. Instead of utilizing Lifepoint Hospitals, one can visit a private practice, visit an urgent-care type facility or utilize a competitor’s facility. In fact, numerous outpatient facilities are springing up around the country, in which services like CT scans can be obtained at a fraction of the cost. In the end, however, the determination of choice is solely based on an individual’s whim, but is strongly influenced by time, cost, location and reputation.
In terms of revenue, hospitals generally derive their source from three patient types: Medicare, Medicaid and Tricare; private insured; and self-pay. Self-pay patients, as one can predict from its moniker, are those without insurance and commit to making payments to the hospital. Privately insured patients are those that are covered by insurance companies such as United Health Care, and pay a predetermined portion of hospital fees. Medicare and Medicaid are governmental insurances provided to those that qualify under disability, age or special conditions such as pregnancy. The following demonstrates the breakdown of the revenue stream for fiscal year 2011:
In theory, hospitals would seem like the perfect investment vehicle. Baby boomers are retiring, and people will inevitably become sick. In addition, with obesity and diabetes festering in the U.S. population, it would almost seem ignorant not to hold healthcare equities. However, federal laws quickly sink this fanciful perception with the introduction of EMTALA. According to EMTALA, no facility with an emergency room shall deny treatment to a patient based on the ability to pay or not. If a case is dubbed to be an emergency, the facility must treat the patient regardless of ability to pay. As such, payment may never be received, especially with respect to the more transient populations.
Some patients, such as those in intensive care units, can cost a hospital thousands a day. To account for this, provisions for doubtful accounts are established in the financial statements. A quick look at the financial statements demonstrated that this line account increased to $518.5 million in 2011 from $443.8 million in 2010, a 16.8% increase. This following is a projected estimate of the trend of losses for the next few years:
The following are primary risks that Lifepoint Hospital, like most hospitals, faces:
1. Medicare and Medicaid reimbursement has been traditionally low, at a level that barely covers the cost of treatment. With the national debt level spiraling and a pattern of decline in government reimbursements, future revenues are expected to be heavily impacted based on revised payment schedules.
2. While patients may commit to payment post-treatment, actually, payment may never be received. Though provisions have been made for doubtful accounts, in a recessionary economy, medical bills may be hard to foster.
3. Government regulations heavily impact the healthcare industry, and as such, any changes can affect the operations of a hospital. Likewise, hospitals can be the target of numerous cases of both criminal and civil legislation, with potentially astronomical losses. The Affordable Care Act will surely impact the future revenue streams of any hospital, but even its legality is in question.
4. Clinical talent is highly sought and courted. As such, Lifepoint must remain competitive in their retention of staff.
Financially speaking, Lifepoint Hospital is sound on several fronts. Over the last 3 years, Lifepoint has grown its revenues by 4%, yet maintained its operating margins in a range averaging around 8.5%. When analyzed quarter to quarter, first quarter 2012 generated $851 million in revenue compared to $758.50 million in first quarter of 2011. On the balance sheet, LPNT currently holds about $116 million cash on hand, and is considerably liquid (greater than 2) in terms of both the current and quick ratio. Free cash flow has been relatively steady, with over $180 million generated in 2011.
Two factors should be considered carefully, however. First, the DSO has been increasing yearly, which should be expected in a recessionary economy, as budgets become tighter. Second, a large portion of their revenues stream from Medicare and Medicaid. As government at both the state and federal levels attempt to reduce deficits via payment revisions, this will impact the bottom line of any provider in the healthcare industry. The very extent of this impact is yet to be determined, as its survival is in contention at the Supreme Court, where the legality of the Affordable Care Act is in question.
The following diagrams serve as a comparative analysis of Lifepoint Hospitals and three of their competitors:
As one can tell from the data, Lifepoint, comparatively speaking, is superior in several metrics. The firm is more liquid and less debt-laden than their competitors. In terms of bottom-line transformation, Lifepoint has a profit margin higher then their competitors. Managerial efficiency metrics, however, are below par. Lifepoint is also trading at higher multiples on several metrics then their competitors, which implies that Lifepoint is more expensive.
The following charts demonstrate valuations rendered via several methodologies:
The data shows that in almost every metric, Lifepoint Hospital is overpriced. The average price rendered from the valuation techniques yield a value of $25.27, which is a downside of approximately 33%. Only under the Enterprise/Free Cash Flow metric does Lifepoint seem undervalued.
Utilizing GuruFocus’ Insider function, one can tell that many of the company’s line officers have been selling their holdings of Lifepoint over the last two years. As such, this should speak for itself in terms of officer confidence in Lifepoint Hospitals.
At the moment, healthcare equities are especially risky, due to the uncertainly related to the Affordable Care Act. Whether it is passed or struck down, the healthcare system will still be fraught with problems. Often, hospitals and providers are the target of astronomical litigation, especially in states with no caps. Medicare and Medicaid reimbursements, as history would suggest, will inevitably continue to decline. The industry itself is heavily regulated, and as such, any hospital found to be out of compliance can suffer numerous penalties. Finally, a large portion of line officers are selling their holdings of LPNT in the open market. In conjunction with negative valuations, an investment into Lifepoint hospital would be a risky addition to one’s portfolio.
Gurus Hotchkis & Wiley and David Dreman are holding LPNT in their portfolio.