The Hospital Glut: Tenet Healthcare (THC $28.45)
Pandemics and Telemedicine Will Shutter 3 out of 10 Hospitals.
And then there were too many hospitals.
It was immediately clear that hospital-administered healthcare had no ready cure for Covid-19. Social distancing rules and general panic curtailed most elective medical procedures. Hospitals, like airports, became highly regulated environments where emergency services overwhelmed some facilities. But overall, capacity lay fallow. Prestigious health systems saw sweeping cuts. Lists of hospitals furloughing workers ran in the hundreds. The American Hospital Association estimated the sector lost $51 billion per month. Attorneys hustled for the reorganization work of advising hospitals and health systems considering bankruptcy. The vultures sensed carrion.
According to the medical industry sources we spoke with, hospital woes were not merely over fears of Covid infection. The pandemic merely magnified the looming uncertainty over the core role of the American hospital. Post-pandemic medical facilities suddenly faced a maze of contradictory executive orders, guidelines and recommendations. Such lists, like those from The American College of Surgeons, show how risky administering even basic medical procedures has become.
What exactly is an operation that “can be delayed without undue risk to the current or future health of a patient"? Unless hospitals start offering vacation packages, even a simple operation is now a newly dangerous opportunity for litigious patients to feel mistreated.
Publicly, health systems tried to recast themselves as telehealth providers, trying to give their operations a web-ish, Amazon-like healthcare retailer spin. Regulators chipped in. Medicare reimbursements for telemedicine were boosted. Larger medical groups, like HCA Healthcare (HCA), bragged about providing 500,000 virtual visits in the first quarter after the Covid outbreak.
Capital also flowed into medical automation and virtualization. Last week, Columbus, Ohio-based hospital administration artificial intelligence firm, Olive, raised $106 million. Its CEO, Sean Lane, said his goal was to have no distinction between working from home or in an office.
But doctors, group managers, and medical infrastructure providers say such efficiencies only go so far. Just as in the music industry, the movie business, and to some extent, financial services, hospitals are finding telemedicine a high-volume, ultra-low-margin business. Reimbursements are a fraction of in-office care. Medical practices currently renting space in hospitals have little choice but to find lower cost options.
And what exactly does a gastroenterologist need a hospital for to hold a Zoom call about a possible colonoscopy?
Insiders say, the hardest hit will be the rural hospital systems and those with significant investments in physician medical office buildings. “There will be significant oversupply of square footage in the new telehealth world,” summed up one medical technology CEO.
A Tricky Pill to Take
The hospital group facing the grimmest prognosis is clearly Community Health Systems (CYH), a large Tennessee-based network with 93 mostly rural hospitals. Its mix of remote locations, dubious acquisition history, and bumpy management choices have devolved this once giant into a 63,000-person operation that fetches a market value of just a little over $400 million.
Essentially, that could be seen as less than the value of its real estate.
Community Health has become that eerie enterprise with no reasonable entry point for investors. The company has attracted no suitors for a potential private sale. Larger, better managed competitors, like HCA HealthCare or Universal Health Services (UHS) seem like ideal merger partners. But today’s uncertainties make an acquisition implausible. Public investors face no clear strategy. Is the target share price a $1, or is the hope the operation will be taken private? Stocks this uncertain face serious challenges for large-scale investments.
A far more logical way to monetize the collapsing market for hospitals would be something like Dallas-based Tenet HealthCare (THC). This is a 65-hospital system that also has roughly 510 outpatient touch points. Initially, its locations show a reasonable distribution across nicely populated areas in places like Fort Worth, Jacksonville, Florida and Phoenix.
But a closer geostatistical analysis of Tenet’s locations reveal just how vulnerable this hospital group, or any hospital group is, to competitors. In Houston, for example, Tenet manages 3 reasonably robust surgical care hospitals distributed sensibly, across greater Houston.
But when a simple analysis of the time customers must travel to a hospital is considered, Tenet’s prospects fade. We counted roughly a dozen closely located competitors to Tenet’s facility in the attractive Hermann Park neighborhood in Houston.
Retail density of that scale strangles any operation. Much less a medium-sized enterprise like Tenet.
3 Out of 10 Hospitals to Close
Certainly, Covid-19 has not been the direct cause of the dramatic shift in the role of American hospitals. The pandemic hastened what’s been quietly evolving. So, extracting value from that shift will be a major undertaking. We cannot stress how challenging even the most basic information about hospitals, can be to confirm.
But over and over, throughout all our initial conversations, one assumption came up: For every 10 hospitals currently open, easily 3 will close. Triaging which 7 will survive will be the investor Covid question at hand.
