Ongoing Labor Cost Pressures Hit HCA

April 22, 2022
The hospital giant’s executives have lowered their outlook for 2022 in large part because contract workers’ usage and wages will take longer to return to normal levels.

Shares of HCA Healthcare Inc. plummeted 20 percent on April 22—wiping out more than $17 billion of the company’s value—after leaders of the Nashville-headquartered said first-quarter profits were hurt by higher-than-expected labor costs and that a normalization of those costs will take longer than they had previously forecast.

Along with reporting first-quarter net income of $1.27 billion, which was down from $1.42 billion a year earlier and below analysts’ forecasts, HCA CEO Sam Hazen and CFO Bill Rutherford also lowered the company’s outlook for the rest of 2022. Their new guidance for the year is for $500 million less in revenues and between $495 million and $600 million less in profits, with more than three-quarters of that figure due to surging labor spending—a challenge the entire healthcare sector is struggling to handle. The salaries and benefits line of HCA’s first-quarter income statement accounted for 46.4 percent of revenues, up from 45.1 percent in early 2021.

On a conference call with analysts and investors, Rutherford said the HCA team had budgeted a 2022 increase in overall costs per full-time employee of between 3 percent and 3.5 percent. As the first quarter progressed, he added, the company—which runs 182 hospitals and about 2,300 ambulatory sites of care–saw that number trending 1.5 percentage points higher than expected. Extrapolated over the course over the year, that will cost HCA an extra $400 million to $500 million.

High-cost contract labor is the main factor in that equation. Rutherford said contract workers’ share of HCA’s hours worked was 11.6 percent during the first three months of this year, up only slightly from Q4, but that the rates HCA paid climbed more than expected, principally because the COVID omicron surge early in the quarter. Lowering the rates of those workers’ contracts, which typically run for 13 weeks, will take HCA longer than previously expected but Hazen noted that wage rates already are down 5 percent from the fourth quarter and ticking down month to month.

“Over the past few years, we have demonstrated an ability to adjust effectively to whatever our realities are,” Hazen said. “And I’m confident we will do it again.”

One lever the CEO said the HCA team expects to pull into 2023 and beyond is with insurance contracts.

 “As we further our discussions with those commercial payers, I’m optimistic we can gain some escalators that are more in line with the inflationary pressures of today versus the inflationary pressures of the past,” Hazen told analysts.

HCA’s earnings report came a day after rival Tenet Healthcare Corp. reported its numbers—a net profit of $280 million on revenues of about $4.7 billion—and CEO Saum Sutaria told analysts the contract labor market hadn’t moderated much in the wake of the omicron wave early this year.

“We would've expected contract labor rates and the labor market to have normalized a bit more,” Sutaria said, later referencing the roughly three-month contracts. “We may be just on a cycle of coming off of those assignments before we start to see even more moderation in the contract labor rates.”

HCA stock (Ticker: HCA) was changing hands around $214 late during the April 22 regular session after they closed trading the day before at nearly $270. Volume was on track to more than quadruple the shares’ average and a close around $214 would mark their lowest end to a session since last June.

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