Healthcare Facilities & Managed Care_Hospitals 2025 Outlook; Fundamentals Remain Strong, Despite Noisy Policy Backdrop

Summary of Healthcare Facilities & Managed Care Conference Call Industry Overview - The hospital industry is expected to maintain strong fundamentals heading into 2025, with a stabilized labor market and reduced contract labor spending [1][2] - Volume growth is projected to remain above historical averages, driven by Medicaid supplemental payments and cost inflation adjustments in governmental and commercial rates [1][10] Key Points Hospital Fundamentals - Labor market stabilization has led to a significant decrease in contract labor spending, with full-time wage growth normalizing [1] - Professional fee inflation has slowed, although certain specialties may still face pressure [1][2] - Same facility adjusted admissions increased by 3.2% in the first three quarters of 2024, down from 5.8% in the same period of 2023, but still above the long-term average of 2-3% [6][10] Policy Environment - The new administration has created policy uncertainty, but major negative changes affecting hospital finances are not expected [2][21] - The expiration of enhanced exchange subsidies at the end of 2025 is viewed as the most significant potential policy change, with manageable impacts anticipated [3][22] - Hospital stocks may experience volatility due to ongoing discussions of various proposals in Congress [2][23] Investment Opportunities - High-quality hospital stocks such as HCA, THC, and UHS are seen as attractive investments due to their strong growth prospects [4] - HCA is expected to achieve 3-4% same facility adjusted admissions growth in 2025, driven by exchange enrollment growth [10][11] Pricing Trends - Net revenue per adjusted admission increased by 4.2% in the first three quarters of 2024, compared to 0.4% growth in the same period of 2023 [8] - Medicare and Medicaid rate increases for 2025 are projected at 2.9%, which is higher than the typical range [12] Labor Trends - Professional fees have seen a deceleration in growth from 20-30% in 2023 to 10-15% in 2024, with expectations for stabilization in 2025 [15] - Contract labor usage has decreased significantly, with average salaries and wages as a percentage of revenue dropping from 44.9% in 2023 to 43.7% in 2024 [18][20] Medicaid Supplemental Payments - Medicaid Directed Payment Program (DPP) payments are expected to continue benefiting hospitals, with significant increases in funding anticipated [30][32] - UHS estimates an annual benefit of $40-$50 million from the expiration of subsidies, translating to approximately 1.8% of consolidated adjusted EBITDA [28] Exchange Subsidies - Enhanced subsidies on ACA healthcare exchanges are set to expire at the end of 2025, which could lead to a decline in enrollment and impact hospital revenues [24][25] - Exchange enrollment has been a significant tailwind for hospitals, as these plans typically reimburse closer to commercial rates [25][26] Conclusion - The hospital industry is positioned for continued growth despite potential policy changes and economic challenges, with specific companies like HCA, THC, and UHS highlighted as strong investment opportunities due to their solid fundamentals and growth prospects [4][10]