The majority of the nation’s leading for-profit hospital systems by revenue reported net gains during the first quarter led by stronger than expected inpatient volumes.

The boost in inpatient volumes and associated revenue comes just a quarter after providers said they would be betting more heavily on outpatient services to drive growth. 

Increases in inpatient revenues is an area to watch as providers weigh whether and how to adjust their portfolios. Community Health Systems, for example, has been on a selling spree recently in an attempt to deleverage its balance sheets, while HCA Healthcare, Tenet Healthcare and Universal Health Services are expanding services in key markets. 

Should inpatient care utilization continue to rise over multiple quarters, it could influence hospitals’ capital spending, according to research notes from analysts.

An ‘unusual’ rise in inpatient revenue

During the first quarter, each health system reported that a rise in inpatient volumes accounted for some or most of the provider’s increase in revenue — a trend one analyst called “a little unusual” during the question and answer period of CHS’ call.

Same-store admissions and adjusted admissions rose 3.8% and 1.9% year over year, respectively, at CHS. HCA reported inpatient admissions grew 6% year over year, and at UHS, adjusted admissions increased 4.5% year over year. Tenet saw same-hospital admissions increase 4.2% while outpatient visits, including emergency room visits, dropped by 0.8% year over year.

On each call, analysts pressed executives about whether such growth could be expected in coming quarters or if the increase was a blip on the balance sheets.

CHS President and CFO Kevin Hammons argued CHS still had room to grow inpatient volumes, saying the health system’s ongoing capacity management efforts have increased opportunities to field additional patients. He said initiatives to decrease length of stay have been particularly impactful.

“That’s helped open up capacity, allowing more admissions to be brought in,” Hammons said. CHS opened a bed tower in Knoxville, Tennessee, at the beginning of April and plans to open another tower in Foley, Alabama by the fourth quarter. 

HCA and Tenet also added capacity during the quarter, with HCA increasing inpatient beds by 2% during the quarter, according to CEO Sam Hazen. Tenet’s CEO Saum Sutaria didn’t provide additional details.

Elective procedures are also still continuing to return to pre-COVID-19 levels, executives said. UHS CFO Steve Filton said his team thinks the rebound isn’t complete, and there’s further room for inpatient volume growth in the coming quarters.

“[We] still haven’t necessarily returned to pre-pandemic levels. So we still think there is a decent amount of runway there for continued acute care volume growth, as well as behavioral volume growth,” Filton said during UHS’ earnings call.

Executives were split on whether the CMS’ two-midnight rule, which mandates inpatient care when a clinician believes a Medicare beneficiary needs hospital care that will likely last for two midnights, played a role in rising admissions. 

HCA CFO Bill Rutherford said the April rule could have given HCA’s inpatient volumes a “modest”  lift, while Hammons said it was still too early to quantify the rule’s impact.

Investments and divestitures

While the health systems were united in reporting rising inpatient volumes, they diverged when outlining capital spending strategy for the quarter and 2024. 

UHS alone was bullish on building out inpatient capacity. The health system’s model — which is broken into acute services and behavioral health services — has traditionally been heavily weighted toward inpatient care. Executives told investors UHS doesn’t have “much competition” when it comes to offering high-acuity inpatient services.

The other operators reported more emphasis on outpatient services, suggesting that despite this quarter’s boost to inpatient volumes, executives still see ambulatory care as a long-term growth strategy.

HCA has earmarked $5.1 billion to $5.3 billion for capital spending this year.

The operator has been focused on developing its freestanding emergency services business since this fall. During this quarter’s earnings call, Hazen doubled down on that commitment, stating they intended to grow the unit “consistently” in 2024 and 2025 to meet rising patient demand for services.

CHS — which has struggled to rebound from COVID and has received a negative credit outlook from multiple credit rating agencies — is focused on selling property to generate liquidity.

The Franklin, Tennessee-based operator continued to be cash-strapped this quarter, with just $48 million in cash and cash equivalents. For comparison, UHS carried $112.1 million, while HCA carried $1.3 billion. And while the other for-profits reported net gains for the quarter, CHS remained an outlier, posting a $41 million net loss, even as operating revenues improved.

CHS announced last month plans to sell a Tennessee hospital for $160 million to Hamilton Health Care System and divested eight hospitals and the majority interest of another during 2023.

Hammons said CHS is evaluating the viability of further sales, which could net more than $1 billion in total proceeds. Divestitures are likely to focus on “smaller, more rural hospitals with a higher bed count and a low occupancy rate,” according to CEO Tim Hingtgen. 

CHS is poised to receive “compelling valuations” in the current environment as it looks for opportunities to divest, according to analysts from Jefferies in a research note published earlier this month.

During the quarter, CHS opened two new ambulatory surgery centers.

Looking forward, Hingtgen said most capital spending will also go to building up CHS’ outpatient facilities because they typically require less “high of a spend” to become operational compared to inpatient facilities. 

Tenet is also divesting from its inpatient services portfolio as part of a “strategic transformation,” according to Sutaria. However, the operator is behaving more aggressively than CHS, both selling more properties and reinvesting the funds into growth.

During the first quarter, Tenet sold nine hospitals over three transactions for combined pretax proceeds of $4 billion and expanded its ambulatory care offerings. 

Tenet currently has more than 535 ambulatory care centers and is in the process of developing nearly 30 additional centers, according to the CEO.

“Our repositioned portfolio of businesses is more predictable and capital efficient with attractive margins and free cash flow,” Sutaria told investors.

The executive also anticipates that ambulatory care profits will “essentially replace the lost EBITDA from the hospital asset sales in our run rate expectations.”