Who’s winning the ‘war for talent’ among Hospital Operators, HCA, HLS, CYH or someone else?
EXECUTIVE SUMMARY
From 2004 to 2008 Health Management Associates (HMA) had the most productive workforce. HMA’s workforce generated an average annual operating income per employee (OIE) of $10,366, while the average OIE of all the companies included in this study was $7,165. Over the same period HMA’s operating margin (OM) averaged 9.32%, while the average OM of all the companies included in this study was 6.48%. However, HMA’s OIE and OM declined from 2004 to 2008 while its total number of employees (TNE) increased 152%, which suggests it added less productive human capital assets during this period. Healthsouth and Tenet Healthcare are the only firms that improved both OIE and OM in this period, but both reduced TNE which suggests these two firms did so by identifying and eliminating poorer performing human capital assets.
METHOD OF ANALYSIS
By analyzing the OIE, OM, and TNE of leading hospital operators we are able to see both the absolute and relative productivity of each firm’s human capital, and therefore determine which hospital operator has the most productive human capital. To measure a firm’s OIE, or the absolute productivity of its human capital, we divide annual operating income by the total number of employees as reported in the company’s 10-K filing. To measure a firm’s OM, or the relative productivity of its human capital, we divide annual operating income by annual revenue as reported in the company’s 10-K filing. TNE data is taken directly from the company’s 10-K filing or annual reports. The equations for this analysis are as follows;
- Annual Operating Income / Total Number of Employees = OIE
- Annual Operating Income / Annual Revenues = OM
RESULTS
In the graph above we can see the OIE for Community Health Systems (CYH), Healthsouth (HLS), Lifepoint Hospitals (LPNT), Hospital Corporation of America (HCA), Tenet Healthcare (THC), Health Management Associates (HMA), and Universal Health Services (UHS) for fiscal years ending 2004 through 2008. Even though HMA’s OIE trended downward, which suggests their human capital became less productive, it averaged around $14,200 during this five year period. Over the same period CYH, HLS, LPNT, HCA, THC, and UHS’s OIE averaged around $10,300, $7,680, $10,900, $9,400, -$4,200, and $8,800 respectively. Between 2004 and 2008 HMA clearly had the most productive human capital assets on an absolute basis, which were 30% more productive on average than the next closes competitor. However, it should be noted that HLS, UHS, and THC are the only firms that had an upward trending OIE in this period, which suggests their human capital became more productive. Of particular note is HLS, who’s OIE reached $18,400 in 2008, the highest OIE that year. This would suggest HLS is improving the productivity of its human capital more than any of these firms.
From the graph below we see that HMA’s OM has averaged around 12% during this period, while CYH, HLS, LPNT, HCA, THC, and UHS’s OM averaged around 9%, 9%, 10%, 7%, -4%, and 8% respectively. Between 2004 and 2008 HMA clearly had the most productive human capital assets on a relative basis, which were 20% more productive on average than the next closes competitor. However one can’t help but notice the downward trend for HMA, which suggests its operations are becoming less efficient. Again, it should be noted that HLS and THC are the only firms that had an upward trending OM in this period. Of particular note is HLS, who’s OM reached nearly 22%, the highest of any firm at any point during this period and over 50% higher than the next closest competitor. Clearly HLS is doing something extraordinary!
Below you can see the TNE for each of these hospital operators from 2004 through 2008. Because the TNE for HCA is two times the size of the other firms its TNE is on the secondary Y axis (the right side of the graph). This was done to make the trends in TNE for all companies easier to see. HMA’s TNE has trended slightly upward, but remained rather steady around 32,000. CYH, HLS, LPNT, HCA, THC, and UHS’s TNE have averaged around 52,000, 31,000, 18,000, 190,000, 71,000, and 38,000 respectively. Only CYH and LPNT’s TNE have a significant upward trend, and CYH’s growth in TNE is largely due to its acquisition of Triad Hospitals in 2007. Of particular note here are both HLS and THC, the only firms that improved OIE and OM during this period, which both have downward trending TNE. This would suggest that these two firms did a good job of identifying and eliminating poorer performing human capital assets during this period. While cutting poorer performing human capital assets is generally a good thing, a note of caution should be taken when doing this. Eliminating any human capital asset that produces more in earnings than the cost of capital necessary to employ it may improve OIE and OM, however it will reduce the firms total operating income because the asset is generating a positive return on investment.
If we look at a chart of these companies stock prices from 2004 to 2008 (see chart below, HCA not included as it is a private company) we see that UHS performed the best with a decline of -32.14%, while CYH, HLS, THC, HMA, and LPNT had declines of -53.85%, -57.75%, -92.85%, -93.39%, and -37% respectively. Why didn’t HLS and THC outperform the other firms given they improved both OIE and OM over this period? That is a hard question to answer definitively, but if you look at their revenues and operating income together you will see that THC lost over $2 billion in operating income and HLS’s top line revenues decreased from almost $4 billion to under $2 billion during this period. It is no surprise that investors stayed away from THC, but why did investors stayed away from HLS? Maybe it is because investors do not approve of HLS cutting its way to the best OIE and OM. UHS improved annual revenues, annual operating income, TNE, OIE, but did not improve OM over his period, however, it appears, at least among this group of companies, that investors favor this type of performance.
CONCLUSION
Between 2004 and 2008 HMA clearly had the most productive human capital on both an absolute and relative basis, with an OIE around 30% greater and an OM around 20% greater than the next closest competitor. Therefore, we conclude that HMA is winning the ‘war for talent’ among hospital operators. Unfortunately for HMA, the downward trend in both their OIE and OM implies that they cannot find nor keep higher performing talent. This trend, if not corrected, will likely continue to push the company’s stock price lower.
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