Assessing Community Health Systems’ hospital business in 3Q14 (Part 3 of 11)
Operating expenses accounted for 86.5% of Community Health Systems’ (CYH) net operating revenues in the third quarter of 2014. This represents a decrease of 180 basis points compared to the 88.3% share of operating expenses in the third quarter of 2013.
In the same time period, other operators including HCA Holdings Inc. (HCA), LifePoint Hospitals, Inc. (LPNT), and Tenet Healthcare Corporation (THC), saw respective operating expenses of 80.7%, 86.6%, and 89.1% of net operating revenues.
The healthcare industry, which is covered by the Healthcare Select Sector SPDR Fund (XLV), relies heavily on skilled human capital. As a result, salaries are a major component of operating expenses.
Community Health Systems’ salary expenses as a percentage of net operating revenues decreased to 45.7% in the third quarter of 2014, from 47.7% on a year-over-year basis. This cost efficiency was achieved by eliminating Health Management Associates Inc.’s (or HMA) corporate overhead costs and achieving synergistic productivity improvements from the merger with HMA. The graph shows a consistent decrease in salary expenses after the first quarter of 2014.
Supplies as a percentage of revenue increased marginally from 15.2% in the third quarter of 2013 to 15.3% in the third quarter of 2014. Since March 2005, the company has purchased medical supplies, medical equipment, and pharmaceuticals under an agreement with HealthTrust Purchasing Group, a group purchasing organization. After the merger with HMA, Community Health Systems acquired HMA’s stake in HealthTrust, and now owns a 24.6% stake in the group purchasing organization.
Other expenses increased from 22.1% in the third quarter of 2013 to 23.4% in the third quarter of 2014. This increase is the result of increased spending on electronic health records as well as acquisition- and integration- related expenses related to the HMA merger.
Browse this series on Market Realist:
- Part 1 – Overview of Community Health Systems
- Part 2 – More outpatient revenues the trend at Community Health Systems
- Part 4 – Community Health Systems’ key markets and Medicaid expansion
- Investment Company Information
- Community Health Systems
- Operating expenses
- Tenet Healthcare Corporation