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HCA Holdings’s Operating Expense Ratio Fell in 4Q15

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Operating expense ratio

In 4Q15, HCA Holdings spent about $8.1 billion on salaries, supplies, and other operating expenses combined—an increase of 5.3% from $7.7 billion spent in 4Q14. Despite the company’s operating expenses rising on an absolute basis, when calculated as a percentage of the total quarterly revenue, the operating expense ratio fell from 80.1 in 4Q14 to 79.3% in 4Q15. To learn more about HCA Holdings’s operating expenses, read Exploring HCA Holdings’ operating expenses.

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Salaries, wages, and benefit expenses

In 4Q15, HCA Holdings’s SWB (salaries, wages, and benefit) expenses were about $4.6 billion—an increase of 7.6% YoY (year-over-year). As a percentage of the total revenue, the SWB expenses also increased by 0.5% YoY and reached 44.9% in 4Q15. HCA Holdings’s revenue in 4Q15 was exaggerated by about $68 million of Texas waiver revenue. Ideally, this should have been included in the company’s 3Q15 revenue. After excluding the waiver revenue, the company’s SWB expenses—as a percentage of the total revenue in 4Q15—are similar to the revenue in 4Q14. In 4Q15, HCA Holdings also witnessed an increase in the productivity of about 1% on a YoY basis and 1.7% on a sequential basis.

The number of contract labor employees in HCA Holdings fell by around 1% from 3Q15 to 4Q15. To improve its cost efficiency, the company aims to reduce nursing contract labor. Currently, it accounts for 8.5%–9% of HCA’s total contract labor. Instead, HCA Holdings is focusing on hiring FTEs (full-time employee). In 4Q15, about 900 FTEs were shifted from orientation programs to roles that involved supporting patients. The company is also striving to control nurse turnover ratios. In turn, this will reduce the dependence on costly contract labor.

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However, HCA Holdings expects that the wage rates could increase in 2016. This would add to the company’s SWB expenses. If this projection occurs, it would impact peer hospital companies’ profit margins such as LifePoint Hospitals (LPNT), Community Health Systems (CYH), and Universal Health Services (UHS) in 2016.

Supply expenses

In 4Q15, HCA Holdings spent ~$1.7 billion on supplies—an increase of 1.6% YoY (year-over-year). As a percentage of the total revenue, the supply expenses fell by 0.8% YoY and reached 16.4% in 4Q15. This was mainly due to a reduction in pharmaceutical costs. Also, effective February 1, 2016, Tenet Healthcare will work with HCA Holdings’s group purchasing organization, HPG (HealthTrust Purchasing Group). This is expected to increase HPG’s bargaining power with drug and device suppliers. It will help HPG secure better pricing for HCA Holdings and other HPG members in the next 12–18 months.

You can also invest in the iShares U.S. Healthcare Providers ETF (IHF) and reduce excessive company-specific risks of investing directly in HCA Holdings. HCA Holdings accounts for about 4.8% of IHF’s total holdings.

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