Shares in Lewisville-based Adeptus Health took a major hit Wednesday after the nation’s largest operator of freestanding emergency rooms reported an $11.7 million loss in the third quarter.
The loss was attributed to high fixed costs that resulted in continued decline in patient volumes at facilities that are not hospital-affiliated. Adeptus refers to those facilities as non-hospital outpatient departments.
The company also surprised analysts by disclosing it needed to secure $27.5 million in emergency financing from investors.
Adeptus shares fell about 3 percent to $26.87 a share on Tuesday, but tanked on Wednesday. It closed down 68 percent to $8.60 a share.
The company’s low patient volume was coupled by billing and collection issues, and expenses associated with opening three new hospitals, which are planned for the end of the year.
Leadership admitted frustration during a call with analysts after the market closed Tuesday.
“Let me be clear, third quarter results were disappointing and are not acceptable operating results,” chief financial officer Frank Williams told analysts. “While our business is currently underperforming, we have put in place plans … that will allow us to correct this underperformance.”
Analysts were less optimistic, describing it as a “distressed situation” and noting that without emergency financing Adeptus has enough cash to fund just two additional quarters of operations. Volume dips and cost scrutiny could hamper any possibility of aggressive expansion, noted equity analyst Brian Tanquilut said in his report on Wednesday.
Cedrick Dark, an emergency medicine physician at the Baylor College of Medicine in Houston who also works in hospital-affiliated freestanding ERs, said the freestanding model will continue to face challenges, but not just with low volumes.
“Facility fees” designed to help freestanding ERs cover their overhead are a major concern for patients who show up for medical issues that could be handled at urgent care. “They’re getting emergency room sized bills,” Dark said.
Freestanding ERs must provide access to doctors, lab testing, nurses, radiologists, and other staff all day, every day.
“It’s not cheap to do,” he said. “The facility fee helps pay for all that. Without it, the model’s not going to financially be viable.”
The proliferation of freestanding emergency facilities in the U.S. also has increasingly been met with criticism by health policy researchers.
They worry that locations are cropping up in wealthy communities and may not be regulated by the same standard that has prevented hospitals from dumping people who cannot afford to pay. Patients have also complained about their confusion over whether services are covered by insurance.
Operators of the facilities, on the other hand, call it an industry of demand. They argue the facilities provide a convenient alternative to affluent patients who do not want to wait in crowded hospital emergency rooms.
Adeptus operates more than 90 freestanding emergency rooms in the United States. In Texas, where growth has been the fastest, Adeptus runs First Choice Emergency Room locations in Dallas-Fort Worth, Austin, San Antonio and Houston.
Patients who are willing to pay higher prices provide the greatest revenue per visit given the company’s high fixed cost model, Williams said.
“Our predominantly fixed cost model has a fairly direct impact on our bottom line,” he told analysts.
The biggest impact was in Houston, its largest market. The company reported “a decline of approximately 2,000 mainly lucrative commercial patients quarter over quarter.” Over 15,200 patients were seen in Adeptus ERs in that market in the third quarter, and the majority of the facilities there became affiliated with hospitals in October.
Other markets that experienced drops in volumes were San Antonio, where 2,578 patients were seen in the third quarter, and Austin, which had a patient volume of 2,644. “These are small markets and less significant to the bottom line,” Williams said. “But still an impact in excess of $2 million for the combined markets.”
The third quarter results were a significant change from the previous quarter, when Adeptus saw operating revenue increase 12 percent to $100.2 million, which it attributed to its affiliations with hospitals. Operating revenue in the third quarter was $85.4 million.
On Tuesday, the company again noted positive results from hospital-affiliated outpatient departments. Patient volume rose 39.3 percent at hospital-affiliated emergency departments and dropped 19.1 percent at those that were not.
Adeptus has been seeking partnerships to bolster hospital relationships.
Texas Health Resources
Texas Health Resources, an Arlington-based health system, began rebranding 31 of Adeptus’ North Texas freestanding emergency facilities and one hospital with its logo in September.
ER volumes in the Dallas-Fort Worth market in the third quarter topped 37,000 patients. Chief operating officer Graham Cherrington said the THR affiliation has “already been a positive impetus.”
Adeptus has opened 21 new freestanding ERs and two hospitals this year alone, and has plans to add three more. That would bring its total to 104 ERs, most of which will be hospital-affiliated.
It also plans to open hospitals in Denver, Houston and Colorado Springs by the end of the year.
In light of the disappointing quarter, Adeptus leadership plans to focus on affiliating facilities with hospitals that do not have those relationships. It also plans to address issues with billing and collections, and scale back on expansion.
The company went public in June 2014 at $23.30 a share. Its share price peaked at $115.68 in September 2015.
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