HLTH: Nobilis Health Corp (TSX:NHC) Analysis and Research Report

2018-06-25 - by Asif , Contributing Analyst - 94 views

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Overview

The company's operations consist of two reportable business segments, the Medical Segment and the Marketing Segment, each of which is described in more detail in the following paragraphs. The company's Medical Segment owns and manages specialty surgical hospitals, ambulatory surgery centers (ASCs) and multi-specialty clinics. It focuses on improving patient outcomes by providing minimally invasive procedures that can be performed in low-cost, outpatient settings. To promote further improvements in patient satisfaction and clinical outcomes, Nobilis has spent the last two years developing a full suite of ancillary services that the company offer patients treated in its facilities. To date, Nobilis is able to provide a variety of in-house ancillary services, such as Anesthesia, Surgical Assist, Intraoperative Neuromonitoring ("IOM"), and clinical lab testing (collectively, "Nobilis Ancillary Service Lines").

The company's business also utilizes innovative direct-to-consumer marketing and proprietary technologies to drive patient engagement and education. The company's Marketing Segment provides these services to the facilities that comprise its Medical Segment; the company also provide these services to third parties as a stand-alone service.

The company's portfolio of specialty surgical hospitals, ASCs and multi-specialty clinics is complemented by its Marketing Segment, which allows it to operate those facilities in many instances with few, if any, physician partners. The company's differentiated business strategy provides value to patients, physicians and payors, and enables it to capitalize on recent trends in the healthcare industry, particularly with regard to increased consumerism in the healthcare space. As a result, the company believe Nobilis Health Corp is positioned for continued growth.

In 2018 the company will continue to expand the continuum of care that the company offer its patients by furthering the integration of primary care physician practices into its business model. Through the alignment of primary care physicians, which includes an array of options from clinical integration to employment, this initiative will allow it to grow its referral based business, while providing direct exposure to the initial level of patient care and diversifying the services provided throughout its healthcare system. It also affords it the opportunity to broaden marketing services throughout the continuum of care and match the healthcare needs of patients, all while maintaining a focus on patient outcomes and satisfaction. The company's engagement of primary care physicians at the clinical level will continue to drive contracted revenues and Management’s ongoing efforts to strengthen its revenue platform.

The company's pipeline of acquisition targets is robust and varies by geography. The company will be opportunistic in choosing the order of these acquisitions and will make its decisions based on geographic location, existing and potential physician relationship and marketing opportunities within the targeted market.

On October 28, 2016 and March 8, 2017, the company purchased Arizona Vein and Vascular Center, LLC and its four affiliated surgery centers operating as Arizona Center for Minimally Invasive Surgery, LLC, (collectively, "AZ Vein") and Hamilton Vein Center (HVC) brand and associated assets, respectively. The acquisitions expanded its specialty mix to include the treatment of venous diseases with little modification to its existing infrastructure of specialty surgical hospitals and ASCs. The company's facilities will be able to offer a range of treatments, both surgical and non-surgical, for those patients suffering from venous diseases, which today affect more than 30 million Americans.

In addition to its vein and vascular business acquisitions, on September 13, 2017, the company purchased DeRosa Medical, P.C. ("DeRosa"). DeRosa is a primary care practice that specializes in health and wellness, medically supervised weight loss, and chronic health condition management. The practice has three locations in the Phoenix, Arizona metropolitan area: Scottsdale, Chandler, and Glendale. The acquisition of DeRosa allows the Company to enhance its ability to serve patients across the continuum of care, from primary care needs to surgical procedures, utilizing its concierge care delivery model. The addition of DeRosa also complements the existing facilities located in Arizona.

On November 15, 2017, the Company acquired a 50.1% ownership in Elite Surgical Affiliates' ("Elite"), an in-network portfolio that manages three ASCs and one surgical hospital in Houston. The purchase was financed through an expansion of $50.0 million to the Company's current credit facility, cash of $6.1 million, a seller's note of $3.5 million, and stock of $0.5 million. This transaction represents the Company's largest acquisition to date and provides a significant enhancement to the Company's goal to realize the majority of revenues from in-network managed care contracts. In addition, this acquisition represents an expansion of 76 physician partners to the Houston market network of physicians and provides additional benefits in the form of operational efficiencies, increased company footprint, and an increase to available resources.

During the fourth quarter of 2017, the Company began operations at Mountain West Surgical Center (ASC) located in El Paso, Texas and Uptown Surgical Center (ASC) in Dallas, Texas. These ASCs will provide similar multi-specialty services to the current brands the Company markets to customers and those currently performed at other company owned facilities. These ASCs generate revenue through in-network contracts and progress the Company's overall in-network contributions to revenue while also capturing additional patients in the Dallas, West Texas, and New Mexico markets.

The company's growth strategy focuses on:

  • Driving organic growth in facilities that the company own and operate; and
  • Executing a disciplined acquisition strategy that results in accretive acquisitions.

Medical Segment

The company's Medical Segment broadly includes its ownership or operation of healthcare facilities (the “Nobilis Facilities”) (which include specialty surgical hospitals, ASCs and multi-specialty clinics) and Nobilis Ancillary Service Lines.

As of March 31, 2018, there are 33 Nobilis Facilities, consisting of 5 specialty surgical hospitals (4 in Texas and 1 in Arizona) (the "Nobilis Hospitals"), 13 ASCs (9 in Texas and 4 in Arizona) and 15 multi-specialty clinics (8 in Texas and 7 in Arizona), partnered with 34 facilities across the country and 9 marketed brands. The company earn revenue in its Medical Segment from the “facility fees” or “technical fees” from third party payors or patients for the services rendered at the Nobilis Facilities. The Nobilis Facilities are each licensed in the state where they are located and provide surgical procedures in a limited number of clinical specialties, which enables them to develop routines, procedures, and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both physicians and patients.

These clinical specialties include musculoskeletal surgery, orthopedic surgery, podiatric surgery, vein and vascular, ear nose and throat (ENT) surgery, pain management, gastro-intestinal surgery, gynecology and general surgery. The Nobilis ASCs do not offer the full range of services typically found in traditional hospitals.

Marketing Segment

The company's Marketing Segment provides marketing services, patient education services and patient care coordination management services to the Nobilis Facilities, to third party facilities in states where the company currently do not operate, and to physicians. The company market several minimally-invasive medical procedures and brands, which include the following:

  • North American Spine: promotion of minimally invasive spine procedures (pain management, musculoskeletal and spine);
  • Migraine Treatment Centers of America: promotion of procedures related to chronic migraine pain (interventional headache procedure);
  • NueStep: promotion of surgical procedures designed to treat pain in the foot, ankle and leg (podiatry);
  • Evolve: The Experts in Weight Loss Surgery: promotion of surgical weight loss procedures (bariatrics);
  • Minimally Invasive Reproductive Surgery Institute (“MIRI”): promotion of women’s health related procedures;
  • Onward Orthopedics: promotion of general orthopedics, sports medicine related to orthopedics (orthopedics and pain management interventions);
  • Clarity Vein and Vascular: promotion of cosmetic and medical vein and vascular treatments; and
  • Arizona Vein and Vascular Center: promotion of cosmetic and medical vein and vascular treatments.
  • Hamilton Vein Center: promotion of cosmetic and medical vein and vascular treatments.

The company's Marketing Segment does not directly provide medical services to patients; rather, the company identify candidates for its branded procedures, educate these potential patients about the relevant procedure and direct those patients to affiliated physicians who diagnose and treat those patients at affiliated facilities. Through its Marketing Segment, Nobilis Health Corp has contractual relationships with facilities and physicians in several states.

The company earn service fees from its partner facilities that, depending on the laws of the state in which a partner facility is located, are either charged as a flat monthly fee or are calculated based on a portion of the “facility fee” revenue generated by the partner facility for a given procedure.

The company's revenues from physician-related services are, depending on the laws of the state in which a partner-physician practices, either earned directly from professional fees or through the purchase of accounts receivable. In Texas, the company engage physicians through entities exempt from Texas corporate practice of medicine laws that directly earn professional fees for partner-physician services and, in turn, pay partner-physicians a reasonable fee for rendering those professional services. In other states, the company manage its partner-physicians’ practices and purchase the accounts receivable at a discount of those practices through accounts receivable purchase agreements, consistent with the laws in those states. The revenues generated from certain accounts receivables purchased from third parties in the ordinary course of business represents its factoring revenues.

Seasonality of the Business

The surgical segment of the healthcare industry tends to be impacted by seasonality because most benefit plans reset on a calendar year basis. As patients utilize and reduce their remaining deductible, Nobilis Facilities typically experience an increase in volume throughout the year, with the biggest impact coming in the fourth quarter. Historically, approximately 35% - 40% of its annual revenues have been recognized in the fourth quarter.

Operating Environment

The Medical Segment depends primarily upon third-party reimbursement from private insurers to pay for substantially all of the services rendered to its patients. The majority of the revenues attributable to the Medical Segment are from reimbursement to the Nobilis Hospitals and Nobilis ASCs as “out-of-network” providers. This means the Nobilis Facilities are not contracted with a major medical insurer as an “in-network” participant. Participation in such networks offer the benefit of larger patient populations and defined, predictable payment rates. The reimbursement to in-network providers, however, is typically far less than that paid to out of network providers. To a far lesser degree, the Nobilis Facilities earn fees from governmental payor programs such as Medicare. For the three months ended March 31, 2018 and 2017, the company derived approximately 1.1% and 0.4% for the respective periods of its Medical Segment’s net revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payers and patient co-pays, coinsurance, and deductibles.

The company receive a relatively small amount of revenue from Medicare. The company also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive.

Insured patients are responsible for services not covered by their health insurance plans, deductibles, co-payments and co-insurance obligations under their plans. The amount of these deductibles, co-payments and co-insurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by the physician limited partners and the other physicians who utilize the Nobilis Facilities to provide services.

Revenue Model and Case Mix

Revenues earned by the Nobilis Facilities vary depending on the procedures performed. For every medical procedure performed there are usually three separately invoiced patient billings:

  • the surgical center fee for the use of infrastructure, surgical equipment, nursing staff, non-surgical professional services, supplies and other support services, which is earned by the Nobilis Facilities;
  • the professional fee, which is separately earned, billed and collected by the physician performing the procedure, separate and apart from the fees charged by the Nobilis Facilities; and
  • the anesthesiology fee, which is separately earned, billed and collected by the anesthesia provider, separate and apart from the fees charged by the Nobilis Facilities and the physicians.

Overall facility revenue depends on procedure volume, case mix and payment rates of the respective payors.


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