Bad Debt Hammers HCA

The ailing hospital industry just keeps getting sicker.

HCA HCA, the biggest player in the for-profit group, has slashed its earnings guidance due to a crippling bad debt problem that continues to worsen. Meanwhile, Tenet THC -- HCA's largest competitor -- added two new probes to the long list of investigations already facing the company.

Both stocks took immediate hits following Wednesday's news. The losses proved contagious, spreading to other hospital operators such as Triad TRI and Universal UHS.

Early Wednesday, HCA diagnosed its first quarter as a weak one and gave no hope for an immediate recovery. The company cut its quarterly profit estimate to 69 cents a share -- 7 cents below Wall Street analyst expectations -- and reduced the full-year guidance it had maintained, despite rising bad debt, just two months ago. It now expects to deliver full-year profits of $2.60 to $2.70 a share, down a quarter from the prior range, even after recognizing gains from favorable malpractice developments. The company blamed the shortfall on a surge in uninsured patients who now account for 12% of its net revenue.

"As I have commented on many occasions over the past two years, the most significant challenge the hospital industry faces is the growing number of uninsured and underinsured in this country," HCA CEO Jack Bovender stated on Tuesday. "It is time for all sectors of society, both public and private, health care and non-health care, to participate in solving this societal issue."

Heal Thyself

Peter Young, a business consultant who caters to the hospital industry, viewed Bovender's comments as a "clear warning of the financial problems facing all hospitals" due to a surge in nonpaying patients. But he expressed little surprise about the industry's mounting problem.

"The news from HCA was not unexpected by seasoned hospital operators and consultants more in touch with real-time operations of hospitals," Young said. "I hope the industry does not worsen, but I am not optimistic near-term."

Indeed, Young believes the sector could still be another 14 months away from seeing bad debt improvements.

In the meantime, some are questioning HCA's ability to diagnose its own problems. Morgan Stanley analyst Gary Lieberman warned in February that HCA had left itself "little wiggle room" after it failed to adjust its full-year guidance to include a projected increase -- totaling 28 cents per share -- in its bad debt expense. But with uninsured admissions rocketing, particularly last month, Lieberman believes that HCA finally had "no choice" but to lower its guidance.