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Flu Bug Stings Hospitals

Analysts expect chains such as Tenet and HCA to be rocked by a torrent of uninsured patients.

This year's strong flu season may soon lay low another victim: the ailing hospital sector.

In a report published Tuesday, Prudential analyst David Shove suggested that heavy flu admissions are crowding out more profitable business. Shove believes that urban hospitals, in particular, are treating a huge number of low-margin cases -- including many uninsured patients -- that will ultimately cut into fourth-quarter earnings.

He points to

Tenet

(THC) - Get Tenet Healthcare Corporation Report

, with its heavy exposure to uninsured patients, as particularly vulnerable.

"The higher-than-normal flu patient volume would cause an uptick in emergency room expenses, especially if the patient mix is tilted to uninsured patients," explained Shove, who has an unfavorable opinion of the hospital sector in general. "The hospitals in Texas and California would need to increase their bad-debt expense to account for the higher uninsured volume, which would adversely affect earnings."

Overall, Shove noted, caregivers are treating 5.1% of their patients -- more than double the normal volume -- for flulike illnesses. But the percentages are even higher in markets with large numbers of uninsured patients. In Texas, where nearly 40% of Tenet's hospitals are located, 7% of hospital patients are showing up with the flu. In California, Tenet's second-largest market, 8% are being treated for the flu.

HCA

(HCA) - Get HCA Healthcare Inc Report

, as the largest hospital operator in California, also faces exposure.

"The flu incidence appears to be running rampant in the western states, with Texas and Colorado as hot spots and California worsening quickly," Shove wrote on Tuesday. "For hospitals, the higher patient volume may be bad for earnings due to the payor mix and crowding-out effect on better-margin, noncritical care."

Exposed?

Shove's report came just one day after another analyst, Deutsche Bank's Balaji Gandhi, warned about a possible earnings hit at industry leader HCA. Gandhi cut HCA to hold from buy over concerns about the company's bad-debt exposure.

"In our view, HCA faces a disproportionate risk associated with employers shifting the hospital cost burden onto its employees ... because 51% of its inpatient hospital revenues are derived from managed care contracts and other discounted health plans," Gandhi wrote on Monday. "The co-pay and deductible piece of the hospital dollar represents a significant collections challenge to hospitals throughout the country."

Looking beyond the flu season, Gandhi predicted that rising bad debt will wipe out all of the gains that HCA stands to realize from the new Medicare law. Thus, he believes that HCA shares -- which have rocketed in recent months on hopes for Medicare benefits -- are now fully valued. The stock inched up 8 cents to $40.85 on Tuesday.

Meanwhile, Tenet shares slid 17 cents to $14.56 on a day that brought mixed news for the company. The beleaguered hospital chain on Monday celebrated the purchase of a "world-renowned" cancer hospital that it has managed for the University of Southern California for seven years. It also touted a settlement with the California Nurses Association -- among the company's staunchest critics -- that ends a 13-month strike at its hospital in San Pablo.

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"This is a win-win for the hospital, the care providers, the community and the CNA," said Khosrow Afsari, chairman of the hospital's governing board. "The entire medical team is pleased that this issue is resolved so that we can continue to provide quality care to meet the needs of the community without the distractions of a strike."

But the resolution came at a price. The hospital has promised its nurses big raises and 401(k) contributions just ahead of a new California law due to take effect in weeks, mandating bigger nursing staffs that will push labor costs even higher.

Meanwhile, Tenet still faces striking nurses -- and dropping admissions -- in the tough Philadelphia market. And the company's problems in its home state of California are far from over.

Record Player

Late Monday, Sen. Finance Chairman Chuck Grassley -- an Iowa Republican who's leading a very public investigation of the company -- issued a subpoena asking Blue Cross of California for records that allegedly show at least two Tenet-owned hospitals profiting from significant unnecessary surgeries. Tenet last week agreed to sell one of the hospitals, Redding Medical Center, because the facility faced exclusion from crucial government insurance programs. But it continues to operate the second, Doctors Medical Center of Modesto, and to receive funding from Blue Cross despite the insurer's previous allegations that its patients were improperly treated there.

Last month, Blue Cross threatened to terminate its agreement with the hospital but suddenly backed away from that plan after Tenet commissioned its own independent study that justified all the surgeries in question. Grassley wants more information about the dispute.

"I was alarmed when Blue Cross announced its concerns about Modesto, especially in light of what happened at Redding Medical Center," Grassley said Monday. "Apparently, Tenet has taken steps to satisfy Blue Cross that it's delivering 'appropriate care' in Modesto. I'm interested to learn exactly what steps Tenet has taken. Patients and taxpayers deserve to know."

Grassley said he issued the subpoena "at the request of Blue Cross." He has asked the big insurer for the results of its independent study of heart bypasses performed at Tenet hospitals. He also wants information about the demands Blue Cross made of Tenet and any evidence about treatment changes that resulted. In the meantime, he has requested that the Office of Inspector General -- which threatened to exclude Redding from federal programs -- now investigate Tenet's hospital in Modesto as well.

Web Surfing

More upbeat news came from a health care company that, just nine months ago, was essentially left for dead.

HealthSouth

(HLSH)

, accused of carrying out one of the biggest accounting frauds ever, announced on Tuesday that it has made two interest payments totaling $52 million this month and "intends to remain current" on all upcoming obligations.

The company also said that two members of its board, accused of lax oversight during the reign of ousted CEO Richard Scrushy, have "voluntarily resigned." Faced with a shareholder lawsuit, HealthSouth recently agreed to replace five of its current directors.

The lawsuit, filed by attorney Stuart Grant on behalf of the Teachers Retirement System of Louisiana, claims that all five directors participated in a "web of financial entanglements" that benefited board members -- particularly Scrushy -- at the expense of common shareholders. It accuses HealthSouth directors of "rubber-stamping" a number of related-party deals that were never properly disclosed to the public.

"Scrushy directed where all the company's business would go," the complaint states, "and that business in large part ended up in the laps of Scrushy and his fellow directors."

HealthSouth has pledged to replace five of its directors, in stages, over the next nine months. Charles Newhall and George Strong, who resigned on Tuesday, will be the first to go. Both directors have been criticized for, among other things, investing in companies that relied heavily on HealthSouth for support.

Interim Chairman Joel Gordon, who will remain on the board, nevertheless praised the departing directors on Tuesday. He thanked both men for "their many years of dedicated service and their tireless efforts on behalf of the company and its shareholders."

HealthSouth directors have consistently maintained that they, too, were victims of Scrushy's alleged abuses.

"As directors, we have shared the frustration, outrage and sense of betrayal of HealthSouth's public security holders and employees over the fact that a relatively small group of people deliberately deceived us," Gordon said on Tuesday. "We also share the strong determination to build HealthSouth back to a respected position in the health care community and to help restore value for our stakeholders."

Already, one former HealthSouth executive -- former assistant controller Emery Harris -- has been sentenced to prison for participating in the alleged accounting scheme. Many others, particularly Scrushy, face possible prison time and hefty fines as well.

In the meantime, HealthSouth shares continue their miraculous recovery. The stock, which sank to an all-time low of 8 cents after the fraud was alleged in March, tacked on 1.1% to hit $4.71 on Tuesday.