Even hospitals suffer when the flu strikes.

Granted, a recent jump in flu cases should mean stronger patient volumes for the current quarter. But the flu brings with it some unpleasant side effects. Quite simply, flu cases often generate smaller profits -- and more unpaid bills -- than other hospital business. As a result, a spike in flu case could prove to be no cure for industry challenges at companies like

HCA

(HCA) - Get Report

,

Health Management Associates

(HMA)

and

Universal Health

(UHS) - Get Report

.

Thus, some health care analysts remain bearish on the group.

"According to the

Centers for Disease Control Web site ... flu is intensifying across the U.S.," Fulcrum analyst Sheryl Skolnick wrote on Friday. "The implication: higher flu volumes in 1Q05 could lead to deterioration in case mix and an increase in bad-debts due to the season pattern of flu and the uninsureds' use of the E.R. as a health clinic."

As a result, Skolnick foresees more industry pain ahead.

So does Banc of America analyst Gary Taylor. On a bright note, Taylor said that most of the hospitals he recently surveyed reported higher January admissions than a year ago. However, Taylor was quick to attribute the increase to flu cases that, he says, have more than doubled in recent weeks. He, too, views the flu as a mixed blessing for the industry.

"The bottom line," Taylor wrote on Monday, "is that flu is temporary and only marginally profitable."

Chronic Problem

In contrast, Taylor sees the industry's bad-debt problem -- which cuts away at earnings -- as more lasting in nature. He highlighted recent testimony from hospital executives when presenting his case.

During his monthly survey of nonprofit hospitals, Gary asked about both admission and bad debt trends. Some 53% of respondents did report a jump in January admissions that reversed a recent downturn. But an even larger 73% warned of an ongoing bad debt problem that is unlikely to ease this year.

They blamed a rise in uninsured patients, a jump in deductibles and co-payments and a hit from state Medicaid programs that are struggling to cover the poor. Specifically, they offered the following:


  • "The fundamental problem of increasing uninsured, high deductibles and high costs remain and are increasing."
  • "Bad debt risk will rise proportionally to increases in patient responsibility in the form of co-payments and deductibles. Mitigation of actual bad debt will require substantial effort on the part of the hospital."
  • "Bad debt levels are still growing, with no relief in sight. State Medicaid plans are in trouble across the country, and as a result Medicaid benefit levels are being reduced. The inevitable result will be a continuing increase in charity and bad debts."

Taylor believes that hospital stocks fail to reflect this pessimism. Instead, he notes, the group has rallied 20% since November. He admits that "perhaps we simply let the stocks get too cheap." But he tends to attribute the run-up to unjustified hopes for relief from the bad debt problem.

Mixed Diagnosis

To be fair, some hospital chains look healthier than others. Skolnick sees plenty to like at rural hospital operator

LifePoint

(LPNT)

, for example. She calls LifePoint's future guidance conservative and foresees the company's "usual potential for better-than-expected operating results." However, she stops short of recommending the stock due to concerns about its valuation and integration risks associated with a big, pending merger.

LifePoint's stock slid 4 cents to $39.78 on Monday but has outperformed the broader market over the past year.

In contrast,

Tenet

(THC) - Get Report

looks downright sick as the company -- along with its share price -- continues to shrink. Even after selling a number of noncore hospitals, Tenet has yet to regain profitability. The company has been hit especially hard by unfavorable industry trends, such as weak volumes and high bad debts, as its past practices have come under scrutiny by government agencies.

Still, Tenet has managed to buy itself some more recovery time. Last month, the company raised $800 million in a bond offering that significantly boosted its liquidity and -- coupled with proceeds from assets sales and tax refunds -- could help fund a turnaround of the company.

Following the successful offering, Gimme Credit analyst Evan Mann even started recommending Tenet's bonds on a short-term basis. That said, Mann continued to express caution when discussing the company's future.

"The company's operating turnaround continues to run behind schedule ... and the hurdle of reaching a global settlement of a government investigation into its billing practices and Medicare payments remains," Mann warned. So "Tenet is using financial engineering to buy it more time to deal with its operating and legal issues."

Tenet's stock inched up 4 cents to $10.13 on Monday but remains within $1 of the multiyear low it set two weeks ago.