HCA Slips; Bad Debt Rises

The stock slides as a rise in doubtful accounts pulls fourth-quarter profits below targets.
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Updated from 9:53 a.m.

A strong flu season proved to be no miracle curefor the nation's largest hospital chain.

Instead,

HCA

(HCA) - Get Report

simply found itself treating more uninsured patients -- and writing off their bills -- during the busy fourth quarter. A surge in flu admissions, particularly in December, did push hospital volumes higher in the final quarter of the year. But more than half of that growth came from low-margin flu cases that left HCA with smaller profits -- and bigger debts -- than expected.

Excluding special items, HCA's fourth-quarter earnings of 59 cents a share missed Wall Street estimates by a penny. Meanwhile, the company's provision for bad-debt expenses rocketed past 11% of revenues in the latest quarter.

HCA CEO Jack Bovender admitted on Tuesday that 2003's weak patient admissions and soaring bad debts had taken the entire sector by surprise.

"Few, if any, anticipated ... such an increase in the number of uninsured patients entering America's hospitals," Bovender told analysts during HCA's earnings call. This "proved to be a very challenging year for the hospital industry."

Despite a fourth-quarter rebound, HCA's same-facility admissions managed to creep up just 0.6% during 2003. And Bovender stopped well short of promising a recovery in 2004.

"I would love to tell you this is behind us," he said. But "I will not predict when volume growth might return to normal levels."

HCA did, however, maintain its full-year 2004 earnings guidance of $2.85 to $2.95 a share. The company is counting on generous capital investments, particularly in high-margin outpatient centers, to help offset continued bad-debt problems this year.

Downside Risk

But HCA admitted that its 2004 guidance could prove vulnerable.

The company pointed to a possible shift in the payor mix, due to further growth in the uninsured, as the "most significant risk" to its forecast. Right now, the company is projecting that bad-debt expenses will hold steady at 2003 levels of between 10% and 11% of revenues. But the company saw bad debts jump past that ratio at the end of last year.

During the fourth quarter, HCA's provision for doubtful accounts surged to 11.4% of revenues -- up from 8.6% last year -- "due to a continuation of trends associated with the growth of uninsured and self-pay accounts and a deterioration in the collectibility of these accounts." Bad debt stemming from emergency visits alone rocketed by 23.6%, "significantly greater than the annual run rate," during the final period of the year.

Merrill Lynch analyst A.J. Rice predicted in anearnings preview Monday that HCA's bad-debt expensewould rise to just 10% for the quarter. He also lookedfor HCA to beat, rather than miss, the consensusestimate.

The company did meet -- and even exceed --expectations in other categories, however.Fourth-quarter revenue, up 11.4% to $5.6 billion,essentially matched Wall Street estimates. And thecompany's decision to increase its annual dividend bymore than 500% offered an upside surprise.

The company, which paid an annual dividend of 8cents a share in the past, is now offering a payout of52 cents a share -- or 20% of estimated earnings -- instead. Rice, for one, was expecting a smaller jump to between 35 cents and 50 cents ashare.

HCA celebrated the dividend hike as good news forshareholders.

"The change in the tax law during the past yeargreatly enhanced the attractiveness of cash dividendsas a means of providing increased and more predictablereturns to our shareholders," Bovenderannounced on Tuesday. "The expected strength of thecompany's cash flows should enable us to pay asignificantly increased dividend, while continuing toreinvest in our markets, strengthen our balance sheetand maintain our historical commitment to sharerepurchases."

In the meantime, HCA posted full-year 2003 resultsthat offered few surprises. Revenue grew 10.5% tomatch Wall Street expectations of $21.8 billion. Netincome jumped 56% to $1.3 billion from a year ago --when a $603 government settlement hurt results -- and,excluding special items, met the consensus estimate of$2.63 a share.

Long-Term View

Looking forward, HCA still expects to deliver long-term EPS growth in the "low-single digits" annually. It also suspects that the bad-debt problem may have peaked in the fourth quarter and will eventually subside. For now, the company is offering more charity care -- up 42% last year alone -- to handle the uninsured. But it is banking on significant policy changes to ultimately address this "major national issue."

"We believe HCA's charity care and financial discount policy ... is the responsible thing to do," Bovender told analysts on Tuesday. "It alone, however, does not fix the problem facing this country."

Following Tuesday's update, HCA shares slipped$1.38 to $44.92. The stock had surged on Monday justahead of earnings. But the rally came after a hit onFriday, when a threat from Medicare apparently putpressure on the shares.

Rice attributed the slide to a report that HCA'sTrident Medical Center in South Carolina faced theloss of crucial government funding if it failed toremedy several patient care deficiencies by the end ofthis week. The hospital fielded the rare death threatafter government officials detected the potential for"harm or a serious threat to patient safety" during aninspection last month, the local

Post & Courier

reported on Friday. HCA's three Charleston-areahospitals generated $45.8 million in profits onrevenues of $529 million in fiscal year 2002, thenewspaper added.

Tenet

(THC) - Get Report

, which currently ranks as one of HCA's largest peers, faces multiple investigations into its own patient care. The company is scrambling to sell off dozens of hospitals following allegations that it bilked Medicare for hundreds of unnecessary surgeries. Tenet is suspected of violating a "corporate integrity agreement" -- inked during a similar scandal less than a decade ago -- which required the company to behave itself going forward.

HCA, which last year paid its own big Medicare settlement, indicated on Tuesday that it faces no similar problems.

"The good news," Bovender told analysts, "is that there is no news."