A rural hospital chain is taking a swing at Wall Street.

Health Management Associates

(HMA)

on Tuesday fought back against a UBS analyst best known for his

exposure of

Tenet's

(THC) - Get Report

aggressive pricing strategy. The company, which bills itself as the "premier operator of non-urban general acute care hospitals" in America, challenged the content of -- and motivation behind -- a

damaging downgrade issued a day earlier by analyst Kenneth Weakley.

Weakley cut the hospital stock from neutral to sell because, in his view, the company has been raising list prices for its products and services at an unsustainable rate. He is, therefore, convinced that HMA's strong profit margins -- like those once enjoyed by Tenet -- are destined to suffer under the current scrutiny of hospital pricing strategies. The downgrade knocked Health Management shares down 11% Monday.

However, HMA claimed Tuesday that Weakley's report "contained material errors that substantially distorted" his analysis. The company then went a step further by suggesting that Weakley's motives were impure.

Specifically, HMA implied that Weakley issued the negative report because HMA had terminated a banking deal with UBS due to the firm's strong ties to

HealthSouth

(HLSH)

, a health care chain suspected of carrying out a long-running multibillion-dollar accounting fraud. HMA said it severed its relationship with UBS because "it was in the best interest of the company and its shareholders."

Less than a year later, the company said, UBS has now issued an unfavorable report.

"The timing and content of UBS' report raises concerns regarding its independence and objectivity," HMA stated. "HMA's integrity has been called into question by Mr. Weakley, and his innuendo that HMA's practices resemble other's who have chosen a different path must be addressed."

Cliff Walk
HMA's plunge

To be fair, HMA has never been Weakley's favorite hospital stock. When he initiated coverage on the sector two years ago, he actually preferred Tenet over the rural hospital provider. He rated Tenet a buy and applauded the company for its impressive turnaround a year before exposing its aggressive Medicare billing. In contrast, he issued one of only two hold ratings to HMA because he viewed the stock as fairly valued.

Weakley's motives came under similar fire when he downgraded Tenet over concerns that have since been wholly validated. James Unland, an investment banker who specializes in health care mergers, last year suggested that Weakley had worked together with

HCA

(HCA) - Get Report

-- one of the analyst's favorite hospital companies -- to coordinate an assault against Tenet when both hospital chains were attempting to buy a health care system in the Midwest.

"Was this a coordinated hit on Tenet by HCA and UBS Warburg designed to get Tenet out of Kansas City or otherwise damage Tenet using a stock downgrade by the same firm who then, within days, touted HCA as a recommended stock?" Unland challenged. "The

Securities and Exchange Commission

needs to urgently clarify whether highly conjectural research reports are proper, for the sake of Tenet's stockholders and -- for that matter -- stockholders of any company."

The SEC did go on to launch an investigation. But it, like many other government agencies, is probing Tenet itself for possible wrongdoing.

In his report on Monday, Weakley made clear that he did not suspect HMA of the same "untoward" behavior that landed Tenet in trouble. Rather, he said that HMA's pricing could wither under the fresh scrutiny kicked up by the Tenet scandal.

But HMA now claims that Weakley's theory, which assumes that most of the company's commercial revenues are linked to list prices, is flawed. HMA acknowledged that 55% of its managed care contracts are reimbursed on a "percent-of-charge" basis. But the company said that only 24% of its managed care revenue -- and less than 10% of its total net revenue -- is based on those same charges.

"Prior to issuing his report," HMA stated, "neither Mr. Weakley nor any other representative of UBS contacted HMA to verify this data point."

By the time HMA issued its rebuttal to UBS, much of Wall Street had already come to the company's defense. A number of firms -- including Banc of America, Credit Suisse First Boston, J.P. Morgan and Merrill Lynch -- described HMA's pricing as normal and reiterated their buy ratings on the company's shares.

J.P. Morgan, for example, insisted that HMA "has not been abusing reimbursement loopholes" as Tenet did in the past and that UBS had instead overstated the company's risk to future pricing pressure. Merrill Lynch also disputed UBS's findings and predicted -- correctly -- that the company would fight back.

"HMA has been historically viewed as running an operation that is generally above reproach," Merrill Lynch analyst A.J. Rice wrote on Monday. "We would not be surprised to see company management respond proactively to comments which, if taken at face value, call into question the integrity of its business model."

But HMA's rebuttal -- and even the backing from Wall Street -- didn't help the company's shares. The stock slid 12 cents to $23 in heavy trading Tuesday.

Meanwhile, Weakley has already issued a second report further detailing his convictions in light of the questions raised elsewhere on Wall Street. Weakley continues to maintain that HMA's prices are "substantially higher" than those of its peers and, therefore, vulnerable to pressure. He also questioned whether acquisitions -- currently a key to HMA's growth -- will now be challenged in the future.

"We believe that a key strategy for improving results of newly acquired facilities is to dramatically raise charge master rates," Weakley wrote on Tuesday. "HMA's competitors may be aided by the inference that HMA simply raises prices dramatically upon acquisition -- something local patient groups may have a problem with down the road."

Earlier this year, HMA told

Reuters

that it plans to buy up to four hospitals annually -- and hopefully more -- in an effort to grow the company.

"We like to under-promise and over-deliver," CEO Joseph Vumbacco told the news service.

In the meantime, the company is fiercely defending its strategy as a whole.

"Fiscal year 2003 marked HMA's 26th year of excellence," Vumbacco said Tuesday. "Going forward, we remain committed to the philosophy, strategies and ethics that have been our trademark in delivering high-quality health care to the non-urban communities we serve."