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HMA Remains Stuck in Sick Bay

The rural hospital operator saw admissions drop in the second quarter.


Health Management Associates


has replaced

Tenet Healthcare


as the sickest player in the hospital group.

Both companies continue to struggle, with HMA weathering a painful drop in second-quarter admissions and Tenet posting another quarterly loss -- and cutting its 2008 guidance --- after bleeding for several years.

Both saw their shares plunge on Tuesday. HMA took the bigger hit, by far, as its stock plummeted 19% to $5.29 in late trading. Meanwhile, Tenet fell 6.9% to $5.80.

Rival hospital chains - including

Community Health Systems






Universal Health Services


-- lost some ground, as well.

At least Tenet could flex a few muscles as the company posted its strongest quarterly admissions growth in four years.

With same-store admissions rising 1.9% -- continuing a positive trend that started late last year -- and bad-debt expense kept under control, Tenet managed to cut its second-quarter loss by half to just $15 million or 3 cents a share. Excluding special items, the company broke even, beating Wall Street expectations by a penny.

Tenet boasted widespread second-quarter gains, with admissions climbing by at least 2.5% in every region except for the South. Volumes in Florida and Philadelphia - former trouble spots for the company -- grew by even more.

Excluding a drop in uninsured visits, outpatient volumes improved at the company as well. Outpatient surgery cases -- which can be especially profitable -- rose by a solid 3.4%, as a larger number of patients used the company's freestanding ambulatory surgery centers.

To be sure, Tenet still faces some clear challenges. Most importantly, perhaps, the company continues to treat fewer patients covered by lucrative commercial health insurance. Commercially insured admissions fell by 2.2% in the latest period.

Tenet also issued some disappointing guidance. Excluding results from its embattled USC Hospital, which will be classified under discontinued operations due to its planned sale, Tenet expects to lose between $20 million and $120 million over the year. That disappointed Wall Street, which had been hoping to see the company eek out a small profit.

Tenet was satisfied with the second-quarter results. "I am very pleased with our core same-hospital growth in admissions, as well as the increase in outpatient visits by paying patients," Tenet CEO Trevor Fetter stated on Tuesday. "Not only is this the best performance we've had in the last four years, it continues an improving trend and demonstrates the increasing effectiveness of our strategies."

Arguably, HMA's vital signs looked worse. For starters, the company missed both top-line and bottom-line estimates for the second quarter.

Revenue inched up just 3.9% to $1.11 billion, falling a bit shy of the $1.13 billion consensus forecast. Net income grew by a little more, rising 4.1% to $12.4 million in the latest period. Excluding special items, however, earnings per share of 10 cents came in a penny short of Wall Street targets.

HMA's volume trends looked especially troubling. The rural hospital operator saw admissions fall by 3.8% in the second quarter, with most of that drop-off caused by a decline in patients covered by insurance. For its part, the company blamed the downturn on "short-term issues" that it said it has already begun to address.

But Sheryl Skolnick, senior vice president of CRT Capital Group, was worried nonetheless. "Was it physician departures that caused the problem?" she wondered. "Was it a drop in admissions in a particular region due to economic conditions or population shifts?

"Or," she mused, "was the underlying reason related to quality issues at Franklin Regional in North Carolina?"

Franklin Regional has come under government scrutiny due to concerns about the quality of its care, the

News & Observer

reported this spring. At one point, the newspaper reported, Medicare actually "threatened to pull federal funding to treat poor and elderly patients" at the hospital.

HMA's CEO Burke Whitman has pledged to improve its operations and "lead the industry in quality and satisfaction" within the next few years. He claimed on Tuesday that the company has made "unambiguous progress" in this area.

Skolnick remains leery. Although she applauds the gains achieved under HMA's popular CEO, she says the company still has a long way to go and is maintaining her "fair value" rating on the company's stock.

"We would like to see more clear evidence of traction in the form of consistently improving same-store volumes before we would pay more for these shares," Skolnick explained on Tuesday. "HMA may have a better culture, but the turnaround still isn't secured."