HMA Sinks on Charity Concerns

Bad-debt problems continue to nip at the heels of the big hospital operator.
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Health Management Associates

(HMA)

has once again managed to hit its quarterly numbers despite going uncompensated for more and more of its care.

During its busy second quarter, which brought a spike in flu cases, HMA saw revenue jump by 10% to $918 million. The company also posted first-quarter profits of 40 cents a share that, with help from an insurance payment, beat the consensus estimate by a penny.

But UBS analyst Kenneth Weakley seemed far from impressed. He noted that HMA increased its second-quarter operating profits by only 5% and said the company's core asset growth has "slowed substantially" over time.

To be sure, nonpaying patients continue to eat away at HMA's bottom line. While the company's second-quarter net income rose 10% to $100 million, its charity care -- provided for patients who cannot afford to pay -- rocketed far more. During the latest quarter, charity write-offs surged 37% to $134 million. In addition, the company's provision for doubtful accounts -- established for other patients who fail to pay -- increased by 8.4% to $64.6 million.

Thus, total uncompensated care rose by 26% to just under $200 million in the quarter.

To be fair, however, one closely watched metric -- bad debt as a percentage of revenue -- did improve. That ratio slipped from 7.1% a year ago to 7% in the latest quarter. As a result, HMA indicated that the company's uninsured problem may finally be moderating.

But Peter Young, a business consultant at HealthCare Strategic Issues, saw little reason for hope.

"The flat bad-debt number comparison for the same quarter a year ago does not bode well, as it appears that charity care jumped an amazing $36 million for the quarter, reflecting apparent adjustment recognition of patients as charity vs. possible collections," Young said. "The self-pay patient remains a protracted problem for the hospital industry" as a whole.

Investors seemed unsettled as well. They pushed shares of HMA down 1.3% to $24.81 on Tuesday.

Mixed Forecast

Fulcrum analyst Sheryl Skolnick was already looking for HMA to beat the consensus estimate with quarterly profits of 40 cents a share. She was also watching to see whether HMA, like some of its peers, would report improvements in both patient volumes and bad-debt expense.

Other experts, too, planned to focus on both of these crucial metrics.

During the second quarter, total patient admissions -- boosted by recent acquisitions -- climbed 7.3%. Morgan Stanley analyst Gary Lieberman had anticipated a stronger 10% rise instead. Still, the company's 1.8% growth in same-store admissions -- a more closely watched figure -- exceeded his forecast of essentially flat growth over last year's solid jump.

But Weakley, for one, saw softness there as well.

"With the strong flu this quarter --

and ER visits up nearly 12% -- this growth is not normalized," wrote Weakley, who has a reduce rating on HMA's stock. "We estimate that, without the strong flu this quarter, HMA's trend would have been flat to down."

HMA did top some other forecasts, however. Notably, the company's pretax profit margins came in at 25% -- up from 24% a year ago -- instead of falling to 22% as Lieberman had projected. Bad-debt expense also fell below Lieberman's 7.4% forecast.

But Lieberman viewed charity care as a real wild card for the quarter. He noted that charity write-offs hurt hospital pricing, another important metric, because only patient admissions -- and not the associated revenue -- are reported on the books.

"Based on our estimates, HMA's absolute charity care per self-pay admission has been rising on a sequential basis and is running higher than reported unit pricing on an absolute basis," Lieberman wrote last week. "Thus, even if the number of self-pay admits steadies -- let alone declines -- pricing could still be negatively impacted."

Even so, Lieberman maintains an overweight rating on HMA's stock and has an increasingly positive view on the sector overall.

"We continue to believe that favorable trends should help bad debt and charity care for HMA and the industry over the next several quarters," he wrote ahead of the company's report. "Current valuations should begin to reflect sentiment that negative bad-debt and volume trends will stabilize and potentially improve, suggesting that stocks should trade in line with the overall market."

Dark Clouds

But Young sees ongoing trouble for HMA in particular.

He points out that HMA continues to seek out new hospitals -- a core part of its growth strategy -- in an especially harsh environment. And he highlights challenges at several hospitals the company already owns.

For example, he says, in the tough West Virginia market -- where four

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hospitals are currently up for sale -- HMA operates one hospital that has weathered a "stinging 50%-plus hit" to profits in just a two-year period. In addition, he says, the company has struggled in the Tennessee market as well. There, he says, Harton Regional Medical Center has seen its total discharges fall by 31% in recent years. Meanwhile, he says, University Medical Center -- another HMA-owned hospital in that same market -- relies heavily on government payers at a time when deep cuts to Medicaid are already on the table.

Young sees similar problems at a hospital in HMA's core market of Florida. At Highlands Regional Center, he says, Medicare and Medicaid patients account for some 85% of total patient days.

Ultimately, Young sees problems for the company overall.

"It is difficult to sustain bottom-line growth when the top-line portion of the business enterprise continues to suffer payer quality erosion," he says. "Such a situation raises a question of revenue quality and revenue sustainability longer term."

But HMA itself remains characteristically upbeat.

"Focusing both on the fundamental operations of our existing hospitals and the acquisition of additional attractive non-urban hospitals in growing markets has been the hallmark of HMA's successfully implemented strategy for more than 20 years," CEO Joseph Vumbacco said on Tuesday. "We are pleased with our continued successful execution of our strategy" and the company's 2005 results so far.