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HMA Still Seeks Elusive Turnaround

Hospital chain says results will be in line, but problems lurk under the surface.

At best, the vital signs for Health Management Associates (HMA) still look mixed.

The rural hospital chain on Tuesday preannounced fourth-quarter results that appear to be in line with Wall Street expectations. The company expects to hit its targets with help from a lower tax rate and, more importantly, stable bad-debt trends. But the company's ongoing weak volumes, coupled with its treatment of accounts receivable, continue to cause concern.

Notably, HMA has been known to adjust its bad-debt ratio in the past. By selling $16 million of receivables last quarter, HMA managed to post earnings that beat expectations, instead of missing for a second straight time. Moreover, the company said it planned to use the same maneuver again.

"We are not looking at the sale of

accounts receivable as just a one-time event, but just as one element or part of our overall strategy to manage our uninsured" accounts receivable, CFO Robert Farnham said during the company's third-quarter conference call. "If it does continue to reduce our self-pay

accounts receivable over time, we do think that's prudent."

Some skeptical analysts stripped out the $16 million anyway. Once they did, HMA's bad-debt ratio jumped from 12% -- the number Wall Street had anticipated -- to 13.3% of revenue.

Clearly, critics didn't buy into HMA's accounting methods at the time.

"Management told us that they chose to sell the receivables... once they understood that bad-debt expense for the quarter was coming in higher than anticipated," CRT Capital Group analyst Sheryl Skolnick said when reviewing HMA's third-quarter results. "Selling off old receivables is a 'gift from heaven,' in our view, with respect to 'making' a quarter."

Now, HMA is promising to report a quarterly bad-debt ratio of roughly 12% once again. Yet that stable bad-debt number seems to run counter to the company's deteriorating patient mix.

Overall, HMA saw same-hospital admissions actually decline in the latest quarter. Surgeries, which are typically lucrative, weathered a slowdown as well. Indeed, only emergency-room admissions -- which often include large numbers of uninsured patients who do not pay their bills -- showed any notable gains.

In a nutshell, HMA attracted fewer patients who normally carry insurance, and more patients who go without -- and still managed to report smaller write-offs for unpaid bills.

Nevertheless, HMA's stock climbed 3.6% to $5.80 on the report. Before that jump, Skolnick hinted at a possible downgrade if the stock gained too much ground. She recently upgraded the stock from "sell" to "fair value" because it was approaching her Street-low $5.45 target. Her firm makes a market in the company's securities.

Meanwhile, Gimme Credit analyst Vicki Bryan continues to steer investors away from HMA. Bryan has expressed concern about the company's escalating expenses in particular. Without the sale of receivables, she notes, HMA would have seen its third-quarter bad-debt expense rocket by more than 50%. Meanwhile, she adds, physician salaries continue to push the company's labor costs higher.

Skolnick, for one, wonders if that investment will pay off.

"HMA is clearly continuing to acquire physician practices at a rapid clip in an attempt to lock in volumes at its hospitals," Skolnick observed last month. "Unfortunately, the strategy is producing quite uneven results ... as some physicians who sold their practices have since reduced their hours worked and patient referrals to the hospitals.

"Thus," she added, "we remain concerned about the likely success of this and HMA's other turnaround strategies, especially in the near term."

The fact that only the company's emergency-room visits -- which require no physician referrals at all -- showed notable gains in the latest quarter, despite HMA's costly investment in physicians, indicates that those concerns may be well-founded.

HMA has been reporting other weak metrics as well. The company's cash flow plunged last quarter, and its once-lofty pretax margins continue to shrink.

A full year has now passed since HMA announced a major recapitalization meant to provide shareholders with both immediate and long-term rewards. HMA borrowed heavily to fund a huge one-time dividend that would allow shareholders to pocket some cash while they continued to wait on a turnaround. So far, however, shareholders have just wound up with a debt-laden company showing deteriorating fundamentals.

Now, HMA is struggling to generate enough cash to cover its huge debt payments and ongoing operating expenses.

"We hardly think that the lenders who funded the special dividend contemplated that HMA might have to sell assets to fund its growth plans, but that does indeed appear to be the case here," Skolnick noted this fall. "HMA remains a distressing turnaround situation similar to others in the industry that increased leverage for no good reason other than to play in the big league with the merger crowd, in our view, and enrich shareholders at the expense of the future vibrancy of the company."

To date, HMA has lost nearly half of its market value since recapitalizing the company in pursuit of its as-yet-elusive turnaround.