At two Florida hospitals purchased this month by

Health Management Associates

(HMA)

, the price for a urinalysis could soon skyrocket.

In the past, the Ingenix health database shows, St. Joseph's and Venice hospitals have charged about a third of the national average for the simple urine tests. But if history is any guide, the data indicates that under HMA's wing the hospitals could soon wind up charging three times more instead.

Just take a look at the prices HMA now charges for outpatient services at a hospital it scooped up three years ago in dirt-poor Fentress County, Tenn. There -- where nearly one-fourth of the population lives below the poverty level -- HMA-owned Jamestown Regional Medical Center charges two to three times the national average price for procedures ranging from blood withdrawal to catheter insertion to treatment of a superficial wound.

HMA has a reputation for buying distressed rural hospitals and raising their prices -- as well as expanding their services -- in an effort to turn them around. The formula has certainly worked at Jamestown Regional, Ingenix shows, where operating profits more than doubled between 2001 and 2003. Remarkably, the hospital has achieved that growth even while relying on Medicaid -- a notoriously poor payer -- for nearly one-third of its patient flow.

With its acquisition-heavy strategy, HMA has now managed to boost company profits for 16 years in a row. But that souped-up growth engine has started to sputter. HMA critics point to the company's pretax profit growth -- saying it has fallen by more than half since 1997 -- as evidence of a chronic slowdown.

These people believe that mounting government scrutiny could hinder HMA's ability to acquire hospitals and then dramatically raise prices. They also question the value of some newer HMA hospitals, like the two in Florida, which depend in large part on vulnerable government funding.

Peter Young, a business consultant at HealthCare Strategic Issues, sees a broken business model.

"Is HMA's acquisition strategy in trouble?" he asked. "I don't see a way to make it work."

HMA did not return phone calls seeking comment for this story. The company's stock, still a favorite among many on Wall Street, fell 1.3% to $22.26 on Thursday.

High Stakes

UBS analyst Kenneth Weakley -- best known for exposing

Tenet's

(THC) - Get Report

aggressive pricing strategy -- has been steering his clients away from HMA for more than a year.

Weakley believes that HMA, like Tenet, could find itself with an unsustainable growth strategy that's too dependent on rising hospital prices. He points to an upcoming government trial as a particular reason for concern.

In a case scheduled to begin this week, the Federal Trade Commission will attempt to undo a 2000 hospital acquisition by Evanston Northwestern Healthcare that, it argues, resulted in "significantly higher prices" for health care services in a suburban Chicago market.

"It's a high-stakes case for the FTC, which is trying to reassert an aggressive stance toward hospital mergers after it and the Justice Department lost a combined seven consecutive cases challenging proposed mergers in the 1990s,"

The Wall Street Journal

reported last month. "If the FTC prevails, it could send a signal to big hospital systems that Evanston-type mergers are likely to face stiffer challenges and could even be blocked."

Weakley believes that HMA has carried out the same kind of price increases that the FTC hopes to stop. He highlights the company's price hikes in Lancaster, Pa., as just one example. There, he says, HMA raised hospital prices at one hospital by 71% and at another by a "whopping" 103% over a two-year period. In contrast, he says, a non-HMA hospital in the same market raised prices by only 25% over that time.

Weakley goes on to raise additional concerns about HMA price hikes in markets without such competition.

"To what degree can hospitals employ aggressive pricing at newly acquired assets -- especially in less competitive markets -- without receiving scrutiny from the Federal Trade Commission?" he asked.

Talk in Tennessee

By the time HMA purchased Jamestown Regional, Fentress County surgeon Leonard Carroll had been working there for more than a decade.

He watched HMA spend millions of dollars to upgrade the hospital. He found himself operating in an expanded surgery unit. And despite everything, he wound up longing for the old days.

"We have a beautiful facility," he said. "But now the pressure is on to maximize use of that facility."

Carroll said that HMA has recruited another surgeon to help fill up the operating rooms. But he worries that some patients might wind up undergoing procedures they don't even need.

He also wonders how poor people in Fentress County -- including many who may soon lose their health care coverage -- can pay rocketing prices for the hospital services they do need. He says the governor's plan to scale back TennCare, an expanded version of Medicaid, could hit the county especially hard.

Carroll says that more than half of his patients rely on TennCare, a program that one state government rep called "Medicaid on steroids." And some of the 320,000-plus Tennesseans set to lose their TennCare benefits will probably join the growing ranks of the uninsured.

Carroll believes those people could suffer the most as a result of HMA's pricing.

"People who have no insurance have to pay the whole bill," he said. "And now, the hospital is more expensive."

To be fair, Ingenix data show, Jamestown Regional still charges slightly less than the average Tennessee hospital for most inpatient procedures. Still, treatment for common pneumonia -- one of the higher-priced services -- costs more than the county's average per capita annual income of $13,000.

Big Challenges

Tennessee is just one of many states that hope to bring spiraling Medicaid costs under control.

Florida, where HMA just closed on two hospitals this month, is another. Young questions whether HMA should have purchased either of the southwest Florida hospitals in the current environment.

He notes that St. Joseph's relies on Medicaid even more than most Florida hospitals. And he frets over Venice's heavy dependence on Medicare as well.

So far, that government business has failed to keep either hospital out of the red. Together, Ingenix records show, the hospitals lost roughly $20 million in 2003.

Going forward, Young believes that both hospitals will struggle to grow revenue due to limits on government spending and scrutiny on commercial pricing.

In the meantime, HMA has already fallen short of revenue expectations for the latest quarter. Excluding special items, it delivered a rare earnings miss as well.

Fulcrum analyst Sheryl Skolnick was quick to notice.

"In our view, the quality of earnings has been and remains poor," wrote Skolnick, who has a neutral rating on the stock. "And the commentary by management in the press release is far too self-congratulatory."

Skolnick noted that patient volumes were "worse than expected across the board." She also called the jump in uncompensated care, with charity write-offs up 34% from a year ago, a big problem for the company.

But a former hospital bill collector -- who spent years negotiating payments with poor patients in Fentress County -- feels no sympathy for the company. Terry Holt was among the first of many employees who lost their jobs at Jamestown Regional after HMA purchased the hospital.

"I was not a hard-nosed collector," he acknowledged. "But I was the only one who knew everyone in town, the only one who knew who needed help and who didn't. And I would always help the ones who couldn't pay."

Still, Holt doubts he lost his job as a result of his performance. He claims he showed up for work every day and received "excellent" evaluations during his 12 years at the hospital. He believes that HMA simply replaced him -- and other hospital veterans -- with cheaper workers in an effort to maximize profits.

He now wonders if HMA patients are suffering as well.

"I'm not mad, but I'm very hurt about the way they treat employees," Holt said. "It makes me wonder what they do to the patients. Do they stick it to them, too?"