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Hospitals Coming Unhinged

Two smaller chains follow giant HCA in warning of soft results.

Pain keeps spreading in the hospital sector.

Two weeks after industry giant


(HCA) - Get Free Report

first warned of a third-quarter shortfall, other hospital operators continue to limp forward with weak results of their own.

Health Management Associates


will soon break a strong record of meeting -- and often beating -- Wall Street expectations, according to a preannouncement issued Thursday night. Meanwhile,

Universal Health

(UHS) - Get Free Report

has now managed to deliver its third earnings miss in a year.

Both companies weathered a severe spike in bad debt from the uninsured, a chronic industry problem that was only exacerbated by the Gulf Coast hurricanes.

HMA expects to report fourth-quarter profits of 35 cents a share, 2 cents shy of the consensus estimate. The hurricanes caused only part of that shortfall, with insurance recoveries from past storms more than offsetting their impact. Weak patient volumes, coupled with higher provisions for doubtful accounts, hurt the company more.

During the latest quarter, HMA saw same-hospital admissions inch up just 0.4%, even as uninsured admissions kept rocketing.

"HMA continues to be challenged by an increasingly uninsured patient mix," wrote Bear Stearns analyst Jason Gurda, who has a market-weight rating on the stock. "Based on some initial data from the company, we estimate that uninsured admissions increased approximately 10% during the September quarter. ... Two of HMA's markets -- Florida and Texas -- continue to see material uninsured growth, and the impact of the hurricanes only makes these trends worse."

All told, 7.5% of the patients treated by HMA hospitals last quarter lacked health insurance coverage. That figure is up from 6.9% one year ago. As a result, HMA found itself increasing its provision for doubtful accounts to 8.2% of total revenue -- compared with 7.5% a year earlier -- and writing off more business up front as charity and indigent care.

The company has offered a dark prognosis for the future as well. It issued 2006 guidance of $1.56 to $1.60 a share that's well short of the current $1.67 consensus estimate.

By now, however, many experts have already cooled on the former Wall Street darling. J.P. Morgan analyst Andreas Dirnagl downgraded HMA's stock to neutral a few months ago over two concerns in particular. First, he worried about "intense weather" in the company's core southeastern market that has, in fact, proven worse than most people could have imagined. And second, he fretted over the company's expansion beyond the rural markets into areas that tend to be more exposed to negative industry trends.

Dirnagl said on Friday that HMA's latest announcement "serves to support our concerns."

"HMA shares may appear attractive to some," he added. "However, given the preannouncement and 2006 EPS guidance below current consensus, sentiment for the stock is likely to be weak."

Actually, the stock was holding up fairly well on Friday. It inched up 6 cents to $21.47 but continues to trade near its low for the year.

Universal Problems

Similarly, Universal jumped 2.6% to $46.73 despite its latest miss.

Universal's third-quarter revenue did rise by a healthy 6% to $971 million, beating the consensus estimate by $1 million. However, net income plummeted 78% to $8.3 million because of big charges associated with hurricane damage that has left four of the company's hospitals still closed. Even without the special items, Universal's third-quarter profits of 54 cents a share still fell 6 cents shy of Wall Street expectations.

Universal blamed the shortfall on a sharp rise in uninsured admissions and continued deterioration in an important Texas market where it faces intense competition from a physician-owned facility.

"UHS reported its highest bad-debt expense ever at 10.6% due to increased uninsured and charity care," noted Dirnagl, who has a neutral rating on the stock. And "we continue to believe that competition in

McAllen/Edinburg, Texas is stronger and tougher than UHS highlighted on its 2Q05 conference call and consider this market likely to perform below historical levels for an extended period of time. ... We're not going to step in front of this

stock now."

Still, UHS has a potent weapon that its competitors lack. The company boasts one of the strongest behavioral health franchises in the country. That division continued to shine -- with higher revenue, admissions and margins -- in the latest quarter.

That kind of outperformance offers hope for some.

"We maintain our neutral rating," Dirnagl wrote after Thursday's disappointment. But "at this point, it is only the strength of the behavioral business and capital structure that keep us from being more negative."

Broad Trend



announced a shortfall this week as well.

The company more than doubled its third-quarter revenue to $552 million after its big acquisition of Province Health. It also boosted net income by 50% to $29.6 million. However, it reported operating profits of 56 cents a share that missed the consensus estimate by 4 cents. Hurricane-related problems caused 3 cents of that shortfall.

Like many throughout the sector, LifePoint suffered from weak volumes and rising bad debt during the latest quarter. Same-hospital admissions fell 0.9%, while the company's provision for doubtful accounts -- greatly expanded to cover Province -- rocketed 162%.

UBS analyst Kenneth Weakley dwelled on the latter metric in particular. He noted that LifePoint's bad-debt ratio has now risen to 11.6% of revenue.

"This upward trend is in line with the results seen in the rest of the hospital space of rising bad-debt expense, but clearly a major disappointment for LPNT," wrote Weakley, who has a reduce recommendation on the company's stock. "As has been the case with other hospital providers -- despite the efforts of many hospitals to reclassify patients into charity care and offer discounts -- bad debt continues to plague the sector."

Peter Young, a business consultant at HealthCare Strategic Issues, blames LifePoint's changing patient mix for part of its problems. He points out that LifePoint now relies on self-pay patients for a bigger chunk of its revenue than it did a year ago. Meanwhile, he says, both Medicare and Medicaid have started contributing less.

Medicaid as a percentage of the company's revenue has dropped from 12.1% to 10.3% over the past year alone. And with big cutbacks being carried out in LifePoint's important market of Tennessee, Young predicts, that decline will only continue.

Still, Young readily acknowledges that LifePoint is hardly suffering alone.

"These companies are all reporting their results independently," he says. "But the evidence is clearly pointing out significant weaknesses in the hospital sector that are totally across the board. ... There is a trend here that does not look good."