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LifePoint's Critical List

It cites medicaid cuts, a plant closure and bad debts in slashing profit guidance.

To at least one industry expert,



harrowing conference call sounded more like a "church confessional" than a regular Wall Street update.

On the call, Peter Young, a business consultant at HealthCare Strategic Issues, heard the rural hospital operator list a number of challenges that he himself had been discussing for months. Just for starters, the company revealed that deep Medicaid cuts would keep it from even approaching Wall Street's expectations for 2006. Then it mentioned a major plant closing in a city where it operates. And it went on to note other significant problems -- particularly bad debt from the uninsured -- that face the industry as a whole.

"I am 100% certain every point I have raised in the past year regarding LifePoint has come home to roost," said Young, who has highlighted his concerns in

articles by

and correspondence with his clients.

For those with high hopes, however, the company's Monday afternoon conference call had to bring some pain. To begin, the company said that it now expects fourth-quarter profits of between 42 cents and 45 cents a share -- or about 20 cents less than it had previously anticipated. And it indicated that 2006 would be far more disappointing than analysts had dreamed.

Specifically, the company said it expects to generate 2006 operating profits of $2.40 to $2.57 a share. Wall Street was looking for $2.87.

CRT Capital analyst Sheryl Skolnick questioned whether things could get any worse.

"You've got problems with Medicare, Medicaid, managed care, physicians, volumes," she noted during Monday's conference call. "It sounds like bad debt at some of the facilities isn't great. I hate to ask it, but isn't that everything? Isn't it like everything went bad in one quarter? Is there anything we are leaving out?"

Investors promptly bailed. Shares of LifePoint plummeted 17% to $30.36 -- a new 52-week low -- Tuesday morning. Other hospital operators, including


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, lost some ground as well.

Medicaid Nightmares

LifePoint blamed part of its big fourth-quarter shortfall on weak volume from a light flu season. But it cited rising costs and deteriorating reimbursements -- particularly from the government -- as well.

The company dwelled on Medicaid cuts the most.

"There's the typical question that investors ask: 'What keeps you up at night?'" LifePoint CEO Kenneth Donahey said during Monday's conference call. "And I have said all year long, since the beginning of the year, what might go on in Medicaid. We are experiencing some significant reductions in Medicaid ...

And I think it is just beginning to unfold."

LifePoint relies on the government for virtually half of its revenue. Moreover, as previously noted by

, the company operates a number of hospitals in states -- like Tennessee -- that have really begun slashing their Medicaid programs.

For the first time, LifePoint has now quantified just how big the resulting hit could be. Cuts in Tennessee, alone, could lower 2006 earnings by as much as 8 cents a share. Reductions in Alabama might wipe out another 7 cents. And changes in both Kentucky and Louisiana will likely hurt some, too.

All told, LifePoint expects government cutbacks to slash earnings by 26 cents a share next year. At the same time, it believes that rising expenses -- for high-priced energy and, of course, bad debt from the uninsured -- will eat away at the bottom line as well.

Even worse, the company no longer expects some planned acquisitions to help out anytime soon. It now believes that some hospitals that it hopes to acquire from


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will decrease, rather than increase, profits in the coming year.

Skolnick, for one, questioned whether LifePoint, which has already acquired some hospitals in hard-hit Tennessee, should follow through on its latest plans at all.

"Maybe you ought to hold off from doing some of these acquisitions, especially if there has been what looks like a material change going from accretive to dilutive by a lot," suggested Skolnick, who has yet to establish a rating on the company's stock. "Maybe you don't need the headache."

Mixed Reaction

Deutsche Bank analyst Darren Lehrich has already backed away from the stock.

Lehrich downgraded LifePoint from buy to hold late Monday because, he says, the company faces "too many headwinds" in 2006. He cited government reimbursement cuts and acquisition-related challenges in particular.

Similarly, Stephens analyst Nancy Weaver reiterated her cautious outlook for the stock. She called the company's fourth-quarter results "dismal" and its 2006 guidance even more disappointing.

To be fair, Weaver did portray most of LifePoint's problems as company-specific -- rather than industry-wide -- in nature. Thus, she cautioned investors against jumping to broad conclusions about the sector.

Meanwhile, Oppenheimer analyst Glen Losev came right out and recommended buying LifePoint itself. He felt the shares, which he previously valued at $50, would look attractive after an expected drop to $32 on Tuesday.

And LifePoint remains optimistic despite everything.

"We have a good group of assets," Donahey insisted when concluding a conference call that many deemed a disaster. And "the management team is very upbeat -- very motivated -- to have a great 2006."