A strong hospital company has fallen suddenly ill. Universal Health Services ( UHS) is suffering through a weak first quarter that some fear could signal an epidemic throughout the industry. The Pennsylvania hospital operator warned on Monday that first-quarter profit could fall "as much as 25%" below last year's results because of deterioration in its acute-care business. Universal blamed widespread industry ailments -- particularly rising bad debt -- as well as company-specific problems for the shortfall. "Certain of the company's acute-care facilities have been impacted by a negative shift in payor mix, a decline in intensity and an increase in length of stay," Universal announced on Monday. "In addition, the rising level of uninsured and self-pay patients continues to unfavorably impact our bad-debt expense." The company, which has withdrawn its guidance for 2004, saw its shares skid 16% to $45.28 after its poor first-quarter prognosis. Several hospital peers -- including HCA ( HCA), Health Management Associates ( HMA) and LifePoint ( LPNT) -- also weathered selloffs as investors fear an industrywide problem. "This news may suggest a challenging
first quarter for the group," explained Lehman Brothers analyst Adam Feinstein. Some of Universal's problems may not prove contagious, however. The company acknowledged that it had overstaffed its hospitals for business that did not materialize in the first half of the quarter. It blamed its soft admissions, in large part, on competition from nearby physician-owned facilities. It also said it has been treating more Medicare patients -- for longer periods -- who bring in a limited amount of revenue.
"Some of the loss of business we are no longer attributing to just the economy," the company told analysts on Monday. At the same time, Universal continues to suffer from the same ailments crippling the rest of the industry. Specifically, the company has seen bad debts rise -- beyond an expected peak -- since the end of last year. Bad debt "literally continues to increase month by month," the company stated. Like most hospital companies, Universal has weathered a huge surge in bad-debt expenses over the past year. During the latest quarter, the company saw more than 10% of its acute-care revenue eaten up by unpaid hospital bills. The company now says its 2004 bad-debt forecast, totaling 9% to 9.5% of acute-care revenue, "won't be achievable" unless economic conditions improve. At least one analyst had already predicted as much. "Our 2004 (earnings) forecast diverges from management's guidance ... almost entirely due to our more bearish outlook on potential provision for bad-debt expense," Deutsche Bank analyst Balaji Gandhi wrote last month in downgrading Universal from buy to hold after the company's fourth-quarter report. "Our forecast for bad debt for the acute-care hospitals is 10.5%, broadly in line with our expectations for other major urban hospital operators." Universal's psychiatric hospitals have helped the company post an overall bad-debt ratio of just 7.8%. But it has seen bad debts rocket, particularly in Las Vegas and Texas, among its acute-care facilities.
Meanwhile, it faces specific challenges that have taken some analysts -- and even the company itself -- by surprise. Just last week, Universal confirmed the full-year earnings guidance of $3.43 to $3.53 a share that it is now withdrawing. The company asknowledged Monday that it "certainly had a sense," even then, that January numbers were lower than expected. But it issued an update only after the trend -- hurt by competition from specialty hospitals -- continued into February. Universal said it felt "compelled" to revise its outlook ahead of analyst presentations scheduled for later this month. It also said it is "vigorously addressing" the challenges it faces. Specifically, it is cutting back on unnecessary labor and seeking to shorten Medicare patient stays. "People are remembered by how they respond to challenges," Universal CFO Steve Filton said. "Many of these steps are already accomplished." Filton went on to describe Universal as a "strong company with good assets in growing markets." But at least one analyst wasted no time in downgrading the company anyway. Charles Lynch of CIBC World Markets cut the stock from outperform to underperform just after news of the earnings miss. By then, Oppenheimer analyst Joseph Chiarelli had already warned of possible disappointments. "We do not see evidence to refute our belief that soft admissions, a higher ratio of self-pay activity and the resultant bad-debt expense should pressure (earnings) growth to the low end of management's guidance," Chiarelli wrote on Feb. 20. Following Monday's plunge, Universal is now trading right around Chiarelli's target price of $45.