The hospital sector attempted to upgrade its condition on Tuesday. A day after a major profit warning that left several hospital operators bleeding, a couple of industry players tried to play up their strengths. Health Management Associates ( HMA) claimed it remains as healthy as ever and reiterated its first-quarter guidance for both earnings and admission growth. Meanwhile, Tenet ( THC) touted new discounts for the uninsured that could help ease its bad-debt headaches down the road. Both companies issued their news after Universal Health Services ( UHS) triggered a big selloff Monday by warning that its first-quarter profit -- hit by sluggish business and rising costs -- could fall 25% shy of Wall Street estimates. Prudential analyst David Shove believes UHS' ailments could prove contagious. Shove warned last week of a "potential storm" that seems to be hitting the industry. "Universal Health Services' earnings shortfall indicates that the storm is here, in our opinion," wrote Shove, who cut UHS from overweight to neutral weight and maintains an unfavorable outlook on the sector overall. "In the coming quarters, we expect the peer hospital companies to report similar trend effects to their earnings power. As a consequence, hospital industry earnings visibility has diminished significantly." But HMA quickly boasted about immunity to such pitfalls. The rural hospital operator said on Tuesday that it still expects to deliver first-quarter profits of 37 cents a share and same-store admissions growth of 2% to 5%. It also indicated that it has not been affected by the same ailments -- such as competition and unfavorable patient mix -- now hurting UHS. "By supplementing existing hospital medical staffs with needed, recruited physicians and investing capital in new technology, HMA improves the quality of health care and reverses patient migration out of the market," HMA CEO Joseph Vumbacco said Tuesday. "Importantly, HMA hospitals have not experienced a significant change in the payor mix of patients seeking treatment at our hospitals, further confirming the strength of the communities we serve."
Still, some industry experts have already questioned the company's health. Fulcrum analyst Sheryl Skolnick believes that acquisitions could be masking HMA's true condition. She points out that HMA takes more time to turn around its new hospitals -- and winds up with smaller profit margins -- than it has in the past. And she has expressed serious concerns about the company's declining cash flow. HMA blamed the latest drop in cash flow on billing delays at five hospitals recently purchased from Tenet. The company offered fresh reassurance about the situation on Tuesday. "Now that we have obtained the necessary billing numbers, we will begin in earnest to bill and collect the reimbursement due us," Vumbacco said. "We expect improved cash flow for the quarter ending March 31, 2004." HMA remained unchanged at $21.61 late Tuesday morning. Yet another analyst -- credited for exposing Tenet's aggressive pricing strategy -- has raised concerns about HMA as well. UBS analyst Kenneth Weakley warns that HMA's own pricing may wither under increased scrutiny. HMA's prices looked unusually high during an industry review carried out last year by the Wall Street analyst. Similarly, Shove has since predicted that recent government moves "could rip open the black-box process of hospital pricing." He issued his opinion shortly after government authorities declared that hospitals could offer discounts to uninsured patients without violating Medicare and Medicaid rules. "As the hospital industry implements this new mandate," Shove said, "we expect consumers and managed care health plans to benefit from the improved pricing transparency." In the meantime, Tenet has laid out plans to offer "managed care-style discount pricing" to uninsured patients whenever possible. The company -- accused of gouging such patients as part of its pricing strategy in the past -- said it will adopt the new discounts in the second quarter of the year. Due to state laws, however, it cannot offer price cuts to the huge uninsured population in its big Texas market.
Still, Tenet CEO Trevor Fetter called the discounts "the right thing to do" for patients who are eligible. "The problem of the uninsured really belongs to all Americans and requires a national solution," Fetter said. "But we are committed to doing whatever we can to being a leader in addressing all issues facing health care today, and we will be known for our dedication to quality in patient care." For now, however, Tenet is known as one of the most challenged players in the group. The company faces potentially huge liabilities -- including government fines and patient lawsuits -- at a time when its bank account is shrinking. Just Monday, Moody's cut Tenet's credit ratings further into junk territory over concerns about the company's ability to fund its obligations in the next 12 to 18 months. Tenet shed a nickel, dropping to $12.07 a share, following the downgrade. Meanwhile, UHS struggled to recover from Monday's big selloff. The stock inched up 23 cents to $43.11 after losing 17% a day earlier. Industry experts have warned that the company still faces a tough road ahead. Peter Young, a business consultant who serves the hospital industry, expressed particular concern about UHS' recent loss of business to competing hospitals.
"Behind the legitimate concerns of UHS' bad debt is the larger issue of what appears to be a failing physician business strategy that has resulted in physician -- and, hence, revenue -- migrations to other competitors and soft admissions during what should have been, and is, a solid month for hospitals," Young said. Young predicted that UHS will need "eight quarters at best" to remedy the situation. SG Cowen analyst Kemp Dolliver was somewhat more generous, saying that UHS' company-specific problems "will take a year to fix." Meanwhile, Dolliver remains concerned about the industry's bad-debt problem overall. The UHS warning "doesn't boost our enthusiasm for the group," Dolliver admitted. "Intensifying bad-debt problems are an industry-wide phenomenon that few will avoid unless 'the turn' starts today."