Big names in the once-robust hospital sector are getting some poor marks on their regular checkups. Ailing Tenet ( THC) found Tuesday that its liquidity had deteriorated significantly in just a matter of weeks. Meanwhile, Health Management Associates ( HMA) saw its health questioned once again by the same Wall Street analyst who first diagnosed Tenet's problems. Tenet said it negotiated a new, but significantly smaller, credit facility with its bankers. The bleeding hospital chain, hit hard by allegations of fraud and the closure of a Medicare loophole, said its new credit agreement offers more flexibility -- but less cash -- than the old one it expected to violate. In order to relax its leverage ratios, Tenet agreed to pledge collateral for a credit facility that's been cut by one-third. The company now has access to $800 million, rather than $1.2 billion, in available credit support. But it can tap just $500 million of that for cash needs. Peter Young, a business consultant who serves the hospital industry, compared Tenet's new arrangements to "debtor-in-possession" financing. "Does the new agreement provide adequate capital access for a future?" Young pondered. That's "an interesting question. But the answer appears
to be , 'Not for a company of the current size.'" Even Jeff Villwock -- a Caymus Partners analyst who warned months ago about a possible liquidity crisis -- expressed mild surprise at terms of the deal. "We expected the banks to reduce cash borrowing from $1 billion to $800 million," said Villwock, who's been analyzing the company for years on behalf of the Tenet Shareholder Committee. "Apparently, they were not comfortable with Tenet's financial condition , and took it down to $500 million. ... That's a big decline." The company's own cash pile continues to melt away as well. Its current balance of $425 million is down from $600 million just six weeks ago. As a result, it now has access to less than $1 billion in cash total.
Meanwhile, the bills keep piling up. Villwock estimates that Tenet will burn through $500 million just to finance its operations this year. The company also faces a looming $275 million tax penalty. Even worse, it faces possible government fines and legal settlements that -- by themselves -- could exceed the company's total liquidity. "I don't know what the company is thinking," Villwock said. But "I don't think Tenet believes the liquidity is as precarious at it seems to be." Tenet's stock slid 3.1% to $11.63 -- drifting back toward its 52-week low -- on the latest news. HMA took a lighter hit, falling 1.7% to $21.50 after a celebrated Wall Street analyst reiterated his concerns about the company. After exposing Tenet's past reliance on price hikes -- and the Medicare "outlier" payments they triggered -- UBS analyst Kenneth Weakley last year conducted an industry study that raised some questions about HMA's pricing as well. Already, Weakley has warned that HMA's prices are higher than those of its rural peers. But he went a step further on Tuesday by saying that HMA also depends on outliers more heavily than most. "The data indicates that HMA receives far more Medicare outlier revenues than its rural peers, but its positive variance in no way resembles the THC situation in 2002," wrote Weakley, who has a reduce rating on both companies. "We believe that HMA's outlier ratio is about average across the hospital industry but, relative to its peers in the rural setting, it is indeed quite high." At an estimated 4.72% of medicare revenue, Weakley found, HMA's outlier ratio is approaching the urban average -- and more than double the rural average of 1.89%. "None of the other rural providers ... have an outlier ratio above 2.5%," he noted.
Weakley pointed to high gross charges -- rather than patient acuity, or sickness -- as the reason behind HMA's deviance. He then went on to highlight high prices -- and resulting outliers -- at some of HMA's Mississippi hospitals, in particular. He singled out Central Mississippi Medical Center in Jackson first. There, he said, gross charges are 50% higher than average -- and outlier ratios have rocketed from 13.5% to 32.2% in just four years. At Rankon Medical Center in Brandon, he found, outlier ratios jumped from 7.3% to 10.6% in a single year despite a substantial decline in a measure of patient sickness. At River Oaks Hospital in Jackson, he noted, outlier ratios have stopped falling and starting inching back upward instead. Indeed, Weakley discovered, HMA's Mississippi hospitals in general seemed to be posting higher outlier ratios along with their higher prices. "The average Medicare outlier ratio in the state for HMA in 2004 ... is expected to surpass 10% -- more than double the national average," he wrote. "HMA's assets in Mississippi appear to have witnessed a surge in Medicare outlier revenues ... over the past few years." Weakley conceded that HMA's outlier ratios at some hospitals outside the state seem to be lower than average and, in some cases, actually falling. But he remains concerned about HMA's pricing strategy in general. He says the company's prices are now more than four times its actual costs. In comparison, he noted, most of HMA's rural competitors charge triple -- and sometimes just over double -- their own costs. As a result, Weakley worries about the sustainability of both HMA's pricing and its generous outlier payments. "With ... numerous stage agencies all initiating efforts to explore hospital billed charges, the lack of transparency that had characterized hospital gross charges in the past could change going forward," he cautioned. "The results at HMA, while not nearly as striking as what we witnessed at THC, still suggest at the very least that HMA's outlier ratio deserves some careful scrutiny by investors."