Health Management Associates ( HMA) is relying on a special formula to boost its strong immune system.

By classifying many of its patients as charity cases, HMA has so far avoided the bad-debt problem that's infecting the rest of the industry. The company -- utilizing a form of preventive medicine -- simply refrains from recognizing revenue that could turn into bad-debt expense down the road.

HMA touted its prescription for health when reporting another "record" quarter on Tuesday. And several analysts were quick to applaud the company's strategy.

"The company disclosed its charity care write-offs for the first time, which confirmed its conservative revenue recognition practice," wrote Lehman Brothers analyst Adam Feinstein, who has an overweight rating on HMA shares. "We suggest the shares will trade higher this morning with this disclosure."

They did. After simply matching earnings expectations -- as it has for the past year -- HMA saw its shares rocket 6% to $22.64 late Tuesday morning.

Surprises

To be fair, HMA delivered several upside surprises.

First-quarter revenue, up 29% to $834 million, came in $13 million ahead of analyst expectations. Cash flow of $84 million, which more than doubled off of last year's depressed levels, handily beat most forecasts. And admission growth, totaling 3.7% on a same-facility basis, struck Wall Street as particularly strong.

But Fulcrum analyst Sheryl Skolnick -- one of few HMA bears on Wall Street -- still found plenty to growl about. She pointed out that cash flow per adjusted admission was still down for the first half of the year. And she, for one, took little comfort in the company's bad-debt ratio.

Skolnick said the company's latest report, which showed a 61.5% surge in charity care from 2002 to 2003, only boosted her concerns about the company. Skolnick already expressed some worry about the company's nonpaying patients after reviewing financial reports for HMA hospitals in Florida.

"We note that these results are remarkably similar to those we found in our analysis of five Florida hospitals," stated Skolnick, who has a sell recommendation and $18 target on HMA's stock. "This in turn suggests that the company's largest and oldest state is over-represented in its charity care statistics and may have a bigger charity care/uncompensated care problem than any other state."

Still, HMA's bad-debt expense -- which fell below most estimates -- seemed to reassure the broader market. By booking far more charity care than most, HMA held its bad-debt ratio steady around 7%. In the latest quarter, HMA wrote-off 11.8% of its net revenue as charity care for the poor.

"Combined with bad-debt expense of 7.1%, HMA's combined reserve of 18.9% against net revenue appears to be the most conservative in the industry," wrote Banc of America analyst Gary Taylor, who recommends buying HMA shares.

Wide Margins

In the end, HMA's modest bad-debt expense actually helped the company meet some profit forecasts on Wall Street. HMA's first-quarter earnings, up 19% to 37 cents a share, matched the consensus estimate exactly. Higher labor and supply costs kept the company from delivering a positive earnings surprise.

Those also cut into HMA's hefty profit margins. In its latest report, HMA once again celebrated "industry-leading" pretax profit margins on a same-facility basis. Margins for the quarter came in at 25.9%. But they still fell short of some analyst expectations and the company's own historic levels.

Skolnick sounded a shrill alarm. She said that EBITDA (earnings before interest, taxes, depreciation and amortization) margins had fallen "for the first time that we can ever remember" despite the company's industry-low bad-debt ratio. She also pointed out that EBITDA per adjusted admission inched up just 0.55% in the latest period.

"These trends suggest to us that operations at HMA are weaker than they look," she concluded.

Even Feinstein noted the weak spots in what he viewed as a generally strong quarter. HMA posted EBITDA of $187.4 million instead of the $189.2 million Feinstein had expected. The company also saw its same-store EBITDA margins slip from 26.5% a year ago.

But Merrill Lynch analyst A.J. Rice -- who ranks as one of the company's biggest fans on Wall Street -- looked past this decline.

"The principal reason for this decline," he explained, "is the addition of five new facilities with margins substantially below that of the company's more mature base."

Those five hospitals, acquired from struggling Tenet ( THC) last year, are now performing at or above expectations, management has said. But Tenet itself continues to suffer.

Following a recent bad-debt warning from industry giant HCA ( HCA), at least one bond analyst was predicting danger ahead for the company's largest peer. Citigroup analyst Steve Abrams cautioned last week that Tenet could see its bad-debt ratio climb beyond the 12% it is currently anticipating.

Tenet is battling with managed care payers, who are retaliating against the company's past business practices, in addition to rising bills from the uninsured.

"HCA has not cited managed care as a significant contributor to its bad-debt problem, and therefore it stands to reason that Tenet's provision for bad debt may need to be significantly higher than HCA's," Abrams noted. "We continue to recommend that investors underweight Tenet bonds ... given the lack of earnings visibility, the relatively tight liquidity position, continued HMO pricing pressures and the possibility of substantial government and civil liabilities."

Analysts have also been warning investors away from Tenet's stock, which slipped 7 cents to $10.63 on Tuesday.

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