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.
"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.
"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.