Health Management Associates ( HMA) may need a more potent formula for success.

The rural hospital operator -- long a favorite on Wall Street -- has failed to please investors with its normal mix of in-line earnings and low bad-debt expense. The company posted third-quarter profits of 36 cents a share to extend a year-long trend of matching consensus expectations exactly. It also reported a bad-debt ratio of 7.6% that, while higher than both last year and last quarter, remains well below the double-digit rates posted by many others in the industry.

Still, HMA's stock took a slight hit, falling 1.5% to $21.38 Tuesday, as investors chose to focus on the apparent side effects of the company's acquisition-dependent growth strategy.

For its third quarter ended June 30, HMA posted net income of $89.3 million, or 36 cents a share. That's up from the year-ago $75.9 million, or 30 cents a share.

HMA's total revenue -- even lifted by new hospitals -- fell short of expectations. It jumped 26.3%, down from 29% just last quarter, to hit $817.3 million. Wall Street was expecting $820.8 million.

Meanwhile, HMA's "industry-leading" profit margins have stopped growing at all. They fell from 26.6% a year ago -- when they were expanding -- to 23.3% in the latest period. And those margins haven't taken the same hit from bad-debt expense that some others in the industry have.

HMA has managed to keep its bad debt stable, in part by aggressively classifying the accounts of some uninsured patients as charity care instead. By doing so, the company never recognizes revenue from the accounts -- writing it off upfront instead -- so it faces no bad-debt hit to its margins when the accounts go unpaid down the road.

Regardless of such classifications, however, HMA is still providing a significant amount of uncompensated care. In the latest quarter, the company wrote off $106 million worth of charity and indigent care -- 54% more than it did just one year ago -- at a time when its bad-debt expense keeps climbing as well.

Peter Young, a business consultant who caters to the health care industry, saw other weak spots in the company's latest results. He pointed to soft inpatient admissions, shortened hospital stays and a drop in lucrative surgery procedures as particular areas of concern.

During the latest quarter, HMA experienced same-hospital admission growth of 1.2% that was two-thirds lower than the increase posted one year ago. It also saw hospital stays slip from 4.6 days to 4.5 days -- signaling a drop in case severity -- despite expected increases elsewhere in the sector. In addition, surgery cases dropped by nearly 1,000 from a year ago.

Meanwhile, expenses climbed in almost every category. Salaries and benefits surged 29% to $316 million. Supplies and other expenses also jumped 29%, coming in at $239 million. Bad-debt expense rocketed 35% to $62.5 million.

To be fair, HMA conceded on Tuesday that the company is not immune to one of the industry's biggest challenges.

"The United States hospital industry has seen an increase in the number of uninsured and underinsured patients seeking health care," the company stated, "and HMA's experience reflects this similar trend."

Prudential analyst David Shove warned on Monday of more pain to come. In a research note on hospital companies in general, he predicted that the industry's bad-debt numbers will continue to rise over the next several quarters. He also believes that mounting competition from nonprofit hospitals and specialty players will keep hurting for-profit hospital business. Looking ahead, he sees another big challenge on the horizon. He says that next year's rollout of consumer-driven health plans "threatens to dramatically weaken inpatient admission volumes and accelerate the patient mix shift toward outpatient care."

Still, Shove expects hospital companies to meet Wall Street expectations this time around. He also sees signs that some players are on the mend. But he nevertheless cautions investors against betting on a recovery already.

"Overlooking the danger of future high bad-debt expense, investors will likely react to the second-quarter 2004 earnings results by driving hospital valuations upward in the near term," wrote Shove, who continues to maintain his unfavorable view of the sector. "Savvy investors should use the second-quarter 2004 earnings season as an opportunity to identify the future opportunities, while avoiding investor euphoria."