HCA ( HCA) continues to see its results hurt by patients who do not pay.

To be fair, the giant hospital chain did manage to deliver on lowered expectations for the third quarter. The company increased revenue by 4% to $6.03 billion and even topped the new consensus profit estimate by a penny with earnings of 62 cents a share. Meanwhile, net income actually jumped 23% to $280 million during the period.

Still, things could have been better. Overall, same-facility admissions slipped 0.7% from a year ago, when hurricanes hurt business as well, even as uninsured admissions rocketed by a startling 15%. All told, uninsured patients accounted for 5.6% of total same-facility admissions and 22% of same-facility emergency room visits during the latest quarter.

Even so, HCA saw its provision for doubtful accounts drop from 11.9% to 10.3% of revenue during the period. However, after adjusting for new discounts given to the uninsured, which lower revenue upfront, the company's bad debt ratio would have been a much-higher 13.7% instead.

Going forward, HCA has pledged to deliver full-year earnings of between $3.10 and $3.20 a share, including a slew of special items that adds 23 cents to the bottom line. Analysts were expecting 2005 profits of $3.01 a share without that extra help.

For 2006, the story looks somewhat similar. HCA expects to deliver earnings of between $3.25 and $3.45, once again with help from one-time items. Wall Street was looking for the company to at least beat the bottom of that range, with profits of $3.29 a share already.

Moreover, HCA has warned that factors outside its own control -- like those hurting the company right now -- could render the company unable to meet even those future targets. It highlighted patient volumes, uninsured admissions and hurricane threats as ongoing challenges.

Shares of HCA slipped 10 cents to $49 on Monday ahead of the company's report.

Early Diagnosis

HCA warned in advance about its recent pain. Two weeks ago, the company predicted that third-quarter profits would fall well short of Wall Street forecasts and went on to lower its expectations for the full year as well. The company blamed weak operating fundamentals, rather than recent hurricanes, for most of the disappointment.

Specifically, HCA revealed that admissions had slipped -- and, even worse, that bad debts had rocketed -- during the seasonally tough third quarter. The company's announcement raised concerns about HCA and the hospital sector overall.

"HCA's feeble earnings growth expectations reflect rising uninsured admissions and bad debt levels," noted Prudential analyst David Shove, who has a neutral rating on HCA's stock and an unfavorable outlook on the group in general. And "HCA's 3Q05 preview shows us that industry trends remain feeble and earnings could be weak across the sector."

Shove had previously expressed some hope that HCA might be making important progress on the bad debt front.

This week, however, Barron's raised questions about whether HCA's past improvement in bad debt expense was ever real at all. Notably, Barron's reported, HCA began scaling back its provision for doubtful accounts even as its receivables from uninsured patients -- who rarely pay their bills -- kept climbing higher.

Until the fourth quarter of 2004, Barron's said, HCA's allowance for doubtful accounts covered about 89% of the company's uninsured receivables. But after that, it said, that coverage began to fall off sharply and stood at just 77% of uninsured receivables in the second quarter of this year.

By now, hospital investors have learned to pay close attention to a company's so-called "bad debt ratio," or the percentage of revenue that must be written off as a result of unpaid accounts. However, investors lacked some of the disclosures necessary to figure out that HCA's reserving method, rather than a drop in unpaid accounts, was actually helping that crucial metric.

Cloudy Vision

Since then, recent hurricanes have only clouded the picture more.

"Pre-hurricane season, our coverage hospitals were reporting soft admission volumes, rising uninsured activity and tenuously stable bad debt expense," Shove wrote on Thursday. "Now, the hurricane activity has adversely affected admission volumes and bad debt trends in struggling markets such as Houston, New Orleans and southern Florida. As a result, the hospital industry's potential recovery has been pushed further out in the horizon."

All told, Shove estimated, HCA by itself saw more than 10% of its licensed beds hurt -- or at least threatened -- by the violent hurricane season. Those storms, he noted, have brought not only short-term disruptions but also long-term pain caused by higher insurance costs and possible hospital closures.

Even so, he suggested, the damage could have been worse. Prior to HCA's pre-announcement earlier this month, in fact, Shove had assumed the storms would slash 12 cents from the company's bottom line. But HCA has estimated its hurricane-related losses -- at least for Katrina and Rita -- at less than half that amount.

Of course, HCA offered its projection before Hurricane Wilma took aim at its market in southern Florida. Since then, Morgan Stanley analyst Gary Lieberman has gone on to predict that as many as eight HCA hospitals might face risks associated with that particular storm.

By now, of course, hospital investors have come to view Mother Nature -- like bad debt -- as a serious industry threat.

"The 2005-2006 hurricane season has exposed the fragility of the hospital industry's admission volumes and (profit) margins," Shove wrote on Thursday. "With three major hurricanes in the season so far, investors have gained a new appreciation for the financial impact wrought by the storms."

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