After years of disappointments, Health Management Associates ( HMA) is finally rewarding its loyal -- and incredibly patient -- shareholder base.

The rural hospital chain has borrowed billions of dollars so that it can pay a one-time dividend of $10 a share to its equity owners. The company, which has always boasted a strong balance sheet in the past, announced its recapitalization plans along with a major accounting change that some view as long overdue.

Specifically, HMA is altering the way it treats accounts for patients who often do not pay their bills. For starters, the company will record a $200 million fourth-quarter charge to increase its reserves for receivables that are not covered by health insurance. Then, going forward, the company will start reserving for "a significant portion" of self-pay accounts at the time they are created.

Before, HMA -- unlike most in the industry -- waited 120 days to fully reserve for those self-pay accounts.

"We had long been concerned that receivables were overstated ... and that the company did not match the timing of bad-debt expense on the income statement with the admission of a self-pay patient," notes Sheryl Skolnick, senior vice president of CRT Capital Group. "Nice to be right, but the company's recap makes being right on that issue moot."

Skolnick herself still lacks confidence in HMA and its management team. However, she has raised her rating on the company's stock from sell to fair value because of fresh support provided by the big one-time dividend.

"Everybody wants to love this thing today, so I'm going to step out of the way for the time being," Skolnick says. "We can have a little HMA love fest right now -- and then we'll go back to business."

As it turns out, that love fest didn't last long. Following news of the recapitalization, HMA's stock jumped more than 10% in premarket trading on Wednesday. However, the stock soon dropped back to flat for the day as investors reassessed.

Desperate Measures

Besides the dividend -- which has already hurt the company's credit rating -- management shared mostly bad news with investors.

Perhaps most notably, HMA expects the company's earnings to drop by nearly half this year. The company's new 2007 guidance of 61 cents to 71 cents a share falls well short of the current $1.34 consensus estimate.

To be fair, rising interest expense -- rather than deteriorating fundamentals -- should account for much of that shortfall. But even excluding that change, some viewed the guidance as soft.

Skolnick questions whether HMA can hit even its lower targets. Importantly, she points out, the company is relying on a big drop in bad-debt expense due to new discounts for the uninsured.

HMA recently agreed to slash its steep prices for self-pay patients as part of a class-action settlement. The company will therefore record lower revenue and, in turn, lower bad-debt write-offs for those self-pay accounts.

But "as we have seen with Triad Hospitals ( TRI) and at Tenet Healthcare ( THC) and HCA, those changes rarely result in sustainably lower bad-debt expense ratios," Skolnick says. "There is risk here, in our view, but risk that we think the market likely ignores today."

Instead, the market sensed desperation. So did some analysts.

Darren Lehrich of Deutsche Bank called HMA's latest moves "extreme measures for difficult times." He portrayed the company's recapitalization plans as risky and recommended that investors take some profits on any big jump in the stock.

Lehrich has a hold recommendation and a $20 price target on HMA's shares. His firm owns at least 1% of the company's stock itself.

Meanwhile, Jefferies analyst Frank Morgan felt that the stock might actually drop on Wednesday's surprising developments.

"While (we are) pleased with the company's efforts to unleash value through its recapitalization plans, the downside of management's guidance to the current consensus appears to reflect further deterioration in industry fundamentals -- largely due to an increase in self-pay volumes," Morgan wrote. Thus, "we expect a modestly negative reaction in the stock on today's release."

Peter Young, a business consultant at HealthCare Strategic Issues, suggested that a hit would be justified. Like Skolnick, Young has long worried about HMA's industry-high days sales outstanding and the huge write-offs that could result. He feels that management is now trying to pay off shareholders for the missteps that have surfaced.

But Young, for one, wonders what investors will be left with after collecting their big dividend on March 1.

"The company is paying an awful lot of money to placate its shareholders," says Young, who has no financial interest in the stock. But "has management been doing the best job relative to industry benchmarks? I would suggest that the answer to this is 'no' ... and we are likely to see changes coming down the road."

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