Health Care's 10 Dumbest Things, Part Two

Editor's Note: This year was a particularly absurd one for the health care industry. In light of that, we've expanded on our popular "Five Dumbest Things on Wall Street" to offer our "10 Dumbest Things in Health Care This Year." Part one examined the blunders of five big-cap names. Now, we look at the missteps of smaller companies.

1. WellCare's Silent Treatment

Silence isn't necessarily golden at tight-lipped WellCare ( WCG).

When 200 government agents swarmed the health insurer's Florida headquarters this fall, investors had a few questions. The company didn't answer them, though.

Instead, WellCare issued a press release mostly touting its "uninterrupted business operations" and, when pressed, followed up with a brief message from the CEO that offered much of the same -- except in audio form. Investors responded by sending WellCare's stock down 80% to a three-year low.

Enter the press, which apparently has a better way with words.

After clearly doing its homework, The Wall Street Journal published a convincing story based on an anonymous source who indicated that the WellCare investigation could prove narrow in scope and the potential fines modest in size. Other media outlets pounced on this new certainty by publishing their own versions of the truth. Wall Street analysts, rescued from the earlier information vacuum, eagerly chimed in with agreeable notes of their own.

WellCare's stock, suddenly attractive again, has rallied with few interruptions ever since.

Still, did publish a few minor items that -- for WellCare's sake -- might have been better left unsaid. First and foremost, WellCare investors have placed their trust in CEO Todd Farha, a "proven" leader who previously helped run two health insurers that weathered spectacular collapses. Moreover, Farha counts his own cousin as an "independent" director who enjoys the unique privilege of serving on every major committee that the board has. And he relies on his general counsel to double as chief compliance officer and keep the company in line.

But perhaps investors have nothing to fear. After all, WellCare runs a hard-core compliance operation reassuringly known as "The Trust Program." That program is designed to ensure that WellCare upholds all government laws so that FBI agents won't find any dirt when they happen to stop by for a raid.

WellCare talked about that program a lot before the company suddenly went mute. These days, however, the company relies on others to put comforting words in its mouth.

Dumb-O-Meter Score: 97. "We will tolerate nothing less than strict adherence to a code of conduct that appropriately educates and protects our members," WellCare CEO Todd Farha vowed just before Medicare cracked down on the company's marketing practices this summer. "I am confident that, with these new compliance enhancements, our overall compliance strategy will continue to be best-in-class."

2. Encysive's Losing Battle

Encysive ( ENCY) sure knows how to pick a fight.

The small Houston biotech wasted most of 2007 arguing with the very agency that could decide its fate.

It all started in early 2006, when the U.S. Food and Drug Administration sent an "approvable letter" suggesting that Encysive perform further clinical trial work on its key hypertension drug, Thelin. Hoping to avoid that time-consuming process, Encysive kept trying to impress the FDA with the same old data instead.

The company received the same old verdict -- through three different approvable letters -- in response. Go figure.

Still, to investors, each of those letters came as some surprise. You see, Encysive never disclosed the specific nature of the FDA's concerns and insisted that those obstacles could be overcome. Investors, assuming that Encysive had stuck to its guns for good reason, were no doubt stunned to learn the truth.

After fielding its last approvable letter this spring, Encysive finally revealed that the FDA had rejected Thelin because it "did not demonstrate the evidence of effectiveness needed for approval."

It's tough to imagine a verdict any clearer than that. But leave it to Encysive to push the issue one more time. Complaining that it had met its goals, but that the FDA had moved the goal posts, Encysive filed a formal appeal. Never mind that, years earlier, Encysive had fallen short of its original targets and therefore changed the rules itself.

The company's fourth and final rejection from the FDA seemed almost inevitable. It was. But only after officially losing its appeal this fall, with no obvious recourse left, did Encysive finally break down and take the FDA's advice.

Dumb-O-Meter Score: 94. "Annnnnnnd the award for Most Stubborn Management Team of the year," proclaimed the Motley Fool, "goes to Encysive."

3. HMA's Worthless Bribe

Bribery backfired at Health Management Associates ( HMA).

The Florida-based hospital chain kicked off the year with a brilliant idea. It would borrow billions of dollars -- wrecking its strong balance sheet in the process -- to finance a huge one-time dividend for its shareholders. By doing so, the company figured, it could soothe inpatient investors and buy more time for a turnaround.

The strategy worked -- for a few hours. After an early spike, HMA's stock soon went flat and has been spiraling lower ever since.

By mid-year, hit by weak volumes and bad debt from the uninsured, HMA was badly missing Wall Street estimates and slashing its guidance to boot.

By the time the third quarter rolled around, HMA searched for a novel way to reach its targets and please its tormented investors. By selling some receivables, which it had struggled to collect itself, it could book the proceeds and actually beat its numbers for a change.

But Kenneth Weakley, that astute analyst at Credit Suisse, quickly caught on.

"The selling of any asset is just that -- selling an asset," Weakley decided. "HMA, of course, is not in the 'selling assets' business; they're in the hospital business.

"It may not be a very good business right now, but that's the business they're in."

Even HMA Chairman William Schoen seems wary of the industry. He continues to dump large chunks of HMA stock despite its falling price.

Umm ... time to pull the plug here, folks?

Dumb-O-Meter Score: 89. "Bill is simply engaging in sound personal financial planning," HMA CEO Burke Whitman assured last month. "His confidence in HMA is unwavering."

4. Matria's False Hopes

This year, Matria ( MATR) had to eat its words.

At first, the Georgia-based disease-management company couldn't stop talking about the big contract it had landed with WellCare. After all, that contract would not only help the company meet its aggressive full-year guidance -- which was heavily back end-loaded -- but it could also pave the way for similar deals with other health insurers.

Indeed, it was supposed to be the first of many deals that would justify Matria's ambitious takeover of CorSolutions and the expansion beyond its core business -- dealing directly with employers --and into the health plan arena.

Just four months into that 10-year deal, however, both parties decided to cancel. Hoping to at least soften the blow, Matria assured that the cancellation would have no real impact on its 2007 results.

That was probably true, since Maria arranged to hold on to that contract until the end of the year. But the company still wound up missing its targets and cutting its guidance, anyway.

"It's déjà vu all over again," BB&T analyst Newton Juhng declared when downgrading Matria in July. "Management credibility takes another blow."

Well, if nothing else, Matria leaders do make good punching bags. They got bruised again when delivering another quarterly disappointment a few months down the road.

Apparently, though, those tough guys feel they deserve more money for taking so much pain.

"Management may think that they are under-compensated," Juhng observed. "But when we see a company use up 30% of its ... earnings to pay out option expense, we cannot agree."

Battered investors no doubt wish they earned so little.

Dumb-O-Meter Score: 85. "Has management learned its lesson?" Juhng wondered. "We're not sure."

5. Tenet's Big Idea

Five years into an elusive turnaround, Tenet ( THC) finally figured out how to make the numbers work.

The Texas-based hospital chain favors a new kind of math. Under this formula, investors simply throw out the company's Florida results and focus on what's left.

Granted, the company will still be suffering from weak admissions and, presumably, ongoing losses. But this way, the situation looks manageable at least.

Some see a slight problem with this approach, however. Namely, Tenet is excluding a core market -- accounting for one-quarter of its total beds -- that the company plans to keep.

"Keep in mind that for hospitals, if one were to exclude their weakest market, their results would look much better," observed Credit Suisse analyst Kenneth Weakley, whose past homework helped trigger Tenet's collapse. "A good analogy, applicable to many readers of this report, may be: How would the fund look if you could eliminate some of the stocks that went down?"

You can't blame Tenet for trying, though. As management stressed in its third-quarter update, Tenet's Florida market and its USC hospital -- which is embroiled in litigation -- "more than fully accounted" for the company's latest volume decline.

Unfortunately, experts view Florida as a key part of Tenet that ultimately has to be fixed. If anything, however, it seems be sliding into an even worse state of disrepair.

"Tenet will tell you things are getting better, based on some hokey survey, but they're really getting worse," one Florida physician told earlier this year. In fact, "in all the years I've been here, this is definitely the low point."

So what are long-suffering Tenet shareholders to do? Judging from Tenet's stock price -- which has rocketed 75% in recent months -- they'll settle for new math.

Only Tenet could present a bandage as an outright miracle cure.

Dumb-O-Meter Score: 78. "The third quarter produced gratifying, tangible evidence that our turnaround strategies are working," declared CEO Trevor Fetter. "We are at last seeing evidence of the sustainable growth in profitability we have worked so hard to achieve."

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