Citing a slumping economy, higher levels of uninsured patients and new competition, HCA reported its net income in the second quarter plummeted 31%, as the nation's largest hospital chain increased its bad-debt reserves and took a charge for discontinuing its patient-accounting system. In doing so, HCA broke ranks with several smaller hospital chains that reported higher profits despite the sluggish economy.
The chain, which owns or operates 190 hospitals, reported net income of $240 million during the three-month period ended June 30, while net revenue increased 11.5% to $5.5 million.
"The economy is the hardest-to-quantify factor affecting our results," Chairman and Chief Executive Officer Jack Bovender Jr. told investors and analysts last week. "You can't look at two quarters or even a year as an overall long-term trend. We believe our strategy is still very viable."
The negative results at HCA were not repeated at other publicly traded hospital chains, such as Community Health Systems, Health Management Associates and Universal Health Services, said Nancy Weaver, an analyst with Stephens, a Little Rock, Ark.-based investment banking firm (See reports, this page).
"Not everybody is seeing the margin compression HCA saw," Weaver said. "Bad-debt issues are isolated to HCA."
The company increased its allowance for bad debt by $106 million in the second quarter because of higher levels of self-pay patients and reductions in Medicaid rates. HCA said efforts to collect more quickly from insurance companies were successful, but the higher number of uninsured has offset gains.
HCA's estimate for bad-debt reserves was off by about $84 million in 2003, and the company took the $106 million reserve as a conservative estimate for accounts receivable that are not expected to be paid, spokesman Jeffrey Prescott said. "The economy is having an impact," he said. "There are more uninsured people coming to our hospitals." HCA will study the amount of doubtful accounts on a quarterly basis-not annually-so it can have a better feel for its bad-debt reserves, he said. The total reserve for doubtful accounts is currently $2.3 billion, said Frank Morgan, an analyst at investment banking firm Jefferies & Co., Nashville. Morgan said the increase in bad-debt reserves is "a prudent and conservative approach." Through 2003, HCA expects the provision for bad debt to increase to 9% to 9.5% of net revenue. "The percentage of accounts receivable that are uninsured or underinsured has grown," Morgan said.
Another negative impact on earnings was a $130 million charge to discontinue the "millennium accounts-receivable system," a software system that was supposed to hasten the process of getting accounts receivable in the door, Prescott said. HCA had announced in May that it was discontinuing the development of the system and taking a charge (May 26, p. 3).
HCA never implemented the system because its own accounts-receivable program was gradually improving. The charge included costs associated with program writing and developmental costs, he said. "We began seeing costs escalating and it just wasn't worth doing," Prescott said.
In the conference call with investors, President and Chief Operating Officer Richard Bracken said the company also was cutting its 2004 capital spending program from $2.1 billion to approximately $1.8 billion. The slumping economy is behind the plan to slow spending over the next three years, he said.
Bovender told investors he expects similar operating results in the near term. "The key to returning to strong earnings-per-share growth is a return to historical volume growth," he said. "Predicting that turnaround is difficult."
Same-facility equivalent admissions, which measure inpatient and outpatient volume, declined 0.4% to 578,900, a trend that is going to take time to turn around, Bovender said.