The operating environment for publicly traded hospital chains is certainly rough. More evidence for that came last week as two more chains joined industry bellwether HCA and Triad Hospitals in reporting lower profits because their bad debts are rising, although two other chains managed to buck the trend.
Higher bad-debt expense hammered profits at both Community Health Systems and Health Management Associates in the third quarter. Community, Brentwood, Tenn., said greater self-pay volume and lower collection rates on self-pay revenue forced it to change its accounting for bad debt for the first time since going public in 2000. The accounting change led to a $65 million pretax charge. Community said profits were down almost 81% to $8.2 million, compared with $42.9 million in the year-ago quarter. Revenue rose 20.9% to $1.12 billion.
During a conference call, Community executives said the company's self-pay volume was flat in 2004 and 2005 but started to rise in 2006. Unlike chains that operate in urban areas, Community said its increase is overwhelmingly driven by uninsured patients rather than higher copayments and deductibles being expected from insured patients. "We can still improve our collections efforts, but the increase is driven by uninsured patients, not collections issues," said Wayne Smith, chairman, president and chief executive officer of Community.
Joseph Vumbacco, vice chairman and CEO of HMA, Naples, Fla., agreed with Smith that the chains have little more that they can do to solve the bad-debt problem. "The real opportunity is on volume," he said. HMA said it is focusing on improving physician relationships and being more flexible in employing and partnering with physicians in order to increase volume.
The company's third-quarter profits fell more than 15% to $74.4 million, down from $87.8 million in the 2005 quarter, even as HMA's third-quarter revenue rose 10.1% to $994.1 million. Bad-debt expense equaled 9.5% of revenue, compared with 8.2% in the 2005 quarter.
Bob Farnham, chief financial officer and senior vice president at HMA, said that out-of-pocket costs for patients continue to depress patient volume. The company reported essentially flat adjusted admissions on a same-hospital basis compared with the year-ago quarter, as a 6.2% increase in inpatient admissions was offset by an 8.7% decrease in total surgeries. Unlike HCA and HMA, Community reported growth in same-facility patient volume.
HCA reported lower third-quarter earnings because of higher bad debt and soft volume on Oct. 20. Four days earlier, Triad Hospitals warned that its third-quarter profits would be hit by the same factors. Triad is scheduled to report its earnings in full on Oct. 30.
LifePoint Hospitals and Universal Health Services, however, reported lower bad-debt expense as a percentage of revenue and higher patient volume. Both LifePoint and Universal reported a decrease in bad debt as a percentage of revenue for the third quarter compared with the year-ago quarter, and Universal also reported a lower bad-debt percentage for the nine-month period.
For LifePoint, Brentwood, Tenn., those figures led to profits of $34.9 million for the third quarter, a 17.9% increase compared with the year-ago quarter. Revenue was up 16.7% to $640.3 million. Universal reported sharply higher profits for the third quarter compared with 2005's third quarter, but the prior-year quarter was hampered by $128.9 million in costs related to Hurricane Katrina, compared with Katrina-related costs of $4.2 million in 2006's third quarter. Universal, King of Prussia, Pa., said it had third-quarter profits of $113.9 million, compared with profits of $8.3 million in the year-ago quarter. Revenue was up 7.5% to $1.04 billion.