Charity Close to Home

Charity Close to Home

Health Care by Jean Gruss | Editor/Lee-Collier

As the number of uninsured patients continues to rise, some

hospital chains such as Health Management Associates are calling for universal health insurance. While it waits for relief from the government, the Naples-based hospital company is focusing on improving its operations and paying down debt.

Burke Whitman saw "Sicko" the week it came out.

Despite the movie's negative portrayal of the U.S. health care system, Whitman says it may help spur Congress to adopt a universal health insurance system.

For Whitman, the newly promoted president and chief executive officer of Naples-based Health Management Systems, such a system would remove a growing cancer in the chain of 61 hospitals he leads.

In recent years, paying for charity care has become a huge problem for hospitals as employers and governments cut back on health insurance. Today, about 43.6 million Americans have no health insurance, or14.8% of the population. Last year, for example, HMA had to set aside an additional $200 million for patients who were unlikely to pay their bills, a charge that contributed to a fourth-quarter net loss of $56.2 million.

"It's the single most challenging part of our business to predict," says Whitman. "I don't have any sense that it's going to get worse or get better," he says. Still, Whitman doesn't expect any more $200-million surprises, a move that jolted investors unaccustomed to such announcements from HMA, the fourth-largest company on the Gulf Coast with $4.1 billion in revenues last year. (The company is scheduled to release second-quarter results July 31.)

Compounding this trend is the fact that HMA rewarded long-suffering shareholders in March with a $10-per-share dividend funded with part of a $3.25 billion loan from Bank of America. Now, HMA must start paying down the massive debt and incur greater interest expense.

So Whitman has paused HMA's hospital acquisitions and is focusing on operating its 61 mostly rural hospitals more efficiently. Already, HMA is considered one of the best-run hospital companies in the country and routinely beats its industry peers on measures of profitability. Chairman William Schoen built the company and led its successful strategy to provide hospital services in rural areas where there was little competition. Schoen, 71, is the company's largest individual shareholder and owns more than 10 million shares of HMA, or 4.2% of the shares outstanding.

On June 1, Whitman replaced Joseph Vumbacco, 61, who became vice chairman. Whitman's annual base salary rose from $600,000 to $800,000 with his promotion. In 2006, Whitman's total compensation totaled $3 million, proxy filings show.

Whitman is already making his mark with innovative ways to partner with doctors, such as selling them an ownership stake in the hospitals. He also understands the competition, which has been heating up in non-urban markets as other hospital chains eye HMA's success. Prior to joining HMA, Whitman was executive vice president and chief financial officer with competitor Triad Hospitals, based in Plano, Tex.

Whitman, 51, a Harvard MBA graduate and colonel in the U.S. Marine Corps Reserve who served in Iraq in 2005, will need all the leadership skills he can muster to meet the newest competition: entrepreneurial doctors who build their own outpatient facilities and skim the best-paying patients from hospitals such as HMA.

Rise of uninsured

Whitman has been traveling to Washington D.C. to lobby for a universal health insurance system and says both Republicans and Democrats have been receptive to the idea. "I'm more hopeful right now than I've ever been," Whitman says.

But the looming presidential elections are unlikely to bring any quick solution. "I wouldn't expect anything profound next year," Whitman says.

By law, hospitals must admit patients regardless of their ability to pay and they must absorb the cost of providing free care. Of course, paying patients have been indirectly subsidizing those who do not pay by way of higher health care expenses. "Society has paid for it," Whitman says.

Last year, HMA underestimated the impact of the uninsured and had to set aside an additional $200 million. The result was that provisions for doubtful accounts rose to 14% of net operating revenue in 2006, up from 8.9% in 2005. In the first quarter of 2007, uninsured patients represented 7.1% of hospital admissions, an 18% increase over the same period in 2006.

The problem is industry wide as employers balk at paying expensive health benefits and federal and state governments cut back these benefits to control their budgets. "That's not something we can solve by ourselves," Whitman says.

Entrepreneurial doctors

While he lobbies and waits for politicians to act, Whitman is busy with a relatively new competitor: the entrepreneurial doctor.

In the last decade, as insurance companies and governments tightened payments for health care services, a growing number of doctors have set up their own outpatient practices to compete directly with hospitals. In the past, doctors used hospitals as grounds for building their patient rosters and relied on hospitals to provide the facilities in which to diagnose and treat patients.

But armed with the latest technology and boosted by eager investors, entrepreneurial doctors have been skimming paying patients away from hospitals and into their own more efficient and profitable outpatient centers. Meanwhile, hospitals end up treating a greater share of uninsured patients.

Doctors are less eager to work in hospitals as they see greater financial opportunities by striking out on their own. In some cases, HMA has had to hire more doctors, something it has been reluctant to do in the past. In 2006, for example, salaries and benefits rose 20% over 2005, though Whitman points out that salaries haven't grown as a percentage of revenue.

HMA has always emphasized its relationships with doctors because they steer patients to its hospitals. For years, HMA has provided new doctors with financial assistance to establish their practices, for example.

But lately HMA has stepped up its efforts to partner with entrepreneurial doctors, establishing joint ventures for outpatient centers. Half of HMA's revenues come from outpatient centers today. In one Gadsden, Ala. hospital, doctors have an ownership interest in the hospital itself.

"Physicians and patients are feeling pressures that they didn't have 10 years ago," Whitman says.

Paying debt, tightening operations

While it juggles the growing number of uninsured patients and the rise of entrepreneurial doctors, Whitman is on a mission to improve operations and pay down the $3.25 billion in debt it took on this spring.

Although the company's debt is substantial, it shouldn't have trouble paying it down as long as cash flows remain strong. "The debt market loves this industry," Whitman says.

What's more, HMA's timing was impeccable as the debt terms below 7% were the most favorable in decades. Since the deal was made at the height of the corporate-credit boom in the spring, the credit markets have tightened considerably and interest rates have risen in response to investor demands for higher returns. "It made sense for us to be more debt-oriented," Whitman says. "I thought for a while we were underleveraged."

While some analysts have quibbled over whether HMA should have used the money for a stock buyback instead of a one-time dividend, the hospital's debt expense nearly quadrupled to $33.3 million in the most recent quarter versus the same quarter in 2006.

In addition to the positive cash flow, Whitman says the company has access to another $500 million in credit and can boost capital spending while paying down "a meaningful chunk" of the debt.

While it does this, Whitman says he's focusing on improving operations, especially at hospitals the company has acquired in recent years. Some of the changes include tying a greater share of hospital managers' compensation to satisfaction surveys of physicians, employees and customers.

HMA also has instituted what it calls "physician leadership councils," which relay deficiencies in any area of the hospital, from food service and parking and hours of operations.

The company's operations have traditionally been decentralized, with each administrator responsible for his or her hospital's financial performance. That's not likely to change dramatically, but Whitman has deepened the management bench in Naples to centralize some functions such as recruiting. For example, HMA recently named a new director of nursing and a director of quality.

Patient case management is another area getting more scrutiny. For example, hospital staff is now better able to identify multiple problems with patients who check into its hospitals. The result is that in hospitals operated by HMA for one year or more, net operating revenue per admission rose 6.2% even as admissions declined 1% in the most recent quarter versus the same quarter a year ago.

There's also a greater emphasis on collections, identifying problem payers early on so they can help them with their personal finances. In particular, HMA is getting better at filing for reimbursement from insurance plans and navigating through the myriad codes. "Payment structures have gotten extremely complicated," Whitman says. "We need to spend time getting that right."

Once the company's debt has been lowered and operations at newer hospitals improved, Whitman says HMA will look at resuming acquisitions. Acquisitions could begin in the latter part of 2008 and HMA has identified 300 hospitals that could be candidates. Eventually, the company could acquire five to seven hospitals a year, resuming the pace it was on just a few years ago.

"We're historically a growth company, but for a year and half we'll focus on operations," Whitman says.

AT A GLANCE

Health Management

Associates

Headquarters: Naples

Annual revenues (2006): $4.1 billion

Recent stock price: $11

Price-earnings ratio (trailing 12 months): 17

Quarterly dividend: Suspended

Web site: www.hma-corp.com

Sources: Securities and Exchange Commission; Yahoo Finance

REVIEW SUMMARY

Company. Health Management Associates

Industry. Hospitals

Key. Hospital companies are struggling to overcome the growing cost of caring for uninsured patients by improving operations.

BY THE NUMBERS

Health Management Associates

(Figures in $ thousands)

INCOME STATEMENT

Three months ending

3/31/06 3/31/07 %Change

Net operating revenues 1,009,489 1,143,533 13%

Operating expenses:

Salaries and benefits 394,718 455,507 15%

Supplies 142,213 158,514 11%

Provision for doubtful accounts 82,732 121,469 47%

Depreciation and amortization 42,900 52,651 23%

Rent expense 19,777 21,146 7%

Other operating expenses 174,155 193,489 11%

Total operating expenses 856,495 1,002,776 17%

Income from operations 152,994 140,757 ?8%

Other income (expense):

Gains on sales of property,

plant and equipment, net 1,629 668 ?59%

Interest expense ?8,402 ?33,288

Refinancing & debt modification costs ?4,628 ?761

Income from continuing operations before

minority interests and income taxes 141,593 107,376 ?24%

Minority interests in earnings

of consolidated entities ?658 ?171

Income from continuing

operations before income taxes 140,935 107,205 ?24%

Provision for income taxes ?54,232 ?41,542

Income from continuing operations 86,703 65,663 ?24%

Income (loss) from discontinued

operations, net of income taxes 510 ?624

Net income 87,213 65,039 ?25%

BALANCE SHEET

ASSETS

3/31/07 12/31/06

Current assets:

Cash and cash equivalents 66,814 98,575 48%

Accounts receivable, net 633,555 668,816 6%

Supplies, prepaid expenses

and other assets 150,791 148,592 ?1%

Restricted funds 20,609 20,482 ?1%

Deferred income taxes 94,206 97,086 3%

Assets of discontinued operations 46,029 46,319 1%

Total current assets 1,012,004 1,079,870 7%

Property, plant and equipment 3,412,541 3,460,966 1%

Accumulated depreciation and amortization ?984,555 ?1,021,620

Net property, plant and equipment 2,427,986 2,439,346 0%

Restricted funds 58,986 63,326 7%

Goodwill 915,326 916,555 0%

Deferred charges and other assets 76,650 130,741 71%

Total assets 4,490,952 4,629,838 3%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 154,229 151,969 ?1%

Accrued expenses and other liabilities 272,096 287,097 5%

Current maturities of long-term

debt and capital lease obligations 44,657 49,840 12%

Liabilities of discontinued operations 1,039 1,040 0%

Total current liabilities 472,021 489,946 4%

Deferred income taxes 109,790 102,501 7%

Other long-term liabilities 149,882 156,528 4%

Long-term debt and capital lease

obligations, less current maturities 1,297,047 3,746,025 189%

Minority interests in consolidated entities 56,090 63,836 14%

Total liabilities 2,084,830 4,558,836 119%

Total stockholders' equity 2,406,122 71,002 ?97%

Total liabilities and stockholders' equity 4,490,952 4,629,838 3%

Source: Securities and Exchange Commission