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REVIEW SUMMARY:
Company. Health Management Associates
Industry. Health care
Key. Giving partners an ownership stake in your business improves the bottom line.

How's this for a cold shoulder from Wall Street?

The day Gary Newsome was named president and chief executive officer of Health Management Associates on Sept. 15, 2008, the stock of the Naples-based hospital company fell 14%.

In the two months that followed, HMA's stock fell another 83% to a low of 79 cents on Nov. 24, 2008 as analysts floated the possibility that the company might be headed to bankruptcy.

Investors had plenty of reasons to be sour on HMA, which owns and manages 55 hospitals across the Southeast. Newsome was the third chief executive in three years, patients weren't paying their bills and it wasn't clear how HMA was going to reduce the $3 billion in debt it had taken on to fund a massive one-time $10-per-share dividend to shareholders on March 1, 2007 to ward off private-equity firms.

Of course, it didn't help that Newsome was appointed just as Wall Street faced collapse in the fall of 2008. HMA was indiscriminately thrown into the questionable-company pile because of its high debt load as investors wondered whether it could pay its obligations in a recession.

But investors underestimated Newsome, 52, a seasoned hospital operator. The economic downturn and investors' lack of confidence spurred the company to reevaluate how it did business.

As a result, Newsome's team made the hospitals' emergency rooms run more efficiently, they aggressively recruited physicians to the non-urban hospitals that lacked specialists, they acquired outpatient centers to funnel new patients into the hospitals and revived HMA's dormant acquisition strategy that had once fueled the company's rapid growth.

Recent investors have been rewarded and existing shareholders who didn't panic can breathe again. In the past year, HMA's stock has risen 321%. If you had invested $10,000 in HMA's stock at its low point in November 2008, your stake would be worth over ten times that amount today. The stock recently traded around $8 a share.

Front door: Emergency room
Because as many as 70% of patients come to the hospital through the emergency room, that's where Newsome looked for greater efficiency. Thanks to tracking software, Newsome and his team could examine how patients flowed through the ER and identify the bottlenecks.

“We measure every component of the ER,” Newsome says. For example, it measured how long a patient waited in triage and how long it took for that patient to be moved to a bed, see the physicians and be discharged.

They discovered the bottlenecks often don't occur in the emergency room. The areas that slow patient flow are in the labs, the X-ray and CAT scan rooms. “Testing really delays,” Newsome says.

HMA developed testing guidelines so physicians in some cases can have test data on patients by the time the doctor sees them the first time, streamlining the process and speeding up patient flow.

A smooth trip through the ER results in a happier patient. “The ER drove our success in 2009,” Newsome says. Indeed, in 2009 emergency, room visits grew 5.5%, boosting HMA's net revenues to $4.6 billion, an increase of 5.9% over 2008.

The fourth quarter of 2009 showed even greater improvement when compared to the same quarter a year ago. At hospitals owned and managed for one year or longer, net revenues increased 7.9% and emergency room visits grew 6.4%. HMA leads its peer group in admissions at hospitals opened one year or longer, Newsome says.
Besides moving patients more efficiently through the ER, HMA is also doing a better job collecting payment when these patients show up. For example, its hospitals have staff dedicated to helping uninsured people sign up for Medicaid, the states' health insurance programs for the poor.

For those uninsured who arrive at the emergency room with an illness that isn't life threatening, HMA requests they pay a sum up front or refer them to community health clinics. “We're really just beginning to do that well,” Newsome says. “Any responsible hospital is doing that today.”

Efficiency isn't limited to the emergency room. For example, HMA's hospitals hired their own marketing agencies to promote their facilities. The result was HMA had 46 different marketing agencies serving its 55 hospitals when Newsome became chief executive. He promptly cut that number down to three agencies, bargaining for lower cost and resulting in what he says is better quality.

Newsome, who had left HMA in 1998 to serve as division president for rival Community Health Systems before rejoining the company, says HMA's home office is bargaining for a broad range of services and supplies that it had relegated to each hospital in the past.

Uninsured burden
Despite improving collections, HMA continues to struggle with people who don't have insurance or those who don't have money to pay for care. It's a worsening trend that's hurting every hospital in the country.

At HMA, the sum of uninsured discounts, indigent write-offs and bad debt expense totaled 24% of net revenues in the fourth quarter, up from 22.7% from the same quarter in 2008.

The cost of caring for the indigent and uninsured continues to rise, which is why hospital companies back government efforts to insure more people. Although Newsome says government's plan to insure more people may ultimately be beneficial, lower reimbursements may temper those benefits. Indeed, to pay for health care reform, the government is proposing cuts to Medicare, the government health insurance program for older people.

Anyhow, ObamaCare isn't of much concern in the short term. “Everything that's being discussed today is three or four years out,” Newsome says. In a recent HMA conference call with Wall Street analysts to discuss 2009 financial results, none asked questions about government health reform.

Indeed, much of the rising cost associated with uninsured or poor people is due to forces outside HMA's control. “It really depends on what happens in the economy,” says Newsome, who has noted some signs of improvement in Florida and Mississippi, its two biggest markets.

The rising burden of caring for indigents is one reason investors sold off the stock of HMA in the winter of 2008. They wondered whether the company would violate agreements with lenders to maintain certain financial ratios, leading to speculation the company would file for bankruptcy protection.

Physician partnerships
Faced with a deteriorating situation when he took over in September 2008, Newsome aggressively courted physicians to the company's non-urban hospitals.

Fact is, the relationship between hospitals and physicians had been changing for a long time. While hospital emergency used to be a source of new patients for doctors, their increasingly indigent population wasn't desirable.

Instead, entrepreneurial doctors were building outpatient centers of their own and skimming the best-paying patients away from hospitals. Rapid improvements in technology helped these entrepreneurial doctors perform procedures that once had been exclusive to hospitals.

So HMA over the past two years has invited physicians to become owners in some of the hospitals it operates, giving them an incentive to bring paying patients to these facilities. Currently, 16 of HMA's 55 hospitals are jointly owned. “They're at the table in discussions of strategy and how to spend capital,” Newsome says.

Although the strategy is fairly new, initial data from hospitals owned in joint ventures with physicians performed better than those HMA owns solely, Newsome says.

HMA has also hired its own physicians in specialties such as cardiology to its small-town hospitals, where attracting them has been difficult in the past. HMA's strategy continues to target non-urban areas where it can be the dominant player and keep patients from traveling to larger urban areas for care. In 2009, the company hired a net 629 physicians.

“HMA for years was a supplier of talent, not an acquirer of talent,” Newsome says. While pay raises and 401k contributions have been suspended, Newsome hints that employees will be rewarded for improving financial results.

Debt won't hurt acquisitions
Financial results are starting to reflect Newsome's initiatives. For the quarter ended Dec. 31, net income rose to $34.1 million, up from $7 million in the same quarter a year ago.

Although its $3 billion in debt still looms large, HMA paid down the principal amount by $192 million in 2009, exceeding its $150 million goal and keeping its debt-to-earnings ratios well within lenders' requirements.

Newsome's effective management has allowed HMA to resume its growth strategy of acquiring hospitals, taking advantage of the downturn to acquire struggling facilities. For example, it recently acquired a 492-bed hospital in Fort Smith, Ark., for $138 million in cash. The hospital reported $250 million in revenues.

More acquisitions are planned this year, either independently or in joint ventures with physicians or other hospital companies and non-profits. “We'll do two or three this year,” Newsome says.

Acquisitions aren't limited to hospitals. Struggling entrepreneurial doctors facing lower reimbursements and the economic downturn have found that operating their own outpatient centers isn't as lucrative as they once expected. Newsome plans to bring some of those into the HMA fold, funneling patients who need hospitalization into its facilities.

Looking back, Newsome says HMA is a better company for creatively finding ways to partner with former competitors. “We're in a good place,” he says.

AT A GLANCE:
Health Management Associates
Headquarters: Naples
Chief executive: Gary Newsome
Market capitalization: $2.2 billion
Recent stock price: $9.05
52-week high/low: $9.12/$2.22
Earnings per share from continuing operations (2009): $0.54
Price-to-earnings ratio (trailing 12 months): 16
Dividend: nil
Source: Yahoo Finance