Sour earn­ings re­port

Fed­eral in­quiry, bad debt shake Com­mu­nity Health

Modern Healthcare - - LATE NEWS - Beth Kutscher

Com­mu­nity Health Sys­tems’ earn­ings preview—which showed larger-than-ex­pected drops in pa­tient vol­ume and net in­come— may set the stage for a dif­fi­cult quar­ter go­ing into earn­ings sea­son for pub­licly traded hos­pi­tal op­er­a­tors. Those dif­fi­cul­ties may be height­ened by on­go­ing fed­eral in­ves­ti­ga­tions into Com­mu­nity and an­other large hos­pi­tal op­er­a­tor, Health Man­age­ment As­so­ciates.

Franklin, Tenn.-based Com­mu­nity on July 18 braced in­vestors for earn­ings re­sults that are ex­pected to show a 57.2% de­cline in net in­come, which it at­trib­uted to weak pa­tient vol­ume, higher-than-ex­pected bad debt and an ad­verse payer mix.

It also said the U.S. Jus­tice Depart­ment had handed down an ad­di­tional sub­poena as well as a re­quest to in­ter­view two high-rank­ing ex­ec­u­tives as part of its two-year in­ves­ti­ga­tion into the com­pany’s ad­mis­sions prac­tices.

The ad­mis­sions num­bers—a 5.7% drop in same-fa­cil­ity ad­mis­sions and a 2.6% de­cline in ad­justed same-fa­cil­ity ad­mis­sions, a num­ber that in­cludes out­pa­tient ac­tiv­ity—came just days af­ter HCA, the coun­try’s largest hos­pi­tal chain, sur­prised Wall Street with an up­beat earn­ings preview that sur­passed ex­pec­ta­tions for vol­ume and net in­come.

“I think HCA will be your out­lier,” said Brian Tan­quilut, an an­a­lyst at Jef­feries & Co. “HCA has dif­fer­en­ti­ated them­selves from ev­ery­one else.”

Tan­quilut noted that some of the dif­fer­ence may be be­cause of HCA’s ur­ban fo­cus com- pared with Com­mu­nity’s more ru­ral fo­cus. He added that HCA of­fers a greater num­ber of an­cil­lary ser­vices. “I think hav­ing a lot of side busi­nesses ba­si­cally opens up a lot of re­fer­ral op­por­tu­ni­ties,” he said.

HCA has also “made a very con­certed ef­fort to cut costs,” said Tom Gal­lucci, an an­a­lyst at Lazard Cap­i­tal Mar­kets. “It sounded like that worked out very well to their ben­e­fit.”

Com­mu­nity said it ex­pects to re­port $65 mil­lion in net in­come on rev­enue of $3.2 bil­lion for the sec­ond quar­ter, com­pared with net in­come of $151.7 mil­lion on rev­enue of about $3.2 bil­lion dur­ing the same pe­riod last year. It is sched­uled to re­port earn­ings July 29.

The govern­ment opened its in­ves­ti­ga­tion into Com­mu­nity’s ad­mis­sions prac­tices in April 2011, af­ter Tenet Health­care Corp.—in an at­tempt to thwart a takeover at­tempt— ac­cused Com­mu­nity of im­prop­erly us­ing short-stay ad­mis­sions in­stead of ob­ser­va­tion.

The lat­est sub­poena came on July 9, shortly af­ter the sec­ond of two meet­ings that Com­mu­nity held this year with the Jus­tice Depart­ment.

But the feds want more doc­u­ments sup­port­ing Com­mu­nity’s po­si­tion, re­quest­ing for in­stance its cri­te­ria for ob­ser­va­tion sta­tus and its fi­nan­cial re­la­tion­ships with physi­cians who have ad­mit­ting priv­i­leges, the com­pany said.

Jus­tice also served “civil in­ves­tiga­tive de­mands” to in­ter­view two cur­rent em­ploy­ees, a di­vi­sion pres­i­dent and a se­nior vice pres­i­dent, ac­cord­ing to the com­pany. Com­mu­nity said it would co­op­er­ate with the govern­ment’s in­ves­ti­ga­tion.

HMA, Naples, Fla., is also un­der in­ves­ti­ga­tion into its short-stay ad­mis­sions prac­tices, and re­ceived sim­i­lar subpoe­nas in May and July 2011. The com­pany used the same emer­gency depart­ment man­age­ment soft­ware as Com­mu­nity.

The in­ves­ti­ga­tion has been one of the on­go­ing is­sues that hedge fund Glen­view Cap­i­tal Man­age­ment has raised in its cam­paign to un­seat HMA’s cur­rent board of di­rec­tors and in­stall nom­i­nees who may be more re­cep­tive to a takeover.

While Com­mu­nity is ru­mored to be the lead suitor for a po­ten­tial tie-up with HMA, the com­pany said in its earn­ings preview that the neg­a­tive sec­ond-quar­ter re­sults have “in­ten­si­fied its fo­cus on core op­er­at­ing strate­gies, vol­ume ini­tia­tives and ex­pense man­age­ment”—which will likely heighten spec­u­la­tion about whether it has the fo­cus and fire­power for a deal.

But Tan­quilut said he thought Com­mu­nity’s trou­bles might of­fer more in­cen­tive for the com­pany to seek out the syn­er­gies a strate­gic trans­ac­tion would of­fer. “It’s go­ing to prompt them to do a deal—I’m in that camp,” he said. “The only con­cern I have is fi­nanc­ing.”

Scott Becker, a health­care at­tor­ney at McGuireWoods, noted that Com­mu­nity has a “pretty driven” leader in Pres­i­dent and CEO Wayne Smith, and the com­pany—like Tenet, which re­cently scooped up Van­guard Health Sys­tems in a $4.3 bil­lion deal—is in “growth mode.” Fed­eral in­ves­ti­ga­tions, he said, aren’t nec­es­sar­ily a hur­dle. “The larger the com­pany, the less it will hold up a deal.”

Glen­view, for its part, is mov­ing for­ward with its con­sent so­lic­i­ta­tion process to re­place HMA’s cur­rent board.

The hedge fund said on its Re­vi­tal­ize HMA web­site that its nom­i­nees have met three times in the past sev­eral weeks “to es­tab­lish com­mit­tee struc­tures and a tran­si­tion plan to foster qual­ity of care and con­ti­nu­ity.” The group also tapped turn­around firm Al­varez & Marsal to con­duct a re­view of HMA’s op­er­a­tions.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.