HMA Earnings Fall on Rising Bad Debt Expense

Hospital operator Health Management Associates, Inc. (NYSE:HMA) today announced earnings for the second quarter of 2007.  HMA reported a large drop in earnings and a big increase in bad debt.

For the second quarter, HMA reported net operating revenue of $1.1 billion and net income of $11.9 million, an 84.5 percent decrease from income reported in the second quarter of 2006.  Revenues were up 10.3 percent in the quarter.

Included in the results is $39 million of bad debt expense recorded as an additional reserve to reflect a recent decline in collectibility of accounts receivable from uninsured patients.  The $39 million is the amount of bad debt expense directly reflected in the quarter’s income figure.

During January 2007, HMA continued its newly implemented bad debt reserve policy of reserving 75% of uninsured accounts. In February 2007, in conjunction with the adoption of its 60% discount program, HMA began reserving those discounted self-pay receivables at 60%. The combination of the 60% discount policy and the 60% bad debt reserve on the discounted self-pay receivables resulted in an overall discount/reserve of 84% of gross charges. Both policies were based on the current collection experience at the time.

HMA has performed a look-back analysis since the new discount policy went into effect in February 2007. The results of this look-back analysis now indicate that HMA is experiencing a deterioration in the collectibility of its accounts receivable from uninsured patients. The deterioration noted relates to the overall collectibility of receivables from uninsured patients, and to patients billed at discounted amounts who may have been written off as charity care under the Company’s previous policy, based on their inability to pay the previously undiscounted gross charges.

Effective July 1, 2007, HMA has updated its existing bad debt reserve policy to reflect a change in estimate of the collectibility of its self-pay receivables. The Company will now record incremental reserves as the receivables age, until they are fully reserved or collected. HMA believes that updating its bad debt reserve policy and adding additional bad debt reserves is prudent given the results of its recent look-back review.

Provisions for doubtful accounts for the second quarter was $150.6 million compared to $90.1 million for the same period a year ago, and $121.2 million for the first quarter ended March 31, 2007.

The sum of uninsured discounts, charity/indigent writeoffs and bad debt expense, as a percent of the sum of net operating revenue, uninsured discounts and charity/indigent writeoffs, totaled 25.4% for the second quarter ended June 30, 2007 compared to 20.3% for the same quarter a year ago and 20.6% for the first quarter ended March 31, 2007.