August 20, 2007

Fitch: Bad Debt Expense & Weak Volumes Continue to Challenge U.S. For-Profit Hospitals

Bad debt expense and stagnant volumes continued to challenge the U.S. for-profit hospital industry in the second quarter of 2007. After a brief moderation in the first quarter, bad debt expense resumed accelerating this quarter. Rising bad debt expense, uncompensated care and/or self-pay admissions growth was reported by every provider in the industry, with Health Management Associates, Inc. (HMA) and LifePoint Hospitals, Inc. (Lifepoint) particularly hard hit. Fitch expects that bad debt expense and uncompensated care levels will continue to challenge the industry for the remainder of 2007.

In addition to bad debt expense, the industry continues to be challenged by weak volumes. For the first time in a year, same store admissions growth turned negative for the sector. The average growth in same store admissions for the quarter was a negative 0.3% while same store adjusted admissions grew 1.3%. As with the first quarter, Universal Health Services (UHS) recorded the greatest gain in admissions, while Tenet and HCA lost the most volume. Fitch believes that recent pressure on volumes has resulted from numerous factors, including increased competition from specialty hospitals and a shift in procedures from the inpatient setting into outpatient settings or even the doctor's office. Ultimately, volume growth should accelerate as a result of favorable demographics in the U.S.; however, Fitch expects volumes to remain near 1% over the near term.

Although the overall sector had a difficult quarter, some providers performed better than others. UHS had another strong quarter, with same store admissions growth of 1.9% and same store adjusted admissions growth of 4% for its acute care facilities. In addition, UHS was one of the few providers to expand its EBITDA margin this quarter. HCA was also one of the better performers this quarter. Although HCA's volumes declined, strong pricing and favorable mix shifts led to continued EBITDA margin expansion this quarter. In contrast, Lifepoint and HMA were among the most challenged this quarter, with both companies reporting declining EBITDA margins and escalating bad debt expense. Tenet also continues to struggle, with the lowest admissions growth and EBITDA margins in the industry.

Additional trend discussions, financial comparisons, and operating metrics are available for each issuer and in aggregate in 'Fitch's For Profit Hospital Industry Quarterly Diagnosis: Second Quarter, 2007' special report. Volumes, pricing, capital expenditures, inpatient versus outpatient, and other metrics are provided as well as comparisons of rural versus urban operators. In addition, Fitch discusses the final 2008 inpatient prospective payment system (IPPS) and its implications for the sector.

The full report is available on the Fitch Ratings web site at

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