Triad Tries for More

Taking care of people for profit is a lousy business. There, I said it. You have to deal with expensive staff, customers who can't pay, customers who will sue you for millions if anything goes wrong, suppliers who want ever-higher prices, and payers who want to spend as little on health care as possible. Great business, huh? Couple that with the industry's long-term inability to earn back its cost of capital, and it's hard for me to really care that P/Es across the industry are at or near multiyear low points.

Triad Hospitals (NYSE: TRI  ) is a good case in point for some of the difficulties right now. Total reported revenue rose about 18% this quarter on a 1.5% increase in adjusted admissions. But adjusted EBITDA was up less than 5%, and income from continuing operations was up less than 10%, if you exclude some one-time refinancing costs from the year-ago quarter.

Bad debt continues to be a challenge as well. Provisioning for doubtful accounts was up 42% from last year and made up more than 9% of revenue. Adjust out the impact of the company's self-pay discount (a mechanism designed to make costs more manageable for uninsured patients), and it exceeded 12% of revenue.

Triad, and other operators like HMA (NYSE: HMA  ) , HCA (NYSE: HCA  ) , and Tenet (NYSE: THC  ) , are not only bedeviled by both patients who can't pay and malpractice lawyers, but also sometimes by the people who ultimately sign the checks -- managed-care companies like UnitedHealth (NYSE: UNH  ) and the government. The health-plan operators want costs as low as possible, and so does the government -- even though I don't expect medical cost increases to abate in the lifetime of my pet rock. Although the government recently revised some reimbursement guidelines that would have threatened some lucrative subspecialties, the overall environment remains difficult.

Simple ratio analysis doesn't get you too far in investing, but it does illustrate a point with hospital stocks like Triad. When medical-device, pharmaceutical, and health-insurance companies are able to post solid margins and excellent returns on capital, you know where the power lies in the system. And while some may argue that that balance of power is due for a change, I wouldn't bet on the hospitals winning many battles against that array of industries.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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