Triad Hospitals Looking Healthy

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Smaller communities need hospitals too, and that's where Triad Hospitals (NYSE: TRI) does a lot of its business. With pricing and admissions staying firm, the company is looking pretty healthy these days.

Total revenue climbed about 12% for the quarter. Although admissions growth was a bit disappointing at 1%, patient revenue was up about 6.5%. Importantly, doubtful accounts held steady. Investors should note, though, that reported doubtful accounts were actually down to 7.7% of revenue (versus 10.6% a year ago). This discrepancy comes from a relatively new program that offers self-paying patients a discount based upon their ability to pay. Excluding those self-pay discounts, the company estimated that doubtful accounts would have been 10.8% of revenue.

Triad has had a bit of a run this year; as its business has improved, the stock has risen nearly 40% over the past 12 months. Triad has seen robust reimbursements while still maintaining good expense control.

Along the way, management has worked to make marginal improvements to the business. The self-pay discount program is one example. Medical expenses are one of the most common causes of personal bankruptcy, and hospitals always have to worry about collecting on their bills -- doctors and suppliers still need to get paid whether a patient can pay the hospital or not. While the self-pay discount reduces revenue up front, if it results in better long-term profitability from lower chargeoffs and less collection activity, Triad will likely come out ahead.

Investors monitoring the hospital sector should remember the constellation of factors that can bedevil the industry. In addition to the costs of malpractice lawsuits and insurance, hospitals have an adversarial relationship with the groups that ultimately pay the bills. Medicare/Medicaid and private insurers want to pay less, and hospitals want them to pay more. Finally, there's the much-ballyhooed rising cost of health care in general -- costs that hospitals can't always recoup.

There's certainly much to like about Triad. Its focus on smaller communities is a positive, and the company has made efforts to improve profitability on a per-patient basis without compromising care. All the same, the current P/E looks a little robust for a company that will most likely grow in the mid-teens for the next few years. I certainly wouldn't sell the stock today if I owned it, but I'm not sure how much value currently remains in these shares.

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