Columbia expects earnings decline

Columbia/HCA Healthcare Corp. said its third-quarter earnings will be less than half of analysts' estimates, reflecting how the ongoing federal investigation is pinching the Nashville-based hospital chain.

Revenues are expected to be flat or down slightly for the quarter ending Sept. 30, but Columbia said earnings per share will be 20 to 25 cents, compared with 46 cents a year ago. Analysts had been expecting the company to report earnings of as much as 53 cents per share. Revenue in the year-ago quarter was $4.89-billion.

The earnings forecast sent Columbia's stock tumbling to a two-year low at one point Tuesday. With a record volume of 22.3-million shares traded, the company's stock closed at $29.62{, down $3.06\. The stock had traded as high as $44.87{ on Feb. 18.

In a conference call, Victor Campbell, a Columbia spokesman, attributed the anticipated earnings decline to a slight drop in hospital admissions as well as special costs related to the investigation. Based on early reports, Columbia said same-facility admissions apparently were down 1 percent in August, after having risen 2.3 percent during the first seven months of the year.

Figures for other hospital chains for August, typically a slow month, were not available. Nor could a spokeswoman for Columbia's Tampa Bay division say whether admissions at the chain's 12 local hospitals were down last month.

In predicting its lower earnings, Columbia said it would also take a charge of about $60-million for legal and accounting costs associated with the government's investigation. Severance payments to several ousted top executives, including founder and CEO Rick Scott are included in this charge, though the company would not reveal the size of the severance packages. Since late July, Scott and seven of his associates have been forced out of the company's top management.

Federal and state governments are investigating whether Columbia, the largest hospital chain in the nation as well as in Tampa Bay, overbilled Medicare and other government health insurance programs. Three midlevel Columbia executives have been indicted on charges of Medicare fraud in connection with Fawcett Memorial Hospital in Port Charlotte. A federal prosecutor has said more indictments will be forthcoming. Tuesday, the head of the Medicare financing agency said the government suspended the processing of cost reports used for reimbursement at many of Columbia's hospitals and home-care agencies, indicating that the investigation has widened considerably.

Though bad news about Columbia has been brewing since mid-March, when FBI agents executed search warrants at several of the company's facilities in El Paso, Texas, Tuesday's announcement caught some analysts by surprise.

"This confirms that physician referral behavior is changing and that the investigation and the surrounding upheaval is having a larger impact on current operations than even I would have thought," said Sheryl R. Skolnick, an analyst with Robertson Stephens in New York City.

"It's obvious they're being less aggressive," said Eugene Melnitchenko, analyst with Principal Financial Securities in Dallas. "Medicare rules are very unclear and subject to all kinds of interpretations. Now Columbia may be following a stricter, less liberal interpretation than in the past."

Columbia's weakened earnings projections came a day after Moody's Investors Service cut the ratings on $8.6-billion of the company's debt. Moody's said that recent steps taken at Columbia to stop acquisitions and focus on core hospital operations could mean a slowdown in the company's growth.

Dr. Thomas F. Frist Jr., who took over as head of Columbia on July 25, announced Columbia would sell its home health division as well as most of Value Health Inc., a provider of diverse health services acquired Aug. 6. The company also has eliminated its national ad campaign, terminated $250-million in capital expenditures and said it will end physicians' investments in Columbia hospitals.

Though Campbell refused to speculate on the company's fourth-quarter results, analysts said they don't expect quick fixes for Columbia. "The rest of this year will be disappointing and next year will probably even be worse," said Melnitchenko. "On the other hand, if they do settle it next year, it will eliminate this uncertainty and let them get back to managing their hospitals."

Columbia's forecast prompted analyst Skolnick to reduce her fourth-quarter estimate for Columbia from 68 to 48 cents per share. She believes if Columbia is found guilty of wrongdoing, it may ultimately lose its certification as a Medicare provider, with its assets being sold.

"And if no wrongdoing is found, the government has virtually destroyed one of the few forces making health care more rational, streamlined and cost effective," Skolnick said. "So the government had better be right or we're all a lot worse off."

_ Information from Bloomberg News was used in this report.