The Worst May Be Over for Columbia/HCA
By Evelyn Ellison Twitchell
Ever since the government's investigation of Columbia/HCA Healthcare for Medicare fraud was made public three years ago, investors have waited to see just how big a check the company would have to write to get Uncle Sam off its back.
Last week, Columbia put to rest much of the speculation by announcing it would pay $745 million to settle civil claims in three of five areas of contention with the government.
The substantial payment had been widely anticipated. But the stock sold off for two days following the news -- most likely because some investors had been hoping Columbia would resolve the matter once and for all.
Instead, the company still must address claims that it in effect gave doctors kickbacks for referring patients to its facilities and that it manipulated cost reports to get higher reimbursement from Medicare. It must also resolve related criminal investigations.
Nonetheless, some bulls on the stock contend the worst is over. The shares already have rebounded some 27% since Weekday Trader wrote about the company last summer (see "Bulls Grant Clemency to Columbia/HCA Stock," August 4, 1999). But Columbia's fans say they can go higher as the company's earnings reflect the restructuring it has completed. They also note that hospitals are getting better reimbursements than they have in years.
"Having cleared up most of [the investigation] is actually going to bring more people to look at the stock more closely," asserts Mike Yellen, manager of the AIM Global Health Care Fund, which added to its position in Columbia over the past month.
The settlement covers allegations of "upcoding" (overbilling by assigning patients to higher-paying Medicare classifications), as well as excessive billing for outpatient lab and home health services.
Goldman Sachs analyst Ed Driggs says the issues on which the company settled could have presented the biggest liabilities for Columbia. "My view is that the big-dollar issues are covered," he says.
The remaining claims -- on alleged kickbacks and cost reports -- may be more difficult for the government to prove because they are very complex, contends Driggs.
"It's a gray area, and the government may find it difficult to meet the necessary standards of proof," he asserts.
The bulls expect the settlement to be complete by the end of the year. Adam Feinstein, an analyst with Lehman Brothers, says it's a plus that the government allowed Columbia to reduce its letter of credit (which assures the company's ability to cover any liabilities arising from the investigation) to $250 million from $1 billion.
With the investigation behind it, Columbia's improved operations should get more attention from Wall Street. In the past two years, Columbia, which has a market capitalization of about $16 billion, has sold or spun off some 117 hospitals, 40 ambulatory surgery centers and its home health division. The strategy: focus on a few key markets to gain pricing clout with both suppliers and managed-care payers.
"Rather than trying to own the country, they're going to take selective markets and truly try to get the most out of those areas," says Ken McQuade, an analyst with Waddell & Reed. (Waddell owns about 2.6 million shares of Columbia's stock and has added to its holdings in the past couple of months.)
So far, so good. Helped by rising premiums for health plans, Columbia has achieved average rate increases of 4% to 6% as it renegotiates managed care contracts. "They're really getting tough about demanding that pass-through [of price increases]," Yellen observes.
Meanwhile, the company's adjusted occupancy rate (which accounts for both inpatients and outpatients) has reached 79%, up from 70% in 1998, says Lori Price, an analyst with Chase H&Q, who rates the stock Strong Buy. She expects Columbia's operating margin to be 17.5% in the third period this year, up from a low of 16.8% in last year's third quarter.
Finally, the tide appears to be turning on Medicare reimbursement. Congress last fall gave back $8.9 billion of the $71 billion it cut from Medicare funding for hospitals in the Balanced Budget Act of 1997 (see "Money Flows Back into Health Service Stocks," February 8). And there is bipartisan talk in Washington about restoring more next year, says Jordan Schreiber, manager of the Merrill Lynch Healthcare Fund, which holds Columbia's stock.
"Columbia is as well-positioned today as it's ever been," Price declares.
At 28 1/8 late Wednesday afternoon, the shares were changing hands at about 19x First Call's consensus 2000 earnings estimate of $1.52 per share. That's almost a 25% premium to the company's projected long-term growth rate of 15%. And the stock is 13% off its 52-week high of 32 7/16, set in January.
But the shares still trade well below their all-time high above 42 in February 1997. And they're a bargain compared with the average P/E multiple of stocks in the Standard & Poor's 500 Index, which earlier this week traded around 26x estimated 2000 earnings. And the average stock in the S&P had an estimated earnings growth rate of well below 10%, points out Driggs, who increased his price target on Columbia shares to 37 last week.
Granted, if the remainder of the settlement exceeds analysts' forecasts, investors likely will punish the stock. And if wage inflation heats up, Columbia could feel the squeeze, since its expense for salaries generally equals about 40% of the company's revenue, McQuade says.
But the Fed is trying to prevent inflation by raising interest rates. And hospital stocks typically do well in slowing economies, when people will readily pay a premium for consistent growth, Feinstein says.
If these bulls are right, it will be Columbia's growth -- not the investigation -- that investors focus on in the future. |
