Health Management Associates Inc



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|Health Management Associates Inc. |(HMA: NYSE) | $10.81* |

Note: This report contains substantially new information. Subsequent reports will have changes highlighted.

Reason for Report: 1Q13 Earnings Update

Prev. Ed.: Apr 5, 2013; Changes In Estimates (share price and broker material as of Mar 19, 2013)

Brokers’ Recommendations: Neutral: 57.2% (12 firms); Positive: 33.3% (7); Negative: 9.5% (2) Prev. Ed.: 11; 9; 2

Brokers’ Target Price: $12.24 (↑ $1.15 from the last edition; 17 firms) Brokers’ Avg. Expected Return: 13.2%

*Note: Though dated Jun 14, 2013, share price as of May 20, 2013.

* A Flash Update was done on May 6

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Health Management Associates (HMA) is a leading operator of general acute care hospitals in the southeast and southwest areas of non-urban America. Health Management remains an active acquirer of under-performing hospitals with a turnaround potential in high-growth geographic markets. The company’s mission is to deliver compassionate and high quality health care services that improve the quality of life for patients, and aid physicians and the communities it serves. Its current strategy is focused on its existing portfolio of hospitals in a slightly difficult operating environment. The company plans to engage in acquisitions from time to time.

Of the 21 firms providing ratings on the company, 33.3% (7 firms) gave positive ratings, 57.2% (12 firms) assigned neutral ratings and 9.5% (2 firms) provided negative ratings.

Neutral or Negative or equivalent outlook – 14/21: The neutral firms are optimistic about the company’s successful strategy to acquire facilities and then turn them around by boosting revenue and margins through better management, capital spending, and physician recruitment. However, doubts remain about sustained growth in volumes. Bad debt and total uncompensated care remain areas of concern. Further, the firms are concerned about the high financial leverage and relative valuation of Health Management.

Positive or equivalent outlook – 7/21: The positive firms believe that Health Management shares offer significant upside potential as the company’s operating turnaround has begun to improve margins. Lately, the firms also witnessed growth in sales and believe that the company has the resilience to overcome cuts in reimbursement. These firms indicate that management changes made by the company and longer-term operating initiatives have begun to pay dividends. In this regard, these firms observe the stabilization in admissions at Health Management largely due to improvements in Emergency Room (ER) and sustained physician recruitment. The company’s initiative to install modern medical surgical systems (such as Mako and da Vinci) continues to propel its market share in surgery. Other positive factors include operational stability, along with containment of salary expenses, and debt reduction initiatives. These firms are relieved that bad debt is no longer an area of growing concern. Finally, Health Management demonstrated its continued commitment towards business growth by using free cash flow to acquire hospital systems, which sets a precedent for additional acquisitions. The firms notice management’s bullish overtones in a drive for further acquisitions.

Long-Term Outlook: In the long run, the firms on the whole, expect the company to show improved operating results. Management also has a bullish long-term view on the company’s growth rate and market share potential. Higher EBITDA growth is among the key goals for management. Health Management expects the EBITDA margins to improve over the next two years on account of the initiatives to grow revenue, gain higher yield managed care contracts, and foster better performance of employed physicians. As in the case with Novant Health, the company may again explore strategic alliances with partnerships. It is intended that the partnership would invest a minority stake in HMA hospitals. This could result in a significant cash inflow, allowing the company to deliver and also redeploy capital from assets that have not been adequately profitable. In addition, a joint venture strategy could lead to further penetration of existing markets and increase Health Management’s negotiating leverage with large managed care companies. The company is currently keen to undertake acquisitions such as Wuesthoff Health System, which was completed in late 2010, Mercy Health Partners, a unit of Catholic Health Partners of Tennessee, accomplished in mid FY11 and Integris Health, of Oklahoma, closed in February 2012. On Apr 1, 2013, Health Management concluded a deal to take an 80% stake in Bayfront Health System besides an affiliation with ShandsHealthCare (belonging to UF&Shands, the Univ. of Florida, Academic Health Care).

Jun 14, 2013

Overview

Analysts identified the following factors for evaluating the investment merits of HMA:

|Key Positive Arguments |Key Negative Arguments |

|Health Management has improved ER services in an effort to boost |The high level of uninsured patients and bad debt expense are areas of |

|admissions. |concern. |

|Improving and enhancing physician relationships continues to be one of |There are inherent risks from increased competition, changes in Medicare |

|the company's key strategic initiatives. |and Medicaid policy, and health care reform. |

|Health Management is focused on improving performance at existing |A large part of the company’s growth is contingent upon acquisition of |

|facilities. |acute care hospital assets. If HMA fails to retain key employees or |

|Analysts expect Health Management to continue to rationalize its hospital|integrate acquisitions successfully, its results would be materially |

|portfolio and boost its margins, which can be a competitive advantage in |affected. |

|the current operating environment. |Unexpected hurdles or delays in implementing operational improvements at |

| |acquired hospitals could result in margin deterioration. |

Based in Naples, Florida, Health Management Associates, Inc. (HMA) is engaged in the ownership and operation of general acute care hospitals and psychiatric hospitals in non-urban communities located throughout the United States. Its services include general surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, behavioral health services, and psychiatric care. The company also provides outpatient services such as one-day surgery, laboratory services and x-ray, respiratory therapy, cardiology, and physical therapy. In addition, it offers specialty services in cardiology, such as open-heart surgery, neurosurgery, oncology, radiation therapy, CT scan, MRI, lithotripsy, and full-service obstetrics. Further information on the company can be found at: hma-.

Note: HMA’s fiscal references coincide with the calendar year.

Jun 14, 2013

Long-Term Growth

The company is focused on several strategic initiatives that it believes will improve the operations of its existing hospitals. These include the following:

Increase of adjusted admissions volumes – The company plans to increase volume by improving ER operations and develop relations with referring physicians. Along with employing physicians, the company also started tracking all physician referrals. This is in order to identify opportunities with physicians in its markets.

Customer satisfaction – Health Management is focused on improving customer satisfaction, which it believes will help drive volumes over time. The company defines its customers as physicians, patients, and employees.

Increase of reimbursement rates – The company typically renegotiates 150 managed care contracts for its facilities annually. Management is stepping up its efforts to renegotiate its contract base, hoping to bring the revenue per adjusted admission pricing up to the industry range.

Improvement of physician practice management operations – By improving physician practice operations, the company expects its operational reputation to attract new physicians. Its overall medical-staff size remained the same in recent years as recruiting efforts were offset by attrition. The company believes a more supportive and flexible stance towards medical-staff relationships can help to solve stagnation and accordingly stepped up its activity related to employment contracts, joint ventures with physicians, and more frequent dialogue with key doctors in terms of strategic needs, capital allocation, and accountability.

Maintenance of cost discipline – The company expects to continue its control of supplies and other operational costs.

Improvement of the management team – Health Management plans to continue recruiting and upgrading its management staff to support its ability to increase volumes and pricing.

The analysts believe that the company’s plan is taking longer than expected to gain momentum in the current operating environment. Factors include hospitals which face increased competition from all sorts of new entrants, a patient population that was already struggling with high co-pay and deductibles even before the substantial increase in fuel and food costs, and physicians who redirect what little volume there is on the basis of indeterminate factors. The entire industry, in an effort to resolve these problems, is looking for solutions away from the old, established pattern of adding a new service line and attracting physicians.

Jun 14, 2013

Target Price/Valuation

The average Zacks Digest price target is $12.24 (↑ $1.15 from the last edition; up 13.2% from the current price). The price targets range from $7.00 to $16.00.

Of the 21 firms assigning ratings, 7 rendered positive ratings, 12 gave neutral ratings, and 2 provided negative ratings.

|Rating Distribution |

|Positive |33.3% |

|Neutral |57.2% |

|Negative |9.5% |

|Avg. Target Price |$12.24↑ |

| Maximum Target Price |$16.00 |

| Minimum Target Price |$7.00 |

| No. of Analysts with Target Price |17/22 |

|Downside from Current Price |13.2% |

|Maximum Upside from Current Price |48.0% |

|Minimum Downside from Current Price |35.2% |

Recent Events

On May 2, 2013, Health Management Associates announced 1Q13 earnings results. Highlights are as follows:

• Total gross revenue grew 2.2% y/y to $1,723.8 million in 1Q13.

• Adjusted EPS from continuing operations was $0.13 in 1Q13 versus $0.24 in 1Q12.

Revenue

The company reported gross revenue of $1,723.8 million in 1Q13, up 2.2% y/y. Net revenue dropped marginally 0.15% y/y to $1,483 million in 1Q13. The Zacks Digest average gross revenue in 1Q13 was in line with the company’s report.

Same store revenue dropped 1% y/y to $1,470 million in 1Q13.

From a continuing operations perspective, occupancy declined to 41.5% in 1Q13 from 44.7% in 1Q12. Admissions were down 7.6% y/y in 1Q13 while adjusted admissions was down 4.3% y/y. Average length of stay stood at 4.4 days compared with 4.3 days in 1Q12. Surgeries declined 4.6% y/y, patient days decreased 5.4% y/y, while emergency room visits rose 3.9% y/y.

On same hospital basis, occupancy declined to 42.1% in 1Q13 from 44.7% in 1Q12. Same store surgeries moved down 5.6% y/y in 1Q13. Same store ER room visits moved up 1% y/y in 1Q13. Same hospital admissions and adjusted admissions dipped 5.8% and 8.8% y/y, respectively.

The company continues to emphasize its three long-standing initiatives, namely Emergency Room operations, physician recruitment and market/service development.

Emergency Room (ER) Operations: The company noted that its top priority remains the patient experience in ER, with significant effort focused on reduction of wait time and enhancing outcome.

Physician Recruitment and Retention: Management continued with efforts to improve physician recruitment. Health Management is expected to achieve its physician hiring goal for FY13.

Market/Service Development: Health Management continues to expand its service lines by adding specialists in areas such as orthopedics, neurology, and cardiology. As it continues to gain market share in the outpatient department and develop new client base for physicians, it should begin to see an improvement in inpatient results.

Commercial: The company continues to experience price increases of 5% to 7% from managed care companies in the region. Managed care pricing continues to be the main source of Health Management’s pricing strength. One change from the past is that more clients now prefer shorter-term 2-year contracts instead of 3-year contracts. This is on account of the uncertainty as to how health care reforms will be actualized.

|($ in million) |1Q12A |

|Copy Editor |Anita Ganguli |

|Content Editor |Rajiv Mukerji |

|Lead Analyst |Rajiv Mukerji |

|QCA |Rajiv Mukerji |

|No. of brokers reported/total |21/21 |

|brokers | |

|Reason for Update |Earnings |

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June 14, 2013 2013

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