Charity care problems out West plague Psych Solutions

Stock plummets as company says it won't issue 2010 guidance until January; 'You've got to give me a break'

Email | Print By Erin Lawley

Joey Jacobs

Psychiatric Solutions’ 90-minute third-quarter earnings call this morning was dominated by probing questions about an unexpected spike in charity care expenses – to the point that CEO Joey Jacobs somewhat jokingly asked for a reprieve.

“Gary, no questions about charity. You’ve got to give me a break,” Jacobs said to Wells Fargo Securities analyst Gary Lieberman.

The company reported lower-than-expected third-quarter earnings after the market’s close Wednesday, largely driven by a $4 million increase in charity care expenses. Most of that, about $3 million, was attributed to specific situations in two markets in California and Colorado.

Investors aren't paying much attention to the details, though: At about noon, Psych Solutions shares (Ticker: PSYS) were down more than 25 percent on volume that is on track to be more than 10 times their daily average. That has taken the stock back to late April's level.

The issue in California, Jacobs explained this morning, was Sacramento County’s decision to close half of the 100 beds in its psychiatric facility serving charity and indigent populations. Patients were then diverted to psychiatric beds at local hospitals and freestanding facilities nearby, including two owned by Psych Solutions.

Charity care expenses for those hospitals jumped form $100,000 in the third quarter of 2008 to $1.7 million in the third quarter of 2009.

The situation in Colorado was less abrupt, with several hospitals closing psychiatric beds over the course of the past 12 months, Jacobs said.

“And then one day, we wake up and we’re the primary provider for southern Colorado and with that came more referrals for charity and indigent patients than we’ve seen previously,” he said.

Jacobs said the company is working on the issue in California and already seeing its strategy in Colorado starting to work. In that strategy, the company creates clearly-defined mental health programs within a hospital, where a certain number of beds are designated for geriatric patients and a certain number for children, for example. Then, when a referral source calls, the facility cannot take the patient unless they fit the criteria of the available open beds.

“That’s one way to diversify the payor mix,” Jacobs said.

Though Jacobs noted repeatedly that there are no other markets where the company is at risk for a Sacramento-like situation, a number of analysts showed their concern – given how quickly the county beds were closed and impacted earnings – that it could occur elsewhere.

“To be blunt, there is a risk that could happen in another locale,” said Andreas Dirnagl, analyst with Stephens Inc.

Jacobs replied: “Absolutely, something unexpected can happen, but this is what you need to find: How many markets have 100-bed charity freestanding hospitals funded by the county? That instantly reduces the pool. Instantly.”

Looking to 2010

Jacobs said Psych Solutions expects a slight further increase in charity care expenses for the fourth quarter, totaling between $8.5 million to $9 million, compared to the total $8.4 million in charity care for this quarter.

The company lowered its guidance for the full year accordingly, to $2.11 per share to $2.14 per share.

Jacobs would not provide projections for 2010 and said the company plans to close the books on 2009 before issuing its guidance for next year, something he expects to do some time in January. Historically, the company has made those projections in November.

However, Jacobs did say he expects the company will complete up to six facility acquisitions in 2010, up from the two to three buys it forecast last year, due to increased availability of multi-facility transactions.

“We could do one transaction and fill the six, or two and get to the six,” he said. “There are more of those opportunities now that the credit markets and PSI’s balance sheet has been strengthened.”

The company completed the purchase of two hospitals in the third quarter – one in Fargo, North Dakota and one in Panama City, Fla.