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Charity care problems out West plague Psych Solutions

By .(JavaScript must be enabled to view this email address) - nashvillepost.com

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."

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