Tenet Fans Keep Their Fingers Crossed

The hospital chain suggests resolution of several probes could be within reach.
By Melissa Davis ,

Tenet

(THC) - Get Report

investors have developed quite a tolerance for pain.

They shrugged off news of a $2 billion quarterly loss on Tuesday and instead focused on areas of relief. Never mind that patient admissions fell in the fourth quarter. Volumes seem to be rebounding right now. And a steady rise in uninsured patients -- who pay little for their care -- is only part of the reason.

"I don't want to gloss over these enormous losses," Tenet CEO Trevor Fetter told analysts during a conference call on Tuesday. But "the first two months of this year look much better. ... These numbers are preliminary but very encouraging."

To be sure, Tenet had plenty of room for improvement. The company weathered a 3.8% drop in same-store admissions -- and a 9.3% dive in outpatient volumes -- during the fourth quarter. Thus, the company could discuss the flat volume growth witnessed in January and February as a "significant improvement" over recent trends.

Moreover, Tenet dangled the possibility of a big government settlement before investors on Tuesday. The company indicated that a new criminal trial, set to begin in early May, shouldn't prevent it from resolving other investigations.

Federal prosecutors have accused a Tenet-owned hospital and its CEO of illegally bribing physicians in exchange for patient referrals. An earlier trial ended last month with a hung jury.

Many experts had assumed that Tenet would need to resolve the criminal charges before it could ink a global settlement with the feds.

"I do not believe that is the case," Peter Urbanowicz, the company's general counsel, said on Tuesday. The trial "should not limit our ability to resolve other matters."

Shares of Tenet rose 1.3% to $11.17 after the company's conference call.

Still, the trial has already caused its share of pain.

Fetter described the legal costs as "enormous," saying the trial had consumed millions of dollars that could have been spent on hospital operations instead. He said the company prefers to reach "fair and reasonable" settlements whenever possible, but the opportunity never arose in this case.

Meanwhile, the government scrutiny appears to be taking a toll on the company's physician relationships at other hospitals as well. Fetter mentioned on Tuesday that investigators have been questioning physicians about the company and visiting the medical buildings where the physicians operate. He went on to say that such activity has a "very substantial negative effect that's impossible to quantify."

By now, however, Tenet already has blamed part of its fourth-quarter downturn on physician admissions to competing hospitals.

"We were a little alarmed by the discussion of increased competition and physician turnover," wrote Lehman Brothers analyst Adam Feinstein, who has an underweight rating on the company's stock. "This would imply that Tenet is losing market share, due to the investigations and controversy throughout the company.

And we do not expect any near-term resolution of the outstanding government investigations/lawsuits, suggesting volumes will continue to be very weak."

New Headaches

Actually, Tenet faces a couple of brand-new legal headaches.

In a surprise lawsuit last week, Florida Attorney General Charlie Crist accused Tenet of overbilling Medicare by $1 billion and violating racketing laws. A Tenet competitor in that same state has filed a putative class-action lawsuit making similar allegations.

When questioned about the new developments on Tuesday, Tenet acknowledged that other state prosecutors and competing hospitals could sue the company as well, even though none has indicated plans to do so.

Meanwhile, analysts remain concerned about Tenet's operational challenges as well. To be fair, they recognized that matters could be worse. They noted, for example, that Tenet posted higher fourth-quarter revenue and pretax profits than some people had expected after a company warning in December. In addition, they pointed out that cash flow -- weakened by a big settlement in the fourth quarter -- is expected to turn positive with help from a big tax refund this year. But they also fretted over a rise in expenses, outside bad debts from the uninsured, and the company's dependence on better volumes for 2005 improvements.

Prudential analyst David Shove was among those who expressed mixed feelings about the company's recent and future performance.

"Tenet's 4Q04 operating results were slightly better than consensus and our expectations," acknowledged Shove, who has a neutral rating on the stock. "However, Tenet's operating drivers indicate the franchise's continuing struggle to effect a turnaround in the midst of a difficult industry environment."

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