Back to Bed for Tenet

Poor admissions hammer shares.
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(THC) - Get Report

needs some intensive care.

The ailing hospital chain suffered a painful third quarter that sent the company -- which had been on the mend -- straight back to the sick ward. The results looked even worse than usual.

Tenet warned that it would likely report a loss of $82 million to $92 million for the third quarter. The company pegged its loss from continuing operations at 5 cents to 7 cents a share -- worse than the 1-cent loss Wall Street had been expecting and steeper than any loss the company has reported so far this year.

Tenet's stock plummeted 10% on news of the results.

"When a hospital company gets sick, Tenet gets pneumonia. We knew that," says Sheryl Skolnick, senior vice president of CRT Capital Group. But "this is a disaster."

Like others in the group, Tenet attracted more patients who didn't pay their bills during the latest quarter. But it also lured fewer patients whose insurance companies do pick up their tabs. Moreover, it secured only meager price increases from those managed care payers.

Skolnick fretted over the third metric in particular.

"The bear story has always been that Tenet only makes money when its prices go up," she noted. "That may be a valid point. ... It's up to management to change that."

Management has far less control over uninsured admissions and the bad debts they create. But Skolnick sensed some problems in this area in advance.

After watching other hospital operators report rising bad debts from the uninsured -- and fearing the same from Tenet -- Skolnick lowered her third-quarter expectations for the company on Friday. Still, she had no idea just how bad the news would be.

Tenet saw admissions from continuing operations fall by 3.3% -- and, even worse, its lucrative managed care admissions drop 6.3% in the latest quarter. The company blamed some of that decline on its "targeted growth initiative," which calls for reducing unprofitable service lines, as well as some changes in the Medicare system. But the company still seems to be losing ground where it matters most.

"In our minds, what's happening is that physicians continue to refer higher-paying commercial managed care patients to competitor facilities," wrote JP Morgan analyst Andres Dirnagl, whose firm counts Tenet among its clients. Meanwhile, "we continue to believe that THC's charity care policy seems to be exacerbating the very problem that it was created to alleviate. The compact (with the uninsured) seems to have gained notoriety in a number of its markets ... thereby essentially attracting more of the uninsured population."

Dirnagl believes that Tenet will continue to suffer for a while. He recommends that investors steer clear of the company's stock in the meantime.

Skolnick still has a buy recommendation on Tenet, however.

"You have to remember who owns this stock," she notes. "These are very deep value-oriented funds that have been here for a long time -- and have taken far worse body blows over the past four years. So what's another quarter" to them?

Still, Skolnick hints that she might not be so patient. She says she needs to review the "gory details" in Tenet's third-quarter report so that she can better determine what has caused the company's setback.

"If it's the market, that's OK. But if it's something else," she adds, mentioned failed turnaround initiatives, "that would be a different story."