Hospital operators seem to be spending the fourth quarter in the sick ward.

This week,

Tenet

(THC) - Get Report

warned about its weak vital signs and issued a dark prognosis for the future. It blamed company-specific problems, stemming from probes into its business practices, for poor volumes and an ongoing lack of profitability. The company, accused of bilking Medicare and performing unnecessary heart surgeries, has been struggling for more than two years.

But some experts now fear that others are suffering as well.

"We view this as a clear negative for not only the company but also the group in general," Fulcrum analyst Sheryl Skolnick wrote after Tenet's announcement. "There is nothing EVER truly company-specific in this group, at least not in our view."

Indeed, Banc of America analyst Gary Taylor was expressing concerns even before Tenet issued its warning on Monday. Taylor said his own research pointed to a weak quarter for the group and caused him to trim his outlook for industry giant

HCA

(HCA) - Get Report

as a result.

Taylor's downbeat note came on the heels of other troubling news for HCA. The

St. Petersburg Times

recently disclosed that a major HCA hospital has suspended the privileges of nine physicians after a review that raised questions about the necessity of certain cardiac procedures performed there.

This "is perhaps the largest single suspension in hospital history and signals a procedural problem likely to have additional implications capable of further entangling the company in regulatory review and subsequent litigation," says Peter Young, a business consultant at HealthCare Strategic Issues. "A lingering heart problem will be expensive to remedy. ... Expect an ugly fight."

HCA called the issue a local one and directed

TheStreet.com

to question the hospital, Regional Medical Center of Bayonet Point in Florida, directly. Hospital spokesman Kurt Conover portrayed the

St. Petersburg Times

article as misleading.

Still, corporate-level executives haven't exactly been showing a lot of faith in their company. A large group of HCA insiders -- including the president, several vice presidents, the CFO and the treasurer -- have cashed in millions of dollars worth of stock options during the current quarter alone. The shares slipped 7 cents to $40.89 on Tuesday.

Yet before this week's bad news, hospital stocks had been rallying hard. Now, Skolnick is suggesting that investors cash in their winnings while they still can.

"Current group valuations

are a Christmas gift," she wrote on Monday. "Our view is to redeem it before the offer expires."

Wish List

By now, Tenet has already denied investors most everything on their wish list.

The company's stock bounced in recent weeks on hopes for a governmental settlement. But the company deflated investors on Monday with a profit warning instead. Moreover, it left some people wondering if they'll wind up disappointed next year as well.

Tenet expects to keep bleeding throughout this year and, quite possibly, next. And it sees only one potent -- but, so far, elusive -- cure for its problems.

"For volumes to recover ... we need to substantially resolve our open litigation and investigation matters," CEO Trevor Fetter said on Monday. "This

turnaround has been more difficult and is taking longer than anyone could have anticipated."

But the Tenet Shareholder Committee has, in fact, been playing the part of Scrooge for years. The group -- calling itself "too optimistic" in the past -- continued to dash hopes for the company this week.

To be fair, the committee predicted that Tenet will ultimately resolve government investigations into its business practices. But it questioned how the company could finance hefty penalties, for which it has no money reserved, while it makes necessary upgrades.

It went on to say that Tenet may "need to be reorganized" in the end.

"We believe that Tenet has entered a phase in its death spiral where even if the management knew the right steps to take, the company no longer has the capital or ability to take those steps," the group wrote on Monday. "We reiterate our expectation that Tenet Healthcare Corporation will not survive in its current form."

Already, the committee noted, Tenet has shed 40% of its hospitals -- and increased its debt load -- in an effort to recover. But the committee said that some of Tenet's core hospitals appear to be "rotting," and that could signal even more pain ahead.

This week, Tenet itself disclosed that it faces special fourth-quarter charges that "could exceed $1 billion," after readjusting the value of its assets.

But the Tenet Shareholder Committee has been questioning the company's real worth for some time. Last year, the group said, some 23 of Tenet's 69 core hospitals suffered from weak operating margins. Moreover, it added, Tenet's hospitals in Florida -- considered a prize market for the company -- delivered negative margins, at least for a seven-month period the group looked at.

The committee even raised concerns about Tenet's most successful hospitals. It called unusually high operating margins at 16 Tenet-owned facilities "very suspect."

"How could legitimate hospital operations support such high margins?" the group asked. "The extremes at both ends represent a significant problem."

Meanwhile, analysts continue to warn that Tenet's stock is overpriced. Taylor believes that a government settlement -- viewed as a catalyst by many -- has already been baked into the company's current valuation. He pegs Tenet's true value at just $7 a share.

The stock, once a $50 highflier, tumbled 2.7% to $10.77 on Tuesday.

Contagious Disease

To some, Tenet's problems are starting to look contagious.

The company blamed its poor condition on a variety of factors -- including weak patient volumes and high bad-debt expense -- that could afflict others in the group as well. Skolnick pointed to a light flu season, with those who have suffered often uninsured, as a culprit. She said the same trend could hurt other urban hospital operators such as HCA and

Universal Health

(UHS) - Get Report

.

Taylor has also warned about possible disappointments from those two companies in particular. He predicted that both companies might fall short of expectations, on the basis of a survey showing that just a minority of nonprofit hospitals enjoyed a bounce in admissions last month.

"Absent a repeat of last December's flu epidemic," he wrote, "4Q04 comps appear on track to be the weakest in at least five years."

Taylor, therefore, trimmed his quarterly profit forecast for the company by 10 cents to 52 cents a share. Wall Street is banking on earnings of 55 cents instead.

Looking ahead, Young sees HCA's Bayonet Point hospital as an additional threat to the company's performance.

"One thing is for sure," he says. "The hospital's heart numbers will tank."

Young describes the facility as HCA's "flagship Florida hospital." He says that up to now, the hospital has been performing "huge" volumes of cardiac procedures. The

St. Petersburg Times

also portrays the facility's heart center as especially important.

"It's a high-volume hospital that gets more than 40% of its revenues from heart procedures such as catheterizations, angioplasty and bypass surgery," the

St. Petersburg Times

wrote. "It has been evident for years that Regional's high-volume heart center outpaces most similar centers in both the number of angioplasties performed and the amount of revenue they generate."

But now, according to the newspaper, the hospital has suddenly cut the physicians on its cardiac staff by more than a third. Conover offered further clarification when contacted by

TheStreet.com

on Tuesday. He said the physicians had lost only their right to perform "interventional cardiology" -- and continue to practice at the hospital -- pending a thorough peer review. He said a recent review had raised some red flags about the doctors, but he failed to disclose exactly why.

Young, for one, sees troubling reminders of Tenet -- which paid a record-breaking fine to settle charges that it profited from unnecessary heart procedures at its own former flagship heart center. He believes the repercussions for HCA could likewise prove harsh.

"A Medicare review of the hospital's findings is likely," he says. Moreover, "commercial insurers are likely to review cases and, if supported by findings, seek 'financial adjustments' either by negotiation or litigation -- items we have seen in Tenet's history."

Meanwhile, Skolnick remains cautious on the group. She believes the federal government could seek to curb growth in hospital spending as early as February. She also feels that private insurers have been hammering out less favorable deals for hospitals as well. Looking ahead, she sees no recovery for hospital operators anytime soon.

"It is our view that the stocks are trading at multiples on 2005 earnings estimates that would be more appropriate a year from now," Skolnick wrote. So "we think that investors can take advantage and trim/sell positions in the group."

Young has echoed that view.

"Current hospital stock prices defy the industry direction," he said last week. "I think there is a substantial amount of air in hospital valuations, and we're likely to see the deflation of the balloon soon."