Losses Leave Tenet in 'Tough Spot' - TheStreet


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just keeps on bleeding.

The ailing hospital chain hemorrhaged $2.02 billion last quarter -- and $2.64 billion last year -- after taking yet another raft of so-called special charges. The company recorded one charge of $1.11 billion just to write down the value of core hospitals in two of its major markets.

Even the Tenet Shareholder Committee, which is known for its pessimism, failed to see such a big hit coming.

"Now, the company has less than $2 billion in equity," said Jeff Villwock, an analyst at Caymus Partners who conducts research on behalf of the shareholder group. Equity is a measure of the value of a company. "It's just astounding how much value has been lost."

The latest blow came as Tenet slashed the value of its hospitals in the Texas-Gulf Coast and Florida-Alabama regions. The Florida system -- once prized as the crown jewel of the company -- suffered an especially tough quarter.

Companywide, Tenet posted a 3.8% drop in same-hospital admissions during the latest period. A downturn in Florida caused one-third of that decline.

Tenet listed multiple challenges -- beyond the lingering effects of last year's hurricanes -- in that particular market. Specifically, it mentioned disputes with managed-care payers, increased competition and physician admissions to other facilities.

To be fair, the company named more familiar challenges -- some shared by the industry -- when explaining the need for the writedown.

"The goodwill impairment charge is the result of lower estimated fair values for the respective regions due to adverse industry and company-specific challenges that continue to affect our operating results," the company wrote in a footnote, "such as reduced patient volumes, high levels of bad-debt expense related to uninsured and underinsured patients, the shift of our managed-care business to contracts that provide lower reimbursement, and continued pressure on labor and supply costs."

Peter Young, a business consultant for HealthCare Strategic Issues, spotted nothing but bad news.

"The statement is painful acknowledgement by Tenet that the business enterprise value is significantly less than anyone thought," he said. "The same statement should also be read as guidance, an indication of future industry and Tenet problems that will negatively impact revenue going forward."

Already, revenue is on the decline. The top line -- hit by new discounts for the uninsured -- dropped 2% to $2.41 billion from a year ago.

Tenet's stock tumbled 1.7% to $10.84 on Tuesday's quarterly update.

Chronic Losses

Even excluding special items, Tenet continues to post losses.

Granted, Tenet blamed $4.18 of its $4.33-per-share quarterly loss on a slew of unusual charges. But it continues to operate in the red and warn that it may only break even, at best, this year. Moreover, it needs stronger patient volumes in order to hit its targets.

"If the company is able to achieve industry-average admissions growth, with the high degree of operating leverage inherent in the acute hospital industry, this should have a positive impact on Tenet's future results," the company announced. "Conversely, if the negative admissions trends of 2004 continue, Tenet will not meet its current objectives for operating performance in 2005."

Tenet did offer some hope. The company said that current 2005 admission rates, which essentially match those from a year ago, represent a "significant improvement" over the 2004 downturn. It also said that its bad-debt expense has started to stabilize.

But bright spots were scarce in the latest quarterly report. Other operating expenses -- for salaries, supplies and special items such as impairments -- all jumped from a year ago. Meanwhile, important sources of revenue continued to decline.

Young fretted over the company's outpatient business in particular. During the latest quarter, Tenet weathered a 9.3% drop in same-store outpatient admissions. Only half of that reduction could be blamed on asset sales.

"While all other hospitals are experiencing increases in outpatient

business due to technology influences, Tenet's number declined," Young noted. "The numbers indicate physicians are practicing elsewhere for a likely host of reasons."

Florida Pain

Villwock was quick to offer a few.

He says that Tenet appears to be spending less on capital improvements than competitors that can offer more attractive facilities. In addition, he notes that Tenet continues to struggle with government investigations that also could be driving physicians away.

He sees problems at Tenet's Florida hospitals in particular. His group enjoys solid industry contacts in that market.

"At Tenet's hospitals

there, occupancy is well below what it was a year ago," he said. "And all the competing hospitals are full. ... I think Tenet has got a number of issues in Florida."

It recently added a big one. In a surprise lawsuit last week, Florida Attorney General Charlie Crist

accused Tenet of overbilling Medicare by $1 billion and violating racketeering laws in the process. Tenet denied any wrongdoing and promised a vigorous defense.

Villwock said the new lawsuit simply compounds the company's problems. All told, Villwock estimates that Tenet faces up to $2.5 billion in future liabilities as a result of outstanding lawsuits and government probes. The company spent $440 million on legal expenses and settlements in the most recent quarter alone.

Looking forward, Villwock calls Tenet's available cash -- expected to total $1.3 billion after a big tax refund -- "wholly insufficient" to cover all of the liabilities that remain.

Still, the company itself remains optimistic. It pointed to the recent settlements as a step forward during a fourth quarter that brought "substantial progress" in its long -- and so far elusive -- journey back to health. And it promised better days to come.

"Now that we have put in place all the elements of our restructuring and have put the most significant patient litigation behind us," CEO Trevor Fetter said, "we will focus all our attention on executing our turnaround initiatives and enhancing our quality and operating performance."

But Villwock, for one, sees more pain ahead.

"This supposed turnaround has not materialized," he said. "They are in a very tough spot."