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Tenet Backs the Big Easy

The struggling chain says it will strive to rebuild its services in hard-hit New Orleans.


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is gambling on a rebound in New Orleans.

Three years into a major losing streak, the giant hospital chain is making a big bet on the future of the devastated city. The company announced plans on Monday to invest "hundreds of millions of dollars" in its New Orleans healthcare network following the massive flood damage caused by Hurricane Katrina.

Two of the company's New Orleans hospitals -- including one where dozens of patients died in the aftermath of the storm -- remain closed and face an unclear future. The other three are "gradually returning to service," the company said.

"Research shows that, over time, at least a majority of New Orleans' population is expected to return," Tenet CEO Trevor Fetter explained on Monday. So "Tenet will rebuild and restore where we can. We will construct new facilities where we need to. And we will give New Orleans a locally-focused network that will be essential to meet the community's healthcare in the years ahead."

The company expects insurance settlements to cover a "significant portion" of that effort.

Even so, some view the move as a risky one. For starters, they note, Tenet has pledged to make its investment at an especially tough time for the hospital sector. In fact, Tenet announced its plans the very day that


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, a much healthier hospital company, disappointed investors with news of declining patient volumes and rising bad debts from the uninsured. Triad slumped 3.9% to $42.23 on that quarterly report.

Tenet faces bigger challenges than most. Notably, the company remains under investigation by multiple government agencies and continues to lose money.

Tenet's stock, once a $50 highflier, fell 23 cents to $8.89 on Monday, marking its first dip below $9 in more than a decade.

The stock had enjoyed a bit of an upswing, approaching the $13 level, until Katrina hit two months ago. Since then, however, the stock has come under mounting pressure, due in part to concerns about New Orleans.

There, Tenet faces a government probe related to 45 patient deaths at its downtown Memorial Medical Center. The company says Memorial's hospital staff acted "heroically" to save every patient that it could. But one New Orleans physician

told CNN that some people there -- including a hospital administrator -- discussed the possibility of euthanizing patients to put them out of their misery instead.

Louisiana Attorney General Charles Foti has ordered autopsies of Katrina-related patient deaths at facilities across the city. The probe covers the practices at 13 nursing homes and six hospitals where patients died during and after the storm. Foti's office, which has already charged two nursing home owners in a Katrina-related case, told the

Associated Press

that further arrests are likely. His office failed to return a phone call from

on Monday.

Even before the violent storm hit, Tenet seemed to be having a hard time in "The Big Easy." The Tenet Shareholder Committee, a group long critical of management, recently compiled Medicare cost reports showing that four of the company's New Orleans hospitals lost money in 2004. Information on the fifth hospital -- once a part of Memorial -- was not available. But Memorial itself suffered the worst reversal, with a $43.7 million profit in 2003 turning into a $23 million loss the following year.

Nevertheless, Tenet has pledged to reopen a surgery institute at Memorial within the next six months and restore -- and even enhance -- healthcare services at both of its downtown New Orleans hospitals going forward.

"New Orleans is one of our core markets, and we know it well," Fetter said. "The Katrina tragedy offers us a great opportunity to reinvent how we will offer services, based on the community's expected needs in the future. We won't just rebuild traditional hospitals; we will create a forward-looking network of healthcare services focused on the needs of the 'new' New Orleans."

Meanwhile, Tenet faces major challenges outside of hard-hit New Orleans as well.

Based on Medicare figures supplied by the shareholder committee, Tenet operates a number of unprofitable hospitals in all four of its core regions. Moreover, the data show, even the company's profitable hospitals make far less money than they once did.

"The hospital net income or loss figures may provide shareholders with one major bottom-line indicator of the many serious trouble spots throughout the Tenet system," the Tenet Shareholder Committee stated when publishing the financial data on its Web site earlier this month. "As these figures indicate, virtually every Tenet hospital for which information was available had substantially lower financial performance in 2004 than in the prior 12-month period."

Of course, other hospital operators have found themselves struggling in the current environment as well. During the third quarter, for example, Triad saw its inpatient admissions decline by 1.4% as its bad debt problem got worse. The company's provision for doubtful accounts, when adjusted to include new discounts for the uninsured, now represents 11.2% of its total revenue.

Triad's third-quarter revenue inched up 3.9% to $1.2 billion, falling just short of the $1.23 billion consensus estimate. Net income fell 5.9% to $46.3 million. Operating profit of 63 cents a share did match Wall Street expectations, however.

But going forward, Triad has lowered the bar a bit. The company expects to deliver fourth-quarter profits of between 69 cents and 71 cents a share instead of the 74 cents analysts had been forecasting. It also expects full-year profits to come in around the low end of its previous guidance of $2.82 to $2.90 a share.

Triad blamed bad debt from the uninsured -- by now a chronic industry problem -- for at least part of that shortfall.

"Bad debt expectations have deteriorated, perhaps not surprisingly," UBS analyst Kenneth Weakley, who rates the stock neutral, noted on Monday. And "the core economics of Triad remain very soft."