Shares of Tenet Healthcare Corp.  (THC) - Get Report fell 8.03%, or $1.34, Tuesday morning to $15.35, after reporting a larger than expected loss for the second quarter and cutting its guidance for the rest of 2017.

Although Tuesday's results seemed to catch Wall Street by surprise, Mizuho Securities USA analyst Sheryl Skolnick said the continued decline in operations should not have been much of a shock. She noted that hospital Ebitda continues to shrink beyond what can be attributed to recent hospital divestitures and that California provider fee revenue has evaporated.

"Had leverage declined from the divestitures, that might be ok." she wrote in a note to clients. "Had the company's margin improved, that might be ok too. Were we convinced that THC as it stands today could drive higher acuity, better labor productivity and higher cash flows from its current asset base, we might be more confident that hospital Ebitda has stabilized. But we're not."

She also cautioned that life could get worse for Tenet.

"There's some risk on our mind that the Trump administration's [Department of Health and Human Services] might not play nicely with California on its provider fee program renewal" due to the state's Blue State leanings, she said.

In addition to declines in its core hospital operations, Tenet got little help from two subsidiaries that it has been hoping would replace lost revenue.

One is United Surgical Partners International, Tenet's U.S. short-stay surgery business, which is expected to have a revenue boost for the year. "USPI did okay considering that being out of network with Humana for two of three months in 2Q17 meant that docs took blocks of patients (not just HUM patients) out of USPI sites," Skolnick said.

Conifer Health Solutions, Tenet's arm for helping hospital and health systems improve revenue cycle performance and operations such as patient scheduling and post-discharge outreach, was a clear disappointment. "What happened here?" she asked, noting that Ebitda in the second quarter was down $3 million to $60 million and guidance for the year is now down $15 million. "Conifer didn't do its job collecting enough revenue for its parent and others (denials up) so it had to invest again just to do its job right - and it's been in a long investment cycle - when will Ebitda growth finally resume? We don't see it coming for a while."

For the quarter Tenet reported a net loss from continuing operations of $56 million in the second quarter of 2017 compared to a $44 million net loss from continuing operations in the second quarter of 2016. Adjusted Ebitda was $570 million in the second quarter of 2017 compared to $629 million in the second quarter of 2016.

"[The second quarter was] largely in line and modest guide-down better than feared," wrote Lerrink Partner's Ana Gupte in an note late Monday. "Pricing was decent ex the CA fee. Volumes were challenged though much of the pressure was from the now successfully negotiated [Humana] (HUM) - Get Report agreement."

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Tenet Chairman and CEO Trevor Fetter put as positive a spin on the results as he could. "While we experienced a softer volume environment in the second quarter, our teams responded well with solid performance on cost control, which mitigated the impact on our results," he said.

He noted that the decline in adjusted second quarter Ebitda was primarily attributable to two factors. One was a $55 million decline in California Provider Fee revenue, with no revenue being recorded under the program in the second quarter of 2017 versus $55 million in the second quarter of 2016. The 2017 program has not yet been approved by the Centers for Medicare and Medicaid Services. The other was a $15 million decline in electronic health record incentives, with $6 million of incentives recorded in the second quarter of 2017 versus $21 million in the second quarter of 2016.

Net operating revenue in the Hospital Operations and other segment was $4.060 billion, down 0.1% from $4.066 billion in the second quarter of 2016, with the lack of revenue under the California Provider Fee Program being the main reason.

On a same-hospital basis, patient revenue increased to $4.03 billion, up 0.4% from $4.02 billion in the second quarter of 2016. The increase was primarily due to an increase in net patient revenue per adjusted admission that was offset by a decline in adjusted admissions. 

Tenet's lowered its 2017 adjusted Ebitda Outlook range by $75 million to reflect the sale of the company's hospitals in Houston, lower expectations in its hospital operations and other segments, as well as slow-downs in its Conifer and Ambulatory Care segments.

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