Tenet

(THC) - Get Report

just keeps getting sicker.

The ailing hospital chain on Tuesday posted a notable drop in business that left the company bleeding more than Wall Street had expected. Serious complications -- including the departure of physicians and the cancellation of managed care contracts -- surfaced during the quarter. All told, same-hospital admissions fell by 2.9% from a year ago.

Hurricanes caused only part of that damage.

"

HCA

(HCA) - Get Report

had Florida hurricanes, too, but not anywhere close to that" drop in patient volume, says Jeff Villwock, an analyst at Caymus Partners who conducts research on behalf of the Tenet Shareholder Committee. "This is devastating."

Villwock spots "the first significant volume crack in the company's results" since Tenet first came under fire for its aggressive business practices two years ago. He also notes that Tenet is now confessing to new problems with physician attrition and managed care companies.

Tenet itself pointed to hospital volumes as its "most significant challenge" on Tuesday. It also weathered a fresh jump in uncompensated care.

Despite the third-quarter setbacks, however, Tenet continues to bank on a recovery down the road.

"Tenet made real progress this quarter in building a foundation for sustainable future growth, but our results in the third quarter were disappointing in the areas of volume and bad debt expense," said Tenet CEO Trevor Fetter. "Nonetheless, I am confident that we are on the right course, with the right strategy, the right hospitals and the right team to build long-term value for our shareholders."

Peter Young, a business consultant at HealthCare Strategic Issues, marvels at such statements.

"I would ask: Where does 'disappointing' end and management's recognition of reality begin?" he says.

Weak Spots

Tenet's third-quarter results exposed multiple weaknesses.

Revenue fell 3.2% to $2.44 billion, missing the consensus estimate by $150 million, due to a decline in patient volumes and a rise in upfront write-offs for uncompensated care. The third-quarter operating loss of 8 cents a share came in much lower than the 66-cent loss of a year ago, but still exceeded Wall Street expectations by 3 cents. Counting special items, including a 2-cent hit from the hurricanes, the operating loss actually totaled 11 cents a share.

"Our performance was impacted by a combination of Tenet-specific challenges, significant negative industry trends and the multiple hurricanes that battered the Southeast," Fetter explained.

Outpatient and surgery volumes took an especially hard hit. Outpatient admissions fell 11.3% on a same-store basis. Surgeries -- an especially lucrative business line -- tumbled 5%.

Tenet did manage to post a decline in "controllable operating expenses" in areas such as salaries, benefits and supplies. But uncompensated care -- which includes both bad debt expense and charity write-offs -- jumped to 14% of revenue. Some 24% of all patients treated in Tenet emergency rooms arrived without insurance.

Still, uninsured patients couldn't be blamed for all of the bad debt expense.

"Bad debt expense was also impacted by the refusal of certain managed care payers to pay on a timely basis as well as disputes with certain managed care payers," the company stated. But "Tenet is actively pursuing collection and resolution to these disputes."

Tenet also blamed "managed care contract negotiations and terminations" for a drop in patient volumes. Moreover, it noted weakness at some of its "core" 69 hospitals in addition to those it is attempting to shed.

A day before Tenet's quarterly update, the Tenet Shareholder Committee warned of deteriorating results at the company's Florida hospitals in particular. The group pointed to state filings showing that Tenet's 15 Florida hospitals had lost a total of $61 million in the last seven months of 2003.

And "this region is often spoken of as the crown jewel of Tenet's system," the committee declared.

Villwock sees nothing in Tenet's latest report to indicate that the company is stabilizing yet. Neither does Young.

"As I look at the performance, I ask myself what tactics and how long would it take a top-notch hospital operator to turn things around?" Young says. "The simple answer is much longer than Tenet indicates and

with a host of specialized outside talent."

Tenet's stock survived the quarterly update, inching up 7 cents to $10.60 late Tuesday morning. Even so, Villwock, for one, questions the value of that investment. Indeed, he has specifically asked why two notable investment firms -- Brandes Investment Partners and Pacific Financial Research, which together have amassed nearly a quarter of the stock -- even like the company.

In a report for the Tenet Shareholder Committee last week, Villwock insisted that Tenet must significantly grow its pretax profits -- on a shrinking asset base -- for the two firms to earn a decent return on their investment.

"Talk about optimism!" he declared. "Brandes, Pacific Research, we ask: What do you know that we don't?"