Tenet Faces New Challenges

The big hospital chain posted strong gains after a solid second quarter, but Medicare questions loom.
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Even after nearly three years of suffering,

Tenet

(THC) - Get Report

still faces a long road to recovery.

Granted, the ailing hospital operator has made some recent progress. During the second quarter, for example, the company saw a successful new pilot program boost patient admissions by a healthy 3.7% in its California market.

But those gains failed to keep the company from weathering a drop in admissions overall. Even worse, the company found itself treating fewer patients with commercial insurance and more patients with low-paying insurance -- such as Medicare and Medicaid managed care plans -- or even no insurance at all.

An analyst at Credit Suisse First Boston on Tuesday fretted that Tenet has weathered "some pretty decent erosion" in its commercial business for a couple of quarters in a row. He then went on to ask for both an explanation and a potential cure for that troubling negative trend.

Reynold Jennings, the company's operating chief, essentially blamed decisions made by so-called splitter doctors who have privileges at both Tenet and non-Tenet hospitals. For starters, he said, those doctors may choose to refer more commercial patients elsewhere because those patients tend to be more mobile than patients on government plans.

But Jeff Villwock, an analyst at Caymus Partners who conducts research on behalf of the Tenet Shareholder Committee, questions whether intense government scrutiny is actually the issue.

"Physicians have a tendency to want to treat better-paying patients better," he said simply. "If Tenet has a hospital that's under investigation or where capital has not been appropriately spent, it would make sense to send those patients somewhere else. ... And I have seen no indication yet that

pattern is reversing."

Lehman Brothers analyst Adam Feinstein seems to agree.

"We continue to believe that physicians are admitting to competing hospitals due to the scrutiny at the Tenet facilities," wrote Feinstein, who has an underweight rating on the company's stock. "As a result, we believe volumes will continue to be under pressure until Tenet settles the outstanding litigation."

Tenet faces a slew of ongoing government probes into its business practices. Nevertheless, the company's stock bounced 5.3% to $12.82 Tuesday on fresh hopes for a recovery.

Diagnosing the Problem

To be fair, Jennings offered some other reasons for the negative shift in payer mix. In general, he said, many companies are re-entering the government managed care business and attracting more patients to those lower-paying plans in the process.

Jennings cited some market-specific challenges as well. In Florida, he said, the company has walked away from several small health insurers that refused to agree on fair price increases. In the same state, he said, the company -- and, indeed, the industry in general -- has struggled to find the doctors necessary to cover emergency room calls. Also in Florida, he added, the company has seen a new competing hospital slash volumes by 15% at three of its nearby facilities.

Villwock found the third problem especially concerning.

"If you have a 15% decline in admissions, that hurts you badly," Villwock said. "And it doesn't necessarily mean next year will be any better."

Still, Villwock wonders if Tenet faces even bigger problems in the market that once ranked as its crown jewel.

"I don't think all three of these problems combined answers the question about why Florida is operating so poorly," he said. "I think physician relationships in Florida are poor -- and I don't know that they're improving."

Tenet did, in fact, blame its recent downturn in admissions on "severe competitive pressures" in both Florida and Texas. Jennings later elaborated by explaining that both markets had weathered high turnover rates among its hospital CEOs, which disrupted relationships with doctors who admit patients to the facilities. In addition, he said that the company's Texas facilities face the added pressures caused by specialty hospitals owned by physicians themselves.

Going forward, however, Tenet ultimately hopes to see its recent success in California spread to other parts of the company.

"Volume growth remains our biggest challenge and our top operational priority," CEO Trevor Fetter said on Tuesday. But "I am confident that we have the right combination of initiatives in place to build back the overall volume growth we need."

Battling New Challenges

Peter Young, a business consultant at HealthCare Strategic Issues, sounds far less confident. He dwells on the deteriorating quality of the company's customer base, which last quarter brought yet another increase in the company's rate of uncompensated care. In addition, he sees broader industry challenges on the way.

Specifically, he notes, Medicare has released plans that could cut into hospital payments for 182 different diagnostic-related groups.

"This policy reduces payment to the hospital when the patient is transferred after a short stay to a post-acute care setting that provides most of the patient's care," the Centers for Medicare and Medicaid Services announced on Monday. "The purpose of this policy is to protect Medicare from paying for the same care twice."

Fulcrum Global Partners analyst Sheryl Skolnick asked Tenet on Tuesday whether she should worry about this development. But she failed to get specific details about the potential impact.

Villwock, however, foresees a possible hit. Under the new rule, he said, hospitals will be forced to treat certain Medicare patients longer -- racking up extra costs -- or take less money for their services.

"Either way, it's not good," he said. "You could make a whole lot less money."

And Tenet could be poorly positioned to weather that additional pain.

"Until the patient mix goes back toward normal, and the company starts picking up more commercial patients, they're not going to make a whole lot of progress on revenue," Villwock said. "The question is when -- and why -- will that happen?"