Tenet Facing a Big Tab From Storm

Flood damage could be extensive and uncovered. But the company does cure a default.
Author:
Publish date:

Tenet Healthcare

(THC) - Get Report

has rid itself of at least one headache.

The ailing hospital chain managed to file its second-quarter report on Tuesday, curing a default that could have triggered significant payment obligations. The company originally warned two months ago that possible accounting problems, dating back for years, could delay the filing. The company has since deemed its more recent financial statements acceptable but continues to investigate the period originally in question.

Now, Tenet must determine whether the company improperly reported revenue "through at least 2001" and into 2002 or even 2003. That time frame encompasses a period during which Tenet aggressively raised its prices, collecting generous bonus checks from both Medicare and managed care companies.

The company officially changed its pricing strategy in 2003 -- sharply reducing the big unusual-event payments that boosted its results before -- and has struggled to make money ever since. It remains under investigation for possible Medicare fraud.

Peter Young, a business consultant at HealthCare Strategic Issues who has no position in the stock, believes that Tenet has begun only now to explore the period in which real accounting problems could show up.

"I doubt if the questionable practices were continued once the outlier and stop-loss scheme became public," he said after reviewing the company's 10-Q filing on Tuesday. So the "overhang remains related to the early years."

Tenet's stock, once a $50 highflier, slipped 11 cents to $11.54 Tuesday morning.

Hurricane Pain

Tenet also revealed Tuesday that insurance coverage may fail to end its storm-related pain.

The company operates six Gulf Coast hospitals that weathered significant damage as a result of Hurricane Katrina. Four of those hospitals remain closed, including two in midtown New Orleans that could be lost for good.

In its 10-Q filing on Tuesday, Tenet said that it holds insurance policies providing up to $1 billion worth of storm-related coverage on its hospitals. However, it said, those same policies limit flood losses to just $250 million. Thus, it noted, the company and its insurance carriers must determine the exact cause of the damage suffered at the hospitals -- which were hit by hurricane winds as well as flooding -- before appropriate payments can be made.

Regardless, Tenet expects to swallow some big losses in the end.

"Although we do not yet know the full extent of the damage or other financial impact caused by the hurricane on our Louisiana and Mississippi operations, we anticipate that the cost will be significant even after taking into account our existing insurance coverage for property damage, business interruption and related coverage," Tenet stated. "And we will likely incur significant asset impairment charges" going forward.

In the meantime, Tenet now faces the prospect of buying additional flood insurance if it winds up exhausting the coverage it already has. Moreover, the company cannot promise that such coverage will even be available. As a result, it has warned of more possible setbacks to come.

"If such flood policy limits should be exhausted as a result of Hurricane Katrina and ensuing events," the company stated, "and we were to sustain a subsequent flood loss -- and if we cannot or do not obtain reinstatement or replacement coverage -- our financial position, results of operation or cash flows could be materially adversely affected."

Already, Fulcrum analyst Sheryl Skolnick has predicted that Hurricane Katrina will significantly delay any turnaround for the company. Meanwhile, a brand-new storm -- Hurricane Rita -- is beginning to move toward Houston, another important Tenet market, even as the nation continues to grapple with the devastation caused by the storm that has already passed.