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Tenet Healthcare Takes Restatement in Stride

But some critics see more problems ahead.



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, the long hangover continues.

The company -- once known for its wild profit growth -- must restate past results following a lengthy forensic audit of its books. The changes, made to correct faulty accounting for reserves, will shift earnings by 3% to 9% for the periods between 2000 and 2003. Reported profits will now be 14 cents higher in the earlier years and 15 cents lower in the later periods. In addition, the company will take a 10-cent tax-related charge for 2004.

Still, following a detailed audit that stretched on for seven months -- and encompassed hospitals throughout the large Tenet chain -- the changes seemed almost minor to some. Indeed, earlier this week, the Tenet Shareholder Committee had questioned whether a "material" hit might be coming.

"Tenet shareholders are obviously relieved that some of the issues we were very concerned about -- given how long the audit was taking -- did not come to pass," conceded Caymus Partners analyst Jeff Villwock, who conducts research on behalf of the shareholder group.

The Tenet Shareholder Committee has long warned -- often quite accurately -- about problems at the chain. Villwock personally holds a short position in the stock.

The shares did weaken some on news of the restatement, slipping 1.4% to $7.61. The same shares fetched $50 before scandal engulfed the company more than three years ago.

Villwock, for one, believes that Tenet's problems are far from over. He expects the company to report dismal fourth-quarter results -- and announce a new round of asset sales -- in the weeks ahead. The company has sold dozens of hospitals in a failed attempt to return to profitability already.

Old Profit Machine

Meanwhile, the "old" Tenet -- with its aggressive pricing games -- now looks even more profitable than it once seemed.

The restatements will add 5 cents, 3 cents and 6 cents to earnings for fiscal years 2000, 2001 and 2002, respectively. But that shift will then lower earnings by 3 cents for the last seven months of 2002 and increase reported losses by 12 cents for 2003.

CRT Capital analyst Sheryl Skolnick believes the changes makes sense. Quite simply, she says, Tenet reserved too much money for so-called contractual allowances -- or discounts off its list prices -- in the earlier periods, and then released those reserves, boosting earnings, down the road. She points out that Tenet established the big reserves at a time when it was seriously raising prices that, perhaps, it never realistically expected to collect.

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"But much to Tenet's surprise," she speculates, "managed care paid."

The restatements reflect some changes in revenue from Medicare and Medicaid as well. But the company insists that it now has far better controls in place.

"We continue to address the legacy of mistakes made by this company in the past," admitted CEO Trevor Fetter. But "since 2003, we have made and continue to make real and profound changes to enhance all aspects of Tenet's operations."

Trials and Tribulations

Still, Tenet has plenty of problems left to cure.

Perhaps most pressing, the company continues to fight criminal kickback charges in San Diego. Following an earlier mistrial -- and a second trial that has now dragged on for months -- the company is currently waiting for a jury to decide its fate. A guilty verdict could ban one of its hospitals from the Medicare program and send the hospital's former CEO to jail.

Tenet has always denied any wrongdoing. But the company has now struggled for years to put the criminal charges behind it.

Recently, Skolnick indicates, the company suffered yet another setback in that particular case.

"I heard that Tenet moved for a mistrial ...

after an alternate juror passed a note to the judge saying the other jurors had rushed him," she says. "But the judge denied that" motion.

Some feel the long case should have ended in a mistrial already. But others, like Villwock, suspect that jurors -- who have multiple counts to consider involving multiple defendants -- are simply being thorough and will reach some sort of a decision in the end.

Even if Tenet walks away scot-free, which some tend to doubt, the company still faces serious operational challenges. Villwock estimates that up to one-third of the company's "core" 69 hospitals are currently struggling to make ends meet.

As a result, he foresees more asset sales on the way. He believes the company could exit Philadelphia and parts -- if not all -- of its former home base of California going forward.

"As I look at the whole portfolio, I see maybe a dozen or 15 hospitals that are bleeding badly," Villwock says. "And at some point, Tenet has to stop funding hospitals that it cannot turn around."