Tenet Takes Step Forward

The hospital chain's numbers aren't as bad as feared.
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Tenet

(THC) - Get Report

has felt worse.

Granted, the hospital chain continues to bleed, suffering its biggest quarterly loss so far this year. Still, the company lost far less money than it did a year ago and has offered a clear diagnosis of its problems.

Bad debt expense and weak admissions continued to hurt results, of course. But pricing, when adjusted for discounts to the uninsured, looked better than some had feared. Moreover, admissions actually held steady -- and, in some cases, even climbed -- at many of the company's hospitals.

Thus, in a nutshell, Tenet's actual third-quarter results looked somewhat better than the company's painful warning last week. Shares rose 30 cents to $7.19.

"Under the circumstances, they really did pretty well," says CRT Capital analyst Sheryl Skolnick, who has a buy recommendation on the company's stock. "Clearly, this is a company that's in a turnaround. ... But the details were not as awful as people had feared."

Revenue slid 1.5% to $2.1 billion and still fell short of the consensus estimate. But losses narrowed sharply from a year ago, dropping from $401 million to $89 million, with the per-share loss from continuing operations of 6 cents actually coming in a penny better than Wall Street's recently lowered targets.

As expected, Tenet continued to suffer from volume declines in the latest quarter. Admissions dropped 3.3%, with lucrative managed-care volumes falling an even harder 6.3%, in the recent period. However, admissions at 42 of the company's 57 hospitals matched last year's performance -- and 19 of those hospitals beat last year's numbers outright.

Tenet blamed 30% of its volume decline on its own "Targeted Growth Initiative" -- which is designed to cut out unprofitable business lines -- as well as certain changes in Medicare's rehabilitation admission criteria. Still, the company suffered some unexpected setbacks as well.

"Three markets have some problems," Skolnick noted. "That's new news, and it's not good news. ... But it's better to say it and do something about it."

The markets -- Houston, Palm Beach and parts of Southern California -- rank as core ones for the company.

Tenet offered some good news, too. Notably, the company's focus on quality continues to pay off. Tenet hospitals designated by

UnitedHealth

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as "Centers of Excellence" have seen cardiac admissions jump 11% so far this year. In contrast, the company's remaining hospitals have grown cardiac admissions by just 3% instead.

Skolnick, for one, was impressed.

"That they had anything up 11% is a miracle," she says. "For premium quality sites to have that much impact on an otherwise poorly perceived hospital chain is a very strong statement -- and a positive one."

Tenet has been trying to keep its costs in check as well. During the latest quarter, total "controllable" operating expenses actually declined.

But bad debt expense from the uninsured and underinsured patients continued to take its toll. Technically, the company's bad debt expense actually fell from a year ago. Counting discounts for the uninsured, however, the company's bad-debt ratio would have totaled 16.4% of revenue -- up from 14.9% a year ago -- during the latest period.

Those discounts hurt overall pricing as well. Net in-patient revenue per admission inched up just 2% in the recent period. Excluding the discounts, however, that metric would have come in at plus 4.5% instead.

A sharp falloff in managed-care "stop-loss" payments -- which resemble the Medicare outlier payments that once inflated Tenet's results -- lowered that metric, too. The company said that a variety of factors, "including a significant decline in the number of patients with extended lengths of stay," caused the stop-loss drop.

In the end, however, Tenet blamed familiar industry problems for much of the company's disappointment -- and, as always, continued to promise better times ahead.

"Net admissions declines and a rising level of bad debt from the uninsured had the effect of exacerbating what has traditionally been a seasonably slow quarter," concluded Tenet CFO Biggs Porter. But "despite the soft results in the third quarter, we believe our strategies are gaining momentum. And we expect a stronger fourth quarter based on our current expectations for a seasonal strengthening of volumes."

CEO Trevor Fetter expressed strong hope as well.

"It is now readily apparent that our Commitment to Quality initiative, launched in 2003, is boosting admissions in Tenet hospitals with top quality ratings from private health insurers," Fetter said. "As this strategy matures, we believe it will contribute to improved financial performance in the future."