Tenet Wins a Round

The company's solid second-quarter report gives bulls some ammunition.
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Tenet

(THC) - Get Report

is hanging on.

The ailing hospital chain managed to narrow its second-quarter loss despite ongoing weakness in patient admissions. A significant drop in malpractice expense fueled much of that improvement. Counting special items -- which added 2 cents to the bottom line -- the company was even able to post break-even results instead of the 3-cent loss Wall Street had been expecting.

But Peter Young, a business consultant at HealthCare Strategic Issues, still views Tenet as a sick hospital company.

"This business is about patient admissions and revenues," Young says. "It's not about other expense items. ... Look at the same-hospital numbers. When nearly every line is a negative entry, that is not the sign of a turnaround."

During the second quarter, Tenet said, same-hospital admissions declined by 1.4% because of "severe competitive pressures" in some Florida and Texas markets. The company did, however, see admissions at its 18 core California hospitals jump by a surprisingly strong 3%.

Still, the company weathered an overall 3.4% drop in revenue during the latest period. Net revenue came in at $2.42 billion instead of the $2.48 billion Wall Street had been expecting. Meanwhile, the company continued to lose money -- although admittedly far less than a year ago. The latest quarter left the company just $21 million in the red, whereas last year's June quarter brought a staggering $426 million loss. Moreover, Tenet attributed all but $3 million of its recent loss to discontinued operations.

Jeff Villwock, an analyst at Caymus Partners who conducts research on behalf of the Tenet Shareholder Committee, felt perhaps most surprised by the lack of surprises in the company's latest results.

Villwock said the big bombshell came already when Tenet warned last month that it would be unable to file its second-quarter report as a result of possible accounting irregularities. In the meantime, he said that revenue was "very light," although the company's earnings should be close to what many were anticipating. He also gave credit to the company for doing a "reasonably good job" on expense control when achieving those bottom-line results.

"Both the bulls and the bears will have something to talk about here," he said.

The bulls were winning out early Tuesday, as they pushed the stock up 2.5% to $12.48 a share.

Accentuate the Positive

As always, Tenet did a good job of highlighting the positive.

"We continue to make good progress in improving quality, controlling costs and improving pricing," said CEO Trevor Fetter. "Despite a decline in overall admissions in the quarter, we are pleased that our volume of surgeries and emergency room visits were both up in the quarter. These are welcome indicators of improved confidence in our hospitals and strategy."

But Young saw mostly negatives instead. Notably, second-quarter inpatient revenue fell by 3.1% -- and an even worse 3.9% on a same-hospital basis -- during the latest quarter.

Villwock blamed "poor pricing" for the recent decline. He has long questioned whether Tenet has really achieved the healthy price increases on managed care contracts that it has regularly claimed. Nevertheless, the company once again reiterated that same claim when issuing its second-quarter results on Tuesday.

"We are achieving our objectives for mid- to high-single-digit percentage pricing increases on newly negotiated commercial managed care contracts," said Reynold Jennings, the company's operating chief. And "as contracts renegotiated in earlier quarters reach their effective dates, these new agreements are marking a tangible contribution."

But Villwock pointed to the company's drop in revenue -- particularly a 2.5% decline in same-hospital net inpatient revenue per admission -- as evidence to the contrary.

"The company is saying the same thing it's always said," Villwock stated. "You've got to give them credit for consistency. ... But I think

analysts are going to harp on revenue per admission" during Tuesday's conference call.

Pint of Harp

Young sees other things to harp about as well.

Overall, for example, the company saw patient days drop by 1.2% and outpatient visits drop by 8.6% in the latest quarter. Moreover, on a same-hospital basis, the drop in outpatient visits was even worse.

To be fair, however, the company blamed half of that drop on a reduction in assets while noting that same-hospital outpatient surgeries actually climbed by more than 1%.

At the same time, Tenet reported that controllable operating expenses -- lifted by a $42 million improvement in malpractice costs -- remained "essentially flat" during the quarter. Write-offs associated with the poor and uninsured also declined. Together, charity care and bad-debt expense totaled $287 million or 11.2% of revenue. Those figures came in at $312 million and 12.3%, respectively, a year ago.

Still, Young feels that bad debt remains a festering problem for the company.

"Direct costs associated with care for uninsured

patients remains a problem -- even more so when paying volumes decline," he says. "The decline of inpatient and outpatient admissions and stagnant net revenue further illustrates physicians have elected to admit patients elsewhere."

Young, for one, sees no easy cure.

"The weak operating numbers suggest the board needs to consider two items: additional hospital sales of underperforming assets

and changes in leadership," Young says.

Questions at the Top

Villwock believes that Tenet will announce further asset sales either this fall or early next year. In the meantime, critics continue to question management's performance.

The company's latest regulatory setback hasn't helped, either. Last month, Tenet warned that possible accounting irregularities -- apparently dating back to when Fetter served as the company's finance chief -- would probably delay the filing of its second-quarter earnings report.

"This is a very high-risk situation," writes Fulcrum analyst Sheryl Skolnick, who has a neutral rating on the stock. "And we remain concerned that current holders still do not grasp the scope or gravity of the fix that THC is in."

At the request of the

Securities and Exchange Commission

, which has been investigating the company for years, Tenet has begun exploring allegations made by a former employee that three of its California hospitals improperly reported revenue in previous periods. Specifically, the SEC is questioning whether some Tenet hospitals recorded excessive contractual allowances -- or discounts for managed care companies -- in certain periods "through at least fiscal year 2001" and then released the extra reserves in a manner that boosted results later on.

For its part, Tenet has portrayed its latest problem as a "legacy issue" that dates back to prior management. But skeptics question whether that is really the case.

Notably, they point out that Fetter himself has failed to comment on the matter so far.

"It's interesting that the CFO said something and the CEO did not," Villwock says. "That could very well be because Trevor is a potential target" in the SEC probe.