Tenet's ( THC) shaky health has taken a turn for the worse.

A complete examination that was intended to evaluate Tenet's near- and long-term prospects has detected a slew of serious problems. As a result, Tenet is bracing for a slow and tedious recovery -- with no chance of even nearing Wall Street estimates in the interim.

"Tenet is navigating through a very challenging transitional period," said Trevor Fetter, Tenet's president and interim CEO, on Monday. "We now believe this transitional period will continue through at least the first half of 2004, and its impact on our financial performance will be more substantial than previously mentioned."

On the basis of a systemwide review of its hospitals -- and mounting pressures on the bottom line -- Tenet warned Monday that upcoming results will fall "significantly below" analysts' expectations. The second quarter looks particularly ugly. After taking a number of special charges -- including a sizable hit for severance payments to ousted CEO Jeffrey Barbakow -- Tenet mustered earnings of only 2 cents a share during the first two months of the current quarter. The company, which offered no hope for improvement in June, was originally expected to deliver second-quarter earnings of 34 cents a share.

Now, Tenet expects to generate barely more than that -- as little as 40 cents a share -- over the next two quarters combined. The company believes that modest earnings pattern will continue, producing full-year earnings of 80 cents to $1 a share, for at least the next 12 months. It also warned that extraordinary charges -- from impairments, restructuring and litigation -- are likely to cut into financial results even further.

Investors, who were looking for 2003 profits of $1.61 a share, took a knife to Tenet's stock. The shares lost 22%, or $3.63, after the regular session opened. At $12.60 a share, the stock is now trading at a new multiyear low.

With his usual determination, Fetter nevertheless pledged to help turn the company around.

"We have made many changes at Tenet recently -- in management, in strategy and in policy," Fetter said. "We still have many challenges to address, but we have a strong, committed management team ready to take them head on."

Withdrawal Symptoms

For now, Tenet's past excesses -- including a risky addiction to lucrative outlier payments from Medicare -- are taking their toll. In recent years, Tenet relied on outliers -- profit-rich payments for treating Medicare's sickest patients -- to fuel its explosive growth. But Tenet's "voluntary" adoption of new outlier billing practices, now mandatory under new Medicare regulations, has nearly wiped that profit center out. Moreover, private insurers are now using Tenet's past behavior against it.

"Although we are fortunate to have a strong portfolio of hospitals," Fetter said, "the pricing practices pursued by the company's hospitals in recent years are making it difficult for many of our hospitals to obtain managed-care price increases at normal industry levels in 2003."

Tenet, which originally predicted little backlash, now admits the setbacks are real. The company said Monday that it has secured "market-level increases" on just a portion of its managed care contracts. It has given one-year price breaks on other contracts. And it may find itself walking away from other contracts entirely.

"We are unwilling to enter into unprofitable agreements," Fetter explained, "even if the result will be contract cancellations or public disagreements."

Tenet's problems come at a hard time for the hospital industry in general. The entire sector has been hit by rising labor costs, soaring malpractice expenses and mounting competition. But Tenet is especially exposed. The company faces heavy pressure from powerful nurses' unions in its home state of California. Patients are suing the company in droves, accusing it of performing risky and even unnecessary surgeries. It is being investigated by multiple governmental agencies for potential Medicare abuses. And it has lost market share in some crucial areas -- such as Redding, Calif., and Palm Beach, Fla. -- where bad publicity has taken a particularly heavy toll.

Even looking forward, Tenet could muster little good news for investors. The company pointed to business volumes, helped by a "solid portfolio of hospitals," as its one area of strength. But the numbers themselves weren't terribly exciting. The company said it outperformed the industry with recent volume growth of under 2%. But it doesn't expect any real improvement as the year wears on. Overall, Tenet predicts that 2003 hospital admissions will hover just 2% over 2002 admissions and remain flat on a same-facility basis for the remainder of the year.

Meanwhile, Tenet expects revenue to actually fall. The company projects that full-year revenue will slip by $300 million, to $13.6 billion in 2003. And the loss of outliers -- which is expected to cut revenue by $760 million -- is not the company's only problem.

"Even after accounting for the reduction in outlier revenues, the trend in unit revenues is significantly lower than in recent periods," the company stated. "At the same time, despite an ongoing focus on cost reduction, cost pressures continue to build."

Tenet is clearly sagging beneath that weight.

Shaky Prognosis

A modest uptick in volumes cannot offset serious drags elsewhere.

Labor costs, which rocketed 9% in the first quarter, are expected to keep inching up through the rest of the year. Supply costs are expected to climb as well. So are bad debt and other operating expenses.

Meanwhile, accounts receivable days are growing. Debt ratios, hit by the plunge in outlier profits, threaten to climb. And the company now expects to spend most of its 2003 cash flow just to satisfy capital expenditures.

As a result, Tenet is suspending a stock repurchase program that had at least hinted at a bullish view for the future. Tenet says it must now spend any excess cash on debt reduction instead of company stock until business "normalizes" sometime next year.

In the meantime, the company has pledged to cut business expenses by $250 million over the next 12 months. And it is depending on its strongest hospitals to carry it through the current downturn.

"Some of Tenet's hospitals are unlikely to grow significantly, but can produce consistent results once operations are normalized," Fetter said. "Other Tenet hospitals are very well-positioned for growth.

"Keeping our hospitals strong and continuously improving their quality and efficiency are the keys to our long-term success."


But Tenet critics have repeatedly questioned the company's true goals. Some of them -- including former patients and striking nurses -- have accused the company of risking patient lives for the sake of profits that are now evaporating.

Jim Moriarty, a Houston attorney representing dozens of former Redding patients, predicts that Tenet will pay a huge price for its behavior.

"I'm firmly convinced that the total liability for Redding will be at least $1 billion -- just for the patients," said Moriarty, who won a big settlement for Tenet patients nearly a decade ago. "It won't go below that."

The California Nurses Association, which ranks as one of Tenet's most vocal critics, also hinted at tough times ahead for the company.

Redding is "not the first Tenet hospital that's had problems -- and I don't believe it will be the last," said union spokesman Chuck Idelson. "New reports will come out in the not-too-distant future. ... It certainly looks like the walls are closing in on Tenet."

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