Tenet Takes Another Hit

Updated from March 15

Tenet ( THC) needs a tourniquet.

The bleeding hospital chain ended the latest quarter and year deeply in the red. The company lost $954 million, or $2.05 a share, in the fourth quarter alone. Tenet posted a quarterly loss of just $31 million, or 6 cents a share, when its condition first started to worsen a year ago.

"This was a tough quarter made even tougher by rising bad debt from the growing number of uninsured patients we treat and our increased difficulties in collecting amounts owed us by managed care payers," Tenet CEO Trevor Fetter said. "We have taken and will continue to take strong actions to address these and other challenges, but positive results will take time."

For now, business continues to deteriorate. Revenue, hit by the closure of a Medicare loophole, dropped 8.9% in the latest quarter.

Full-year results looked dismal as well. Tenet lost more money in 2003 than it made in the two previous years combined. It ended 2003 some $1.4 billion in the red and offered a dark prognosis for the future as well.

"We do not anticipate significant operating performance or margin improvement to be achievable in 2004 and, potentially, in 2005 because many challenges will require time to work through," Tenet stated in its latest annual report, filed after the market closed on Monday.

The company, hurt by fraud allegations and the loss of Medicare "outlier" payments, saw total revenue slip by 3% to $13.2 billion in 2003. Net inpatient revenue, a key measure of a hospital company's health, slid even more. It fell 6.9% on a same-facility basis, reversing the double-digit growth posted when generous outlier payments were still flowing to the company in 2002.

Meanwhile, bad debts continue to eat away at Tenet's bottom line. The company's provision for doubtful accounts surged to 16.7% of revenue -- up from 11.5% in recent years -- during 2003.

Tenet's condition may yet worsen. The company faces potentially huge obligations -- including government fines and patient lawsuits -- at a time when it can hardly afford them.

"We believe it is important for a reader to understand that (1) if our results of operations continue to deteriorate and/or (2) if claims, settlements or investigations are resolved in a materially adverse manner, there could be substantial doubt about the company's liquidity," Monday's filing states.

After bouncing off yet another multiyear low, Tenet's stock rose a penny early Tuesday to $9.82.

Still, any diagnosis -- even a poor one -- may relieve some antsy investors. Fulcrum analyst Sheryl Skolnick essentially said as much when upgrading the stock from sell to neutral ahead of Monday's report.

Fulcrum predicted that investors would welcome any new visibility into Tenet's earnings power. But she stopped short of painting a pretty picture herself.

"We do believe that there could be a price at which the investor has a chance of making a reasonable risk-adjusted return on an investment in THC shares," Skolnick admitted. "We are just not there yet and -- if operations continue to deteriorate at THC -- we may not get there in 2004."

Skolnick is particularly concerned about Tenet's dwindling liquidity. She warns of a possible "worst-case scenario" in which Tenet could burn through its available resources this year and then resort to expensive new financing that gobbles up cash for years to come.

In the meantime, she suspects the market has come to share her worries about the company's outlook.

"We believe that investors are finally beginning to understand just how difficult THC's situation is," she stated.

The Tenet Shareholder Committee is less certain. The group, known for diagnosing Tenet's problems early, said that even its own dark calls have proven optimistic -- and the same thing happened again on Monday. The committee had predicted that Tenet would generate negative cash flow of $500 million, up from an earlier projection of negative $360 million, in 2004. But Tenet said on Monday that it could post up to $600 million in negative cash flow this year.

The committee did, however, caution investors to prepare for the worst.

"In Shakespeare's play, a soothsayer warned Julius Caesar to 'beware the Ides of March,'" the committee said in a report issued Monday morning. "It doesn't take a soothsayer to predict that on this Ides of March, the news about Tenet will not be good."

The committee then urged the public to ask tough questions during Tenet's follow-up conference call on Tuesday. The group wonders about, among other things, the following:

  • The status of investigations and lawsuits targeting multiple Tenet facilities;

  • Tenet's ability to collect payments from Medicare and renegotiate contracts with private insurers;

  • Management's expectations for revenue and pretax profits in 2004;

  • Recent admission trends at both Tenet's core hospitals and those held for sale, and

  • Specific plans for avoiding a cash crunch.

"Consider what they disclose, and also consider what they fail to disclose," the committee advised. "All too often in the past, both management and outside cheerleaders have glossed over multiple serious issues to the eventual detriment of Tenet's shareholders, patients, employees, physicians, taxpayers and the communities served by Tenet hospitals."

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