Tenet Warns of Third-Quarter Profit Shortfall

Tenet Healthcare Corp. on Wednesday said it expected to report third-quarter earnings far short of forecasts because of sharply higher expenses for bad debt and disputes with health insurers about hospital bills.

The Santa Barbara-based company said its financial outlook was so cloudy that it was not giving an expected range for its earnings.

For the third quarter, analysts had forecast, on average, a profit of 20 cents a share. Tenet is scheduled to release its results Nov. 11.

The company’s disclosures sent its shares, already pummeled by scandals in the last year, down $1.82, or 12%, to $13.58 on the New York Stock Exchange.

Tenet, the nation’s second-largest for-profit hospital chain, said its bad debt expenses reached $500 million to $550 million in the third quarter -- about double the amount it had projected three months ago.

Those estimated expenses, amounting to 15% to 17% of the company’s revenue, include debts that Tenet expects it will not be able to collect, as well as a writedown of what it expects to be paid on various old accounts.

Tenet and other hospital operators around the nation are finding it harder to collect what they are owed, said Jan Emerson, a spokeswoman for the California Healthcare Assn., which represents the state’s hospitals.

She added that high unemployment and continuing double-digit increases in health-care costs have contributed to a growing population of people who can’t, or won’t, pay their medical bills.

The nation’s largest and third-largest for-profit hospital chains -- HCA Inc. of Nashville and Triad Hospitals Inc. of Plano, Texas, respectively -- each have boosted the funds they are holding in reserve for bad debts. Tenet’s financial problems are worse, analysts said, because many of its 112 hospitals are in California, where one in five residents lack health insurance. Tenet also is feeling disproportionately more pain because of its past aggressive price increases and collection efforts as well as its Medicare billing policies, which spawned several government investigations and numerous private lawsuits.

As a result of the scrutiny and criticisms, Tenet voluntarily stopped billing Medicare for so-called outlier payments for the most difficult cases. And as part of a legal settlement with a community activist group, Tenet backed away from its aggressive efforts to collect payments from indigent patients.

“Tenet had been raising their gross [hospital] charges so rapidly that it makes the impact of not being able to collect that much larger,” said Andreas Dirnagl, an analyst at Harris Nesbitt Gerard.

In addition, Tenet said in a statement that it “continues to experience significant payment pressure from managed-care companies” -- pressures exacerbated by disputes over past billings.

Michael Chee, a spokesman for Blue Cross of California, one of the state’s biggest medical insurers, said that “what’s in dispute is under investigation.” He declined to elaborate but said: “It’s true that we have concerns about some of the Tenet billing that has come through.”

Analyst Frank G. Morgan of Jefferies & Co. took that to mean that the managed-care companies either were calling past hospital billings into question or using the situation as leverage for future contract negotiations.