Tenet’s Condition Is Still Not Stable

Tenet Healthcare Corp.’s decision to unload nearly a third of its medical facilities is a bitter pill, but analysts say it may not be a cure for the financial woes plaguing the nation’s second-largest hospital operator.

After the Santa Barbara company announced its turnaround plan early Wednesday, investors hammered its stock, pushing the shares down more than 23% at one point.

Later in the day, Standard & Poor’s debt-rating service downgraded Tenet’s credit to junk-bond status, saying the success of the company’s plan was uncertain because of continuing pricing problems, government investigations and cash-flow difficulties. Indeed, some experts said it might be tough to unload some of the money-losing hospitals at any price.

Tenet said its earnings would fall far short of analyst expectations for the fourth quarter of 2003 and all of 2004. The company also said it would take a $1.4-billion charge reflecting a write-down of the value of its hospitals.

Chief Executive Trevor Fetter said the divestiture of 27 hospitals, including 19 in California, was part of a campaign designed to improve Tenet’s financial outlook by allowing the company to focus on its 69 strong hospitals.

But analysts said the scope of the company’s problems suggested that the turnaround would be a multiyear process, longer than some investors had expected.

“What I think today’s announcement reminded many investors is that any return to normalcy at Tenet is very far removed,” said Darren Lehrich, an analyst with Suntrust Robinson Humphrey, which has an “underweight” rating on Tenet’s stock. “The message was a resounding negative.”

Tenet underscored that fear by revealing that earnings from continuing operations would undershoot analyst projections of 11 cents a share for the fourth quarter of 2003 and 50 cents a share for all of 2004.

Tenet said its best-performing hospitals -- the ones it was keeping -- would only break even this year and the poorly performing hospitals it was unloading could reap significant losses.

Analysts said an aggressive pricing strategy Tenet abandoned late in 2002 after it came under federal scrutiny was largely to blame for its current problems collecting payments and negotiating new contracts with managed-care companies.

The strategy was applied to the sickest patients and allowed Tenet to profit from their care rather than take an expected loss. Once the practice was discovered, it soured the relationship between the company and its major sources of payment for patient care.

“They have alienated or annoyed every payer source they have, be it the federal government, the state governments or the managed-care private insurance companies and the uninsured,” said Sheryl Skolnick, an analyst with Fulcrum Global Partners.

Tenet’s stock responded to the announcement by plunging early in the day on the New York Stock Exchange, but it recovered somewhat to close at $13.18, down $2.97, or 18.4%.

What alarmed some Wall Street analysts was not the planned sale but the bargain-basement pricing of the hospitals. Much of the $600 million in net proceeds the company expects would come not from profits on the hospital sales but from tax benefits on the anticipated losses. Such benefits would not be realized until 2005.

“It’s shocking,” said Andreas Dirnagl, a healthcare analyst with Harris Nesbitt Gerard who has a “sell” rating on the stock. “It’s not like they are doing this to get a big shovel of cash in the door. They are fire-sale prices. I don’t think that’s a good sign.”

Tenet, which faces several government probes of its Medicare billing and other questionable practices, blamed its problems on weak revenue and uncollected patient debt. In addition, the company figured it would have to spend nearly $2 billion by 2007 to make earthquake safety upgrades required by California law.

In seeking to sell 19 of its 26 hospitals in the state, Tenet would reduce those costs to less than $300 million for the California hospitals the company plans to keep.

The hospital sales are expected to be completed this year, but the company faces a difficult environment in which to sell, according to many people familiar with the business.

In California, hospitals are coping with relatively high levels of uninsured patients and struggling to achieve the minimum level of nurses required by a new law.

“If these are hospitals that aren’t making money, then I think that’s going to make it hard to sell these hospitals,” said E. Richard Brown, director of the UCLA Center for Health Policy Research. “People generally aren’t hot to buy hospitals that are losing.”

Some of the facilities might be a tough sell even to not-for-profit operators, which have grown less willing than they once were to pick up hospitals that aren’t performing financially, even at rock-bottom prices, Standard & Poor’s analyst Lisa Zuckerman said.

“Some could get picked up pretty quickly,” she said. “But the hospitals in California are pretty savvy now and probably pretty humbled by mistakes made in the past in terms of being a lot more realistic about how hard it would be to take on a troubled facility and turn it around.”

Catholic Healthcare West, a large not-for-profit operator based in San Francisco, declined to say whether it was interested in any of the California hospitals on the block.

Tenet might find buyers among other providers located near its for-sale hospitals, analysts said.

Some said HCA Inc., the nation’s largest hospital company, and Universal Health Services Inc. might want to expand their holdings in California despite the challenges.