Strong Gains for Tenet Healthcare Bode Well for Other Hospitals

In what was widely seen as a sign of good health in the hospital industry, Tenet Healthcare Corp., the nation’s No. 2 hospital chain, reported strong financial gains Wednesday, helped by more favorable HMO contracts and higher Medicare payments.

Tenet also appeared to benefit from the aging population of baby boomers. The Santa Barbara-based company said its two strongest growing groups of patient admissions were those between the ages of 41 and 50 and 51 and 60.

Investors have long looked for signs of an aging America improving the outlook for health-care companies, said Charles Lynch, an analyst with CIBC World Markets in New York. But until now there has been little evidence of what he called this slow-moving trend.

“What’s interesting here is that Tenet is one of the first companies that is able to start to quantify that effect,” Lynch said. “If that is truly what’s behind the volume gains at Tenet, it could be the start of an impressive and persistent trend in the health-care industry.”

Tenet’s income from operations jumped 30% to $198 million in its third fiscal quarter ended Feb. 28. Earnings per share from operations reached 60 cents, up 25% from the same period a year earlier. Revenue rose 6.5% to $3 billion.

With 110 hospitals in 17 states, including 30 in Southern California, Tenet is the nation’s second-largest hospital chain.

The gains pushed Tenet’s shares up $2.12, or 5%, to close at $46.12 on the New York Stock Exchange on Wednesday. The stock has nearly doubled over the last year.

“You can often extrapolate how the rest of the hospital group will perform from the comparisons and the trends in the Tenet report. That’s why you are seeing the entire hospital group so strong [Wednesday],” Lynch said.

Most other big chains will report their earnings later this month. Shares of HCA-The Healthcare Co., the nation’s largest hospital chain, rose 72 cents, or 2%, to close at $40.20; Universal Health Services shares jumped 6%, or $5.30 to close at $90.85 and Community Health Systems saw an even larger increase, 8%, or up $2.09 to close at $28.20. All trade on the NYSE.

Increases in Medicare payments and health maintenance organization contracts contributed to Tenet’s latest results, Lynch said, a trend that also should appear in the coming reports of other hospital chains.

“It was a splendid quarter by any measurement,” Jeffrey C. Barbakow, chairman and chief executive of Tenet told investors and analysts during a conference call.

Thomas Mackey, Tenet’s chief operating officer, told investors the company is watching negotiations between CalPERS, the giant California public employee retirement system, and HMOs for setting premium increases in 2002. Tenet and others expect health insurers to exact average premium increases of 16% from CalPERS, the nation’s second-biggest buyer of health insurance. CalPERS’ position on pricing typically sets the bar for how high the industry can raise premiums in a given year.

Mackey said the size of the likely premium increase “bodes well for continued strong managed care and hospital premium increases.”

Another key hospital measure--revenue collected per patient--grew 8.3% in the quarter compared with a year ago, a reflection of robust gains in cardiology, orthopedics and neurology admissions, lucrative specialty areas.

Tenet’s financial picture improved despite little--less than 1%--annual growth in admissions at its hospitals open at least one year. Admissions were flat because this year lacked a leap year day and was the lightest flu season in five years, Mackey said.

Yet Mackey pointed out that Tenet increased its profit despite little growth in admissions, evidence, he said, that the flu season has little financial impact on the company.

But the area where admissions grew the strongest was among Baby Boomers, a demographic that is expected to need more hospital care as it ages.

Lynch said the improving admissions numbers can be attributed to different factors, such as Tenet’s ability to capture market share from other competitors, especially not-for-profit hospitals.

The not-for-profits have become a favored takeover target for Tenet, which is in the process of purchasing four money-losing institutions in Atlanta, Florida and Pennsylvania.

Though the hospitals Tenet is buying are losing money, Mackey said, “There is nothing that we have discovered so far that gives us any indication at all that we can’t relatively quickly achieve the same kind of operating margins that we do in the rest of the market.”

“We are not going to do these deals unless we think there is a significant upside for the company,” Mackey said.

Tenet’s strong cash flow allowed the company to slash debt by $188 million in the quarter. As of Feb. 28, the company’s total debt dropped to under $4.9 billion, down more than $1 billion from a year ago.