Tenet Cuts Earnings Forecast for 2 Years

Tenet Healthcare Corp., chastened by harsh criticisms for reaping excessive Medicare payments, on Tuesday slashed its earnings outlook for the next two years and outlined a new approach to hospital pricing that includes discounts for uninsured patients.

The nation’s second-largest for-profit hospital chain told financial analysts in New York that about half its earnings growth in the last two years came from special Medicare reimbursements known as outliers, which regulators are now auditing. Tenet has acknowledged that it doubled its outlier payments in the last two years, to about $750 million last year, by aggressively raising its hospital charges.

Spurred by Tenet’s sizable Medicare outlier payments, the agency that oversees Medicare said Tuesday that it will step up its scrutiny of hospitals that generate unusually large outliers.

Tom Scully, administrator of the Centers for Medicare and Medicaid Services, said hospitals suspected of inflating their charges to boost outlier payments could be investigated by the Office of the Inspector General.

“If you have true costs, great. If not, we are going to come looking for you,” Scully said in an interview. Edward Prunchunas, chief financial officer at the nonprofit Cedars-Sinai Medical Center, called Scully’s action “an appropriate response. They need to be able to control any gaming of the [Medicare] system.”

The announcement from Medicare came as Santa Barbara-based Tenet Chief Executive Jeffrey Barbakow and other company officials sought to reassure Wall Street about its future prospects in the wake of a Medicare audit and a separate federal investigation into allegedly unnecessary heart operations at a Tenet hospital in Redding, Calif.

Analysts said they were generally pleased with Tenet’s presentation, but remained concerned about the ultimate effect of the federal audit and the Redding investigation.

“I think the problem here is that the story is still in the hands of the government,” said Clifford Hewitt, a health analyst with Legg Mason in Baltimore. “There are a lot of shoes that could drop.”

During the conference Tenet officials acknowledged that under Medicare’s new outlier payment criteria as many as 56 of the company’s 113 hospitals could face greater scrutiny over their billing practices. Outlier payments are intended to cover unusually expensive procedures and are paid in addition to fixed Medicare reimbursements.

Under one of Scully’s new standards, hospitals with outlier payments that exceed 10% of regular Medicare reimbursements could trigger a review. Under this formula, Tenet said, as much as $376 million in current outlier revenue could be at risk.

Tenet officials said their earnings from operations will range from $2.38 to $2.78 a share in the current fiscal year. That would compare to a profit of $2.34 a share in fiscal 2002. Previously, the company estimated its current-year earnings would grow by at least 25%.

For fiscal 2004, Tenet estimated its earnings per share would be about $2.

Barbakow told analysts that the company’s recent analysis of outlier payments was the first such review at Tenet. Barbakow maintained that he wasn’t aware of the company’s heavy reliance on outlier payments.

“I didn’t dig deep enough when things were going unusually well,” Barbakow said at the investment conference. “Clearly I will do so in the future.”

The stock has since fallen by more than 65% since its high of $52.50 in early October.

On Tuesday Tenet’s shares closed at $17.84, up 8 cents, on the New York Stock Exchange. The company’s presentation was made after the market closed, and in after-hours trading Tenet’s shares fell to $16.90

“The company’s under a microscope and we know it,” said Trevor Fetter, who took over as Tenet’s president after two of the company’s top executives stepped down last month. “We’re likely to remain under that microscope for years.”

Under its new hospital pricing strategy, Tenet said that it will try to simplify its contracts with health insurers. Tenet said it would move away from reimbursements based on gross retail charges set by hospitals in favor of fixed daily fees.

Although Tenet said that would not hurt its revenues, some analysts worry that the company will not be able to sustain its sharp increase in reimbursements from managed care health companies.

As part of its new approach Tenet is freezing its retail prices until at least next May, and plans to charge uninsured hospital patients the same reduced rates that those in HMOs get.

“I am thrilled to hear it,” said Phil Boesch, a Marina del Rey lawyer, who has filed suits against Tenet on behalf of 10 uninsured patients.