Tenet Posts Loss, Reduces Outlook
Tenet Healthcare Corp. said Thursday that it swung to a loss in its fiscal third quarter because of dramatic cutbacks in Medicare revenue and a significant increase in malpractice reserves after the government started investigating California’s largest hospital chain.
Tenet Chief Executive Jeffrey C. Barbakow warned investors to expect weaker results for the rest of this calendar year during what he called a “transitional period,” marking Tenet’s third cut in its earnings forecast since December.
Reporting its first negative quarter in nearly four years, the Santa Barbara-based chain said its net loss was $55 million, or 12 cents a share, in the three months ended Feb. 28. That contrasted with a net profit of $280 million, or 56 cents a share, a year earlier. Revenue in the quarter increased 6% to $3.69 billion from $3.48 billion a year earlier.
Barbakow said the core business looks reasonably good.
“We’re continuing to try to keep the core business on track,” added Barbakow, who this week said he would resign as chairman and director of Tenet but remain as CEO.
Tenet shares edged up 4 cents to $15.10 on Thursday in New York Stock Exchange trading. The stock has declined 71% since October.
That the stock didn’t fall Thursday is “basically a sigh of relief that the operations didn’t deteriorate more,” said Sheryl Skolnick, an analyst at Fulcrum Global Partners in New York, who has a “neutral” rating on Tenet.
The nation’s second-largest for-profit hospital chain has been under fire since last fall, when government probes were launched into several Tenet hospitals and practices, including its method for billing Medicare for “outlier” payments for the most expensive and difficult treatments.
Tenet, which saw profit soar when it was booking $65 million a month in outlier payments, in January voluntarily lowered its outlier collections to $8 million a month. On Thursday, Tenet said newly proposed government guidelines probably would further reduce its outlier payments to $6 million a month.
In the third quarter, Tenet’s outlier payments dropped to $40 million from $191 million the same time last year.
During the quarter, Tenet also booked costs for a change in the firm’s pending shift in its reporting period to match the calendar year; spent $110 million on a stock buyback program; incurred fees associated with a $1-billion debt refinancing in January; and took a $383-million write-down to reduce the value of assets at 10 hospitals.
As a result, Tenet on Thursday lowered its outlook for calendar 2003 and said earnings-per-share would be $1.34 to $1.65.
Tenet had forecast earnings of $2.40 to $2.60 a share for its fiscal year ending in May, and before the scandals broke, some analysts projected Tenet would earn as much as $3.23 a share for that period.
During a nearly two-hour conference call with Wall Street analysts, Barbakow and his executive team stressed that the company’s core business remains solid, noting that hospital admissions increased 1.9% for the quarter. Executives also highlighted Tenet’s plan to sell 14 hospitals, make management changes, focus on corporate governance and add outside directors to the board.
“Some of these actions will impact our near-term performance but are necessary as we work to reposition the company and build a strong foundation for the future,” Barbakow said.
Legg Mason analyst Clifford Hewitt, who has a “buy” on Tenet, said the company’s quarterly results, coupled with massive and fundamental governance and management changes, created “an impressive story.”
In its fiscal third quarter, Tenet increased its malpractice reserves to $189 million from $50 million a year earlier; that contributed to the company’s loss. Average payments from malpractice suits rose 45% to $125,000 from $86,000 a year earlier, the company said.
In January, Tenet revealed that 29 lawsuits had been filed against it, with allegations ranging from breach of fiduciary duty to violations of federal securities laws.
Two federal investigations of Tenet’s California hospitals continue. In December, federal agents raided a San Diego hospital in a probe into whether it illegally paid doctors to recruit patients. The raid followed an investigation into whether doctors at a hospital in Redding performed unnecessary heart surgeries.
Separately on Thursday, Tenet sued a dissident shareholder in U.S. District Court in Los Angeles, claiming that he may be seeking to unseat its board of directors. The company said M. Lee Pearce, chairman of the Tenet Shareholder Committee, sent out a “flawed and misleading” news release this week that Tenet may be liable for up to $6 billion stemming from a government investigation into Medicare payments.
“He in effect launched a proxy fight and tried to influence shareholders,” Tenet spokesman Harry Anderson said.
Gary Cripe, general counsel for the committee, said he had not read the suit. “But this sounds like a desperate attempt by a dying regime,” he said.
Bloomberg News was used in compiling this report.
