Tenet Shares Drop 26% on Warning

Tenet Healthcare Corp. said Monday that earnings would fall dramatically short of expectations through the first half of 2004, triggering a 26% plunge in the hospital chain’s already-battered shares.

The stock sank $4.22 on the New York Stock Exchange to $12.01, its lowest ebb in more than three years.

The company’s third earnings warning since November indicates that Tenet’s problems extend beyond the Medicare pricing policies that prompted a federal investigation and a Justice Department lawsuit. Tenet’s aggressive strategy of charging Medicare at rates well above the industry average also extended to its managed-care operations, and health maintenance organizations are fighting back, analysts said.

“The HMOs feel gouged, and now it’s payback time,” said Sheryl Skolnick of Fulcrum Global Partners.

Tenet President and acting Chief Executive Trevor Fetter acknowledged as much in a statement Monday. “The pricing practices pursued by the company’s hospitals are making it difficult for many of our hospitals to obtain managed-care price increases at normal industry levels in 2003,” Fetter said.

Santa Barbara-based Tenet also said per-patient revenue for hospitals it has owned at least a year were down 6.6% in April and May compared with a year earlier. Hospital admissions rose 1.8%. A spokesman said the revenue drop was related to the voluntary reduction Tenet took in Medicare reimbursements.

Fetter replaced longtime Chairman and CEO Jeffrey Barbakow, who stepped down last month. Barbakow was unable to survive a series of body blows to the company, including the federal probe of Tenet’s Medicare billing practices that began in November. Separately, federal agents late last year raided the offices of two heart specialists suspected of conducting unnecessary surgeries at Tenet’s Redding Medical Center in Redding.

On Friday, lawyers were seeking class-action status for patients of a Tenet hospital in North Carolina, alleging they were overbilled.

Fetter said the company’s diminished financial outlook over the next 12 months stemmed in part from “repercussions of past pricing practices.”

Analyst Matthew Borsch of Goldman Sachs said Tenet’s problems would echo in the hospital industry as fewer people need serious care and HMOs drive harder bargains. But Advest Inc. analyst Robert W. Mains said Tenet’s warning came “in stark contrast to the rest of the hospital industry, which are up in terms of managed-care payments in the 5% to 6% range.”

“This is a Tenet problem, not an industry problem,” agreed analyst Jeffrey J. Hoffman of Buckingham Research Group.

HMOs including Blue Cross of California, Health Net Inc., Aetna Inc., PacifiCare Health Systems Inc. and others either declined to comment or did not return calls about their contract talks with Tenet.

Tenet, which operates 112 hospitals in 16 states, negotiates upfront agreements on its pricing with HMOs. Analysts said the disclosures of questionable billing practices have weakened Tenet’s ability to negotiate higher payments.

Tenet said it would temporarily abandon plans to use some of the funds from the sale or closure of 14 hospitals to repurchase stock. Instead, it plans to use $500 million from the sales to reduce its debt load.

Another factor in Tenet’s diminished expectations is higher malpractice costs, mirroring an industry trend. In the first quarter of 2003, its malpractice expenses were $79 million, up 41% over the $56 million for the same period a year earlier.

The company said earnings from the first two months of the second quarter were 2 cents a share, including charges of 15 cents a share for severance, retirement and malpractice costs.

Analysts, on average, had expected the company to earn 34 cents a share for the three-month period, according to a poll by Thomson First Call.

Fetter said he expected problems to continue “through at least the first half of 2004.” For the 12-month period beginning July 1, Tenet predicted it would earn 80 cents to $1 a share, or 45 to 65 cents below analysts’ expectations.

Later Monday, Standard & Poor’s said it put Tenet on its CreditWatch list in response to the lowered earnings guidance.