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Tenet President and CEO Trevor Fetter

Tenet expects ACA will boost earnings up to $100M

By Beth Kutscher
Posted: February 25, 2014 - 4:30 pm ET

Tenet Healthcare Corp., Dallas, expects the Affordable Care Act to contribute between $50 million and $100 million to 2014 earnings before interest, taxes, depreciation and amortization, the company detailed in reporting its earnings Tuesday.

Tenet is assuming a 15% reduction in uninsured volume, with 10 percentage points of the drop attributed to those gaining Medicaid coverage and 5 points to those buying plans from either a state or the federal exchange, Chief Financial Officer Daniel Cancelmi said on an earnings call.

That's below the 23% estimate for an overall reduction in the uninsured from the Congressional Budget Office, owing to Tenet's heavy presence in Southern states like Texas that are not expanding Medicaid.

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The chain is also assuming that 5% of patients who previously had employer-based coverage will migrate to the exchanges as companies drop coverage. Reimbursement rates from exchange products are expected to be within 10% of commercial rates, Cancelmi said.

President and CEO Trevor Fetter stressed in an interview that the chain is optimistic about healthcare reform. “Everything about the Affordable Care Act should help,” he said.

In its first earnings report since closing its deal for Vanguard Health Systems Oct. 1, Tenet reported a fourth-quarter net loss of $24 million as it racked up higher interest expenses on debt to finance the $1.8 billion Vanguard deal. Tenet took on a total of $4.6 billion in debt because of the purchase, as well as $400 million in share repurchases.

That quarterly loss, as well as its conservative outlook for 2014, drove down its share price more than 10% Tuesday, despite an earnings report that showed higher operating revenue and admissions numbers that weren't as bad as in previous quarters.

Tenet's same hospital admissions fell 2.3% year-over-year, or 0.5% when adjusted for outpatient activity. It reported income from continuing operations of $43 million on revenue of $3.9 billion, compared with $65 million in income on revenue of $2.3 billion during the same period last year.

Tenet is predicting a $25 million negative EBITDA impact from the controversial “two-midnight” rule, which uses length of stay to determine whether care should be billed as inpatient or outpatient. Unlike some of its peers, the company believes the rule will hurt volume and earnings.

“To us, it seems a stretch of the imagination that you could arrive at a hospital on a Friday night and leave Sunday and call it an outpatient visit,” Fetter said. “That seems like a stay, not a visit.”

On the call, Fetter also praised Tenet's outpatient development initiatives, in which it has invested $264 million between 2010 and 2013 to triple the number of outpatient centers. “Tenet now has a very strong competency in designing, building, buying and operating outpatient centers of all types,” Fetter said.

The chain's initial emphasis on imaging centers has been expanded to include buying and building urgent-care centers, free-standing emergency rooms and physician clinics in communities where it is already located, he told Modern Healthcare. It also will add surgery centers in current locations and those where it doesn't yet have a presence.

Follow Beth Kutscher on Twitter: @MHbkutscher

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