A week of stock-market turmoil for Tenet Healthcare Corp., Santa Barbara, Calif., began with a stock analyst calling its profit and revenue prospects into question.
Tenet's hospitals receive a far greater percentage of their Medicare inpatient revenue from so-called outlier payments than other hospitals, according to the report, issued Oct. 28 by healthcare analyst Kenneth Weakley of UBS Warburg (See chart, p. 9). Outlier payments are granted in cases where the treatment costs are well beyond the DRG rate, and the payments only partially make up for the difference between the costs and the DRG rate.
The rapid growth in Tenet's outlier payments, and increasing scrutiny of those payments, add a lot of uncertainty to Tenet's prospects, Weakley wrote. HHS' office of the inspector general said in its fiscal 2003 workplan that it is investigating Medicare outlier payments and will report its findings in fiscal 2004. A change in Medicare policy effective Oct. 1 also reduced the expected amount of outlier payments, Weakley said.
Later the same day, Tenet responded in a news release that it was affirming its profit projections because it had taken the policy change into effect. "Tenet is confident that its hospitals are fully compliant with Medicare rules and regulations, including those governing outlier payments," the statement said. The company, which owns and operates 113 hospitals, said the outlier payments would equal about 5% of net patient revenue for the year.
Investors responded quickly by selling off Tenet shares in large volumes, sending its stock down $6.81 on Oct. 28 and $3.25 on Oct. 29, according to stock data firm Commodity Systems. About 43 million Tenet shares-roughly eight times Tenet's normal volume-traded hands during those two days.
Not only did Tenet and investors respond, but other healthcare analysts jumped into the fray, countering Weakley's arguments with reports detailing the positive earnings outlook for the for-profit hospital sector. It was the more positive spin that made the rounds in Washington last week, where lobbyists said it might hurt their case for Medicare reimbursement relief for hospitals.
Weakley countered Tenet's release with a second report, writing that Tenet's estimate that outlier payments would make up 5% of its revenue was higher than his 4.1% estimate, based on his analysis of data released by the Centers for Medicare and Medicaid Services. He repeated his prediction that Tenet's long-term earnings growth would not be sustainable.
It has been CMS policy not to reconcile outlier payments when a hospital's cost reports are filed, but that policy may change, Weakley said in two separate reports. Several hospitals within the past two years have reported to CMS that they believe they received too much money from outlier payments, he wrote.
CMS Administrator Thomas Scully is expected to make the final call on these cases, and he may decide that CMS will check outlier payments against cost reports in the future, Weakley wrote. He did not cite his source for this information and did not return several calls seeking comment. Scully, through a spokeswoman, refused to comment.
Weakley already had cited other factors that would slow Tenet's growth in an earlier report. Tenet will likely be more strongly affected than other hospital systems by efforts by both government and private payers to slow the growth in reimbursements, especially because about one-third of its revenue comes from California, a strong managed-care state, he wrote. Tenet also is not likely to continue to win market share because its local not-for-profit competitors appear poised to resist its further encroachments on their turf, he added.
Weakley cut his rating last week on Tenet shares, suggesting to investors that they "reduce" their holdings. It was the second time in a month that he downgraded Tenet.
Weakley's reports also seemed to spur other analysts to issue reports on the investor-owned hospital chains, but they disagreed with his conclusions.
"Outlier payments typically reduce the losses hospitals experience when treating the very sickest patients. They do not enhance profits," wrote Robert Mains, an analyst with the brokerage firm Advest.
A.J. Rice, a healthcare analyst with Merrill Lynch & Co., published a report on Oct. 29 titled, "Why So Much Worry, When Trends are So Good." The report detailed the strong earnings that investor-owned companies reported in the most recent quarter (Oct. 28, p. 20), and Rice suggested that the aging of the population and the companies' continued investments in their hospitals would allow these trends to continue.
Rice's glowing report was noted in Washington, where one healthcare lobbyist, who asked that he not be named, said it hurt the case for a Medicare giveback bill for providers.
Chip Kahn, president of the Federation of American Hospitals, said the earnings reports of the investor-owned companies are not what's driving healthcare policy. Tenet is the second largest member of the federation, which represents for-profit hospitals. Both houses of Congress have been considering boosting payments to hospitals, physicians and other providers, Kahn said, "because of congressional concern about rural hospitals and teaching hospitals and the significant minority of hospitals that are barely making ends meet."
When asked if Tenet's high level of outlier payments are perceived by lawmakers as another example of a for-profit hospital company gaming the Medicare system to increase reimbursements, Kahn said, "I don't see it that way." He declined to elaborate.