Tenet Healthcare Corp. invited stock analysts and investors to its soon-to-be headquarters in Dallas last week, and the company leveled with them.
In a five-hour conference also broadcast over the Internet, company officials provided a comprehensive look at the fallout from the past two years, since the twin tempests of high Medicare outlier payments and allegations that physicians performed unnecessary heart procedures at one of Tenet's former hospitals triggered a massive upheaval. Tenet has since installed a new management team, divested 40% of its hospital portfolio and will complete the previously announced move of its headquarters from Santa Barbara, Calif., to Texas on Jan. 3, 2005.
"Each time they have a discussion with (the investment community), they're more open in acknowledging that their issues go beyond the macro environment and affect them disproportionately because of all the company-specific backlash that they're experiencing," said Lori Price, a healthcare stock analyst with J.P. Morgan Chase & Co. who did not attend the conference but listened to the broadcast.
Among the topics addressed, Tenet said weak volume and high bad-debt expense would depress its fourth-quarter financial results below the company's third-quarter net loss of $70 million. The company said it would likely take noncash charges related to its hospital divestiture program that may exceed $1 billion.
Tenet also said that while it expects results to be better in 2005 than in 2004, the coming year will likely yield an operating loss before various charges. In addition to the volume and bad-debt challenges, Tenet said it faces a shift of a portion of its managed-care business to lower-paying contracts and continued pressure on expenses, especially labor and supplies. Tenet's California and Philadelphia markets are more unionized than markets in the Southeast and Southwest typically targeted by investor-owned chains, driving labor costs higher.
For now, Tenet is not a likely target for a takeover or a breakup, said Nancy Weaver, a healthcare analyst with investment bank Stephens. Until there is a better idea of what Tenet may have to pay the government to settle the various investigations of the company's practices, it would be very hard for another company to acquire Tenet, Weaver said. Breaking the company apart and selling off its pieces also would be difficult, because it would be very complicated to assign an unknown liability among a series of acquirers, she said.
Tenet needs to reconcile its need for volume growth with its stated goal of walking away from managed-care contracts that aren't profitable enough, Price said. The company should be investing more in its facilities, but instead, it is falling short of its $600 million capital budget for 2004, having spent just $360 million in the first nine months, in an attempt to quell liquidity concerns. "They should be putting their capital to expanding and improving services," Price said. Those investments improve physician loyalty, and that leads to patient volume, she said.
The company is focused on operations like never before, Chief Executive Officer Trevor Fetter said. "For its entire history, this company's strategy has been driven almost wholly by transactions," he said. "The new Tenet team is transforming that transactional culture into one focused on execution."
Of the 69 core hospitals Tenet is retaining, 40 are performing up to financial expectations and 29 are performing poorly, said Reynold Jennings, Tenet's chief operating officer. The poor-performing group consists largely of smaller urban hospitals, he said. The volume decline that Tenet has experienced is forcing the hospitals to find ways to trim their labor forces. Tenet will also consider paring service lines, converting little-used emergency rooms to urgent-care settings (where state law allows) and even shifting the focus of some hospitals to a particular specialty, Jennings said.
On volume, Jennings said the company wants to return to its former annual growth rate of 2%, but its hospitals have a "tarnished brand" as a result of the government investigations.
Fetter provided a vivid description of how the investigations are affecting physicians who admit patients to Tenet hospitals. "In December 2002, our hospital in San Diego was actually raided," Fetter said, referring to Alvarado Hospital Medical Center. "Even more recently, as these U.S. attorneys across the country have opened their investigations, federal agents have been going door-to-door in medical office buildings, asking physicians about their relationships with Tenet hospitals. This is difficult to endure."
In the Alvarado criminal trial, the hospital, a Tenet subsidiary and two former Alvarado executives are accused of using physician relocation agreements to illegally gain patient referrals. Tenet completed its cross-examination of one of the prosecution's key witnesses, physician Paul Ver Hoeve, last week in U.S. District Court in San Diego before a two-week break for the holidays. The prosecution is expected to wrap up its case in January, and Tenet is eager to begin its defense, General Counsel Peter Urbanowicz said.
While the trial is going on, settlement negotiations are more difficult, Urbanowicz said, but the trial "does not, ultimately, restrict our ability to settle on other matters." Urbanowicz did not offer any indication of when a settlement might occur. He added that Tenet is cooperating widely with federal investigators around the country, voluntarily providing millions of pages of business documents.
The company faces 750 lawsuits stemming from the allegedly unnecessary procedures performed at its former hospital in Redding, Calif., and those cases are expected to begin to go to trial in Shasta County (Calif.) Superior Court in July, Urbanowicz said.
Meanwhile, Tenet has taken another step toward completing its nearly year-old divestiture program, signing a definitive agreement to sell St. Charles General Hospital, New Orleans, to Preferred Continuum Care, Birmingham, Ala. Terms of the deal were not disclosed, but Tenet said its net after-tax proceeds would be $11 million. Tenet has divested 11 of 27 hospitals on a divestiture list announced in January and has agreements to divest 11 more.