Should Tenet Healthcare Corp. just call the whole thing off?
After Dallas-based Tenet reported another quarter of disappointing earnings results last week, one analyst asked the companys executives if they are having conversations with the board about strategic alternatives, such as a sale of the company or another massive sell-off of hospitals. Trevor Fetter, Tenets president and chief executive officer, declined to answer that question, saying that the board was confident in the companys operating strategies.
Fetter did argue, however, that Tenet was not stuck in the Catch-22 the analyst described: The companys patient volumes wont improve unless it invests more in its facilities, but unless the volumes improve, it wont have the financial strength to invest more.
Gary Lieberman, healthcare services analyst for Stanford Group Co., said in an interview that two reasons were behind his question.
One is that, nearly five years after Tenets problems began with revelations about its high Medicare outlier payments, theyve had very little traction in the turnaround, Lieberman said. While patient volumes have been weak among Tenets peer companies, none has seen its payer mix deteriorate like Tenet has, Lieberman said.
The second quarter was the 10th straight in which Tenet logged lower commercial managed-care admissions, he noted.
The second reason, Lieberman said, is that Tenet appears to be slowing its capital spending to preserve cash. When Tenet announced its government settlement last year, it also said that it planned to boost its capital spending, particularly on medical equipment, to lure back physicians who have been diverting patients to other hospitals (July 3/10, 2006, p. 10).
Tenet said last week that its capital spending will fall about $25 million short of the $700 million to $750 million range that it expected for this year, and will fall to a range of $600 million to $650 million in future years.
Tenets lower capital spending before the settlement led to the commercial volume declines, and it will take a lot of spending to lure physicians back, Lieberman said. Its a lot easier to lose a customer than to gain a customer, he said.
During a conference call, Fetter said that none of the projects that were part of last years commitment has been shelved. Regulatory delays, especially in California, and the grouping of equipment purchases in large blocks to trim costs have both slowed progress, Fetter said, adding that all the projects should be completed by the end of the year.
Tenet executives also outlined some potential positives on the volume side. Last month, the company reached a national agreement with insurer Aetna that adds nine Tenet hospitals to Aetnas plans, and could mean an additional 500 admissions annually, said Stephen Newman, Tenets chief operating officer.
Tenet also is increasing its physician recruitment efforts by centralizing this function at corporate headquarters, according to Newman. Adding specialists will help Tenet keep patients who need to be referred for tertiary services, particularly in the Palm Beach, Fla., market, he said.
Lieberman also questioned what Tenets strategic options are at this point. Most of the for-profit companies have added a lot of debt in the past year, so they are not good candidates to buy Tenet, he said.
Private equity has slowed its acquisition pace as problems with subprime mortgage debt have raised the cost of debt for most borrowers, Lieberman said.
David Cyganowski, a managing director at Citigroup and co-head of its healthcare group, said he expects that private equity will pick up the pace again once the debt markets stabilize.
You cant count them out, Cyganowski said. There are vast amounts of private equity money right now, and they have a significant interest in healthcare.
Tenet has some time to wait for the debt markets to turn around, Cyganowski said, as the company has no debt maturing until 2011. There is management talent available, too, with the acquisition last month of Triad Hospitals, Plano, Texas, leaving most of that management team out of work, he added.
Not-for-profit systems also could be strategic buyers of Tenet hospitals in certain markets, Cyganowski said. The large not-for-profit systems are really coming off their best year ever, he said. They realize that scale within a given market translates into better commercial pricing, lower supply costs and that translates into greater profitability.