Vanguard 2013 net income improves by 8%; analyst cautions investors about merger with Tenet

Vanguard Health Systems, the Nashville-based parent of Detroit Medical Center, increased shareholder net income 8% to $61.9 million in fiscal year 2013. The increase represented 75 cents per share in the fiscal year ended June 30, an increase from $57.3 million, or 71 cents per share, for the same period in 2012.

Total revenue for 2013 increased 0.6% to $5.99 billion compared with $5.95 billion for the same period last year.

But Vanguard's shareholder net income for the fourth quarter of 2013 dropped 25% to $14.5 million, or 18 cents per share, from $19.3 million, or 24 cents per share, for the same period in fiscal 2012. Total revenue increased 4.8% to $1.52 billion in 2013 from $1.45 billion the year before.

Vanguard officials said 2013 profits were boosted by $22.3 million, or 28 cents per share, due to a settlement with Medicare on a reimbursement dispute related to the Balanced Budget Act of 1997.

Because of the pending merger with Tenet Healthcare Corp., which is expected to close in early 2014, Vanguard officials did not hold a conference call to discuss its year-end financial report.

However, in a statement, Vanguard said patient discharges decreased 3.3% to 285,026 during 2013, but patient revenue per adjusted discharge increased 1.5% to $9,637. Average length of stay increased to 4.48 days from 4.4 days.

Capital expenditures increased 43.4 percent to $420.5 million during the year, primarily due to increased spending at DMC and a new hospital under construction in New Braunfels, Texas.

Vanguard's 2013 annual report also shed new light on how the merger with Tenet would be structured.

Under the June 24 merger agreement, Vanguard would become a wholly-owned subsidiary of Tenet. The deal calls for a newly created subsidiary of Tenet, called Orange Merger Sub Inc., to merge with Vanguard and become the surviving corporation, according to Vanguard.

So far, Vanguard has reported $7.8 million spent on transaction costs related to the merger.

In an Aug. 7 report, Vicki Bryan, an analyst with New York-based Gimme Credit, said Tenet's higher-than-expected losses for the second quarter ended June 30 disappointed the market.

Tenet reported a second quarter net loss attributable to common shareholders of $50 million after-tax, or $0.49 per share, compared to a net loss of $6 million after-tax, or $0.06 per share, in the same period of 2012.

Bryan noted that other major for-profit hospital owners this year also have reported lower-than-expected financial results.

"We already have warned that Tenet and Vanguard Health Systems, an even weaker performer than Tenet, will continue to disappoint market expectations up to and beyond the expected close of their merger later this year," Bryan said.

"As has been the case for years, Tenet was unable to sustain revenue growth in its general hospitals (two-thirds of total revenue) without prior period cost report settlements and unusual incentive payments," Bryan said.

Bryan said Tenet's recent strategy has been to increase outpatient business through acquisitions to reduce the impact of declining inpatient business.

Vanguard owns 28 hospitals with 7,081 beds in Detroit, Chicago, Phoenix, Boston and Brownsville, Texas. Vanguard also owns five health plans in its markets, including ProCare Health Plan, a Medicaid HMO in Detroit, which it acquired earlier this year.

"Vanguard 2013 net income improves by 8%; analyst cautions investors about merger with Tenet" originally appeared in Crain's Detroit Business.