Tenet mulls sale of revenue-cycle management subsidiary Conifer

(Updated on Dec. 20)

Tenet Healthcare Corp. is shopping around its debt-collection business Conifer Health Solutions, a growing segment that could yield a nice return after some hurdles, according to analysts.

In an announcement Tuesday morning, Tenet said it is expanding its cost-cutting strategy from $150 million to $250 million in expected savings realized by the end of 2018. It also enlisted Goldman Sachs to explore selling Conifer and is aligning executive compensation with patient quality and experience benchmarks.

Conifer provides software to hospitals and doctors to help them register patients, authorize their insurance and bill them and payers for care. It serves Tenet's 77 hospitals and more than 700 other hospitals, including some that are managed by Catholic Health Initiatives, which owns a minority stake in Conifer.

Selling Conifer would be a part of Tenet's broader restructuring plan that entails cutting a major swath of its workforce, reorganizing its management structure, divesting hospitals and possibly breaking up the company's business segments. The overleveraged hospital chain has made a series of changes as it looks to trim its $15 billion debt load.

Analysts said that Tenet would be reticent to sell off its "crown jewel"—United Surgical Partners International, a giant ambulatory surgery center chain that accounts for about 10% of Tenet's total operating revenue. But Conifer has growth potential and could yield "a large cash infusion" in a sale.

Conifer is worth about $17 per Tenet share, which is up from its stock price, which is currently hovering around $15, but it may not be so easy to sell, according to Sheryl Skolnick, director of research covering healthcare equities for Mizuho Securities.

Outside of Tenet, most hospitals and health systems task outside companies to manage their bad debt. Bad debt continues to grow with the rise of high-deductible plans, which cause nearly half of Americans to delay payments, research shows. Tenet's provision for doubtful accounts was $355 million in the third quarter, representing 7.2% of the company's revenue before bad debt, up from 7% in the third quarter last year. Repealing the Affordable Care Act's individual mandate via the tax bill could increase the number of uninsured and also could accelerate bad debt accumulation.

Companies are increasingly relying on software solutions like Conifer to secure payment, but Conifer has been growing slowly over the past year. Conifer's revenue reached $401 million in the third quarter, up from $398 million in the same period last year, marking about 9% of $4.59 billion of Tenet's total operating revenue. Conifer revenue increased to $1.2 billion from $1.17 billion in the first nine months of 2017. Revenue from third-party Conifer customers increased 5.4% to $252 million in the third quarter while the segment generated $79 million of adjusted earnings before interest, taxes, depreciation and amortization.

"Every hospital would like to improve revenue cycle management and their debt collection, but growth in (the Conifer) business hasn't been that significant because volumes have also been declining, which impact their revenues, and hospitals are budget-constrained," said Jessica Gladstone, an analyst and senior vice president at Moody's Investors Service.

As for Tenet's other businesses, its ambulatory care and USPI segment revenue increased to $468 million from $448 million, while hospital operations dipped to $3.87 billion from $4.16 billion. Tenet plans to continue using cash to increase its ownership in USPI from 80% today to 95% by mid-2019, Tenet CEO Trevor Fetter said in September, before stepping down in October under increasing investor pressure.

While the sale of Conifer would likely fetch at least $2 billion in net proceeds that could be used to pay down debt, more cost-cutting measures would be necessary, Jefferies & Co. healthcare analyst Brian Tanquilut told Modern Healthcare Wednesday.

"People who would look at Conifer would consider its ability to generate cash," he said. "The asset has two pretty large clients in Tenet and CHI—this is a pretty good standalone asset with long-term potential." Outside of divestitures, cost cutting is something that is necessary not just for Tenet but for most other hospitals, Tanquilut added.

Tenet's total-debt-to-EBITDA ratio is over 7-to-1, and even if it gets a good price for Conifer, that would only bring it down to the mid-6s, which is still high, Gladstone said.

"Selling Conifer could disrupt its own billing and revenue cycle management," she said.

In the announcement Tuesday, Tenet also hinted at a possible truce with Glenview Capital Management, which resigned its two board seats in August, citing "irreconciliable differences" with management and the board.

Tenet updated its 2018 outlook to net operating revenue of $17.8 billion to $18.2 billion; net income from continuing operations attributable to its common shareholders of $65 million to $70 million; and adjusted EBITDA of $2.475 billion to $2.575 billion. It expected adjusted EBITDA for its hospital operations of $1.435 billion to $1.495 billion; ambulatory care and USPI of $770 million to $800 million; and Conifer of $270 million to $280 million.

"We remain open to all options that can enhance shareholder value, and given that we have adequate liquidity to operate our business and no near-term debt obligations, we have the flexibility we need to achieve the best alternative for shareholders," said Ronald Rittenmeyer, executive chairman and CEO, who took over running the company after Fetter announced his planned departure. "Conifer has great business lines with strong growth potential and robust free cash flow."

Tenet is well-positioned to make operating improvements or change its strategic direction because the company has no significant near-term maturities and good liquidity with minimal restrictions, Moody's analysts said in a report issued in October.