Tenet narrows net loss in third quarter of 2018

(Updated on Nov. 6)

Tenet Healthcare Corp.'s CEO described the company's hospital segment growth as "not acceptable" in its third quarter earnings call Tuesday.

Shares of the Dallas-based hospital chain were down by more than 10% by midday Tuesday, after its executives worked to convince analysts and investors that the company would revive its lagging hospital segment, even after lowering the company's full-year 2018 earnings outlook.

Tenet CEO Ron Rittenmeyer kicked off the earnings call by describing the third quarter of 2018 as being a solid quarter for Tenet's United Surgical Partners International and Conifer Health Solutions, but not so much in its hospital segment.

"Make no mistake: Growth and operational excellence are my top priorities as it relates to hospital operations," he said.

Admissions to Tenet's hospitals declined 2.1% during the third quarter of 2018 year-over-year, while adjusted admissions increased 0.3%. Tenet noted that adjusted admissions would have risen 1.3% on a same-facility basis if not for service line closures and declines in Detroit.

Although Detroit still poses a headwind for Tenet, Rittenmeyer said the company is on a path to restore organic growth.

Tenet's hospital operations revenue declined 2.7% during the third quarter of 2018 year-over-year, which the company said was primarily due to hospital divestitures. Net patient revenue in Tenet's hospital segment increased 6% year-over-year on a same-facility basis. And revenue per adjusted admission increased by 5.7%.

Last week, Universal Health Services also reported a big year-over-year jump in revenue per adjusted admission: 6.6%.

Overall, Tenet narrowed its net loss from continuing operations to $9 million in the quarter, compared with $366 million during the third quarter of 2017. Tenet's net operating revenue was $4.5 billion during the third quarter year-over-year, down slightly from just under $4.6 billion in the third quarter of 2017, but beating analysts' expectations.

Tenet's operating income was $320 million during the quarter, up significantly from $51 million during the same time in 2017. Its adjusted earnings before interest, taxes, depreciation and amortization was $577 million in the third quarter of 2018, up nearly 14% from $507 million in the third quarter of 2017.

Tenet still has yet to strike a deal for its revenue-cycle subsidiary, Conifer, almost a year after first announcing plans to sell the business. Rittenmeyer said Tuesday the company is in the "late stages" of making a final decision, which could include formats such as a merger, spin-off or combination of alternative transactions.

"While I realize many believe we should have accomplished this faster, our commitment to shareholders is to do it right," he said.

Conifer's year-to-date margin is 23.3%, the company announced Tuesday, up from 17.7% at the same time in 2017. The segment's revenue dropped 7.5% year-over-year in the third quarter of 2018 to $371 million, which Tenet attributed to client attrition following divestitures. Conifer's EBITDA, meanwhile, grew 2.5% year-over-year, to $81 million.

Tenet projects strong growth in its USPI segment next year, driven by $130 million worth of ambulatory acquisitions through the third quarter of 2018, a number that's expected to grow to between $225 million and $250 million by the end of the year.

"This will provide a nice tailwind to USPI's growth in 2019," Rittenmeyer said.

Tenet's ambulatory revenue grew 6.7% on a same-facility basis. Revenue per case increased 1.6% year-over-year. Since last November, the company has built or bought 30 outpatient centers, including urgent care centers, off-campus emergency departments and surgery centers, Rittenmeyer said.

At the same time, Tenet is paring back on services it says are "margin dilutive." The company has closed four obstetrics programs and five behavioral health programs since last November. That's in addition to divesting eight hospitals and related outpatient centers, nine facilities in the United Kingdom and certain home health and hospice assets since that time.

Rittenmeyer noted Tenet also amended its bylaws to include a special meeting right for shareholders. A major shareholder, Glenview Capital Management, had been pushing the company to take that a step further, but later backed off on that proposal.

"We will have and continue to engage frequently with shareholders and solicit their feedback on a wide range of topics," Rittenmeyer said.