Tenet posts big loss, expresses contrition on conference call

By Paul Deckelman

New York, Nov. 11 - Tenet Healthcare Corp. spiraled deeper into the red in the third quarter, brought low by a charge related to bad debts racked up by non-paying patients and the mounting costs of dealing with litigation and investigations on multiple fronts. In a conference call later Tuesday, company executives struck what Tenet president and chief executive officer Trevor Fetter called "a new tone of contrition" for the Santa Barbara, Calif.-based hospital operator's past arrogance and other misdeeds.

Tenet shares declined 22 cents (1.66%) to $13.03 in New York Stock Exchange dealings Tuesday. Its bonds were heard to have been little traded, with the bond market officially closed for the Veterans' Day Holiday' Tenet's 6 3/8% notes due 2011 were quoted at 91.5 bid.

Tenet reported a net loss of $308 million (66 cents per diluted share) for the third quarter ended Sept. 30 - a sharp deterioration from the $328 million profit (66 cents per share) seen in the year-earlier quarter. It also represented a sequential widening of the $195 million (28 cents per share) loss which Tenet had posted in the second quarter.

Company officials said the primary driver in Tenet's swing into the red from its year-ago profit was the $522 million charge it recorded for what the company termed "provision for doubtful accounts" - i.e. bad debts from uninsured patients, or from those unable to make co-payments or deductible payments required by their insurance. A year earlier, the company had taken a $260 million charge related to doubtful accounts.

Fetter told analysts and investors that Tenet was confronted by "a significant and dramatic shift in our payer mix towards patients who pay little or nothing" toward the care which Tenet provides for them.

Fetter noted the paradox that while hospital industry financial performance had historically been driven by admissions and utilization of hospitals by patients, "with these new payer realities, more volume may in certain circumstances decrease profit." Indeed, in the third quarter, Tenet's system-wide admissions actually rose 1.5% overall and 1.6% in those hospitals which had been part of its network for at least a year.

But with more patients paying less of their own bills, Tenet has been stuck having to eat much of those costs - and they have been accelerating. Fetter noted that using figures covering 80% of Tenet's 99 hospitals, growth in uninsured discharges accounted for less than 10% of the growth in total discharges in the first quarter - but this had doubled to nearly 20% in the second quarter, and had doubled again to around 40% in the third quarter.

And while uninsured patients - most of whom come to the emergency rooms of Tenet's hospitals for treatment - still account for less than 5% of total discharges at Tenet hospitals, chief financial officer Steven Farber noted that in addition to growth in the number of uninsured patients, they are requiring an increasing level of complicated and expensive services, with the highest growth is taking place in what is known in medical parlance as "level 5" emergency room services, for the most serious of conditions requiring the greatest amount of care.

"These higher acute services obviously generate higher bills, Farber said, "and statistically, we collect meaningfully less on large bills than on small bills for self-pay patients [i.e. the uninsured or those with low levels of coverage the patient must supplement out of pocket]."

He told the conference call that the rise in the number of uninsured patients, combined with a decline in the collectability of the debts they owe has recently caused Tenet to write down the value of such uncollected debts once they pass the 120-day mark and go to internal collection processes to around 12 cents on the dollar - a major decline from the historical norm for such unpaid bills of 17 cents on the dollar.

Farber said that Tenet is trying to get on top of the problem by improving its electronic system for collecting, collating and verifying data at the time of patient admissions, in order to ensure that patient information is correct and complete - and that the patient has not provided false information. Tenet is using the system in about half of its hospitals so far.

Another initiative it is taking is the increased use of patient advocates, who work with uninsured patients to determine whether they might in fact be eligible for Medicaid or other forms of government assistance and help them to sign up for such programs, "which will result in the hospital being paid some amount for the care that it provides." Farber said that through September, Tenet had seen a 22% increase in cases eligible for government assistance.

However, even with the deployment of new information technology, the use of patient advocates, the centralization of Tenet's billing and collection activities into eight regional offices - the first is slated to open in January - and the planned "compact with the uninsured" program which will allow Tenet to legally charge uninsured patients less than the going rate for services, Farber warned that "given the speed of the patient mix shift and the increasing deterioration throughout the third quarter, it seems clear that the market trends have not yet finished playing out. If the trends continue to deteriorate, we will likely incur additional bad-debt charges in the future."

While costs connected with non-paying patients are perhaps the single largest drag on the company's finances, they are by no means the only problem Tenet faces.

It is in the process of trying to renew its contracts with various managed care providers, and while Fetter said that Tenet is "on track" to have 80% of the contracts renewed by year-end, some problems have arisen between the company and its managed-care clients, most notably, a nasty dispute with WellPoint Health Networks Inc.'s subsidiary, Blue Cross of California, arising from charges by Blue Cross that Tenet's Modesto, Calif., facility had allegedly performed unnecessary cardiac bypass procedures. Blue Cross announced plans to drop its contract with the medical center; Tenet says it is owned $50 million, and has threatened legal action to get the money.

Tenet itself is on the receiving end of legal actions, by investors, doctors who have had dealings with its hospitals, and was also being probed by the Securities and Exchange Commission, the Justice Department, the Senate Finance Committee and the California Department of Health. The litigation and investigations cost Tenet $253 million in the third quarter - an expense it did not have in the year-earlier period.

Fetter, in his opening statement, alluded to all of the company's legal problems, as he declared "this is a troubled company."

The executive - who officially took over as CEO two months ago, after having held the post on an interim basis since the spring, frankly acknowledged that "something went very wrong with Tenet." He said it "faces enormous challenges in rebuilding trust among government, our customers, our physicians, our patients, our employees and our shareholders."

In certain cases, he said "the company seems to have confused what was legal with what was right. It was wrong for the company to pursue what was called an 'aggressive pricing strategy'. If any unnecessary procedures were performed in any of our hospitals, that too was wrong."

Fetter pledged that Tenet was launched on "a new course," with better procedures in place to monitor and control what goes on at the company.

"We still have a lot of work to do," he asserted, "but the mistakes of the past will not be tolerated in the future."

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