Tenet Healthcare (THC)

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Over two-thirds of Tenet's hospitals are located in three states - California, Florida, and Texas - and demographic trends in these states have a substantial effect on the company's balance sheet. In California, nursing salaries are 30% higher than in other parts of the U.S., which increases costs and lowers Tenet's net income. Florida has relaxed its Certificate of Need laws, which serve as a barrier to entry in the healthcare industry, resulting in greater competition and lower admissions at Tenet's hospitals.^[1] Texas has the highest proportion of uninsured residents (24.6% of admissions) of Tenet's three core states. Since the hospital does not collect money from uninsured patients yet incurs the cost of treating them, having such a large proportion of uninsured treatments is a cost that goes straight to the bottom line.^[2]

The hospital industry has suffered in the last five years because specialty private clinics that focus on the most profitable procedures are pulling patients away from major hospitals. At the same time, insurance companies are cutting costs and hospitals continue to see high numbers of uninsured patients. So Tenet is left with less profitable patients, and performs more low-margin procedures. In addition to these industry-wide risks, Tenet is also facing fallout from past legal problems. Before 2003 Tenet consistently inflated its revenues by misrepresenting its Medicare prices. A government investigation led to a settlement 2006, with Tenet agreeing to pay the government over $900 million.^[3]

[edit] Business and Financials

Tenet Healthcare operates 59 general hospitals, a cancer hospital, and a critical access hospital in 12 states. It offers general as well as specialized medical care, and owns two rehabilitation centers, a nursing facility, outpatient surgery centers and medical office buildings.^[4] Operating hospitals is Tenet's core business, but Tenet also invests in other healthcare companies. The greatest concentrations of licensed beds in its hospitals are in Florida (25.0%), California (24.4%) and Texas (17.1%).^[5] Although these three locations have proved to be profitable for Tenet, the downside is that major developments in any one of those areas, such as the growth of uninsured patients in Florida and Texas, will have a big impact on Tenet's net income.^[6]

Tenet has reported declining patient visits in the last three years. One cause of the decline is that the total number of registered beds has decreased over the last three years^[7], due in part to Tenet's sale of some of its hospitals. The overall healthcare industry has seen decreasing patient admissions, due to two main factors: first, advances in technology have made it possible for many procedures to be performed in a physician's office, apart from the facilities and resources of an entire hospital. Also, declining physician reimbursement has led some physicians to seek out other sources of revenue.

Tenet reported losses in the past three years, mainly fallout from legal troubles concerning improper billing of insurance companies which hurt Tenet in two important ways: paying the settlements for those cases reduced their operating income and the negative press harmed their image.^[9] These legal issues concern improper Medicare billing practices. Before 2003 a loophole existed in which a hospital could increase its Medicare outlier payments by raising its prices quickly from year to year. Tenet earned $1.6 billion through this loophole, leading to an investigation and indictment by the Department of Justice for its dishonest billing practices. Tenet eventually decided to make a settlement and agreed to pay $900 million. As the following graph will show, Tenet reported negative operating income in the years 2005 and 2006. However, last year the company reported positive profits.

[edit] Key Trends and Forces

[edit] Growth of Specialty Clinics is Driving Higher Margin Procedures Away from Tenet's Hospitals

A growing trend in the health care industry is the rise of private clinics that specialize in particular areas of medicine. Advancing technology has allowed these smaller providers to offer complex procedures that previously were only possible in a hospital. Unfortunately for hospital managers like Tenet, the specialized procedures that these clinics provide are the same ones that earn the highest margins for hospitals - installing pacemakers, for example, or oncology drug infusions. Losing the business of these patients means that more of Tenet's procedures are performed at low or even negative margins, undermining its performance on the balance sheet.

[edit] Government Regulation of Healthcare Industry is Directly Connected to Revenues

1/3 of Tenet's net patient revenues come from government-sponsored programs (25.8% from Medicare and 8.4% from Medicaid). Any change made to the Medicare or Medicaid programs adjusting the rate at which the government will reimburse hospitals will have an effect on Tenet's revenue. If the federal government decides to cut Medicare funding, then Medicare would have to cut back on the number of people and procedures it covers, which would directly affect Tenet's revenue.^[11] In addition, as Tenet's $900 million settlement with the Department of Justice will prove, attempting to bend or defy these regulations will result in significant losses for the company.

[edit] High Numbers of Uninsured and Underinsured Patients Are Bad News for Business

There is an increasing number of patients who either have no insurance or whose insurance does not cover the full cost of their care. Treating these people results in losses for the hospital. These losses will continue if the proportion of insured patients does not increase.^[12] Tenet has an above-average number of insured patients-75.2% of the households in counties where Tenet operates have some form of medical insurance.^[13] The greater number of insured patients helps soften the blow the company experiences from treating uninsured ones.

[edit] Hospitals Try to Retain Doctors, Patients, and Nurses in Face of Independent Practitioners and Labor Unions

The growing number of physician-owned and stand-alone surgery centers entering the healthcare market has had another effect beyond costing Tenet some of its higher margin procedures. When a doctor has a contract with a particular hospital they will refer their patients to that hospital.^[14] If that doctor instead maintains their own private practice, then hospitals in the area lose potential referrals, leading to fewer admitted patients and lower revenues. Furthermore, new clinics and surgery centers attract talent away from Tenet, making it more difficult for hospitals to retain quality staff. This is exacerbated by increasing the amount of union activity in the healthcare industry. As of December 31, 2007 22% of Tenet's employees belonged to a union. Tenet has already increased salaries, wages, and benefits in response to union pressure. Some states, such as California (which represents a substantial portion of Tenet's revenues), have enacted nurse staffing-ratio laws which require hospitals to hire a certain number of nurses, a requirement made increasingly difficult due to the nationwide shortage of nurses. If a hospital is unable to hire the requisite amount of nurses, it will have to lower patient admissions in order to comply with the law, leading to lower revenues and lower prices.^[15]

[edit] Competition

In the healthcare industry, competition is mainly local, and thus a particular company's position within the industry usually depends on the specific geographic area in which it operates.^[17] Within its industry, however, Tenet's sales are about twice as high as its competitiors, Universal Health Services and Health Management Associates.

Universal Health Services operates 31 hospitals and 113 behavioral health centers in 32 states, as opposed to Tenet's 12.^[18] Since Tenet's facilities are focused in a few specific areas: Florida, California, and Texas, many substantial development in those areas, economic or otherwise, will have a significant impact on the company as a whole.

Health Management Associates operates 59 hospitals and clinics along the eastern coast and the Midwest, focusing on non-urban areas.^[19] Given the regional nature of competition in the healthcare industry, Health Management Associates is not always in direct competition with Tenet Healthcare, however it is still a major player in the healthcare industry.

[edit] References

1. ↑ "Tenet Healthcare Corp. Health Care Facilities: Equity Research Recent Development Report," AG Edwards, Page 23. May 30, 2007
2. ↑ "Tenet Healthcare Corporation." Stifel Nicolaus report, Page 4. June 21, 2007
3. ↑ Tenet Healthcare Corporation Morningstar Analysis, Page 3
4. ↑ THC 2007 10-K, Item 1, Page 1.
5. ↑ THC 2007 10-K, Item 1, Page 5.
6. ↑ "Tenet Healthcare" Bear Stearns report, Page 4
7. ↑ THC 2007 10-K, Item 1, Page 5.
8. ↑ THC 2007 10-K, Item 1, Page 5.
9. ↑ Tenet Healthcare Corporation Morningstar Analysis, Page 1
10. ↑ THC 2007 10-K, Item 6, Page 26.
11. ↑ THC 2007 10-K, Item 1A, Page 16.
12. ↑ THC 2007 10-K, Item 1A, Page 16.
13. ↑ "Tenet Healthcare Corp. Health Care Facilities: Equity Research Recent Development Report," AG Edwards, Page 18. May 30, 2007
14. ↑ "Industry Profile: Hospitals" Hoover's.
15. ↑ THC 2007 10-K, Item 1A, Page 17.
16. ↑ Tenet Healthcare Corporation Morningstar Analysis, Page 3
17. ↑ THC 2007 10-K, Item 1, Page 8.
18. ↑ Universal Health Services 2007 10-K, Item 1, Page 4.
19. ↑ [1]"Introduction to HMA"]