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Tenet Profit Jumps, but Forecast Dims

Hospital chain cuts fiscal 2003 earnings outlook as it reduces the amount it charges Medicare.

January 14, 2003|Ronald D. White | Times Staff Writer

Tenet Healthcare Corp. reported Monday that its fiscal second-quarter profit more than tripled, but the nation's No. 2 hospital chain also warned investors not to expect similar results in the future because of anticipated cutbacks in its Medicare collections.

Tenet's net income for the quarter ended Nov. 30 rose to $315 million, or 64 cents a share, from $89 million, or 18 cents, a year earlier. But the Santa Barbara-based company, which is facing multiple government investigations related to its Medicare billings and some other business practices, once again narrowed its earnings outlook for this year.

The hospital operator's quarterly results were bolstered by large Medicare reimbursements known as outlier payments, which are intended to defray hospital costs for complicated cases.

Last fall the Centers for Medicare and Medicaid Services launched an audit of Tenet Healthcare's outlier payments, prompting the company recently to voluntarily slash its dependence on them to about $8 million a month from $65 million beginning this year.

"Ultimately, the issue is when you take away outlier payments, Tenet's profit margins are less than their peer group," said Clifford A. Hewitt, an analyst at Legg Mason Wood Walker. "Why they are low and what they are going to do about it is yet to be defined."

In its second quarter, however, the company's revenue increased 12% to $3.78 billion from $3.39 billion as hospital admissions rose 4%. Analysts said that growth reflected a shortage of hospital beds, coupled with rising demand.

"There is no glut of hospitals and ... people are getting older and sicker," said Jeffrey J. Hoffman, an analyst for Buckingham Research Group.

Tenet's president, Trevor Fetter, said that despite the bad publicity in recent months, the company has "not seen any adverse effect" on patient volumes save for a few isolated cases.

One exception, he said, was Tenet's Redding Medical Center in Northern California, where the number of heart procedures performed has fallen by about two-thirds since the fall.

In October, the FBI raided the hospital as part of an investigation of allegations that two cardiac doctors, Chae Hyun Moon and Fidel Realyvasquez, were performing unnecessary heart surgeries. No charges have been filed.

The Joint Commission on the Accreditation of Healthcare Organizations also has conducted reviews at Redding and other Tenet hospitals.

During their conference call with financial analysts Monday, Tenet officials said that the medical malpractice insurance coverage of the two Redding doctors was due to expire at the end of January. That could affect the ability of the two doctors to continue their practice at the Redding hospital, which has been one of Tenet's most profitable centers.

Tenet faces other problems. Last week, the Justice Department sued Tenet for as much as $323 million in damages, claiming the company falsified patient diagnoses to boost Medicare revenue separate from outlier payments. In December, federal agents raided a Tenet hospital in San Diego to investigate whether it illegally paid doctors to recruit patients.

In a filing Monday with the Securities and Exchange Commission, Tenet revealed that 29 lawsuits have been filed against the company, with allegations ranging from breach of fiduciary duty to violations of federal securities laws.

Tenet also disclosed that the Internal Revenue Service is examining the company's federal income tax returns for fiscal years 1995 through 1997 in connection with a civil settlement paid to the federal government in June 1994.

The IRS could deny a deduction the company used; that could result in Tenet facing additional income taxes and interest of about $100 million. Tenet spokesman Harry Anderson said the deduction was proper and that the company believes it will be vindicated.

On Monday, Tenet Chairman Jeffrey C. Barbakow announced that the company's senior vice president of audit services now will report directly to him and the board's audit committee rather than to the company's chief financial officer.

He also announced that Michael H. Focht Sr., who retired in 1998 as Tenet's president and chief operating officer, was returning as executive vice chairman.

Tenet executives reduced the company's fiscal 2003 earnings outlook to $2.40 to $2.60 a share, down from its earlier projection of $2.38 to $2.78 a share. Early in December, Tenet cut its profit estimate from $2.93 a share after Medicare threatened to reduce outlier payments.

For fiscal 2004, Tenet is forecasting a profit of about $2 a share. "Things have to go absolutely right" for the company to hit that goal, said analyst Sheryl Skolnick of Fulcrum Global Partners.

Tenet shares rose 84 cents to $17.69 on the New York Stock Exchange. That is down about two-thirds since October.

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