Some hospitals have been struggling just to keep their doors open, largely due to low reimbursement rates paid by managed care plans. But Tenet Healthcare Corp., the largest hospital operator in the Orange County and the Southland, has pushed for,and gotten,higher reimbursements.
And that is pushing its earnings and stock price higher.
Tenet’s stock, which was trading at about 25 a share a year ago, in recent weeks has been bouncing between 45 and 50 a share.
The investor enthusiasm may seem surprising given the fact that Tenet’s two biggest customers are Medicare and managed care companies, both of which have been notoriously stingy when it comes to reimbursing care providers.
But the federal government has restored some Medicare reimbursements through the Benefits Improvement and Protection Act of 2000, and Tenet instituted pricing increases of 3% to 6%, on average, on its managed care contracts, said Harry Anderson, a Tenet spokesman.
Those increases came primarily after Santa Barbara-based Tenet and other hospital operators began turning away managed care companies or opting not to renew contracts in the past few years.
“Tenet has done a good job of making sure managed care contracts are at levels that are appropriate; they’re not getting into unprofitable managed care contacts,” said Jim Baker, an analyst with Raymond James Financial Inc. “Managed care (companies) would like to have you (providers) take care of patients and not pay you a lot. Your costs are going up, and if you don’t get price increases from those paying the bills,Medicare or HMOs,your margins are going to get hurt. For a while, (providers) were getting any contract they could, for volume, and (they) accepted managed care contracts at less-than-acceptable reimbursement rates.”
Two years ago, Tenet shares were hovering in the teens, at an all-time low. So the company began re-thinking its financial structure by improving cash flow, reducing corporate debt and refinancing bank debt, Anderson said.
The results have been dramatic. Cash flow for 2000 was $854 million, compared to $236 million in 1997. Tenet’s long-term debt, which had been $5.7 billion in 1997, was reduced to $6.4 billion in 1999 and around $5 billion today, Anderson said.
“By virtually ever financial measure, we’re in better shape than we were,” he said.
Tenet also has benefited from being in a sector, healthcare, that recently has been viewed by investors as something of a safe haven, according to analyst Baker.
“With the concerns of the economy and money moving out (of technology), a lot went into healthcare,” he said. “In 2000, it was viewed as a defensive area for investors, a safe haven. It is resistant to a downturn in the economy.”
And with people getting sick or injured and needing hospitalization in good economic times as well as bad, a good many of them are being treated in the more than 27,000 licensed beds at the 111 general hospitals operated by Tenet.
Much of that size has been achieved through mergers and acquisitions. Founded as National Medical Enterprises in 1969, Tenet acquired OrNda HealthCorp. in the mid-1990s to become the second largest hospital company in the country.
In 1999, Tenet began scaling back its acquisitions, concentrating more on organic growth, said Ken Weakley, managing director of Bear Stearns & Co.
“They are being selective about acquisitions and have shown great solid financial discipline,” Weakley said. “When they find a deal that doesn’t fit, they walk away from it. It’s better for shareholders and financial returns.”
Integration is one of the reasons that Tenet has slowed down its pace of acquisitions; it has wanted to focus on integrating newly purchased hospitals from the Allegheny Health, Education and Research Foundation, Anderson said.
That doesn’t mean Tenet has stopped acquiring, however. It recently completed the purchase of South Fulton Medical Center in Atlanta, where Tenet had hospitals already. And it’s negotiating with two hospitals in West Palm Beach, Fla., to boost its presence that area, Anderson said. The company already is the largest hospital provider in south Florida. n
Bronstad is a staff writer with the Los Angeles Business Journal.
