Tenet Healthcare Corp., once Orange County’s largest hospital operator, is downsizing to grow.
At one time, Dallas-based Tenet owned nine hospitals in the county.
In a few short months, Tenet will be down to three hospitals here: Fountain Valley Regional Hospital and Medical Center, Placentia-Linda Hospital and Los Alamitos Medical Center.
Tenet officials said earlier this summer that the company wasn’t going to renew its lease on Irvine Regional Hospital and Medical Center, citing an inability to come to terms with landlord HCP Inc., a Long Beach-based owner of healthcare real estate, as well as increased competition.
“It’s a very competitive market in Orange County,” said Jeff Flocken, a Tenet senior vice president who oversees the OC operations from Santa Ana offices.
Kaiser Permanente’s May opening of a hospital near Irvine Regional on Sand Canyon Avenue affected Tenet’s business, Flocken said. Kaiser previously contracted with Irvine Regional to handle its local patients.
Newport Beach’s Hoag Memorial Hospital Presbyterian is taking over Irvine Regional’s lease and will close the hospital and reopen it after renovations.
Looking to North OC
Tenet now is putting its efforts and resources into hospitals in North County.
Tenet’s “just been more successful over the long haul” in communities such as Los Alamitos, Placentia, Yorba Linda and Fountain Valley, Flocken said.
The Fountain Valley location, which ranked No. 8 on the Business Journal’s annual hospital list published in February, saw its pre-tax profit go from $300,000 to $5.9 million for the 12 months ended September 2007.
Fountain Valley’s patient revenue rose 8% during the period to $230 million.
The profit jump came through a change in services, including expanded cardiology and neurosurgery, Chief Executive Debbie Keel said in an earlier interview.
Tenet is spending money in its remaining hospitals to create the same kind of growth.
It’s investing some $25 million to improve Placentia-Linda, including a new diagnostic and outpatient center, as well as a cancer treatment center, Flocken said.
At Los Alamitos, Tenet opened a $12 million cancer center in April.
Tenet’s downsizing has taken place during the past three years.
In 2005, Tenet sold Western Medical Center-Santa Ana, Western Medical Center-Anaheim, Coastal Communities Hospital in Santa Ana and Chapman Medical Center in Orange for $70 million to Integrated Healthcare Holdings Inc. of Santa Ana.
Integrated has faced its own challenges, including several lawsuits between its management and a major shareholder, while it works to turn the four hospitals around.
Tenet sought to sell some of its hospitals in the wake of a federal probe into alleged overbilling of Medicare. Tenet eventually paid $725 million to the government in 2006 as part of an investigation-ending settlement.
Tenet sold Garden Grove Hospital and Medical Center and a San Dimas hospital to Prime Healthcare Services Inc., a company owned by Victorville cardiologist Prem Reddy, for $41 million in June.
Garden Grove “was in a very competitive area and community” and did not fit a profile of what Tenet was looking for in terms of where to invest its money, said Flocken.
“We (did) not ever, in any way, consider closing Garden Grove, but we wanted to find another operator who could make the investments that need to be made in that facility,” said Flocken, a former chief operating offi-
cer with St. Joseph Health System, the Orange-based Catholic hospital operator with three local facilities.
Besides the OC hospitals, Tenet has nine other hospitals in California and 55 across the country.
Tenet is “always interested” in potential acquisitions, but Flocken emphasized there were no deals in place now.
“We’re committed to California,” Flocken said.
That settles well with some analysts.
Tenet’s got a bullish forecast from Darren Lehrich, an analyst for Deutsche Bank AG.
Lehrich, in an early September report, predicted Tenet’s shares could increase up to 40% in the coming year, primarily based on what he saw as a “carry forward” effect on a loss that would shield the hospital operator’s pre-tax income from certain taxes through the next 10 to 15 years, as well as what he called cash initiatives to cut down its debt.
Financials
Lehrich’s report spurred a mini-rally in Tenet stock, sending it to a high of $6.63 on Sept. 3, around the time the report came out, before moderating in recent days. For the year, Tenet’s shares are up more than 20% with a market value of about $2 billion.
Lehrich argued that Tenet has been cast in a negative light by Wall Street and that other analysts have downplayed its potential for a turnaround because of its history.
But other analysts disagree.
Dawn Brock of JPMorgan Chase & Co. wrote after Tenet released its second-quarter results in August that the operator was “still losing profitable patients” and that “we simply can’t get too enthused about a sustainable growth rate” until the company’s able to get its commercial managed care patient admissions up. Brock was referring to a 2.2% commercial managed care admissions decline.
Brock also said that while she believed Tenet was in the “early stages” of a recovery, the company had some issues it needed to fix.
Tenet responded on its conference call that it narrowed its second-quarter net loss to $15 million from $30 million a year earlier.
