Tenet Says It Will Review Price Strategy
In reaction to
regulatory inquiries and rising anxiety among investors, Tenet Healthcare
By REED ABELSON
Tenet's policy
of significantly increasing its hospital prices, which helped create much of
its robust profits in recent years, has become the center of controversy. The
recent spike in hospital costs has become a source of concern nationwide, and
Tenet said yesterday that aggressive pricing, particularly in
Tenet's pricing
strategy "is inconsistent with the position and posture that I want Tenet
to have in the industry," Jeffrey C. Barbakow,
Tenet's chairman and chief executive, said in a conference call late yesterday
afternoon with analysts and investors. The call lasted for more than three
hours.
Mr. Barbakow said that the practice did not violate any
Medicare rules, but he described the company as conducting an "intensive
review of our overall strategy, particularly pricing."
Tenet's change
in stance appears to reflect its concerns that a policy of sharply raising
prices has become a lightning rod for regulators and other critics, said Sheryl
Skolnick, an analyst with Fulcrum Global Partners, who has a neutral rating on
the shares. But analysts raised concerns that the company's less aggressive
posture could hamper its negotiations with insurance plans. Tenet's operating
strategy is "significantly damaged," Ms. Skolnick said.
Tenet also
announced the departure of two senior executives, including its chief financial
officer, and the creation of a new executive management team that will report
directly to Mr. Barbakow. The company also named a
former executive, Trevor Fetter, as its president.
Investors
reacted negatively, sending the shares down significantly after hours. Many
analysts and investors on the conference call expressed frustration and anger.
"You have
a disaster on your hands now," said one caller, noting the stock's drastic
drop to less than $20 during the course of the call. The stock closed yesterday
at $27.95, up $1.67, before the company released the news.
Last night,
Standard & Poor's lowered its rating on the company's debt to BBB- from BBB
and placed it on notice of a possible further downgrade.
Amid
increasing regulatory scrutiny, Tenet has spent the last two weeks scrambling
to reassure investors. Once as high as $52.50 in early October, the stock has
lost roughly half of its value in recent days. Federal agents raided a
Tenet-owned hospital in
Earlier this
week, the Federal Trade Commission issued a subpoena for information about a
merger of two Tenet-owned hospitals in
The issue of
the special Medicare payments, known as outliers, was first raised by Kenneth
R. Weakley, an analyst at UBS Warburg, who wrote a detailed report on the topic
on Oct. 28. Medicare typically pays a fixed fee to a hospital to treat a given
disease, but it has also set up a system to protect hospitals from losses that
can occur when they handle unusually expensive and complicated cases. If a cost
for a given case surpasses a certain threshold, the hospital is entitled to a
special payment using a formula that reimburses it for much of those extra
costs.
Because those
special payments are partly calculated using hospital prices, Tenet's policy of
increasing prices resulted in significant outlier payments, the company said.
Investors and analysts, worried about Tenet's heavy reliance on the payments,
have asked the company to provide more information.
The company
disclosed yesterday that it received $763 million in outlier payments during
the fiscal year ended in May and expected about $750 million this year. A large
proportion of the payments was made to 11 hospitals, many in California, where
higher pricing played a particularly important role.
In response to
analysts' questions about the effect of these payments on profits, Tenet
estimated that about a third of this year's projected earnings per share of
$2.95 was a result of outlier payments. But the company said that investors
should focus on only 50 cents, or 17 percent, of those earnings as particularly
problematic. Tenet emphasized that hospitals were entitled to outlier payments
and that it expected to continue to collect them.
Analysts
pressed the company for more information about how its policy of not increasing
prices as significantly would affect future earnings, but Tenet did not provide
it. The company said it was comfortable with the estimates for the current
fiscal year but would not discuss future years.
Analysts also
raised numerous questions about the departures of two executives, Thomas B.
Mackey, a longtime employee who had been the chief operating officer, and David
L. Dennis, its chief financial officer and chief corporate officer.
Tenet
described the departures as voluntary and argued that they were not related to
the audit by federal officials. "These departures are related to the
management restructuring we announced today," Mr. Barbakow
said.
Tenet also
said that it was continuing to monitor the situation at Redding Medical Center,
the California hospital that was the subject of the federal raid. The state
authorities have indicated that they will try to prevent the doctors from
practicing, but the physicians have not been charged with any crime. Tenet also
defended the actions of the hospital administrators, who have been accused of
ignoring concerns about the doctors, as appropriate.
Tenet also
said that it was able to resolve infection control problems at one of its
hospitals in Florida, Palm Beach Gardens Medical Center, to the satisfaction of
regulators so that it will continue to receive Medicare and Medicaid payments.
Regulators will return in January.