Tenet Releases Q4 Results

Tenet Healthcare Corp. has reported results for its fourth quarter and full year ended Dec. 31, 2003.

“This was a tough quarter made even tougher by rising bad debt from the growing number of uninsured patients we treat, and our increased difficulties in collecting amounts owed us by managed care payers,” said Trevor Fetter, president and CEO. “We have taken and will continue to take strong actions to address these and other challenges, but positive results will take time.”

“We have launched a dramatic restructuring of Tenet’s operations to focus all our efforts on 69 well-positioned hospitals in good markets,” added Fetter. “We have implemented more than a dozen major turnaround initiatives that will significantly slash our costs, conserve our cash and build a more nimble, responsive operating structure. We have appointed an innovative, experienced hospital executive, Reynold Jennings, as our chief operating officer. We have launched a far-reaching initiative to enhance every aspect of quality in the care we provide to patients. And we are rebuilding our relationships with our government and private partners. Everything we do has one purpose: To rebuild trust in this company and put it on a solid track for future growth.” Net operating revenues were $3.18 billion in the quarter, down 8.9 percent from the $3.49 billion in the prior-year quarter. This decrease includes the impact of the following four items:

(1) a $114 million reduction in Medicare outlier revenue from $135 million in the prior-year quarter to $21 million in the current quarter;

(2) a $70 million favorable adjustment to Medicare outlier revenue resulting from adjustments and reconciliations related to the time period January 1 to August 7 during which Tenet voluntarily accepted reduced outlier payments while CMS finalized its new outlier rules; certain open issues remain in this adjustment and reconciliation process;

(3) $146 million of unfavorable net adjustments primarily related to Medicare contractual allowances; and,

(4) lower average managed care pricing, offset in part by increases in other payer categories and increases in admissions.

The company reported a net loss of $954 million, or $2.05 per share, for the fourth quarter, compared with a net loss of $31 million, or $0.06 per share, in the prior-year quarter. The net loss for the fourth quarter reflects the impact of outlier revenue decreasing by $114 million compared to the same period in 2002, as well as the following seven items that net to a total pre-tax loss of approximately $1,182 million ($987 million after-tax, or $2.12 per share):

(1) impairment and restructuring charges totaling $1,447 million ($1,126 million after-tax, or $2.42 per share);

(2) income of $250 million ($134 million after-tax, or $0.29 per share) from discontinued operations, including a pre-tax gain of approximately $274 million from the sale of divested facilities;

(3) Net favorable adjustment of $45 million ($21 million after-tax, or $0.05 per share) primarily comprised of (a) the reversal of approximately $105 million resulting from a Court of Appeals decision reducing damages awarded to a former executive from $253 million to $161 million (which includes approximately $13 million for additional interest and legal costs that have been accrued in the fourth quarter), (b) the company accruing approximately $30 million for proposed settlements involving certain legal matters, and (c) approximately $12 million of costs to defend the company;

(4) a $70 million favorable adjustment ($42 million after-tax, or $0.09 per share) to Medicare outlier revenue as discussed above;

(5) $146 million of unfavorable net operating revenue adjustments noted above ($87 million after-tax, or $0.19 per share) primarily related to Medicare contractual allowances;

(6) a favorable adjustment of $39 million for the reversal of certain accruals for retirement and employee benefits ($24 million after-tax, or $0.05 per share); and,

(7) A gain of $7 million ($5 million after-tax, or $0.01 per share) primarily related to the collection of certain notes receivable associated with hospitals sold in prior years that had been reserved for in prior periods.

Stephen Farber, Tenet’s chief financial officer, stated, “While it is clear that Tenet continues to face significant issues, we are confident that we are on the right track to improve Tenet’s performance and believe our capital resources are sufficient as we execute our plans to restore Tenet to a competitive level of profitability.”

“Although we expect to have significant negative cash flows of roughly $500 to $600 million in 2004, excluding legal settlements, we expect an improvement of at least $300 to $400 million in cash flows in 2005 with a good chance to achieve breakeven or even slightly positive cash flow for that year,” Farber added. “These improvements will be driven primarily by our restructuring program and operating performance improvements in our core hospitals. As we move through this transition period, the company should have ample liquidity for ordinary operations given the company’s current $425 million in cash, its newly amended $500 million bank credit line, and roughly $600 million in expected proceeds from its recently announced divestiture program, approximately half of which we expect to receive by the end of 2004.”

“It is important to note that our current liquidity structure was not designed to fund a significant settlement with the government or any other party,” said Farber. “While we cannot predict the ultimate timing or magnitude of any such settlements, our plan, which we shared with our bank group as part of our recent amendment process, is that if we achieve significant settlements in the near term we would seek to finance at least a portion of such settlements through other means. A material settlement of litigation would likely reduce the credit risk of the company and increase our access to additional capital.”

Full Year 2003 results
For the 12 months ended Dec. 31, 2003, net operating revenues declined by 2.9 percent to $13.21 billion, compared to $13.60 billion in 2002. Tenet reported a net loss of $1,477 million, or $3.17 per share, compared with net income of $817 million, or $1.64 per share, for 2002. The net loss for the current period reflects the impact of lower outlier revenue, higher bad debt expense, a larger amount of impairment and restructuring charges, as well as additional litigation and investigation costs. These items net to a total pre-tax loss of approximately $2,147 million ($1,690 million after-tax, or $3.63 per share), and include:

(1) impairment charges of $1,770 million ($1,352 million after taxes, or $2.90 per share);

(2) restructuring charges of $111 million ($69 million after taxes, or $0.15 per share);

(3) cost of litigation and investigations of $282 million ($182 million after taxes, or $0.39 per share);

(4) a $70 million favorable adjustment ($42 million after-tax, or $0.09 per share) to Medicare outlier revenue as discussed above;

(5) $146 million of unfavorable net operating revenue adjustments noted above ($87 million after-tax, or $0.19 per share) primarily related to Medicare contractual allowances;

(6) a favorable adjustment of $39 million for the reversal of certain accruals for retirement and employee benefits ($24 million after-tax, or $0.05 per share), as noted above;

(7) income of $244 million ($133 million after-tax, or $0.29 per share) from discontinued operations, which is comprised of net gains on sale of assets of $274 million, as noted above, and a loss from operations of asset group of $30 million;

(8) a $202 million charge to discontinued operations for impairment and restructuring charges ($134 million after taxes or $0.29 per share);

(9) a $72 million after-tax charge, including interest costs, for a disputed tax deduction now in appeal with the Internal Revenue Service related to the company’s discontinued psychiatric hospital business ($0.15 per share);

(10) a gain of $16 million ($10 million after-tax or $0.02 per share) primarily related to certain gains on sale, of which $7 million ($5 million after tax) or $0.01 per share) was identified for the fourth quarter

(11) a $5 million charge ($3 million after tax, or $0.01 per share), related to the impairment of investment securities.

Net income in 2002 reflects goodwill amortization of $40 million ($34 million after-taxes, or $0.07 per share) and loss from early extinguishment of debt of $105 million ($66 million after-taxes, or $0.13 per share).