Tenet: Strong Vital Signs


By Arlene Weintraub For Tenet Healthcare, the nation's second-largest hospital operator, 2001 was the healthiest ever. On Jan. 4, the Ventura (Calif.) giant announced that operating earnings per share in the quarter ended Nov. 30 grew 42%, to $0.77, beating analysts' estimates of $0.69. It was the sixth consecutive quarter of more than 25% operating EPS growth for Tenet (THC

), and the announcement added more fuel to the company's stock, which has risen 67.6%, to nearly $62 a share in trading on Jan. 4.

But the best may be yet to come. Fifteen of the 21 analysts covering Tenet give its shares their most enthusiastic rating, strong buy.

Why the ongoing love affair with Tenet? For one, it couldn't be a better time to invest in the sector. Health-care reform has been placed on a back burner in Washington. And as aging baby boomers begin to flood the system, Tenet has seen hospital admissions grow 3.5% over the last year. Also, Tenet's size -- 116 hospitals in 17 states -- gives it the upper hand in negotiations with insurers that are shelling out payments to Tenet that are 3% to 6% higher than a year ago.

"Tenet will continue to be able to achieve higher reimbursement rates the next several years," says John F. Hindelong, an analyst for Credit Suisse First Boston. He expects in the fiscal year ending in May, Tenet's revenues will grow 13%, to $13.6 billion, and earnings per share will rise to $2.92 from $2.30.

"GETTING TOUGH." Tenet is a famously fierce negotiator, using the rate hikes HMOs get from employers as leverage at the bargaining table. PacifiCare Health Systems, for example, announced in 2001 that it squeezed higher payments from its customers -- up to 30% in some cases. "We expect to get a piece of that," says Tenet CEO Jeffrey Barbakow. And in August, Tenet formed a managed-care litigation unit dedicated to pouncing on HMOs that don't pay claims on time. "We're just getting tough," Barbakow says.

Tenet is tough at the hospital level, too. The company adjusts hospital executives' compensation based on how quickly they collect payments. In reducing days outstanding on accounts receivables by 15 days over the past year, Tenet estimates it will save $500 million annually.

Tenet also whips newly acquired hospitals into shape by closing underperforming units and instituting strict accounting procedures. Such handiwork turned its seven-hospital chain in Pennsylvania profitable in 2001 -- no small achievement, considering the group had been bleeding $1 million a day when Tenet bought it out of bankruptcy in 1998. "Nobody wanted that turkey," recalls Thomas Getzen, CEO of the International Health Economics Assn. "Tenet did remarkably well with plain, old-fashioned good management."

NURSING SHORTAGE. Today's Tenet is a far cry from the outfit Barbakow took over in 1993. Then called National Medical Enterprises, the company faced fraud suits from more than a dozen insurance companies and malpractice claims from 150 patients. Barbakow settled the suits and set out to sell the company. Then he recognized an opportunity in Tenet: "[I figured] if we could move rapidly to be a consolidator, we could become a strong presence in key markets and get the leverage we needed with insurers," he says.

It won't be all smooth sailing. Any renewed efforts by Congress to make changes in the health-care system could make waves for the industry. And like all hospital operators, Tenet is facing a shortage of nurses. Nationwide, nursing turnover is now a huge 50% every six months, forcing Tenet to consider everything from offering more benefits to improving mentoring programs for new nurses.

Some analysts worry that if Tenet is forced to spend more on wages and benefits, its bottom line could suffer. "Wage inflation could increase, particularly in bigger cities, where there are more employment alternatives for nurses," says Frank G. Morgan, an analyst for Jefferies & Co.

INTERNAL GROWTH. So far, though, Tenet's battle to fill nursing slots hasn't had an impact on the company's profitability -- or its growth. In fact, Tenet is in a better position than ever to continue building its network. Taking advantage of falling interest rates and a bond rating that was recently upgraded from junk to investment grade, Tenet has refinanced its debt, which will save it an estimated $35 million a year in interest expenses. In 2001, Tenet acquired six more hospitals, in Los Angeles, Atlanta, West Palm Beach, Fla., and St. Louis.

Barbakow says he'll continue to look for acquisition targets as well as new ways to generate growth internally. Tenet spends $700 million a year outfitting hospitals with the latest high-tech diagnostic equipment and adding services based on demand, such as orthopedic and cardiovascular units in cities with large elderly populations. With the baby boomers on the way, the CEO says, "we need to make the right investments to meet their needs."

Given Barbakow's track record, it's no surprise that so many still consider Tenet to be a smart investment in an uncertain economy. Weintraub is a BusinessWeek correspondent based in Los Angeles


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