Tenet Shares Tumble 14% After Downgrade

Shares of Tenet Healthcare Corp., the nation’s No. 2 hospital operator and a favorite on Wall Street, were hammered Monday after an analyst downgraded the stock and raised questions about the Santa Barbara-based hospital company’s Medicare reimbursements.

Tenet’s stock plunged 14% in heavy trading as the report, from Ken Weakley of UBS Warburg, stoked investor fears about Tenet’s future. Weakley’s report questioned whether Tenet could sustain its stellar growth rate. Although some analysts called the investor reaction overblown, others said shareholders were especially anxious because Weakley’s report seemed to raise the specter of Medicare overbillings that have plagued big hospital companies in the past.

“Absolutely, it’s spooking investors,” said Sheryl Skolnick, a managing director at Fulcrum Global Partners, which provides investor research. She said some investors she spoke with were asking whether the company did something intentionally to overstate hospital bills to maximize Medicare reimbursements, although that was not suggested by Weakley’s report.

Tenet said it was confident that its hospitals were complying fully with Medicare rules. Tenet said the Medicare reimbursements in question represented just 5% of the company’s revenue, and it reaffirmed its prior earnings projection.

The company’s statement was issued after the close of markets. In regular trading on the New York Stock Exchange, Tenet shares lost $6.81 to close at $42.50.

Tenet, which operates 113 acute-care hospitals in the nation, including 40 in California, has been one of the most profitable health-care companies in recent quarters.

Most analysts recommend that investors buy Tenet stock. But Monday, Weakley lowered his rating from “hold” to “reduce” and issued a report analyzing Medicare’s so-called outlier payments to Tenet.

Outlier payments are additional Medicare payments to hospitals for inpatient services that are unusually costly, such as coronary bypass operations. These outlier payments are intended to protect hospitals from incurring a big loss on any case.

Although outlier payments are based on a complicated formula set by the Centers for Medicare and Medicaid Services, the greater the increase in retail hospital bills, the greater the outlier payment.

Weakley estimated that Tenet’s outlier payments as a ratio of its total Medicare reimbursements went up from 7.7% in the 12 months ended in August 2000 to an estimated 23.5%, or $657 million, in fiscal 2003. The average for all urban hospitals, he said, held steady at 5.6% to 5.7% during that period.

Weakley said Tenet’s financial benefits from rising outlier payments may be near an end because the government recently increased the threshold for those payments and was set to scrutinize the program.

Thomas B. Mackey, Tenet’s chief operating officer, did not dispute Weakley’s estimate of outlier payment ratios. But he said those outlier payments, even if government scrutiny were to affect Tenet, still amounted to just 5% of the company’s revenue for fiscal 2003. He said Tenet’s increased hospital charges reflect rising costs. Tenet said its many teaching hospitals and higher acuity services also affect outlier payments.

Skolnick, the Fulcrum analyst, said she was comfortable with Tenet’s statement, noting that one important difference from the Medicare billing problems of the past -- which often involved billing Medicare for more expensive procedures than what were actually performed -- is that the Centers for Medicare and Medicaid Services has much greater control over how outlier payments are distributed.