Yesterday, Tenet Healthcare Corp. (THC) announced reduced earnings projections for the rest of 2011. Accordingly, the company’s 2011 earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be toward the lower end of the previously announced guideline of $1.175–$1.275 billion. Additionally, EBITDA for the third quarter of 2011 is expected to be almost at par with $203 million in the year-ago quarter.
The reduced expectations are a result of an increase in the admission of poor patients under its Medicaid program as well as growth in Medicare admissions, both of which have lower reimbursement rates than private health insurance patients.
Tenet revealed that the admissions in its Medicaid health program for the needy, aged, disabled and blind have increased 5.5% so far in the third quarter of 2011, accounting for almost 75% of the admission growth in the quarter. However, revenue from elderly patients receiving treatment under the Medicare program in July and August was lower than normal as most of the treatments were for less critical medical conditions.
Tenet also revealed that decreasing interest rates on medical malpractice and other discounted liabilities have negatively impacted the earnings in the current quarter. The resultant negative effect on the company’s profitability offset the increased earnings from patients with commercial insurance as well as the earnings growth due to increased patient admissions.
Tenet’s total admissions and paying admissions increased 1.8% in the first 70 days of the third quarter. Outpatient volume and paying outpatient volume also increased 3.7% and 4.0%, respectively. Moreover, same-hospital adjusted admissions of Tenet rose 2.5% while total surgeries showed an upside of 3.4%.
While Tenet did implement some cost cutting measures in August 2011 to counter the effect of declining revenue, the impact of such measures is expected to be visible from the fourth quarter of the year. The company also expects to generate additional cost savings of more than $25 million during September-December 2011 under its Medicare Performance Initiative (MPI). Additionally, MPI is expected to generate incremental savings of $80 million for Tenet in 2012.
Meanwhile, rival healthcare company HCA Inc. (HCA) confirmed its 2011 EBITDA growth expectation of 3–5%, despite a downturn in the volume of heart surgeries. Though the decline in surgeries led to a fall in revenue from Medicare health program for the elderly, the company managed to generate an overall revenue growth of 3.4% and adjusted admission growth of 4.3% in July and August 2011.
Currently Tenet carries a Zacks #3 Rank, which translates into a short term Hold rating.
The estimate revision led to a fall in the stock price of the company. On Monday, the shares of Tenet closed at $4.52, down 9.96% on the New York Stock Exchange.
