July 28, 2009 / 10:42 PM / 11 years ago

Hospitals slash costs to offset falling admissions

CHICAGO (Reuters) - Hospital operators Tenet Healthcare Corp and Health Management Associates said quarterly results would be better than feared as they held the line on costs to blunt rising bad debts and lower admissions in the recession.

Tenet shares finished up 47 cents on Tuesday, or 13.06 percent, at $4.07, while Health Management stock ended up 29 cents, or 5.26 percent, at $5.80.

Hospitals are seeing more patients walk through their doors without insurance coverage or the ability to pay for treatment.

Dallas-based Tenet, the third-largest U.S. hospital chain behind privately held HCA Inc and Community Health Systems Inc, said it is contending with rising bad debts from patient who are not paying their bills and admitting fewer patients with commercial insurance.

Yet while those trends are eroding profits, a focus on cost management and improving productivity helped boost revenue 4.5 percent in the second quarter and improve free cash flow, the company said.

“The whole hospital industry ... really scraped every bit of excess cost out of their business models that they absolutely could,” said Sheryl Skolnick, an analyst with CRT Capital Group, who called Tenet’s second-quarter earnings preview released Tuesday “astounding.”

Tenet said on Tuesday it expects to post a small net loss in the second quarter as it clamped down on costs.

Tenet’s announcement followed the release late Monday of better-than expected second-quarter earnings from Health Management Associates, a Naples, Fla.-based operator of rural U.S. hospitals.

Both Tenet and Health Management raised their full-year earnings forecasts, citing faith in their ability to improve operations for the remainder of the year.

Tenet said it is increasingly confident that strict cost controls and higher outpatient volumes will offset pressures from bad debts and lower admissions of managed care customers going forward.

Hospitals are responding to the specter of U.S. healthcare reform and its emphasis on wringing costs from the system to pay for coverage for the uninsured, analysts said.

ANTICIPATING HEALTH REFORM

“Health reform is on the tip of everyone’s tongues. All of these companies, Tenet in particular, are looking for ways to get ahead of the curve, finding efficient ways to treat patients that are cost-effective, while keeping the standard of care,” said Morningstar analyst Jeff Stafford.

Tenet expects a net loss in the second quarter of 3 cents per share, in line with the average analyst estimate, according to Reuters Estimates.

But it also projected a 50.9 percent rise in adjusted earnings before interest, taxes, depreciation and amortization to $246 million for all its hospitals in the second quarter, compared with a year ago.

Raymond James analyst John Ransom raised his rating on Tenet to “outperform” from “underperform” after the better- than-expected results.

Net operating revenue from same-hospital continuing operations was projected to rise 4.5 percent to $2.21 billion, boosted by strong growth in outpatient volumes, as well as pricing increases, Tenet said.

Tenet said its same-hospital outpatient visits were expected to rise 4.5 percent, while commercial managed care admissions were seen decreasing by 5.7 percent. But the company said it improved pricing through better terms on its commercial managed care contracts.

Tenet raised its 2009 outlook for adjusted earnings before interest, taxes, depreciation and amortization to a range of $810 million to $875 million, from a prior range of $760 million to $825 million. For net results, it expects a 2009 range from a loss of $20 million to net income of $60 million.

Health Management reported second-quarter earnings of 13 cents a share from continuing operations, topping the average Wall Street estimate by 3 cents on improvement in its emergency room operations and physician recruitment efforts.

It raised its full-year outlook for earnings from continuing operations to 45 cents to 49 cents a share from a previous range of 37 cents to 45 cents a share.

Reporting by Susan Kelly; editing by Andre Grenon

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