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Why Chilton liquidates position in Tenet Healthcare

Smita Nair

Must-know: Chilton Investment Company's 1Q14 positions (Part 7 of 7)

(Continued from Part 6)

Chilton and Tenet Healthcare

Chilton Investment added new positions in Canadian Pacific Railway (CP), CBS Corp. (CBS), and Wyndham Worldwide Corp. (WYN). It sold positions in  CF Industries Holdings (CF), Norfolk Southern Corp. (NSC), and Tenet Healthcare (THC).

Chilton disposed of a position in hospital operator Tenet Healthcare (THC) which accounted for 0.38% of the firm’s 4Q13 portfolio.

Tenet Healthcare’s subsidiaries and affiliates operate regionally focused, integrated healthcare delivery networks with a significant presence in several large urban and suburban markets. As of December 31, 2013, Tenet primarily operated 77 hospitals, 183 outpatient centers, six health plans, six accountable care networks, and Conifer Health Solutions LLC, which provides business process solutions to more than 700 hospital and other clients in the U.S.

Tenet noted in its quarterly filing that “Historically, our outpatient services have generated significantly higher margins for us than inpatient services.” In 1Q14, Tenet derived ~36% of its net patient revenues from outpatient services. It added, “By expanding our outpatient business, we expect to increase our profitability over time. We believe that growth by strategic acquisitions, when and if opportunities are available, can supplement the growth we believe we can generate organically in our existing markets.” Last year, Tenet completed the acquisition of Vanguard Health Systems Inc., an investor-owned hospital company whose operations complemented Tenet’s existing business.

Tenet saw shares plunge in February after the company posted a fourth-quarter net loss and provided a lower guidance. Adjusted admissions declined 0.5% in the fourth quarter on a same-hospital basis, including a 2.3% decline in same-hospital inpatient admissions. Tenet believes the current economic conditions continue to have an adverse impact on the level of elective procedures performed at its hospitals, which contributed to the decrease in the total admissions.

First quarter net loss narrows, sees improvement in admissions trend

However, 1Q14 results beat estimates as its net loss narrowed to $32 million on robust revenue. Net operating revenue increased 64.5% to $3.93 billion from the same quarter the previous year. Including Vanguard’s operations in both reporting periods, 1Q14 pro forma adjusted admissions and admissions increased by 0.3% and declined 0.9%, respectively, compared to the 1Q13. Tenet said, “Aided by our extensive preparations to serve the newly insured patient populations under the Affordable Care Act, we achieved a broadly-based improvement in our admissions trend in the first quarter. The strengthening volume trend was particularly pronounced in the states that expanded their Medicaid programs. In these four states our Medicaid admissions grew by 17% and uninsured plus charity admissions declined by 33%.”

Adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) for the first quarter was $387 million, an increase of $113 million, or 41%, as compared to $274 million in the 1Q13. Tenet added that the impact of Medicare sequestration payment cuts reduced adjusted EBITDA by $25 million in the 1Q14.

The revenue increase primarily reflected improved terms in commercial managed care contracts, and growth in Tenet’s outpatient and Conifer services businesses. Outpatient visits increased by 4.6% on a pro forma basis and 2.5% on a same-hospital basis. Tenet said more than 40% of pro forma outpatient growth was organic. Conifer’s revenues were $285 million in the 1Q14, an increase of $74 million, or 35.1%, compared to $211 million in the 1Q13. These growth drivers were partially offset by an approximate $75 million decline in health plan revenue due to a different contract with the state of Arizona Medicaid program that has fewer covered lives, and the absence of revenue recognition from the California Provider Fee program in the 1Q14 compared to $12 million in the 1Q13.

Medicare two midnight rule leads to decline in one-day admission stays

Tenet said “it experienced a decline in Medicare and managed Medicare one-day admission stays, which contributed 26 basis points to the first quarter’s aggregate admissions decline on a pro forma basis. A portion of the decline in one-day admissions may be related to the recently implemented Medicare two midnight rule. The impact of severe weather events in certain markets is estimated to have reduced pro forma growth in admissions by 36 basis points and outpatient visits by 160 basis points.”

Under the two-midnight rule, which became effective in October last year, Centers for Medicare & Medicaid Services (CMS) indicated that a Medicare patient should generally be admitted on an inpatient basis only when there is a reasonable expectation that the patient’s care will cross two midnights, and, if not, then the patient generally should be treated as an outpatient. A report from Moody’s said it expects the “rule change to negatively impact financial performance for most hospitals during calendar year 2014″ and that “the rule could decrease revenues on average by $3,000 to $4,000 per case.”

Tenet said its outlook for adjusted EBITDA for the 2Q14 is $375–$425 million and earnings per share in a range of a loss of $0.39 per share to income of $0.12 per share. It forecast 2014 adjusted EBITDA in a range of $1.8–1.9 billion.

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