CHS sees massive Q3 net loss amid weak volume, aftershocks of HMA settlement

https://www.healthcaredive.com/news/chs-sees-massive-q3-net-loss-amid-weak-volume-aftershocks-of-hma-settlemen/540868/

Credit: Rebecca Pifer / Healthcare Dive, Yahoo Finance data

 

Dive Brief:

  • Community Health Systems reported third quarter net operating revenues of $3.5 billion, a 5.9% decrease compared with $3.7 billion from the same period last year but slightly higher than analyst expectations.
  • In its earnings release after market close Monday, the Franklin, Tennessee-based hospital operator also disclosed a massive shareholder loss in the quarter of $325 million, or $2.88 per diluted share. CHS had a net loss of $110 million, or $0.98 per diluted share, in Q3 2017.
  • Lower volume was partially to blame, as the quarter saw a 12.4% decrease in total admissions and a 12.2% decrease in total adjusted admissions compared with the same period in 2017. The report also pointed the finger at the financial aftershocks of its troubled purchase of Health Management Associates (HMA), along with loss from early extinguishment of debt, restructuring and taxes.

Dive Insight:

CHS, one of the largest publicly traded hospital companies in the U.S., reported its highest operating cash flow since the second quarter of 2015, according to Jefferies. The third quarter figure of $346 million is also significantly higher than the $114 million from the same quarter last year.

Similarly, volume and revenue didn’t tank as heavily on a same-store basis as they did overall. Same-facility admissions decreased just 2.3% (adjusted admissions by 0.8%) compared with a year ago. Net operating revenues actually increased by 3.2% during the quarter compared with last year, beating analyst expectations.

But declining admissions show how hospital operators continue to struggle under the fierce headwinds 2018 has blown their way so far. CHS is clearly not immune, as the 117-hospital system faces ongoing operational challenges, bringing in financial advisers earlier this year to restructure its copious long-term debt.

The 20-state hospital operator continues to deal with the fiscal fallout from its roughly $7.6 billion acquisition of Florida hospital chain HMA in 2014. The Department of Justice accused the 70-facility HMA of violating the Stark Law and the anti-kickback statute for financial gain between 2008 and 2012, activities CHS reportedly was aware of prior to the merger.

Just last month, CHS announced a $262 million settlement agreement ending the DOJ investigation into HMA’s misconduct. However, that liability was adjusted during the third quarter and, taking into account interest, now totals $266 million. The fee will reportedly be paid by the end of this year.

The settlement also slapped an additional $23 million tax bill on the 19,000-bed system under recent changes to the U.S. tax code.

But that’s not the only regulatory brouhaha CHS has dealt with this quarter.

Since August, CHS has been under civil investigation over EHR adoption and compliance. Annual financial filings show that the company received more than $865 million in EHR incentive payments between 2011 and 2017 through the Health Information Technology for Economic and Clinical Health Act, payments that investigators believe may have been overly inflated.

To deal with the burden, CHS has continued its portfolio-pruning strategy into the third quarter (although a recent Morgan Stanley report notes the system has a very high concentration of weak facilities, and those at risk of closing, relative to its peers). 

During 2018 so far, CHS has sold nine hospitals and entered into definitive agreements to divest five more. The earnings report also divulged CHS is pursuing additional sale opportunities involving hospitals with a combined total of at least $2 billion in annual net operating revenues during 2017, taken in tandem with the hospitals already sold.

The ongoing transactions are currently in various stages of negotiation, the report notes, but CHS “continues to receive interest from potential acquirers.”

CHS is cast in a better light when balance sheet adjustment and non-cash expenses are discarded, as well. Adjusted EBITDA was $372 million compared with $331 million for the same period in 2017, representing a 12.4% increase and suggesting the company can still generate cash flow for its owners in a more friendly atmosphere than the one Q3 provided.

But, though Q2 results were a bright spot in an otherwise gloomy year for the massive hospital operator, its shares have lost about 30% of their value since the beginning of the year (compared to the S&P 500’s decline of roughly 0.5%).

Jefferies believes that CHS should improve its balance sheet and drive positive same-store volume growth, along with speeding up divestitures to raise cash to pay down debt, in order to improve its stock performance.

 

 

Tenet continues hospital sell-off spree with deals in Illinois, Texas

https://www.beckershospitalreview.com/hospital-transactions-and-valuation/tenet-continues-hospital-sell-off-spree-with-deals-in-illinois-texas.html

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Dallas-based Tenet Healthcare divested a Chicago-area hospital and sold its minority interest in four Texas hospitals.

Tenet completed the sale of MacNeal Hospital in Berwyn, Ill., and its local physician practices to Chicago-based Loyola Medicine, which is part of Livonia, Mich.-based Trinity Health. MacNeal Hospital includes 374 acute care beds, a 12-bed rehabilitation unit, a 25-bed inpatient skilled nursing facility and a 68-bed behavioral health program.

“We look forward to serving a greater number of patients through our expanded delivery network, thanks to the resources, providers and value-added care made possible by adding MacNeal Hospital and its physicians to our system,” Larry M. Goldberg, president and CEO of Loyola Medicine and Trinity Health’s Illinois region, said in a statement.

Tenet also announced the completion of several other deals on Feb. 2. The company sold its minority interest in Baylor Scott & White-Centennial in Frisco, Texas, and Baylor Scott & White-Lake Pointe in Rowlett, Texas, to Dallas-based Baylor Scott & White Health. The company transferred its minority interest in Baylor Scott & White-Sunnyvale (Texas) to Texas Health Ventures Group, which is a joint venture between Tenet’s United Surgical Partners International subsidiary and Baylor Scott & White Health. Tenet also sold its minority interest in Baylor Scott & White Medical Center-White Rock in Dallas to Pipeline Health, a hospital management company based in Manhattan Beach, Calif.

Tenet ended the fourth quarter of 2017 with a net loss of $230 million, compared to a net loss of $79 million in the same period of the year prior. To improve its financial position, Tenet launched a $250 million cost reduction initiative last year, which involves divesting hospitals in non-core markets and cutting 2,000 jobs, or about 2 percent of the company’s workforce.

Tenet’s hospital divestiture plan is expected to yield more than $1 billion of proceeds. In the first quarter of 2018, Tenet received $550 million of cash proceeds from the divestiture of MacNeal Hospital, the sale of its minority interest in the Texas hospitals and the sale of two hospitals in Philadelphia.

Tenet sees net loss swell to $230M, says $1B hospital divestiture plan is on track

https://www.beckershospitalreview.com/finance/tenet-sees-net-loss-swell-to-230m-says-1b-hospital-divestiture-plan-is-on-track.html

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Dallas-based Tenet Healthcare, which operates 74 hospitals, saw its net loss widen in the fourth quarter of 2017.

The for-profit hospital operator ended the fourth quarter of 2017 with revenues of $5 billion, up from $4.9 billion in the same period of the year prior. On a same-facility basis, patient revenue was up 6.1 percent year over year in the fourth quarter of 2017, with adjusted admissions up 1.3 percent.

After factoring in operating expenses, a $252 million write-down of the company’s deferred tax assets due to the Tax Cuts and Jobs Act, and a $22 million year-over-year increase in noncontrolling interest expense, Tenet reported a net loss of $230 million in the fourth quarter of 2017. That’s compared to the fourth quarter of 2016, when the company posted a $79 million net loss.

To improve its financial position, Tenet launched a $250 million cost reduction initiative last year, which involves divesting hospitals in non-core markets and cutting 2,000 jobs, or about 2 percent of the company’s workforce.

Tenet’s hospital divestiture plan is expected to yield more than $1 billion of proceeds. A presentation published with the company’s fourth-quarter financial results said the hospital divestiture plan is on track. Tenet sold its last two Philadelphia hospitals in January, and the company said it expects to complete the divestiture of 368-bed MacNeal Hospital in Berwyn, Ill., in March.

Tenet is also exploring the sale of Conifer Health Solutions, its healthcare business services subsidiary. The company said in December it expects to decide whether to sell Conifer during the first half of 2018.

 

Major shareholder wants more frequent oversight of Tenet’s board: 5 things to know

https://www.beckershospitalreview.com/finance/major-shareholder-wants-more-frequent-oversight-of-tenet-s-board-4-things-to-know.html

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Glenview Capital Management, which currently owns 17.8 percent of Dallas-based Tenet Healthcare, has submitted a proposal to Tenet that would amend the for-profit hospital operator’s bylaws to allow all shareholders to take action by written consent without a meeting.

Here are five things to know about Glenview’s proposal, which will be voted on at Tenet’s annual meeting.

1. In a letter to Tenet shareholders, Glenview said Tenet has been a “chronically underperforming company for decades,” and shareholders need the ability to take action by written consent.

“Just as a person in worsening health may need more frequent medical attention than a check-up once every 12-18 months, a chronically unhealthy company is likely to return to health quicker and with more certainty if its owners are allowed more frequent board oversight, and this is effectively accomplished through the ability to take action by written consent,” Glenview wrote in the letter to shareholders.

2. In addition to Tenet’s financial underperformance, Glenview said there are several other factors supporting the proposed change, including the board’s slow response to Tenet’s financial and operational challenges.

3. Although Tenet’s board approved amendments to the company’s bylaws in January that allow majority shareholders to request special meetings, Glenview argued shareholders still need action by written consent.

Glenview said the amendment to allow majority shareholders to call special meetings is “wholly impractical, clearly off-market, and sends a dangerous signal that the board may need additional feedback from shareholders to fully appreciate the cultural renaissance for which we mutually strive.”

4. Tenet said it is reviewing Glenview’s proposal. “We will make a recommendation to shareholders in due course,” Tenet said in a statement.

5. Tenet launched a $250 million cost reduction initiative last year, which involves divesting hospitals in non-core markets and cutting 2,000 jobs, or about 2 percent of the company’s workforce. The for-profit hospital operator ended the third quarter of 2017 with a net loss of $367 million on revenues of $4.59 billion. That’s compared to the same period of 2016, when the company recorded a net loss of $8 million on revenues of $4.85 billion.

These Hospital Bonds Are on Life Support

https://www.bloomberg.com/gadfly/articles/2017-10-27/a-49-billion-hospital-emergency-heads-toward-junk-bonds

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Junk-bond buyers appear to have a blind spot when it comes to for-profit health care companies.

They’ve snapped up bonds of Tenet Healthcare Corp. and Community Health Systems Inc. despite the drastically souring outlook for both hospital operators. Some of this may be idiosyncratic or the result of specific investors’ strategies (or unwillingness to sell). Franklin Resources Inc., for example, now owns nearly 20 percent of Community Health’s total debt and more than half of its $1.9 billion of bonds maturing in 2019, according to recent filings compiled by Bloomberg.

In general, however, as credit investors plow into broad indexes of riskier assets, it appears they’re simply turning a blind eye to the ugly balance sheets of hospital operators amid an increasingly difficult backdrop. Federal programs like Medicaid are clamping down on costs. And the Trump administration’s various efforts to weaken the individual insurance market will potentially put hospitals on the hook for more uncompensated care as fewer people sign up for health care coverage.

Meanwhile, Tenet and Community Health made some questionable decisions in recent years to borrow billions of dollars to make acquisitions that now look pricey. These companies don’t generate a ton of cash at the best of times, and much of what they do have now goes to debt service rather than much needed hospital improvements.

CIRCLING THE DRAIN

It’s hard for companies to confront mountainous piles of debt when they don’t generate consistent cash flow.

These hospital operators have a narrowing field of options right now. Tenet recently tried, and failed, to sell itself, which sent its shares plunging on Thursday. Both hospitals report earnings within the next few weeks. If HCA Healthcare is any guide — the company pre-announced worse-than-expected third-quarter earnings last week — they won’t be pretty.

But still, no one in the bond market seems to care. Tenet’s bonds have soared 7.8 percent so far this year, even though its stock has fallen 13.3 percent. Community Health debt has gained 16.5 percent, four times the 4.1 percent gain in its shares.

DIVERGING FATES

Bond investors seem to be turning a blind eye to difficulties recognized by stock investors

This seems sort of ludicrous. One hedge fund manager, Boaz Weinstein of Saba Capital Management, sees this as an opportunity to short some of these companies’ junior bonds. Weinstein pointed out at a conference this month that Community Health’s $14 billion pile of debt is 20 times the value of its equity.

Unless the company’s fortunes turn around, it will be forced to reckon with its debt in painful ways for its business as well as the returns of creditors. It’s hard to see how the business could get better with President Donald Trump’s continuing attempts to torpedo health care insurance subsidies, which is widely expected to hurt hospital profitability.

Credit investors at some point are going to have to come to grips with this. Community Health and Tenet, along with HCA, account for $49 billion of debt in a broad U.S. high-yield bond index. This pile is looking increasingly vulnerable to a day of reckoning.

Tenet to close 232-bed Phoenix hospital

https://www.beckershospitalreview.com/finance/tenet-to-close-232-bed-phoenix-hospital.html

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Dallas-based Tenet Healthcare will close Abrazo Maryvale Campus, a 232-bed hospital in Phoenix, by the end of the year.

The hospital is closing primarily because of dwindling patient volumes, said Frank Molinaro, market CEO for Abrazo Community Health Network, which encompasses six acute care hospitals.

“Over the past several years Abrazo Maryvale has experienced a significant decline in community demand for its services,” said Mr. Molinaro. “The Abrazo Community Health Network’s top priority is delivering high-quality, cost-effective care to residents of the greater Phoenix area, and we are properly allocating our resources to meet our patients’ and our communities’ healthcare needs.”

Although the hospital will remain open until Dec. 18, it will no longer admit patients after Dec. 1. “We will assist patients and their physicians in transitioning their care to other Abrazo Network facilities or the healthcare provider of their choice,” said Mr. Molinaro.

Officials said the closure of Abrazo Maryvale should not impact the community’s access to care, as there are four acute care hospitals and 11 urgent care centers within the 6-mile area surrounding Abrazo Maryvale.

The closure of the hospital will affect around 300 employees. All Abrazo Maryvale employees who are in good standing will receive priority for open positions within Abrazo Community Health Network and its affiliated partners, said Mr. Molinaro.

Tenet, Abrazo Maryvale’s parent company, is exploring a number of strategic options, including the sale of assets, divisions or the entire company. The 77-hospital chain ended the second quarter of this year with a net loss of $56 million, compared to a net loss of $44 million in the same period of the year prior. Tenet will release its earnings for the third quarter in November.

Hospital stocks sink after HCA’s earnings stumble

http://www.beckershospitalreview.com/finance/hospital-stocks-sink-after-hca-s-earnings-stumble.html

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Major for-profit hospital operators saw their share prices fall Tuesday after Nashville, Tenn.-based HCA Healthcare released its earnings for the second quarter, which fell below analysts’ estimates, according to Bloomberg.

HCA’s revenues increased 4 percent year over year to $10.73 billion in the second quarter of 2017, which fell below analysts’ estimate of $10.85 billion. The company ended the second quarter of this year with net income of $657 million, which was down slightly from $658 million in the same period of 2016.

After releasing its earnings, HCA shares fell 2.5 percent to $83.93. Dallas-based Tenet Healthcare shares dropped 7.3 percent to $19.57 and Franklin, Tenn.-based Community Health Systems shares fell 7.4 percent to $8.96, according to Bloomberg.