Tenet Healthcare announces 9.0% increase in fourth-quarter EBITDA

Tenet Healthcare Corporation (NYSE:THC) today reported adjusted EBITDA of $218 million for the fourth quarter ended Dec. 31, 2009, an increase of $18 million, or 9.0 percent, as compared to $200 million for the fourth quarter of 2008. On a same-hospital basis, adjusted EBITDA was $214 million for the fourth quarter of 2009, an increase of $14 million, or 7.0 percent, as compared to $200 million in the fourth quarter of 2008. The net income attributable to common shareholders for the fourth quarter of 2009 was $21 million, or $0.04 per share, compared to net loss attributable to common shareholders of $33 million, or $0.07 per share, for the fourth quarter of 2008.

“We are very pleased with Tenet’s performance in the fourth quarter and full-year 2009”

“We are very pleased with Tenet’s performance in the fourth quarter and full-year 2009,” said Trevor Fetter, president and chief executive officer. “Despite pressures from a soft economy and rising levels of unemployment in many of our markets, we achieved another year of solid revenue growth with an increase of five percent. Excellent cost control combined with this revenue growth helped us produce the strongest growth in earnings and the highest margin we’ve achieved in seven years. We also increased adjusted free cash flow by almost $400 million over 2008. I remain confident in Tenet’s strategies, and we believe these strategies will continue to drive growth in earnings and cash flow. Our expectations for growth in 2010 are impacted by our accelerated clinical information technology investments and our conservatism with respect to the effects and uncertainties of the economic environment.”

For the full-year 2009, adjusted EBITDA was $982 million, an increase of 32.9 percent as compared to 2008 adjusted EBITDA of $739 million. The 2009 adjusted EBITDA margin was 10.9 percent, an increase of 230 basis points as compared to a 2008 adjusted EBITDA margin of 8.6 percent. Net income attributable to common shareholders in 2009 was $181 million, or $0.37 per diluted share, as compared to 2008 net income of $25 million, or $0.05 per diluted share. Net income attributable to common shareholders in 2009 included a gain from early extinguishment of debt, net of taxes, of $61 million, or $0.12 per share; and 2009 and 2008 also included net gains on sales of investments, net of taxes, of $10 million and $88 million, or $0.02 and $0.18 per share, respectively.

Continuing Operations

Net income attributable to common shareholders was $21 million in the fourth quarter of 2009, or $0.04 per share, including the following items with an aggregate, net favorable impact of $18 million after-tax, or $0.04 per share:

Same-Hospital Data

Same-hospital continuing operations data excludes Sierra Providence East Medical Center, in El Paso, which opened on May 21, 2008. Same-hospital continuing operations data is the primary form of tabular data presentation in the narrative sections of this document. In the fourth quarter of 2009 there were 48 hospitals in same-hospital continuing operations. Sierra Providence East Medical Center will be added to our same-hospital reporting beginning in the first quarter of 2010. This action will bring all of Tenet’s 49 continuing hospitals into the same-hospital definition.

Admissions, Patient Days and Surgeries

Total admissions and commercial managed care admissions declined by 0.9 and 5.3 percent, respectively, in the fourth quarter of 2009, as compared to the fourth quarter of 2008, on a same-hospital basis. The Company’s California Region and its Philadelphia Market each reported positive growth in total admissions for the quarter. Tenet’s other regions reported admissions declines in the fourth quarter. Flu-related admissions were 666 in the fourth quarter of 2009.

Admissions from government payers, including both traditional and managed government programs, grew by 0.8 percent in the fourth quarter of 2009. Uninsured plus charity admissions grew by 0.2 percent in the fourth quarter of 2009, a slower growth rate as compared to 3.1 percent growth reported in the sequential, third quarter of 2009.

Outpatient Visits

Outpatient volume grew by 32,551 visits, or 3.5 percent, in the fourth quarter of 2009 as compared to the fourth quarter of 2008, on a same-hospital basis. Tenet has reported year-over-year growth in outpatient visits in seven of the last eight quarters. All of the Company’s regions saw growth in outpatient visits in the fourth quarter with the strongest growth occurring in the Philadelphia Market, which achieved double-digit growth that was impacted by growth in flu-related visits at our children’s hospital. In addition, the Company’s Central Region achieved outpatient visit growth of 5.2 percent. Flu-related outpatient visits were 10,391 in the fourth quarter of 2009.

Newly opened or acquired facilities contributed 967 visits, net of the volume loss from a facility in which our ownership was converted to a minority interest in 2009. Excluding these 967 visits, the organic increase in outpatient visits would have been 31,584 visits, or growth of 3.4 percent.

Outpatient surgeries increased by 1.3 percent, representing a moderation in growth as compared to the 4.4 percent growth reported in the third quarter of 2009. Outpatient imaging visits declined by 1.4 percent in the fourth quarter of 2009 primarily due to newly opened physician-owned competition in imaging centers.

Emergency Department outpatient visits increased by 30,637 visits, or 9.5 percent. This increase in Emergency Department outpatient visits contributed 94 percent of the 32,551 increase in total outpatient visits in the quarter.

Charity plus uninsured outpatient visits decreased by 1.6 percent in the fourth quarter of 2009 as compared to the fourth quarter of 2008.

Revenues

Net operating revenues increased by $75 million in the fourth quarter, or 3.5 percent, on a same-hospital basis. Favorable prior-year cost report adjustments contributed $6 million to net operating revenues in the fourth quarter of 2009 as compared to a contribution of $2 million in the fourth quarter of 2008. Net operating revenues in 2008’s fourth quarter also included a favorable $8 million related to a Medicare reimbursement issue. Excluding prior-year cost report adjustments from both quarters, as well as the $8 million revenue from the fourth quarter of 2008, same-hospital revenues would have increased by 3.7 percent.

Commercial managed care revenues grew by 2.8 percent, on a same-hospital basis. This revenue growth is indicative of our continuing commercial pricing strength, as the growth was achieved despite the declines in commercial managed care admissions and commercial managed care outpatient visits which declined by 5.3 and 3.9 percent, respectively.

Revenues on a Per Admission, Per Patient Day, and Per Visit Basis

Unit revenue improvement was evident across all key metrics, primarily reflecting the improved terms of our commercial managed care contracts. The growth in net inpatient revenue per admission of 3.5 percent was adversely impacted by a shift in payer mix, including a decline in commercial managed care admissions as a percent of total admissions to 25.5 percent in the fourth quarter of 2009 as compared to 26.6 percent of total admissions in the fourth quarter of 2008.

In a similar fashion, in our outpatient business, the unit revenue increase of 2.3 percent in outpatient revenue per visit was constrained by an adverse mix shift including a decline in commercial managed care outpatient visits as a percent of total outpatient visits to 35.6 percent in the fourth quarter of 2009 as compared to 38.3 percent of total outpatient visits in the fourth quarter of 2008.

Controllable Operating Expenses

Salaries, wages and benefits per adjusted patient day increased by 2.9 percent in the fourth quarter of 2009 compared to the fourth quarter of 2008. This increase reflects merit increases awarded to our employees, effective October 1, 2009, increased accruals for annual incentive compensation, and a $16 million expense in the fourth quarter of 2009 related to a discretionary contribution to the 401(k) accounts of employees who are not eligible for incentive compensation. These items were partially offset by a decline in full-time employee headcount and a reduction in contract labor expense. Excluding the discretionary contribution to our 401(k) plan, the increase in salaries, wages and benefits per adjusted patient day would have been 1.3 percent.

Supplies expense per adjusted patient day increased by 1.9 percent compared to the fourth quarter of 2008. The increase in supplies expense was primarily driven by increased usage of high cost pharmaceuticals and biologics, as well as growth in the use of implantable devices.

Other operating expenses per adjusted patient day increased by 2.2 percent compared to the fourth quarter of 2008. An increase in Indigent Care Tax at one of our hospitals added $4 million to other operating expense in the fourth quarter of 2009. This increased expense item was approximately offset by additional Medicaid DSH revenue of a similar amount. Also contributing to the growth in other operating expenses were increases in costs of contracted services and a reduction in the cost allocation to discontinued operations for information systems and business office costs. These increases were partially offset by a $4 million reduction in malpractice expense to $14 million in the fourth quarter of 2009, related to improved claims experience.

Controllable operating expenses, defined as salaries, wages and benefits, supplies, and other operating expenses, increased by 2.5 percent on a same-hospital, per adjusted patient day basis compared to the fourth quarter of 2008. Excluding the $16 million discretionary 401(k) match, this increase would have been 1.6 percent.

Provision for Doubtful Accounts

Bad debt expense increased by $12 million, or 7.3 percent, compared to the fourth quarter of 2008, on a same-hospital basis. The increase in bad debt expense was related to higher pricing and the 240 basis point decline in our collection rate from self-pay. These items were partially offset by a decline in uninsured volumes, improved collection rates from managed care payers, and improved managed care accounts receivable aging categories.

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance-after insurance accounts receivable, declined to approximately 30.1 percent in the fourth quarter of 2009, compared to 32.5 percent in the fourth quarter of 2008, and 30.3 percent in the third quarter of 2009.

The estimated direct and allocated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for uninsured patients were $93 million for the fourth quarters of both 2009 and 2008. The estimated costs of providing charity care were $30 million and $28 million, respectively, for the fourth quarters of 2009 and 2008.

Accounts Receivable

Consolidated accounts receivable were approximately $1.158 billion at December 31, 2009 and $1.195 billion at September 30, 2009. Accounts receivable days outstanding from continuing operations were 46 days at December 31, 2009 compared to 47 days at September 30, 2009 and 50 days at December 31, 2008. This amount is calculated as accounts receivable from continuing operations divided by net revenue from continuing operations divided by the number of days in the quarter.

Cash Flow

Cash and cash equivalents were $690 million at December 31, 2009, a decrease of $41 million from $731 million at September 30, 2009.

Significant cash flow items in the three months ended December 31, 2009 included:

• $21 million we received under our interest rate swap agreement;
• $1 million in cash distributions we received related to our investment in the Reserve Yield Plus Fund, which are classified as investing activity cash flows;
• $192 million of capital expenditures;
• $23 million in principal payments, classified as operating cash outflows from continuing operations, related to our 2006 civil settlement with the federal government;
• $99 million in interest payments; and
• $58 million of income tax payments.

Outlook for 2010

The Company’s outlook for the year ending December 31, 2010 is materially dependent on a number of items that are difficult to project given the uncertain macro-economic environment. Among the most important of these items are aggregate patient volumes, payer and patient mix, and collection rates on patient accounts. In our 2010 assumptions below, same-hospital and total-hospital statistics are identical as all 49 of our continuing hospitals are included in both definitions in 2010.

Admissions growth is assumed to be in a range of down 0.5 percent to up 0.5 percent in our 2010 outlook. Our 2010 outlook includes an assumption of continued payer mix shift away from commercial admissions. In 2009, same-hospital admissions and commercial admissions declined by 0.6 percent and 4.7 percent, respectively.

Outpatient visits are assumed to grow by 3 to 4 percent in our 2010 outlook. No significant payer mix shift is assumed with respect to commercial managed care outpatient visits. In 2009, same-hospital outpatient visits increased 3.4 percent while commercial outpatient visits declined by 1.2 percent.

Unit revenue increases in our 2010 outlook assume an increase in net inpatient revenue per admission of 2 to 3 percent and an increase in outpatient revenue per visit of 3 to 4 percent. In 2009, these same-hospital inpatient and outpatient unit revenue metric increases were 3.5 and 3.2 percent, respectively. Our unit revenue outlook for 2010 reflects the impact of the assumed adverse inpatient payer mix changes discussed above. A number of additional items impacting our 2010 unit revenue outlook are discussed below as part of our 2010 outlook for net operating revenues.

Net operating revenues for our 2010 outlook are assumed to be in the range of $9.35 billion to $9.55 billion, representing assumed growth of 4 to 6 percent. In 2009, same-hospital net operating revenues grew by 4.3 percent. Among other things, the range of outlook for unit revenues, total revenues, and EBITDA will be influenced by payer mix shift away from commercial managed care, lower Medicare rate increases in the current fiscal year, as well as the magnitude of cost report and favorable managed care settlements, known and possible state funding reductions, and by the potential receipt of revenues associated with the California provider fee legislation as described below and in our Form 10-K.

Controllable operating expenses for our 2010 outlook are assumed to be in the range of $7.6 billion to $7.75 billion, representing assumed growth of 4 to 6 percent. In 2009, controllable operating expenses grew by 1.2 percent, on a same-hospital basis. Our 2010 outlook for controllable operating expenses includes an estimate of an incremental $40 million in expenses associated with the Company’s multi-year plan to comply with the American Recovery and Reinvestment Act of 2009 (“ARRA”) regarding healthcare information technology (“HIT”). Given the time required for implementation, these HIT expenses are assumed to generate no offsetting revenue from either incentive payments or operating benefits in 2010. Beginning no later than early 2012, we expect to begin recording incentive payments and achieving the first stages of operating benefits, which are expected to offset a portion of these investments.

Bad debt expense is assumed to be in a range of 7.8 to 8.8 percent of net operating revenues in our 2010 outlook. This assumption corresponds to bad debt expense of $730 million to $840 million. The range of bad debt expense will be influenced by the collection rate on patient accounts and the rate of growth of uninsured volumes. In 2009, total-company bad debt expense was $697 million, or 7.7 percent of net operating revenues.

Adjusted EBITDA for 2010 (reconciled to net income, as defined by GAAP, in Table #3 at the end of this release) is assumed to be in the range of $985 million to $1.050 billion. Based on the outlook for net operating revenues, as cited above, this corresponds to an adjusted EBITDA margin range of 10.5 to 11.0 percent. In 2009, Tenet’s adjusted EBITDA was $982 million, or an adjusted EBITDA margin of 10.9 percent. Our outlook for adjusted EBITDA includes assumptions of $40 million in incremental ARRA/HIT expense; and $35 million in reduced state reimbursements (before the California provider fee legislation, discussed below), including reduced Medicaid DSH payments, and revenue reductions related to a state program providing healthcare services to prison populations. Our EBITDA 2010 outlook assumes that these negative effects from various states’ reimbursement reductions will be partially offset by the receipt of up to approximately $60 million in net proceeds related to California’s provider fee legislation. This payment is not currently approved by Centers for Medicare & Medicaid Services (“CMS”). If the payment is approved by CMS, actual net proceeds from the legislation could be substantially lower or greater than the $60 million cited above.

Depreciation and amortization expense are assumed to be approximately $385 million to $420 million in our 2010 outlook. In 2009, depreciation and amortization expense was $386 million.

Interest expense, net of investment earnings, is assumed to be approximately $415 million to $435 million in our 2010 outlook. Our outlook assumptions exclude the impact of any potential financing activities. In 2009, interest expense, net of investment earnings, was $445 million.

Income from continuing operations before income taxes in 2010 is assumed to be approximately $165 million to $215 million excluding two items in Table #4 at the end of this release: (1) net gains (losses) on sales of investments; and (2) litigation and investigation costs.

Preferred dividends are assumed to be approximately $24 million in our 2010 outlook. In 2009, preferred dividends were $6 million, representing only a partial year for our preferred issue.

Normalized net income from continuing operations attributable to common shareholders in our 2010 outlook is assumed in the range of $70 to $94 million, or $0.14 to $0.19 per share. This metric assumes normalized income taxes of $65 million to $85 million, using an assumed tax rate of 40 percent for normalized income taxes, and assumed average diluted shares outstanding of 503 million shares. The details of this calculation are provided in Table #4 at the end of this release.

Adjusted net cash provided by operating activities from continuing operations has a 2010 outlook in the range of $580 million to $650 million. The Company defines adjusted net cash provided by operating activities from continuing operations to exclude income tax payments (refunds), litigation and restructuring payments, and net cash provided by (used in) operating activities from discontinued operations. In 2009, adjusted net cash provided by operating activities from continuing operations was $620 million, and net cash provided by operating activities was $425 million.

Capital expenditures from continuing operations in our 2010 outlook are assumed to be in the range of $475 million to $525 million. This includes HIT capital expenditures of approximately $70 million as part of the Company’s multi-year plan to comply with ARRA. In 2009, capital expenditures for continuing operations were $455 million, including approximately $50 million of ARRA/HIT capital expenditures.

Adjusted free cash flow from continuing operations for our 2010 outlook is assumed to be in the range of $105 million to $125 million dollars. (The adjustments to free cash flow are detailed in Table #5 at the end of this release). In 2009, adjusted free cash flow from continuing operations was $165 million.

Cash and cash equivalents at December 31, 2010 is assumed to be in the range of $630 million to $700 million. This assumption excludes the impact of any material asset sales or purchases, and incremental financing activities. At December 31, 2009 cash and cash equivalents was $690 million.