VideoAt Tenet, market share increases via acquisitions in urban markets are producing impressive results. Same-facility admissions rose 3.5 percent and operating margins, based on earnings before interest, taxes, depreciation, and amortization (EBITDA), expanded by more than a point, to 19 percent, thanks in part to price increases of more than 6 percent from managed-care companies. "We've got the right amount of capacity, and we're offering the right services," says CFO Dennis, who expects Tenet to post at least 25 percent higher earnings for fiscal 2002.
Tenet's experience building its urban hospital base illustrates an advantage publicly traded chains have over nonprofits: the ability to choose the markets they serve. Nashville-based HCA has been able to sell or spin off many of the acquisitions it made in the mid-1990s, refocusing on large urban markets.
At Triad — one of HCA's spin-offs — the senior management team determined that a third of the 47 selected urban and midmarket facilities were either too small or too financially weak to fit into the new company's business strategy. Those facilities that required a significant capital infusion were especially unattractive to Triad. It began life as a public company with a debt-to- equity ratio of 5.5-to-1. The sale of 17 hospitals brought leverage down to about 3-to-1, and enabled Triad to buy competitor Quorum Health Group last April.
Triad's success, says CFO Whitman, depends on its good relations with doctors--the biggest driver behind the company's industry-leading, same- facility admissions growth of 8 percent. "We provide services for patients on the recommendations of doctors," he says. "They are our customers, and we have to earn their respect and referrals."
Doctors get strong representation on local hospital boards, and the resources they need for their practices. If that cuts into hospital profits, so be it, says Whitman. Triad's EBITDA margin of just under 15 percent last year is one of the lowest in the industry. "We made a deliberate decision to move slowly so we wouldn't disrupt the relationships we're developing," the CFO explains. A good strategy, if you can afford it.
Andrew Osterland is a senior editor at CFO.
The Medicare Millstone
The average hospital derives 39 percent of its revenues from Medicare patients. For hospital CFOs, though, getting paid under the federal system for Americans 65 and older and the disabled can be frustrating.
Launched in 1965, Medicare first reimbursed on a cost basis. Good for providers; not so good for taxpayers. Since 1970, fees have been fixed for health-care services — leading to different billing codes for everything from tongue depressors to open-heart surgery. "The system is incredibly complicated," says CFO Rick Langfelder of New York Health and Hospitals Corp.
And underfunded. The system was headed for insolvency until 1997, when Congress passed the Balanced Budget Act and cut expected payments to hospitals by nearly 12 percent through 2004. The American Hospital Association now expects the cuts will create an average 4 percent operating deficit on Medicare patients by 2004.
Already 60 percent of hospitals lost money on Medicare in 2000, according to the association. "We get paid about 70 cents on the dollar treating Medicare patients," says Tom Lenkowski, CFO of Southwestern Vermont Health Care Center, in Bennington. Small-market providers say they are shortchanged by reimbursement formulas factoring in regional wage costs. Like many CFOs, Lenkowski shifts uncompensated costs to commercial insurance payers. "It plays havoc with premiums for companies in our region," he says, "but somebody has to make up the shortfall." —A.O.
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