Lecture Notes on Tenet Healthcare - Corporate Financial Management | FIN 4360, Study notes of Finance

Download Lecture Notes on Tenet Healthcare - Corporate Financial Management | FIN 4360 and more Study notes Finance in PDF only on Docsity! Tenet Healthcare Financial Position and Recommendations For CFO Stephen Farber FIN 4360 Dr. Rich Jonathan Carosh Blake Conkle Shubair Jaffrey Kevin Johnson Carrie Olander Melissa Sewell 0 Executive Summary Tenet Healthcare’s current financial situation is a result of several factors. The problems include a federal investigation of overcharging Medicare, performing unnecessary invasive heart procedures, and rewarding doctors with kickbacks. In addition to these problems Tenet’s bad debt expense is increasing rapidly due to the fact that they are paying off numerous, repetitive lawsuits. Actions must be taken to better their financial position, and there are some opportunities still out there. The following pages discuss several pertinent problems that Tenet Healthcare currently faces and recommendations to alleviate their current financial distress. Our first suggestion is for Tenet to reduce their debt and expenses. They are in the process of selling off some of their hospitals. We feel that Tenet should continue to do this and sell all of their hospitals with low profit margins. Selling off the equipment from these hospitals will also generate some revenue for them. One of the main things that has been hurting Tenet is their increasing bad debt expense. A solution to this problem is to be more selective with the patients they treat. By doing this they can reduce the risk of bad debt expenses that come from patients with either no insurance or insufficient insurance. Another big expense for Tenet over the last year has been legal fees due to lawsuits that have been filed against them. Instead of taking all of these suits to court it would be more beneficial to them to settle some of them out of court. Another suggestion to Tenet would be to open or purchase specialty hospitals in addition to the hospitals they already own. These hospitals generally have low costs and high profits, which will be beneficial to Tenet. We suggest that Tenet purchase already existing specialty hospitals, but another option is for them to open new ones. Buying existing hospitals would be better for them because they would not have to compete as much with already existing specialty hospitals. In addition to reducing debt and expenses and buying specialty hospitals, we feel that a big step in improving the financial status of Tenet would be to completely restructure the company. This would involve everything from changing the name of the company to restructuring the different departments of the company. One of the biggest problems Tenet is facing right now is that they have lost the trust of many of their patients, investors, and employees. By restructuring we feel that Tenet can start fresh and build their way back up to where they were financially before they started having problems. While all of our suggestions are merely recommendations, we see our recommendations for Tenet as having both a short-term positive impact on the financial statements and operations, and a long-term positive impact on operations. 1 Tenet received $550 million for 5 hospitals. An article in the same magazine in October said Tenet received $25 million for another hospital. These cash flows are classified as property, plant, and equipment, and will be used for general corporate purposes. Possibly Tenet could and will use these savings to payoff more debt. We believe that Tenet should analyze all 105 of their remaining hospitals and eliminate the ones with low profit margins. By doing this they will gain proceeds from the sales and reduce debt and will be better off in the long run because they will have eliminated hospitals that are not meeting their targeted returns. One of the downsides of eliminating hospitals is that Tenet would greatly reduce their patient care. For example, if they eliminated a hospital in one area, a patient would either be forced to go to a different health care provider, or he/she would have to travel a potentially much greater distance to another hospital owned by Tenet. However, we feel that the financial benefits from selling the hospitals outweigh the costs of keeping the poorly performing hospitals. While Tenet is selling hospitals they should also review the situation within their system. They could combine some of the departments to help cut costs and create a more efficient working environment. For example, they could merge the business department, financial information systems department, and administrative department together. This would lead to a decrease in the need for some employees and therefore a decrease in their costs. On the flip side of that, there are many consequences of firing employees. One of these might include a lower morale of remaining employees. There would also be a big impact on the lives of the people who were fired. They would have to completely adjust and reorganize their 4 lives for their new lifestyle. Another consequence would be the cost that would be incurred for the training of new employees. Yet, we feel the merging of departments and the elimination of some jobs within the departments benefits Tenet in the long run. The merger will form a tighter internal network, and force Tenet to retrain employees, leaving them with a greater span of knowledge and an increased productivity level. Specialty Hospitals Another suggestion to help Tenet Healthcare would be to open or purchase specialty hospitals. These specialty hospitals perform high-profit, high-demand operations and treat people on both an inpatient and outpatient basis, usually in the areas of orthopedics, cardiology, oncology, and diagnostic imaging. A growing number of such hospitals have been started by groups of doctors and other corporations, which have taken this high-profit business away from larger acute care facilities leaving them with high-cost, lower-profit procedures. Specialty hospitals also treat a lower percentage of severely ill patients (see Appendix C), which allows them to treat more patients in the same amount of time. By doing so, these hospitals are taking more financially rewarding procedures away from community hospitals. Specialty hospitals can also choose not to treat an individual whom they see to be less profitable than others; a community hospital does not have this luxury and generally must treat everyone. Tenet should purchase several specialty hospitals and incorporate them into their already existing healthcare system. This will allow them to make the profit off of these high-profit, low- cost procedures, increasing their corporate profits. Tenet could incorporate the specialty hospitals as an addition to an already existing hospital, and share both supplies and resources, 5 reducing the costs to both facilities. Most specialty hospitals also have newer equipment to reduce doctor error during a procedure. This will reduce malpractice claims and give the company less negative publicity while in turn creating a name for themselves for having up-to- date equipment, thus allowing for fewer errors in procedures performed. To incorporate these specialty hospitals into Tenet’s already existing hospital structure the company should see these specialty hospitals as a way to recover the business that was lost. In areas where there are Tenet hospitals close by, they could build a facility at the same location or add on to the existing hospital and transfer the equipment and personnel to the centralized facility. This would further the sharing of resources and equipment, while also limiting the cost of transporting supplies to multiple locations. Both the community hospital and the specialty hospital would benefit from this sharing of equipment and resources. At the same time, joining the two powerhouses would aid in reducing the costs to both facilities. Doctors that want to specialize in one of these areas can make a name for themselves while using the resources of Tenet and giving Tenet the reputation of having well known, dedicated doctors in specialized fields. This reputation will greatly help with repairing the Tenet name in the healthcare industry today. Tenet also has the option to open new specialty care facilities of their own to compete with already existing specialty hospitals in certain areas. This would be a more costly approach than buying an existing specialty hospital because Tenet would have to hire more people in an industry that is suffering from a shortage of highly trained personnel. Also, with the competition in certain areas and the recent negativity that surrounds the Tenet name, a competing specialty hospital owned by Tenet may not do as well as expected and may not be worth the costs of start up. These costs include costly state of the art equipment, the purchase of supplies and delivery 6 combining of different agencies, and the termination of employment of non-productive employees in all areas. After these changes had taken place Tenet would offer medical insurance companies a discount on their contracts as an incentive for them to offer their patients lower co- payments at any of our hospitals. This would ensure that more patients choose Tenet hospitals for their entire range of healthcare needs. To finance the project Tenet will use a combination of three financial sources available to them. First, they would use internal funds, which would include the money made from the sale of hospitals and revenue from our current hospitals. Second, they will take out bank loans; hopefully, their previous attempts to lower dept would ensure a lower interest rate and a higher line of credit from suppliers. Last, if necessary, the remaining funds required to complete the project would be raised by issuing both stocks and bonds. Tenet plans on hiring two consulting firms, one that specializes in planning, overseeing, and assisting a company through the restructuring process, and another that specializes in researching a new company name for Tenet. This will be the first expense of the project, costing anywhere from $600,000 to $1,000,000 annually for the restructuring consultants and $70,000 to $100,000 for the researchers. Major costs will include the following (conceptually):  Trademark cost for new name  Legal fees  Cost to change old signs and other assets (e.g. pens, stationary, website etc.)  Marketing cost (e.g. advertisements)  Opportunity cost associated with offering cheaper contracts to Insurance companies For a Company of this size, the projects estimated total costs range from $60 million to $100 million. Additional funds will be set aside to compensate for unforeseen costs that may 9 arise. In order to insure a successful turnaround, Tenet will adhere strictly to the 3 R’s of reorganization: repositioning, restructuring, and reengineering. Repositioning of the company generally refers to a strategic shift in its position in the marketplace. This process of repositioning has been already started with previous purchases of specialty hospitals; which would concentrate on providing patients with more unique and specialized procedures and give Tenet a specific niche in the market. The second R is restructuring, which only denotes changes in the organizational structure of the company. It refers to the entire process undertaken to accomplish the turnaround, as discussed earlier. Re-engineering of the business process is a term used to denote changes in the business process of the company and the changes in the way things are done, which are often the most challenging and fundamental. In taking on a project this big, there will undoubtedly be many negative aspects associated with the project. The first of these is the large amount of time involved in completely overhauling a company. Another drawback of streamlining the company’s business structure comes from the downsizing of personnel. With all the large changes being made to the company, we believe that employee morale will initially decrease, until the progression of time returns stability to the company. There is also always the possibility of the restructuring project failing to accomplish its purpose of bringing the company out of their current problems, and causing the firm to be in further financial distress. Just as there are many negative aspects associated with the restructuring of the company, there are also many positive aspects to the project. Under the new IRS revenue ruling (Rev. Rul. 2000-7), the removal costs for dismantling the old signs or changing over assets is now a tax- 10 deductible expense. We predict that the increase in volatility to the companies stock, usually caused by large projects such as this, would potentially make our stock more appealing to stockholders. This would ultimately make the companies stock more valuable. Streamlining the organizations business process enables the company to perform more efficiently. This efficiency would ensure lower costs in the long run, which would in turn increase the company’s profit. Additionally, with the implementation of the ethics seminars, the new Tenet Healthcare could help keep the unethical practices of the past from re-emerging. Furthermore, the increased attention to patients’ needs could help regain the trust that Tenet has lost over the past years. Although this risk of failure does exist, there is also the greater possibility of this project being a great success, which would pull the company out of its current downward spiral. The process to completely restructure Tenet Healthcare will not be an easy one. This project is one that involves a great deal of time, work, and money. After considering all of Tenet’s options, we feel that all these sacrifices are necessary to ensure the survival and success of Tenet Healthcare for many years to come. 11 Appendix B Situation A- Settlement is taken to court Situation B- Settlement completed out of court A B Settlement $2,000,000 $2,000,000 Legal Fees $500,000 $0 Total $2,500,000 $2,000,000 Conclusion: Tenet could use the money saved by settling out of court to pay off some of the bad debt expense they have occurred or they could put the money toward other lawsuits. Note: The numbers are not real; they were fabricated to show the extent of money that could be saved. 14 Appendix C Figure 3. Median percentage of severely ill patients treated in specialty hospitals and general hospitals, by specialty hospital category BB Specialty Hospitals : | General Hospitals Cardiac Orthopedic Surgical Women's Source: United States General Accounting Office, April 18, 2003 15