The health care industry is in a challenging position right now, as the Trump administration is pushing to cut profits out of the industry. And insurers are among the biggest losers.

However some hospital operators like Tenet Healthcare (THC) are more immune than others during this healthcare shakeup.

The company is still one of the best names in health care today, after spending years divesting underperforming assets and investing into higher-margin options.

Patients still need quality care, making Tenet a viable option for investors looking for exposure in health care.

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In a little more than a year, headcount at West Virginia’s Blue Field Regional Medical Center was cut down by more than 270.

And in less than a decade, one employee reported that the number of nurses on the OB floor during a shift had dropped from six or seven to three or four.

The hospital was so underequipped, she said, that the nurses ran out of baby blankets. They had to wrap babies in towels instead.

Unfortunately, Bluefield wasn’t alone with its problems.

The only emergency room in Lumpkin County, Georgia closed in 2018, forcing patients to drive more than 30 miles for critical services.

And hospital conditions in Fort Wayne, Indiana got so dire that a group of doctors tried to buy the network from its corporate owner, Community Health Systems (CYH).

The problems for Community Health started with CEO Wayne Smith’s ambitious plan in the early 2000s. Smith wanted to turn the then-small Tennessee-based hospital operator into one of the biggest health care companies in the U.S.

By 2010, Community Health owned 130 hospitals and generated $13 billion in annual revenue. It seemed like Smith had succeeded in his goal.

However, many of the hospitals it acquired were struggling. And Community Health’s debt load was spiraling out of control. By the end of 2010, the company carried $9 billion in debt, a huge jump from less than $2 billion just four years earlier.

These cracks in the foundation became glaringly obvious during Smith’s most aggressive move: the attempted hostile takeover of Tenet Healthcare (THC).

Smith made his move in December 2010. The deal, valued at $7.3 billion, would have created a health care juggernaut.

But Tenet’s board refused, calling the offer opportunistic and undervalued. It even filed a lawsuit in April 2011, accusing Community Health of overbilling Medicare by admitting patients to its hospitals who should have been treated as outpatients.

The lawsuit made national headlines as it painted Community Health as a company more interested in aggressive growth than ethical management. By May 2011, Smith abandoned the Tenet bid and set his sights on Health Management Associates, which he bought for $7.6 billion.

Health Management added 71 hospitals to Community Health’s portfolio. But the acquisition came at a heavy cost. Community Health’s debt ballooned to almost $17 billion by the end of 2015.

Many of the acquired hospitals struggled to generate consistent profits, exacerbating the company’s financial woes.

Between 2016 and 2020, Community Health sold or closed more than 60 hospitals to manage its debt, including Lumpkin County’s Chestatee Regional Hospital in 2018.

Reports cropped up all over the country of understaffed, deteriorating hospitals—all with the same corporate owner.

Smith’s debt-fueled expansion strategy spooked the market. Shares plunged 86%, from their $52 peak in 2015 to $7.43 through the end of 2020. They sit at a mere $3.37 today.

Meanwhile, Tenet Healthcare pursued a different path.

After fending off Smith’s takeover bid, the hospital operator focused on operational efficiency and growth in outpatient care. It divested underperforming assets and invested in higher-margin options.

In doing so, Tenet steadily improved its financial position.

These changes will also help it stay afloat during this year’s push to cut health care costs.

President Donald Trump is pushing to cut profits out of the industry. Insurers are among the biggest losers. But hospital operators like Tenet aren’t immune.

That said, outpatient care is much cheaper, and that’s what Tenet has been focusing on recently. It’s among the most stable players in health care for that reason.

This is a tough industry right now. But people still need quality care.

For investors looking for stability, outpatient operators like Tenet are one of the best names in health care today.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research