Troubled times for Tenet: Company's future in doubt

It has been a year and a half since a cloud of trouble formed over Tenet Healthcare Corp., and the storm hasn't let up yet. The old adage must be right: When it rains, it pours.

It's been a veritable deluge. With $4 billion in debt, a dwindling cash position and massive potential legal liability from government investigations and lawsuits, some critics say Tenet is in danger of drowning in its problems. At the very least, they predict Tenet will have to dissolve into a new form to emerge from its woes.

But the nation's second-largest for-profit hospital company has taken some drastic measures to reposition itself for survival and insists that it is now on stronger footing. With a major operations restructuring effort and management overhaul, the company sees its problems as "fixable" and hopes that investors will, too, as it tries to recover from an ocean of legal and financial setbacks.

Observers are divided about whether Tenet can keep itself from going under, though most agree some changes at the Santa Barbara, Calif.-based company have been necessary. Some hold the company out as an example of what's wrong with for-profit hospitals, while others say Tenet simply got burned by its previous leadership and policies. Drawing comparisons with other hospital giants who have teetered on the edge of disaster -- notably HCA Inc., the No. 1 for-profit chain -- they have looked at Tenet's current position as well as its history and made predictions about its future ranging from bleak to bright.

Somewhere in the middle is Ted Schwab, a Los Angeles-based consultant, who acknowledges that the company is facing serious problems, but also thinks that Tenet can survive.

"Tenet is a pretty sick patient. In the near future, there's going to be an amputation. It has got some appendages that are cancerous and are going to have to be cut off," said Schwab, who works for Sokolov, Sokolov & Burgess and consults to hospitals, physicians and health plans.

"Tenet's situation is not as bad as [HCA] was." HCA, when it was called Columbia/HCA in the mid-1990s, was the subject of Medicare fraud investigations and questions about its business practices. "They just came out a smaller, leaner company, and that's exactly what Tenet is going to do. And they've got a roadmap on how to do it."

Schwab and other observers said Tenet's financial position could force it to put more hospitals up for sale, perhaps leading some to close. This could affect scores of physicians who do business with the company and work at its facilities.

"If you're working at a Tenet hospital that is on the block, you've got to be worried about who is going to purchase it and if anybody is going to purchase it," Schwab said.

"Tenet's woes are bad news for [doctors]. Physicians need a good hospital partner, and they have got to be very worried that in the future Tenet might not be a good partner."

Even physicians who don't work at Tenet hospitals might feel the ripple as those who do leave look for new professional homes, he said.

Tenet, on the other hand, says its hospitals are the company's treasures and are receiving the resources necessary to provide the best patient care. During a conference call with investors in March, Tenet President and Chief Executive Officer Trevor Fetter insisted that the hospitals had not been adversely affected by the company's woes.

Those problems include a long series of legal and regulatory troubles that began in October 2002, when the FBI raided the offices of two physicians at a Tenet hospital in Redding, Calif., to investigate alleged unnecessary heart procedures. Tenet later agreed to pay the government $54 million to settle without admitting any wrongdoing. But the company still faces scores of civil lawsuits by former patients and their families, amounting to hundreds of millions of dollars in potential legal liability.

Two more government investigations were resolved with a March 24 agreement in which Tenet said it would pay $30.8 million to settle claims stemming from physician employment issues at a hospital in Florida and a transfer-discharge inquiry at its hospitals nationwide.

In addition, the company has come under scrutiny over its pricing and the way it billed Medicare in the past. Tenet faces significant potential liability in a lawsuit over its Medicare billing, as well as lawsuits from shareholders, an investigation by the Securities and Exchange Commission of some reimbursements and payments, a Justice Dept. investigation of Tenet's relocation agreements with physicians and an Internal Revenue Service audit that says the company could owe $279 million in back taxes.

At the same time, Tenet is enduring financial hardships, as its earnings have fallen short and it struggles to manage a $4.1 billion debt. The company announced in March that its loss for the fourth quarter of 2003 was $954 million, with a loss for that whole year of $1.5 billion.

While addressing investors, Fetter said the problems were serious but not insurmountable.

"I don't want to give you the impression that Tenet's problems are behind it. We have done a lot of work over the past 16 months, and have a good sense of the challenges we face. They are significant, but I believe they are fixable," he said.

Fetter outlined several initiatives Tenet has undertaken to overcome its woes, including a board and management overhaul and a restructuring of the company's strategy and operations. Tenet announced the latter effort in January, saying it would sell 27 hospitals and refocus its energy on 69 core facilities.

Some critics have questioned whether Tenet will be able to find buyers for the hospitals. Nineteen of them are in California, where costly regulations requiring retrofitting the hospitals to meet earthquake-proof standards could scare off potential suitors. Jeffrey Villwock, managing partner at the Atlanta health care investment banking firm Caymus Partners, said Tenet was trying to reposture itself with the sales.

"One thing they clearly are trying to do is get to a smaller size and turn some of their assets into cash," Villwock said. "If at some point it appears that the cash is going to run out or they need more cash, the only assets they have truly are hospitals."

Villwock is a financial adviser for the Tenet Shareholder Committee, a dissident shareholder group that once led an unsuccessful proxy fight. He helped the committee draft a report in February called "Tenet's Death Rattle," which predicted that the company won't survive in its current form.

In the report, committee Chair M. Lee Pearce, MD, who had sold his hospital company to Tenet in the company's early days, said: "In our view, Tenet will not have sufficient liquidity to handle the eventual costs resulting from multiple government investigations, malpractice lawsuits at Redding and other hospitals, multiple shareholder lawsuits and other liabilities.

"It seems to us that the more likely outcome is a reorganization of Tenet into several separate regional companies, perhaps as many as four."

Pearce also resounded the committee's claim that Tenet practices "Wall Street medicine," valuing dollars more than quality care. He concluded the report saying, "Tenet's decline is the direct result of greed and arrogance on the part of past senior management, aided and abetted by a dysfunctional board."

Financial failings

Tenet officials have acknowledged that the company is suffering from past mistakes. Fetter admitted during a Nov. 11, 2003, conference call that "something went very wrong at Tenet." He said in some cases that the company had "seemed to confuse what was legal with what was right."

But Fetter told investors in March that the organization is radically different now and being run with fresh leadership while trying to correct its problems.

Villwock said he thinks there is a reasonable chance that Tenet will run out of cash. He pointed to Tenet's current cash flow, which is predicted to be negative in 2004 by roughly $500 million to $600 million. In 2005, the company said cash flow should improve by at least $300 million to $400 million.

But Tenet executives insist there is no need for alarm. At the March talk with investors, Fetter said Tenet's cash and credit availability gave the company access to about $1 billion.

Additionally, he noted that over the next year or two Tenet expected some $600 million, mostly in the form of tax credits, from the latest round of hospital sales.

HCA, the nation's largest for-profit hospital chain, was able to settle its massive $1.7 billion fraud case with the government after years of wrangling. It has stayed afloat since, though it had to shed hospitals and restructure.

Villwock said that just because HCA and Tenet both had been threatened by regulatory woes doesn't mean that the for-profit hospital chain model is flawed. "Every single hospital in America better turn a profit. Whether you pay taxes or not is not the issue," he said.

But Sheryl Skolnick, an analyst with Fulcrum Global Partners in New York, said Wall Street seems to have a problem understanding that hospitals are not necessarily growth businesses, and that misunderstanding puts undue pressure on companies like Tenet.

"The hospitals simply can't generate the year-after-year earnings that Wall Street wants," she said. "I think Wall Street has to realize that these are real estate based, highly regulated businesses."

Skolnick predicts that it will take a few years before the company's future becomes clearer. As for the physicians who are working with Tenet now, Skolnick said they shouldn't panic. "They do need to understand that this is going to go on for a while. But even if a hospital gets sold, there's still life after the sale. And that might not be a bad thing."

Meanwhile, physicians working at Tenet hospitals that are on the block haven't reported any problems. John Rampulla, MD, medical director of the emergency department at Doctors Medical Center-San Pablo in northern California, said, "They're doing a good job, and the CEO has promised that until the day they leave they'll give us whatever we need."