This page examines the second major scandal involving National Medical Enterprises (NME), a re-branded company now called Tenet Healthcare. The first NME scandal (5)in the early 1990's involved criminal Medicare fraud and the misuse of vulnerable citizens in psychiatry, substance abuse, and probably in rehabilitaion. Concerns were expressed about its general hospitals in the USA and internationally but these were either not investigated or not confirmed.
Its past conduct is mirrored in the 2002
Tenet Healthcare scandal involving allegations of Medicare fraud and
the misuse of patients undergoing major surgery and invasive
procedures. Its arrogance, inherent dishonesty and its inability to
grasp the nature of health care is exposed again. This web page
examines Tenet/NME's second coming.
The page describes the persistance of NME's culture folllowing its
1994 fraud settlement, and then its sudden collapse as its conduct
was exposed in October 2002.
I then show why this was predictable and that
it was predicted, before going back to examine the company's progress
through the years 1994 to 1999 when it was restrained by compliance
and integrity agreements, the new business policies, which so closely
resembled its earlier policies and were commenced as soon as the
integrity agreement expired n 1999, and its response when the
consequences of these business policies were exposed.
To go directly to a list of the major issues and actions on this page
CLICK
HERE
Contents
Introduction :: Persistence of a Market First Culture
New Business Policies and their Consequences
2002
When this is all done, we will see that the issue is NOT isolated to a single hospital, NOT isolated to a couple of physicians, and that it IS DIRECTLY related to a philosophy of Wall Street Medicine rather than a focus on quality health care. Tenet figured out how to game the system, and according to the FBI affidavit, it put patients' lives at risk.
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Just because something may not be illegal, - - - - - - it is, nevertheless, improper, unethical, unjustifiable and unacceptable conduct for a hospital company which purports to be socially responsible.
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The recurring problems at Tenet have been engendered by a corporate culture that prioritizes illusory profits over patient care and a Board which has, heretofore, abdicated its responsibility and condoned this misordering of priorities. The non-management members of the Board must, now, make management accountable. From a letter to Tenet's board calling for a total change of management - written by a shareholder, Dr Pearce in December 2002
The extent of the recent scandal engulfing
Tenet Healthcare (the re-branded National Medical Enterprises) has
been obscured by the larger but much less disturbing exposure of
accounting fraud at HealthSouth.
In HealthSouth's rehabilitation and day surgery services the patients
were healthy and the treatment low risk. The consequences for
citizens were largely financial and this received much more public
attention.
Tenets recent scandal involved invasive cardiac procedures, heart
surgery and major orthopaedic procedures. These are high risk
procedures with major complication and death rates. Failures in care
and over-servicing have far more serious consequences for the lives
of the citizens involved. The financial consequences are accompanied
by death and disability.
In examining HealthSouth I reviewed the
social
and psychological processes at work
in the health care marketplace and how they generate dysfunctional
and criminal conduct. In HealthSouth's case the role
of the founder and leader in
developing a dysfunctional culture was particularly well illustrated.
I have described a similar leader generated situation in
Sun
Healthcare and in other
companies.
Richard
Eamer, the eccentric founder of
National Medical Enterprises filled this leadership role in the
1980's. He played a critical part in developing a culture which made
the misuse of patients in order to defraud Medicare appear
legitimate.
Successful cultures hold the successful meaning systems of their
members. They do not die with their founder. They are infective,
inherited and highly resistant as long as these meaning systems work
for those who adopt them. In the market context they are very
successful. Tenet/NME illustrates this well.
By the early 1990's
NME's successful systems had spread
(5)
through the psychiatric, substance abuse and rehabilitation
communities. Other's poached its highly trained executives and
learned from them. All were eager to learn the recipes for success
and money making strategies were passed around without regard for the
social and personal consequences. Multiple corporate for profit
psychiatric chains reached fraud settlements.
The inheritance of the aggressive market
based patterns of understanding developed by Eamer
can be traced through the nursing home company Hillhaven, once owned
by NME and chaired by Eamer. Hillhaven
trained the founders
of
Horizon and Sun
Healthcare, - all three were
disturbing groups. A published
interview with Andrew Turner,
Sun's founder is particularly revealing.
Hillhaven was purchased by the corporate disaster Vencor,
which emerged from bankruptcy as Kindred Healthcare. Horizon was
dismembered and absorbed by HealthSouth and Integrated
Health Services (IHS) Like Sun
Healthcare and Vencor, IHS entered bankruptcy and then re- emerged.
All these companies have been at the centre of a nation wide outcry
about understaffing, poor care, neglect, and fraud in nursing
homes.
National Medical's fraud was dramatically
exposed in 1991 when it became so confidant that it started
kidnapping insured teenagers. It pleaded guilty to criminal conduct
in 1994 and paid about $1 billion in fraud and patient care related
settlements during the mid 1990's. The company's negotiated survival
was subject to a restrictive integrity agreement and an ethics
program. I described what happened in National Medical, and its
culture in a paper I gave in 1996. A version of this paper is on the
web site. (CLICK
HERE) I will provide links
to it frequently on these pagesand you cen reduce reloading by
opening it in a separate window. I will put the paragraph
numbers in
green next to the link to help.
In spite of the $1 billion punishment, the enforcement of integrity
and ethics agreements, ongoing oversight, and the loss of its
discredited leaders, NME's underlying patterns of thought survived in
Tenet Healthcare. They resurfaced as soon as the restrictive
integrity and ethics requirements were lifted and gave rise to the
2002 scandal.
If we look behind the mirage created by Tenet's marketing and
accepted by the share market in the years after its 1994 guilty plea,
the persistence of NME's patterns of thought are readily
identified.
I will not describe NME's culture in detail again here but will
provide direct links to similar conduct described on my earlier
pages. The similarities and continuity are clear.
These criticisms, the criticisms of critics
like Dr Pearce and the comments of analysts and academics might
suggest that Tenet is somehow unique. This is far from the truth.
Tenet is certainly more aggressive, more committed to the market
model, and if it is possible more blind to its own failings. It has
rebounded more aggressively from what it considers unfair
restrictions placed on it. Very similar patterns of thinking can be
identified in Columbia/HCA, HealthSouth and most of the health and
aged care chains.
NME was certainly one of the earliest advocates of market place
thinking in health care. Its spokesman and co-founder John Bedrosian
took part in public debates in the 1980's arguing with doctors like
Professor Relman that health care was a commodity like any other, and
citizens would be best served by trading health services in the
marketplace. The traditional medical model which put patients first
and shielded care from market forces was obsolete. The consequences
of this are now obvious.
Shortell (dean of the School of Public Health at UC Berkeley) said he believed that Tenet had done nothing illegal and was following blueprints similar to other for-profit hospital chains.
"Historically the nature of investor-owned, for-profit hospital systems is they tend to locate in parts of the country with good socio-demographics. Then, they tend to push to the limit in terms of what insurers and Medicare will pay," he said. Tenet raises prices more quickly than competitors :: Union asks state to look at charges San Francisco Chronicle November 20, 2002
In addition to illustrating the persistence
of dysfunctional cultures in the marketplace Tenet's second coming
also illustrates the role of money oriented institutional investors
in supporting this culture in the face of dreadful conduct. It only
turns against management when profits are falling.
Because of the life threatening consequences
and the involvement of doctors in this latest fraud I will look much
more closely at the impact of the health care marketplace and its
culture on the medical profession. Tenet is an excellent example of
this. I have not done so elsewhere. I have devoted a
separate
page to analysing Tenet and NME's
relationship with doctors.
to
contents
In resolving the NME scandal in 1994 common
sense became the victim of a legal process involving
negotiations (5.17)
between NME's lawyers and the justice
department. NME, which exploited the weaknesses of individuals in
situations which were not life threatening was forced to abandon care
in these areas.
NME was restricted to owning general hospitals. These provide care
for the seriously ill and for those undergoing high risk procedures.
These carry a much greater risk of complications and death. The
consequences of similar conduct for patients would be much greater.
If the allegations have substance which seems very likely then this
is what happened to seriously ill at risk patients in Tenet
Healthcare's hospitals less than 10 years after its settlement.
Although Eamer and two other founders resigned NME was not forced to
radically change the management responsible for what happened in the
first scandal.
He (Mr. Barbakow) was a friend of Richard K. Eamer, the flamboyant co-founder of National Medical Enterprises, who asked him to join the board in 1990 and to be his successor in 1993. Mr. Barbakow has said that - - - he was not fully aware of the extent of problems at the company until he became chief executive. Inquiries Raise Questions About Tenet's Strategy New York Times November 11, 2002
The market should have been warned in 2000 by
Tenet's publicly stated policies, which were clearly dysfunctional,
and by a rapid turn around in Tenet's profits during 2001 and 2002.
In the health care marketplace both are clear pointers to a loss of
insight and potential dysfunction. A medical shareholder, Dr Pearce
drew the attention of the market to what was happening and mounted a
challenge. Institutional investors crushed him.
Instead Tenet once again became the darling of the marketplace as it
had been in 1991
(3).
Evidence of price gouging, lack of integrity in honouring its
commitments, and also smaller fraud settlements were simply ignored -
the latter because they were not large enough to impact on profits.
The issues did not come to a head until there was a major crisis, one
that threatened investors profits.
The bond-rating firm Standard & Poor's, noting that the total (fraud) settlements Tuesday are small compared with Tenet's cash flow, said there is no effect on the ratings or outlook for Tenet's bonds.
Shares of Tenet rose $1.84 to $76.54 on the New York Stock Exchange. The stock has gained 30% this year. Tenet's $55.8-Million Payment Settles Claims LA Times June 19, 2002
"Overall, it's another strong quarter from this premier hospital company," said David Shove, analyst at Prudential Securities. "A combination of excellent admission growth and favorable pricing drove the top-line revenue performance." Tenet Earnings Surge, Raises Outlook Reuters October 2, 2002
Tenet's proud recovery fell apart in October 2002. A market analyst and an insurer who was subcontracted to make Medicare payments for government both noted independently that Tenet's rejuvenated profits resulted from a massive growth in "outlier payments" when compared with competitors. These are extra payments made to hospitals for the care of high risk patients and for complex procedures. At the same time the FBI raided one of Tenet's most profitable hospitals accusing its doctors of carrying out large numbers of unnecessary heart procedures and surgical operations. These are the sort of procedures that attract outlier payments. Authorities simultaneously commenced an investigation into Tenet's merger practices.
Despite its past, the new Tenet seemed to be the kinder, gentler for-profit hospital conglomerate, even as it aggressively built its empire of 113 hospitals. The only nagging public relations problems were local objections to hospital mergers and a lawsuit filed against Tenet by some Hispanic activists in Orange County, Calif., charging the company with price gouging low-income and uninsured patients.
Investors, meanwhile, loved the company for its aggressive strategy of building strong local market share, consolidating services and using that leverage to force higher prices for its services from health plans.
What a difference a week or so makes. Unlike the slow decline of Columbia/HCA's fortunes, Tenet's share price plummeted overnight, - - - - - . Another for-profit under scrutiny raises questions about publicly traded chains Modern Healthcare November 18, 2002
Within 3 weeks Tenet's share prices had
dropped 70% from $50 to $14. This collapse was compounded by the
company's delay in disclosure and repeated denials -
so
reminiscent of its 1991 responses.
(5.17)
Barbakow did not seem to realise what was happening.
It seems likely that as in 1991 Tenet's executives had no idea that
they were doing anything wrong and were surprised at the negative
response and anger. They had simply made business decisions and were
blind to the human consequences and the views of others. As in the
1990's scandal their success was proof of their policy's legitimacy.
As in 1991 they had embraced their own marketing and the
image they had
promoted
(5.4) rather than the reality for
patients and for the health system. They simply looked past
what they were actually doing. Without insight the company responded
slowly to the negative views in the community. With unexpected
rapidity an avalanche of allegations, subpoenas, hospital raids,
investigations and court proceedings followed and are still in
progress.
A dissident shareholder demanding a total
chabnge in management has suggested that the costs to Tenet may
approach US $6 billion. Tenet tried to silence him by lodging a court
action. Other estimates range from US $1 to 5 billion but no one
really knows.
to
contents
It was predictable and it was predicted that
Tenet Healthcare, the repainted criminal organisation National
Medical Enterprises would offend again once it was able to do so. Its
culture of self-deception
and its self-righteousness (5.4)
were deeply embedded and staff including
senior management had never
accepted the serious implications of
what they had done.
Its frustration with the integrity processes imposed on it and its
lack of commitment to them is reflected in its refusal to even
acknowledge repeated submissions to Tenet's widely advertised ethics
committee regarding the conduct of senior staff in the company. One
of these submissions summarising the concerns expressed in previous
submissions is included
as a web page.
Particularly revealing was when a well lubricated senior Tenet legal
adviser stood up at a legal dinner to speak. He complained
bitterly that everyone was treating
Tenet/NME as if they were criminals. They were even forced to run
criminal checks on staff they employed. This outburst was greeted
with stony silence. NME had only recently pleaded guilty to criminal
and unconscionable behaviour. NME was a criminal organisation but its
staff were quite unable to accept this. Many believed that the
investigation and prosecution was a response to the frenzy created in
the community by a biased press.
This unreal arrogance persisted through the years.
"The level of arrogance that exists at this company still distresses me," Skolnick (a managing director of Fulcrum Global Partners, which provides investor research) said. Specifically, she said, Tenet management needs to address questions in a more forthright manner. Tenet to Close or Sell 14 Hospitals in an Overhaul :: For-profit chain says it will lay off some employees as it cuts costs and boosts efficiency. LA Times March 19, 2003
No attempt was made to address the
fundamental problems in the way the company and its staff saw the
health care world - the framework within which it provided care.
Tenet set out to gloss up its image and made broad motherhood
marketing statements. It dealt with what it perceived as an image
problem.
NME changed its name to Tenet, claiming the new name reflected its
new commitment to ethics, integrity and cooperation. It marketed
itself as a gentle, caring and socially responsible company. It
boasted of its ethics and compliance programs.
Tenet's name reflects its core business philosophy: the importance of shared values among partners - including employees, physicians, insurers and communities - in providing a full spectrum of health care. Tenet can be found on the World Wide Web at www.tenethealth.com. Statement included at the foot of every Tenet Press Release.
In 1993 when challenged with Tenet's
misinformation to the public during cross examination John Bedrosian,
an NME founder responsible for public relations brushed it aside as
"singing to the choir". In 1992 I called NME's forceful public
rhetoric claiming exemplary conduct, in exactly those areas where
they were most deficient, NMEspeak - comparing it to George Orwell's
"Newspeak".
It amazed me how readily the market, so recently burned by NME's
misconduct enthusiastically embraced this newly marketed image. Tenet
was widely praised and its reforms accepted at their face
value.
Within a few years, Mr. Barbakow was winning praise for turning Tenet into what a 1997 Wall Street Journal article called "a model of ethical health care practices." Tenet Chief to Lose Title of Chairman in a Shake-Up New York Times April 9, 2003
Most worrying was Tenet's very public and
superficially benign emphasis on partnerships and shared values with
doctors and others. There can be little doubt that what they really
wanted was for others to adopt their beliefs and their values.
Financial partnerships with doctors had been at
the root of NME's 1991 fraud.
(5.14) Many of the problems in the health
care marketplace have involved the participation or acquiescence of
doctors in what was happening. Most of them had some sort of
financial
"partnership" arrangement with the
companies. HCA was
forced to abandon this practice in 1997.
Given this behaviour the likelihood that the
company would re-offend was very high - particularly so once the
onerous restrictions placed on them by the integrity and ethics
agreements expired. My belief that Tenet/NME would re-offend, and my
concerns about the staff who were appointed to senior posts are
reflected in my analysis
(5.18),
in my complaint
to Tenet's ethics committee,
and in the statement
made in the Australian senate.
The market eagerly waits for companies who have indulged in disreputable conduct to recover and be successful again. It does not receptive to adverse information until it actually challenges marketplace success (3), definitely not in hard data such as that generated by their traditional enemies the unions, who are often the first to speak out. When a company's shares recover from a crash vast sums can be made by astute banks and investors. Patient care, probity and criminality are not considerations. The question is not whether Tenet will be prosecuted for fraud or for working with doctors who were killing people by operating on them needlessly. It is whether they will survive and recover. If so shares can be purchased while low and large profits can be made. The exposure of collusive practices between companies, market analysts and banks in HealthSouth and across the Wall Street marketplace raises a spectre of possibilities about what is happening behingd the scenes. Tenet and Barbakow and fetters past close links with Merril Lynch one of the companies allegedly involved fuels suspicion.
But some pros have turned bullish, with several fund managers buying--and expecting the price to hit 40 this year.
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Since free cash flow is expected to rise from $800 million in 2003 to $1.4 billion in 2007, Hewitt believes the financial risk from the probes is "manageable." With a shakeup in management and a new focus on internal controls, "Tenet will emerge from the crisis," he says, with its ills resolved in a year or two. Can Tenet Fight Off Its Many Ailments? INSIDE WALL STREET FEBRUARY 10, 2003
If we look more closely at what has happened
since 1994 it is clear that the old Tenet was never far below the
surface. What happened can be traced to a continuation of the same
policies and practices which resulted in the fraud for which it was
convicted in 1994.
After its 1994 fraud settlement, exclusion
from the specialty hospital marketplace and the forced sale of over
half of its hospitals NME's new chairman and CEO Jeffrey Barbakow
moved rapidly. He received massive support from the banks in the form
of loans. He changed the company's name
to Tenet Healthcare
(5.18),
marketed a
new image and bought American Medical
International, Americam Medical Holdings and then OrdNa Healthcare.
He sold off NME's international holdings which were under pressure
because of its fraudulent conduct.
Tenet was now the second largest hospital group in the USA. It
continued to expand competing with Columbia/HCA in Pacman takeovers
of not for profits and also buying from Columbia/HCA when it was
subject to fraud investigations in 1997. It was not long before the
general public forgot that Tenet was the same company as NME and
accepted its new image.
While the marketplace welcomed Tenet back
into the fold, community groups interested in health care generally
had a longer memory. Its attempt to
take over the University Teaching Hospital in
Missouri (5.18)
in 1995 was abandoned after the community and the medical staff
united in opposition.
As with Columbia/HCA there were repeated objections when Tenet
attempted to form joint partnerships or buy community and university
hospitals. They were repeatedly challenged by community groups and
close scrutiny from state attorney generals.
To maintain its "nice guy" softer image Tenet was forced to give
undertakings to serve the community and the uninsured. This was not
in its commercial interests. There have been ongoing concerns about
the way in which it has fulfilled its agreements, particularly when
it closed community hospitals, transferring services to its other
hospitals.
Nurses at the coal face have known what was happening all along. They
have repeatedly warned of the risks Tenet's management posed. The
spine chilling allegations made in 2002 about heart procedures speak
for the validity of their concerns.
If Tenet's intent was indeed to start over as a new company with a clean break from the "dark years" of the early 1990s, one might reasonably expect a new management and board untainted by the NME scandals, and new corporate leadership with experience as a healthcare professional. Instead:
Nursing groups have repeatedly expressed
concerns about staffing levels, employee safety, and care in Tenet
hospitals. There have been a number of Medicare fraud settlements.
These were not large enough to alarm the marketplace, which chose to
ignore them. I will deal with these matters later under individual
headings.
Tenet recovered and did reasonably well with
its softer partnership approach for the first 2-3 years after its
1994 fraud settlements. Market conditions were favourable.
By the late 1990's health corporate shares all lost ground. This was
due to Medicare cuts, the shift of market money from the static
health sector into the technology boom, Columbia/HCA's fraud, the
collapse of aged care chains, and a community outcry about managed
care. Tenet was probably constrained by its integrity agreement and
less able to compete under pressure in a marketplace where bending
the rules gives a large competitive advantage. It did poorly and sold
20 of its 129 hospitals in 1999.
In January 1999 Michael
Focht retired but stayed on the board
until June 2002. He had been brought back from NME's claimed to be
fraud free international division in 1991 to become COO and help sort
out the mess. My concerns about his involvement in NME's
dysfunctional practices had been ignored.
Thomas Mackay, who joined NME in 1985, and Trevor Fetter, who
followed Barbakow from Merril Lynch to MGM and then to Tenet in 1995,
were promoted into senior positions to fill the gap. In June 1999
Fetter was moved to Broadline e-commerce a spin off of Tenet's mass
buying strategy.
Statement by Mr Barbakow
"He (Focht) will be greatly missed by all of us who have had the pleasure and honor of working with him. Long before it became a hot topic, Mike understood that it was essential to build a corporate culture that emphasizes ethics. As chairman of the management committee of Tenet's corporate integrity program, he continued to play a critical role in shaping the company's character. Tenet owes Mike a great debt for his leadership in this area." Tenet Healthcare President Michael H. Focht to Retire; Two Company Executives Promoted Business Wire January 14, 1999
Statement to Australian Senate by Senator John Herron
Dr Wynne is asking National Medical to honour its public commitment to integrity and its statement that it will not tolerate ethical misconduct. He has asked Tenet's ethics committee to investigate the conduct of National Medical's international division in Singapore, to investigate their refusal to explain why they did not properly contest the Ng allegations - - - - .
He is particularly concerned at the possible involvement of Focht in these activities because Focht is now in overall charge of Tenet's compliance program. The welfare of patients in Tenet's hospitals will depend on the integrity which Focht displays in fulfilling his obligations under the compliance program. ADJOURNMENT :: Dr Michael Wynne Australian Senate Hansard for 28th November 1995
By June 1999 Tenet owned 129 hospitals. It was performing particularly poorly and it sold twenty. Dr Lee Pearce's shareholder group later claimed that Tenet's restricting integrity agreement had expired and this likely occurred in late 1999, 5 years after the fraud settlement. Tenet's fortunes rapidly recovered.
1999
Onetime investment-grade hospital management companies like Tenet Healthcare and Columbia/HCA Healthcare have been downgraded to junk - - - - , a trend that isn't likely to reverse anytime soon. Bonds to run away from FORBES June 14, 1999
Tenet, a chain of 130 hospitals, experienced a 29% drop in its stock to close at $ 18.56 on June 30. Health care; Health care stocks mostly ailing in first half of year THE BUSINESS PRESS/CALIFORNIA July 19, 1999, Monday
By October 2002 Tenet owned 114 acute hospitals, more than double its holding after the fraud settlement in 1994. It was doing very well and was a Wall Street darling. Its stock sold for $51.47. It was planning a large expansion. This was a result of new policies introduced in 1999.
Cripe (general counsel for the Tenet Shareholder Committee) said it was not a coincidence that Tenet had embarked on the "aggressive" pricing strategy the month the corporate integrity agreement had expired with the federal government. Tenet Group Sees Up to $6 Bln Liability New York Times (Reuters) April 7, 2003
Somewhere around 1999 to 2000 Tenet adopted a
far more aggressive and unfriendly business policy. It made no secret
of this and its success in implementing these business strategies was
enthusiastically welcomed and praised by analysts. Clearly none of
them saw anything wrong or antisocial in what Tenet were doing. These
policies were simple business common sense.
The policy was to provide more expensive and profitable services by
treating more sicker patients with more serious conditions, dominate
its markets, charge more wherever they could, and reduce costs
wherever they could get away with it. The overall policies were
directed from the centre and enforced by coercion and incentives -
exactly as in the 1990's scandal.
Tenet's strategy, as the company explained to admiring Wall Street analysts when its stock was on the rise, is three-pronged: raise prices, cut costs and try to dominate regional markets. Profiting from health care :: Hospital chain's steep prices blamed for raising costs for all San Francisco Chronicle November 14, 2002
The impossibility of treating many more sicker patients and undertaking more complicated care while reducing costs (ie nurses) without compromising care and increasing mortality did not enter the equation. It was inevitable that the nurses, who were expected to be part of this dangerous policy would revolt. They eventually did, forcing Tenet to back down.
Tenet is raising prices it charges insurers by 3 percent to 6 percent when it renews contracts and is shifting from contracts that pay fixed rates (ie DRGs) per patient to those based on hospital costs (ie outliers), said Thomas Mackey, chief operating officer. Tenet Healthcare's Profit Up by 20% New York Times October 4, 2000
Another part of its strategy has been to concentrate on seriously ill patients needing services that command the highest profits, particularly cardiology and orthopedics. While that approach has made the company a darling of Wall Street, it has angered some patients, unions and community activists. Inquiries Raise Questions About Tenet's Strategy New York Times November 11, 2002
This change in policy was probably part of a
long term plan formed long before its irksome integrity agreement
expired. Tenet had been assiduously pursuing a policy aimed at
securing dominance in regional markets. It sought to buy up
competitors and was suspected of buying not for profit competing
hospitals simply to close them down and remove competition.
Once secured this regional dominance enabled Tenet to bargain more
effectively and dictate higher payments when negotiating with managed
care plans. Analysts praised all this.
The Federal Trade Commission was aware of the dangers and had
prohibited many of the purchases on the basis that they reduced
competition. Tenet and other corporations had appealed these
decisions to the courts which had overturned almost all of them.
This is exactly the strategy adopted by
Mayne Nickless in Australia during
the same period. The experience with Tenet is a salutary lesson of
what might have happened had they succeeded.
Compare the 1999 and 2001 reports below with Barbakow's November 2002
(see later) claim that he did not know what was happening and was not
kept informed.
1999
"Tenet’s strategy is to build integrated networks of hospitals in large markets and to use its size and market concentration to reduce costs, gain market share, and improve pricing." Source: Legg Mason Wood Walker, Inc., Company Report, Tenet Healthcare (THC), Oct. 1, 1999. Tenet's Strategy for Making Money From the SEIU web site Tenet Monitor Accessed Dec 2002
2001
Hard times for managed care companies have meant surging profits for Tenet Healthcare, the country's second-largest hospital chain.
----------------------------
Its new strength in key regions, particularly in California, has given it "pricing power" in the opinion of several analysts, who recommend buying Tenet stock despite the already considerable appreciation of its shares.
------------------------------
But the fortunes of Tenet have risen, partly as a result of its ability to exert pricing pressure.
In the earnings advisory on Tuesday, Jeffrey C. Barbakow, the company's chairman and chief executive, pointed to its ability to raise prices for hospital services. "The continuing phenomenon of strong pricing trends combined with strong admissions trends is a potent combination," Mr. Barbakow said. A Hospital Chain Rises as Managed Care Suffers New York Times June 17, 2001
2002
Mr. Barbakow sought to increase profits by buying often distressed hospitals in areas where Tenet can command a significant market share. - - - - - That gives it leverage in consolidating services and boosting prices. Inquiries Raise Questions About Tenet's Strategy New York Times November 11, 2002
He (Michael Cowie, Federal Trade Commission) said that when hospital companies buy facilities and later close them, it also can create antitrust problems.
"When they eliminate competitors, that could lead to higher prices," Cowie said, although he declined to comment about specific companies.
----------------------------
Feinstein (analyst) said. "It's not the crux of their strategy to close down hospitals."
But with Daniel Freeman Marina (hospital purchased by Tenet), many people would argue that was the plan all along.
-------------------------------
But along the way, Tenet also has closed hospitals, including facilities in Philadelphia, St. Louis and New Orleans. In California, the company shuttered at least five hospitals and was involved in the closure of three others from 1995 to 2000, according to a study by UC Berkeley's School of Public Health. Closures Put Big Hospital Chains Under Microscope Health: An uproar in Marina del Rey reflects growing government and consumer pressure. LA Times August 22 2002
Tenet shifted its focus to more complicated cases and procedures, principally cardiac, neurology, and orthopaedic procedures. These could be manipulated to attract extra "outlier payments". It built, equipped and marketed its hospitals for these complex procedures. It set out to increase admissions in these areas. It used its regional dominance to rapidly increase the prices it charged, and cut costs (ie nursing).
Admissions at hospitals owned for more than a year rose 3.6 percent over the prior year, Tenet reported. It has been expanding its cardiology, neurology and orthopedic units and is benefiting from the aging of the baby boom generation, several analysts said. A Hospital Chain Rises as Managed Care Suffers New York Times June 17, 2001
Tenet has "completed a rather miraculous turnaround" of the facilities (purchased from bankrupt not for profit Allegheny Health system), Tenet spokesman Harry Anderson said. The hospitals are for the most part focused on high-end care. Tenet in talks to expand Philadelphia network Modern Healthcare August 21, 2002
Outlier payments by Medicare and stop-loss
payments by HMOs were based on the prices a hospital charged rather
than the discounted prices negotiated under managed care contracts.
They were used to claim extra payments for complicated cases which
did not adequately fit DRG categories. They were simply another way
around Diagnosis Related Groups (DRGs). DRG's were introduced in the
mid 1980's in order to curb rorting of the health care funding
system.
In the 1980's NME moved into specialty hospitals principally because
the DRG system
was not used there
(2.2) and it could successfully exploit
the system. The aged care chains Sun Healthcare, Horizon and IHS
similarly moved into step down care to capitalise
on the opportunities presented by the
absence of DRG's.
Outlier and stop-loss payments differed from DRG's in that they were
based on the fees charged by the provider. DRG's were based on the
average costs paid for treating a particular diagnosis.
Tenet's new policy increased the number of treatments eligible for
outlier payments. By dramatically increasing its fees it boosted the
remuneration it got from Medicare for each "outlier" payment. Most of
its increased profits and its financial recovery between 1999 and
2002 came from these outlier payments. The more of these services it
could induce its doctors to provide, the greater its profits. The
concern is that as
in the 1990's scandal
(5.14),
Tenet induced its doctors to provide these profitable but high risk
treatments when they were not medically indicated.
Tenet also dramatically increased its charges
to the uninsured and pursued them aggressively for payment, even
claiming their houses. When the uninsured were unable to pay they
used these increased charges to claim more than they should have from
the funds set up to assist hospitals in paying for unfunded care.
The nursing unions had been pointing to the
problems in Tenet's hospitals and expressing their concerns at the
continuation of NME's management since 1998
Instead of bringing in new faces Tenet put long term NME staff in
senior positions. Mackey (see below) was eventually promoted to Chief
Operating Officer, a position where he would have been central to the
outlier debacle and in a position to put pressure on doctors to admit
more and treat more.
But instead of bringing in an experienced healthcare professional untainted by the NME scandals, Tenet pulled from inside the organization and moved Jeffrey Barbakow from a director's position to the CEO.
The continuity with the past is evident in the rest of top management. Most of the current key operations staff worked for or were board members of Tenet prior to the settlement of fraud and of patient abuse cases:
· Michael Focht, Tenet's Chief of Operation, joined Tenet in 1978.
· Barry Schochet, Executive Vice President of Operations, joined Tenet in 1979.
· Thomas Mackey, Executive Vice-President of Western Operations, joined Tenet in 1985.
· Jeffrey Barbakow, Chief Executive Officer, joined Tenet in 1990 as a director.
It is the same story with Tenet's board of directors. Of the nine board members (as of August 27, 1997), all served on Tenet's board in 1993. In 1995, these same board members approved a $63.8 million settlement of a shareholders' derivative suit which alleged in part that key managers were aware of Tenet's illegal and criminal activities.
In short, while the company has adopted some changes -- a new name after a merger and a highly hyped "ethics" program -- it is clear that the core leadership of this company are holders from its NME days.
-------------------------------
The board opted for Wall Street experience over patient care expertise. Risky Business: The Tenet Story* SEIU (Nurses Union) Research document Jan 1999
Dr Pearce, a medical businessman and
shareholder from Florida was alarmed by Tenets practices and the
likely consequences. In 2000 he formed a group of minority
shareholders which attempted to oust CEO and chairman, Barbakow and
his supporters from the board, reduce executive compensation and
relocate the headquarters. He tried to get himself and three others
voted onto the board. By this time Tenet's new policies were working
and Tenet's profits were improving. The large institutional
shareholders whose only interest is profit sat on their hands and
refused to back Pearce.
2000
Recent SEC filings say Pearce will "explore reduction in executive compensation, relocate corporate headquarters to a central location and reduce a bloated management structure."
"Significant changes in makeup of the board are necessary to revitalize the company and improve and maximize shareholder value," said Pearce and his Tenet Shareholder Committee in the cover letter sent to the SEC.
-----------------------------
- - - - - - Health care is a profession, not a commodity. We think that Tenet would be better run by health care professionals rather than investment bankers.
"When you look at the record, nine of the 10 Tenet directors have virtually no ownership stake in the company," he said. "Their interests are not aligned with the shareholders. In reality, they have relinquished the company to its CEO. And he is inaccessible to employees and lives the expensive life."
----------------------------------
According to Villwock, the independent proxy solicitation firm Innisfree M&A of New York has been hired to help convince institutional shareholders, who own more than 90 percent of the company's stock, that Pearce's group can reverse Tenet's poor financial performance over the last five years. The proxy solicitation will cost Pearce about $2.5 million. Miami Beach doctor challenging Tenet American City Business Journals Inc. September 22, 2000
The Tenet Healthcare Corporation, the No. 2 United States hospital chain, said today that fiscal first-quarter profit rose 20 percent as its hospitals admitted more patients and charged health insurers higher prices. Tenet Healthcare's Profit Up by 20% New York Times October 4, 2000
2003
That time, Pearce was rebuffed when major institutional shareholders such as the pension fund of the American Federation of State, County and Municipal Employees, which owns more than 2 million Tenet shares, backed Barbakow. Tenet faces JCAHO surprise visits, management critic Modern Healthcare January 2, 2003
Dr Pearce had been a director of AMI and OrNda before they were purchased by Tenet in 1995 and 1997. In November 1996 I wrote to OrNda's president, Charles N Martin Jr, and to doctors in OrNda's hospitals, and put material on this web site (since removed) urging OrNda shareholders to think twice before selling to Tenet. At the time Tenet's hospital was still prosecuting a defamation action against me in Singapore and my submission to Tenet's ethics committee questioning the ethical integrity of senior staff had not been acknowledged. My letter and my submission echoes Pearce's concerns expressed in 2000 and again in 2003. I wonder if this letter ever got to OrNda's board or was seen by Dr Pearce. Instead of acknowledging my letter the sale was brought forward.
The need for independent assessment and advice, for shareholders on non-financial issues in the healthcare "industry":- Ethical considerations, integrity and a sense of social responsibility to others are important in the provision of care to people who are ill and often very vulnerable. To outsiders it seems that Tenet owned hospitals have followed Milton Friedman's advice that managers should shun all social responsibility in their pursuit of profits for shareholders. I respectfully suggest that you have my submissions to Tenet and the documents which support them evaluated by a responsible medical ethicist and by a medical representative appointed by an independent body such as the American Medical Association. Such objective outsiders could prepare a report for your shareholders and for your doctors, prior to final approval of the purchase. An informed decision could be taken. Extract : Letter from Dr Michael Wynne to OrNda's president Charles N Martin Jnr. November 6, 1996.
By 2001 investors were moving from the collapsing technology sector into the more stable health sector. With its new policies Tenet made a rapid recovery during 2001 and by 2002 profits had soared 43%. Barbakow confidently predicted even more in the future. By October 2002 income was double that in 2001 and the share price reached a record high of $51.55. Analysts were ecstatic.
Tenet Healthcare Corp. said profit surged beyond expectations in its fiscal fourth quarter as the hospital operator treated more patients, raised prices and controlled costs. The Santa Barbara-based company's earnings grew 43% - - - . Tenet Says Quarterly Profit Beats Estimates LA Times July 12, 2002
Tenet attributed the gains to strong revenue growth, driven largely by rising demand for more sophisticated and costly hospital services, and to reduced costs, including lower debt and interest payments. Tenet Says Earnings Will Top Estimates LA Times September 24, 2002
Chief Operating Officer Thomas Mackey in a conference call said intensive care, critical care and acute care patient stays (generating outlier payments) increased in the quarter while lower revenue, sub-acute care patient (paid by DRG) stays became shorter.
--------------------------
Shove (analyst at Prudential Securities) said he expects Tenet's shift to treating sicker patients will help to drive 20 percent growth earnings for the next several years.
Tenet Chairman and Chief Executive Jeffrey Barbakow said the company has significantly increased its investment in hospitals, expanding and enhancing the facilities and the services Tenet offers. Tenet Earnings Surge, Raises Outlook Reuters October 2, 2002
In the marketplace the strategies by which success is attained are seldom questioned. Success is validation enough and the credibility it gives prevents criticism. Even Modern Healthcare which has documented and commented on the ever increasing corporate fraud over the years did not question Tenet's unexplained success describing Tenet as "well-respected". It was often contrasted with Columbia/HCA. Modern Healthcare ranked Barbakow number 16 in its list of most powerful people in US health care - a long way ahead of HealthSouth's Richard Scrushy.
To not-for-profit hospitals looking to sell, the rehabilitated HCA is on a par with well-respected Tenet Healthcare Corp., Santa Barbara, Calif., the second-largest for-profit chain, Montalvo said. - - - - - By the time Columbia/HCA was imploding, (1997-8) Tenet was joining the American Hospital Association to improve relationships with not-for-profit hospitals - - - - . End of an era: Justice Department ends nine-year criminal probe of Columbia/HCA executives, but company recovery began earlier Modern Healthcare July 29,2002
Tenet executives said the company is generating higher revenue by treating older patients and those with acute conditions--a cornerstone of Tenet's long-term strategy. The company said it is spending $1 billion this year for capital improvements, much of it for specialties such as cardiology.
Based on such trends, Tenet estimated that earnings for the 2002-03 fiscal year would grow by at least 25%. Analysts said that was realistic, but perhaps a little conservative.
---------------------------------
Skolnick (analyst) said Tenet is well-positioned because its strategy is to be a dominant player in its market. "Concentration in discrete markets seems to be working," she said. Tenet Says Its Profit More Than Doubled LA Times October 3, 2002
This arrogant management was almost certainly
so caught up in its success and its new credibility that it saw
itself as invincible. Its culture, so brutally bruised in the 1990's,
and its core beliefs were validated.
It chose not to see and hear anything which did not fit with its new
successful and widely praised policies. It failed to heed the
warnings from the nurses, the findings of poor care in its
facilities, the allegations of unnecessary procedures, the
community's concern about its takeover practices and policies, the
outcry from the uninsured, the response of the HMO's, and the general
disenchantment about its prices and strategies pervading the
community. It chose not to look. Even Sulzbach, in charge of its
compliance program did not look.
Anderson said Sunday that it probably would take two to three weeks "to determine how a situation of this magnitude was not properly vetted in the organization, and to figure out exactly what the pricing situation was at every hospital." Tenet Under Closer Exam :: Pricing policy may have resulted in excessive Medicaid payments, some analysts say. LA Times November 11, 2002
The strategy has hurt consumers nationwide and especially in California, according to health care professionals and consumer advocates. They say it has inflated costs for hospital care, run up taxpayer-funded Medicare bills and increased the amount some insurers pay -- which ultimately gets passed on to their customers. Profiting from health care :: Hospital chain's steep prices blamed for raising costs for all San Francisco Chronicle November 14, 2002
-- HMO withdrawals: In the past couple of years, Shasta County, where Redding Medical Center is located, has lost all its HMO plans. HMOs said they pulled out because it was too expensive to do business there, citing the limited competition Profiting from health care :: Hospital chain's steep prices blamed for raising costs for all San Francisco Chronicle November 14, 2002
Tenets financial success in 2002 was reflected in plans to spend US $1 billion buying and building new facilities. But outside the market place there was a large increase in negative sentiment. There was growing criticism of the way Tenet's market dominance had pushed prices up, and the impact of its policies on care. Government bodies were starting to investigate. As in 1991 Barbakow and his cohort of arrogant managers were totally impervious to this.
The Santa Barbara-based hospital chain unveiled its fiscal 2003 capital plan in an atmosphere of growing unease over hospital mergers and acquisitions and their effect on patients.
----------------------------------
"They have not kept their promises," said Laurie Sobel, staff attorney for the San Francisco office of Consumers Union. Chain says capital improvements are needed to meet needs of aging baby boomers. LA Times August 24 2002
Tenet's hard tactics of getting rid of under-performing hospitals and of driving hard bargains with health plans also have earned enemies. Tenet CEO to Receive Double Pension LA Times August 27, 2002
Atlanta hospitals charging the highest rates for patient care may be using their market sway to command those above-average prices. Five metro hospitals charge more than Atlanta's average $596 a night rate for a patient room. (Two were Tenet hospitals and they topped the list)
------------------------
Undeniably, some hospitals are in a position to charge what they want to charge &endash; and get it &endash; say industry watchers.
-----------------------
The Federal Trade Commission has recently revived its interest in just how a bevy of national hospital mergers and acquisitions has affected pricing nationally. Powerful hospitals push up rates Atlanta Business Chronicle August 30, 2002
In early October authorities subpoenaed documents, to look at Tenet's practices and the way it fulfilled its undertakings to local communities. An investigation of its doctors in Redding was commenced. These had no impact on Tenet's share price but when an analyst questioned Tenet's profit projections the market suddenly spooked.
An analyst's report raises questions about the hospital company's Medicare reimbursements and whether it can sustain its stellar growth.
----------------------------
Weakley's report seemed to raise the specter of Medicare overbillings that have plagued big hospital companies in the past.
------------------------------
- - -, Weakley lowered his rating from "hold" to "reduce" and issued a report analyzing Medicare's so-called outlier payments to Tenet.
---------------------------------
Weakley estimated that Tenet's outlier payments as a ratio of its total Medicare reimbursements went up from 7.7% in the 12 months ended in August 2000 to an estimated 23.5%, or $657 million, in fiscal 2003. The average for all urban hospitals, he said, held steady at 5.6% to 5.7% during that period. Tenet Shares Tumble 14% After Downgrade LA Times October 29, 2002
The share price halved dramatically and over the next 3 weeks slid down 70%
At the end of the month trading in Tenet's shares was temporarily suspended.
Tenet said on Wednesday it received an audit request from the Kansas City, Missouri, office of the Office of Audit Services of the U.S. Department of Health and Human Services.
------------------------------
Harris said a ``fiscal intermediary noticed larger than usual or irregular claims -- more than Medicare regulations would normally allow for.'' - - - - . The audit will focus on so-called "outlier payments,'' Tenet Facing Audit of Medicare Payments REUTERS November 2002
The company, which saw its "outlier'' payments double from $351 million in 2000 to $763 million in 2002, has said it outpaces the national average for "outlier'' payments because many of its hospitals have costlier open heart surgery and teaching programs. Gov't Announces Hospital Crackdown THE ASSOCIATED PRESS November 2002
Later the same day, Tenet responded in a news release that it was affirming its profit projections because it had taken the policy change into effect. "Tenet is confident that its hospitals are fully compliant with Medicare rules and regulations, including those governing outlier payments," the statement said.
------------------------
Tenet also is not likely to continue to win market share because its local not-for-profit competitors appear poised to resist its further encroachments on their turf, he added. Tenet's stock takes dive as profit outlook suffers Modern Healthcare November 4, 2002
Tenet's inflated prices also formed the basis of special "stop loss" fees paid to HMO's. These were similar to "outlier" payments so boosted profits in the same way.
Most health insurers pay hospitals a flat, negotiated daily rate for patient care -- usually a fraction of the retail charges. But as with the Medicare system, hospitals also receive "stop-loss" payments from insurers for special cases that can be very expensive. And like outliers, these stop-loss payments are calculated as a percentage of retail charges. Tenet Shifting Its Formula for Reimbursement LA Times November 29, 2002
Analysts blamed the aggressive business culture in top management for Tenet's problems - the same problem which existed in 1991 (5.4). As in 1991 large incentive payments (5.12) were the driving force in the misuse of patients. In the 1990's scandal central management introduced strong profit pressures and chose not to know how the profits were actually generated (4.2). Note the comment about Barbakow in the report below. Dr Pearce wrote a stinging letter to the board accusing it of "Wall Street Medicine" and of providing substandard care. He called for a major change in management.
But some investors and corporate governance experts believe Tenet's problems are at least partially the result of the aggressive profit-driven culture fostered by Barbakow himself.
How responsible is Barbakow for the mess at Tenet? He backed an incentive plan under which hospital CEOs receive cash bonuses tied largely to exceeding profit and revenue growth targets. In fact, cash bonuses represented half of all the compensation hospital chiefs earned in 2001. That incentive plan, critics charge, may have led to abuses.
-----------------------
"If you have a CEO who claims he doesn't understand where his revenues and profits are coming from, you need to change your CEO fast," says Lynn E. Turner, director of the Center for Quality Financial Reporting at Colorado State University. A Scandal-Ridden Tenet Stands by Its Man BusinessWeek magazine NOVEMBER 25,
In 2002 alone, the United States has extracted payments from Tenet Healthcare on 3 occasions. With CMS's press release of December 3rd, it is apparent that Tenet will once again be making a payment to the Medicare system. How many times must the company be fined before the Board realizes that the problems are endemic and systemic? How many people must unnecessarily die because cardiac physicians and surgeons are allegedly performing medically unnecessary procedures, or because hospitals such as Palm Beach Gardens, it has been alleged, are not properly cleaned and maintained?
If you conduct an investigation, independent from management, you will probably find that these are not isolated incidents. The culture is fundamentally flawed; as it provides too much incentive for physicians and administrators to push profit goals over patient health. Dr Pearce Letter to board December 2002
Tenet's market bubble disintegrated as agency
after agency started investigating. Shareholders, patients and
investigators took to the courts. In December Barbakow announced
Tenet's new reformed practices but by now his credibility was gone
and no one was listening. By the end of December at least 16 lawsuits
had been commenced.
Tenet had pushed itself into an impossible
position. It had somehow to regain its credibility and it could only
do so by claiming a new image, cooperating with government, cutting
its pricing, responding to the community, settling with the
uninsured, and giving in to the nurses. This meant abandoning most of
its profits. It now had to negotiate with aggressive and angry HMO's
who would have no more hesitation than Tenet had in the past in
capitalising on its weakness.
It had committed itself to treating the sicker and more complicated
cases but without the outlier payments and the reduced staffing
levels these would run at a loss.
Without that strategy (ie outliers), Tenet could get saddled with more of the financial liability for taking care of the sickest patients. Yet it continues to pursue an aggressive growth plan of targeting aging baby boomers who demand the best in cardiac care, orthopedic surgery, and other risky procedures.
Some who follow Tenet worry that it may get blindsided. During an analysts meeting in December, Sheryl Skolnick of Fulcrum Global Partners asked Barbakow and his management team how Tenet could maintain its profitability while being paid less to take on more risk. "They had these looks on their faces like they were deer caught in the headlights," Skolnick recalls. "Clearly, they haven't really thought this through." Tenet's Prognosis: Lots of Complications BusinessWeek magazine NEWS ANALYSIS JANUARY 13, 2003
Tenet had previously been in a position to aggressively drive hard bargains with HMO's. It had now cut its prices. HMOs were angry about stop-loss charging and responded accordingly in their bargaining.
A key factor contributing to Tenet's weaker profitability is a major change in its managed care pricing. Tenet is renegotiating many contracts after previously employing aggressive pricing practices. This is resulting in far weaker pricing trends, including actual reductions in certain cases. The weak trend will likely continue for the next couple of years as contracts are renegotiated on an ongoing basis. Subsequent rate increases will also probably be smaller than in the past. In addition, weak Medicaid reimbursement is also expected to affect future profitability. S&P cuts Tenet Healthcare ratings to junk status Reuters July 10, 2003
Tenet set about addressing its problems by publicly claiming new business practices, and giving way to the nurses and the uninsured. Over the months it repeatedly downgraded its profit expectations and its share price shrunk. Analysts followed by downgrading its shares and its debt repeatedly. It indicated that there would be no recovery until well into 2004. Its started reporting losses. By the end of June 2003 its shares were below $12 and its dept had been downgraded by Moody's rating agency to junk.
"Tenet's issues are resonating so deeply in the sector that they remind investors that acute-care hospitals are highly regulated and bound by Medicare rules," said Darren Lehrich, an analyst at SunTrust Robinson Humphrey in New York.
-------------------------------------------
At least 10 other analysts Friday downgraded Tenet's stock, which lost $13.05 to close at $14.90 on the New York Stock Exchange. More than 114 million shares changed hands. Shares of Tenet Fall on Cuts in Ratings LA Times November 9, 2002
After weeks of negotiations, Tenet is close to signing a two-year contract with Health Net Inc. that sharply reduces Tenet's reliance on payments based on a hospital's retail charges.
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The shift signals that Santa Barbara-based Tenet, the nation's second-biggest hospital chain, is backing away from its much-criticized policy of ramping up hospital prices.
--------------------------
But some analysts are skeptical. "It's going to be tough for the company to exert the kind of leverage they've had," said Sheryl Skolnick, a managing director at Fulcrum Global Partners, which provides investor research. Tenet Shifting Its Formula for Reimbursement LA Times November 29, 2002
Tenet Healthcare Corp., chastened by harsh criticisms for reaping excessive Medicare payments, on Tuesday slashed its earnings outlook for the next two years and outlined a new approach to hospital pricing that includes discounts for uninsured patients. Tenet Cuts Earnings Forecast for 2 Years :: The hospital chain says it is overhauling policies that let it boost prices charged to Medicare. LA Times December 4, 2002
Tenet Healthcare Corp., Santa Barbara, Calif., said it has volunteered to revise its outlier payment practices as of Jan. 1 in anticipation of upcoming federal changes and as a gesture of good faith. Tenet volunteers to revise outlier policy Modern Healthcare January 6, 2003
Tenet Healthcare Corp., Santa Barbara, Calif., today gave investors their first peek at the company's financial results - - - -: a loss for the three months ended Feb. 28 of $55 million, or 12 cents per share. Outlier payments sharply lower, Tenet reports loss Modern Healthcare April 10, 2003 April 11, 2003
Moody's Investors Service placed the ratings of Tenet Healthcare Corporation (Baa3 senior unsecured) under review for possible downgrade. MOODY'S PLACES TENET HEALTHCARE'S DEBT RATINGS (SR. UNSECURED AT Baa3) UNDER REVIEW FOR POSSIBLE DOWNGRADE : Approximately $4 Billion in Debt Affected Reuters 16 Apr 2003
Tenet has undergone extensive changes, by revamping senior management, announcing a $100 million cost-cutting plan and establishing a new policy for fair treatment of uninsured patients. Tenet chief executive resigns AP Newswires May 27, 2003
"Based on results for April and May, and the recent completion by our new executive management team of a highly detailed, hospital-by-hospital budget review process, we now believe this transitional period will continue through at least the first half of 2004, and its impact on our financial performance will be more substantial than previously anticipated," Mr. Fetter said. Tenet shares fell 5 cents to $16.23 on the NYSE. Tenet Healthcare lowers estimate for 2Q, rest of year Dow Jones Business News June 23, 2003
Hospital chain Tenet Healthcare Corp. (THC.N), under government probe for billing practices, on Monday said earnings would fall well short of Wall Street forecasts, leading the stock to lose roughly a quarter of its value. Trouble Reigns at Tenet Healthcare New York Times June 23, 2003
Tenet Healthcare Corp., Santa Barbara, Calif., said today that its problems with Medicare outlier reimbursements have spread to managed-care contract negotiations. The company acknowledged what analysts had been predicting -- that health plans are driving a harder bargain with Tenet than its competitors because of Tenet's prior strategy of rapidly increasing its gross charges. Tenet woes spread to contract talks Modern Healthcare June 23, 2003
Standard & Poor's, New York, said it was putting Tenet's corporate credit and senior unsecured debt ratings on "CreditWatch Negative," indicating a possible downgrade from the lowest investment-grade rating, BBB-. Tenet's lowered projections cause stock to crash Modern Healthcare June 24, 2003
Tenet Healthcare, - - - - blamed higher costs and its limited success in negotiating more favorable prices with private health plans for care.
---------------------------------
"This is a company where costs are growing seven to eight times faster than revenues," said John W. Ransom, an analyst with Raymond James & Associates.
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In some cases, Tenet said it was forced to lower its prices to keep its contracts, - - - . " Already Battered, Tenet Healthcare Reduces Earnings Forecast New York Times June 24, 2003
Moody's Investors Service on Wednesday cut its debt rating on No. 2 U.S. hospital company Tenet Healthcare Corp. THC.N by three notches to junk status following a profit warning and said it may cut the rating again.
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Moody's cut Tenet's senior unsecured rating to "Ba3," its third-highest junk rating, from "Baa3", its lowest investment-grade rating.
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Tenet's stock closed at $11.95 on the New York Stock Exchange on Wednesday.
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The stock, which is trading at lows not seen since March 2000, has taken a beating UPDATE 1-Moody's cuts Tenet Healthcare rating to junk Reuters June 25, 2003
Standard & Poor's Ratings Services said today that it lowered its corporate credit and senior unsecured debt ratings on health care service provider Tenet Healthcare Corp. to a speculative-grade 'BB' rating from 'BBB-'.
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"The downgrade reflects weaker profitability and cash flow expectations at Tenet," said Standard & Poor's credit analyst David Peknay. S&P cuts Tenet Healthcare ratings to junk status Reuters July 10, 2003
Barbakow and Tenet's response to the exposures was vintage NME - multiple improbable and often conflicting justifications. Barbakow's first response was to deny any wrongdoing claiming Tenet had done nothing wrong, but he conceded that it had been too aggressive. He as CEO had not been kept informed - hardly reassuring. He asked senior financial executives to resign shifting the blame to them. Barbakow's predecessor Richard Eamer behaved similarly in 1993 firing Norm Zober who was in charge of the specialty hospitals.
"The actions I am taking to form a new management team and to take a fresh look at our approach to pricing are not a signal that our fundamental strategy is flawed or the result of any impropriety,"
-------------------------
Barbakow said he was confident Tenet would be vindicated by the audit and that the company's earnings would continue to grow.
---------------------------
"As I carefully studied our Medicare outlier situation over the last two weeks, it became clear to me that formulas that drive these outlier payments were affected by our overall pricing," Barbakow said. "In some cases, particularly aggressive pricing strategies created increasing outlier payments. That's simply not the way I want to do business at Tenet, nor do I want such a perception to exist in anyone's mind." Tenet gets new president amid probe United Press International November 11. 2002
The company said it did not break Medicare rules, but analysts said Tenet unfairly took advantage of Medicare's outlier payment formula to reap excessive reimbursements.
He said that Jeffrey Barbakow, Tenet's chairman and chief executive, learned in the last two weeks that aggressive pricing was leading to big increases in outlier payments. Barbakow then confronted Chief Financial Officer David Dennis and Chief Operating Officer Thomas Mackey last week. He told them that he had lost confidence in them and requested they leave the firm, according to Anderson. (Tenet spokesman) Shares of Tenet Fall on Cuts in Ratings LA Times November 9, 2002
Barbakow claimed that Tenet had done nothing illegal. The fees which far exceeded those of competitors were he claimed never actually paid. They were simply a starting point for negotiations. Analysts compared this with the asking price of used cars.
Hospital charges, similar to the sticker price for cars, ordinarily are not paid in full. But they help determine payments for unusually expensive cases. Tenet raises prices more quickly than competitors Union asks state to look at charges San Francisco Chronicle November 20, 2002
The comparison of Tenet's practices with used
car salesmen was certainly appropriate to the situation but this was
a devious explanation. These are the prices Tenet places on its
services and which the public sees. This is not the way the public
expects those who care for them when they are sick and vulnerable to
behave. These charges were used for the uninsured, the least able to
pay, and they were pursued aggressively for payment.
Barbakow claimed that the problem of unnecessary cardiac procedures
at Redding hospital was related to the conduct of the doctors and had
nothing to do with Tenet or its outlier policy. In fact Tenet was
responsible for ensuring an effective quality assurance process was
in place and its staff had repeatedly ignored concerns. Theextra
patients increased its returns from outliers.
All this unrealistic rationalisation mirrors the convoluted
justifications and rationalisations used in the 1991 scandal. It
reflects the continuation of NME's culture of verbal deception under
Barbakow's stewardship. In 1993 I christened it NMEspeak.
The Santa Barbara-based company said there was nothing illegal in sharply boosting retail hospital charges, which are used in calculating special Medicare reimbursements known as "outlier payments."
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Under heavy pressure from investors, Tenet on Thursday disclosed that it received $763 million in outlier payments in fiscal 2002, much of it from 11 hospitals that have ramped up retail charges. Seven of those 11 hospitals are in California.
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Tenet officials did not answer a question about whether they deliberately pursued a pricing strategy so as to maximize outlier payments, - - - .
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But Jeffrey Barbakow, Tenet's chairman and chief executive, said it had come to his attention only recently that aggressive pricing was leading to big increases in outlier payments.
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Barbakow called the resignation of Dennis and the retirement of Mackey voluntary, but analysts wondered why the two executives who probably knew the most about the hospital's pricing strategy were now gone.
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Tenet officials have said the Redding investigation and the outlier controversy are two separate issues. But they are linked in that Tenet's Redding hospital has been getting a significant amount of outlier payments, according to analysts' estimates. Tenet Admits Price Hikes; 2 Execs Leave LA Times November 8, 2002
Barbakow probably learned from the way
Columbia/HCA's Thomas Frist had twisted the truth to his advantage.
Like Frist Barbakow tried to present himself as the good guy who had
not been part of all this. He conceded that Tenet's aggressive
pricing was inappropriate and claimed it was not what he would have
liked, shifting the blame to underlings. He had not been told. This
is hardly credible given his public statements over the years.
Barbakow very publicly revised Tenet's policies, reversing its
previous practices and downgrading profit expectations. It might
survive this way for a while but it would not be profitable and
Barbakow must have known this. As Tenet's experience in 1999 shows
this was not an image any company could successfully live up to and
survive.
Instead of bringing in new blood to generate
real change Barbakow turned to his old colleagues from NME days, the
people who had helped him mount the public relations exercises and
negotiate NME's unexpected survival from its previous fraud.
He brought back Trevor Fetter and Michael Focht. Fetter had been with
Barbakow at Merril Lynch, followed him to MGM and then moved to
Tenet/NME from 1995 to 1999. Focht had been president of
NME's
international division at a time when
unconfronted allegations suggest that similar practices to those
unearthed in the USA scandal occurred there. He became Chief
Operating Officer (COO) in 1991 guiding operations during the
fraud
negotiations (5.17).
He had retired as COO in 2000 but remained on the board until July
2002.
Barbakow relied heavily on Sulzbach, the lawyer who made her fame by
rescuing NME from oblivion in 1994. She was by now a senior officer
in Tenet. Dr Pearce and his group challenged the role Sulzbach had
played as Chief Compliance Officer. He asked how the problems at
Redding could have been overlooked if she had done her job
properly?
Will you continue to rely upon the legal advice of Ms. Sulzbach? She has the titles of General Counsel, Chief Compliance Officer and recently she was promoted to Chief Corporate Officer. Do you not see the inherent conflicts of interests?
-----------------------------------
How is it legally or ethically possible for Redding to produce this level of earnings?
How is it possible that your internal auditors missed the fact that these physicians were such huge admitters? Did Ms. Sulzbach, or anyone in management, or on the Board ever question how it was possible to legally and ethically do so much profitable business at Redding? Did anyone, ever, question the medical necessity of this volume of procedures, particularly after the hospital was contacted by patients asking questions about these two physicians?
How is it that medical experts from California to New Hampshire believed, for a number of years, that Redding had been "wild" for a long time and was being led by doctors described in the medical vernacular as "cowboys" (doctors who aggressively offer invasive procedures) and the Board didn't see a problem? How much did the CEO at Redding receive in compensation?
During Ms. Sulzbach's tenure as Chief Compliance Officer, the Company has repeatedly paid the government for violations of Medicare billing, and is now embroiled in allegations of over-utilization of surgery and other cardiac services and allegations that Tenet nearly doubled its list prices in three years in order to increase Medicare reimbursements. Does this sound like someone who has done an effective job? Dr Pearce Letter to Tenet's Board December 2002
When Tenet declared a loss in April 2003 and Moody's looked to downgrade the company Barbakows days were numbered. There was a massive backlash accusing Tenet of dishonesty, of delaying disclosure, and of misleading the market in its disclosures. Many shareholder court actions blame this delayed disclosure for their losses.
Analysts said both the audit and the fact that Tenet waited more than a week to disclose it presented problems.
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Judy Holtz, a spokeswoman for the Inspector General's Office at the Department of Health and Human Services in Washington, said Wednesday that the agency notified Tenet by telephone of the audit Oct. 28 -- the same day as the analyst's report. U.S. to Audit Tenet Hospital Bills :: Focus will be on large Medicare payments. Meanwhile, state seeks to curb Redding doctors. LA Times November 7, 2002
Tenet tried to silence Pearce by taking legal action against him when he suggested that the cost to Tenet might be as high as US $6 billion. This is the strategy NME had used to silence its critics in the 1990's.
Tenet Healthcare Corp., Santa Barbara, Calif., filed a securities lawsuit late yesterday against shareholder M. Lee Pearce, - - - - Pearce and his Tenet Shareholder Committee issued a news release contending that Tenet could face up to $6 billion in liability for practices related to Medicare outlier payments. Pearce also urged the CMS, HHS' inspector general's office and the U.S. Justice Department to prosecute Tenet under the False Claims Act and other civil and criminal laws.
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In the lawsuit, - - - - Tenet asked for a preliminary injunction ordering - - - "to cease making false and misleading statements regarding Tenet," and "to correct the false and misleading statements" he and his committee have made. Tenet takes rabble-rousing shareholder to court Modern Healthcare April 11, 2003
In his response, Pearce turned the tables and accused Tenet of using the lawsuit against him as part of an unregistered solicitation and, more broadly, as part of a campaign to silence Pearce. The 72-year-old physician also accused Tenet of moving up the date of its annual meeting to July 23 from Oct. 8 to stifle attempts by Pearce or others to change the board's makeup. Shareholder accuses Tenet of seeking to silence him Modern Healthcare May 13, 2003
Tenet's profits fell rapidly. With Medicare
and HMO's squeezing Tenet and refusing to accept Tenet's pricing
there was little prospect of making more in the foreseeable
future.
Tenet has $4 billion in debt and must reduce this by $500 million by
the end of 2003. It is cutting jobs, selling off expensive corporate
toys, and rationalising services. It is selling 14 hospitals which
are still profitable and 8 million shares of Ventas common stock
which it owns at $11 per share. Ventas was the REIT associated with
Vencor. Vencor
went bankrupt amidst allegations of a US $3 billion fraud. The size
of these cutbacks and sales suggests that in spite of its denials
Tenet is also preparing for a large fraud settlement. In July 2003 it
sold off a large slice of its spun off company Broadlane, claiming
this had always been intended.
Changes in payments by private insurers alone, including moves such as that made by Health Net, could cost Tenet $122 million next year and $985 million in 2004, says Darren Lehrich at SunTrust Capital Markets.
And if other insurers pressure hospitals to drop so-called stop-loss payments, as Health Net did with Tenet, it could send hospitals that care for costlier-than-average patients into the red. Tenet deal with insurer could have wide impact USA TODAY December 2, 2002
On Monday, Tenet's shareholder committee, a dissident shareholder group, said that the company could face up to $6 billion in legal liabilities to the federal government Tenet Chief to Lose Title of Chairman in a Shake-Up New York Times April 9, 2003
To meet its obligation under its bank credit agreement, it must reduce its debt by $500 million by the end of the year. Already Battered, Tenet Healthcare Reduces Earnings Forecast New York Times June 24, 2003
Tenet Healthcare Corp., the second largest U.S. hospital operator, on Thursday sold $1 billion of bonds, twice as much as planned, Tenet sells $1 bln bonds after doubling sale Reuters January 23, 2003
In an effort to bolster profit and restore investor confidence, Tenet Healthcare Corp. said Tuesday that it would close or sell 14 hospitals, cut expenses by $100 million and adopt certain accounting changes. - - - - - - are expected to fetch as much as $900 million.
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The company said that its expense-cutting steps would include an undisclosed number of layoffs and a reduction in travel costs and other corporate expenses.
Tenet said it also would dispose of two of its three Gulfstream corporate jets. Tenet to Close or Sell 14 Hospitals in an Overhaul :: For-profit chain says it will lay off some employees as it cuts costs and boosts efficiency. LA Times March 19, 2003
Tenet Healthcare Corp., Santa Barbara, Calif., said it plans to consolidate 56 billing offices into eight regional offices in a three-year project that will cost $275 million and eliminate 300 jobs. Tenet to consolidate billing into regional offices Modern Healthcare June 13, 2003
Since October Barbakow had struggled to stay on. With escalating exposures the full consequences of his leadership became apparent. Like John Bedrosian, NME's spokesman in 1991 he was so disingenuous in his explanations that he was no longer trusted. His initial claim that only a few hospitals were involved was shredded by Dr Pearce. This is exactly the claim made in the 1990's scandal. As late as 1994 Focht publicly described over half of Tenet's hospitals which had pleaded guilty to fraud as an infected appendage which had been amputated..
November 2002
But now, Mr. Barbakow, Tenet's 58-year-old chairman and chief executive, is in danger of losing the trust among investors that he and his management team have so carefully built up over the years.
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Tenet delayed telling them (shareholders) about the federal inquiries it faces, and Mr. Barbakow created further anxiety by insisting in an often combative conference call with analysts last week that the sudden departures of two executives were voluntary.
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Mr. Barbakow now says that he lost confidence in the two executives,
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Many analysts believe Mr. Barbakow genuinely did not know what was happening, though they find that troubling in itself.
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When Mr. Weakley, the analyst, issued his report on these special Medicare reimbursements on Oct. 28, the company initially played down their significance.
Only after federal regulators said they planned to audit these reimbursements to make sure they were proper did Mr. Barbakow say the company had been overly aggressive in pricing.
The company also waited a day to tell investors that federal agents had raided a Tenet-owned hospital in Redding, Calif
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Tenet says it heavily discounts those prices for the uninsured (but see price gouging later). Those prices do not affect what payments it receives, the company said.
Although Mr. Barbakow said the company was undertaking a thorough review of its systems in light of recent events, he said he was convinced that the issues that had surfaced were limited to only a handful of hospitals among the 113 Tenet now owns. "This is an exceptional organization," he said. Inquiries Raise Questions About Tenet's Strategy New York Times November 11, 2002
During a conference call with Tenet officials, investors vented their frustrations with that huge drop, openly questioning the credibility of management and repeatedly asking when the next shoe would drop.
One fund manager wondered whether Tenet was "trying to game investors the way you gamed Medicare." Others questioned Barbakow's explanation that Dennis and Mackey left because they wouldn't work with Fetter above them on the organizational chart. Stormy weather :: Echoes of Columbia/HCA heard as Tenet overhauls management amid scrutiny of outlier payments and investor protests Modern Healthcare November 11 2002
Jeffrey C. Barbakow, the chief executive who led Tenet Healthcare Corp. back from the brink of disaster nine years ago, is facing increasing blame for the company's current woes and mounting pressure to resign.
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"Investors need to know that they can trust the institutions they are involved in," CEO Thomas Marsico said Tuesday in an interview. He said that reinvestment in Tenet later would depend on a number of factors, including "a total change in the management team."
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Analysts say Tenet and Barbakow face a crisis of confidence exceeded only by the dark days of 1992 and 1993, Pressure on Tenet Chief to Resign :: Jeffrey Barbakow is increasingly getting the blame for the hospital chain's troubles. New York Times November 13, 2002
There are many more questions than answers in this affair. How, for example, could Barbakow say that Tenet's pricing strategy "is inconsistent with the position and posture that I want Tenet to have in the industry" and that he was unaware of the intensive effort to win higher outlier payments? Given that the company has openly said it has been placing a strong emphasis on increasing its high-acuity services and has prided itself on its market domination, it just doesn't ring true. Another for-profit under scrutiny raises questions about publicly traded chains Modern Healthcare November 18, 2002
December
It is time for the Board of Tenet Healthcare Corporation to stand up and take back the company from a management team that has neglected its duties, mislead its shareholders and omitted material information in its statements to the public and to you, its Board.
The culture of imperial power that permeates the organization ... epitomized by its resort town headquarters, astounding bonus compensation, and $111 million in ill-gotten profits from stock options must and will come to an end. We are absolutely dedicated to making sure that the culture that allowed the over utilization at Redding, that allowed the infections to continue at Palm Beach Gardens, is changed. It must and will be done. Dr Pearce Letter to Tenet's Board December 2002
January 2003
But the landscape has changed-and Tenet's shares have declined from $52.50 to $17 this year. Though AFSCME is not backing Pearce, it is seeking management change and concedes many of Pearce's points.
David Miller, senior strategic analyst for the government employees union, said the pension fund "has serious concerns about truthfulness of this management team," accusing executives of engaging in insider trading before negative news was made public in a Securities and Exchange Commission complaint. "And while we share many of the concerns Dr. Pearce has raised, we do not see Dr. Pearce himself as the agent of change," Miller said. Tenet faces JCAHO surprise visits, management critic Modern Healthcare January 2, 2003
Barbakow resigned as chairman in April 2003
but stayed on as CEO. Pearce met with a new independent board member
in May 2003 and seemed to reach some sort of understanding of what
would happen. He and his group decided not to nominate new members
for the board. While he expressed some confidence in the new board,
his subsequent statements indicate that he was still after a clean
sweep of the old brigade including Barbakow's mate Fetter. Within
days of this meeting Barbakow announced his resignation as CEO taking
effect immediately. Fetter took over. It is clear that institutional
investors such as the pension funds had had enough.
At the same time several of the older long term directors were forced
to go. Tenet went looking for new blood. All executives in the
company were removed from the board so that it was completely
independent of management.
While Pearce seemed satisfied by these measures it remains to be seen
whether the sort of people joining the board will be able to produce
the sort of cultural changes needed. The new directors appointed so
far come from Toys "R" Us, the accountants Deloitte Touche Tohmatsu
and from the pharmaceutical corporate sector.
The institutional investors have so far avoided any doctors. It is
also worrying that instead of bringing in new management as urged by
Dr Pearce long time Tenet/NME chief accounting officer Raymond L.
Mathiasen is to be replaced with Timothy L. Pullen who joined
Hillhaven while it was part of NME then moved to NME and has been
with the company since.
The likelihood that people like these new appointments will move away
from a Wall Street culture of profit before care is very small. In
this marketplace Tenet's current culture is the norm. Alternative
more appropriate conduct is not profitable nor
competitive.
April
Jeffrey Barbakow, chairman and director of U.S. No. 2 hospital chain Tenet Healthcare Corp. THC.N , will step down later this year in a bid to quell shareholder discontent, the Wall Street Journal reported on Tuesday. - - - - - - though Barbakow will stay on as chief executive officer.
- (This)- - - - - will leave the board without any management representatives at all, a step which the Journal described as highly unusual. All four director posts will be filled by independent outsiders, joining the six existing ones. Tenet CEO to leave board over governance issues-WSJ Reuters April 8, 2003
Tenet also said its three longest-serving outside directors won't stand for re-election, giving the company four new board members out of the 11 total. Tenet's Barbakow to resign as chair in board revamp Modern Healthcare April 8, 2003
Tenet also said in a statement it would name new heads of its compensation, nominating, and audit committees as part of a shake up of its corporate governance rules. Tenet: CEO Barbakow Loses Chairman Title Reuters April 08, 2003
Edward A. Kangas, 58, former chief executive of Deloitte Touche Tohmatsu, has been added to the company's board. Tenet Adds Former Deloitte CEO to Board LA Times April 25, 2003
May
Barbakow will remain CEO. Robert Nakasone, former CEO of Toys "R" Us, was elected as the 12th board member. In other people news Modern Healthcare May 7, 2003
In a letter sent Monday to non-management board members, Pearce said Tenet must replace its senior management, name a chief executive from outside the company and adopt tougher standards for director independence.
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Pearce added the troubled hospital company also must name a physician as its chief quality assurance officer, stop spending resources on share repurchases, and move Tenet's headquarters to Dallas from Santa Barbara, Calif. Tenet shareholder group says company must name new CEO AP Newswires May 19, 2003
After meeting last week with Edward Kangas, a former accounting executive and a new independent member of Tenet's board, Pearce said in a written statement that he's convinced the board will work to reform the company and its governance. As a result, Pearce said, he won't challenge the board by nominating a slate of directors for election at Tenet's annual shareholders' meeting, set for July 23. Tenet's board wins over disgruntled shareholder Modern Healthcare May 19, 2003
Tenet Healthcare Corp., Santa Barbara, Calif., this morning announced the resignation of CEO Jeffrey Barbakow, effective immediately.- - - - Tenet President Trevor Fetter, 43, was named acting CEO, the company said, adding that Fetter and outside candidates will be considered as the board looks to hire a replacement CEO. Barbakow resigns as Tenet's CEO Modern Healathcare May 27, 2003
"It's not a total surprise to me," said Michael Yellen, a portfolio manager for AIM Investments who invests in health care companies. "There were a lot of institutions that were upset that he was still at the helm."
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Tenet's board plans to hire an executive search firm to help find a permanent successor. It will consider Mr. Fetter and candidates from outside the company.
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Barbakow was the chief architect and practitioner of short-term `Wall Street medicine' at Tenet," Dr. Pearce said in a statement. "His departure clears the way for improved corporate governance, provision of high-quality health care and the eventual restoration of real long-term financial performance." With No Surprise, Chief Leaves Tenet Healthcare The New York Times May 28, 2003
Troubled Tenet Healthcare Corp. said Thursday that Timothy L. Pullen will become the Santa Barbara firm's chief accounting officer Aug. 15. - - - (he) will replace Raymond L. Mathiasen, who will be retiring - - .
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Pullen joined Hillhaven Corp., a subsidiary of Tenet's predecessor company, in 1983 and has served in various finance-related jobs. Tenet Taps New Accounting Officer LA Times June 13, 2003
Meantime, the Tenet Shareholder Committee, a group of investors led by Florida physician M. Lee Pearce, said Monday that Fetter should quit and be replaced by a CEO outside the company. Fetter is part of an "entrenched management team" that has been discredited, the group said in a statement. Tenet cuts 2003 profit estimates BLOOMBERG NEWS, June 24, 2003
Tenet Healthcare Corp., Santa Barbara, Calif., said its board has elected its third new independent member this year -- John Kane, former vice chairman, president and COO of drug distributor Cardinal Health, Dublin, Ohio. - - - He also spent 19 years at Abbott Laboratories, the pharmaceutical and medical device giant. Tenet board adds former drug-distributor exec Modern Healthcare June 26, 2003
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