Tenet Gets New COO to Help Cure Its Woes

By Lisa Girion

Feb. 10, 2004 12 AM PT

Times Staff Writer

Tenet Healthcare Corp., the ailing hospital chain that is trying to shed nearly a third of its facilities, named a new chief operating officer Monday amid fresh questions about the Santa Barbara company’s ability to pull off its turnaround plan.

The appointment of Reynold J. Jennings to run the 69 hospitals Tenet plans to keep culminates a management shake-up precipitated by a host of financial losses and scandals, including unnecessary heart surgeries at a Redding, Calif., hospital and unusually high Medicare charges for the sickest patients.

Chief Executive Trevor Fetter described Jennings’ appointment as a critical step in rebuilding operations. It comes almost two weeks after Fetter announced that the company would sell 27 hospitals, including 19 in California, and focus on a core of strong facilities.

Jennings, 57, was promoted from the position of president of the eastern division, which includes some of the chain’s strongest financial performers.

“He can hit the ground running,” Fetter said in an interview. “He has a tremendous amount of experience in this business, and he has an impeccable track record of success in turnarounds.”

Analysts, healthcare consultants and public officials have expressed doubts about whether Tenet would be able to find new operators for all of the hospitals. Fetter said that the company received more than 200 inquiries from prospective buyers within two days of the announcement.

Although the company has pledged to look for buyers and seek alternative arrangements to keep all of the hospitals open, Fetter said it was still too early to say what the company would do if suitable operators were not found in every case.

“We’ve had interest in every hospital,” Fetter said, adding that he was “pleasantly surprised.”

However, a dissident shareholder’s group, in a report called “Tenet’s Death Rattle,” questioned whether the company would be able to pull off its plan or even survive in one piece.

“With Tenet’s rapidly deteriorating cash position and potential multibillion liabilities, we do not see how Tenet can survive as it is currently structured,” M. Lee Pearce, a Florida physician who fronts the “Tenet Shareholder Committee,” said in a statement issued with the report. “The more likely outcome is a reorganization of Tenet into several separate regional companies, perhaps as many as four.”

Pearce has long been critical of Tenet’s management practices and waged an unsuccessful proxy battle nearly four years ago for control of Tenet’s board. Pearce was traveling and could not be reached for comment, but his spokesman Paul Brickman said Pearce holds about 15,000 shares and represents several other anonymous shareholders who together own about 10,000 shares.

The war of words between Tenet and Pearce resulted in the company filing suit last year, accusing him of waging an improper proxy fight. Pearce countersued and the case was dismissed about a month ago.

Tenet’s stock fell 66 cents Monday to close at $12.15 a share on the New York Stock Exchange. The stock is down nearly 77% since October 2002, shortly before Tenet’s problems came to light.

Pearce’s shareholders’ report said the group doubted the company would have enough cash to handle the eventual liabilities of malpractice suits stemming from Redding and the investigations being conducted by several government agencies.

The report said that the 18 hospitals on the block in Los Angeles and Orange counties would be among the least marketable. It anticipates that physicians and patients would move away from all of the hospitals up for sale, eroding admissions and revenue at the facilities, which already have been labeled as among the chain’s weakest financial performers.

Operations at the for-sale hospitals are likely to “deteriorate very rapidly, potentially sucking hundreds of millions of dollars in cash,” the report said.

The broadside comes amid growing concerns in Los Angeles and elsewhere over the fate of the hospitals earmarked for sale. The Los Angeles City Council will consider a resolution today, calling on Tenet to guarantee that it will keep its hospitals here open and fully staffed until new owners are in place.

Fetter downplayed the significance of the report, characterizing it as one man’s opinion.

“I disagree with his statements on liquidity, liabilities and cash flow,” Fetter said. “It comes from no more an informed opinion than what any other analyst might have from the outside. It is premature to be speculating at all about some of the liabilities, if any, that we might face.”

As for breaking up the company, Fetter said that did not make sense. “There are economies of scale that are well understood in this industry,” he said.

The shareholders’ critique echoes the concerns of several analysts in the wake of the hospital sales announcement. Maryann Hennessey, an analyst with the Criterion Research Group, also pointed to legal liabilities and liquidity as problems.

Recent speculation that the company could settle its billing dispute with Medicare over the sickest patients for $1.5 billion, for instance, might be wishful thinking, she said. The figure represents the difference between what the company charged Medicare for very sick patients, or “outliers,” during the period under investigation and the amount the government is accepting for current cases.

The government doesn’t “want to cripple the company,” Hennessey said, “But they are going to want, as they do in these situations, to make an example of them.... I think that those numbers could be pretty big.”

Hennessey also raised the specter of bankruptcy as a remote possibility, especially if it became difficult for Tenet to borrow money.

Fetter dismissed the idea of bankruptcy, saying “I don’t even think it’s a possibility.”

Hennessey said that, because of the company’s tumult, it was impossible to break out revenue produced by the 69 hospitals that Tenet wants to keep.