Tenet’s problems an echo of previous scandals

Gary Gentile

Monday, Jan. 13, 2003 | 10:16 a.m.

LOS ANGELES -- In 1995, hospital chain National Medical Enterprises changed its name, hoping the new label would banish memories of the scandals that shook the company just a few years earlier.

For six years, the name change appeared to be part of a successful turnaround strategy. The company grew, buying hospitals around the country and going from a $425 million loss in 1994 to a $302 million profit in 2000.

The Santa Barbara-based firm is now the nation's second-largest hospital chain with 114 acute care facilities in 16 states. In North Las Vegas, the company owns Lake Mead Hospital.

But late last year, claims of doctor misdeeds and insurance fraud once again cast a shadow on the company that chose its new name because it represented integrity and "shared values" -- Tenet Healthcare.

Since October, Tenet's shares have plunged nearly 70 percent amid allegations that two doctors at a hospital in Redding performed hundreds of unnecessary heart surgeries, and that doctors at a hospital in San Diego may have paid to recruit patients.

Federal officials have raided both hospitals as part of ongoing investigations that have thus far centered on the doctors, not the Tenet facilities.

Tenet is also facing a federal probe into whether its aggressive pricing policies improperly triggered supplementary Medicare payments for care. The company has said it did not break any regulations.

The company's latest stumble came Thursday, when the Justice Department sued Tenet for up to $323 million for allegedly overbilling Medicare to inflate its revenues from 1992 to 1998. The government said Tenet overcharged Medicare for certain procedures by using improper diagnosis codes for hospital stays.

The problems have shaken the faith of patients and Wall Street.

"A dark cloud now hovers over the company," Damon Ficklin, a stock analyst at Morningstar, wrote in a recent report.

Tenet's journey from scandal-plagued company to Wall Street darling and back again has been overseen by Jeffrey Barbakow, who joined the board in 1990 and became chief executive in 1993.

Since Oct. 28, when Tenet's fortunes began to turn once again, Barbakow has been blunt about his failures and taken responsibility for not being aware of the firm's ills sooner.

In a December conference call, he said he regretted that the so-called supplementary Medicare "outlier" payments contributed half of the company's growth in earnings from 1999 to 2002 -- a dramatic increase from previous years and far above state and national averages.

"Had I known the magnitude of those payments and where this was taking the company, I would have never let the situation get to the point it did," he said.

Outlier payments are designed to reimburse hospitals for extra care given to the sickest patients beyond fixed charges set by Medicare.

Barbakow, 58, also acknowledged that Tenet has lost much of the trust it gained from shareholders and the public.

"I became chairman and CEO during a time of terrible turmoil when the credibility was nil," he said. "It took us years to earn our credibility back."

Problems for what was then National Medical Enterprises began in the early 1990s, when it was accused of holding some patients against their will in its psychiatric hospitals and treating them until their insurance benefits ran out.

More than 100 patients sued NME as did several insurers. In 1993, federal agents raided company offices in 17 states as part of an investigation. No charges were filed and Tenet eventually settled lawsuits involving the claims.

In 1994, NME pleaded guilty to seven federal charges of paying kickbacks and bribes for referrals and was fined $382.7 million. A former executive also acknowledged paying doctors for referrals to psychiatric hospitals then filing false Medicare claims to cover the payments.

By the time the company settled the lawsuits, sold its psychiatric hospitals and refocused its business on acute care hospitals, NME's founders had resigned or been forced out, as had several top executives, leaving Barbakow in charge.

"The key to this is that we are marching, maybe slowly, but marching along and putting the past behind us," Barbakow said in 1993.

Today, Barbakow again finds himself leading a company suspected of fraud. In November, he replaced two top executives and adopted new pricing policies designed to reduce outlier payments from $65 million to $8 million a month.

The company also lowered its earnings estimates for 2003, assuming a sharply lower amount of outlier payments.

Most analysts agree with Barbakow's claim that Tenet's fundamental business remains strong and that the company will benefit in coming years as aging baby boomers seek more medical care. Tenet's stock has stabilized in recent weeks at around $17 a share, even as the company has said it will take until 2004 for its earnings to grow.

But it remains to be seen whether Tenet -- and Barbakow -- can recover from the current investigations.

"The options are that A) he didn't know this was going on, which is troubling, or B) he knew, which is troubling," said stock analyst Ficklin. "He went with option A, which doesn't make you feel a whole lot better."

Last month, a leader of a group of dissident shareholders demanded that Tenet oust its senior management.

"It is time for the board of Tenet Healthcare Corp. to stand up and take back the company from a management team that has neglected its duties," M. Lee Pearce, a Florida doctor, wrote in December.

Pearce and his group, which own a relatively small number of Tenet shares, had tried to oust Barbakow two years earlier.

In the meantime, Barbakow is left to lead the company as it once again faces the possibility of criminal charges and lawsuits.

Barbakow, who won praise for leading the company during its most difficult days, now says he should have paid more attention when Tenet's profits shot up -- fueled by outlier payments.

"At Tenet we tended to dig deep wherever there was a problem that caused a negative variance to our plans," he said during the December conference call. "In hindsight, I didn't dig deep enough when things were going unusually well. Clearly, I will do so in the future."