By Saul Sterman
The worst is over. Out of the four plagues that struck THC, two have been resolved, progress is being made on one and a cure needs to be found for the fourth.
Federal securities class action lawsuit
In January 2006, THC reached a settlement with the Justice Department regarding shareholder derivative litigation and a broad range of securities class action suits. The net damage was about $140M.
In June 2006, THC reached a settlement with the Justice Department over the more complex and perhaps more rampant alleged claims regarding Medicare outlier billing. The net damage was $900M; however the cash payment of $725M is over a four year period.
The remaining SEC investigation regarding the latter is ongoing. Dennis and Mathiasen, former CFO and CAO, settled in April 2007 ($240k and $150k). Mackey and Sulzbach, former COO and Chief Compliance Officer [CCO], will most likely settle shortly. According to this article, the SEC is letting the Justice Department deal with former CEO Barbakow, possibly alleging criminal conduct. THC was fined $10M. As it stands now, the company can close the book on this one and individuals (former executives) will take the spotlight.
In 1995 National Medical Enterprises acquired American Medical International ($3.3B) and changed its name to Tenet Healthcare. The media has concentrated on one aspect of the Tenet debacle, primarily management. Part of THC’s problem was the loose controls implemented, perhaps intentionally, over a far-reaching empire. With constant performance demand outstripping potential organic growth, costs spiraling out of control and needless to say, doctors are really not at all different from the rest when it comes to money; the stage was set for some sort of sinister scheme. Don’t blame all the woes on management though they definitely did their part. There were plenty of doctors and nurses that either knew what was going on or had their hand in the kitty.
As part of the 06/2006 settlement, THC agreed to divest another 11 hospitals. Upon completion this would leave THC with 57 hospitals (not including clinics). THC’s empire will be reduced from 109 (114 at peak) hospitals in 2003 to a more manageable 57 in 2007.
Based on this alone, several analysts are beginning to take another look at Tenet. For example; Sheryl Skolnick, senior vice president of CRT Capital Group, who has been bearish on Tenet through most of its downturn, is quoted;
“We see the turnaround as only really having started when THC settled with the federal government and started spending money on its facilities … 3Q06 and not earlier as some believe …with the implication that it is far too early to call the turnaround either a failure or a success…we clearly have a different view of Tenet Healthcare’s prospects than most of the sell-side on Wall Street.”
Where’s The Doctor When You Need One?
THC claims that it is making progress with its employee relations. Doctors and Nurses have been at odds with management for over two years and morale is an issue as well. In essence, management has retained what I call the ‘Heinz 57’ hospitals. All 57 hospitals lean towards standardization and are candidates for re-staffing, if necessary. Change always leads to uncertainty, which beckons low morale. By yearend this should be behind us as well.
The trick is to set a high standard and not fall to the lowest common denominator. COO Newman is implementing a standard unified procedure protocol throughout ‘the 57’. The morale issue is tricky as some ethical issues are intertwined as well. In addition, as stated above, some personnel were somewhat involved in the outlier lie. This actually could work in favor of the turnaround. We’ll have to wait and see how Newman plays his hand.
The one area that is still hemorrhaging is the public’s perception of some (many) of the ’57’. There is a general perception that doctors at Tenet hospitals regularly tell patients to go elsewhere for better treatment. The average Joe associates a Tenet hospital with second class medicine. Some negative association is with the name Tenet and not the hospital itself (source: web surf check).
Changing public perception is both costly and time consuming, but it can be done. I agree with THC’s approach. First, have Newman install the new procedures and make sure they are being followed. This includes making the necessary investments and upgrades to facilities. Make sure that ALL personnel know that a satisfied customer (patient) spreads the ‘great hospital’ disease faster than any airborne virus. Second, run a PR campaign, get back the customers (patients), and prove that “Tenet is the new medical standard”. Perhaps Dr. Newman will send a memo; “Don’t cut corners. If you do, we’re dead”.
Disclosure: No conflicts. Estimated EPS for 2007 and 2008 is $-0.08 and $0.10.
Unverified and new sources: