Tenet: From Scandal To Second PlaceEric Schinez
Tenet: From Scandal To Second PlaceEric Schinez
By now, it seems little more than a distant nightmare. Just two months after taking over at National Medical Enterprises Inc. in 1993, CEO Jeffrey C. Barbakow received a 7:30 a.m. phone call: 600 federal agents were rifling through records at NME's Santa Monica headquarters and at several of its psychiatric hospitals, in search of evidence of billing fraud and malpractice. By the time Barbakow arrived, a noisy phalanx of TV reporters was clustered at his office watching government workers roll out truckloads of documents. "It was a bad day," he says. "A complete mess."
In the end, Barbakow would have to pay out more than a half-billion dollars to the government, insurance companies, and irate patients to clean up that mess. But the 51-year-old former Merrill Lynch & Co. investment banker did far more than simply open the corporate wallet. Barbakow--who left Merrill to run Kirk Kerkorian's MGM/United Artists Communications Co. in the late 1980s--was then better known for Hollywood dealmaking than for health-care expertise. But he has since brought the scandal-ridden company back from the brink. Today, with $5 billion in revenues and 75 hospitals from California to Florida, the renamed Tenet Healthcare Corp. ranks second only to the $15 billion giant, Columbia/HCA Healthcare Corp.
To restore Tenet to health, Barbakow jettisoned the troubled psychiatric division, trimmed down to the core U.S. hospitals business, and made acquisitions to broaden its base. Now, as the health-care market consolidates, the hardest part may be yet to come. Barbakow is racing to sell Tenet's international operations to fund U.S. growth. His goal: Ensure that Tenet remains big enough to compete with acquisition-happy Columbia as insurers and HMOs shift to large managed-care networks.
But with far less financial muscle than Columbia, Tenet can't be sure of success. Certainly, its performance has improved: Operating profits for the fiscal year ended May 31, 1995 were up 30%, to $391 million, on revenues of $3.3 billion, a 14% gain. This year, analyst Todd Richter of Dean Witter Reynolds Inc. estimates earnings will rise to $701 million as sales hit $5.1 billion. But acquisitions have left Tenet deep in debt. Today, Tenet's debt tops 64% of capitalization, compared with Columbia's 47%. Worse, Tenet's operating cash flow is nil, while Columbia is rolling in dough. "Barbakow has proved he can cut deals, not operate a hospital chain," says Richter.
HOUSECLEANING. Still, it's a surprise that Tenet even survived. More than a dozen insurance companies sued Tenet, charging it with fraudulently billing $750 million in care. More than 150 former patients also sued for everything from physical abuse to false imprisonment. "We were all wondering about our futures," says Michael H. Focht, Tenet's president.
Pressed by other directors, Barbakow, an outside director, assumed the task of fixing up Tenet. He says that when he took over, he knew little of the extent of the problems. After the Justice raids, however, Barbakow cleaned house and insisted on full cooperation with the investigations.
Over the next several months, Barbakow negotiated settlements topping $200 million to insurance companies. And in July, 1994, Tenet pled guilty to eight criminal counts and paid a $379 million settlement to state and federal agencies. Just as important, Barbakow spent months restoring Tenet's reputation with doctors and insurers. "Barbakow's getting out and beating the bushes was key," says Dr. John R. Porteous, a board member of Doctors Medical Center in Modesto, Calif.
Barbakow realized Tenet needed to grow to prosper. But neither Wall Street nor the medical world took his plans seriously. Says Focht: "At that point, the easiest course would have been to sell." That was what many on Wall Street expected. After all, Barbakow had netted $20 million in 1990 after he restructured MGM/UA and arranged its sale to Giancarlo Parretti. But Barbakow figured there was a much bigger play in the industry consolidation then spreading across the country.
Barbakow's strategy was to focus on the hospital business, while selling the rest. He began by unloading the psychiatric business to Charter Medical Corp. for $172 million, then got $350 million for Tenet's rehabilitation clinics. Next he sold a 75% stake in the company's dialysis centers for $75.5 million. Tenet also raised $420 million selling hospitals in Australia and Asia.
ON THE MAP. The biggest break came with the acquisition of American Medical Holdings Inc. for $3.3 billion in October, 1994. The deal more than doubled Tenet's presence in hospitals--and thanks in part to AMH's squeaky-clean reputation, it put Tenet back on the industry map. "All of a sudden we were getting calls from 35 hospitals around the country," wanting to link up, recalls Barbakow. The reason: Columbia's sharp cost-cutting had soured many doctors and hospital administrators. "We benefited from the ABC phenomenon," says Barbakow: "Anyone But Columbia."
Barbakow now plans to spend $400 million a year on acquisitions or improvements to Tenet hospitals. But he still has far to go before catching up to Columbia. With financing tight, Tenet has bought only four more hospitals.
The acquisitions have helped Tenet move well beyond its stronghold in Southern California; Barbakow is now building networks of physicians and hospitals in such markets as South Florida and Louisiana. But many question whether being a distant No.2 will be enough. "Eventually this company is going to have problems," Richter warns. "The pie is getting smaller." Such concerns have clearly hit Wall Street: Though Tenet's shares more than doubled, to 18, in the 15 months after he took over, they have been lackluster since. Some analysts also believe that having revived Tenet, Barbakow still aims to sell out eventually to his bigger rival.
For now, Barbakow dismisses such talk, as well as the concerns about size. He insists the key is building strong networks in regional markets. In South Florida, for instance, Tenet enjoys the highest margins in the market, at 10.9%, even though Columbia has nearly twice as many hospitals there. But as pressure to cut costs grows from Medicare cuts and HMOs, those margins won't last.
Tenet has also stumbled badly in other key markets. At its Century West facility in Los Angeles, for instance, local overcapacity and pricing pressure have squeezed reimbursements, severely weakening Tenet's fourth-quarter results. Barbakow brushes off such problems as minor complications. And that they are--at least compared to the nightmare of hundreds of federal agents rummaging through his office.
CEO Barbakow's Prescription For Tenet
-- Paid more than $500 million to settle charges of fraudulent billing and improper care, helping win back doctors' and insurers' confidence
-- Sold off noncore businesses such as psychiatric hospitals and rehabilitation clinics
-- To fund growth in core U.S. hospital market, sold hospitals in Asia and Australia
-- Doubled number of hospitals by acquiring American Medical Holdings in October, 1994, followed by several smaller acquisitions