A Scandal-Ridden Tenet Stands by Its Man
When Tenet Healthcare (THC ) Chief Executive Jeffrey C. Barbakow offered to resign in early November, the board members gave the idea serious thought. After all, they were caught off-guard by the publication of an analyst's report accusing the hospital chain of garnering huge profits from aggressive Medicare billing. Barbakow had assured the board that most of the company's strong growth could be explained by aging baby boomers seeking treatment in Tenet hospitals. "It implied ethical lapses," says director and former U.S. Senator Bob Kerrey, now president of New School University in New York.
Yet in the end, the board stuck by Barbakow, in part because of his success in bringing Tenet Healthcare Corp. back from an earlier billing scandal in 1993. Back then, Barbakow was the guy brought in to clean house.
This time around, distancing himself from the scandal won't be so easy. True, he quickly removed his two top lieutenants, the chief financial officer and the chief operating officer of the company. 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. They question whether the former Merrill Lynch & Co. (MER ) investment banker is the best person to tidy up Tenet today. "The only way investors will feel comfortable is with a new management team," says Thomas Marsico, chairman and CEO of Marsico Capital Management, which recently sold off its Tenet holdings. "He can't regain his credibility."
Among Tenet's raft of problems: It billed some $763 million in Medicare "outlier" payments last year, employing a loophole that boosted total profits 20%. Outlier payments were 17% of Tenet's total Medicare payments, far greater than the national average of about 5%. The billing system is meant to be used to reimburse hospitals for excessive charges incurred during complex procedures, such as a heart bypass surgery that leads to complications. The system is intended to protect hospitals from having to shoulder too much of the cost for treating very sick, elderly patients. But outlier payments can also be easily abused, since hospitals determine the charges used to calculate payments. Tenet's Redding Medical Center in Redding, Calif., for example, charged 40% more for outlier payments than the seven other major hospitals within 200 miles.
Barbakow faces other complications. On Oct. 30, the FBI raided the Redding facility as part of an investigation into allegations that two heart surgeons there performed unnecessary surgeries. No charges have been filed against the doctors or Tenet. The doctors are not Tenet employees and Barbakow says they were not pressured to generate high Medicare reimbursements.
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.
Barbakow concedes that aggressive pricing at some Tenet hospitals led the company to collect excessive Medicare payments. But he insists that he was not aware of Medicare's impact on Tenet's earnings until confronted by a research analyst who had dug out the facts from publicly available government data. That alone, say some governance experts, is enough to push Barbakow out the door. "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. Says Barbakow: "My judgment is only as good as the information I receive."
That's not the only thing damaging Barbakow's credibility. Investors are also upset over his benefitting from the Medicare controversy. His $4.2 million bonus last year was mostly a reward for boosting earnings by 113%, to $643 million on $12 billion in sales. He also sold $130 million worth of Tenet shares when it traded at 44 in January. It now trades around 15.
Barbakow says he will work with Tenet's board to conduct a top-to-bottom review of pricing, compensation, and ethics. He says the company will announce a new, less aggressive strategy by the end of the year. But investors are going to need a lot of convincing that the man who long ago fixed Tenet is the one to do it again.
By Arlene Weintraub in Los Angeles