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Tenet Healthcare’s Fall From Grace

A tougher environment for hospitals—along with a few self-inflicted wounds—had the once high-flying corporation fighting this fall to survive.

For Dallas-based Tenet Healthcare Corp., 2014 and 2015 were the Golden Age, a time that must seem like a long time ago at the nation’s third-largest for-profit hospital chain.

Just three years ago, the company’s stock was trading for around $60 a share, the Affordable Care Act was delivering new patients while shrinking uncompensated care, and Tenet was on a growth track, having snapped up Vanguard Health Systems for $4.3 billion in 2013. It grew to 77 acute-care hospitals and 130,000 employees, including those at its Fountain Place headquarters in downtown Dallas and at Frisco’s Conifer Health Solutions, which provides services to Tenet’s hospitals and other healthcare companies.

But by this August, with its share price down in the mid-teens, long-time CEO Trevor Fetter announced that he would be stepping down—and carried through on his promise before the end of October. It was also announced that the board of directors was being remade in order to “maximize the future value of the company.” It was shareholder discontent—particularly from activist hedge fund Glenview Capital Management, which had two members of the Tenet board resign in August, citing “irreconcilable differences” with management—that prompted these moves. An operating loss of $56 million and reports of declining admissions were just two of the low-lights in Tenet’s August earnings announcement.

How did the outlook change so quickly? Analysts and industry experts say Tenet, and all U.S. hospital companies, are operating in a more difficult environment today than just a few years ago. Health plans, working to reduce patient costs, are doing all they can to avoid utilizing high-priced hospital care. At the same time, critics make a case that some of Tenet’s wounds were self-inflicted. Execution has been uneven, they say, and some of its strategic moves appeared to be either contradictory or cases of too-little, too-late.

Tenet and its hospital company peers are facing new headwinds, no doubt. Frank Morgan, a hospital analyst with RBC Capital Markets, told The Wall Street Journal this fall that the underlying trend is being driven by insurers’ and employers’ moves to shift more people to high-deductible insurance plans. Patients, in turn, have sought lower-cost options such as out-patient surgery centers, stand-alone emergency rooms, and urgent care clinics.

The slump in hospital admissions that began during the Great Recession never reversed, leaving admissions at Tenet flat to down most quarters since late 2015. Its big for-profit rival, HCA Healthcare, has also seen a slowdown, although its admissions remain positive, with roughly 1 percent to 2 percent annual growth.

Tenet responded to the trend by expanding its ambulatory surgery holdings and purchasing controlling interest in United Surgical Partners International from Welsh, Carson, Anderson & Stowe, a private equity firm. At the time of the acquisition, Dallas-based USPI had 244 ambulatory surgery centers, 16 short-stay surgery hospitals, and 20 imaging centers in 29 states.

While Tenet significantly increased its debt load to fund the purchase—it said it would raise $2.2 billion in debt to fund a phased purchase of USPI as well as a three-hospital chain also owned by Welsh Carson—the move was generally regarded as a smart one for Tenet. “USPI was one of their good choices,” says Sheryl Skolnick, an analyst at Mizuho Securities USA. Hardly a fan of the company, Skolnick earlier this year called Tenet “the single most frustrating stock, ever.”

“Their deployment of capital has been uneven at best, in terms of their pursuing growth opportunities versus deploying capital to their existing hospitals, in my view,” Skolnick says. “They expanded in Arizona when their health plan was collapsing. Why?” Her reference was to the failure of a health co-op that covered about a third of Arizonans who bought their insurance through the ACA marketplace.

In the same vein, Tenet last year completed a $115 million critical care tower at one of two hospitals it operated in Philadelphia, then announced this year it was selling both facilities after booking years of losses. Fetter told analysts in August the tower was a mistake, given how the market had changed in the six years it took to complete the project.

Tenet is moving to focus its future capital resources in hospital markets where it’s either No. 1 or No. 2 in market share. Skolnick agrees that’s a good plan, but says that Tenet “hasn’t moved fast enough on it,” and that HCA is executing that strategy better. While it’s hardly music to health consumers’ ears, hospital chains such as Tenet and HCA look to own hospitals in markets where they have a dominant market position in order to extract higher prices from health insurers. HCA acquired three acute-care hospitals from Tenet in Houston to further solidify its position as the second-largest hospital operator in Space City, for example. And Tenet sold its hospitals last year in Atlanta, where it was far from dominant.

Perhaps the most disappointing news during Fetter’s 14-year tenure was the company’s October 2016 announcement that it had agreed to pay $513 million to resolve federal criminal charges and civil claims arising from a long-running kickback and bribery scheme. The case involved mainly undocumented, expectant mothers who were told at prenatal care clinics in Georgia and South Carolina that Medicaid would cover their costs if they gave birth at one of two Tenet hospitals in Atlanta. That’s illegal under the federal Medicare and Medicaid Anti-Kickback Statute. The scheme, which lasted from 2000 to 2013, involved about 20,000 women and $400 million in Medicaid payments.

Fetter took over as CEO in 2003, amid an earlier series of Medicare billing scandals involving kickbacks for patient referrals and performance of unnecessary heart surgeries by two doctors at a Tenet hospital in California. Under his leadership, the company resolved those claims by paying a $900 million settlement, and kept itself in business by signing a “corporate integrity” agreement and preserving its ability to treat federally insured patients.

“They supposedly dug deep into the company at the time the scandal happened in 2002 and supposedly cleaned it up,” Skolnick says. She gives Fetter credit for instilling a culture of integrity and quality earlier in his tenure, but said some of that momentum seemed to have been lost.

Skolnick saves some of her harshest criticism for the plan Fetter set in motion in August, which she says did little to inspire investor confidence in the company: “The stock went up, and it came back down.” It was good that Tenet took steps to avoid a proxy fight with its largest shareholder, she says, but the set of steps it layed out for the future appeared to be contradictory, or difficult to parse at best. It was “very unusual” that Fetter announced he was leaving, but also that he might stay on as late as March of 2018, she says.

As this article went to press in late October, Tenet was reportedly consulting with bankers about a possible sale of the company, and it was being led by interim CEO Ronald Rittenmeyer, a board member with little experience at the helm of healthcare companies. Formerly chief executive for Plano’s Electronic Data Systems, Rittenmeyer has a résumé that boasts how he “successfully completed the sale of EDS to Hewlett Packard in August 2008,” then retired.

That Tenet was making any strategic decisions at all with a CEO who was on his way out, a board in flux, and a temporary leader, did not sit well with Skolnick. Beyond that, she says, “They say they want to recruit a new CEO. How are you going to recruit a new CEO into a business that is maybe up for sale, where the board is not the board? . . . This to me is a massive contradiction.”

In a 2014 interview with D CEO, Fetter said he switched industries and moved to Tenet from an executive post at MGM because he liked the intellectual challenge of running hospitals. He called it “an incredibly complicated business.” It appears that with Tenet and the shifting sands of U.S. healthcare, Fetter got the steep challenge he wanted, and more.


Thomas Korosec writes regularly on business and legal matters for Bloomberg News and D CEO.

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