A year ago, the news that Jeffrey Barbakow was stepping down as chairman and chief executive officer of then-high-flying Tenet Healthcare Corp. would have been shocking.
But there was no shock at last week's announcement that Barbakow was leaving, only the nodding acceptance of what observers of the Santa Barbara, Calif.-based company had been expecting for months.
Barbakow, 59, resigned as CEO nearly 10 years to the day he took the reins of Tenet's predecessor company, National Medical Enterprises, then based in Santa Monica, Calif. He will remain as chairman of the company until its July 23 annual meeting, the company said.
Even less surprising than Barbakow's resignation is the notion that hospital and healthcare system executives seem to be facing tougher questioning-from their trustees, regulators and the news media.
"Healthy governance equals healthy skepticism," said Karma Bass, a vice president of the Governance Institute, San Diego. "CEOs are encouraging skepticism on the part of their directors. It is imperative.
"We're in a different world, and we're never going back."
Coming full circle
As Barbakow departs, Tenet finds itself in much the same sort of tempest that led to his hiring in 1993.
At that time, NME's psychiatric subsidiary was in the midst of an investigation that would lead to a then-record $379 million settlement of fraud charges with the federal government. Barbakow, who had been an independent director of the company since December 1990, was brought in as the honest broker to rescue NME.
Now, the company finds itself buffeted by the uproar over its huge receipts of Medicare outlier payments, which are designed to minimize the losses that DRG-based payments would foist on hospitals treating the sickest patients.
The storm began brewing in October 2002, when a UBS Warburg stock analyst first disclosed that Tenet was receiving outlier payments at four times the national average when measured as a percentage of Medicare inpatient reimbursements. The furor grew louder when Tenet's initial investigation indicated that a strategy of rapidly increasing its gross charges, or list prices, was a big driver of the payments.
Since then, Tenet has found itself the subject of an audit by HHS' inspector general's office, has had two of its California hospitals raided by federal investigators and has been the subject of harsh criticism from both Washington policymakers and angry investors who saw two-thirds of the value of their Tenet stock vanish in a matter of weeks.
Tenet also has announced plans to sell or close 14 of the 114 hospitals it owns. A company spokesman said the process is ongoing, but he declined to offer any other details.
With last week's resignation, the company's three top executives-CEO Barbakow, Chief Financial Officer David Dennis and Chief Operating Officer Thomas Mackey-all have left Tenet since the outlier storm broke. Barbakow will receive $6.8 million in severance pay. Under Tenet's standard severance package for executives, he will receive his nearly $1.3 million salary for three years, according to securities filings and a company spokesman. He also will receive his "target bonus," which is awarded annually and is equal to 78% of his salary, the spokesman said, or $989,000.
Tenet's board of directors has begun a search for Barbakow's replacement, naming Tenet President Trevor Fetter acting CEO in the meantime. Fetter, 43, who rejoined Tenet last November, said in an interview that he is a candidate for the full-time job (See Healthcare Profile, p. 32).
Edward Kangas, a former accounting executive who was elected to Tenet's board in April, said in an interview that Tenet's next CEO needs to be able "to comprehend the vast array of both problems and opportunities. The individual cannot be overwhelmed by the magnitude of the problems or opportunities."
After the criticism that Barbakow sometimes took for not having "grown up" in the hospital industry, Kangas said it would be a plus for a candidate to have that experience, "but the more important thing is that person would need to understand, in a strategic and practical way, the operation of a hospital, as well as the interrelationships with all of the constituencies within a hospital."
Fetter, like Barbakow, has a background in investment banking and running a major Hollywood studio. Barbakow left banking to become chairman, president and CEO of Metro-Goldwyn-Mayer/United Artists, Culver City, Calif., in 1988. He hired Fetter as a senior executive, and Fetter eventually became CFO of the company. But, as Fetter has noted, he has spent more time working in the hospital industry than in the studio business, including his stints at Tenet and his experience as president and CEO of Broadlane, the San Francisco-based provider of cost-management services to hospitals, from 2000 to 2002. Tenet owns a majority stake in Broadlane.
From the outside
M. Lee Pearce, a Tenet shareholder and former physician who has been calling for Barbakow's removal, said in a statement that the company should hire a CEO from outside the company with either a medical degree or a master's degree in health administration and "with a lifetime of work and experience in all aspects of hospital-healthcare management." Pearce repeated his calls for other management changes, including the appointments of a chief quality assurance officer, a financial executive who is familiar with fraud prevention and an ombudsman, with all three of these officers reporting to the board, not the CEO.
Kangas and Pearce met May 16 in New York so Kangas could listen to Pearce's concerns, Kangas said. While that meeting resulted in a statement from Pearce that he would not attempt to change the management with a shareholder proxy vote at the company's annual meeting on July 23, Kangas said there was no discussion of Barbakow's resignation, nor was Kangas there to negotiate with Pearce. Kangas declined to offer other details of what he called a "private, personal, confidential, privileged conversation." Pearce did not respond to several interview requests made through his spokesman.
Pearce likely is not the only shareholder who would like to see an outside candidate emerge. Lori Price, a healthcare stock analyst with J.P. Morgan Chase & Co., New York, said investors are irate with the current management, not only for the sharp decline in value of Tenet's shares but also for its inability to offer detailed predictions of the company's long-term prospects.
"I think ideally they would be best served with a complete changeover in leadership, with someone from the outside with a strong background in healthcare, preferably hospitals," Price said. "Trevor has a strong reputation as an operator, but he is someone who has been with Tenet for a long time." She added that she has not heard any other specific candidates being connected to the Tenet job.
Kangas said he and his fellow directors are aware that the longer the search takes, the more the uncertainty about Tenet increases, but he also said they have a lot of trust in the current management and don't feel compelled to be hasty.
Scrutiny ratcheted up
Whoever replaces Barbakow will deal with an increasingly treacherous environment for business executives.
"Everything and anything that could affect a public company is under higher scrutiny than it had been," said Alan Miller, chairman, president and CEO of Universal Health Services, King of Prussia, Pa. "When you're the chief executive, you probably get too much credit for successes and too much of the burdens for problems, illegality and whatever."
Universal, an investor-owned chain of 25 acute-care hospitals in the United States and Puerto Rico, offered its own example earlier this year of how quickly an executive's fortunes can change. Longtime CFO Kirk Gorman was forced out in February when the company's auditor, KPMG, lost confidence in his ability to vouch for the company's financial statements (Feb. 17, p. 13). The culprit? A simple letter, made public by Universal, that Gorman wrote to KPMG laying out Gorman's philosophy of the relationship between financial executive and auditor. What to Gorman was mostly an intellectual exercise apparently rang alarm bells for KPMG, because the auditor refused to sign off on Universal's fourth-quarter and fiscal 2002 results with Gorman as CFO. That led to Gorman's removal.
Noting that there have been no allegations of wrongdoing on Gorman's part, Miller said that "had it come up in a different time, (it) might have been overlooked entirely."
More generally, Miller said the pendulum has swung back toward more active oversight because of the corporate scandals that have dominated the newspaper business pages for the last two years. The Sarbanes-Oxley Act, the federal law that requires CEOs and CFOs to sign off on the financial results their companies report, is the greatest manifestation of the general trend, Miller said (See related story, p. 6). The problems at Tenet-and especially the allegations that HealthSouth Corp., Birmingham, Ala., inflated its financial results-have hurt the healthcare industry's stature with federal lawmakers, he added.
"In HealthSouth's case, for example, the chief executive was beyond the pale," Miller said, referring to HealthSouth founder and former President and CEO Richard Scrushy. "It's just not a good environment for people who do it the right way."
At Universal, he said, there have been neither government investigations nor accounting scandals, so, he contended, there also has been very little media coverage. "We've been making these high returns for shareholders, doing it the right way, growing 20% a year, but we're boring," he said. "Consistent and boring."
Not just a corporate problem
The Governance Institute's Bass said there are two duties in particular that hospital trustees are zeroing in on-setting the strategic direction of their hospital or system and appointing, evaluating and overseeing the CEO. She said she does not have any data but added that these are the themes that come up repeatedly as she talks to 10 to 15 CEOs of not-for-profit hospitals or systems per week.
"These (duties) have always been part of the responsibilities of the board, but in light of what's going on in the corporate sector and the (greater scrutiny) from state attorneys general, these two areas are being emphasized," Bass said.
Trustees seem to have learned something from the mid-1990s experience with buying physician practices, an experience where the poor results indicate to some trustees that perhaps they failed to ask enough tough questions about these acquisitions, Bass said.
Another key change is that trustees are "looking for leading indicators instead of lagging indicators of performance," she said. "They're looking for the indicators that turn yellow or red before the bad thing happens, not after." As examples, she cited patient- and physician-satisfaction scores, clinical indicators developed by the Centers for Medicare and Medicaid Services, and measures that show whether their hospitals are using the clinical decisionmaking tools at their disposal.
Trustees must not only pick the measures but also set the parameters or ranges that are acceptable for these indicators, Bass said. That makes it incumbent upon management to bring these matters to the board's attention when the scores fall outside the acceptable range, she said.
The final days
Since November 2002, Tenet directors have definitely been focusing on their duty to evaluate the CEO and hold him accountable. Fetter said Barbakow offered his resignation to the board in November, when Tenet's troubles burst into the open. Barbakow and the other directors have had a "relatively continuous dialogue on this topic" since then, Fetter said.
No one from Tenet would characterize the resignation as anything other than mutual. "Jeff knew that ultimately there would have to be a change," Kangas said. The timing was right because Tenet had been able to rack up some positive developments in the past few months, Kangas said, such as signing an agreement with two labor unions covering hospitals in California and a handful in Florida and dodging a proxy contest led by Pearce.
The directors met by telephone May 23, with Barbakow's status just one of the items on the agenda, Kangas said. A few directors, not including Kangas, spoke with Barbakow over the holiday weekend, the CEO offered his resignation on Memorial Day and the board accepted it, Kangas said.
Barbakow declined requests for interviews last week, through a spokesman. "Stepping down as chief executive officer of Tenet," Barbakow wrote to company employees in a letter obtained by Modern Healthcare, "is one of the toughest things I have faced."
Fetter said Barbakow's fate was sealed by the tenor of the times. "If, as a public company CEO, something goes wrong on your watch, you're blamed, right or wrong," he said. Looking at the whole of Barbakow's decade with the company, Fetter said, "Jeff deserves quite a lot of credit for having the vision to get the predecessor company out of trouble and build Tenet into the force it is today."
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