While the foundation of Tenet Healthcare Corp. remains a group of hospitals owned by its two predecessor companies, the hospitals Tenet purchased through its second largest deal are largely being trimmed away, calling into question the rationale behind the acquisition in the first place.
Tenet became the nation's second-largest investor-owned hospital chain through three large mergers and acquisitions and a handful of smaller deals. The core of the Santa Barbara, Calif., company remains the hospitals owned by the former National Medical Enterprises and American Medical International, which merged to form Tenet in March 1995.
But the second-largest deal in Tenet's nine-year history-the acquisition of OrNda HealthCorp-will largely be unwound if the company completes all its current divestiture plans (Feb. 2, p. 8). Tenet acquired OrNda and its 50 hospitals in January 1997 in a deal valued at $3.5 billion-$2 billion in newly issued stock and $1.5 billion in assumed OrNda debt.
"This merger clearly strengthens our position as a driving force in the healthcare industry," former Tenet Chief Executive Officer Jeffrey Barbakow said at the time. "The ability to provide quality healthcare efficiently across broader geographic areas will make us more attractive to managed-care plans and other healthcare providers looking for strategic alliances."
That strategy has collapsed: If the divestitures are completed, Tenet will own only eight of the former OrNda hospitals. Of the 27 hospitals that Tenet listed for sale last month, 12 of them were former OrNda hospitals. Tenet separately also plans to end its lease on another former OrNda hospital.
"If I were making the decision all over again, I wouldn't do it today," Tenet President and CEO Trevor Fetter said in an interview last week, adding, "You don't set out ever to acquire something that you end up divesting."
Changes in California's healthcare landscape over the past seven years doomed the strategy of dominating Southern California to be better positioned to negotiate with health plans, Fetter said. Seven years ago, there was no nurse-patient ratio law, healthcare labor unions were weaker and labor costs weren't climbing as rapidly as they have since, he said.
Also, the first deadline imposed by the seismic-safety law was more than a decade away.
Charles Martin Jr., former OrNda chairman and CEO, declined to comment through a spokesman at his current company, Vanguard Health Systems.
Fetter said he did not see a link between the weak performance of the former OrNda hospitals and Tenet's strategy, which began two years after that deal, of sharply increasing its gross charges, or list prices. Overall, Fetter said he believes that Tenet has recouped its investment in OrNda, although he noted that he has not done a thorough hindsight analysis of the deal.
In the company's review of the strategy, it appears the motivation was to increase managed-care reimbursements after those payments had been flat or falling during the mid-1990s, Fetter said. The OrNda deal did give Tenet the leverage to negotiate statewide contracts with some payers, and those deals benefited from the gross charges strategy, but that wasn't the prime motivation for the strategy, which also rapidly boosted Tenet's Medicare outlier payments.
Another large deal was Tenet's $345 million purchase of eight hospitals out of the bankruptcy of Allegheny Health, Research and Education Foundation in 1998; Tenet plans to keep four of those hospitals. Tenet also has acquired about two dozen hospitals in deals involving one, two or three hospitals. Nine of these hospitals have been or will be divested.
Fetter said the company and its investment bankers have received more than 200 inquiries, covering all 27 hospitals that Tenet announced it wants to sell, expressing interest in purchasing one or more hospitals.
While Fetter remains confident that the latest divestiture plan will set up Tenet for growth and prosperity, the company's leading shareholder critic, M. Lee Pearce, predicted that Tenet would face liquidity problems that would force more sales. In a news release, Pearce predicted that Tenet's legal liabilities-stemming from Medicare outlier payments, malpractice issues at Redding (Calif.) Medical Center, investigations of physician arrangements and others-would cost the company more than the $1.7 billion that HCA paid to settle its Medicare fraud case.
Another tentative sale involving Tenet was announced last week. Amedisys, a Baton Rouge, La., home health company, said it would pay $20 million to buy 11 home health agencies from Tenet. No closing date has been set. Meanwhile, Tenet's sales plans in California are drawing a lot of local concern. State legislators conducted a public hearing earlier this month on the impact the sales would have on Southern California in particular, where 18 of the hospitals on the latest divestiture list are located.
Stephen Newman, CEO of Tenet California, testified at the hearing and, according to his prepared remarks, went to great lengths to assure the legislators that Tenet would make every effort to sell the hospitals to buyers who will operate them, not convert them to other uses.
But observers who attended the hearing noted that Newman didn't promise that all of the hospitals would remain open. The Los Angeles County Medical Association is concerned that Tenet won't be able to find buyer-operators because the environment in California is so difficult, said Marcy Zwelling-Aamot, president of the association.
The association hopes the state will soften its seismic-safety and nurse-patient ratio laws and wants the CMS to relax its rule that prohibits Medicare from paying for nursing home care unless a Medicare patient has spent at least three days in a hospital first, she said.
Zwelling-Aamot said she appreciates Tenet's pledge to do everything it can to ensure the buyers will be hospital operators and not real estate developers, but she wondered how a new operator is going to make money where Tenet failed to prosper. Some of the facilities could become specialty hospitals, she said, "But it's hard to imagine they would remain full-service community hospitals. Is it possible? Sure. Is it probable? I don't think so."
As for potential closures if no buyer-operators come forward, she said, "That's a fear. Like it or not, there is nobody who could tell that company that they could not do that."