Analyzing Tenet’s discards

The divestitures made by Tenet Healthcare Corp. over the past four years comprise a disparate group of 48 hospitals from 10 states, but some broad themes emerge from the Medicare cost reports filed by those hospitals.

Modern Healthcare analyzed financial data culled from nearly 300 cost reports filed by these hospitals from 2002 through the most recent filings in early 2007. The data were provided by the American Hospital Directory, Louisville, Ky., for hospital divestitures announced in 2003, 2004 and 2006. There was no divestiture plan for 2005.

Not all of the change before and after June 30, 2003, can be attributed to the Medicare outlier change. Tenet was struggling across the board as a result of various federal investigations of the company that were spurred by the events of late 2002. However, the effect of the change in outlier policy was pronounced, as a look at Tenet’s security filings shows.

Tenet recorded $454 million in outlier payments for the 12 months ended May 31, 2002, while for the seven months ended Dec. 31, 2002, the company recorded $304 million in outlier payments. In 2003, using the calendar year as its new fiscal year, Tenet recorded $101 million in outlier payments. In 2004, that figure fell to $64 million.

When the reports from the 2003 and 2004 groups are broken down by year, a clear trend emerges, Clark says. Both sets of hospitals saw improved performance for periods ending in the year after they were slated for divestiture compared with their performance in the year Tenet made the decision to sell. That trend suggests that Tenet may have grown faster than its management could handle, Clark says.

Trevor Fetter, Tenet’s president and chief executive officer, acknowledged this point when announcing the 2006 divestiture group (July 3/10, 2006, p. 10). “In hindsight, many of these acquisitions are ones that Tenet should not have made,” Fetter said at the time. “Our growth in the future has to come by building on the strength of markets that we do know, rather than acquiring hospitals in markets that we don’t know.”

When Tenet acquired these hospitals, Clark says, “A lot of these hospitals were distressed or bankrupt, and they just weren’t able to turn (them) around.” The prime example of that was Tenet’s acquisition of eight hospitals in the Philadelphia area from the bankruptcy case of the former Allegheny Health, Education and Research Foundation. Moreover, when pulling off multihospital acquisitions, she says, “Sometimes, you have to pay for some dogs to buy some good ones,” and that may explain some of the hospitals that were sold.

The 2004 group studied for this story consists of 23 hospitals. Two California hospitals that were part of Tenet’s 2004 divestiture plan but are still operated by Tenet were not examined. The bulk of the 2004 group—16 hospitals—are in California, and the investment needed to get these facilities to meet the state’s seismic-safety standards played a big role in the decision to divest them, Tenet has said. The small and startup companies that purchased many of the hospitals in the 2004 group may catch a break on seismic-safety standards that Tenet couldn’t have predicted in 2004, as some relief from the seismic-safety law’s deadlines is being considered (Oct. 29, p. 32).

The 2006 group consists of 11 hospitals that are more disparate. Four of the hospitals were New Orleans-area facilities that Tenet decided to divest in the wake of Hurricane Katrina. Tenet was forced to sell two of the hospitals: Alvarado Hospital Medical Center, San Diego, was sold pursuant to a settlement of a federal fraud trial, and the Cleveland Clinic Foundation exercised its option to buy Tenet’s stake in their joint venture to operate Cleveland Clinic Hospital in Weston, Fla.

See Web-exclusive chart on how outliers change affected hospitals

While the overall results have improved under the new owners, there are some notable exceptions. Brotman Medical Center, Culver City, Calif., filed for Chapter 11 bankruptcy protection in October. Centinela Freeman HealthSystem, which formed to buy three Los Angeles-area hospitals from Tenet in 2004, is shutting down one of the two Inglewood, Calif., hospitals, the former Daniel Freeman Memorial Hospital, acquired in the deal. Centinela Freeman was shifting services from Memorial to the other Inglewood hospital, Centinela Hospital Medical Center, before it was sold to Prime Healthcare Services, Victorville, Calif., in October. Centinela Freeman said that the shift of Memorial’s services will be completed even after the sale.

“These hospitals were weak to begin with, and they tend to have been sold to weaker organizations,” Fetter says. By cutting its hospital portfolio in half, Tenet has been able to concentrate its investments on things that affect quality, such as new equipment, Fetter says.

Several of the hospitals have continued to change hands. Tenet sold two hospitals in St. Louis to a startup called Argilla Healthcare in 2004. Argilla was later acquired by Doctors Community Healthcare Corp., Scottsdale, Ariz. Tenet sold four Arkansas hospitals to Triad Hospitals, Plano, Texas, in 2003. Triad was acquired in July for $6.97 billion by Community Health Systems, Franklin, Tenn. Just last week, Community announced a deal to sell two of those hospitals as part of a $315 million nine-hospital sale to Capella Healthcare, Franklin, that is expected to be completed in the first quarter of 2008. Community also is selling its 60% interest in a Jonesboro, Ark., hospital that Triad acquired from Tenet.

Of the 48 hospitals Tenet divested over the past four years, it sold 35 to for-profit companies; eight to not-for-profits; three to public hospitals; and two were closed by Tenet. One of the closed hospitals was sold to a for-profit, Cancer Treatment Centers of America, Schaumburg, Ill.

In an interview with Modern Healthcare Editor David Burda, Tenet President and CEO Trevor Fetter discusses his system’s hospital divestiture plans. To listen to this interview and others, visit the Podcast section of Modern Healthcare Online at modernhealthcare.com.

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