Critical Condition

Tenet Healthcare has been laid low by scandal, fraud and cash-draining litigation. Can new CFO Biggs Porter help cure the ailing hospital operator?

September 2007
from CFO Magazine

On June 6, 2006 — D-Day, appropriately enough — Biggs Porter addressed the troops. Standing in a crowded meeting room in Dallas, the new CFO of embattled hospital chain Tenet Healthcare Corp. outlined his expectations for the finance department and its employees. Porter spoke of fiduciary responsibility and transparency. He talked about open-door policies, good communication, and challenging the organization. He said a lot about integrity.

No one would have blamed the assembled workers if they had simply tuned him out. After all, the 53-year-old Porter is the fourth finance chief in as many years at Tenet. But during that speech, finance staffers got a glimpse of what makes Porter a good fit at the scandal-plagued company. One, he's a quick study. Two, he sticks to a plan. And three, he doesn't back away from a challenge.

In fact, Porter's résumé reads like a shooting script for "World's Toughest Jobs." He worked for LTV in the early 1990s, when the conglomerate was in the throes of a tempestuous consolidation. In 2000, he joined Dallas-based utility TXU, right around the time the Texas power industry was shuddering through deregulation. And he signed on as controller at Patriot-missile maker Raytheon in 2003, even though the aerospace giant was being investigated by the Securities and Exchange Commission. "I've been at companies that were going through significant transitions," says Porter. "You either like that or you don't."

Classifying Tenet's current situation as a "transition" is a sizable understatement. Once a rising star in the health-care universe, the publicly traded, Texas-based hospital holding company has suffered blunt-force trauma during the past 15 years. Two different scandals have battered the company, and left its corporate brand in tatters.

The first incident involved kickbacks, bribes, and the alleged hiring of bounty hunters to fill hospital beds. It also led to felony convictions, a $379 million settlement with the Department of Justice in 1994, and the ouster of the company's top executives. The second scandal, which broke in 2002, saw Tenet's subsequent management team charged with running a secret pricing scheme that excessively boosted the rates the company charged for treating Medicare's sickest patients, known as outliers. Tenet denied the allegations, but soon after, a raft of senior executives resigned, including then-CEO Jeffrey Barbakow. Although the company and its former executives never admitted guilt in the case, Tenet last year agreed to pay $725 million (plus interest) to the Justice Department over four years to settle the charges.

Changing the corporate mind-set at a company with widely dispersed facilities — and more than 60,000 employees — is tough enough. But the latest ignominy at Tenet has pushed the hospital operator to the brink. Since news of the alleged outlier scheme broke in late 2002, Tenet has been hemorrhaging cash. Last year, the company reported a pretax loss of $1.1 billion on $8.7 billion in revenues. Tenet's share price has plummeted as well, dropping from more than $50 to $5, and the credit rating on its senior debt has sunk with it (pegged at CCC+ by Standard & Poor's). The company has shrunk dramatically, and now operates about half the number of medical facilities (56) it did at its zenith. And it has witnessed an exodus of doctors, some of whom say they'll never work for Tenet again.

Even Mother Nature appears to be conspiring against Tenet's management and its much-talked-about turnaround. Hurricanes, first Wilma in southern Florida and then Katrina in coastal Louisiana, have ravaged two of Tenet's most important markets. Moreover, the hospital sector itself has been buffeted by sinking patient volumes and surges in the number of uninsured patients. In some ways, it's a perfect storm of trouble for Tenet. "Tenet needs to do the right things, yes," says David Bachman, a senior research analyst at Longbow Research. "But it also needs to get a little lucky with the headwinds that are currently affecting the industry."

An Adult Approach

Tenet did finally catch a break earlier this spring. In April, the company settled charges brought by the SEC that its former management team failed to adequately disclose the company's alleged payment scheme between 1999 and 2002. Tenet ended up paying a mere $10 million to settle the civil charge. Pivotally, the commission also waived a rule that would have made it easier for shareholders to sue Tenet.

In a published interview, SEC chairman Christopher Cox defended the waiver. "The settlement terms favored investors because of the significant corporate-governance changes that had occurred [at Tenet]," Cox said. In a press release accompanying the settlement, Tenet general counsel Peter Urbanowicz stated that the hospital operator is "virtually a new company."

It had better be. The company's previous approach to running hospitals — grow through acquisitions, apply little apparent oversight, and seemingly put profits ahead of patients — made Tenet a poster child for shabby corporate behavior. Granted, other for-profit hospital chains, notably Columbia/HCA and HealthSouth, had their own scandals following a go-go decade that saw 900 acquisitions and mergers in the hospital sector. But few hospital chains carried the massive debt that Tenet took on (the company's debt servicing still amounts to $400 million a year). And none were as blatant as Tenet at purportedly gaming the payment system to meet aggressive earnings targets. One study in 2003 found that, of the 100 most-expensive hospitals in the United States, 64 belonged to Tenet. In fact, the top 14 hospitals were all Tenet facilities. An earlier report indicated that, in California, Tenet was paid nearly three times more for bypass surgery than the average payment to non-Tenet hospitals — $93,829 versus $32,473.

Under Porter (a former auditor whose father was vice chairman of Arthur Young) and Trevor Fetter (a onetime Tenet CFO and current CEO), the hospital chain has begun to clean up its act. Longtime company watchers say Tenet has vastly improved its internal-controls systems and its board setup. Moreover, Porter has overcome initial doubts about his lack of experience in the health-care industry. "Porter brings a lot of professionalism to the company," says Sheryl Skolnick, senior vice president at CRT Capital Group. "He's brought an adult approach to financial controls, to conference calls, to investor presentations."

He's also brought an unwavering confidence that Tenet will get through these dark days. The Department of Justice civil settlement, while a cash drain, removed much of the uncertainty about the company's future. That has given Porter a little more room to maneuver. Last year, for instance, Tenet was able to win higher reimbursement rates from medical insurers. "As we went through the period of litigation," he says, "we were not in the best position to negotiate with managed-care providers. But we're now able to restore [the rates] to market pricing."

The more favorable arrangements should help boost the company's revenue-per-patient, which, along with volume, is a key indicator of Tenet's progress. Indeed, net patient revenue from managed-care payers rose 8 percent in the first quarter of 2007 compared with the same period last year. And despite Tenet's thin cash flow and hefty leverage (nearly $5 billion in long-term debt), Porter has continued to look for potential acquisition targets. In July, a Tenet subsidiary acquired Coastal Carolina Medical Center from LifePoint Hospitals Inc. for $35 million.

"For a hunkered-down company, it's easy not to pursue other opportunities," comments Skolnick. "But [Porter] understands business risk better than anyone else there. To Porter, there is business risk in not pursuing growth opportunities."

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John Goff is a senior editor of CFO.

© CFO Publishing Corporation 2007. All rights reserved.