Part Four - Tenet Shareholder Committee

Greed, Scandal & Wrongful Deaths
at Tenet Healthcare Corp.

A multi part series from the Tenet Shareholder Committee

As the Tenet Shareholder Committee finishes its fifth year, we have prepared a summary of what, from our point of view, went wrong at Tenet and a history of our longstanding effort to reform this company. We are publishing this multi part series on our web site.

Today (03/01/2005):
Part 4 – Our View of the Future of Tenet: Limited Reforms Adopted Far Too Late;
Survival in Present Form Unlikely

Find below a brief description of each section in Part 4.
Click here to see Part 4 in full

Tenet Reluctantly and Belatedly Adopted Many TSC Recommended Reforms

Over the last five years, the TSC has made at least 24 major recommendations for reform and change at Tenet Healthcare Corp. to improve quality of care, corporate governance, management, and financial performance.
The company eventually adopted some of these reforms, reluctantly and often in a limited fashion. In almost all cases, they acted far too late to prevent significant additional damage to patients, shareholders, physicians, company employees, and the tax paying public.
In reviewing the recent history of Tenet, several journalists have now concluded that the early warnings raised by the TSC were right on the money.
Having failed to heed those warnings, Tenet has bounced from one poorly performing quarter to the next, running out a string of eight consecutive quarters with a net income loss. Tenet will announce the results for the fourth quarter of 2004 shortly, but does anyone doubt this will be the 9th consecutive quarter with a net income loss, and a rather significant one at that?

Tenet’s Legal Exposure

This is the 800 pound gorilla that investors either wish to ignore, or have been talked into believing that somehow the government won’t be hard on Tenet.
We think this is wishful thinking. Tenet is a company with a felonious past, and is once again in serious trouble with numerous state and federal agencies and private litigants.
It takes 20 pages in the company’s last quarterly report (10Q) to describe these investigations and lawsuits.
How many other matters are there lurking just beneath the surface, or yet to be disclosed by the company? The very recent disclosure of state action against a Tenet hospital in Florida for serious mistreatment of psychiatric patients is a case in point. The real Tenet story has now come full circle, back to the starting point and the settlement of very similar patient abuse cases in 1994.

How Does One Value the Potential Liabilities of These Investigations and Lawsuits?

We calculate that Tenet received test .9 billion in excess Medicare outlier payments. Will the Justice Department determine that the misappropriation of outliers constituted fraud and seek treble damages? If not, then settlement of the outlier issue will involve a significantly less, but still a very substantial sum.
HCA paid test .7 billion to settle only multiple allegations of financial wrongdoing. Is it likely that the government will settle with Tenet for anything less? Given the additional allegations of wrongful deaths, patient injuries, and recidivist behavior, isn’t this especially so?
If the company is convicted in a rescheduled Alvarado trial, shareholders could face significant losses with hospital exclusions from Medicare.
Shareholders have suffered an economic loss of billion. If the recovery rate comes to a mere 3%, a settlement of the class action shareholder suits could represent a potential liability of 0 million.
Then there is the IRS claim of 3 million, plus additional audits for the fiscal years ended May 31, 1998 through the seven-month transition period ended December 31, 2002. Who knows what additional claims may come from the IRS?
Taking all of that into account, we believe future settlement costs, including both Medicare and non-Medicare items, could be in the range of to .5 billion, at a minimum. That does not count the estimated 5 million in government and private litigant settlements already paid since the scandals first erupted in late October 2002.
The total cost to shareholders could easily exceed billion.

Where Does the Company Go From Here?

In the past couple of months, Tenet’s liquidity has decreased from about test .8 billion to about 0 million in unrestricted cash.
In the first nine months of ’04, Tenet earned 8 in EBITDA from continuing operations. It is unlikely that full year 2004 will exceed 0 million.
Tenet has already said improvement in 2005 is unlikely. Many analysts expect 2005 EBITDA in the 0-0 million range, but a continuation of operating losses.
With annual cash interest expense of about 0 million and capital spending of 0 million, earning just 0-700 million means that the company will lose 0-0 million in cash in 2005. Changes in working capital may require another - million. Bottom line: Tenet could lose about 0-0 million in cash from operations alone in 2005.
Tenet expects to get a large tax refund and could gain some more cash by selling some of under performing hospitals (approximately 1/3 of all hospitals) beyond those in the current divestiture program. Obviously, the company could also try to sell even more bonds or other financial gimmicks.
Of course, there could be an attempt to sell the company. However, we do not believe there is a strategic buyer available to pay enough, given the sad performance and still evolving liabilities.

What Is the Most Likely Outcome?

In our view, 0 million in unrestricted cash plus the tax refunds and a small amount from the sale of the hospitals in the current divestiture program is wholly insufficient to fund all of the company’s legal issues, along with funding the continuing negative cash flow from operations. We believe that a financial restructuring is inevitable, sooner or later.
There is no guarantee that an attempted restructuring will be successful. It would be difficult to accomplish. Failing that, we believe a Chapter 11 bankruptcy in late ’06 or ’07 is a significant possibility.