Prescription for profit: Tenet Healthcare boosts revenues, influence by adding patient services.

To know what makes Tenet Healthcare Corp. tick, go to the neonatal intensive care unit at Queen of Angels Hollywood Presbyterian Medical Center.

The room has an expanse of bassinets connected to a bewildering array of tubes and wires. In one corner, a nurse feeds a tiny premature newborn. In another, workers confer in urgent whispers.

But there's a problem. The place is too busy. It's packed with 15 babies needing the kind of costly care only a unit like this can offer. That limits operations at the obstetrics unit downstairs, which may need to transfer ill babies to intensive care. The obstetrics unit is already one of the two busiest in the county, where some 6,000 babies were born last year.

So what's Tenet doing? It's seeking state permission to expand and modernize the unit, doubling its capacity to 30 beds, a multi-million dollar project.

All this at a hospital that health care activists and the Archdiocese of Los Angeles fought to keep out of Tenet's hands before it was purchased for $86 million in 1998 from a non-profit operator. They feared that for-profit Tenet, with a reputation as a cost cutter and consolidator, would wield its ax.

But Tenet executives say those fears display a misunderstanding of the hospital company's strategy for boosting earnings -- growing admissions through the addition, not closure, of operations, even in neighborhoods where government programs fund most of the care.

"I think that we have convinced a lot of skeptics," says senior vice president Gustavo Valdespino, who oversees the hospital and eight others in his region. "We have carried on the commitment to the community."

Tenet has not convinced all the skeptics, but the Santa Barbara-based system, the second largest in the nation with 116 hospitals, is the envy of the industry -- and the dominant player in Southern California.

It operates 34 hospitals in the region, including 18 in the county, most recently purchasing the two Daniel Freeman hospitals in Inglewood and Marina del Rey for $55 million from nonprofit Carondelet Health System of St. Louis.

Tenet also has become a Wall Street darling, having most recently reported a 43 percent jump in earnings for its third quarter ended Feb. 28 -- the ninth consecutive quarter the company has reported earnings per share growth from operations of at least 20 percent. Last week, its stock hit a 52-week high of $71, far outperforming its peers.

Troubled beginning

Tenet rose from the ashes of National Medical Enterprises, which operated a handful of hospitals in the county and was the second largest operator of psychiatric hospitals nationwide. But it was a mess, reeling under accusations that psychiatric patients were drugged and their insurance funds looted. The result was scores of lawsuits and a government investigation.

Jeffrey Barbakow, a former investment banker and corporate director, took over in 1993 and cleaned house. He also sold off psychiatric hospitals to fund what eventually totaled $600 million in legal settlements -- as well as to ready the chain for sale as an operator of general acute care hospitals.

He never went through with it after taking a closer look at the industry. "We began to understand the marketplace a little more and understand the possibilities," he says now. "We decided to form Tenet and go from there."

In 1995, NME merged with American Medical International to form Tenet. The move gave Tenet a dozen Southern California hospitals, but it did not become a major player until 1997, when it merged with OrNda Healthcorp, another consolidator. Suddenly, the company had over 130 hospitals -- later pared to 110 after a bunch of smaller, money-losing facilities were sold off or closed.

But Tenet was onto something else. It got out of a half dozen sidelights, including dialysis and home health, to focus on its core business of running hospitals, beefing up services, and forming what it calls high quality "integrated delivery systems." And it did it before many others in the industry.

"There was a focus on the hospitals themselves," says Charles B. Lynch, an analyst with CIBC World Markets. "There was a realization it was physicians that drive hospitals admissions. Increase your capital spending and really cater to physician's needs."

As a hospital acquirer and consolidator, Tenet always sought to gain regional market share that would give it bargaining power to extract higher payments from managed care insurers. And that has been a major part of its success, recently earning the company reported price increases from insurers of 6 percent.

It also uses its heft to significantly lower purchasing costs for both routine supplies and advanced equipment, such as $1 million CT scanners that can take detailed images of internal organs. Tenet may order a dozen from a single supplier.

System of networks

Another keystone is establishing networks in which certain hospitals specialize in particular services to become regional "centers of excellence." These centers handle cardiology, neurology and orthopedics, and while they are expensive to set up, the future payoff is assured, given the 83 million baby boomers are aged 37 to 54. "In your 50s you start using them more than when you are younger and it goes on from there," Barbakow says.

The company is spending $600 million this year on its centers of excellence and other service upgrades, an amount it plans to increase to $700 million next year.

When Tenet acquired Centinela Hospital Medical Center in 1997, the Inglewood facility had a second-rate cardiology program. Nearby Daniel Freeman had dominated those services, but the money-losing hospital was lagging. So Tenet opened the Tommy Lasorda Heart Institute at Centinela and has pumped $14 million into the heart program, where open heart surgery is now performed. To run it, Tenet found Dr. Robert Chesne, who was chief of Freeman's cardiology program for 28 years.

"When I came here I was worried about going from a non-profit to a for-profit," Chesne says. "I heard Tenet cut costs. They get rid of people. They do things to the bare bones. All they want to do is close down hospitals."

Instead, he found a company with loads of cash and willing to spend, but also one that demanded efficiency. "They run it like a business and in this day medicine has to be run like a business," he says.

Tenet buys Freeman

When Carondolet put Daniel Freeman on the market last year, Tenet snapped up the hospital. It is closing down the advanced cardiac services unit, and further expanding Centinela's, less than two miles away.

Ted Schreck, the senior vice president who oversees the two hospitals, notes that Freeman likely will see its own expansions, perhaps in its still vaunted rehabilitation program. And now that two Tenet hospitals are so close to each other, the company may buy a multi-million dollar positron emission tomography scanner, something one hospital alone could not support.

"That's where it gets interesting," he says. PET scans can take advanced, non-invasive images of the brain.

Tenet is also planning to spend $100 million to double the size of USC University Hospital, the research and teaching hospital that it operates for USC's Keck School of Medicine, where all of Tenet's organ transplants and other very advanced procedures are done in the Los Angeles area.

Tenet's approach has won over some former critics, such as Sister Carolita Hart, who is director of health affairs for the Los Angeles Archdiocese.

She recently met with Freeman's new management team and is convinced that the centers of excellence strategy make sense in an era of competitive and costly health care. "You really cannot afford to have services duplicated," she says.

Moreover, she has been happily surprised by Queen of Angels, where she feared charity care would be compromised but believes the company is living up to a promise of spending $15 million annually on it.

But such praise is not universal.

Michael Cousineau, a professor at USC who studies health care access and financing, said Northeast Pasadena lost an important resource when Tenet closed St. Luke Medical Center, a money-losing hospital that it picked up in the 1997 OrNda deal. Spokesman Harry Anderson says the 68-year-old facility was isolated from other Tenet properties and had become a relic, with no fully private rooms. Moreover, it would have to be essentially rebuilt to meet state earthquake standards.

"The only place they can now go is Huntington Memorial (Hospital) or the county," gripes Cousineau.

Plus, there are fears that the only hospital Tenet really wanted in the Daniel Freeman purchase was the Inglewood site, not the far smaller Marina facility. Tenet acknowledges it has not made a decision on that hospital, which may be more valuable for its real estate.

Tenet, which is largely non-unionized, also is at odds with nurses who have been trying to organize its facilities. Its tough stance at Garfield Medical Center drew a hearing by state Sen. Gloria Romero, D-Los Angeles, during which nurses testified that labor shortages at the hospital were compromising care. And just this month the United Nurses Association of California filed suit against the company claiming it systematically understaffed registered nurses and failed to pay them for legal work breaks.

"Tenet's well known hostility to registered nurses and hospital staff forming unions hurts patients and workers alike," said Maura Kealey, health care coordinator for the Service Employees International Union, which is attempting to organize Garfield and is not associated with United Nurses.

Barbakow counters that the labor troubles are coming from the union, which is taking advantage of a statewide nursing shortage. He says the company values its employees and must keep them happy to have good patient care and meet profit goals.

Finally, questions remain over Tenet's commitment to charity care.

Lark Galloway-Gilliam, executive director of the Community Health Council, a health care advocacy group, said she has heard that bill collectors have hounded patients, and the company acknowledges that executive pay is partially based on the ability to collect bills on time.

But Tenet executives make a distinction between true charity care, which involves not charging people who can't pay, and seeking payments from private parties without insurance who have the ability to pay. Barbakow, who this year cashed in stock options worth $111 million, stresses that executive pay is based on a broad range of criteria, not just financial returns but services and ethical decision-making.

Cousineau acknowledges that Tenet is not quite the bad operator he feared before its takeover of Queen of Angels and he believes the distinction between for-profit and non-profit health care is being lost. But he has fears.

"Health care for the poor is always being provided by the private sector on the margin. I still worry what Tenet will do to preserve the bottom line when the bubble bursts," he says.

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Revenues (millions)

Primary business: Second largest hospital operator nationwide with 116 facilities and over 28,000 beds in 17 states, with largest concentration in California.

Headquarters: Santa Barbara 

Quarterly Net Income (millions)

CEO: Jeffrey C. Barbakow

Market Cap: $22.1 billion

Local holdings: 34 acute general care hospitals in Southern California, including 18 in Los Angeles County