Hospital Chain’s Critics Call Recovery Incomplete

Aug 6, 2000
New York Times

By KATHLEEN SHARP

AS he built the nation’s second-largest hospital chain and achieved stellar profits in a battered industry, Jeffrey C. Barbakow, the chief executive of the Tenet Healthcare Corporation, has taken a lot of heat. Over the last seven years, people from Philadelphia to Los Angeles have watched Tenet buy their community hospitals, streamline operations and cut back on staff. Labor relations have suffered. Union leaders and some public health advocates question whether Mr. Barbakow’s economizing will harm patient care, especially for the poor.

Mr. Barbakow says the financial skills he honed in a career outside the hospital business have let him improve Tenet’s performance for shareholders and patients alike. But his mission now is to keep patients and employees as happy as he has Wall Street.

At the least, he has turned Tenet, formerly National Medical Enterprises, from one of the most scandal-ridden chains into one of the most admired among its peers and on Wall Street. Since he took over in 1993, Tenet’s revenue has grown fivefold, to $11 billion a year. After four years of erratic earnings, Tenet reported a 20 percent jump in profits for the year that ended May 31, to $302 million, and its stock price has doubled in the last year.

Many analysts say they think that its days of draconian cutbacks are over. ”Tenet’s operating performance has been extremely good in a tough environment,” said John Hindelong of Donaldson, Lufkin & Jenrette. ”It could help undo the damage to the reputation of for-profit hospitals.”

As hospital reimbursements have shrunk, especially from Medicare, hospitals have lost either money or integrity. The nation’s largest hospital chain, Columbia/HCA, paid $745 million this spring to settle the government’s charges that it defrauded Medicare.

Tenet itself has problems in its history. Its predecessor, National Medical Enterprises, owned the second-largest chain of psychiatric hospitals when Mr. Barbakow became a company director in 1991. At the time, former patients contended that employees had routinely restrained and drugged them in order to loot their insurance funds. In 1993, not long after Mr. Barbakow was hired as chief executive, F.B.I. agents arrived one morning and seized company records.

Over the next two years, the company paid more than $600 million in legal settlements, agreed to install a hot line for employees to report abuses and started ethics training. In 1995, the company changed its name to Tenet and next year moved from Santa Monica, Calif., to Santa Barbara, where Mr. Barbakow already had a home. BUT in trying to rebuild his company, Mr. Barbakow faced employees who already suspected him of being in it only for the money. They recalled how Mr. Barbakow, a former investment banker, spent two years in the late 1980′s helping Kirk Kerkorian, the financier and deal maker, sell his troubled MGM/UA Studio. Even though the sale unraveled, Mr. Barbakow pocketed $20 million. ”He’s a junk-bond salesman who’s interested in fees,” said Jorge Rodriguez, an officer of the Service Employees International Union, Local 399, of Los Angeles.

After taking over at Tenet, Mr. Barbakow shed psychiatric hospitals and focused on acute care. He also consolidated Tenet’s purchasing, saving millions of dollars.

Then Mr. Barbakow acquired weaker chains, like American Medical International in 1995, and OrNda Healthcorp in 1997. He sold or closed unprofitable hospitals, some with occupancy rates as low as 20 percent.

The closings forced some patients to travel farther and required some urban hospitals to absorb more emergency room visitors.

”We often lose access to care for the people who need it most,” said Dr. Michael Cousineau, a professor of health administration at the University of Southern California. ”But it’s part of the industry’s consolidation trend.” Tenet, in response, says it has increased charity care at some hospitals.

But cases of business practices run amok continue to recur. In 1998, doctors at two Tenet hospitals in California refused to give poor women epidurals to relieve their labor pains unless they each paid $400 in cash. Tenet, which confirmed the episode, reprimanded the doctors.

In St. Louis, an uninsured patient at Lutheran Medical Center, a Tenet facility, was refused a $1,250 operation in 1997 for endometriosis, a condition of the uterus that threatens fertility. Lacking the credit to qualify for even a hospital loan, she borrowed a down payment from her grandmother.

When Tenet tried to buy the prestigious St. Louis University Medical Center that year, Archbishop Justin Rigali opposed it, saying, ”The poor will pay the price.” Likewise, when Tenet wanted to buy the Queen of Angels/Hollywood Presbyterian Medical Center in California, Cardinal Roger Mahoney threatened to go to the pope.

Mr. Barbakow persevered and bought both hospitals. ”You have to fight the battle every time you enter a community, and show people that you are going to do the right thing,” he said.

Lately, Tenet has at times even been seen as a savior. The Allegheny Health, Education and Research Foundation, with eight nonprofit hospitals in Philadelphia, had lost $2.5 billion and was about to fold in 1998. Gov. Tom Ridge lobbied for Tenet’s $345 million purchase, which was completed late that year. Tenet immediately began cutting expenses like golf club memberships for some Allegheny officers and trustees.

Medicare cutbacks have forced Tenet to reduce costs more broadly by laying off administrative staff, subcontracting janitorial services and selling 17 hospitals last year, leaving 110.

To achieve growth, Tenet is looking to the Internet. The company has invested $37 million in Internet start-ups, mostly related to health care, and realized $73 million in gains. ”We got lucky in the beginning,” Mr. Barbakow said.

Tenet was also co-founder of Broadlane.com, which hospitals can use to buy supplies, compare vendors and track orders. Not yet a year old, Broadlane, which plans to go public, has contracts with about 2,500 hospitals that buy $7 billion in supplies.

Tenet employees, however, say the company is not sharing the wealth. Earlier this year, union negotiations between Tenet and Massachusetts Nursing Association members in Worcester stalled over mandatory double shifts two times a quarter. The nurses went on strike, and Tenet hired expensive replacements.

After nearly two months, Gov. Paul Cellucci and Senator Edward M. Kennedy forced the parties back to the bargaining table. In a new contract, the nurses agreed to work some overtime, but only voluntarily. ”Now, it seems that Tenet is more interested in working with us,” said a union spokesman, David Schildmeier.

IN California, the nurses’ union in Tenet’s hospital in San Luis Obispo, formed in 1995, struck last year for the third time before winning its first contract. The nurses’ union at its hospital in Palm Springs picketed this year and won 3 percent raises. ”Tenet consistently prolongs negotiations, provokes nurses into striking and refuses to have discussions with us about patient care,” said Rose Ann DeMoro, executive director of the California Nurses Association. ”It’s almost their policy.”

Mr. Barbakow, however, says that keeping his staff satisfied and productive is his top priority. ”Now we need to make sure that all of our employees are doing the best possible jobs, that they’re happy and they focus on quality and service,” he said. ”Everything else flows from that.” He cites new management training for supervisors and an online educational system that employees can use to obtain degrees from Tenet’s many academic hospitals.

Employees, however, are no longer willing to accept Tenet’s contention that it cannot afford to give them more control and better pay. Despite the Medicare cutbacks, Tenet is doing so well that Mr. Barbakow, besides receiving $1.8 million in compensation last year, also received stock options worth $26 million. His pay has become a target for union leaders and public health advocates. It is a sensitive topic for Mr. Barbakow, who dismisses the required calculations of his options’ value as unfair because they vest over three years, and adds, ”It’s embarrassing.”

But Mr. Barbakow works in an industry in which an embarrassment of riches is hard to find these days.

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