Florida Physician Accuses Tenet Healthcare of Practicing ‘Wall Street Medicine’; Calls on Tenet Board to Remove Top Management And Improve Quality of Patient Care.

MIAMI — M. Lee Pearce, M.D., a Florida physician, shareholder activist and Chairman of the Tenet Shareholder Committee, today accused Tenet Healthcare’s top management of practicing “Wall Street Medicine,” at the expense of health care quality and patient safety in Tenet hospitals.

PR Newswire
December 9, 2002
Non-Management Members of Board of Directors
Tenet Healthcare Corporation
Dear:

Representative Pete Stark called it “Deja vu All Over Again.”
Unfortunately for the patients in Tenet facilities, he is only half right.
While Tenet’s current scandals share many of the characteristics of the
Columbia/HCA fraud, as directors of Tenet Healthcare Corporation, you need
to understand that there are, at least, three big differences:

1) The HCA Board quickly removed Rick Scott in July 1997, a move that
began the cleansing process at HCA, a process that the Tenet Board has
failed to initiate;
2) Because of Tenet’s reliance, in part, upon the alleged over
utilization of cardiac surgical procedures and its focus on the bottom
line, too many Tenet patients are dying, or experiencing unnecessary
morbidity;
3) The Sarbanes-Oxley Act did not exist and, therefore, was not a
standard against which the conduct of Columbia/HCA could be measured.
How many of the 167 deaths of Medicare patients at Redding under the care
of Drs. Moon and Realyvasquez were avoidable?(1) The allegations,
respecting the Redding Medical Center and the infection problem at Palm
Beach Gardens clearly demonstrate, if true, systematic failure of quality
controls at some of Tenet’s hospitals. How many more Tenet hospitals are
putting their patients at risk? How many people must die before the Board
puts an end to the current culture of profits over quality patient care? I
have been a licensed physician for over 47 years, and I’m appalled at the
apparent systemic disregard for public safety.

How much legal exposure for compensatory and punitive damages, both
corporate and personal, are you willing to accept before you take charge?
How much longer will you embrace Wall Street Medicine and its spurious
earnings to the detriment of quality care?

Two years ago, we asked to meet with the Board to discuss very serious
governance and quality of care issues.(2) As a direct result of CEO
Jeffrey Barbakow’s cavalier attitude and refusal to let us meet with you
to discuss these issues, We felt we had an obligation to take the issues
to the shareholders and the public. In that effort, we learned a valuable
lesson. Even though virtually everyone that we talked to agreed with us
in principle, few would vote against Tenet’s management, or non-
management, Board members with a rapidly rising stock price. However, in
my speech at the October 2000 annual meeting, I said, ” … win or lose,
we intend to remain vigilant in holding Tenet’s directors accountable to
its shareholders on economic issues, on the delivery of quality health
care, on the iron clad prevention of fraud and abuse, and on dramatically
improved corporate governance.” I’ve attached a copy of my speech as
Exhibit C for your convenience.

Today the tide has changed. No longer will prudent investors already
skeptical and scarred by Tenet’s financial chicanery, which resulted in a
loss of $15 billion in market value in just 45 days, ignore the truth for
the sake of a share price temporarily propped up by an imprudent stock
repurchase plan and forward financial projections which exclude likely
Medicare claims of overpayments, fines, malpractice and shareholder
judgments and settlements which could be in the billions of dollars.
Tenet won’t get a quick, inexpensive pass on the allegations arising from
these latest scandals. Senator Charles E. Grassley’s recent refusal to
sign off on the HCA settlement 5 1/2 years after the charges were leveled
against HCA makes this unambiguously clear.(3)

Even though the tide has changed, let me make this very clear: We don’t
expect anything from Tenet Healthcare, except to be a catalyst for change.
We said at that annual meeting that we would be watching. We have watched.
This is what we have found.

In 2002 alone, the United States has extracted payments from Tenet
Healthcare on 3 occasions.(4) With CMS’s press release of December 3rd, it
is apparent that Tenet will once again be making a payment to the Medicare
system.(5) How many times must the company be fined before the Board
realizes that the problems are endemic and systemic? How many people must
unnecessarily die because cardiac physicians and surgeons are allegedly
performing medically unnecessary procedures, or because hospitals such as
Palm Beach Gardens, it has been alleged, are not properly cleaned and
maintained?

If you conduct an investigation, independent from management, you will
probably find that these are not isolated incidents. The culture is
fundamentally flawed; as it provides too much incentive for physicians and
administrators to push profit goals over patient health. The biggest
difference between the era of Richard Eamer and the reign of Jeffrey
Barbakow is that you’ve allowed Mr. Barbakow to remain at the company;
despite either his complicity in the creation of the problems, or his
admitted ignorance of them.

Since the shareholder meeting in 2000, shareholders have seen their stock
value soar, then evaporate — while Mr. Barbakow took home $111 million in
stock option profits — profits built upon an unstable foundation of over
utilization of services and gaming Medicare. But Mr. Barbakow “didn’t
know,” or so he said again during the investor presentation on December 3,
2002. Remember the plaque on Harry Truman’s desk: “The Buck Stops Here”.
He didn’t know? The CEO of a $15 billion revenue company doesn’t know
that Tenet’s improved earnings were because the company nearly doubled its
prices at its California hospitals over a three-year period? You might
recall the chart book we produced two years ago when Mr. Barbakow and
several other directors were up for re-election (Exhibit F). This clearly
illustrated that Tenet had the worst financial performance of any publicly
traded hospital company.

During the middle of the proxy contest, results from the scheme,
implemented in FY 1999 according to management, to game Medicare,
miraculously appeared … miraculous results accelerated by gluttonous
outlier payments. On October 28, 2002 Ken Weekly published his UBS
Warburg report(6) which illuminated the damning evidence which showed
Tenet, a $15 billion revenue company is receiving 500% more in outlier
payments than its largest competitor, $20 billion a year HCA.

Now, after two years of smoke and mirrors and without the extraordinary
outlier payments, Mr. Barbakow admitted on December 3rd that the Company
continues to under-perform relative to its industry peers. In 2000 we
told you that Tenet was on a path of unsustainable growth. He didn’t
know? If he truly didn’t know, then such incompetence should neither be
embraced, nor rewarded. In this context, the recent article in Business
Week A Scandal Ridden Tenet Stands by its Man” is disturbing (Exhibit G).
We agree with Lynn Turner who stated in the article “If you have a CEO who
claims he doesn’t understand where his revenues and profits are coming
from, you need to change your CEO fast.”

If he did know, isn’t Tenet on the same slippery slope as Enron, Global
Crossing, WorldCom and Tyco? Does your CEO sound any more credible than
Ken Lay, Gary Winnick, Bernie Ebbers or Dennis Koslowski?

In all four cases, some fact was revealed and the CEO steadfastly told the
world that the company was not guilty, and that he “didn’t know.” In New
York, just after the UBS Warburg report clearly detailed the gaming of the
Medicare outlier payment system, Mr. Barbakow denied there was a problem.
The FBI raided a hospital. The Company waited nearly 24 hours to issue a
press release, and only after the raid became public on the Modern
Healthcare web site. It was reported this was done on the advice of
Tenet’s General Counsel. Still Mr. Barbakow saw no problem … this was
simply an isolated physician issue, he said. That first conference
call(7) was a masterpiece … slickly choreographed as if out of an MGM
movie. Then Mr. Barbakow sacrificed his two lieutenants(8), with the not
-so-subtle inference that it really was Mr. Mackey and Mr. Dennis that
caused the problems. Nevertheless, he maintained their and the company’s
innocence. If they did no wrong why were they purged? Was it to provide
Mr. Barbakow with the defense of plausible deniability?

The stock dropped precipitously as Mr. Barbakow tried to use his MGM magic
to convince analysts that Mr. Mackey and Mr. Dennis retired and resigned.
Wall Street saw through this ruse and now knows that the emperor has no
clothes. How long will it take the Board to figure this out?

When this is all done, we will see that the issue is NOT isolated to a
single hospital, NOT isolated to a couple of physicians, and that it IS
DIRECTLY related to a philosophy of Wall Street Medicine rather than a
focus on quality health care. Tenet figured out how to game the system,
and according to the FBI affidavit, it put patients’ lives at risk. Was
this done to generate illusory profits to prop up a stock price, and stave
off the defeat of Mr. Barbakow and the other directors who were up for re-
election in 2000?

Isn’t Tenet another Tyco? Tyco’s actions didn’t result in apparently
unnecessary death, pain and suffering. Tyco, like Tenet, is a company with
some level of fundamental value, but a company so embroiled in unethical,
and perhaps illegal, activity that a complete change of management is
needed now.

Predictably Tyco’s Board was slow to act and now they are all gone. We
urge you to review Exhibit H. It details the revelations, denials, and
results of Tyco’s very public problems. Tenet is either tightroping down
the sideline that separates legality from illegality, or careening out of
bounds like Tyco. Just because something may not be illegal, e.g. raising
prices nearly 100% during a 3 year period when the general rate of
inflation was not more than 3.5% annually, it is, nevertheless, improper,
unethical, unjustifiable and unacceptable conduct for a hospital company
which purports to be socially responsible.

Who at Tenet is imbued with the MORAL COMPASS needed to ensure that
quality health care is its primary duty, not financial gain based on
improper and even possibly fraudulent activities? How long will you allow
this misdirected focus to continue?

How long before Eliot Spitzer, California Attorney General Bill Lockyer,
or California Corporations Commissioner Demetrios Boutris take an interest
in Tenet? The Los Angeles Times has reported that the “California Health
Committee will open hearings in January to investigate whether Tenet and
other hospital chains charged health maintenance organizations too much
for services and drugs.”(9) Can Congress be far behind? When Congress
reconvenes in January, what better subject for the nightly news than to
grill the CEO of a “for profit” healthcare company before the cameras
about how he put profit ahead of the health of patients? Some of the
patients are among the approximately 40 million Americans who are
uninsured. The spokesman for some of these patients has said “… Tenet
treats human beings like Excel spread sheets …” by overcharging
uninsured patients and then aggressively seeking payment.(10)
The recurring problems at Tenet have been engendered by a corporate
culture that prioritizes illusory profits over patient care and a Board
which has, heretofore, abdicated its responsibility and condoned this
misordering of priorities. The non-management members of the Board must,
now, make management accountable.

The CEO and CFO gave written certifications that there are no untrue
statements of material fact or omissions of material facts necessary to
make the statements not misleading. They certified that the financial
statements and other financial information reported present fairly, in all
material respects, the financial condition of the company. Further, the
officers: were responsible for establishing and maintaining internal
controls, designed to ensure that material information is made known to
officers and that they have evaluated such controls; were obligated to
disclose to the auditors and audit committee all significant deficiencies
in internal controls, and; were required to disclose any fraud involving
management employees who have significant roles in internal control. The
officers were also required to certify that there were no significant
changes in internal controls subsequent to their evaluation date. Were
the officer certifications made on October 11, 2002 on form 10-Q false?
If so, you must hold management accountable.

The CEO and the former CFO appear to have made material
misrepresentations. Recent revelations about the outlier payments also
raise serious questions about Tenet’s compliance with federal securities
laws. The Company’s annual report on form 10-K stated, in each of the
last three years, that outlier payments in the following year will be
lower than the base year.(11) In view of the increased outlier payments
these statements were obviously untrue. It is also obviously material,
given the decline in the stock price when the correct information was made
public. Tenet also failed to disclose the importance of the outlier
payments to Tenet’s financial results. The intentional omission of key
information about outlier payments, and the material impact they make on
the company’s earnings (2002 outlier payments represented 5.4% of sales,
28.3% of EBITDA and 43.3% of pretax income) may subject the Company, its
officers and directors to corporate and perhaps even personal liability.
Grounds may exist for shareholders to demand the return of some or all of
Mr. Barbakow’s bonus payments and gains from stock option exercise, and
they may similarly make demands on other corporate officers and all
directors who have sold stock in the last three years. Recall that it was
the Board that approved the payment of $9.4 million in bonuses over the
past three years “for his contribution to the company’s exceptional
financial performance.”

Will you continue to rely upon the legal advice of Ms. Sulzbach? She has
the titles of General Counsel, Chief Compliance Officer and recently she
was promoted to Chief Corporate Officer. Do you not see the inherent
conflicts of interests? Shouldn’t the non-management Board members,
individually and collectively, consult with both their respective personal
counsel and independent counsel, free of any ties to management or Tenet,
hired to advise the non-management Board members as a body?

The average Tenet hospital (including the large university ones) does no
more than $130 million in net revenue. Yet the Redding hospital, in a
small community town, produced pre-tax income of $94 million.(12) Did
anyone ask Dr. Loop how Redding’s earnings compared to those of the
Cleveland Clinic, which probably earned little or nothing last year from
operations on revenues in the range of $2.8 billion? As noted by Mr.
Barbakow during the December 3rd investor conference many hospitals
operate on a 2% margin. Only the best performing hospitals operate at
even a 10% margin. How is it legally or ethically possible for Redding to
produce this level of earnings?

How is it possible that your internal auditors missed the fact that these
physicians were such huge admitters? Did Ms. Sulzbach, or anyone in
management, or on the Board ever question how it was possible to legally
and ethically do so much profitable business at Redding? Did anyone,
ever, question the medical necessity of this volume of procedures(13),
particularly after the hospital was contacted by patients asking questions
about these two physicians? How is it that medical experts from
California to New Hampshire believed, for a number of years, that Redding
had been “wild” for a long time and was being led by doctors described in
the medical vernacular as “cowboys” (doctors who aggressively offer
invasive procedures) and the Board didn’t see a problem?(14) How much did
the CEO at Redding receive in compensation?

During Ms. Sulzbach’s tenure as Chief Compliance Officer, the Company has
repeatedly paid the government for violations of Medicare billing, and is
now embroiled in allegations of over-utilization of surgery and other
cardiac services and allegations that Tenet nearly doubled its list prices
in three years in order to increase Medicare reimbursements. Does this
sound like someone who has done an effective job? Do you think she has
adequately protected patients from abuse, or shareholders from unnecessary
losses in shareholder value? Has management protected you from liability
by prompt and full disclosure of material facts, or exposed you to
liability by telling you only what they wanted you to know confident in
your indifference, and your silence?

Lack of credibility is a huge problem for you and your management team.
Why did you elect not to make good on the promises you made in 2000 to
Institutional Shareholder Services (ISS) and CalPers regarding board
governance:(15)

1) Increase the board by adding no less than two new independent
directors (two have left and two have been added for a net
change of zero);

2) Approve a change in the company’s charter to require
shareholder approval before approving a poison pill (not done);

3) Have the directors study the staggered board election and
provide a complete report to shareholders regarding their
decision (not done) and;

4) Create a governance committee to examine all of these issues
(not done).

Is the company going to appear before the CalPers investment committee on
December 16 to answer their questions?
We call upon the Tenet Board to do the following now:

1) Remove the senior management team that created a culture of over utilization, financial engineering and what we call Wall Street Medicine. Dr. Tommy Frist had the backbone to take the company back from the financial engineers. And as a result, HCA has been rebuilt into an ethical and financially strong company which rewards its patients with quality care and its shareholders with profits. It is time the management team including Mr. Barbakow, Ms. Sulzbach, Mr. Schochet and Mr. Fetter to leave. It is time to have hospital executives rather than MGM executives, investment bankers and financial engineers running Tenet’s hospitals. Name an interim and uncompromised healthcare executive with current hospital operating experience operating as CEO, and follow-up with a national search to bring someone with unimpeachable experience and integrity into the Company.

2) Appoint a qualified, independent special committee of the non- management Board members led by Dr. Floyd Loop and advised by counsel without any ties to management, or Tenet, to investigate past practices and review quality of care and utilization. While Mercer Consulting may be a fine group, we see nothing in their background to suggest that they can adequately determine if surgeries were necessary at Redding. Bring together independent cardiac and surgical experts from the Cleveland Clinic, the Mayo Clinic, Massachusetts General and Johns Hopkins to consult with the special committee and develop a plan to remedy the systemic problems at Tenet hospitals.

3) Independently investigate the inflated chargemaster and the resulting
extraordinary Medicare outlier payments.

4) Challenge management’s focus on illusory, short term profits at the
expense of quality health care. Saving lives, not saving management,
should be the Board’s objective.

5) Separate the duties of General Counsel, Chief Compliance Officer and
Chief Corporate Officer and appoint a physician to be Chief
Compliance Officer.

6) Add at least five new, truly independent directors to the Board. At
10 members, the Board is grossly understaffed to adequately review
and direct the operations of a $15 billion corporation.

7) Adopt a corporate policy of transparency and openness. Tell the truth
and let the market properly price the company’s securities.
At the recent Tenet presentations of December 3rd and 4th, all management
talked about was money, money, money, share repurchase plans and other
financial issues. The only proper way to save this company is to shift the
focus from money to quality of patient care.

It is time for the Board of Tenet Healthcare Corporation to stand up and
take back the company from a management team that has neglected its
duties, mislead its shareholders and omitted material information in its
statements to the public and to you, its Board. The culture of imperial
power that permeates the organization … epitomized by its resort town
headquarters, astounding bonus compensation, and $111 million in ill-
gotten profits from stock options must and will come to an end. We are
absolutely dedicated to making sure that the culture that allowed the over
utilization at Redding, that allowed the infections to continue at Palm
Beach Gardens, is changed. It must and will be done. How it is done is in
your hands. A new Tenet Corporation will be born out of these problems.
We hope that this Board will have courage to be at the forefront of the
change.

As promised, we will continue to watch. We expect that on or before
Thursday, December 12, 2002 at 12:00 noon EST there will be a public
announcement by the non-management members of the Board announcing the
formation of a special committee and the implementation of the action
items set forth above. Time is of the essence because lives, apparently,
are at risk.

Sincerely,
M. Lee Pearce, MD
Chairman
Tenet Shareholder Committee, L.L.C.

(1) FBI affidavit, page 14 (Exhibit A).
(2) Letter from Dr. Pearce on July 14, 2000 (Exhibit B)
(3) Wall Street Journal, November 20, 2002
(4) $29 million to settle Medicare false claims allegations related to
Palmetto General Hospital; $17 million to settle allegations of
overcharging multiple federal health care programs by 139 current or
former Tenet Hospitals, and; $9.75 million to settle allegations of
overcharging Medicare by Brotman Memorial Center. Department of
Justice Press Releases, June 18 and July 17, 2002
(5) Press release by CMS dated December 3, 2002 (Exhibit D)
(6) Research report dated October 30, 2002 by UBS Warburg (Exhibit E)
(7) November 1, 2002
(8) November 7, 2002
(9) Los Angeles Times December 5, 2002
(10) Kansas City Star September 13, 2002
(11) Form 10-K for fiscal year ended May 31, 2002, “CMS has proposed
substantially raising the cost threshold used to determine the cases
for which a hospital will receive Outlier Payments. The proposed
change in the cost threshold will substantially reduce total Outlier
Payments by reducing (a) the number of cases that qualify for Outlier
Payments and (b) the amount of Outlier Payments for cases that
continue to qualify.” Form 10-K for fiscal year ended May 31, 2001,
“CMS has proposed substantially raising the cost Tenet Healthcare,
outlier payments increased in fiscal 2002 from $564 million in fiscal
2001 to $763 million.”
(12) Los Angeles Times November 2, 2002
(13) San Francisco Chronicle November 2, 2002, and November 7, 2002
(14) San Francisco Chronicle November 2, 2002, and November 7, 2002
(15) Letter dated October 2, 2000 to Rich Furlauto of ISS from Ms. Christi
Sulzbach and Tenet Shareholder Committee Press Release dated October
5, 2000 (Exhibit I)

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