Melissa Davis

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Tenet Transfer Extends L.A. Saga

Melissa Davis

Tenet (THC) has "transferred" three of its hospitals to a group of insiders.

The company announced late Tuesday that Centinela Freeman HealthSystem, which includes a pair of Tenet hospital CEOs, has won the bid for three west Los Angeles hospitals. However, the company failed to disclose terms of the deal -- suggesting to some that it may have turned the hospitals over for free.

"The use of the phrase 'transfer of assets' suggests that this is the first transaction likely to show minimal proceeds to THC," wrote Fulcrum analyst Sheryl Skolnick, who has a neutral rating on the stock. "We think, in other words, that this is the first transaction in which Tenet is essentially giving the assets away to avoid future costs."

The hospitals -- Centinela Hospital Medical Center, Daniel Freeman Memorial Hospital and Daniel Freeman Marina Hospital -- are among 27 that Tenet is trying to shed this year as part of a massive restructuring effort. But the company has disclosed estimated proceeds from other transactions, including one announced Tuesday along with the Los Angeles sale. The company said it expects to receive $33 million, including the liquidation of working capital, for its Doctors Hospital of Jefferson in Louisiana.

A local community group, which sought the Marina hospital for itself, suspects that Centinela Freeman HealthSystem secured the Los Angeles facilities for nothing as well. The group, known as We CAHRE (which stands for Community Action for Healthcare Reform and Education), claims it was stonewalled in its own efforts to negotiate for the very Marina hospital that it saved two years ago when Tenet tried to shut it down.

Instead, We CAHRE says, Tenet favored a group of insiders from the beginning. Centinela Freeman HealthSystem is being chaired by a longtime Centinela board member, Michael Finnegan, who is perhaps best known as the former CFO and real estate developer for Hollywood Park racetrack. The group has named Centinela CEO Michael Rembis as the chief of all three hospitals. And it will retain Daniel Freeman CEO Harris Koenig as its senior vice president.

For its part, Tenet called the deal "the best alternative for the hospitals and communities." It also indicated that it had treated We CAHRE appropriately.

"All interested parties had an equal and fair opportunity to enter the bidding process," Tenet spokesman Steven Campanini said. "We only considered bids we received; we did not receive a bid from that group."

But We CAHRE Executive Director Julie Inouye claims that Tenet "never let us get to first base" in the process. She says that Tenet ignored her group's request for information -- including a hospital prospectus -- that would have strengthened its ability to bid. Nevertheless, she says, We CAHRE persisted and was in the process of obtaining $10 million to fund operations at Marina when Tuesday's deal was announced.

Meanwhile, the newly named Centinela Freeman HealthSystem -- which has been in negotiations with Tenet for months -- managed to arrange backing from local private investment firm Westridge Capital. It will now seek the remaining capital necessary from members of its own group.

Although neither party has disclosed terms of the deal, Finnigan himself indicated that his group's funds will be used to operate -- rather than buy -- the hospitals. He told TheStreet.com on Wednesday that the group is simply raising the money necessary to run the hospitals sufficiently. And he is confident the group will succeed.

"This will be very soundly financed," he assured. "We're not concerned about whether there will be sufficient funds."

But Inouye is skeptical. During the negotiation process, the group sent out emails saying that it needed $20 million to start operating all three hospitals. Inouye says that Tenet indicated that Marina -- by far the smallest of the three facilities -- would require at least half that much by itself.

Some fear the group will take radical steps to secure any extra financing they need. Specifically, they worry the new owners will try to sell Marina to developers who are interested in the valuable real estate on which the hospital sits.

Indeed, a recent email from one Centinela Freeman HealthSystem insider hints at just that possibility.

"There has been scuttlebutt about Marina, vis-a-vis real estate options, keeping it until it can be developed vs. having a fancy day-surgery there," the email states.

But the new owners have emphatically stated that they plan to keep operating all three facilities, including Marina, as full-service hospitals with emergency rooms.

"Marina is just an excellent, growing, upscale community," Finnegan told TheStreet.com on Wednesday. "It's the perfect place for a hospital. ... [And Marina] is the only hospital there."

Still, locals haven't forgotten that Tenet tried to shut down the hospital, anyway. And some feel they have little reason to trust new owners with ties to that same company.

Skolnick foresees a possible backlash.

"There is still [apparently] no love lost between some community members and the administrators of these facilities," she wrote. "This could give rise to further community activism."

But Brandon Edwards, a spokesman for the new owners, described the pending arrangement as an "interesting" and "dynamic" one. He believes the hospital CEOs are well-equipped to operate the facilities they will soon partly own.

"They know everything that goes on with those hospitals," he explained. "So there will be fewer surprises."

Certainly, they understand that all three hospitals are under investigation by the government. The probes, seeking evidence of illegal physician kickbacks, began last year when both administrators were at the helm of the facilities. Those investigations follow on the heels of an ongoing criminal probe of another Tenet hospital, Alvarado Hospital Medical Center in San Diego, where both men previously served as senior executives.

By now, the feds are examining physician relationships at a number of Tenet facilities. The company disclosed just Wednesday, for example, that prosecutors are now seeking information about its San Ramon Regional Medical Center in San Francisco. Still, Tenet continues to maintain that its arrangements with physicians have always been appropriate despite the mounting government scrutiny.

Meanwhile, other members of Centinela Freeman HealthSystem are possible targets of the government as well. The Los Angeles Business Journal reported earlier this year that Apex Cardiology Consultants -- a high-profile practice at Centinela -- has fielded a subpoena and appears to be the focus of an investigation by federal prosecutors. At least two members of that busy cardiology practice are among the group now buying the three L.A. hospitals, based on past emails sent out by Finnigan.

Still, Finnigan himself claimed he didn't know whether Apex is participating in the deal or not. But Edwards at least took a guess.

"I honestly don't know," he said. "But I suspect that they are."

For a variety of reasons, We CAHRE now has fresh worries about the hospital it once saved.

"We will continue to monitor the situation along with other healthcare advocates," Inouye pledged, "as we continue to vie for the Daniel Freeman Marina Hospital."

Skolnick, for one, has already hinted at a possible fight ahead.

"This saga," she declared on Wednesday, "may not be over yet."