More Travails for Tenet

The company's latest setback on the accounting front could put pressure on its CEO, some say.
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Tenet Healthcare

(THC) - Get Report

has taken yet another turn for the worse.

The ailing hospital chain now believes it will be unable to file its second-quarter report due to possible accounting irregularities in the past. At the request of the

Securities and Exchange Commission

-- which has been investigating the company for years -- Tenet has begun exploring allegations made by a former employee that three of its California hospitals improperly reported revenue in previous years.

Fulcrum Global Partners analyst Sheryl Skolnick, for one, is worried. Until the forensic accountants conclude their work, she notes, outside auditor KPMG will "understandably" refuse to certify any of Tenet's financial results. If the investigation stretches on, she adds, the company could find itself in violation of

New York Stock Exchange

rules and face the risk -- while remote -- of being delisted.

"We believe that some significant portions of the shareholder base would no longer be able to own THC shares if the company were not in compliance with timely filing requirements," Skolnick wrote on Thursday. And "that could lead to significant selling pressure."

The stock already showed some weakness Thursday, tumbling 2.3% to $12.11.

CEO at Risk?

For its part, Tenet has portrayed its latest problem as a "legacy issue" that dates back to prior management.

But Peter Young, a business consultant at HealthCare Strategic Issues, suggests otherwise. After all, he points out, Tenet itself has said that it is examining accounting practices that took place "at least through fiscal year 2001." And none other than current CEO Trevor Fetter served as the company's CFO through March 2000.

Moreover, Young notes, Tenet's brand-new CFO, Robert S. Shapard, offered the only comments when disclosing the latest SEC development on Wednesday.

"I believe that to be an indication of Tenet's understanding of the exposure Mr. Fetter appears to face," Young says. "It appears Mr. Fetter may well have exposure issues and be a party of interest in the investigation."

So far, at least, Fetter has escaped the suspicion cast on other former executives because he had left by the time the company's questionable business strategy really took off. He returned to lead the company as CEO only after that strategy was exposed.

A Big Fix

Skolnick views the latest SEC development as reason enough to worry. Indeed, she questions whether investors truly grasp "the scope or gravity of the fix that THC is in."

Since April 2003, the SEC has been investigating whether Tenet properly disclosed its heavy reliance on extra payments -- known as Medicare outliers and managed care stop-losses -- under an aggressive pricing scheme that significantly boosted results. More recently, in April of this year, the SEC served both the company and a slew of its former executives with Wells notices indicating that it intends to pursue civil enforcement actions over the disclosure matter.

Now, the SEC has found itself focusing on new allegations related to the same alleged scheme. Specifically, the agency is questioning whether some Tenet hospitals recorded excessive "contractual allowances" -- or discounts for managed care companies -- in certain periods and then released the extra reserves in a manner that boosted results later on.

Under Tenet's old pricing strategy, Skolnick notes, the company's high charges could have triggered stop-loss payments that offset some of the reserves needed to cover managed care discounts. Those unnecessary reserves, she says, would then increase revenue down the road.

To be fair, Skolnick says that other hospital companies could encounter the same problem. Notably, she points out that hospitals simply estimate contractual allowances when figuring their net revenue.

"Essentially, the issue is this: Net revenue is a made-up number for every hospital company," she says.

Still, Skolnick stops far short of including Tenet in an ordinary crowd. She notes that Tenet has now spent three years on a turnaround effort that has regularly brought setbacks along with progress. She highlights the new SEC development as simply the latest example.

Moreover, Skolnick reminds, Tenet must deal with its own challenges even as it struggles to operate in an industry environment that's already tough enough.

"The latest twist in the THC story should serve as notice to the Street that all of the risks at THC are not known, cannot be measured and therefore cannot be priced into the stock," she writes. "We reiterate our neutral rating but strongly caution investors that the risk parameters of these shares have, in our view, changed for the worse."