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Tenet

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shouldn't expect any miracle cures from its newest CEO.

Trevor Fetter, elevated this week from interim to permanent CEO, reminded analysts Wednesday that Tenet remains "a company that's in transition with very significant challenges." In his first public appearance in a while, held just a day after his position became permanent, Fetter told investors at a Banc of America Securities conference that he must first stabilize the company and work through legal and regulatory hurdles before he can focus on future growth. For now, he said, the company continues to struggle.

"In a word, I would describe Tenet's current situation as stabilizing," he said. "The near term will continue to be difficult."

Indeed, Fetter pointed to just one major bright spot in Tenet's recent performance. Despite headline-grabbing scandals, the company managed to grow hospital admissions by its normal 2% in the first half of 2003. But the company's profits nevertheless tumbled. Hit by the loss of special Medicare "outlier" payments -- which fueled much of the company's past growth -- and tougher contracts with private insurers, Tenet has found itself barely scraping by instead of swimming in the rich cash flow of yesterday. As a result, the company has turned to asset sales and aggressive cost-cutting in an effort to regain its financial footing.

Ultimately, Fetter believes Tenet can recover and capitalize on opportunities to serve aging baby boomers who will soon form "the largest elderly generation in history." And Banc of America, which counts Tenet as a client, considers it "fascinating" to think about the progress Tenet could make over the next year alone.

Something to Chew On

But for now, Tenet is dogged by very real problems that even Fetter himself describes as "unacceptable."

Most notably, Tenet faces a slew of patient lawsuits and government probes for allegedly performing unnecessary surgeries and bilking government-insurance programs. Already, the company agreed to pay what prosecutors called a record-breaking $54 million fine to limit its financial exposure at a single facility in Redding, Calif. But the company has since learned that the hospital -- once its most profitable -- could soon lose the Medicare funding that keeps it going.

Fetter acknowledged that the Redding settlement, celebrated by the market last month, didn't end the company's problems.

It was "a very important step," he said. But "you should realize the settlement with one entity ... doesn't mean the matter is entirely behind the company."

Beyond the $54 million fine and possible Medicare cutoff, Tenet also faces potentially huge payments to hundreds of Redding patients and survivors who are now suing the company. Jim Moriarty, a Houston attorney who has won big awards against Tenet before, estimates the company's exposure from Redding at around $1 billion. And Tenet isn't necessarily braced for such a hit.

"Actually, you're not able to reserve against litigation the way you were able to" in the past, CFO Stephen Farber told analysts, when questioned about the matter on Wednesday. "There are no reserves on the balance sheet for those."

Tenet also fielded questions about more executive changes going forward. As interim CEO -- presiding over an especially troubled company -- Fetter admitted that he'd faced difficulty "recruiting outstanding people for some key positions." But he expects that job to get easier with his permanent title in place.

Fatback

In the meantime, Fetter said, Tenet has shed a number of high-ranking positions as it works to cut overhead.

"More than one-third of the executives in our 2002 annual report have either retired or resigned," he said.

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One of those appears to be a senior executive who, together with Fetter, rejoined the company months ago as part of a rebuilding process. Tenet's Web site no longer lists Michael Focht -- a retired Tenet president who came back as executive vice chairman -- among its leaders. Earlier, when Focht returned in January, Tenet had pointed to the company veteran as a key player in what could be a two-year turnaround plan.

"Mike has the experience and perspective to be uniquely constructive in helping us accomplish our objective to get these issues behind us," Fetter said at the time. "He enjoys the trust and respect of our board, our management and many of our external constituents who have dealt with him in the past."

Tenet, which has not formally announced Focht's departure, did not return a phone call from

TheStreet.com

questioning his apparent absence. The company's silence contrasts sharply with the warm farewell afforded Focht when he first left the company in 1999.

"Long before it became a hot topic, Mike understood that it was essential to build a corporate culture that emphasizes ethics," said Jeffrey Barbakow, ousted this year as Tenet's CEO. "Tenet owes Mike a great debt for his leadership in this area."

But outsiders have challenged Focht's ethics. Some eight years ago, an Australian senator testified that a physician there had produced voluminous evidence raising concerns about Focht's behavior. Michael Wynne, a Queensland surgeon, helped push Tenet out of the country after documenting apparent ethical violations by Focht and other Tenet leaders.

Wynne "is particularly concerned ... because Focht is now in overall charge of Tenet's compliance program," the senator stated. "The welfare of patients in Tenet's hospitals will depend on the integrity which Focht displays."

Clean Sweep

M. Lee Pearce, a Florida physician who chairs the Tenet Shareholder Committee, has been calling for sweeping management changes for months. Although the company has already replaced a number of key people -- including its CEO, CFO and operating chief -- it continues to employ many of the same leaders who have steered the company through rocky waters before.

Perhaps most notably, it has held on to the senior executive who, until recently, held the conflicting roles of lead counsel and chief compliance officer. Christi Sulzbach continues to serve as lead counsel despite alleged violations of an old government settlement that she actually helped arrange.

In late June -- after Tenet stunned the market with dismal projections -- Pearce singled out holdovers like Sulzbach for particularly harsh punishment.

"It is time for Mr. Barbakow's prot¿g¿

Fetter to go, along with Michael Focht and Christi Sulzbach," Pearce said. "It is apparent that the primary objective of top management is to ensure its own survival. ... How long will the board support this failed management team?"

Fetter, for one, couldn't ask for much stronger support. Edward Kangas, Tenet's nonexecutive chairman, has already showered the new CEO with praises.

"I have come to know Trevor as a person of great talent and integrity," Kangas said, "with the ability to lead the rebuilding of Tenet on a foundation of ethics, quality, service and compliance."

The market was less enthusiastic. Tenet shares -- expected to jump if an outsider was hired -- inched up just 11 cents to $15.22 on news of Fetter's appointment.