Overburdened

Tenet

(THC) - Get Report

is lightening its load.

The nation's second-largest hospital chain -- weighed down by government probes and patient lawsuits -- is shedding five profitable hospitals in an effort to raise cash and regain its financial strength. Tenet announced Monday that it expects to net $550 million from the sale of nonurban hospitals in Florida, Missouri and Tennessee.

Health Management Associates

(HMA)

, which ranks as one of the most profitable hospital chains in the country, is the buyer.

HMA assured the market that it had applied its "time-tested due diligence process" before inking a deal for facilities in Tenet's beleaguered chain. Together, the five rural hospitals generate roughly $400 million in annual patient revenue.

Stephens analyst Nancy Weaver said HMA is paying a "pretty fair price" for the facilities. "These hospitals are pretty profitable," said Weaver, who has an equal weight rating and a $10 price target on Tenet's stock.

Both Tenet and HMA inched up Monday on the news. Tenet climbed 17 cents to $14.85, while HMA tacked on 23 cents to hit $21.32.

Auction Block

Despite criticism from the Tenet Shareholder Committee -- which has grumbled about a drain on revenues -- Tenet is moving forward with plans to sell 14 hospitals that "no longer fit the company's core operating strategy." Since late last year, when its Medicare billing practices came under fire, the company has been searching for new ways to generate profits and regain its ability to grow.

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Acting CEO Trevor Fetter pointed to the five hospital sales -- and two pending ones -- as clear signs of progress. Together, the seven facilities are expected to bring 70% of the pretax profits the company hoped to generate from the entire divestiture program.

"We are very pleased with this transaction," Fetter said. "The value of this transaction reflects the excellent reputation for quality care of these hospitals."

One of those facilities, Seven Rivers Community Hospital of Crystal River, Fla., is located in a core state for Tenet. The hospital ranked as one of the nation's top 100 hospitals in an industry survey two years ago. But Tenet has decided to shed the rural hospital and focus on its 14 other Florida facilities -- including scandal-plagued Palm Beach Gardens Medical Center -- located in the southern part of the state. In a rare move last year, federal authorities nearly shut down Palm Beach Gardens because of serious infection control problems that have triggered more than 100 patient lawsuits.

Meanwhile, Tenet is parting with two hospitals each in both Missouri and Tennessee. Less than five years ago, Tenet paid $40.5 million -- and waged an expensive antitrust battle -- in an acquisition that created one of those hospitals, Three Rivers Healthcare System in Poplar Bluff, Mo. Since then, a large group of local doctors has joined forces with a Catholic hospital in an effort to bring a competitor to the market.

Leadership

Tenet is also selling its Twin Rivers Regional Medical Center in Kennett, Mo. Several of the divested hospitals -- and others on the block -- fall under the oversight of Stephen Corbeil, a Tenet vice president who previously served as CEO of the company's embattled hospital in Redding, Calif. Corbeil joined the Redding hospital, now accused of performing unnecessary heart surgeries, at a time when the facility began aggressively growing its cardiac business.

"In the early 1990s, Redding began to aggressively posture to become known as a top-ranked heart center," states an FBI affidavit, based on expert testimony. "From that point on ...

witnesses felt

cardiologist Chae Moon and the cardiology program at Redding were much too aggressive in their diagnosis and treatment of patients."

Redding recently paid a record-breaking $54 million fine to end its exposure to a government probe of the facility. Moon and another Redding cardiologist remain under investigation. Meanwhile, hundreds of former patients and survivors are pursuing lawsuits against Tenet, Redding and several of its heart surgeons. One plaintiff's attorney who has scored a big settlement against Tenet before estimates that the company will pay at least $1 billion to settle litigation at the Redding facility alone.

Faced with rising costs and dwindling profits, Tenet is pursuing asset sales as a way to regain financial stability. In addition to the hospitals in Florida and Missouri, Tenet is selling two Tennessee facilities known for aggressive pricing. The California Nurses Association rates both Harton Regional Medical Center of Tullahoma and University Medical Center of Lebanon among the 10 most expensive hospitals in Tennessee. The union -- an outspoken critic of Tenet -- also ranks Harton regional among the 100 most expensive hospitals in the nation. Tenet is selling Harton less than a year after pouring millions of dollars into an expansion of the hospital's emergency room.

The company is also in the process of selling a hospital in Philadelphia and another in Santa Ana, Calif. It is still seeking buyers for all four of its facilities in Arkansas and one each in Las Vegas and Texas.

The company, which originally planned to use proceeds from the sales to repurchase shares, has since abandoned its stock buybacks in favor of paying down debt. Once awash in rich cash flow, Tenet has been gushing red ink since the planned sales were first announced.