Investors welcomed the resignation of Tenet Healthcare's ( THC) chief executive on Tuesday, but analysts say the company's troubles are far from over. Shares of Tenet Healthcare rose 75 cents, or almost 5%, to $16.30 after CEO Jeffrey Barbakow announced that he would step down. The U.S. hospital chain said its president, Trevor Fetter, would serve as interim chief executive while the firm looks for a replacement. Fetter resigned as CEO of Broadlane, a Tenet spinoff, in November. Calls for Barbakow's resignation had grown louder in recent months after the firm became the target of government investigations into its billing practices and doctor conduct. Last month, Barbakow announced that he would step down as chairman, and in November both the chief financial officer and chief operating officer said they were leaving the company as shareholder discontent reached a fever pitch. Tenet's stock plunged 61% from Oct. 30 to Nov. 8. While the shift in management is a good first step, analysts say the outlook for Tenet's stock remains cloudy. "The precipitating event for all the management leaving is still with the company," said Robert Mains, an analyst at Advest. "That is the controversy about the use of Medicare outlier payments to increase revenues." Advest has no banking relationship with Tenet. The Justice Department filed suit against the firm earlier this year, accusing it of submitting fraudulent claims and overcharging the government in an attempt to boost its revenue. A change in Tenet's pricing strategy, which started in January, led to a first-quarter loss of $20 million, reversing a strong profit of $278 million a year ago. Mains said there are other issues also hanging over the stock. The Justice Department currently is investigating two doctors at a Tenet hospital in Redding, Calif., amid allegations they performed hundreds of unnecessary heart procedures. In addition, Tenet has been subpoenaed over agreements with a cancer clinic and physicians affiliated with various hospitals.
"All of those issues are going to be external forces on the company for a while," said Mains, adding that the company faces potentially adverse rulings in the future and could be forced to pay big fines or penalties. Jeffrey Hoffman, an analyst at Buckingham Research, agreed that "headline risk" would likely keep the pressure on Tenet's stock over the near term, but he believes the CEO resignation could help accelerate the Justice Department probes. (Buckingham is an independent research firm.) "Any kind of agreement between the company and the government to bring the current investigations to an end, I'd guess would have included
the CEO's needing to leave," he said. Hoffman also believes the stock may be undervalued on a fundamental basis. "The company's assets are still excellent and still essentially the same assets that it had when it was a $46 stock," he said. "I expect it to recover over the next couple of years." In a press release Tuesday, Tenet said Barbakow would receive "separation benefits under a previously executed agreement that is available to all company senior vice presidents and above under certain circumstances." Florida doctor and shareholder M. Lee Pearce had been pushing for Barbakow to resign for several years, but dissatisfaction took hold among a broader swath of investors over the past six months as the company became embroiled in scandal and as evidence surfaced that Barbakow had made large stock sales before Tenet's problems became public knowledge. "It's the right time for Tenet to have new top leadership with a demonstrated ability to address issues facing the company and restore the confidence of our investors," said new Tenet director Edward Kangas in a statement. "We have a strong balance sheet, incredibly dedicated employees and a talented management team led by Trevor Fetter."