Copyright 2002 TheStreet.com, Inc.
 
TheStreet.com
November 14, 2002 Thursday
 
Insider Sales Cloud the Tenet Tale
 
By Melissa Davis, Staff Reporter
 
Tenet (THC:NYSE) insiders have been blessed with more luck than some of the
hospital chain's unfortunate patients.
 
A number of officers and directors at Santa Barbara, Calif.-based Tenet
pulled off the stock market equivalent of a medical miracle this year, some
of them selling their Tenet shares just weeks before the company took a
drastic turn for the worse. Moreover, they claim to have done so without noticing
any troubling symptoms at Tenet.
 
But by October's end, Tenet's ills would be on display for all to see.
Reports of unnecessary surgeries at one Tenet hospital and aggressive
Medicare billing at others shocked Wall Street. Prominent executive departures and
sharp analyst downgrades followed, amid rising concerns about where Tenet would
find earnings growth. The company's shares, which traded for $50 as recently as
Halloween, have lost two-thirds of their market value in just two weeks.
 
Lucky for insiders such as former Sen. Bob Kerrey, now a Tenet director,
the fall hasn't been equally painful for all Tenet investors. The Democrat from
Nebraska netted $850,000 selling Tenet stock in transactions on Oct. 4 and Oct.
8 -- and he wasn't even the biggest or the timeliest seller. Fellow
director Maurice DeWald, a former auditor and current chairman of a California
investment firm, sold $382,500 worth of Tenet stock eight days after Kerrey's last
transaction. And Tenet's operating chief made millions selling stock just a month before he left the company.
 
Despite their uncanny timing, the insiders stress that they were unaware
of any problems when they made their sales. "My financial adviser said I
should not hold any more than half of my options at any one time," said Kerrey. "So I
left half and sold half."
 
But now, with Tenet knee-deep in investigations and investors questioning
the credibility of a company that has come under fire before, the insider sales
give investors yet another reason to turn their backs on this already struggling
stock.
 
Tarnished Brass In some eyes the most jarring insider transactions came Oct.
4, the day of Kerrey's first stock sale. That was when then-Chief Operating
Officer Thomas Mackey unloaded 277,500 shares at $51.50 for a sweet gain of just
under $10 million. Roughly a month later -- the stock nearly sliced in half by
investigations and downgrades -- Mackey abruptly ended his 17-year tenure
with Tenet, retiring from his $3 million-a-year job at the age of 54.

Tenet CEO Jeffrey Barbakow explained the sudden departure of Mackey and
former CFO David Dennis, who followed Mackey out the door, by saying he'd
lost confidence in both men after learning about Tenet's heavy dependence on
aggressive Medicare pricing.
 
By this time, more than a month had passed since UBS Warburg analyst Ken
Weakley first raised questions about Tenet's Medicare payments. Those
questions, posed on Oct. 2, came two days before Mackey executed his $9.9 million
stock sale.

In Mackey's defense, Weakley has said his questions took on a specific
nature only after that transaction and that he never discussed the matter with
Mackey personally. Instead, Weakley said he broached the subject roughly a week
after Mackey's sale with then-CFO Dennis -- one of only two insiders who actually
bought Tenet stock (in nonoption transactions) this year.
 
Analysts have expressed similar faith in Barbakow's innocence. They
widely believe that Barbakow, who stirred controversy with a $111 million stock
sale in January, was oblivious to Tenet's questionable Medicare profits. Even so,
they take little comfort in that conclusion. 

Healthy Profits

Tenet Healthcare insiders have rung up nearly $140 million in profits by selling their

stock this year.

Date     Insider                                             Shares Sold      Profit
Jan. 9   Director Sanford Cloud                        2,500                   $109,000
Jan. 11  Exec V.P. Raymond Mathiasen             100,000                 4.82 million
Jan. 14  Director Michael Focht                        125,000                 5.38 million
Jan. 15  COO Thomas Mackey                          151,666                 6.75 million
Jan. 16  Chairman Jeffrey Barbakow                 2,000,000              111 million
April 4  Director Bernice Bratter                       5,000                    200,100
April 19 Director Van Honeycutt                       5,000                    178,100
Aug. 16  Honeycutt                                        7,500                   168,150
Aug. 19  Cloud                                              10,000                 360,000
Oct. 4   Director Robert Kerrey                         30,000                 638,400
Oct. 4   Mackey                                              277,500               9.92 million
Oct. 8   Kerrey                                               18,000               213,100
Oct. 16  Director Maurice DeWald                      7,500                 275,000


"We are troubled by [Barbakow's] apparent lack of awareness of the inner
workings of the company at which he is at the helm," Andreas Dirnagl, an

Analyst at Gerard Klauer Mattison, said when slashing his recommendation for the
stock from buy to sell last week. "We believe it raises questions as to Mr.
Barbakow's accountability."

Outside Detectives

Some outsiders, without Barbakow's unlimited access to company records,
figured out plenty about Tenet on their own. Researchers at Dartmouth
Medical School said they flagged the high surgery rate at Tenet's Redding Medical
Center -- now under federal investigation -- years ago. An ongoing study,
conducted by Dartmouth's Center for the Evaluative Clinical Sciences, showed that
Redding had the highest rate of heart bypass surgeries among Medicare beneficiaries in the 1990s. The hospital now ranks third in the nation, performing twice as many
of the lucrative heart procedures as a similar-size rival in the same area.
 
But a tip this summer from Catholic priest John Corapi, who escaped an
unnecessary heart bypass by minutes, could send that surgery rate plunging.
Building on Corapi's tip, the FBI recently launched a full-blown
investigation of Redding and two of its most prominent heart surgeons. That
investigation, if fruitful, could prove costly for America's second-largest hospital chain.

More than 150 Redding patients have died from invasive heart procedures
like the one Corapi nearly endured without reason. Already, up to 100 people
have contacted lawyers about joining Corapi in lawsuits against Tenet that could
seek more than $1 billion in damages.
 
So far, Tenet has attempted to downplay the matter as an isolated, if
serious, problem limited to Redding. And even researchers at Dartmouth,
who've labeled Redding's high surgery rate as noteworthy, are giving the company
the benefit of the doubt.
 
Megan Cooper, co-author of Dartmouth's study, said Tenet also operates
hospitals with sub-average surgery rates.
 
"There's no clear pattern here," Cooper said this week. "I just don't
think the evidence that Tenet is driving this [high surgery rate] is in the
data."
 
Stark Reminder
 
Still, analysts are wary.
 
"We suspect that there may be other units with powerful physicians who
may have run the business aggressively and might invite further scrutiny,"

Fulcrum analyst Sheryl Skolnick wrote in a research note this week. "We see a very
real risk that the investigation in Redding, Calif., could spread to the company itself."
 
The California Nurses Association has reported that Redding's "outlier"
payments -- Medicare reimbursements for costly procedures such as heart
surgeries -- are eight times the state average. Tenet as a whole collects
three times the national norm for such Medicare-funded procedures.
 
"Tenet is clearly far out of line with the nearly 6,000 other hospitals
in the U.S. and the other 500 hospitals in California," said nurses group
President Kay McVay.
 
The federal Health and Human Services Department is auditing Tenet for
possible Medicare violations. And Tenet itself has already promised to back
away from its aggressive pricing policies.
 
To analysts, that means up to 50% of Tenet's earnings growth -- all
attributable to outlier payments -- is suddenly at risk. Given the expected dive
in earnings and the potential for billions of dollars in liabilities,
Skolnick now believes that Tenet's stock is worth only $11.60 a share, even less
than its recent price of $15.
 
The stock hasn't traded that low since Tenet's fraud-riddled era as
National Medical Enterprises nearly a decade ago.
 
Rep. Pete Stark, a Democrat from California, warned last week that
history may be repeating itself.
 
"I fear that Tenet's relentless corporate strategy to increase profits by
providing and billing for more expensive medical services has improperly
influenced the practice of medicine and resulted in unnecessary and harmful
surgeries," Stark said in a recent press release. "I suspect that this audit is
just the tip of the iceberg and will ultimately reveal that, despite its new
name, Tenet is up to its old tricks."