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Tenet Is Ordered to Pay $253 Million to Former Executive

A court rules that the hospital chain failed to honor his compensation contract 10 years ago.

October 31, 2003|Debora Vrana | Times Staff Writer

In another severe financial blow to Tenet Healthcare Corp., a California appeals court has ordered the hospital chain to pay $253 million to a former executive for allegedly failing to honor his compensation contract 10 years ago.

The amount of the judgment represents almost a third of Tenet's earnings for 2002. It posted a loss of $195 million in this year's second quarter on revenue of $3.38 billion.

Announced Thursday by Tenet, the judgment came just days after the Santa Barbara-based company told investors that its third-quarter earnings report would not meet forecasts because of a huge jump in uncollectable patient debts.

This latest hit to the company's finances -- Tenet said it would take the entire judgment as a one-time charge in the third quarter -- stunned analysts.

"This just came out of left field," said Andreas J. Dirnagl, a health-care analyst with Harris Nesbitt Gerard, a brokerage firm.

Tenet, which has been beset by government probes and lawsuits over its business practices, did not give any guidance Thursday on its third-quarter financials, set to be reported Nov. 11, or earnings further out. The company said it would seek a review of the ruling from the Los Angeles appellate court that issued the decision.

"We do not believe the evidence in this case justifies this huge award," said Gary W. Robinson, Tenet's deputy general counsel, in a statement.

Analysts said that it didn't look good for the nation's second-largest hospital chain. Given appellate courts' past practices, they said, it was unlikely the matter would be reviewed.

"The tunnel for Tenet just got longer and the light dimmer," said Sheryl Skolnick, a managing director at Fulcrum Global Partners in New York, which provides investor research.

The appellate court award stemmed from a lawsuit filed in 1993 by John C. Bedrosian, a co-founder of National Medical Enterprises Inc., Tenet's predecessor company, which was mired in a scandal over its psychiatric hospitals.

Bedrosian was fired in 1993 at the age of 58 as part of a housecleaning by former Chairman Jeffrey Barbakow, who sold the troubled psychiatric centers, changed the firm's name to Tenet Healthcare and led the rebuilding of the company.

Bedrosian alleged that Tenet breeched his contract because it failed to provide stock benefits owed to him. Last spring, after the case had spent years wending through courts and other delays, a Los Angeles County Superior Court awarded Bedrosian $9.2 million, based on a stock price of $19 a share.

But in its ruling Tuesday, the 2nd District Court of Appeals determined a much larger award on a higher stock price of $52.50 a share, plus $111 million in interest and adjustments for various stock splits since Bedrosian left the firm.

The $52.50 price was a high reached Oct. 3, 2002. By the end of the month, Tenet shares began a precipitous fall as revelations of inflated Medicare billings surfaced and other problems emerged.

Bedrosian now is a retired investor and lives in Los Angeles. His attorney, Richard E. Hodge of Santa Monica, said Thursday, "We have fought long and hard for justice, and we hope to maintain this just result."

Among Tenet analysts, some privately questioned how long the company could continue in its current form given the gravity of various investigations and its worsening financial picture.

In August, Tenet paid $54 million to resolve government allegations that doctors at its hospital in Redding performed numerous unnecessary heart operations.

Government investigators are still looking into the way Tenet recruits doctors at some hospitals and its Medicare billing practices.

Still, Tenet, which owns 112 hospitals nationwide, said recently that it had confirmed commitments for a $1-billion revolving line of credit and that it had $200 million on hand.

Tenet's shares fell 8 cents on Thursday to $13.78 on the New York Stock Exchange.

Analysts said the muted investor reaction to Thursday's announcement reflected the fact that most who own the stock now are in it for a return in three to five years.

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