Doctors Kicking Tires of Tenet Hospitals

Staff Reporter

Tenet Healthcare Corp. is receiving higher-than-expected interest in its Los Angeles-area hospitals up for sale, including a number of bids being prepared by doctors.

In one of the larger efforts, doctors and executives at Centinela Hospital Medical Center and four other nearby Tenet facilities are developing a bid to buy five hospitals as a group.

As of last week, the Santa Barbara-based system reported receiving more than 300 inquiries in the 27 hospitals it has up for sale nationwide, including the 19 in California and the 14 in Los Angeles County.

"At most of the facilities for sale, the physicians at those hospitals are considering whether or not they want a financial stake, but we have had multiple inquiries on each hospital," said Tenet spokesman David Langness.

Not all the inquiries are expected to result in formal bids, and Tenet plans to consider only those bidders with experience operating hospitals, or with the specific facilities they are interested in purchasing. This would qualify doctors, Langness said.

For now, the level of interest puts to rest fears that as many as one-third of the hospitals might not find buyers. "I always thought the number of facilities that could close could be counted on one hand and (now) it could be fewer," said Sheryl Skolnick, an analyst with Fulcrum Global Partners.

Skolnick said the heightened interest makes sense given that managed care in California has forced doctors into partnerships. "Large doctors groups already are organized," she said.

Doctor interest

Tenet is requiring bidders to sign confidentiality agreements, so information on most of the interested parties is not known. But some details have become available, including a bid being developed by the Westside doctors and executives.

The group, which already has formed a legal entity called Hospital Acquisition OO5 Inc., is exploring the purchase of Centinela, Brotman, Daniel Freeman Marina, Daniel Freeman Memorial and Queen of Angels hospitals.

Among those leading the efforts are Dr. Lawrence Paletz, chairman of the governing board at Centinela, as well as the chief executives at Centinela and Daniel Freeman Memorial, acting as individuals.

The group has been soliciting $5,000 contributions from doctors interested in participating in the bid. The seed money will cover attorneys, investment bankers and due diligence expenses. Last week, at a meeting at Daniel Freeman Memorial, Paletz encouraged doctors to take an ownership interest rather than having an outside chain purchase their hospitals.

Michael Finnegan, vice chairman of Centinela's board and former chief financial officer of Hollywood Park, said the effort got its start at Daniel Freeman Memorial and Centinela, both located in Inglewood.

"It would be terrible to the community to not have those," Finnegan said.

Daniel Freeman Marina, located in Marina del Rey, was included because it is a sister hospital to Memorial, while Tenet suggested the group add Queen of Angels and nearby Brotman to the package.

Queen of Angels, located in East Hollywood, is seen by some as perhaps the most difficult local hospital for Tenet to sell, given the substantial seismic work it needs. But its closure would provoke a huge outcry in that community.

At Monterey Park Hospital, doctors on staff are soliciting $5,000 contributions to determine, among other things, the cost to seismically retrofit the structure. Tenet cited seismic costs as one reason for the sales.

Dr. Alfonso Barragan, chief of surgery at Monterey Park, said doctors there want to keep the hospital out of another chain's hands, but have no interest in buying any other facility.

"If we are able to pay our bills, serve the patients and give a little profit to the doctors that would be fine. We are not out to enrich ourselves," Barragan said.

Doctors interested in the Monterey Park purchase will be expected to invest $25,000 to $100,000 as part of a formal bid assuming the due diligence process does not provide any surprises. The doctors also would be interested in keeping Tenet's current management team in place, he said.

"There are a lot of people out there chasing these assets," said Rich Marr, a principal at Namco Financial, a West Los Angeles real estate investment and financial firm that is considering offers to finance some of the possible purchases.

Not everyone is pleased with the grass-roots interest. Lark Galloway-Gilliam, executive director of the Community Health Councils, a Los Angeles health care advocacy group, said doctors' track records in managing hospitals has been mixed at best. "Do they have the resources to do what is needed?" she asked. "We have seen such investor-owned deals fail."

Also grumbling are potential bidders who say that insiders and hospital operators have the inside track. This includes Biomar Technologies, a Pasadena health care information firm seeking to get into hospital operations.

Allan Martia, one of the firm's principals, said Tenet does not appear interested in its bids. "You would think all you would have to show is financial ability," he said.

Apparently not a concern among bidders is potential liability arising from several government investigations into wrongdoing at Tenet, including improper Medicare billing, unnecessary surgeries and other problems.

It is common for hospital sellers to indemnify buyers for any fines or judgments that could arise out of such probes, and that is what Tenet expects to do as part of these sales, Langness said.

The nation's second largest hospital system announced the divestiture in January amid continuing government probes of its operations, especially higher-than-usual Medicare charges. Tenet officials said they did not have adequate cash flow to fund improvements at the hospitals up for sale.

On the Block - Key facts in Tenet Healthcare's planned divestitures.

L.A. County facilities for sale: 14

Local hospital beds on market: 3,159

Inquiries from potential buyers: 300

Sale target date: End of 2004

Local hospitals to be retained: Norris Cancer Center, San Dimas Community Hospital, Suburban Medical Center, USC University Hospital

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