On June 6, 2006 — D-Day, appropriately enough — Biggs Porter addressed the troops. Standing in a crowded meeting room in Dallas, the new CFO of embattled hospital chain Tenet Healthcare Corp. outlined his expectations for the finance department and its employees. Porter spoke of fiduciary responsibility and transparency. He talked about open-door policies, good communication, and challenging the organization. He said a lot about integrity.

No one would have blamed the assembled workers if they had simply tuned him out. After all, the 53-year-old Porter is the fourth finance chief in as many years at Tenet. But during that speech, finance staffers got a glimpse of what makes Porter a good fit at the scandal-plagued company. One, he’s a quick study. Two, he sticks to a plan. And three, he doesn’t back away from a challenge.

In fact, Porter’s résumé reads like a shooting script for “World’s Toughest Jobs.” He worked for LTV in the early 1990s, when the conglomerate was in the throes of a tempestuous consolidation. In 2000, he joined Dallas-based utility TXU, right around the time the Texas power industry was shuddering through deregulation. And he signed on as controller at Patriot-missile maker Raytheon in 2003, even though the aerospace giant was being investigated by the Securities and Exchange Commission. “I’ve been at companies that were going through significant transitions,” says Porter. “You either like that or you don’t.”

Classifying Tenet’s current situation as a “transition” is a sizable understatement. Once a rising star in the health-care universe, the publicly traded, Texas-based hospital holding company has suffered blunt-force trauma during the past 15 years. Two different scandals have battered the company, and left its corporate brand in tatters.

The first incident involved kickbacks, bribes, and the alleged hiring of bounty hunters to fill hospital beds. It also led to felony convictions, a $379 million settlement with the Department of Justice in 1994, and the ouster of the company’s top executives. The second scandal, which broke in 2002, saw Tenet’s subsequent management team charged with running a secret pricing scheme that excessively boosted the rates the company charged for treating Medicare’s sickest patients, known as outliers. Tenet denied the allegations, but soon after, a raft of senior executives resigned, including then-CEO Jeffrey Barbakow. Although the company and its former executives never admitted guilt in the case, Tenet last year agreed to pay $725 million (plus interest) to the Justice Department over four years to settle the charges.

Changing the corporate mind-set at a company with widely dispersed facilities — and more than 60,000 employees — is tough enough. But the latest ignominy at Tenet has pushed the hospital operator to the brink. Since news of the alleged outlier scheme broke in late 2002, Tenet has been hemorrhaging cash. Last year, the company reported a pretax loss of $1.1 billion on $8.7 billion in revenues. Tenet’s share price has plummeted as well, dropping from more than $50 to $5, and the credit rating on its senior debt has sunk with it (pegged at CCC+ by Standard & Poor’s). The company has shrunk dramatically, and now operates about half the number of medical facilities (56) it did at its zenith. And it has witnessed an exodus of doctors, some of whom say they’ll never work for Tenet again.

Even Mother Nature appears to be conspiring against Tenet’s management and its much-talked-about turnaround. Hurricanes, first Wilma in southern Florida and then Katrina in coastal Louisiana, have ravaged two of Tenet’s most important markets. Moreover, the hospital sector itself has been buffeted by sinking patient volumes and surges in the number of uninsured patients. In some ways, it’s a perfect storm of trouble for Tenet.

“Tenet needs to do the right things, yes,” says David Bachman, a senior research analyst at Longbow Research. “But it also needs to get a little lucky with the headwinds that are currently affecting the industry.”

An Adult Approach

Tenet did finally catch a break earlier this spring. In April, the company settled charges brought by the SEC that its former management team failed to adequately disclose the company’s alleged payment scheme between 1999 and 2002. Tenet ended up paying a mere $10 million to settle the civil charge. Pivotally, the commission also waived a rule that would have made it easier for shareholders to sue Tenet.

In a published interview, SEC chairman Christopher Cox defended the waiver. “The settlement terms favored investors because of the significant corporate-governance changes that had occurred [at Tenet],” Cox said. In a press release accompanying the settlement, Tenet general counsel Peter Urbanowicz stated that the hospital operator is “virtually a new company.”

It had better be. The company’s previous approach to running hospitals — grow through acquisitions, apply little apparent oversight, and seemingly put profits ahead of patients — made Tenet a poster child for shabby corporate behavior. Granted, other for-profit hospital chains, notably Columbia/HCA and HealthSouth, had their own scandals following a go-go decade that saw 900 acquisitions and mergers in the hospital sector. But few hospital chains carried the massive debt that Tenet took on (the company’s debt servicing still amounts to $400 million a year). And none were as blatant as Tenet at purportedly gaming the payment system to meet aggressive earnings targets. One study in 2003 found that, of the 100 most-expensive hospitals in the United States, 64 belonged to Tenet. In fact, the top 14 hospitals were all Tenet facilities. An earlier report indicated that, in California, Tenet was paid nearly three times more for bypass surgery than the average payment to non-Tenet hospitals — $93,829 versus $32,473.

Under Porter (a former auditor whose father was vice chairman of Arthur Young) and Trevor Fetter (a onetime Tenet CFO and current CEO), the hospital chain has begun to clean up its act. Longtime company watchers say Tenet has vastly improved its internal-controls systems and its board setup. Moreover, Porter has overcome initial doubts about his lack of experience in the health-care industry. “Porter brings a lot of professionalism to the company,” says Sheryl Skolnick, senior vice president at CRT Capital Group. “He’s brought an adult approach to financial controls, to conference calls, to investor presentations.”

He’s also brought an unwavering confidence that Tenet will get through these dark days. The Department of Justice civil settlement, while a cash drain, removed much of the uncertainty about the company’s future. That has given Porter a little more room to maneuver. Last year, for instance, Tenet was able to win higher reimbursement rates from medical insurers. “As we went through the period of litigation,” he says, “we were not in the best position to negotiate with managed-care providers. But we’re now able to restore [the rates] to market pricing.”

The more favorable arrangements should help boost the company’s revenue-per-patient, which, along with volume, is a key indicator of Tenet’s progress. Indeed, net patient revenue from managed-care payers rose 8 percent in the first quarter of 2007 compared with the same period last year. And despite Tenet’s thin cash flow and hefty leverage (nearly $5 billion in long-term debt), Porter has continued to look for potential acquisition targets. In July, a Tenet subsidiary acquired Coastal Carolina Medical Center from LifePoint Hospitals Inc. for $35 million.

“For a hunkered-down company, it’s easy not to pursue other opportunities,” comments Skolnick. “But [Porter] understands business risk better than anyone else there. To Porter, there is business risk in not pursuing growth opportunities.”

Taking Its Medicine

Now under new management, Tenet appears to have adopted a more measured, more conservative approach to its business. In short, Tenet appears finally to be taking its medicine. Last year, for example, the company reported a $380 million impairment and goodwill charge against earnings — a painful but necessary recognition of the declining value and potential divestiture of some of its assets. “This is a long process,” Fetter admits. “When I became CEO in 2003, I didn’t realize how deep the problems were.”

He found out fast. During his first year at the helm, Fetter signed off on a $60 million agreement to settle disturbing allegations that doctors at one company hospital had boosted revenues by needlessly performing heart surgery on hundreds of patients. “When Trevor Fetter took over as president,” says one analyst, “Tenet had no infrastructure in place to generate consistent, appropriate, or ethical earnings. It was completely dysfunctional.”

To resuscitate the company, Fetter and now Porter have zeroed in on the quality of care at Tenet’s 56 remaining hospitals (mostly in Texas, Florida, and California). In a world with an expanding array of health-care options, they reason, patients will go to the best service providers. Hence, Tenet management has set up a balanced scorecard that includes, among other things, ratings for the care that patients receive. “Clinical quality is what payers are demanding,” says Porter. “We think it’s crucial.”

At the same time, Tenet has begun making substantial capital improvements at its hospitals. Last year, the company spent or committed about $643 million on technology and patient-care enhancements. For Tenet, however, the spending appears to be a game of catch-up. “During the scandal years,” says Ann Hynes, a senior analyst at Leerink Swann & Co., “borrowing rates were so low that Tenet’s competitors were putting funds into their hospitals.”

Late to the game, Porter has nonetheless lined up an $800 million revolving-credit line, which was completed in November. The facility, which replaced a $250 million letter of credit, is based on patient accounts receivables at Tenet’s acute and specialty hospitals. The credit facility, jointly led by Citigroup and Bank of America, was a nice bit of business. It not only boosted the capital available to Tenet, it freed up $263 million of cash Tenet had previously pledged to support the letters of credit. “We have the liquidity to execute our turnaround,” insists Porter.

Not all observers are so sanguine. “If the turnaround doesn’t materialize soon,” says Bachman, “they may have to sell more hospitals.” They’ve already sold plenty. In the past 18 months, Tenet unloaded another 11 medical facilities, netting the company pretax proceeds of $278 million. Porter defends the divestitures. “It’s easier to execute a turnaround at a smaller enterprise,” he says.

But some see Tenet’s divestitures as a fire sale. At the very least, Tenet’s continuing losses, coupled with a well-publicized strategy to shed underperforming assets, have seemingly left the hospital operator with little leverage in its real estate dealings. In July, for example, Tenet completed the sale of two acute-care hospitals in Philadelphia — Roxborough Memorial and Warminster — to Solis Healthcare LLC. The transaction earned the company pretax proceeds of $25 million. What went unreported, however, is that Tenet paid close to $25 million to acquire just one of the hospitals (Roxborough) in 2002.

Losing Patients

Tenet isn’t the only hospital operator struggling with tough times. Profit margins for most of its peer group are being squeezed and now hover around 4 percent. Recently, LifePoint reported a 61 percent drop in second-quarter profits and lowered its full-year guidance. Near-term prospects don’t appear much brighter for HCA, CHS, or any of Tenet’s other competitors.

The reason for the difficulties? For starters, a steady decline in the number of patients. New, less-invasive technologies, along with improvements in drugs, have sapped hospital volumes. Moreover, many municipal and not-for-profit hospitals — typically tax-exempt — have upgraded their facilities, drawing patients away from private hospitals. At the same time, scores of doctors, tired of paperwork and insurer price constraints, have launched their own medical facilities. About 200 physician-owned specialty hospitals now exist nationwide, including a dozen in California, one of Tenet’s biggest markets. Says one analyst: “Doctors are cherry-picking the best-paying patients” (see “At Your Beck and Call“).

That’s bad news for Tenet, which is already staggering under the weight of $1.4 billion in accounts receivable — primarily from slow-paying or nonpaying customers. One telling statistic: self-pay patients account for a mere 8.8 percent of Tenet’s admissions but nearly a third of the accounts due for more than 180 days. The share of uncollected bills will likely go higher, too, as more businesses demand higher deductibles from employers or ditch coverage altogether. “The biggest problem for Tenet,” says Kemp Dolliver, managing director at Cowen and Co., “is that a rising percentage of the population lacks health insurance.”

The numbers tell the tale. In 2001, 28 percent of U.S. middle-class workers reported not having health-care coverage at some time during the prior 12 months. Last year, the figure was closer to 41 percent. Tenet is trying to counter the problem by upping its share of insured admissions and offering managed-care-like pricing to self-pay patients. The company also took a minority stake in a software company (started by former Tenet CFO Stephen Farber) that is developing models to flag patients who might be credit risks.

So far, Porter’s staff appears to be making some headway in Tenet’s accounts payable. Last year the collection rate for self-paying accounts topped 32 percent, up from 24 percent the previous year. Of course, the collection rate for insured patients is 97 percent. Meanwhile, the ranks of self-payers seeking medical attention continue to grow. Says Skolnick: “Cash collection from the uninsured really puts the spotlight on the CFO.”

So, too, does the restoration of Tenet’s image. As Dolliver notes, Tenet “doesn’t have the flexibility to endure another significant scandal. It needs to keep its nose clean for a very long time.” It remains to be seen, however, if institutional investors are willing to give Tenet a third chance. A lack of communication over the past few years has not helped the company make its case. Says Porter: “I’m now reaching out to our investor base after a period of silence during investigations and litigation.”

The Tenet CFO needs to reach out to the medical community as well. Following the scandals of 2002 and subsequent litigation, scores of physicians abandoned ship. Some apparently felt the association with Tenet had hurt their careers. Says Bachman: “Doctors don’t want their reputations tarnished.”

Nor do colleges, it appears. In late August, the University of Southern California sued Tenet, looking to terminate the company’s ownership of USC’s teaching hospital. According to the suit, Tenet’s ability to maintain patient admissions and recruit and retain physicians has been materially diminished as a result of Tenet’s “poor reputation.” Says Cowen’s Dolliver: “There are some people who will just never want to do business with them.”

Biggs Porter likes the challenge of significant transitions. He must be very, very happy right now.

John Goff is a senior editor of CFO.

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