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March 27, 2015

He took a job no one wanted. How Trevor Fetter brought Tenet back from a crisis, and where he thinks health care is headed.

Daily Briefing

    This interview with Trevor Fetter, President and CEO of Tenet Healthcare, was conducted by Eric Larsen, managing partner, and condensed by John Wilwol, content strategist.

    Question: You had quite the job history before taking the helm of Tenet. You were first in the investment banking business and then went to MGM Studios, where your tenure included movies like "Rain Man" and "Thelma and Louise." So finance, movies, health care. What's the common thread?

    Trevor Fetter: The explanation, I guess, if there is one, is that when I graduated from business school in 1986, I returned to MerriIl Lynch, where I'd worked between college and business school. Back then, the business was organized regionally, so in the California office, our principal clients were in the entertainment industry, health care, and oil services. I worked in all three areas. I visited an oil rig in the North Sea; I visited movie sets; I visited hospitals.

    MGM ended up hiring me from Merrill Lynch, and I stayed at MGM for seven years. Then, a colleague of mine from MGM became the CEO of National Medical Enterprises, which later became Tenet. That's how I ended up in this industry. He hired me to be the CFO of Tenet.

    Q: I imagine your family and friends were surprised when you went from the movies to hospitals.

    Fetter: There was no one in the movie industry who could understand why I would do such a thing. But I think family and friends were more understanding, even though they all know how much I love movies. It was a move to a much larger industry, a much larger company, and into something that did very positive things for people.

    Here's some perspective. The total domestic box office receipts of all films released in the U.S. in a given year are about $11 billion, and it has grown very slowly over the last 20 years. In 1995, when I joined Tenet, the company was much larger than the total North American box office of all movies released that year.

    In that same year, the Clinton administration was attempting to restructure the U.S. health care system, and the health care industry was in the news. I felt it was a unique opportunity to participate in the transformation of an industry that has a profound impact on the life of every American.

    Q: 2003, when you became Tenet's CEO, was a pretty tumultuous time. What was it like taking the helm of a health system that had so many challenges?

    Fetter: I returned to Tenet in late 2002 as President. At that time, the CEO had fired the CFO and COO, and his position was in jeopardy with Wall Street and the board; he ended up leaving six months later. In mid-2003, the largely new board appointed me acting CEO and launched a search for a permanent CEO. Looking back, I think the reality was that nobody else particularly wanted the job.

    It was a very difficult time for the company, but I was up for the challenge, and I appreciated both the board's confidence in naming me as permanent CEO and the strong support they provided as I implemented the changes that needed to be made at Tenet. 

    I'll never forget my early days as CEO: I received a call from Jack Bovender, who was the CEO and chairman of HCA at the time. He'd been through difficult times with HCA back in the 90s.

    He said to me, "You cannot underestimate how difficult what you want to do is going to be. It's going to take a lot longer than you can imagine. But the good news is that your company will come out of it stronger than it ever was at any time past."

    Q: That sounds incredibly difficult. What was going through your mind in those early years as CEO?

    Fetter: It was incredibly difficult because the government investigations [into previous Medicare billing practices] hung over us for another three years, which is an incredibly long time to reach a resolution.  

    “We had to make some very difficult decisions. We sold half of our hospitals.”

    The Department of Justice insisted on taking as much as we could possibly afford to give them, in what was called an "ability to pay" settlement. Otherwise we would be put out of business. We had to make some very difficult decisions. We sold half of our hospitals, we reinvested the proceeds into the remaining hospitals and paid the settlement [with the federal government], and we refocused the business on our core operations. We really had to take it down to a much smaller version of its former self in order to begin the rebuilding process.

    The causes of what happened here at Tenet had to do with a relatively small number of people making what proved to be very bad decisions. Meanwhile, there were tens of thousands of other people who did absolutely nothing wrong and deserved better from their leaders.

    That's what energized me. They deserved a better environment. All they were trying to do was take care of people and do what they knew how to do. It was the opportunity to restore that integrity, rebuild our reputation, help establish industry-leading quality measures, ensure corporate governance best practices, and refocus the company around a sustainable strategy.

    After surviving, a strategy to thrive

    Q: What's remarkable is that Tenet is going great guns now. Tell me a little about your strategy over time and how you got Tenet to where it is now.  

    Fetter: From about 2006 until 2012, our strategy was strictly one of organic growth. In the core business of hospitals, we made one acquisition of a small hospital in South Carolina. We also built five hospitals during that time, but those were in existing markets, adjacent to operations we already had.

    So it was an organic strategy—and one that had never been seen in the business other than at HCA post-1997. The traditional models among the investor-owned companies were a variation on the consolidation or "roll-up" theme. We generated eight consecutive years of strong earnings growth and improved margins.

    In 2008, we got serious about creating a much more active outpatient facility strategy, and in 2013, we had the opportunity to acquire Vanguard. That was a real departure from our strategy, and I was anxious that our investors would be concerned. But, as we examined the markets and the similarities between the two companies, it became very compelling.

    I'd characterize our strategy now as developing our ambulatory and services business, and further developing our core acute care business, but not through acquisitions alone. That's a tool that's available to us, but we're much more interested in expanding and solidifying our geographic footprint through innovative partnerships with well-respected not-for-profit organizations.

    Tenet poised to become America's largest ambulatory surgery provider

    Q: How are you approaching those partnerships with not-for-profits?

    Fetter: We want to be viewed by leading not-for-profits as their preferred partner when it comes to either services or ambulatory activities, or even hospital joint ventures.

    The successful not-for-profits, for obvious reasons, aren't putting themselves up for sale; but what they are interested in doing is assembling scale and efficiencies through partnerships. And they want to do it with a partner who shares their commitment to the local community and mission-driven culture.

    One example of this happened in Northern California in 2012. We have one hospital—San Ramon Medical Center—in the east bay of San Francisco. Adjacent to us is a three-hospital system at John Muir Health, also in the east bay, but in the northern part. I can't remember who approached whom, but we said, "Why don't we create a joint venture here? Why don't you buy part of our hospital?  We'll take the proceeds and invest it into more ambulatory development for the benefit of this community and both of our organizations." They thought that was a great idea. Two years later, it's working fabulously.

    If you had asked anybody, could there be a joint venture of physical assets between an investor-owned company and a not-for-profit institution in that community, they would have said you're out of your mind. But people all over the country have talked about that deal and how unusual it is to see an investor-owned system like us sell a portion of an asset.

    Q: You mentioned your strategy involves a focus on ambulatory services. I'm struck by the fact that 85% of your growth in outpatient is organic.

    Fetter: What's happening there is that we've been very active acquirers of ambulatory facilities and also we've built a lot of them. As we're purchasing facilities, which we're usually doing in partnership with physicians, it breathes new life into the center. I never would have imagined this, but if you look at all the things we've acquired in the aggregate, and where our volumes are now compared to where they were when we bought them, we're up by nearly 80%. That is a staggering increase. It's way beyond any sort of industry-standard rate of growth. The whole experience has exceeded my expectations.

    We've also been experimenting with new concepts: urgent care, freestanding emergency departments, urgent care focused just on kids. It's remarkable how successful that enterprise is. And we are viewing ambulatory services as a way to move into new markets where we might never own acute care hospitals, but where our expertise in developing and operating outpatient facilities can provide new options for physicians and patients, often in partnership with existing hospital systems.

    Betting on population health

    Q: You're also making a big bet on population health. Talk to me a little about that strategy.

    Fetter: We've had, for 25 years, a capability inside Tenet to manage population health, first in capitated arrangements, and now across the entire spectrum of risk-based arrangements that have emerged in recent years. It's managed through, Conifer Health Solutions, a Tenet affiliate we launched in 2008 and now own in partnership with Catholic Health Initiatives. If you add up all of the arrangements that they are managing in some way, all the patients that they touch, it's up to now four-and-a-half-million people. 

    In those arrangements, we oversee all of the utilization of that population in health care services, and then intervene in cases where the care coordination is weak, or the pathways seem wrong, or the utilization is excessive.

    So it's everything from that deep to more casual interaction. Again, it's four- and-a-half million people, but these skills, along with our quality and cost position, enable us to be very comfortable taking risk. We've got the scale, and we've had success in the arrangements.

    You have to remember why you're doing population health and have a good reason to do it. Not to be cool, not because Modern Healthcare says you should be doing it, but because it will provide better care for the local community and you have the capability to make it work.

    Q: Right. Many organizations seem under pressure to dive into population health and then don't ask or answer some basic questions.

    Fetter: Like, "Why are we doing this?"

    Q: Exactly. "Why are we doing this? Do we have the courage to actually intentionally disrupt in-patient demand and realize that the pie can be bigger?" That's a pretty big leap of faith.

    Fetter: It's a big leap. Look, I would have a very different outlook if I were running a small, regional system. We're large enough and we have experience from decades of doing this. We can get very comfortable with the risks.

    If I were just providing advice to a friend who was running a three-hospital, not-for-profit system in a small town, I would say don't do it. It could wipe you out.

    In the mid-90s, you would have capitated agreements and risk pools that would blow up, so to speak.

    You could have risk pool losses that could wipe out an entire year of operating profit for a hospital. We've seen nothing like that in recent years, but you've got to recognize you're taking a risk. Part of any strategy for dealing with risk is diversification. We're diversified geographically, and we also can do this in such a way that nothing we're doing is big enough to create a problem for the whole company.

    The future of consolidation

    Q: Tenet's total assets are now at over $16 billion.

    Fetter: Closing in on $17 billion.

    Q: And yet you guys still only represent 1.8% of the industry. How much more consolidation do you see? And on the flip side, is there viability for the stand-alone community hospital going forward?

    Fetter: Any other industry would be consolidating rapidly, but the difference here is you don't really have owners in 80% of the hospitals in the U.S. I think the pace of consolidation will be very slow. I don't see some catalyst changing that.

    As for the community hospital question, that's a really hard one. With all of the regulatory requirements—the change to ICD-10, the need to have advanced clinical systems, the cost of putting in these advanced clinical systems, and every other challenge—you can't take risks. So I think it's an incredibly tough place to be.

    I've recently gotten to know some of the individual community hospitals with which we are discussing possible acquisition or partnership. They would be the first to tell you: "Is it viable?" Sure. "Is it a recipe for success?" Not at all.

    Meanwhile, you've had phenomenal consolidation on the payer side. We operate in markets where a single Blue Cross plan will have an 80% market share. And the hospitals are really fragmented. So it's not a level playing field for unconsolidated hospitals. I think you will see pressure on those individual community hospitals to come up with some kind of solution.

    I don't picture any of the investor-owned companies having twice the number of hospitals they have today five years from now. But what I do picture is having a lot of affiliations. Like I described earlier with our strategy, we'd like to be one that is viewed as a very friendly, collaborative partner, and one that improves healthcare delivery for communities while preserving the mission and values of each hospital system.

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