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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission file number 1-7293

TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes ý    No o

        As of June 30, 2003, there were 462,863,619 shares of common stock outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of June 30, 2003, based on the closing price of the Registrant's shares on the New York Stock Exchange, was approximately $5,386,886,861. This information is being provided pursuant to SEC rules. As of February 27, 2004, there were 465,453,681 shares of common stock outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of February 27, 2004, based on the closing price of the Registrant's shares on the New York Stock Exchange, was approximately $5,589,105,084. Reporting this information as of February 27, 2004 is not required by SEC rules, but the Registrant is furnishing it to give shareholders a more recent statement of the value of stock held by non-affiliates. For the purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive proxy statement for the 2004 annual meeting of shareholders to be held on May 6, 2004 are incorporated by reference into Part III of this Form 10-K.

CONTENTS

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PART I.

ITEM 1. BUSINESS

DESCRIPTION OF BUSINESS

        Tenet Healthcare Corporation operates in one line of business—the provision of health care, primarily through the operation of general acute care hospitals. All of Tenet's operations are conducted through its subsidiaries. (Unless the context otherwise requires, Tenet and its subsidiaries are referred to herein as "Tenet," the "Company," "we" or "us.") Tenet is the second largest investor-owned health care services company in the United States. At December 31, 2003, Tenet's subsidiaries owned or operated 101 domestic general hospitals with 25,116 licensed beds, serving urban and rural communities in 15 states. Of those domestic general hospitals, 82 were owned by Tenet subsidiaries and 19 were owned by third parties and leased by Tenet subsidiaries (including one Tenet-owned facility that is on land leased from a third party). Our domestic general hospitals generated 95.8% and 97.0% of our net operating revenues in the years ended May 31, 2001 and 2002, respectively, 97.3% in the year ended December 31, 2002, and 96.8% in the year ended December 31, 2003.

        At December 31, 2003, Tenet subsidiaries also owned various related domestic health care facilities, including a small number of rehabilitation hospitals, specialty hospitals, long-term-care facilities, a psychiatric facility and medical office buildings—each of which is located on the same campus as, or nearby, one of our general hospitals—and a general hospital in Barcelona, Spain. In addition, our subsidiaries owned physician practices, captive insurance companies, and various ancillary health care businesses, including outpatient surgery centers, home health care agencies, occupational and rural health care clinics, and health maintenance organizations.

        Our mission is to provide quality health care services within existing regulatory and managed care environments that are responsive to the needs of the communities we serve. To accomplish our mission, our operating strategies are to (1) improve the quality of care provided at our hospitals by identifying best practices and exporting those best practices to all of our hospitals, (2) improve operating efficiencies and reduce costs while maintaining or improving the quality of care provided, (3) improve patient, physician and employee satisfaction, (4) improve recruitment and retention of nurses and other employees, (5) reduce bad-debt expense and improve cash flow, and (6) acquire new, or divest existing, facilities as market conditions, operational goals and other considerations warrant. We adjust these strategies as necessary in response to changes in the economic and regulatory climates in which we operate and the success or failure of our various efforts.

OPERATIONS

        Through March 10, 2003, we organized our domestic general hospitals and other health-care-related facilities into eight regions within three operating divisions. Effective March 11, 2003, our hospitals and other facilities were reorganized into two divisions with five underlying regions. As announced on February 9, 2004, we further streamlined our organizational structure by eliminating the two divisions. We appointed a new chief operating officer, who, among other things, will directly oversee operations in the five regions: California, Central-Northeast, Florida, Southern States and Texas.

        We seek to operate our hospitals in a manner that positions them to compete effectively in the rapidly evolving health care environment. To that end, we sometimes decide to close, sell or consolidate certain facilities in order to eliminate duplicate services, non-core assets or excess capacity, or because of changing market conditions. From time to time, we make strategic acquisitions of, or enter into partnerships or affiliations with, general hospitals and related health care businesses.

        In March 2003, we announced our intention to divest or consolidate 14 general hospitals that no longer fit our core operating strategy of building competitive networks of hospitals that provide quality

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patient care in major markets. We completed the sales of 11 of the 14 hospitals by the end of 2003. The sale of one other hospital took place effective February 1, 2004. The remaining two hospitals were closed in 2003. In November 2003, we announced we would not renew our leases on two additional hospitals and expect to cease operations at both of these hospitals before the end of 2004. In addition, in December 2003, we announced our intention to close one more hospital and sell another. Also in December 2003, we completed the acquisition of the USC Kenneth Norris Jr. Cancer Hospital, a 60-bed specialty facility. A Tenet subsidiary has managed this facility since 1997. Additionally, Tenet subsidiaries continued construction in 2003 on a 118-bed general hospital and medical complex in Frisco, Texas, and a 90-bed hospital in Bartlett, Tennessee. Both hospitals are near completion and are expected to open in mid-2004.

        In January 2004, we announced our intention to divest an additional 27 hospitals, including 19 in California and eight in Louisiana, Massachusetts, Missouri and Texas. This decision was based on a comprehensive review of the near-term and long-term prospects of each of the hospitals, including a recent study of the capital expenditures required to comply with California's seismic regulations for hospitals. As a result of this comprehensive review, we decided to focus our financial and management resources on a core group of 69 domestic hospitals, including the two hospitals currently under construction, that will remain after the proposed divestitures are completed. Subsequently, in March 2004, we approved a proposed sale of our general hospital in Barcelona, Spain.

        Each of our general hospitals offers acute care services, operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, and pharmacies; most offer intensive care, critical care and/or coronary care units, physical therapy, and orthopedic, oncology and outpatient services. A number of the hospitals also offer tertiary care services such as open-heart surgery, neonatal intensive care and neuroscience. Eight of our hospitals—Memorial Medical Center, USC University Hospital, Saint Louis University Hospital, Hahnemann University Hospital, Sierra Medical Center, Western Medical Center Santa Ana, St. Christopher's Hospital for Children and the Cleveland Clinic Hospital—offer quaternary care in such areas as heart, lung, liver and kidney transplants. USC University Hospital, Sierra Medical Center and Good Samaritan Hospital also offer gamma-knife brain surgery and Saint Louis University Hospital, Hahnemann University Hospital and Memorial Medical Center offer bone marrow transplants. With the exception of the 25-bed Sylvan Grove Hospital located in Georgia and the 25-bed Frye Regional Medical Center—Alexander Campus located in North Carolina, which are designated by the Centers for Medicare and Medicaid Services as critical access hospitals and which have not sought to be accredited, each of our facilities that is eligible for accreditation is fully accredited by the Joint Commission on Accreditation of Healthcare Organizations, the Commission on Accreditation of Rehabilitation Facilities (in the case of rehabilitation hospitals), the American Osteopathic Association (in the case of two hospitals) or another appropriate accreditation agency. With such accreditation, our hospitals are eligible to participate in government-sponsored provider programs, such as the Medicare and Medicaid programs. The two hospitals that are not accredited nevertheless do participate in the Medicare program by otherwise meeting the Medicare Conditions of Participation.

        Our hospitals also will continue to emphasize those outpatient services that can be provided on a quality, cost-effective basis and that we believe will meet the needs of the communities served by the facilities. The patient volumes and net operating revenues at our general hospitals and related health care facilities are subject to economic and seasonal variations caused by a number of factors, including, but not limited to (1) unemployment levels, (2) the business environment of local communities, (3) the number of uninsured and underinsured patients in local communities, (4) seasonal cycles of illness, (5) climate and weather conditions, (6) vacation patterns of both patients and physicians, and (7) other factors relating to the timing of elective procedures.

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        The following table lists, by state, the general hospitals owned or leased by our subsidiaries and operated domestically as of December 31, 2003:

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*

Tenet intends to divest these facilities as part of the restructuring of its operations announced in January 2004.

(1)

Leases at these facilities will not be renewed; operations at Century City Hospital are expected to cease by the end of April 2004, and operations at Suburban Medical Center are expected to cease by the end of October 2004.

(2)

Leased by a partnership in which Tenet's subsidiaries own a 75% interest and of which a Tenet subsidiary is the managing general partner.

(3)

Tenet announced in December 2003 that it is seeking a buyer for this facility; the sale process is expected to be complete by mid-2004.

(4)

Facility owned by Tenet on land leased from a third party.

(5)

Owned by a partnership in which a Tenet subsidiary owns a 51% interest and is the managing general partner.

(6)

Owned by a limited liability company in which a Tenet subsidiary owns a 90% interest and is the managing member.

(7)

Owned by a limited liability company in which a Tenet subsidiary owns a 74% interest and is the managing member.

(8)

Facility was sold effective February 1, 2004.

(9)

Tenet intends to close this facility on or about June 30, 2004.

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        As of December 31, 2003, the largest concentrations of our licensed beds were in California (33.3%), Florida (18.2%) and Texas (12.0%). Strong concentrations of hospital beds within geographic areas help us contract more successfully with managed care payers, reduce management, marketing and other expenses, and more efficiently utilize resources. However, such concentrations increase the risk that, should any adverse economic, regulatory or other development occur within these states, our business, financial position, results of operations or cash flows could be adversely affected.

        The following table shows certain information about the general hospitals owned or leased domestically by our subsidiaries for the fiscal years ended May 31, 2001 and 2002, for the seven-month period ended December 31, 2002 and for the years ended December 31, 2002 and 2003.

(1)

Includes two facilities that we owned at December 31, 2003, but at which operations were discontinued for financial reporting purposes as of that date.

(2)

Utilization of licensed beds represents patient days divided by average licensed beds divided by number of days in the period.

PROPERTIES

        At December 31, 2003, our offices were located in Los Angeles, Santa Ana and Santa Barbara, California; Ft. Lauderdale, Florida; Atlanta, Georgia; New Orleans, Louisiana; St. Louis, Missouri; Philadelphia, Pennsylvania; and Dallas, Texas. Our subsidiaries leased the space for our offices in Los Angeles, Santa Ana, Ft. Lauderdale, Atlanta, New Orleans, St. Louis and Philadelphia. We own our Santa Barbara office building, which is on land that is leased by a Tenet subsidiary under a long-term ground lease that expires in 2068. A Tenet subsidiary leases the space for our Dallas office under a lease that terminates in 2010 subject to the lessee's exercise of one or both of its two five-year renewal options.

        Our subsidiaries domestically operated 120 medical office buildings at December 31, 2003; most of these office buildings are adjacent to our general hospitals. The number of licensed beds and locations of our general hospitals at December 31, 2003 are described in the table beginning on page 3.

        As of December 31, 2003, we had approximately $43 million of outstanding loans secured by property and equipment, and we had approximately $45 million of capitalized lease obligations. We believe that all of our properties, as well as the administrative and medical office buildings described above, are suitable for their intended purposes.

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MEDICAL STAFF AND EMPLOYEES

        Tenet's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. Members of the medical staffs of our hospitals also often serve on the medical staffs of hospitals not owned by Tenet. Members of our medical staffs are free to terminate their affiliation with Tenet hospitals or admit their patients to competing hospitals at any time. Although we own some physician practices and, where permitted by law, employ some physicians, the overwhelming majority of the physicians who practice at our hospitals are not employees. Nurses, therapists, lab technicians, facility maintenance staff and the administrative staff of hospitals, however, normally are employees. Tenet is subject to the federal minimum wage and hour laws and maintains various employee benefit plans.

        Our operations depend on the efforts, ability and experience of our employees and the physicians on the medical staffs of our hospitals. Our future growth depends on our ability to (1) attract and retain skilled employees, (2) attract and retain physicians and other health care professionals, and (3) manage growth successfully. Therefore, our success, in part, depends upon the quality, quantity and specialties of physicians on our hospitals' medical staffs, most of whom have no long-term contractual relationship with us. In some of our markets, physician recruitment and retention are affected by a shortage of physicians in certain specialties and the difficulties that physicians are experiencing in obtaining affordable malpractice insurance or finding insurers willing to provide malpractice coverage.

        Although we believe we will continue to successfully attract and retain key employees, qualified physicians and other health care professionals, the loss of some or all of our key employees or the inability to attract or retain sufficient numbers of qualified physicians and other health care professionals could have a material adverse effect on our business, financial position, results of operations or cash flows.

        At December 31, 2003, the approximate number of Tenet employees (of which approximately 29% were part-time employees) was as follows:

(1)

Includes employees whose employment relates to the operations of our general hospitals, rehabilitation hospitals, psychiatric facility, specialty hospitals, outpatient surgery centers, managed services organizations, physician practices, debt collection subsidiary and other health care operations.

        The largest concentration of our employees are in those states where we have the largest concentrations of licensed hospital beds:

        At December 31, 2003, approximately 11% of our employees were represented by labor unions, and labor relations at our facilities generally have been satisfactory. Tenet, and the hospital industry in general, is seeing an increase in the amount of union activity, particularly in California. In May 2003, we entered into an agreement with the Service Employees International Union and the American Federation of Federal, State, County and Municipal Employees with respect to all of our California hospitals and two hospitals in Florida. In December 2003, we entered into an agreement with the

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California Nurses Association with respect to all of our California hospitals. The agreements are expected to streamline the organizing and contract negotiation process, with minimal impact on and disruption to patient care, if a hospital's employees choose to organize into collective bargaining units. We expect that most of the hospitals covered by the agreements will hold union elections in 2004. The agreements also provide a framework for cost stability through prenegotiated salaries and benefits at the related hospitals.

        The hospital industry is experiencing a nationwide nursing shortage. This shortage is more serious in certain specialties and in certain geographic areas than others, including several areas in which we operate hospitals, such as South Florida, Southern California and Texas. The nursing shortage has become a significant operating issue to health care providers, including Tenet, and has resulted in increased costs for nursing personnel.

        Another factor that will increase our labor costs significantly is the enactment of state laws regarding nurse-staffing ratios. California has enacted such a law and it became effective on January 1, 2004. Not only will state-mandated nurse-staffing ratios adversely affect our labor costs, if we are unable to hire the necessary number of nurses to meet the required ratios, they may also cause us to limit patient admissions with a corresponding adverse effect on net operating revenues.

        We cannot predict the degree to which Tenet will be affected by the future availability or cost of nursing personnel, but we expect to continue to experience significant wage and benefit pressures created by the current nursing shortage throughout the country and escalating state-mandated nurse-staffing ratios, particularly in California. We may be required to enhance wages and benefits to recruit and retain nurses. We may also be required to increase our use of more expensive temporary personnel. Among the steps we are taking to attract and retain employees in general, and nurses in particular, is our "employer of choice" program, through which we strive to be the employer of choice in the regions where we are located.

COMPETITION

        Tenet's general hospitals and other health care businesses operate in competitive environments. Competition among health care providers occurs primarily at the local level. A hospital's position within the geographic area in which it operates is affected by a number of competitive factors, including, but not limited to (1) the scope, breadth and quality of services a hospital offers to its patients and physicians, (2) the number, quality and specialties of the physicians who admit and refer patients to the hospital, (3) nurses and other health care professionals employed by the hospital or on the hospital's staff, (4) the hospital's reputation, (5) its managed care contracting relationships, (6) its location, (7) the location and number of competitive facilities and other health care alternatives, (8) the physical condition of its buildings and improvements, (9) the quality, age and state of the art of its medical equipment, (10) its parking or proximity to public transportation, (11) the length of time it has been a part of the community, and (12) the prices it receives for its services. Accordingly, each hospital develops its own strategies to address these competitive factors locally. In addition, tax exempt competitors may have certain financial advantages not available to Tenet's facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes.

        A significant factor in our future success will be the ability of our hospitals to continue to attract and retain staff physicians. We attract physicians to our hospitals by equipping our hospitals with technologically advanced equipment and physical plant, properly maintaining the equipment and physical plant, sponsoring training programs to educate physicians on advanced medical procedures, providing high-quality care to our patients and otherwise creating an environment within which physicians prefer to practice. We also attract physicians to our hospitals by using local governing boards, consisting primarily of community members and physicians, to develop short- and long-term

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plans for the hospital and to review and approve, as appropriate, actions of the medical staff, including staff appointments, credentialing, peer review and quality assurance. While physicians may terminate their association with a hospital at any time, Tenet believes that by striving to maintain and improve the quality of care at its hospitals and by maintaining ethical and professional standards, it will attract and retain qualified physicians with a variety of specialties.

        Target 100 and Tenet's Commitment to Quality are two important programs that we have adopted to enhance physician satisfaction and make our hospitals more attractive to physicians. The Target 100 program targets 100% satisfaction scores among patients, physicians and employees at Tenet's facilities. Under the program, employees at every hospital are trained to focus on the following five pillars in every aspect of their jobs: Service, Quality, Cost, People and Growth. Tenet's Commitment to Quality is focused on (1) improving patient safety and the reporting of medical results, (2) supporting physician excellence, (3) improving the practice and leadership of nursing, and (4) facilitating patient flow and care delivery. Our goal is to improve the quality of care provided at our hospitals by maximizing the most effective clinical practices.

        The health care industry continues to contend with a nursing shortage and increased competition for nurses and other health care professionals. These issues are described in the discussion concerning Medical Staff and Employees, which begins on page 7.

HEALTH CARE REGULATION AND LICENSING

CERTAIN BACKGROUND INFORMATION

        Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Changes in the Medicare and Medicaid programs and other government programs, hospital cost-containment initiatives by public and private payers, proposals to limit payments and health care spending, and industry-wide competitive factors are highly significant to the health care industry. In addition, the health care industry is governed by a framework of federal and state laws, rules and regulations that are extremely complex and for which the industry often has the benefit of little or no regulatory or judicial interpretation. Although we have policies and procedures in place to maintain compliance in all material respects with such laws, rules and regulations, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial position, results of operations or cash flows could be adversely affected.

        In addition to certain statutory coverage limits and exclusions, federal law and regulations require health care providers, including hospitals that furnish or order health care services that may be paid for under the Medicare program or state health care programs, to assure that claims for reimbursement are for services or items that are (1) provided economically and only when, and to the extent, they are medically necessary, (2) of a quality that meets professionally recognized standards of health care, and (3) supported by appropriate evidence of medical necessity and quality. In addition, the Centers for Medicare and Medicaid Services has requested quality improvement organizations to monitor hospital admission and coding patterns by ongoing analysis of Medicare discharge data. The quality improvement organizations have the authority to deny payment for services provided and recommend to the U.S. Department of Health and Human Services (HHS) that a provider that is in substantial noncompliance with certain standards be excluded from participating in the Medicare program. Managed care organizations also have concurrent utilization review protocols, as well as prepayment utilization review procedures.

ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS

        The health care industry is subject to extensive federal, state and local regulation relating to licensure, conduct of operations, ownership of facilities, physician relationships, addition of facilities

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and services, and prices for services. In particular, Medicare and Medicaid anti-kickback and anti-fraud and abuse amendments codified under Section 1128B(b) of the Social Security Act (the "Anti-kickback Amendments") prohibit certain business practices and relationships that might affect the provision and cost of health care services payable under the Medicare and Medicaid programs and other government programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid for by such programs. Sanctions for violating the Anti-kickback Amendments include criminal penalties and civil sanctions, as well as fines and possible exclusion from government programs, such as Medicare and Medicaid. Many states have statutes similar to the federal Anti-kickback Amendments, except that the state statutes usually apply to referrals for services reimbursed by all third-party payers, not just federal programs.

        In addition, it is a violation of the Federal Civil Monetary Penalties Law to offer or transfer anything of value to Medicare or Medicaid beneficiaries that is likely to influence their decision to obtain covered goods or services from one provider or service over another.

        In addition to addressing other matters, as discussed below, the Health Insurance Portability and Accountability Act of 1996 also amends Title XI (42 U.S.C. Section 1301 et seq.) to broaden the scope of current fraud and abuse laws to include all health plans, whether or not payments under such health plans are made pursuant to a federal program.

        Section 1877 of the Social Security Act (commonly referred to as the "Stark" law) generally restricts referrals by physicians of Medicare or Medicaid patients to entities with which the physician or an immediate family member has an ownership interest or other specified financial arrangement, unless one of several exceptions applies. The referral prohibition applies to a number of statutorily defined "designated health services," such as clinical laboratory, physical therapy and radiology services. The exceptions to the referral prohibition cover a broad range of common financial relationships. These statutory, and the subsequent regulatory, exceptions are available to protect certain permitted employment relationships, leases, group practice arrangements, medical directorships, and other common relationships between physicians and providers of designated health services, such as hospitals. A violation of the Stark law may result in a denial of payment, required refunds to patients and to the Medicare program, civil monetary penalties of up to $15,000 for each violation, civil monetary penalties of up to $100,000 for "sham" arrangements, civil monetary penalties of up to $10,000 for each day that an entity fails to report required information, and exclusion from participation in the Medicare and Medicaid programs and other federal programs. Many states have adopted or are considering similar self-referral statutes, some of which extend beyond the Medicaid program to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care. Tenet's participation in and development of joint ventures and other financial relationships with physicians could be adversely affected by these amendments and similar state enactments.

        On January 4, 2001, the Department of Health and Human Services issued final regulations, subject to comment, intended to clarify parts of the Stark law and some of the exceptions to it. These regulations are considered the first phase of a two-phase process, with the remaining regulations to be published at an unknown future date. While HHS may add new exceptions to the final regulations, the current statutory exceptions, discussed above, will continue to be available. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on our operations.

        The federal government has also issued regulations that describe some of the conduct and business relationships that are permissible under the Anti-kickback Amendments. These regulations are often referred to as the "Safe Harbor" regulations. The fact that certain conduct or a given business arrangement does not meet a Safe Harbor does not necessarily render the conduct or business arrangement illegal under the Anti-kickback Amendments. Rather, such conduct and business arrangements risk increased scrutiny by government enforcement authorities and should be reviewed on

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a case-by-case basis. Tenet has a regulatory compliance department that systematically reviews all of Tenet's operations to determine the extent to which they comply with federal and state laws related to health care, such as the Anti-kickback Amendments, the Stark law and similar state statutes.

        Both federal and state government agencies continue heightened and coordinated civil and criminal enforcement efforts against the health care industry. As part of an announced work plan, which is implemented through the use of national initiatives pertaining to health care providers, including Tenet, HHS and the Department of Justice are scrutinizing, among other things, the terms of acquisitions of physician practices and the coding practices related to certain clinical laboratory procedures and inpatient procedures. We believe that Tenet, and the health care industry in general, will continue to be subject to increased government scrutiny and investigations such as this, which could have a material adverse effect on Tenet's business, financial position, results of operations or cash flows.

        Another trend impacting health care providers, including Tenet, is the increased use of the False Claims Act, particularly by individuals who bring private actions under the act. Such qui tam or "whistleblower" actions allow private individuals to bring actions on behalf of the government, alleging that a hospital or health care provider has defrauded a federal government program, such as Medicare or Medicaid. If the government intervenes in the action and prevails, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may continue to pursue the action independently. Although companies in the health care industry in general, and Tenet in particular, have been and may continue to be subject to qui tam actions, we are unable to predict the impact of such actions on Tenet's business, financial position, results of operations or cash flows.

        We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations (discussed beginning on page 43). Further changes in the regulatory framework affecting health care providers could have a material adverse effect on our business, financial position, results of operations or cash flows.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT

        The Health Insurance Portability and Accountability Act, or HIPAA, mandates the adoption of industry standards for the exchange of health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the health care industry. HIPAA requires that health providers and other "covered entities," such as insurance companies and other third-party payers, adopt uniform standards for the electronic transmission of medical records, billing statements and insurance claims forms. HIPAA also establishes new federal rules protecting the privacy and security of personal health information. The privacy and security regulations address the use and disclosure of individual health care information and the rights of patients to understand and control how such information is used and disclosed. The law provides both criminal and civil fines and penalties for covered entities that fail to comply with HIPAA.

        Department of Health and Human Services regulations include deadlines for compliance with the various provisions of HIPAA. In 2001, in response to concerns by many health care providers about their ability to comply with impending HIPAA deadlines, Congress extended until October 2003 the original deadline for compliance with the electronic data transmission standards that health care providers must use when transmitting certain health care information electronically. In October 2003, under authority given by HHS, the Centers for Medicare and Medicaid Services implemented a plan that allows providers and other electronic billers to continue to submit pre-HIPAA format electronic claims for periods after October 16, 2003, provided they can show good faith efforts to become HIPAA

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compliant. Tenet continues to work toward full and complete compliance with the electronic data transmission standards.

        All covered entities, including Tenet, were required to comply with the privacy requirements of HIPAA by April 14, 2003. Tenet was in material compliance with the privacy regulations by that date and continues to develop training and revise procedures to address ongoing compliance. The HIPAA security regulations require health care providers to implement administrative, physical and technical safeguards to protect the security of patient information. We are required to comply with the security regulations by April 21, 2005, and are on target to complete our implementation plan by that date.

        We have developed a comprehensive set of policies and procedures to comply with HIPAA, under the guidance of our compliance department. Each of our hospitals has a privacy officer responsible for implementing and monitoring compliance with our HIPAA policies and procedures. We have also created an internal on-line HIPAA training program, which is mandatory for all employees. Based on the existing and proposed regulations, we believe that the cost of our compliance with HIPAA will not have a material adverse effect on our business, financial position, results of operations or cash flows.

HEALTH CARE FACILITY LICENSING REQUIREMENTS

        Tenet's health care facilities are subject to extensive federal, state and local legislation and regulation. In order to maintain their operating licenses, health care facilities must comply with strict standards concerning medical care, equipment and hygiene. Various licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. Tenet's health care facilities hold all required governmental approvals, licenses and permits material to the operation of its business.

UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE

        Tenet's health care facilities are subject to and comply with various forms of utilization review under the Medicare Conditions of Participation. In addition, under the Medicare prospective payment system, each state must have a quality improvement organization to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in general hospitals. Medical and surgical services and practices are extensively supervised by committees of staff doctors at each health care facility, are overseen by each health care facility's local governing board, the members of which primarily are community members and physicians, and are reviewed by Tenet's quality assurance personnel. The local hospital governing board also helps maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures, and approve the credentials and disciplining of medical staff members.

CERTIFICATE OF NEED REQUIREMENTS

        Some states require state approval for construction, expansion and closure of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of need, which are issued by governmental agencies with jurisdiction over health care facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services, and certain other matters. Following a number of years of decline, the number of states requiring certificates of need is once again on the rise as state legislatures are looking at the certificate of need process as a way to contain rising health care costs. As of December 31, 2003, we operated hospitals in 10 states that require some form of state approval under certificate of need programs. We are unable to predict whether we will be required or able to obtain any additional certificates of need in any jurisdiction where such certificates of need are required.

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ENVIRONMENTAL REGULATIONS

        Our health care operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations, as well as our purchases and sales of facilities, also are subject to compliance with various other environmental laws, rules and regulations. We believe that the cost of such compliance will not have a material effect on our future capital expenditures, results of operations or competitive position.

COMPLIANCE PROGRAM

        We voluntarily maintain a multifaceted corporate compliance program that strives to meet or exceed applicable standards established by federal guidance and industry practice. On January 14, 2004, our board of directors approved a new compliance program charter intended to further our goal of fostering and maintaining the highest ethical standards, and valuing our compliance with all state and federal laws and regulations as a foundation of our corporate philosophy. The primary focus of the program is compliance with the requirements of the Medicare and Medicaid programs and all other government health care programs.

        We have restructured our compliance department as a separate and independent body. To further ensure the independence of the compliance department, the following measures have been implemented: (1) the compliance department has its own operating budget, (2) the compliance department has the authority to hire outside counsel, to access any Tenet document and to interview any Tenet personnel, and (3) according to the new structure, the chief compliance officer reports directly to the ethics, quality and compliance committee of the board of directors. While the chief compliance officer reports to the chief executive officer for administrative purposes, the compliance department has independent access and accountability to the board of directors.

        Pursuant to the terms of the compliance program charter, the compliance department is responsible for the following activities: (1) drafting company policies and procedures related to compliance issues, (2) developing and providing compliance-related education and training to all Tenet employees and, as appropriate, directors, contractors, agents and staff physicians, (3) monitoring, responding to, and resolving all compliance-related issues, (4) ensuring that appropriate corrective action and disciplinary action is taken by Tenet when non-compliant or improper conduct is identified, and (5) measuring compliance with Tenet's policies and legal and regulatory requirements related to health care operations.

        In order to ensure the compliance department is fully capable of performing its duties as outlined in its charter, we are in the process of significantly expanding our compliance staff. As part of this expansion, we are hiring regional compliance directors and are in the process of ensuring that there is a compliance officer for each hospital. All regional compliance directors and hospital-based compliance officers report to the chief compliance officer.

        We are working toward creating a fully integrated compliance communications and data infrastructure. This tool will support the compliance staff in ensuring accountability at all levels within Tenet with measurable criteria for the effectiveness of the compliance program. Furthermore, it will help ensure that we are able to effectively address and resolve all compliance-related issues.

ETHICS PROGRAM

        We voluntarily maintain a values-based ethics program that is designed to monitor and raise awareness of ethical issues among employees and to stress the importance of understanding and complying with Tenet's Standards of Conduct.

        All of our employees, including our chief executive officer, chief financial officer, chief accounting officer and controller, are required to abide by our Standards of Conduct to ensure that our business is

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conducted in a consistently legal and ethical manner. The members of our board of directors are also required to abide by our Standards of Conduct. The standards reflect our basic values and form the foundation of a comprehensive process that includes compliance with all corporate policies, procedures and practices. Our standards cover such areas as quality patient care, compliance with all applicable laws and regulations, appropriate use of our assets, protection of patient information and avoidance of conflicts of interest.

        As part of the program, we provide annual ethics training sessions to every employee, as well as to our board of directors. All employees are required to report incidents that they believe in good faith may be in violation of the Standards of Conduct, and are encouraged to contact our toll-free ethics action line when they have questions about the standards or any ethics concerns. Incidents of alleged financial improprieties reported to the ethics action line or the ethics and business conduct department are communicated to the audit committee of the board of directors. All reports to the ethics action line are kept confidential to the extent allowed by law, and employees have the option to remain anonymous. In cases reported to the ethics action line that involve a possible violation of the law or regulatory policies and procedures, the matter will be referred to the compliance department for investigation. Retaliation is taken very seriously by Tenet, and if it occurs will result in discipline, up to and including termination of employment.

        The full text of our Standards of Conduct is published on our Web site, at www.tenethealth.com, under the "Ethics & Business Conduct" caption in the "Our Company" section. A copy of our Standards of Conduct is also available upon written request of our corporate secretary.

PROFESSIONAL AND GENERAL LIABILITY INSURANCE

        Through May 31, 2002, we insured substantially all of our professional and comprehensive general liability risks in excess of self-insured retentions through Hospital Underwriting Group, our majority-owned insurance subsidiary, under a mature claims-made policy with a 10-year extended reporting period. (Hospital Underwriting Group became a wholly owned subsidiary effective May 31, 2003.) These self-insured retentions were $1 million per occurrence for fiscal years ended May 31, 1996 through May 31, 2002. Hospital Underwriting Group's retentions covered the next $2 million per occurrence. Claims in excess of $3 million per occurrence were, in turn, reinsured with major independent insurance companies. In earlier policy periods, the self-insured retentions varied by hospital and by policy period from $500,000 to $5 million per occurrence.

        For the periods June 1, 2000 through May 31, 2001, and June 1, 2001 through May 31, 2002, the policies written by Hospital Underwriting Group provided a maximum of $50 million of its retained losses for each policy period. As of December 31, 2003, Hospital Underwriting Group's retained reserves for losses in each policy period were approaching the policy maximum. If the $50 million maximum amount is exhausted in either of these years, Tenet will be responsible for the first $25 million per occurrence for any subsequent claim paid that was applicable to the exhausted policy period before any excess insurance coverage would apply.

        Effective June 1, 2002, Tenet's self-insured retention per occurrence was increased to $2 million. In addition, a new wholly owned insurance subsidiary, The Healthcare Insurance Corporation, was formed to insure substantially all of these risks. This subsidiary insures these risks under a claims-made policy with retentions per occurrence for the periods June 1, 2002 through May 31, 2003, and June 1, 2003 through May 31, 2004, of $3 million and $13 million, respectively. Risks in excess of these retentions are reinsured with major independent insurance companies.

        All reinsurance applicable to Hospital Underwriting Group, The Healthcare Insurance Corporation and any excess insurance purchased by Tenet is subject to policy aggregate limitations. If such policy aggregates should be partially or fully exhausted in the future, Tenet's financial position, results of operations or cash flows could be materially adversely affected.

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        In addition to the reserves recorded by the above insurance subsidiaries, we maintain self-insured retention reserves based on actuarial estimates for the portion of our professional liability risks, including incurred but not reported claims, for which we do not have insurance coverage (i.e., self-insured retentions). Reserves for losses and related expenses are estimated using expected loss-reporting patterns and are discounted to their present value under a risk-free rate approach using a Federal Reserve 10-year maturity composite rate of 4.6% at December 31, 2002 and 4.0% at December 31, 2003 based on our claims payout period. If actual payments of claims materially exceed projected estimates of claims, Tenet's financial position, results of operations or cash flows could be materially adversely affected.

EXECUTIVE OFFICERS

        The names, positions and ages of our executive officers, as of March 15, 2004, are:

        Mr. Fetter was elected president effective November 7, 2002 and was named chief executive officer in September 2003. He also was elected to the board of directors of Tenet in September 2003. From March 2000 to November 2002, Mr. Fetter was chairman and chief executive officer of Broadlane, Inc. From October 1995 to February 2000, he served in several senior management positions at Tenet, including executive vice president and chief financial officer, and chief corporate officer in the office of the president. Mr. Fetter holds an M.B.A. from the Harvard Business School and a bachelor's degree in economics from Stanford University. Mr. Fetter also serves as a director of the Tenet Healthcare Foundation and Broadlane, Inc.

        Mr. Jennings was named chief operating officer on February 9, 2004. Prior to that, he served as president of our former eastern division, and, from 1997 to March 2003, he served as executive vice president of our former southeast division. Mr. Jennings rejoined Tenet in 1997 from Ramsay Health Care Inc., where he was president and chief executive officer from 1993 to 1996. Before that, he served as senior vice president, operations, responsible for National Medical Enterprises, Inc.'s acute care hospitals in Texas, Missouri and West Florida from 1991 to 1993. His career experience includes executive directorships at a number of acute care hospitals. Mr. Jennings has an M.B.A. from the University of South Carolina and a bachelor's degree in pharmacy from the University of Georgia. Mr. Jennings is also a fellow of the American College of Healthcare Executives and a board member of the Federation of American Hospitals.

        Mr. Farber was elected chief financial officer on November 7, 2002. Prior to his current position, Mr. Farber served as Tenet's senior vice president, corporate finance, and treasurer. Mr. Farber rejoined Tenet in May 1999 from J.P. Morgan & Co. in New York, where he served as vice president, health care investment banking. He previously served Tenet as vice president, corporate finance, from February 1997 to October 1998. From 1993 to 1997, Mr. Farber worked as an investment banker in the Los Angeles office of Donaldson, Lufkin & Jenrette. Mr. Farber has a bachelor of science degree in economics from the University of Pennsylvania's Wharton School of Business and completed the Advanced Management Program at Harvard Business School. Mr. Farber also serves as a director of the Tenet Healthcare Foundation.

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        Mr. Urbanowicz joined Tenet as general counsel and was appointed secretary on December 22, 2003. From October 2001 to December 2003, he was the deputy general counsel of the U.S. Department of Health and Human Services. Before joining HHS, from June 2000 to October 2001, Mr. Urbanowicz was a partner in the law firm of Locke Liddell & Sapp, specializing in health care law. From January 1998 to June 2000, he was a partner in the New Orleans law firm of Liskow & Lewis and was head of that firm's health care law practice. Before joining Liskow & Lewis, Mr. Urbanowicz was a partner in the New Orleans law firm of Monroe & Lemann, where he was head of the firm's health care law practice. Mr. Urbanowicz holds a J.D. from Tulane University's School of Law and a bachelor of arts degree in English and political science from Tulane University.

        Mr. Schochet was elected vice chairman of Tenet in January 1999. He joined Tenet in 1979 and has held a variety of executive positions since that time, most recently serving as executive vice president of operations from March 1995 to January 1999. Mr. Schochet is active in industry affairs, and has twice served as chairman of the board of the Federation of American Hospitals. Mr. Schochet holds a master's degree in hospital administration from George Washington University and a bachelor's degree in zoology from the University of Maine. Mr. Schochet also serves as a director of Broadlane, Inc. and is on the Board of Trustees of the Healthcare Leadership Council.

        Mr. Smith was promoted to president of our former western division on March 10, 2003; in February 2004, we announced that Mr. Smith would be responsible for managing the transition of the 27 hospitals that we intend to divest in 2004. Prior to March 2003, Mr. Smith was executive vice president of our former central-northeast division. Before joining Tenet in 1995, he served as executive vice president, operations, for American Medical International, where he held various positions over 16 years. Mr. Smith has a master's degree in health care administration from Duke University and a bachelor's degree in business administration from Furman University. He has served in leadership positions for a variety of health care and community organizations, including the Federation of American Hospitals, Esoterix, Inc. and Epic Healthcare Corporation.

FORWARD-LOOKING STATEMENTS

        The information in this Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements represent management's current belief, based on currently available information, as to the outcome and timing of future events. They involve known and unknown risks, uncertainties and other factors—many of which we are unable to predict or control—that may cause our actual results, performance or achievements, or health care industry results, to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the following:

•

Changes in the Medicare and Medicaid programs, including modifications to patient eligibility requirements or the method of calculating payments or reimbursements.



•

Any removal or exclusion of us, or one or more of our subsidiaries' hospitals, from participation in the Medicare program.



•

The ability to enter into managed care provider arrangements on acceptable terms.



•

The outcome of known and unknown litigation, government investigations, and liability and other claims asserted against us.



•

Competition.

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•

Changes in, or our ability to comply with, laws and governmental regulations.



•

Changes in business strategy or development plans.



•

Our ability to satisfactorily and timely collect our patient accounts receivable, particularly in light of increasing numbers of underinsured and uninsured patients.



•

Settlement of professional liability claims and the availability of professional liability insurance coverage at current levels.



•

Technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care.



•

General economic and business conditions, both nationally and regionally.



•

Demographic changes.



•

The ability to attract and retain qualified management and other personnel, including physicians, nurses and other health care professionals, and the impact on our labor expenses resulting from a shortage of nurses and other health care professionals.



•

The amount and terms of our indebtedness.



•

The timing and payment, if any, of any final determination of potential liability as a result of an Internal Revenue Service examination.



•

The availability of suitable acquisition and disposition opportunities, and our ability to accomplish proposed acquisitions and dispositions.



•

The availability and terms of capital to fund the needs of our business.



•

Changes in the distribution process or other factors that may increase our costs of supplies.



•

Other factors referenced in this Form 10-K.

        When considering forward-looking statements, you should keep in mind the foregoing risk factors and other cautionary statements in this Form 10-K. Should one or more of the risks and uncertainties described above or elsewhere in this Form 10-K occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety, and therefore disclaim any resulting liability for potentially related damages.

        All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

COMPANY INFORMATION

        Tenet files annual, transition, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Tenet's reports, proxy statements and other documents filed electronically with the SEC are available at the Web site maintained by the SEC at www.sec.gov.

        Tenet's Web site, www.tenethealth.com, also offers, free of charge, extensive information about Tenet's operations and financial performance, including a comprehensive series of investor pages. These pages include real-time access to Tenet's annual, transition, quarterly and current reports (and amendments to such reports) and other filings made with, or furnished to, the SEC.

ITEM 2. PROPERTIES

        Note: The disclosure required under this Item is included in Item 1.

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ITEM 3. LEGAL PROCEEDINGS

        Tenet and its subsidiaries are subject to a significant number of claims and lawsuits. They are also the subject of federal and state agencies' heightened and coordinated civil and criminal investigations and enforcement efforts, and have received subpoenas and other requests for information relating to a variety of subjects. In the present environment, Tenet expects these enforcement activities to take on additional importance, that government enforcement activities will intensify, and that additional matters concerning Tenet and its subsidiaries may arise. Tenet also expects similar and new claims and lawsuits to be brought against it from time to time.

        The results of these claims and lawsuits cannot be predicted, and it is reasonably possible that the ultimate resolution of these claims and lawsuits, individually or in the aggregate, may have a material adverse effect on Tenet's business both in the near and long term, financial position, results of operations or cash flows. Although Tenet defends itself vigorously against claims and lawsuits and cooperates with investigations, these matters

•

Could require Tenet to pay substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under Tenet's insurance policies where coverage applies and is available.



•

Cause Tenet to incur substantial expenses.



•

Require significant time and attention from Tenet's management.



•

Could cause Tenet to close or sell hospitals or otherwise modify the way it conducts its business.

Tenet records reserves for claims and lawsuits when they are probable and reasonably estimable.

        Currently pending legal proceedings and investigations that are not in the ordinary course of business are principally related to the subject matters set forth below. Tenet undertakes no obligation to update this disclosure for any new developments.

PHYSICIAN RELATIONSHIPS

        Tenet and certain of its subsidiaries are under scrutiny with respect to their hospitals' relationships with physicians. Tenet believes that all aspects of its relationships with physicians potentially are under review. Proceedings in this area may be criminal, civil or both.

United States v. Weinbaum, Tenet HealthSystem Hospitals, Inc., Alvarado Hospital Medical Center, Inc. and Nazaryan, Case No. 03CR1587L (United States District Court for the Southern District of California, Second Superseding Indictment filed September 25, 2003)

        On June 5, 2003, a federal grand jury in San Diego, California returned an eight-count indictment against Barry Weinbaum, the chief executive officer of Alvarado Hospital Medical Center, Inc., a hospital owned by a subsidary of Tenet and located in San Diego. The indictment alleged conspiracy to violate the federal anti-kickback statute and included substantive counts alleging the payment of illegal remuneration related to physician relocation, recruitment and consulting agreements.

        On July 17, 2003, the grand jury returned a superseding indictment adding Tenet HealthSystem Hospitals, Inc. and Alvarado Hospital Medical Center as defendants. (Tenet HealthSystem Hospitals, Inc. is the legal entity that was doing business as Alvarado Hospital Medical Center during some of the period of time covered by the indictment.) The superseding indictment charged one count of conspiracy to violate the anti-kickback statute and 16 substantive counts of payment of illegal remunerations.

        On September 25, 2003, the grand jury returned a second superseding indictment that added the hospital's director of business development, Mina Nazaryan, as a defendant. The second superseding

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indictment charged the defendants with conspiracy to violate the anti-kickback statute and 19 substantive counts of paying illegal remunerations. Additionally, Ms. Nazaryan is charged with one count of obstruction of a health care offense investigation and two counts of witness tampering.

        All of the defendants have pleaded not guilty and trial has been set for October 13, 2004 in United States District Court in San Diego. If convicted, the two defendant subsidiaries would be subject to monetary penalties and exclusion from participation in the Medicare program and other federal and state health care programs.

Southern California Investigations

        On July 3, 2003, Tenet and several of its subsidiaries received administrative subpoenas from the U.S. Attorney's Office for the Central District of California seeking documents since 1997 related to physician relocation agreements at seven Southern California hospitals owned by Tenet's subsidiaries, as well as summary information about physician relocation agreements related to all of Tenet's hospital subsidiaries. Specifically, the subpoenas, issued in connection with a criminal investigation, seek information from Tenet, three intermediary corporate subsidiaries and subsidiaries that own seven of Tenet's Southern California hospitals: Centinela Hospital Medical Center in Inglewood, Daniel Freeman Memorial Hospital in Inglewood, Daniel Freeman Marina Hospital in Marina del Rey, John F. Kennedy Memorial Hospital in Indio, Brotman Medical Center in Culver City, Encino-Tarzana Regional Medical Center in Encino and Tarzana, and Century City Hospital in Los Angeles. Tenet is cooperating with the government regarding this investigation.

        Physician arrangements at three of these hospitals—Century City Hospital, Brotman Medical Center and Encino-Tarzana Regional Medical Center—are also the subject of an ongoing federal civil investigation.

        In addition, Tenet is cooperating with the United States Attorney's Office in Los Angeles regarding its investigation into physician agreements, coronary procedures and billing practices at three hospitals in Southern California—Centinela Hospital Medical Center, Daniel Freeman Memorial Hospital and USC University Hospital—from 1998 to the present. In October 2003 and January 2004, Tenet received voluntary document requests from the government seeking information concerning this investigation.

Women's Cancer Center

        In April 2003, Tenet received an administrative subpoena duces tecum from the Department of Health and Human Services, Office of the Inspector General, seeking documents relating to any agreements with the Women's Cancer Center, a physician's group practicing in the field of gynecologic oncology, and certain physicians affiliated with that group. The subpoena seeks documents from Tenet as well as four California hospitals—Community Hospital of Los Gatos, Doctors Medical Center of Modesto, San Ramon Regional Medical Center and St. Luke Medical Center in Pasadena (which is now closed)—and Lake Mead Hospital Medical Center in North Las Vegas, Nevada (which was sold effective February 1, 2004).

        Tenet is cooperating with the government with respect to this investigation.

Florida Medicaid Investigation

        The Florida Medicaid Fraud Control Unit ("FMFCU") issued an investigative subpoena to Tenet in June 2003 seeking employee personnel records and contracts with physicians, therapists and management companies, including loan agreements and purchase and sale agreements, from 1992 to the present related to the Florida hospitals owned by Tenet subsidiaries. Since such date, Tenet has received additional requests for information related to the foregoing topics as well as coding at its Florida hospitals, and it is cooperating with the FMFCU's investigation.

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United States Ex Rel. Barbera v. Amisub (North Ridge Hospital), Inc., Case No. 97-6590-CIV-JORDAN (United States District Court for the Southern District of Florida, filed May 13, 1997)

        This qui tam lawsuit under the False Claims Act was filed under seal by a former employee in 1997 after his employment with a subsidiary of Tenet was terminated. The employee's original qui tam action, which was brought against Tenet and various subsidiaries, including a third-tier subsidiary that owns North Ridge Medical Center, a hospital located in Fort Lauderdale, Florida, contends that certain physician employment contracts and practice acquisition agreements violate (1) the federal anti-kickback statute and (2) the Stark law. The employee also alleges that Tenet and North Ridge submitted improperly coded bills from certain physician practices to the Medicare program that caused them to receive excessive reimbursements.

        The government intervened as to certain of the Stark law-related claims and also alleges that North Ridge's cost reports for fiscal years 1993 through 1997 were false, principally because they improperly included non-reimbursable costs related solely to the physicians' private practices. The government also has brought various state law claims based on the same allegations. Additionally, the government contends that a medical director agreement between North Ridge and a physician not named in the employee's complaint violated the Stark law.

        The claimant and the government seek treble damages, civil penalties, pre- and post-judgment interest, and injunctive and other relief.

        In January 2004, Tenet and lawyers for the U.S. Department of Justice (DOJ) entered into a Letter of Understanding outlining the broad terms of a proposed settlement, which may include a corporate integrity agreement, of all of the allegations in this litigation. The Letter of Understanding is subject to a number of conditions, including formal approval by the DOJ, approval by the former employee, and agreement by the Department of Health and Human Services, Office of the Inspector General, to release its authority to exclude North Ridge from federal health care programs on the basis of the allegations of this case. Tenet has adequately provided for the proposed settlement as of December 31, 2003, pursuant to the Letter of Understanding.

Transfer-Discharge Investigation

        The Department of Justice has been investigating certain hospital billings to Medicare for inpatient stays reimbursed under the diagnosis-related group system from January 1, 1992 to June 30, 2000. The investigation has focused on the coding of patients' post-discharge status. The investigation arose from the federal government's nationwide transfer-discharge initiative. In January 2004, Tenet reached an understanding with attorneys at the DOJ to recommend settlement of all civil claims against Tenet with respect to the transfer-discharge matter at substantially all Tenet hospitals, subject to further approval by the DOJ and negotiation of a definitive agreement. Tenet has adequately provided for the proposed settlement of this matter as of December 31, 2003.

El Paso Investigation

        On January 23, 2004, Tenet learned that the Office of the Inspector General of the Department of Health and Human Services had issued subpoenas to various physicians who have financial arrangements with three Tenet hospitals in El Paso, Texas. The subpoenas request documents relating to financial arrangements between these physicians and Tenet or its subsidiaries. On March 3, 2004, as anticipated, Tenet received from the Civil Division of the Department of Justice a request for documents in connection with this inquiry. Tenet is cooperating with the government with respect to this matter.

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PRICING

        Tenet and certain of its subsidiaries are currently subject to governmental investigations and civil lawsuits arising out of the pricing strategies implemented at facilities owned by Tenet's subsidiaries.

Outlier Investigation

        On January 2, 2003, the United States Attorney's Office for the Central District of California issued an administrative investigative demand subpoena seeking production of documents related to Medicare outlier payments by Tenet and 19 hospitals owned by subsidiaries.

        On January 14, 2003, Tenet received an additional subpoena requesting information concerning outlier payments and Tenet's corporate integrity agreement that expired in 1999.

        On October 15, 2003, Tenet received another subpoena from the U.S. Attorney's Office seeking medical and billing records from 1998 to the present for certain identified patients who were treated at two Los Angeles-area facilities owned by Tenet subsidiaries—Encino-Tarzana Regional Medical Center in Tarzana and USC University Hospital. Additionally, the subpoena seeks personnel information concerning certain managers at those facilities during that period, as well as information about the two hospitals' gross charges for the same time period.

        The investigation is focused on whether Tenet's receipt of outlier payments violated federal law and whether Tenet omitted material facts concerning its outlier revenue from its public filings. Tenet is cooperating with the government with respect to this investigation.

Pharmaceutical Pricing Litigation

        Tenet has been sued in class actions in a number of states regarding the pricing of pharmaceuticals and other products and services at hospitals owned and operated by its subsidiaries. In California, the following actions have been coordinated into one proceeding entitled Tenet Healthcare Cases II, J.C.C.P. No. 4289, now pending in the Los Angeles County Superior Court:

(1)

Bishop v. Tenet Healthcare Corp., Case No. 2002-074408 (Superior Court of California, County of Alameda, filed December 2, 2002);



(2)

Castro v. Tenet Healthcare Corp., Case No. C03-00460 (Superior Court of California, County of Contra Costa, filed February 24, 2003);



(3)

Colon v. Tenet Healthcare Corp., Case No. BC 290360 (Superior Court of California, County of Los Angeles, filed February 13, 2003);



(4)

Congress of California Seniors v. Tenet Healthcare Corp., Case No. BC 287130 (Superior Court of California, County of Los Angeles, filed December 17, 2002);



(5)

Delgadillo v. Tenet Healthcare Corp., Case No. BC 290056 (Superior Court of California, County of Los Angeles, filed February 7, 2003);



(6)

Geller v. Tenet Healthcare Corp., Case No. BC 292641 (Superior Court of California, County of Los Angeles, filed March 21, 2003);



(7)

Jervis v. Tenet Healthcare Corp., Case No. BC 289522 (Superior Court of California, County of Los Angeles, filed January 30, 2003);



(8)

Moran v. Tenet Healthcare Corp., Case No. CV 030070 (Superior Court of California, County of San Luis Obispo, filed February 5, 2003);



(9)

Plocher v. Tenet Healthcare Corp., Case No. BC 293236 (Superior Court of California, County of Los Angeles, filed April 2, 2003);

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(10)

Vargas v. Tenet Healthcare Corp., Case No. BC 291303 (Superior Court of California, County of Los Angeles, filed March 3, 2003);



(11)

Walker v. Tenet Healthcare Corp., Case No. BC 03082281 (Superior Court of California, County of Alameda, filed February 7, 2003);



(12)

Watson v. Tenet Healthcare Corp., Case No. 147593 (Superior Court of California, County of Shasta, filed December 20, 2002); and



(13)

Yslas v. Tenet Healthcare Corp., Case No. BC 289356 (Superior Court of California, County of Los Angeles, filed January 28, 2003).

        On December 24, 2003, after the court overruled most of Tenet's demurrers to plaintiffs' First Amended and Consolidated Complaint, plaintiffs in the coordinated California action filed a Second Amended and Consolidated Class Action and Representative Complaint against Tenet and all of its California hospitals on behalf of plaintiffs and a purported class consisting of certain uninsured, self-insured and Medicare patients who allegedly paid excessive or unfair prices for prescription drugs or medical products or procedures at hospitals or other medical facilities owned by Tenet or its subsidiaries. The complaint asserts claims for violation of California's unfair competition law, violation of California's Consumers' Legal Remedies Act, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. Plaintiffs seek to enjoin Tenet from continuing the alleged unfair pricing policies and practices, and to recover all sums wrongfully obtained by those policies and practices, including compensatory damages, punitive damages, restitution, disgorgement of profits, treble damages, and attorneys' fees and costs. On January 20, 2004, Tenet answered the Second Amended and Consolidated Complaint and filed counterclaims against the majority of the named plaintiffs for failure to pay the outstanding balances on their respective patient bills. The case is currently in the class discovery phase, with plaintiffs' motion for class certification due to be filed on August 16, 2004. The hearing on plaintiffs' motion for class certification is scheduled for January 31, 2005.

        In addition, a similar class action entitled Wade v. Tenet Healthcare Corporation, et al., No. Ct-000250-03, was filed in Circuit Court in Memphis, Tennessee on January 15, 2003. The complaint asserts claims for violation of the Tennessee Consumer Protection Act, unjust enrichment, fraudulent concealment, declaratory relief and breach of contract. These claims are based on allegations that Tenet excessively inflated its charges for medical products, medical services and prescription drugs at its hospitals. Plaintiffs seek compensatory and punitive damages, attorneys' fees, and equitable and other relief. On April 28, 2003, Tenet filed a motion to dismiss the complaint. On November 13, 2003, the court accepted Tenet's challenges to the sufficiency of the complaint and granted plaintiffs leave to amend to allege certain matters with more specificity. To date, plaintiffs have not amended their complaint, and there is no deadline to do so.

        On March 31, 2003, Tenet was served with a similar class action in Louisiana, entitled Jordan, et al. v. Tenet Healthcare Corp., et al., No 591 374, Civil District Court, Jefferson Parish. The class action complaint alleged that the seven Louisiana hospitals owned by subsidiaries of Tenet charged excessive amounts for prescription drugs, medical services and medical products. The complaint asserted claims for violation of the Louisiana Unfair Trade Practice and Consumer Protection Law, and sought on behalf of the alleged class an accounting, injunctive relief, restitution, compensatory damages and attorneys' fees and costs. The Jordan action was dismissed with prejudice by the court on statute of limitations grounds. A nearly identical action, Wright v. Tenet Healthcare Corp. et al., No. 2003 6262, Civil District Court, Orleans Parish, Louisiana, was filed on April 22, 2003. The court granted defendant's exception to the Wright complaint for failure to state a cause of action and gave plaintiff 30 days to amend her petition. On November 14, 2003, plaintiff filed an amended petition, alleging claims against Tenet under the Louisiana Unfair Practices Act, as well as claims for unjust enrichment, fraud and misrepresentation. Tenet has filed a motion to dismiss the amended complaint, and a hearing is scheduled for March 26, 2004.

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        A third class action was filed in Louisiana on May 5, 2003, entitled Miranda v. Tenet Louisiana, Tenet Healthcare Corp., No. 03 6893, Civil District Court, Orleans Parish. The class action complaint, filed on behalf of all uninsured and partially insured residents of Louisiana who were treated at Tenet-affiliated hospitals in Louisiana since February 1, 1999, alleges that the hospitals charged excessive prices for health care and pharmaceuticals. Plaintiff asserts claims for unjust enrichment, negligent misrepresentation, fraud and misrepresentation, and breach of contract, and seeks compensatory and punitive damages, attorneys' fees and equitable, injunctive and other relief. Tenet has filed exceptions seeking to have the complaint dismissed, although no hearing date is scheduled. Also, plaintiff moved to consolidate the lawsuit with the Wright action, which motion has not yet been set for hearing.

        Two similar class actions were filed in Florida, Sanchez v. Lifemark Hospital of Florida dba Palmetto General Hospital, No. 03 10131 CA 32, Miami-Dade County, filed April 25, 2003, and Garcia v. Tenet Healthcare Corp. et al., No. 03 008646 CA 18b, Broward County, filed May 16, 2003. On October 15, 2003, plaintiffs in the Sanchez action filed a notice of voluntary dismissal without prejudice. In the Garcia action, plaintiffs allege, on behalf of themselves and a purported class of uninsured and partially insured patients, that Tenet and/or its affiliated hospitals charged excessive and unlawful prices for medical products, services and pharmaceuticals. The complaint alleges a violation of Florida's Deceptive and Unfair Trade Practices Act and also asserts claims for unfair competition and unjust enrichment and seeks damages, attorneys' fees, and injunctive and other equitable relief. Tenet has filed a motion to dismiss the complaint, which is set for hearing on April 29, 2004.

        A similar class action was filed on June 19, 2003 in South Carolina, entitled Comer v. Tenet Healthcare Corporation, No 03-CP-46-1688, Court of Common Pleas, Sixth Judicial Circuit, York County. The action has been amended and renamed Atherton v. Tenet Healthcare Corp. & AMISUB of South Carolina, Case No. 03-CP-46-1688. The amended complaint alleges, on behalf of plaintiffs and all "uninsured or self-pay patients" treated at Piedmont Medical Center in York County, South Carolina, since January 1, 1997, that the charges at Piedmont Medical Center are excessive and in breach of a contract between York County and the defendant and trustees of the hospital to limit charges at the hospital. In addition to this breach of contract claim, plaintiffs also have alleged claims for unjust enrichment and implied contract for value of goods and services received and seek compensatory and punitive damages, injunctive and other relief. Tenet filed a motion for summary judgment on all claims, which was heard on March 1, 2004, however, as of March 12, 2004, the court had not yet ruled on the motion.

        Finally, a similar class action was filed on December 17, 2003 in Pennsylvania, entitled Wright v. Tenet Healthcare Corp., No. 002365, Court of Common Pleas, Philadelphia County, on behalf of all Pennsylvania residents who allegedly paid unlawful or unfair prices for prescription drugs or medical products or procedures at hospitals or other medical facilities owned by Tenet and/or its subsidiaries. The complaint alleges causes of action for violation of the Pennsylvania Unfair Trade Practices Act, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment, and seeks damages, restitution, injunctive relief and attorneys' fees. Tenet filed a motion to dismiss the action on February 26, 2004; as of March 12, 2004, a hearing date on the motion had not yet been set.

        Additional actions with similar allegations and claims may be filed in the states discussed above or other states.

Managed Care Insurance Disputes

        Tenet and its subsidiaries are also engaged in disputes with a number of managed care health plans and other types of health insurance companies concerning charges at facilities owned by Tenet's subsidiaries and the impact of those charges on stop-loss and other payments. These disputes involve accounts receivable owed to Tenet's facilities, as well as claims by the insurance companies for alleged overcharges, and the disputes are in various stages, from negotiation to arbitration.

23

SECURITIES AND SHAREHOLDER MATTERS

In Re Tenet Healthcare Corporation Securities Litigation, Case No. CV-02-8462-RSWL (United States District Court, Central District of California, Consolidated Amended Complaint filed May 23, 2003)

        From November 2002 through January 2003, 20 securities class action lawsuits were filed against Tenet and certain of its officers and directors in the United States District Court for the Central District of California and the Southern District of New York on behalf of all persons or entities who purchased Tenet's securities during the various class periods specified in the complaints. All of these actions have been consolidated under the above-listed case number in the United States District Court for the Central District of California. The procedures of the Private Securities Litigation Reform Act ("PSLRA") apply to these cases.

        On February 10, 2003, the State of New Jersey was appointed "lead" plaintiff in the consolidated actions and its counsel, the law firm of Schiffrin & Barroway, was appointed as lead class counsel.

        On January 15, 2004, after the court granted in November 2003 defendants' motion to dismiss plaintiffs' first amended complaint for failure to plead fraud with particularity, plaintiffs filed their second amended complaint. The named defendants are Tenet, Jeffrey Barbakow, David Dennis, Thomas Mackey, Raymond Mathiasen, Barry Schochet and Christi Sulzbach. The claims in the second amended complaint are (1) securities fraud under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 (the "Exchange Act"), (2) control person liability pursuant to Section 20(a) of the Exchange Act, (3) insider trading under Section 10(b) of and Rule 10b-5 under the Exchange Act, and (4)-(5) making false statements in registration statements for Tenet's debt offerings under Sections 11 and 15 of the Securities Act of 1933. Plaintiffs allege that Tenet and the individual defendants made or were responsible for false and misleading statements concerning Tenet's receipt of Medicare outlier payments and allegedly medically unnecessary heart surgeries at Tenet's Redding Medical Center. Plaintiffs have not identified their damage theory. Defendants' Motion to Dismiss was filed on March 1, 2004. The hearing on this motion will take place sometime after May 15, 2004.

        Pursuant to the PSLRA, all discovery is stayed until the Motion to Dismiss is denied. On October 20, 2003, the court denied a motion by the lead plaintiff to lift the discovery stay.

Shareholder Derivative Actions

(1)

In re Tenet Healthcare Corporation Derivative Litigation, Lead Case No. 01098905 (California Superior Court, Santa Barbara County); and



(2)

In re Tenet Healthcare Corporation Derivative Litigation, Case No. CV-03-0011 RSWL (United States District Court, Central District of California).

        The above-listed cases are shareholder derivative actions filed against members of the board of directors and senior management of Tenet by shareholders purporting to pursue their actions on behalf of Tenet and for its benefit. No pre-lawsuit demand to investigate the allegations or bring the action was made on the board of directors. Tenet is also named as a nominal defendant in each of the cases.

        In the California derivative litigation, which involves 10 cases that have been consolidated, the lead plaintiff filed a Consolidated Amended Complaint on March 3, 2003. On May 1, 2003, defendants filed a motion to stay the California derivative litigation in favor of the federal derivative litigation and filed demurrers to all of the causes of action alleged in the Consolidated Amended Complaint. The complaint alleges claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, indemnification and insider trading under California law. The complaint alleges that the individual defendants breached their fiduciary duties and engaged in gross mismanagement by allegedly ignoring indicators of the lack of control over Tenet's accounting and

24

management practices, allowing Tenet to engage in improper conduct, permitting misleading information to be disseminated to shareholders, failing to monitor hospitals and doctors to prevent improper action, and otherwise failing to carry out their duties and obligations to Tenet. The lead plaintiff further alleges that the defendants violated the California insider trading statute because they allegedly knew, but did not disclose, that (1) physicians at hospitals owned by subsidiaries of Tenet were routinely performing unnecessary procedures in order to take advantage of Medicare outlier reimbursement, (2) Tenet deliberately raised its prices to take advantage of Medicare outlier reimbursement, (3) Tenet's growth was dependent primarily on its continued receipt of Medicare outlier payments, and (4) the rules and regulations related to Medicare outlier payments were being reformed to limit outlier payments, which would have a material negative effect on Tenet's revenues and earnings going forward. Plaintiff seeks a declaration that the individual defendants violated their fiduciary duties, compensatory damages plus interest, treble damages under Section 25502.5(a) of the California Corporations Code for insider trading, restitution and disgorgement of profits. On July 22, 2003, the California Superior Court entered an order overruling defendants' demurrer, and granting the motion to stay. The action remains stayed until further order of the court.

        In addition to the derivative litigation pending in the California Superior Court, four derivative cases have also been filed in federal court. These four cases have been consolidated in the United States District Court for the Central District of California. Dr. Bernard Stern, North Border Investments and the City of Philadelphia have been appointed lead plaintiffs. Plaintiffs served their First Consolidated Amended Complaint on March 28, 2003, which was dismissed by the court, with leave to amend, pursuant to defendants' motion to dismiss in November 2003.

        Plaintiffs filed their amended complaint on January 15, 2004. In addition to common law claims for breach of fiduciary duty, abuse of control, waste of corporate assets, indemnification, insider trading and unjust enrichment, the Second Consolidated Amended Complaint alleges violations of Sections 14(a) and 10(b) of the Exchange Act and Rules 14a-9 and 10b-5 under the Exchange Act. Plaintiffs have alleged that the court has diversity jurisdiction over the state law claims. Plaintiffs seek declarations that the directors violated Section 14(a) of the Exchange Act, that Jeffrey Barbakow violated Section 10(b) of and Rule 10b-5 under the Exchange Act, that defendants are liable for contribution and indemnification under Section 10(b) of and Rule 10b-5 under the Exchange Act, that defendants committed insider trading, and that defendants breached their fiduciary duties, were unjustly enriched and must indemnify Tenet under common law. The action also seeks an order that defendants refrain from further breaches of fiduciary duty. Plaintiffs further seek compensatory damages in an unstated amount, recovery of "millions of dollars" of profit from alleged insider trading and imposition of an equitable lien to secure recovery, repayment of salaries and other compensation, statutory treble damages and punitive damages. Defendants filed a motion to dismiss this complaint on March 1, 2004. The hearing on this motion will take place sometime after May 15, 2004.

SEC Investigation

        The Securities and Exchange Commission initiated a formal investigation of Tenet and certain of its current and former directors and officers by order dated April 22, 2003. The confidential investigation involves whether Tenet's disclosures in its financial reports of outlier reimbursements and stop-loss payments under managed care contracts were misleading or otherwise inadequate, and includes whether there was any improper trading in Tenet's securities by current and former directors and officers of Tenet. The securities law provisions implicated include Sections 10(b) and 17(a) of the Exchange Act, Rules 12b-20, 13a-1 and 13a-13 under the Exchange Act, and regulations associated with those statutes and rules.

        The SEC has served a series of document requests and deposition subpoenas on current and former employees, and Tenet is cooperating with the government with respect to the investigation.

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Hamner v. Tenet Healthcare Corp., Case No. CV 03-2318 RSWL (United States District Court for the Central District of California, filed February 19, 2003)

        The plaintiff in this action is Gary Hamner, a former employee of Tenet who is seeking to represent a class of present and former Tenet employees who held stock under the Tenet Healthcare Corporation Employee Stock Purchase Plan on October 3, 2001 and thereafter. The defendants are Tenet, Lawrence Biondi, Mónica Lozano, Floyd Loop, Jeffrey Barbakow, Bernice Bratter, Sanford Cloud, Maurice DeWald, Van Honeycutt, Robert Kerrey and Lester Korn.

        The stated claim is for breach of fiduciary duty. The plaintiff alleges that during the class period, the defendants failed to disclose information concerning Redding Medical Center and Tenet's receipt of Medicare payments to holders of stock in the Tenet Employee Stock Purchase Plan, and thereby harmed the employee shareholders, who otherwise might have sold or diversified their investments. The plaintiff seeks an unspecified amount of damages.

        Defendants demurred to plaintiff's claim on February 9, 2004. The hearing on defendants' demurrers will be on April 2, 2004.

Tenet Healthcare Corporation v. M. Lee Pearce and The Tenet Shareholder Committee, LLC, and related counterclaim, Case No. CV-03-2552 RSWL (United States District Court, Central District of California, filed April 10, 2003)

        On April 10, 2003, Tenet filed a complaint against M. Lee Pearce, M.D., and the Tenet Shareholder Committee, LLC ("TSC") under the federal proxy laws, seeking injunctive relief in connection with Tenet's 2003 annual meeting of shareholders. The defendants filed their original answer and counterclaim against Tenet on May 12, 2003. On June 16, 2003, defendants filed an amended answer and first amended counterclaim that, in addition to the original allegation of violations of the federal proxy laws, included a claim for breach of fiduciary duty against Tenet and certain of its executive officers, and sought injunctive relief, as well as attorneys' fees and costs.

        On December 29, 2003, the court granted Tenet's Motion to Dismiss (1) Tenet's original complaint against Dr. Pearce and TSC, and (2) defendants' first amended counterclaim, which was dismissed with prejudice. Defendants appealed the court's order in its entirety, but subsequently moved to dismiss their appeal voluntarily. On February 2, 2004, the court granted defendants' motion and the appeal was dismissed.

REDDING MEDICAL CENTER

Redding OIG Administrative Action

        On August 4, 2003, following an investigation by federal government agencies regarding whether two physicians who had staff privileges at Redding Medical Center Inc. performed medically unnecessary invasive cardiac procedures at the hospital, Tenet reached a settlement with the United States and the State of California in the amount of $54 million. This settlement resolved all civil and monetary administrative claims that the United States may have had under the False Claims Act, the Civil Monetary Penalties Law, the Program Fraud Civil Remedies Act and/or common law theories of payment by mistake, unjust enrichment, breach of contract and fraud arising out of the performance of, and billings for, allegedly medically unnecessary cardiac procedures at Redding Medical Center from January 1, 1997 through December 31, 2002. In addition, the settlement resolves all civil and monetary administrative claims the State of California may have had under California Government Code Section 12650-54 and/or common law theories of payment by mistake, unjust enrichment, breach of contract and fraud arising out of this same alleged conduct. Tenet has been informed by the U.S. Attorney's Office for the Eastern District of California that it will not initiate any criminal charges

26

against Redding Medical Center, Tenet HealthSystem Hospitals or Tenet for the conduct covered by the settlement. The settlement had no affect on the civil litigation described below.

        The Office of the Inspector General (OIG) of the Department of Health and Human Services agreed to the settlement, but reserved the right to pursue possible administrative action later. On September 3, 2003, the OIG issued a notice of its intent to exclude Redding Medical Center from participation in the Medicare and Medicaid programs and all other federal health care programs.

        Upon receipt of this notice, Redding Medical Center exercised its right to commence administrative proceedings challenging the bases upon which exclusion was proposed. During the course of those proceedings, OIG, on the one hand, and Redding Medical Center, Tenet HealthSystems Hospitals and Tenet, on the other, agreed to resolve their dispute. As a result, a Divestiture Agreement was entered into on December 11, 2003. Through this agreement, the OIG agreed to stay further exclusion proceedings against Redding Medical Center, conditioned upon Tenet's sale of Redding Medical Center's hospital assets.

        The OIG's exclusion proceedings were undertaken against Redding Medical Center, the corporate entity, not against the hospital assets. The obligations set forth in the Divestiture Agreement are exclusively those of Redding Medical Center, Tenet HealthSystems Hospitals and Tenet, and are not applicable to any bona fide purchaser of the hospital assets. The Divestiture Agreement states explicitly that its terms do not apply to the hospital assets during any time period in which they are not owned or operated by Tenet. Further, the terms of the agreement terminate on the date on which Tenet completely divests itself of ownership and management of the hospital assets.

        Thus, a bona fide purchaser of the hospital assets is not subject to exclusion from Medicare participation based on the claims described above. Under the Divestiture Agreement, the OIG has agreed to meet with any bona fide prospective purchaser should further assurances on this issue be required.

Civil Litigation

        Included actions:

(1)

Dahlgren v. Chae Moon, M.D., et al., Case No. 147330 (California Superior Court, Shasta County, filed November 15, 2002);



(2)

Josefsson v. Chae Moon, M.D., et al., Case No. 147273 (California Superior Court, Shasta County, filed November 8, 2002);



(3)

Morrell v. Chae Moon, M.D., et al., Case No. 147271 (California Superior Court, Shasta County, filed November 8, 2002);



(4)

Reed v. Chae Moon, M.D., et al., Case No. 147391 (California Superior Court, Shasta County, filed November 22, 2002);



(5)

Smath v. Chae Moon, M.D., et al., Case No. 147433 (California Superior Court, Shasta County, filed November 27, 2002);



(6)

Corapi v. Chae Moon, M.D., et al., Case No. 147223 (California Superior Court, Shasta County, filed November 27, 2002);



(7)

California Foundation for Independent Living Centers v. Tenet Healthcare Corporation et al., Case No. 147610 (California Superior Court, Shasta County, filed December 27, 2002);



(8)

Baker v. Chae Moon, M.D., et al., Case No. 148326 (California Superior Court, Shasta County, filed March 19, 2003);

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(9)

Bacani v. Chae Moon, M.D., et al., Case No. 148675 (California Superior Court, Shasta County, filed May 1, 2003);



(10)

Fitzgerald, et al. v. Chae Moon, M.D., et al., Case No. 148676 (California Superior Court, Shasta County, filed May 1, 2003);



(11)

Garcia v. Chae Moon, M.D., et al., Case No. 148710 (California Superior Court, Shasta County, filed May 5, 2003);



(12)

Garwood v. Chae Moon, M.D., et al., Case No. 148709 (California Superior Court, Shasta County, filed May 5, 2003);



(13)

Hunt, E. v. Chae Moon, M.D., et al., Case No. 148677 (California Superior Court, Shasta County, filed May 1, 2003);



(14)

Kenney v. Chae Moon, M.D., et al., Case No. 148678 (California Superior Court, Shasta County, filed May 1, 2003);



(15)

Keys v. Chae Moon, M.D., et al., Case No. 148679 (California Superior Court, Shasta County, filed May 1, 2003);



(16)

Kirk, et al. v. Chae Moon, M.D., et al., Case No. 148681 (California Superior Court, Shasta County, filed May 1, 2003);



(17)

Newson v. Chae Moon, M.D., et al., Case No. 148683 (California Superior Court, Shasta County, filed May 1, 2003);



(18)

Thompson et al. v. Chae Moon, M.D., et al., Case No. 148723 (California Superior Court, Shasta County, filed May 7, 2003);



(19)

Varicelli v. Chae Moon, M.D., et al., Case No. 148684 (California Superior Court, Shasta County, filed May 1, 2003);



(20)

Adams, et al. v. Tenet Healthcare Corp., et al., Case No. 149024 (California Superior Court, Shasta County, filed June 12, 2003);



(21)

Alvarez, et al. v. Tenet Healthcare Corp., et al., Case No. 149063 (California Superior Court, Shasta County, filed June 16, 2003);



(22)

Baldini, et al. v. Tenet Healthcare Corp., et al., Case No. 149025 (California Superior Court, Shasta County, filed June 12, 2003);



(23)

Handel, et al. v. Tenet Healthcare Corp., et al., Case No. 149064 (California Superior Court, Shasta County, filed June 16, 2003);



(24)

Wooten, et al. v. Tenet Healthcare Corp., et al., Case No. 148633 (California Superior Court, Shasta County, filed April 28, 2003);



(25)

Hunt, S. v. Tenet Healthcare Corp., et al., Case No. 148283 (California Superior Court, Shasta County, filed March 18, 2003);



(26)

Zamora v. Tenet Healthcare Corp., et al., Case No. 149510 (California Superior Court, Shasta County, filed August 11, 2003);



(27)

Ford v. Chae Moon, et al., Case No. 149809 (California Superior Court, Shasta County, filed September 17, 2003);



(28)

Burton, et al. v. Tenet Healthcare Corporation, et al., Case No. 148703 (California Superior Court, Shasta County, filed May 5, 2003);

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(29)

Calistro, et al. v. Tenet Healthcare Corporation, et al., Case No. 148705 (California Superior Court, Shasta County, filed May 5, 2003);



(30)

Gately, et al. v. Tenet Healthcare Corporation, et al., Case No. 148932 (California Superior Court, Shasta County, filed June 3, 2003);



(31)

Ogram v. Tenet Healthcare Corporation, et al., Case No. 148704 (California Superior Court, Shasta County, filed May 5, 2003);



(32)

Roope v. Chae Moon, et al., Case No. 148247 (California Superior Court, Shasta County, filed March 14, 2003);



(33)

Dillard et al. v. Chae Moon, et al., Case No. 03AS00544 (California Superior Court, Sacramento County, filed January 31, 2003);



(34)

Gill v. Chae Moon, et al., Case No. 03AS01025 (California Superior Court, Sacramento County, filed February 25, 2003);



(35)

Harrison, et al. v. Chae Moon, et al., Case No. 149411 (California Superior Court, Shasta County, filed July 30, 2003);



(36)

Leaf, et al. v. Chae Moon, et al., Case No. 03AS00731 (California Superior Court, Sacramento County, filed February 10, 2003);



(37)

Parker v. Chae Moon, et al., Case No. 03AS01333 (California Superior Court, Sacramento County, filed March 10, 2003);



(38)

Shrader, et al. v. Chae Moon, et al., Case No. 149062 (California Superior Court, Shasta County, filed June 16, 2003);



(39)

Wigley v. Chae Moon, et al., Case No. 03AS01286 (California Superior Court, Sacramento County, filed March 10, 2003);



(40)

Hooper, et al. v. Tenet Healthcare Corporation, et al., Case No. 03AS04983 (California Superior Court, Sacramento County, filed September 5, 2003);



(41)

Aduddell, et al. v. Tenet Healthcare Corp., et al., Case No. 148656 (California Superior Court, Shasta County, filed April 30, 2003);



(42)

Bontrager v. Tenet Healthcare Corp., et al., Case No. 148029 (California Superior Court, Shasta County, filed February 20, 2003);



(43)

Osborne v. Tenet Healthcare Corp., et al., Case No. 148027 (California Superior Court, Shasta County, filed February 20, 2003);



(44)

Stein v. Tenet Healthcare Corp., et al., Case No. 148028 (California Superior Court, Shasta County, filed February 20, 2003);



(45)

Alford, et al. v. Tenet Healthcare Corp., et al., Case No. 149320 (California Superior Court, Shasta County, filed July 18, 2003);



(46)

Kenzy, et al. v. Tenet Healthcare Corp., et al., Case No. 150162 (California Superior Court, Shasta County, filed December 23, 2003);



(47)

Waterman, et al. v. Tenet Healthcare Corp., et al., Case No. 149551 (California Superior Court, Shasta County, filed August 15, 2003);



(48)

Crocker v. Chae Moon, et al., Case No. 150106 (California Superior Court, Shasta County, filed October 21, 2003);

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(49)

McQuillan v. Chae Moon, et al., Case No. 150104 (California Superior Court, Shasta County, filed October 21, 2003);



(50)

Almazan, et al. v. Tenet Healthcare Corp., et al., Case No. 149533 (California Superior Court, Shasta County, filed August 15, 2003);



(51)

Altic, et al. v. Tenet Healthcare Corp., et al., Case No. 149476 (California Superior Court, Shasta County, filed August 7, 2003);



(52)

Barber, E., et al. v. Tenet Healthcare Corp., et al., Case No. 149543 (California Superior Court, Shasta County, filed August 14, 2003);



(53)

Branscum, et al. v. Tenet Healthcare Corp., et al., Case No. 149475 (California Superior Court, Shasta County);



(54)

Eidson, et al. v. Tenet Healthcare Corp., et al., Case No. 149542 (California Superior Court, Shasta County, filed August 14, 2003);



(55)

Falcon, et al. v. Tenet Healthcare Corp., et al., Case No. 149540 (California Superior Court, Shasta County);



(56)

Glasgow, et al. v. Tenet Healthcare Corp., et al., Case No. 150126 (California Superior Court, Shasta County);



(57)

Hammerstaedt, et al. v. Tenet Healthcare Corp., et al., Case No. 150127 (California Superior Court, Shasta County);



(58)

Lee, et al. v. Tenet Healthcare Corp., et al., Case No. 149539 (California Superior Court, Shasta County, filed August 14, 2003);



(59)

Marich, et al. v. Tenet Healthcare Corp., et al., Case No. 149318 (California Superior Court, Shasta County, filed July 18, 2003);



(60)

Slye, et al. v. Tenet Healthcare Corp., et al., Case No. 150146 (California Superior Court, Shasta County);



(61)

Summers v. Tenet Healthcare Corp., et al., Case No. 150176 (California Superior Court, Shasta County);



(62)

Aguilera, et al. v. Tenet Healthcare Corp., et al., Case No. 150169 (California Superior Court, Shasta County);



(63)

Alexandre, et al. v. Tenet Healthcare Corp., et al., Case No. 149550 (California Superior Court, Shasta County, filed August 15, 2003);



(64)

Bradley v. Moon, M.D., et al., Case No. 147998 (California Superior Court, Shasta County, filed February 18, 2003);



(65)

Mitchell v. Moon, M.D., et al., Case No. 147997 (California Superior Court, Shasta County, filed February 18, 2003);



(66)

Holbrook, et al. v. Moon, M.D., et al., Case No. 150074 (California Superior Court, Shasta County, filed October 20, 2003);



(67)

Beem, et al. v. Tenet Healthcare Corp., et al., Case No. 150174 (California Superior Court, Shasta County);



(68)

Beck-Deckert v. Tenet Healthcare Corp., et al., Case No. 150188 (California Superior Court, Shasta County, filed October 30, 2003);

30

(69)

Johnston, et al. v. Tenet Healthcare Corp., et al., Case No. 149920 (California Superior Court, Shasta County, filed October 2, 2003);



(70)

Prosser, et al. v. Tenet Healthcare Corp., et al., Case No. 150182 (California Superior Court, Shasta County);



(71)

Rogers v. Tenet Healthcare Corp., et al., Case No. 149918 (California Superior Court, Shasta County, filed October 1, 2003);



(72)

Wright, et al. v. Tenet Healthcare Corp., et al., Case No. 149919 (California Superior Court, Shasta County, filed October 1, 2003); and



(73)

Johnson v. Tenet Healthcare Corp., et al., Case No. 150194 (California Superior Court, Shasta County).

        These cases were filed following the announcement in October 2002 of the government's investigation concerning whether two physicians, who were independent contractors with medical staff privileges at Redding Medical Center, may have performed medically unnecessary coronary procedures. Tenet anticipates that plaintiffs' counsel will proceed with cases on behalf of approximately 700-800 patients.

        When first filed, many of the complaints alleged various claims including fraud, conspiracy to commit fraud, unfair and deceptive business practices in violation of California Business & Professions Code Section 17200, elder abuse, battery, negligence, wrongful death and intentional infliction of emotional distress. Although the specific claims varied from case to case, the complaints generally alleged that the physician defendants knowingly performed medically unnecessary coronary procedures on patients and that Tenet knew or should have known that such medically unnecessary procedures were being performed. The complaints sought injunctive relief, restitution, disgorgement, and compensatory and punitive damages. Tenet filed demurrers and motions to strike in response to the complaints. The court either sustained the demurrers in their entirety or plaintiffs voluntarily withdrew their original complaints.

        Plaintiffs then filed amended complaints in response to which Tenet again filed demurrers and motions to strike. With the exception of action (7), in which the demurrers to the first amended complaint have not yet been heard (set for March 29, 2004), the court again sustained the demurrers in their entirety. Also with the exception of action (7), plaintiffs in their amended complaints deleted their cause of action under Section 17200.

        Thereafter, plaintiffs again filed amended complaints alleging claims for fraud, breach of fiduciary duty, battery, elder abuse and negligence, based upon a direct liability theory, as well as three derivative liability theories, namely conspiracy, aiding and abetting, and ratification. Tenet again filed demurrers and motions to strike. The court ruled that plaintiffs were permitted to pursue a negligence claim against Tenet, and were permitted to pursue their fraud, breach of fiduciary duty, battery and elder abuse claims, but only based upon the derivative theories of aiding and abetting and ratification. The court struck plaintiffs' conspiracy allegations. The court also struck without prejudice plaintiffs' request for punitive damages and attorneys' fees.

        All of the above actions are being coordinated for pretrial purposes in Shasta County. A master complaint for the above actions was filed on March 1, 2004; a master answer will be filed by May 17, 2004. Discovery has commenced. It is anticipated that the actions may proceed to trial commencing as early as November 2004.

        Tenet anticipates that additional cases with similar allegations may be filed and served.

31

MEDICARE CODING

United States v. Tenet Healthcare Corp., et al, Case No. CV-03-206-GAF (United States District Court for the Central District of California, filed January 9, 2003)

        The Department of Justice, in conjunction with the OIG, has been investigating certain hospital billings to Medicare for inpatient stays reimbursed pursuant to diagnosis-related groups ("DRG") 79 (pneumonia), 415 (operating room procedure for infectious and parasitic diseases), 416 (septicemia), and 475 (respiratory system diagnosis with mechanical ventilator). The investigation is believed to have stemmed initially from the government's nationwide pneumonia "upcoding" initiative and focuses on 103 acute care hospitals owned by subsidiaries of Tenet or its predecessors during the period September 1992 through December 1998. On January 9, 2003, the government filed a lawsuit in the United States District Court for the Central District of California in regard to this matter alleging violations of the federal False Claims Act and various common law theories of liability. The government seeks treble damages and other relief, including punitive damages. On November 19, 2003, the District Court, (1) granted Tenet's motion to dismiss for failure to plead fraud with the requisite particularity, with leave to amend, (2) granted, in part, Tenet's motion to sever, with leave to amend, and (3) dismissed, with prejudice, the government's claims for unjust enrichment, disgorgement and recoupment. Pursuant to the District Court's order, on February 6, 2004, the government filed a Second Amended Complaint and two additional related complaints against Tenet and various subsidiaries alleging successor liability for claims submitted by predecessors of Tenet. Tenet has not yet responded to these complaints. No trial date has been set in the case.

OTHER LITIGATION

John C. Bedrosian v. Tenet Healthcare Corp., Case No. SC026542 (Los Angeles County Superior Court, filed October 5, 1993)

        On October 29, 2003, the Court of Appeal of the State of California, Second Appellate District, Division Two, awarded $253 million in contract damages for failing to provide certain stock incentive awards to John C. Bedrosian, one of the three founders of National Medical Enterprises, Inc., or NME. Tenet sought a rehearing before the Court of Appeal. While a rehearing was denied, the Court of Appeal modified its earlier award, reducing the approximately $112 million interest award to approximately $7 million, for a total award of $148 million, plus accrued post-judgment interest. The appellate court ruling modified a 2003 lower court decision that awarded Mr. Bedrosian a judgment of approximately $7.6 million in a lawsuit he filed against Tenet alleging breach of his employment contract in connection with the termination of his employment 10 years ago. The lower court also awarded Mr. Bedrosian an additional $1.6 million in attorneys' fees and costs. Mr. Bedrosian subsequently appealed the lower court rulings.

        Mr. Bedrosian's employment with NME was terminated in September 1993, following a federal investigation into Tenet's psychiatric subsidiary. Under new management, NME was renamed Tenet Healthcare Corporation in 1995, following the resolution of the investigation and a subsequent merger of NME and American Medical International Inc.

        Tenet filed a petition for California Supreme Court review, however, on February 18, 2004, the California Supreme Court declined to review the appellate court's decision. Tenet has accrued the amount necessary to pay the award, including post-judgment interest through December 31, 2003 and attorneys' fees and costs. Tenet paid approximately $163.3 million to Mr. Bedrosian on March 1, 2004 in satisfaction of the final judgment.

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David L. Dennis Arbitration

        On October 27, 2003, David L. Dennis, Tenet's former chief financial officer and chief corporate officer, filed a demand for arbitration alleging that he is entitled to payments under a severance benefit plan that was adopted by Tenet's board of directors in January 2003. Tenet's position is that the severence benefit plan does not apply to Mr. Dennis, who resigned in November 2002. The parties are currently in the process of selecting an arbitrator.

People's Health Network Investigation

        People's Health Network, or PHN, a New Orleans health plan management services provider in which a Tenet subsidiary holds a 50% membership interest, in October 2003 received two subpoenas from the U.S. Attorney's office in New Orleans seeking certain records from January 1, 1999 to the present. The first subpoena, received October 3, 2003, seeks documents including articles of incorporation and bylaws, membership data, agendas and minutes of meetings, and policy manuals from PHN and additional documents related to several New Orleans-area independent physician associations that also hold membership interests in PHN. The second subpoena, received on October 14, 2003, seeks information on patients who were admitted to a rehabilitation unit and members for whom inpatient rehabilitation services were ordered, recommended or requested, and subsequently denied. On November 21, 2003, PHN received two additional subpoenas from the U.S. Attorney's Office in New Orleans. One of the subpoenas to PHN seeks documents and information from January 1, 1999 to the present related to payments to and contractual matters related to physicians and others, as well as third-party reviews of denials of services. The second subpoena to PHN seeks various documents, including agendas, minutes, bylaws, membership data and policies, from June 1, 2002 to the present, related to certain medical staff committees and other medical staff entities. The U.S. Attorney's Office in New Orleans also issued a subpoena, on November 21, 2003, to Memorial Medical Center, a New Orleans hospital owned by a Tenet subsidiary. That subpoena seeks various documents, including agendas, minutes, bylaws, membership data and policies, from June 1, 2002 to the present, related to certain medical staff committees and other medical entities.

Congressional Investigations

        On September 5, 2003, Senator Charles E. Grassley, chairman of the Senate Finance Committee, notified Tenet that the Committee is investigating Tenet and has requested documents relating to Redding Medical Center, Medicare outlier payments, patient care and other matters. Since such time, Tenet has received additional requests from the Senate Finance Committee, including requests for quality reviews at certain hospitals. Tenet is cooperating with the Committee with respect to this investigation.

        Twenty large health care systems in the United States, including Tenet, received a letter dated July 16, 2003 from the U.S. House of Representatives, Committee on Energy and Commerce, seeking documents related to hospital billing practices and their impact on the uninsured. Specifically, the Committee, through its Subcommittee on Oversight and Investigations, is conducting an investigation into the "sophisticated and complicated forces driving health care financing, including government entitlements, managed care, rising costs, and shrinking public funds." The Subcommittee is seeking input from each of the major health care systems to analyze the impact these competing forces have on the uninsured patient population. Tenet is cooperating with the Subcommittee with respect to this investigation.

Internal Revenue Service

        The Internal Revenue Service has completed an examination of Tenet's federal income tax returns for the fiscal years ended May 31, 1995, 1996 and 1997, and it has issued a Revenue Agent's Report in

33

which it proposes to assess an aggregate tax deficiency for the three-year audit period of $157 million plus interest of approximately $122 million through December 31, 2003, before any federal or state tax benefit. The Revenue Agent's Report contains several disputed adjustments, including the disallowance of a deduction for a portion of the civil settlement paid to the federal government in June 1994 related to Tenet's discontinued psychiatric hospital business and a disputed adjustment with respect to the timing of the recognition of income for tax purposes pertaining to Medicare and Medicaid net revenues. In connection with the proposed adjustment regarding the civil settlement, Tenet recorded an additional after-tax charge for taxes and interest to discontinued operations of approximately $70 million in the quarter ended June 30, 2003. Tenet believes its original deductions and methods of accounting were appropriate, and has filed a protest with the Appeals Division of the Internal Revenue Service. In the event that these issues cannot be resolved successfully with the Appeals Division, Tenet may further appeal the findings by filing a petition for redetermination of a deficiency with the Tax Court or by filing a claim for refund in U.S. District Court or in the Court of Federal Claims. In order to file a claim for refund in U.S. District Court or in the Court of Federal Claims, all disputed taxes plus interest must be paid prior to filing the claim. Tenet has adequately provided for all tax matters in dispute related to the Revenue Agent's Report for the fiscal years ended May 31, 1995, 1996 and 1997 as of December 31, 2003.

        The Internal Revenue Service recently commenced an examination of Tenet's tax returns for the fiscal years ended May 31, 1998 through the transition period ended December 31, 2002. Tenet is not able to estimate the total amount, if any, that it might owe or pay upon the final resolution of these issues, nor is Tenet able to estimate the timing of such resolution.

Medical Malpractice and Other Ordinary Course Matters

        In addition to the litigation described above, Tenet is subject to claims and lawsuits in the ordinary course of business. The largest categories of these claims relate to medical malpractice.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "THC." The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock on the New York Stock Exchange. All prices have been adjusted to reflect a 3-for-2 stock split declared in May 2002 and distributed on June 28, 2002.

        On February 27, 2004, the last reported sales price of our common stock on the New York Stock Exchange composite tape was $12.02 per share. As of that date, there were approximately 9,600 holders of record of our common stock.

        We have not paid cash dividends on our common stock since the first quarter of fiscal 1994, and we do not intend to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain earnings, if any, for the future operation and development of our business. In addition, our credit agreement contains provisions that may have the effect of limiting or prohibiting the payment of dividends from time to time. (See Note 6 of the Notes to the Consolidated Financial Statements.)

        Please see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management, for information regarding securities authorized for issuance under equity compensation plans.

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ITEM 6. SELECTED FINANCIAL DATA

OPERATING RESULTS

        In March 2003, our board of directors approved a change in our fiscal year from a fiscal year ending on May 31 to a fiscal year that coincides with the calendar year, effective December 31, 2002. The following table presents selected audited consolidated financial data for Tenet Healthcare Corporation and its wholly owned and majority-owned subsidiaries for the years ended May 31, 1999 through 2002, the seven-month transition period ended December 31, 2002, and the year ended December 31, 2003. It also presents unaudited, comparable data for the year ended December 31, 2002.

36

        All periods have been adjusted to reflect a 3-for-2 stock split declared in May 2002 and distributed on June 28, 2002.

        The selected financial data presented in the previous table are not necessarily indicative of our future financial condition or results of operations. Reasons for this include, but are not limited to (1) our announced divestiture of 27 hospitals in 2004, (2) future changes in Medicare regulations, (3) ability to collect our accounts receivable, (4) our voluntary adoption of a new method for calculating Medicare outlier payments effective January 1, 2003, and subsequent new regulations governing the calculation of such payments, (5) the increase in the number of patients who are uninsured, (6) the ultimate resolution of investigations and lawsuits, (7) fluctuations in revenue allowances and discounts, and (8) changes in interest rates, tax rates, occupancy levels and patient volumes. Other items include the effects of impairment and restructuring charges, losses from early extinguishment of debt, and other disposals of facilities and other assets, all of which have also occurred during some or all of the periods presented in the above table. Beginning with the first quarter of 2004, 27 of the 28 hospitals that we intend to divest will be accounted for as discontinued operations, and the remaining hospital will be included in continuing operations until July 31, 2004.

BALANCE SHEET DATA

CASH FLOW DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
            OPERATIONS

INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS

        The purpose of this section, Management's Discussion and Analysis of Financial Condition and Results of Operations, is to provide a narrative explanation of our financial statements that enables investors to better understand the Company, to enhance our overall financial disclosures, to provide the context within which financial information may be analyzed, and to provide information about the quality of, and potential variability of, our earnings and cash flows. This information should be read in conjunction with the accompanying consolidated financial statements. It includes the following sections:

•

Executive Overview



•

Sources of Revenue



•

Results of Operations



•

Liquidity and Capital Resources



•

Off-Balance Sheet Arrangements



•

Critical Accounting Estimates

EXECUTIVE OVERVIEW

SIGNIFICANT CHANGES AND INITIATIVES

        Fiscal 2003 was a year of transition for Tenet. During 2003, we faced numerous financial and legal challenges, as discussed in more detail within this report. Many of those challenges arose from our prior pricing policies. Changes to those pricing policies, along with changes to the Medicare rules governing the calculation of outlier payments and other factors, have led to declining net operating revenues. In addition, Tenet, like other providers in the health care industry, has experienced significant increases in bad-debt expense, largely as a result of increases in the number of uninsured patients and reductions in coverage by some private insurers and state Medicaid programs. At the same time, we have become the subject of heightened and coordinated civil and criminal investigations and legal actions.

        In 2003, we commenced a series of initiatives and reforms designed to restructure our organization, rebuild our reputation, and improve the performance and quality of our hospitals. These initiatives and reforms included the appointment of new senior management in key positions, changes in corporate governance, streamlining of our operating structure and a new focus on our core hospitals, clinical quality initiatives, cost reductions, and the formation of new labor union alliances. Key initiatives undertaken in 2003 include:

•

Medicare Outlier Revenue Calculations—One of the most significant changes that we initiated in the year ended December 31, 2003 was our voluntary adoption, effective January 1, 2003, of a new method for calculating Medicare outlier payments. Effective August 8, 2003, the Centers for Medicare and Medicaid Services (CMS) implemented a new rule governing the calculation of such payments. These significant changes contributed to a drop in total Medicare outlier revenue from approximately $750 million for the year ended December 31, 2002 to approximately $140 million for the year ended December 31, 2003. Many of the strategic initiatives that we have adopted are designed to address the financial impact of the loss of revenues resulting from changes to the outlier revenue calculations.



•

Development of a New Senior Management Team—In September 2003, following a comprehensive executive search process, the board of directors elected Trevor Fetter as chief executive officer. Mr. Fetter had been appointed president in November 2002 and acting chief executive officer in May 2003. In March 2003, Tenet appointed two top hospital executives, Reynold J. Jennings and

38

W. Randolph Smith, to its senior executive management team, and appointed Stephen Newman, M.D., a seasoned hospital executive, as chief executive officer of Tenet's California region. More recently, on February 9, 2004, Tenet announced the appointment of Mr. Jennings as its chief operating officer. In December 2003, Tenet hired E. Peter Urbanowicz as its new general counsel. Prior to joining Tenet, Mr. Urbanowicz was the deputy general counsel of the U.S. Department of Health and Human Services. Since November 2002, nearly 40% of the executives listed in Tenet's 2002 Annual Report to Shareholders have retired or resigned, leading to the hiring or promotion of new personnel in key positions.

•

Consolidation of Operating Divisions—In March 2003, we consolidated our operating divisions from three to two, with five underlying regions. In February 2004, we appointed a new chief operating officer and announced that we would be further streamlining our organizational structure by eliminating our two divisions and having our five regions, California, Central-Northeast, Florida, Southern States and Texas, report directly to the chief operating officer.



•

Divestitures of Facilities—During the year ended December 31, 2003, or shortly thereafter, we sold 12 and closed two acute general hospitals. These facilities have been accounted for as discontinued operations. We had determined that these facilities no longer fit our core operating strategy of building competitive networks of quality hospitals in major markets. They had, however, contributed net operating revenues of $1.0 billion and pretax income of approximately $32 million for the year ended December 31, 2002. Total net proceeds, after taxes and transactions costs, from these divestitures, including working capital, will be approximately $663 million.

In January 2004, we announced a major restructuring of our operations involving the proposed divestiture of 27 of our acute care hospitals, including 19 in California and eight others in Louisiana, Massachusetts, Missouri and Texas. We expect to receive total net proceeds from these divestitures of approximately $600 million, a significant portion of which is expected to be received in the form of tax benefits from anticipated losses from the proposed divestitures of many of these hospitals. Additionally, in March 2004, we approved a proposed sale of our general hospital in Barcelona, Spain. The purpose of this restructuring is to enable us to focus our financial and management resources on our remaining 69 domestic general acute care hospitals in 13 states and to create a stronger company with enhanced potential for long-term growth.

•

Cost Reduction Initiatives—In March 2003, we initiated an operating expense reduction plan consisting of staff and expense reductions above the hospital level, reductions within hospital departments that are not directly involved with patient care, and purchasing power improvements related to our comprehensive nurse agency contracting program. Operating plans at our individual hospitals also include significant levels of cost reduction. Later in 2003, we established additional cost-reduction initiatives consisting of improvements in supply chain costs, primarily involving expanded coverage of purchasing contracts with negotiated discounts, increasing compliance with existing contracts, and consolidating purchased services among fewer vendors. We also embarked upon an initiative to consolidate hospital business offices and standardize our information systems to generate recurring annual savings beginning in 2005, with the majority of savings being realized in 2006. This initiative, however, will require significant investment over the next two years. Despite these efforts, we anticipate continuing cost increases in most areas of our operations that may be partially offset by our expense reduction plan.



•

Redding Medical Center Settlements—In August 2003, we reached a $54 million settlement with the federal government and the State of California in connection with their investigations of allegations that two physicians performed medically unnecessary invasive cardiac procedures at our Redding Medical Center. In December 2003, we also reached an agreement with the Office of the Inspector General (OIG) to resolve our dispute over the OIG's intention, as a result of

39

the above allegations, to exclude Redding Medical Center from participation in the Medicare and Medicaid programs. Through this agreement, the OIG agreed to stay further exclusion proceedings, conditioned upon our sale of the hospital. (See Part I, Item 3, Legal Proceedings, for further detail.)

•

Compliance Program—In August 2003, we announced the creation of a new compliance department and the appointment of Cheryl Wagonhurst as chief compliance officer. The compliance department is responsible for establishing and meeting industry-leading standards in all areas of compliance with government regulation of hospitals. The compliance function was previously handled primarily by the law department, and our general counsel served as chief compliance officer. The chief compliance officer now reports directly to the ethics, quality and compliance committee of our board of directors.



•

Clinical Quality Initiatives—In July 2003, Tenet appointed Jennifer Daley, M.D., to the newly created position of senior vice president, clinical quality, and appointed Lauren Arnold, Ph.D., to the newly created position of vice president, nursing. Dr. Daley is responsible for leading Tenet's Commitment to Quality initiative, which is focused on (1) improving patient safety and the reporting of medical results, (2) supporting physician excellence, (3) improving the practice and leadership of nursing, and (4) facilitating patient flow and care delivery. Also in 2003, we announced that all eligible Tenet hospitals would participate in a voluntary initiative launched by the American Hospital Association, the Association of Medical Colleges and the Federation of American Hospitals to collect and share with consumers results of the hospitals' performance on 10 quality measures for three medical conditions: heart attack, congestive heart failure and pneumonia.



•

Labor Union Alliances—During 2003, we announced the creation of alliances with the Service Employees International Union, the American Federation of Federal, State, County and Municipal Employees, and the California Nurses Association that include provisions regarding union elections, multi-year, predictable wages and benefits, and collaboration and cooperation between management, employees and union representatives. In addition, in December, we announced that a 13-month strike by nurses at Doctors Medical Center in San Pablo, California ended when the hospital entered into an agreement with the California Nurses Association.



•

Implementation of Corporate Governance Changes—In 2003, four long-serving board members retired from our board of directors and four new directors were appointed. The board then elected a new independent non-executive chair, reorganized the audit, compensation, and corporate governance and nominating committees, and approved the declassification of the board, resulting in all board members standing for election annually. New and improved corporate governance measures included the development of stricter director independence standards and the implementation of minimum stock ownership requirements for directors and senior executives.



•

Enhancement of Financial Transparency—Effective January 1, 2003, Tenet became the first company in the hospital industry to begin treating stock-based compensation as an expense in its financial statements. In addition, in March, we announced a decision to change from a fiscal year ending May 31 to a calendar-based fiscal year ending December 31, retroactive to December 31, 2002. This change in year-end will allow investors to more easily compare our performance to that of our competitors.

RESULTS OF OPERATIONS—OVERVIEW

        During the year ended December 31, 2003, we reported net operating revenues of $13.2 billion, compared to $13.6 billion in the year ended December 31, 2002, $12.7 billion in the year ended May 31, 2002, and $11.0 billion in the year ended May 31, 2001. We reported a $1.4 billion loss from continuing operations for the year ended December 31, 2003, compared to income from continuing

40

operations of $744 million for the year ended December 31, 2002, $573 million for the year ended May 31, 2002 and $471 million for the year ended May 31, 2001.

        Patient days and admissions from continuing operations were slightly higher (0.4% and 1.7%, respectively) during the year ended December 31, 2003 than during the year ended December 31, 2002, while net inpatient revenues per patient day or admission were down by 5.1% and 6.3%, respectively. Accordingly, net inpatient revenues were down by 4.7% during the year. The most significant factor contributing to the decline in net inpatient revenues was a $610 million reduction in Medicare outlier revenue during 2003 compared to the year earlier period. Outpatient visits decreased by 0.1% and net outpatient revenues were down by 1.1%.

        Operating expenses, exclusive of impairment and restructuring charges, were 97.6% of net operating revenues in the year ended December 31, 2003, compared to 85.8% in 2002. Lower net operating revenues, higher salaries and benefits expense, additional provisions for doubtful accounts and costs of litigation and investigations were the principal contributors to this increase.

        In the year ended December 31, 2003, we recorded impairment and restructuring charges of approximately $1.9 billion, compared to $316 million in 2002 (see page 61 for further detail). The increased charges were largely the result of declining financial performance at some of our hospitals and a recently completed comprehensive review of the near-term and long-term prospects of each of our hospitals, including a study of capital expenditures required to comply with California's seismic regulations for hospitals.

LIQUIDITY AND CAPITAL RESOURCES—OVERVIEW

        Net cash provided by operating activities dropped from approximately $2.3 billion in each of the years ended May 31, 2002 and December 31, 2002 to $838 million in the year ended December 31, 2003. The principal reasons for the decline were revenue pressures, including reduced Medicare outlier revenue, continued growth in routine costs, particularly labor, malpractice expense and pharmaceuticals, costs of litigation and investigations, increased provision for doubtful accounts, and changes in our business mix as admissions of uninsured patients has grown at an escalating rate.

        Proceeds from the sales of hospitals and other assets during 2003 aggregated $730 million. The $600 million in estimated proceeds from the anticipated divestiture of 27 domestic hospitals in 2004 and any tax benefit associated with such divestitures should further bolster our liquidity; however, because we expect a significant portion of the proceeds to be received in the form of tax benefits from anticipated losses from the proposed divestitures of many of these hospitals, we do not expect to realize such benefits until 2005. We have no significant debt maturities before late 2006 and we had approximately $600 million in unrestricted cash on hand at December 31, 2003.

        We are currently in compliance with all covenants under our bank credit agreement and our bond indentures (See Note 6 of the Notes to the Consolidated Financial Statements). Under an agreement recently reached with a required number of our lenders, the total commitments available to us will be reduced from $1.2 billion to $800 million, with a concurrent change to the maximum leverage ratio and minimum fixed charge ratio permitted under the agreement. We have approximately $214 million of letters of credit outstanding under the credit agreement, but we have no cash borrowings outstanding.

OUTLOOK

        We have implemented a variety of programs and initiatives to address the various challenges that we presently face. We believe that our decision to divest all but our 69 core hospitals, the consolidation of our divisions and regions, our ongoing program to reduce costs and enhance operating performance, and our clinical quality initiatives will ultimately position us to report significantly improved margin performance. However, we do not anticipate significant operating performance or margin improvement to be achievable in 2004 and, potentially, in 2005, because many challenges will require time to work through. These include ongoing problems resulting from Tenet's prior pricing strategy, bad-debt

41

expense related to self-pay patients, reduced operating cash flow and the need to resolve a number of government investigations and legal actions. The 27 hospitals scheduled for divestiture are expected to generate negative cash flow during the sale process, and the expected long-term benefits of our cost-saving initiatives will temporarily be offset by restructuring costs. In the long term, however, we believe the prospects for the 69 hospitals that we will continue to operate are positive and the restructuring and initiatives we have undertaken will position us to improve our financial performance.

        We are also impacted by the challenges facing the health care industry as a whole. We believe that the key ongoing industry-wide challenges are as follows:

•

Providing quality patient care in a competitive and highly regulated environment.



•

Obtaining adequate compensation for services provided.



•

Accounts receivable collection.



•

Managing costs.

        The industry as a whole is challenged by the difficulty of providing quality patient care in a competitive and highly regulated environment. Our establishment of a new compliance department to coordinate our hospitals' compliance with the myriad laws and regulations that govern their operations, and our Commitment to Quality initiative, designed to enhance patient outcomes and improve operational effectiveness, should position us competitively to meet these challenges.

        Pressure from payers also affects our industry. We strive to ensure that we are appropriately compensated for the services we provide, but third-party payers continue to ask us to accept lower rates of payment even in the face of rising medical costs. While government regulations determine the amounts we receive for care provided through government programs, we can and will continue to work with managed care payers to ensure adequate and timely reimbursement for our services. We continue to negotiate with managed care payers to reduce reliance on gross charges; however, many payers are unwilling to accept such a change without a reduction in overall net reimbursement to levels significantly below market, which we will not accept. We have disputes with many of our third-party payers over payment for past services. Our proposed Compact with Uninsured Patients ("Compact") is designed to offer managed-care style discounts to certain uninsured patients, which will enable us to offer lower rates to those patients, who today are charged full gross charges. Currently, a significant portion of those accounts are often written down as provision for doubtful accounts. On February 19, 2004, the Secretary of Health and Human Services issued guidance on discounts for uninsured patients, which will allow us to implement our discount plan. The discounts will be phased in during the second quarter of this year and will be fully in effect by June 30. When implemented the Compact should reduce bad-debt expense levels, but it will also reduce net revenues and should have an immaterial effect on net operating performance.

        We also have seen a recent adverse change in our business mix as admissions of uninsured and underinsured patients have grown at an escalating rate. We believe this new trend is due to a combination of broad economic factors, including higher unemployment rates, increased number of patients who are uninsured, and an increased burden of co-payments to be made by patients instead of insurers. Additionally, many of these patients are being admitted through the emergency department and often require more costly care, resulting in higher billings.

        An additional significant cost pressure facing us and the industry is the ongoing increase of labor costs due to a nationwide shortage of nurses. We expect the nursing shortage to continue, and we have implemented various initiatives, such as the Commitment to Quality initiative discussed on page 40, to improve productivity, to better position our hospitals to attract and retain qualified nursing personnel, and to otherwise manage labor-cost pressures.

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SOURCES OF REVENUE

        We receive revenues for patient services from a variety of sources, primarily, the federal Medicare program, state Medicaid programs, managed care payers (also known as health maintenance organizations), indemnity-based health insurance companies, and self-pay patients (patients who do not have health insurance and are not covered by some other form of third-party arrangement).

        The table below shows the sources of net patient revenues for our domestic general hospitals, expressed as percentages of net patient revenues from all sources:

(1)

The change is the difference between the 2002 and 2003 amounts shown.

(2)

Includes Medicare Advantage and Medicaid managed care.

GOVERNMENT PROGRAMS

        Payments from the government, specifically, the Medicare and Medicaid programs administered by the Centers for Medicare and Medicaid Services (CMS), constitute a significant portion of our net operating revenues. These programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease program payments, as well as affect the cost of providing services to patients and the timing of payments to facilities. We are unable to predict the effect of future policy changes on our operations. If the rates paid or the scope of services covered by governmental payers are reduced, if we are required to pay substantial amounts in settlement, or if we, or one or more of our subsidiaries' hospitals, are excluded from participation in the Medicare program, there could be a material adverse effect on our business, financial position, results of operations or cash flows. The government is currently investigating our Medicare outlier payments, as discussed under Part I, Item 3, Legal Proceedings, of this report.

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Medicare

        Medicare offers different ways for beneficiaries to obtain their medical benefits. One option, the Traditional Medicare Plan is a fee-for-service payment system. The other option, called Medicare Advantage (formerly, Medicare + Choice), includes managed care and private fee-for-service plans. The major components of our net patient revenues for services furnished to patients enrolled in the Traditional Medicare Plan for the years ended May 31, 2001 and 2002 and the years ended December 31, 2002 and 2003 approximate the following:

Acute Care Hospital Inpatient Prospective Payment System

        Diagnosis-Related Group Payments—Section 1886(d) of the Social Security Act sets forth a system of payment for the operating costs of acute care hospital stays based on prospectively set rates or a prospective payment system. Section 1886(g) of the Social Security Act requires that capital-related costs of hospital inpatient stays also be paid under a prospective payment system. Under these two prospective payment systems, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups ("DRGs").

        The base payment amount for operating costs is comprised of an average standardized amount that is divided into a labor-related share and a nonlabor-related share. Both the labor-related share of the operating base payments and the capital base payments are adjusted by the geographic variations in labor and capital costs. These base payments are multiplied by the relative weight of the DRG assigned to each case. Although these payments are adjusted for area labor and capital cost differentials, the adjustments do not take into consideration an individual hospital's operating and capital costs. The DRG operating and capital base rates are updated annually, giving consideration to the increased cost of goods and services purchased by hospitals. The rate increases that became effective on October 1, 2002 and on October 1, 2003 were 2.95% and 3.40%, respectively.

        Historically, the annual DRG rate increases have been below the cost increases for goods and services purchased by our hospitals. We expect that future rate increases will also be below such cost increases.

        Outlier Payments—Outlier payments, which were established by Congress as part of the DRG prospective payment system, are additional payments made to hospitals for treating Medicare patients who are costlier to treat than the average patient.

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        A hospital receives outlier payments when its defined costs (gross charges adjusted by the hospital's historical cost-to-charge ratio) exceed a certain threshold established annually by CMS. As mandated by Congress, CMS must limit total outlier payments to between 5% and 6% of total DRG payments. CMS annually changes the threshold in order to bring expected outlier payments within the mandated limit. A change to the cost threshold affects total outlier payments by changing (1) the number of cases that qualify for outlier payments, and (2) the dollar amount hospitals receive for those cases that still qualify. The most recent change to the cost outlier threshold became effective on October 1, 2003.

        Prior to October 1, 2003, CMS used a hospital's most recently settled cost reports to set the hospital's outlier cost-to-charge ratio. Those settled cost reports typically were two to three years old. Additionally, if a hospital's cost-to-charge ratio fell below a certain threshold (derived from the cost-to-charge ratios for all hospitals nationwide), then the cost-to-charge ratio used to calculate Medicare outlier payments defaulted to the statewide average for that hospital's particular state, which was considerably higher. The statewide average was also used when settled cost reports were not available (such as with newly constructed or certain acquired hospitals).

        During 2003, CMS issued new regulations governing the calculation of outlier payments to hospitals. These regulations, which became effective August 8, 2003, included the following changes:

        For discharges on or after August 8, 2003 and before October 1, 2003:

•

The ratio of cost to charges would be based on the rules in effect prior to August 8, 2003 unless CMS (through its fiscal intermediaries) determined that an alternative ratio of cost to charges should be used.



•

Newly constructed or certain acquired hospitals for which a settled cost report was not available would continue to be paid on the statewide ratio of cost to charges.



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There would be no change to the cost outlier threshold.

        For discharges on or after October 1, 2003:

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The ratio of cost to charges is based on the latest of either the most recently submitted or the most recently settled cost reports to calculate the cost-to-charge ratio for outlier payments.



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The use of the statewide average cost-to-charge ratio for hospitals with very low cost-to-charge ratios is discontinued.



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Medicare fiscal intermediaries have been given specific criteria for identifying hospitals that may have received inappropriately high outlier payments. The intermediaries are authorized to recover overpayments, including interest, if the actual costs of a hospital stay (which are reflected in the settled cost report) were less than those claimed by the provider or if there were indications of abuse.



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To avoid overpayments or underpayments of outlier cases, hospitals may request changes to their cost-to-charge ratio (in much the same way that an individual taxpayer can adjust the amount of withholding from income).

        On January 6, 2003, we voluntarily submitted a proposal to CMS that would reduce outlier payments to our hospitals retroactive to January 1, 2003. Our proposal, issuance of new regulations governing the calculation of outliers, and other factors resulted in a reduction of Medicare outlier revenue recognized by the Company from approximately $750 million for the year ended December 31, 2002 to approximately $140 million for the year ended December 31, 2003.

        Our proposal to CMS included a provision to reconcile the payments we would receive under our proposed interim arrangement to those we would have received if the new CMS rules had gone into effect on January 1, 2003 up to the effective date of the final rules and regulations (the "Reconciliation Period"). Effective August 8, 2003, outlier payments to Tenet subsidiary hospitals are being calculated

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by the fiscal intermediary in accordance with the final rule, which applies to all hospitals. As stipulated by our voluntary outlier payment reduction proposal, we prepared the reduction period reconciliation based on instructions we received from CMS and its fiscal intermediary. Those initial instructions were subsequently revised by CMS, and we submitted an updated reconciliation based on revised instructions. The fiscal intermediary is currently reviewing the updated reconciliation. The final determination and outcome of outlier payments under the arrangement is subject to further review and approval by CMS. Although we earlier expected the fiscal intermediary's and CMS's determination with respect to the reconciliation to be made prior to December 31, 2003, additional clarification regarding the reconciliation has delayed a final determination. Based on the recent clarification, the final outcome could result in an additional material increase to the ultimate amount of outlier revenue we could potentially recognize for the Reconciliation Period.

        During the fourth quarter of the year ended December 31, 2003, we recorded total outlier revenues of approximately $91 million. Included in this amount is approximately $70 million of outlier revenues received in prior quarters and recognized in the fourth quarter as a result of receiving an acknowledgement from CMS confirming the amount due to the Company under the outlier reduction proposal reconciliation that was based on the initial instructions for preparing the reconciliation that we received from CMS and its fiscal intermediary.

        Disproportionate Share Payments—If a Medicare-participating hospital serves a disproportionate share of low-income patients, it receives a percentage add-on to the DRG payment for each case. This percentage varies, depending on several factors that include the percentage of low-income patients served. Certain of our hospitals qualify for disproportionate share payments. Congress recently mandated CMS to study the formula used to calculate these payments. One change being considered would give greater weight to the amount of uncompensated care provided by a hospital than it would to the number of low-income patients treated, and CMS started collecting uncompensated care data from hospitals in 2003. We cannot predict the impact on our hospitals if CMS revises the disproportionate share payment formula.

        Direct Graduate and Indirect Medical Education—The Medicare program provides additional compensation for approved teaching hospitals for the additional expenses incurred by such institutions. This additional compensation is made in the form of Direct Graduate Medical Education and Indirect Medical Education payments. Direct Graduate Medical Education Payments are based on an average per resident amount multiplied by the number of residents. Indirect Medical Education Payments are a percentage add-on to the DRG payment for each case. The Indirect Medical Education add-on payment percentage is based on a formula that is comprised of a fixed percentage (currently, 5.5%) established by Congress, and a hospital-specific ratio of residents to beds. Tenet currently operates 35 approved teaching hospitals with a total intern/resident complement of approximately 1,650 full-time equivalents, and plans to divest 11 of these hospitals, which have an intern/resident complement of approximately 340 full-time equivalents.

Hospital Outpatient Prospective Payment System

        In accordance with Section 1883(t) of the Social Security Act, CMS implemented a prospective payment system for hospital outpatient services effective August 1, 2000, which replaced a cost-based reimbursement system. Under the Outpatient Prospective Payment System, hospital outpatient services, except for certain services that are reimbursed on a fee schedule, are classified into groups called Ambulatory Payment Classifications or APCs. Services in each APC are similar clinically and in terms of the resources they require, and a payment rate is established for each APC. Depending on the services provided, hospitals may be paid for more than one APC for an encounter. CMS periodically updates the APCs and annually adjusts rates paid for each APC. The final hospital outpatient rule, which became effective January 1, 2004, provides for the aggregate payments for outpatient services for all hospitals, not just Tenet hospitals, to increase by approximately 4.5%.

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        The outpatient prospective payment system has not had a material impact on our results of operations.

Inpatient Rehabilitation Reimbursement

        Rehabilitation hospitals and rehabilitation units within acute care hospitals are paid according to the inpatient rehabilitation facility prospective payment system. In order for a hospital or unit to qualify for inpatient rehabilitation reimbursement, 75% of its patients must be treated for at least one condition requiring rehabilitation as specified in the CMS regulations. Citing inconsistent enforcement of the "75% rule," CMS suspended its enforcement in June 2002.

        On September 9, 2003, CMS issued a proposal to revise one of the criteria used to categorize a hospital or hospital unit as an inpatient rehabilitation facility. If approved, the new rule would lower the percentage of patients required to fall within the specified medical criteria from 75% to 65%. It would also modify and expand the list of eligible medical conditions. The proposed changes would apply to cost reporting periods starting on or after January 1, 2004, however, CMS has not issued the final rule.

        We currently operate two inpatient rehabilitation facilities and 28 hospital rehabilitation units as of December 31, 2003. Our previously discussed disposition plan contemplates the divestiture of hospitals that operate eight of these units. Medicare payments for services provided at those hospitals and units represented approximately 6% of Tenet's annual Medicare net revenue for the year ended December 31, 2003. Medicare payments to qualifying inpatient rehabilitation facilities are generally higher than those paid under the Medicare acute hospital prospective payment system for similar services. Failure of our rehabilitation facilities and units to continue to qualify as inpatient rehabilitation facilities could have an adverse effect on our business, financial position, results of operations or cash flows.

Cost Reports

        The final determination of certain Medicare payments to hospitals, such as indirect medical education, direct graduate medical education, disproportionate share, and bad-debt expense, are retrospectively determined based on the hospitals' cost reports. The final determination of these amounts (sometimes called a reconciliation) often takes many years to resolve because of audits by the program representatives, providers' rights of appeal, and the application of numerous technical reimbursement provisions. Prior to 2003, the Company recorded estimates for contractual allowances and cost report settlements based on amounts generated from information accumulated from various accounting and information systems. Adjustments to these accruals were generally made upon the final settlement of Medicare and Medicaid cost reports. In 2003, the Company completed the implementation of a new system and methodology for recording Medicare net revenue and estimated cost report settlements. This resulted in a refinement in recording the accruals to more closely reflect the expected final settlements on its cost reports. For filed cost reports, the Company now records the accrual based on those cost reports and subsequent activity, and records a valuation allowance against those cost reports based on historical settlement trends. For the year ended December 31, 2003, the accrual is recorded based on estimates of what the Company expects to report on the filed cost reports and a corresponding valuation allowance is recorded as previously described. Cost reports must be filed generally within the five months after the end of the annual cost report reporting period. After the cost report is filed, the accrual may be adjusted accordingly. This change in approach was inseparable from a change in estimate and resulted in a charge of approximately $133 million. This amount is included in the table on page 44 under the line item "Adjustments for valuation allowance and prior year cost report settlements."

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Medicaid

        Medicaid programs are funded by both the federal government and state governments. These programs are administered by the states and vary from state to state.

        Payments we receive under various state Medicaid programs, excluding state-funded managed care programs, constituted approximately 9% of our net operating revenues in 2003. These payments are typically based on fixed rates determined by the individual states. (A few states in which we operate have a Medicaid outlier payment formula.) We also receive disproportionate-share payments under various state Medicaid programs. For the twelve months ended December 2002 and 2003, the disproportionate-share payments were approximately $169 million and $175 million, respectively.

        On November 3, 2003, the California Department of Health Services issued a press release announcing the results of its audits of Redding Medical Center's Medicaid cost reports. The release alleged that Redding Medical Center had received approximately $12 million in excess reimbursements, $9 million of which had been repaid by the hospital. That $9 million was related to routine reconciliations. The remaining $3 million was related to audit findings, which will be appealed. The news release also stated that the California Department of Health Services intends to expand its audits to all hospitals owned by Tenet subsidiaries in California and refer the audit findings to other state and federal agencies.

        Many states in which we operate are facing budgetary challenges that pose a threat to Medicaid funding levels to hospitals and other providers. We expect these challenges to continue; however, we cannot predict the extent of the impact of the states' budget reductions on our hospitals. Also, any changes to federal Medicaid funding methodologies or levels to the states could adversely impact Medicaid payments to our hospitals.

Legislative and Regulatory Changes

Annual Update to the Medicare Inpatient Prospective Payment System

        Under Medicare law, CMS is required annually to update certain rules governing prospective payments for acute, rehabilitation and skilled nursing facilities. The updates generally become effective October 1, the beginning of the federal fiscal year ("FFY"). On August 1, 2003, CMS issued the FFY 2004 hospital inpatient Prospective Payment System final rule. This rule included a 3.4% increase in payment rates for inpatient acute care effective October 1, 2003, and a reduction to the outlier threshold from $33,560 to $31,000. Other payment factors affected by the updated rules include DRG weights, the wage index, and expansion of the DRG transfer rule from 10 diagnosis-related groups to 19. While the percentage increase and the lower outlier threshold are somewhat beneficial to Tenet, changes to the outlier payment rules described above and the expansion of the transfer rules offset any benefit.

Medicare Occupational Mix Adjustment

        As explained above, CMS adjusts most hospital prospective payments (including inpatient acute prospective payments, hospital outpatient APC payments, and inpatient rehabilitation facility payments) to account for geographic differences in labor costs through the use of a wage index. Health care industry analysts and others, especially from rural areas, argue that the current wage index calculation, based on cost reports of wages, hours and wage-related costs of all hospital employees, does not reflect differences in the mix of occupational categories of employees across hospitals, distorting the wage index for hospitals that employ lower-cost employees who perform the work of higher-cost, more specialized employees. Furthermore, hospitals with specialized employees treat more acutely ill patient populations, which is reflected in the higher case mix of these hospitals.

        Section 1886(d)(3)(E) of the Social Security Act requires CMS to collect data every three years on the occupational mix of employees for each short-term acute care hospital participating in the Medicare

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program in order to construct an occupational mix adjustment to the wage index. The law also requires the application of the occupational mix adjustment to the wage index beginning October 1, 2004. The data collected on the survey will be used to adjust hospitals' wage data for the effect of each hospital's special occupational category mix within the general occupational categories. Although we are unable to quantify the effect of the occupational mix adjustment at this time, we believe that it will result in a reduction to our Medicare payments.

Inpatient Psychiatric Prospective Payment System

        On November 19, 2003, CMS proposed a new Medicare per diem prospective payment system for inpatient psychiatric facilities to replace the existing cost-based payment system. The inpatient psychiatric prospective payment system affects about 2000 inpatient psychiatric facilities, including both freestanding psychiatric hospitals and certified psychiatric units in general acute care hospitals. The proposed base per diem amount will cover nearly all labor and non-labor costs of furnishing covered inpatient psychiatric services—including routine, ancillary and capital costs. CMS is proposing, among other things, to make additional payments for outlier cases involving beneficiaries with extraordinary care needs to ensure appropriate care for the most ill beneficiaries, and a three-year transition period that will be a blend of decreasing cost-based payments and increasing prospective payment system payments, with full prospective payment system rates becoming effective in the fourth year. The proposed rule contains an effective date of cost reporting periods beginning on or after April 1, 2004; however, CMS has stated that this date will likely be moved back due to the late publication of the proposed rule.

        We currently operate one freestanding psychiatric hospital and 37 of our hospitals operate Medicare-certified psychiatric units. Included in our hospital divestiture plans are 12 hospitals that operate Medicare-certified psychiatric units. Because CMS has not issued the final rule, we are unable at this time to estimate the impact on our payments. However, because of the aforementioned delay in the implementation date, and the three-year transition period, we do not believe the proposal will significantly impact our 2004 inpatient psychiatric payments.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003

        The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173), which was signed into law on December 18, 2003, includes several provisions affecting hospital Medicare and Medicaid reimbursement. Below is a summary of the significant provisions affecting our hospitals' reimbursement.

        Medicare.    Medicare inpatient prospective payment system payments will maintain an inflationary increase of 3.4% in FFY 2004, a rate equal to the full market basket index. For FFY 2005, 2006 and 2007, hospitals will receive an inpatient update equal to the full market basket rate if they submit quality performance data to the Department of Health and Human Services. Those hospitals not submitting quality performance data for 10 quality measures will receive an increase equal to the market basket rate minus 0.4 percentage points. The update reduction is a one-year adjustment and does not affect the base amount inflated from year to year. Hospitals not submitting quality data in FFY 2005 may choose to submit data in 2006 or 2007 and would then receive a full inflationary update. In order to qualify for the full market basket update, hospitals must submit performance data on all patients on the 10 quality measures that are a subset of common hospital performance measures developed and aligned by CMS and the Joint Commission on Accreditation of Healthcare Organizations and endorsed by the National Quality Foundation. All of our hospitals currently participate in the National Voluntary Initiative and will, as required by CMS, report the quality data on all 10 measures to receive the full market basket update.

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        The indirect medical education adjustment currently set at 5.5% increases to 6.0% in the last six months of FFY 2004 (April 2004 through September 2004), to 5.8% in FFY 2005, to 5.55% in FFY 2006, and down to 5.35% in FFY 2007. It reverts to current law, 5.5%, for FFY 2008 and beyond.

        Hospitals meeting certain criteria established by CMS may appeal their Prospective Payment System wage index classification. This one-time appeal must be filed between December 8, 2003 and February 15, 2004. Reclassifications would be effective only for discharges on or after April 1, 2004, and in effect for a three-year period only. CMS has set aside $900 million for these reclassifications. Certain of our hospitals qualify for an appeal to their wage index classification, and such appeals have been filed where appropriate, however, we cannot predict the success of those appeals.

        Medicaid.    The reduction in Medicaid Disproportionate Share hospital funding (referred to as the "DSH cliff") in fiscal year 2004 is eliminated and the DSH allotment will increase 16% over fiscal year 2003 levels. Subsequent years are frozen at 2004 levels until the allotment level intersects with where it would have been absent relief from the Balanced Budget Act. Increases thereafter are tied to the change in the Consumer Price Index.

PRIVATE INSURANCE

Managed Care

        We currently have over 5,000 managed care contracts with various health maintenance organizations (HMOs) and Preferred Provider Organizations (PPOs). HMOs generally maintain a full-service health care delivery network composed of physician, hospital, pharmacy, and ancillary service providers that HMO members must access through an assigned "primary care" physician. The member's care is then managed by his or her primary care physician and other network providers in accordance with the HMO's quality assurance and utilization review guidelines so that appropriate health care can be efficiently delivered in the most cost-effective manner.

        HMO members or their employers typically pay a fixed, periodic premium for access to the HMO network, so the HMO assumes substantial financial risk for the cost of its members' care. HMOs generally seek to shift this financial risk to their network providers in a number of ways. Hospitals generally enter into either capitation or per diem provider services agreements. Under both types of agreements, a hospital is obligated to provide a prescribed range of services to HMO members.

        Under a capitation agreement, an HMO generally assigns a population of members to a hospital and pays the hospital a fixed amount each month for all the hospital care those members are entitled to receive pursuant to their HMO membership. The capitation agreement therefore shifts significant financial risk to the hospital, since its reimbursement is fixed and the amount of care to be delivered is unknown.

        Under a per diem agreement the hospital is reimbursed for care delivered to an HMO member pursuant to a discounted fee schedule, and the discount amount is generally expressed as a percentage of the hospital's billed charges. Because an HMO member is billed as services are rendered, these types of agreements generally represent less financial risk to a hospital than capitation agreements.

        The financial risk is further mitigated by the fact that many per diem agreements contain some form of "stop-loss" provision that allows for higher reimbursement rates in difficult medical cases where the hospital's billed charges exceed a certain threshold amount.