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Tenet Healthcare Facing Billions in Potential Liabilities

Tenet Healthcare Facing Billions in Potential Liabilities

By LAURENCE DARMIENTO

Staff Reporter

The worst may be yet to come for Tenet Healthcare Corp.

The Santa Barbara-based hospital company, hit by dual scandals involving its Medicare billing practices and possible unnecessary cardiac procedures at a hospital, is potentially facing $3 billion or more in financial liabilities.

Tenet is not only the target of shareholder lawsuits, but is being audited by federal regulators who could demand it reimburse any questionable Medicare payments.

And, in a worst-case scenario should there be fraud involved, the government could pursue a False Claims Act case, which requires companies to pay back ill-gotten gains in treble.

“I would be surprised if there were not a (fraud) investigation going on,” said James Moorman, a former assistant U.S. attorney who now heads Taxpayers Against Fraud, a non-profit group that monitors and promotes the False Claims Act. “Medicare is this big fat bundle of money, and you can find little ways to game the system.”

Tenet has acknowledged that it earned $481 million in its 2002 fiscal year by triggering a Medicare loophole that gave the company extraordinary large payments for particularly lengthy and difficult cases, called “outliers.”

It also acknowledged that loophole was triggered by the company’s aggressive pricing policy, since the cost for services is a key factor in determining whether a hospital qualifies for such payments.

At the same time, however, Tenet has repeatedly stated that it did not intentionally trigger the loophole, but that it was the result of its overall policy of aggressively jacking up its prices.

Big money at stake

Sheryl Skolnick, an analyst with Fulcrum Global Partners, said she calculates the company received $1.2 billion since the 2000 fiscal year from outlier payments triggered by the loophole.

Skolnick added that it could be in the company’s interest to refund the government all or a portion of these payments.

“You sign a consent decree, and say, ‘We didn’t do anything illegal but in the ordinary course of business we couldn’t have gotten these payments,'” she said. “I think the company will end up doing this rather than allowing itself to be dragged through the mud.”

Tenet could afford to pay the entire amount back through its regular earnings, she said. At the same time, should the government investigation find an intentional scheme by the company to raise retail prices specifically to trigger the loophole, it could prompt a False Claims Act case seeking $3 billion or more in damages.

“If you have a smoking gun like that, then the company has some significant legal challenges ahead of it. That would make life difficult, and then you are talking about having to sell some assets,” she said.

Spokesman Greg Harrison said the company would not comment on such speculation, but indicated that the audit would show Tenet had followed the law. “We plan to work cooperatively with the government and are confident that our hospitals have complied with Medicare guidelines,” he said.

Not all analysts are convinced Tenet will even have to pay anything back, considering it’s been a long-standing industry practice to jack up retail prices far above actual costs.

“Their (charges) are way above what the industry has done but how do you say that 120 percent charge inflation is OK but somehow 250 percent is fraudulent,” questioned Gary Taylor, a Banc of America Securities analyst. “I would say it’s without precedent for Medicare to go back and seek to collect those dollars.”

The question is far from academic. Just last month TAP Pharmaceuticals Inc. agreed to pay the government $850 million in civil and criminal penalties in a False Claims Act case involving Medicare billing practices.

Even if the company should escape any major civil penalties from the government, it still faces close to a dozen shareholder lawsuits brought by various law firms as a result of the billing and surgery scandals.

Tenet has seen its stock plunge from a 52-week high of $52.50 a share in early October prior to under $14 in trading last week, destroying some $17 billion in stockholder value in the process last week. It closed at $15.56 on Nov. 14.

Such cases often prompt settlement by insurers, sometimes for big dollars. Three years ago Cendant Corp. agreed to a $2.8 billion settlement after an accounting scandal deflated its stock. Harrison said his company had “considerable” insurance but could not cite the exact amount.

Normally, Wall Street takes a dim view of such lawsuits but Skolnick said that in this case, “If I had been a shareholder I would be a party to those cases.”

A Los Angeles securities attorney who defends companies against such lawsuits said the information disclosed so far indicates that Tenet may have trouble.

“You’ve got the ingredients of a case that has some legs to it,” said the attorney.




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