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Tenet settles Medicare probe for $900 million

Tenet Healthcare Corp. has reached a $900 million settlement with federal officials to end investigations into alleged overbilling of Medicare.
/ Source: The Associated Press

Tenet Healthcare Corp., the nation’s second-largest hospital operator, has reached a $900 million settlement with federal officials to end investigations into alleged overbilling of Medicare, and plans to sell about a dozen hospitals in an effort to regain its financial footing.

The settlement — valued at about one-fourth of Tenet’s stock-market value — will be paid over four years and ends all federal investigations by the Department of Justice and several U.S. attorneys, Tenet said.

The deal means that there will be no finding that Tenet broke the law, but President and Chief Executive Trevor Fetter said the Dallas-based company “made mistakes” before 2003, when the company came under investigation.

Tenet will pay $725 million plus interest to settle allegations that it overbilled Medicare for the most costly cases, made illegal kickbacks to doctors to refer Medicare patients to its hospitals, and used improper billing codes to bilk the health care program.

Tenet said it would pay $450 million plus $20 million interest immediately and pay off the balance by mid-2010. The company also agreed not to seek an additional $175 million that it argued it was owed by Medicare.

Some analysts had expected Tenet to pay even more — estimates ran as high as $1.5 billion. Prosecutors said the final amount was based on the company’s ability to pay.

“Today’s settlement reflects our continued resolve to hold responsible those who engage in health care fraud in any form,” said Peter D. Keisler, an assistant U.S. attorney in Los Angeles.

Fetter, who became CEO in 2003, said, “Some of this company’s past actions did not measure up to the high standards that we have imposed on ourselves.”

Tenet officials had hoped that with a settlement, the company would put behind it a series of investigations and lawsuits that have alienated doctors and sent Tenet’s stock price plunging. They even raised their outlook for 2006 operating profits by $25 million, to between a pretax loss of $75 million to a pretax gain of $25 million.

But investors responded tepidly to the deal. Tenet shares fell 20 cents, or 2.8 percent, to $7.03 in afternoon trading on the New York Stock Exchange. They have crashed from more than $50 in late 2002 to a range of $6.77 to $13.06 in the past year.

The settlement did not end a Securities and Exchange Commission investigation into the company’s disclosure of Medicare and managed-care payments.

Analysts said investors were digesting not only the price of the settlement, but executives’ comments that patient volume at its hospitals will fall 2 percent this year but somehow rise by 1 percent next year. Other hospitals companies have also been hit by weak volume, partly because of a mild flu season.

Erik Chiprich, an analyst with BMO Capital Markets, said reversing the volume decline would be difficult but possible, partly because Tenet’s steady recent decline in patients has lowered the bar for improvement.

“I’m not sure they can win that battle in the next 12 months, but maybe they can over two or three years,” he said. “It’s going to be a challenge.”

Kemp Dolliver, an analyst with Cowen & Co., said investors may have reacted negatively to the news that Tenet will sell more hospitals and that its profit outlook isn’t as rosy as same forecasters had hoped.

“But getting this done is a good thing,” Dolliver said. “They were essentially in paralysis.”

Tenet hopes to improve its financial health by removing poorly performing hospitals.

The company announced Thursday it will sell about a dozen more hospitals by mid-2007. Four are in New Orleans, including Memorial Medical Center, where more than 40 bodies were discovered after Hurricane Katrina last year. Three are in Philadelphia and two in Florida.

In addition, Tenet just sold a hospital in Biloxi, Miss., a partner plans to buy out Tenet’s 51 percent share of a third Florida facility, and the company agreed in May to sell a San Diego hospital as part of a $21 million settlement of charges that it made illegal kickbacks to doctors.

Officials said the company might also drop two leased hospitals in Dallas next year, leaving Tenet with as few as 55 hospitals — fewer than half the number it had three years ago.

Tenet said it would take an unspecified charge against earnings in the June quarter to cover the divestitures.

The company expects to raise $250 million to $275 million from the sales. Officials vowed to increase investment in new equipment at the remaining hospitals to attract doctors who have been sending patients elsewhere.

The deal announced Thursday ends investigations by federal prosecutors in Los Angeles, San Francisco, St. Louis, New Orleans, Memphis, Tenn., and El Paso, Texas.

The amount of the payment is nearly identical to Tenet’s $724 million loss on sales of $9.61 billion last year.

Up to one-fourth of the money could go to whistleblowers who tipped off the government about the company’s behavior, prosecutors said.