Tenet Feels the Heat From the Feds

By Melissa Davis

Staff Reporter, TheStreet.com
07/25/2003 07:19 AM EDT

Tenet (THC:NYSE)  may soon be fighting the equivalent of a nasty auto immune disease.
Like the crippling ailments that turn the body's protective immune system against itself, Tenet's top managers could soon be feeling pressure to assail their corporate host. Already, federal agents have indicted one Tenet hospital CEO and issued subpoenas that could trigger fresh criminal charges at seven other facilities. And experts doubt the probes will end there.

"The Department of Justice seems to be moving ahead relatively quickly with what is known as a 'twisting in the wind' strategy, where one or two charges are filed but many more are being considered," said Peter Young, a health care consultant with Florida-based HealthCare Strategic Issues. "And they use the threat of conspiracy while persons or companies twist in the wind."

Indeed, last week's indictment of Tenet's Alvarado Hospital Medical Center -- which followed an earlier indictment of Alvarado CEO Barry Weinbaum -- specifically accuses the hospital of conspiring to defraud the federal Medicare program by paying illegal kickbacks to physicians in exchange for patient referrals. The new probes at seven other Southern California hospitals also question perks for Tenet physicians.

Tenet, which has denied any wrongdoing, failed to grant an interview for this story. But the company's own actions speak loudly about the potential magnitude of the DoJ probe. In a speech this week at Tenet's annual meeting, CEO Trevor Fetter revealed that the company had secured industry hotshot D. McCarty Thornton -- the former inspector general chief counsel who led the big attack on HCA (HCA:NYSE - news - commentary - research - analysis) -- as a consultant. And Thornton himself has publicly warned of serious repercussions for physician kickbacks.

"Thornton identified antikickback violations as the hottest area of risk for health care providers," the American Health Lawyers Association reported earlier this month. And Thornton emphasized that "greed is not good."

Young, who aided the DoJ in another big Medicare fraud case, said he's unable to share details about his current discussions with the DoJ about Tenet. But he pointed to the DoJ's own manual for sweeping health care fraud probes as a roadmap for the current Tenet investigation. And he speculated that Tenet could soon face an investigation that's "national in scope," with penalties approaching the $1.3 billion HCA paid to settle its own Medicare fraud charges.

Michael Ruggio, a Washington, D.C., attorney who helped defend HCA against the government, believes Tenet could face a penalty even worse than HCA's record-breaking fine. But he still tends to doubt that Tenet is guilty of a corporatewide conspiracy to defraud the government.

Investigators "see shadows that don't really exist," Ruggio said. "But they're going to pursue those shadows. And there is some stuff there -- there's no question about it."

Ruggio said Tenet could be forced to pay triple damages for Medicare violations. For now, he said, Tenet's exposure is "incalculable."

But Prudential analyst David Shove has warned of a potentially devastating backlash.

"A companywide investigation may be in its genesis," wrote Shove, who recommends selling Tenet shares. "Should such an investigation gather steam, it could potentially jeopardize Tenet's participation in federal health plans such as Medicare and Medicaid.

"Overall, these investigations raise some serious questions regarding Tenet's oversight of its local hospitals."

20/20 Vision

For his part, Young believes that Tenet keeps a close eye on its individual hospitals -- and stands culpable for any local wrongdoing as a result.

"In the Alvarado instance," he said, "there will be a sizable paper trail of millions of dollars of book entries to the physicians, all of which would have needed to be approved at the corporate-level finance department."

The DoJ is currently asking Tenet to explain both its general policy on physician relocation payments and its specific relocation contracts at the Southern California hospitals now under fire. For its part, Tenet has fiercely defended its relocation agreements as "entirely appropriate under the law" and essential to quality health care in underserved communities. Despite skepticism from critics, Tenet also insists that Alvarado's home base of San Diego struggles to attract doctors because of poor reimbursement levels and high business and housing costs.

"Although San Diego is often thought of as a desirable place to live," Tenet said, "it is facing a severe shortage of physicians."

But prosecutors have accused Alvarado of rewarding established doctors and medical practices -- instead of just incoming ones -- with the relocation agreements. Since 1992, the government claims, Alvarado has paid San Diego physicians millions of dollars for referring patients instead of covering legitimate relocation contracts.

"Kickbacks to doctors can wear many disguises, including sham relocation agreements," said Carol Lam, the U.S. attorney in San Diego. "They are still kickbacks. They are still illegal. And they threaten the integrity of our medical system."

Funny Money

Tenet has settled federal kickback charges before. In documents obtained by TheStreet.com, a California physician illustrated how one of the old arrangements worked.

"Garfield Medical Center always ... will be the only referring hospital in my private practice," the doctor wrote to Patrick Petre, acting CEO of the Southern California hospital, in 1991. "I will be using the following equipment and instruments. Anything you can do in setting and/or helping me in purchasing those instruments will be highly appreciated."

A week later, the top administrator of the Tenet-owned hospital sent the doctor a letter showing that Garfield had purchased $25,000 worth of equipment for the doctor's office. By this time, the doctor had already been referring patients to Garfield for five years. But he was allegedly promised rewards for referring patients from a new office where he was expanding. And he signed a so-called relocation agreement to secure the bonus payments.

"He agree [d] to advertise for and hire an associate doctor," the doctor's attorney later noted. "The hospital would pay $25,000 for recruiting expenses and pay $3,916 per month salary for [his] new associate. But [he] was told ... that he need not really hire a new associate and that [he] could use the money for any purpose he chose."

The doctor, who reportedly assumed the arrangement was legal, later ended such dealings after Medicare cracked down on Tenet in 1994. But he told his attorney five years later that kickbacks to other doctors were continuing.

The attorney noted that his client "knows the names of numerous doctors receiving suspicious incentives or holding duplicative or fictitious paid posts or otherwise involved in various kickback and incentive schemes. ... [He] revealed that there were continuing kickback and incentive schemes similar to the one [he] personally experienced, which were still in existence in at least five hospitals."

One of those five hospitals -- Encino/Tarzana Regional Medical Center of Los Angeles -- has already been swept up in the new DoJ kickback probe.

Wheels of Justice

Young expects more Tenet hospitals to follow. Overall, he's forecasting a "huge" investigation that leaves Tenet a far different -- and weaker -- company than it is today. Of course, Tenet stock has lost more than three-quarters of its value over the last year.

Specifically, Young believes Tenet will shed a number of hospitals that cannot perform under tighter Medicare guidelines. He also predicts that Tenet's relationship with doctors will suffer under DoJ scrutiny. And he thinks that Tenet executives -- in addition to Tenet itself -- could pay a high price in the end.

"People have tended to expect 'checkbook justice' because very few people have been charged before," Young said. "But I think the climate -- post-Enron, WorldCom and ImClone (IMCL:Nasdaq - news - commentary - research - analysis) -- is entirely different today."

Ruggio has also felt a shift. And he warns that big health care probes will probably begin, rather than end, with Tenet.

"Tenet is the beginning of a whole new era," he said. "This is the next frontier."