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Tenet's Tight Spot

Melissa Davis

Tenet Healthcare's (THC) turnaround took an unexpected detour Monday.

Investors have been rooting for the hospital chain to shake its legal headaches. But they got bad news Monday, when the government threatened to bar a Tenet hospital from federal insurance payments.

The Office of Inspector General on Monday laid out plans to bar Tenet's Alvarado Hospital Medical Center in San Diego from treating patients covered by Medicare and other federal insurance programs. The rare threat, if carried out, would be a virtual death sentence for Alvarado.

The Justice Department has accused Alvarado of paying illegal kickbacks to physicians in exchange for patient referrals. The agency continues to investigate other Tenet facilities suspected of similar misconduct. Tenet has denied any wrongdoing, and two federal criminal kickback trials involving Alvarado and its former execs have ended in mistrials.

Many investors had assumed that the latest courtroom battle -- which dragged on for nearly a year before ending last month in a mistrial -- would finally wear the government down and pave the way for a global settlement as early as the first half of this year.

But now hopes for any near-term deal have started to fade. CRT Capital analyst Sheryl Skolnick promptly downgraded Tenet to sell from fair value as a result.

"The move by the OIG is a clear signal to us that the federal government ... is unwilling to cut THC even a little bit of slack," Skolnick wrote on Tuesday. "This development could mean that the Justice Department and the OIG are intent to take THC to task every and any way they can. ... This is clearly a setback for the global settlement, the turnaround and the stock, in our view."

Skolnick now estimates the breakup value of the company between $4.42 and $9.97 a share. She has set her 12-month target price on the stock at $6.43, just below the midpoint of that range.

Tenet slipped 2.1% to $7.79 on Tuesday.

Previously, the OIG has issued similar threats on just a handful of occasions.

Tenet fielded one of those itself. Back in 2003, the OIG announced plans to ban California's Redding Medical Center -- a hospital suspected of performing unnecessary surgeries -- from treating government-insured patients. The news came even after Redding had agreed to pay the government a record-breaking fine just one month earlier. Tenet wound up selling the hospital, once among its most profitable, for a fraction of its former value the following year, before the government carried out its threat.

More recently, the OIG sent a similar notice to a financially strapped hospital in Florida that has no ties to Tenet. The agency expressed frustration because it felt that the hospital, known as South Shore, had flagrantly violated a corporate integrity agreement promising to behave. The hospital wound up filing for bankruptcy protection -- even before losing Medicare payments -- just two months later, according to the Palm Beach Daily Business Review.

Meanwhile, records show, Alvarado has already started bleeding. The hospital swung from a $20.4 million profit in 2003 -- with help from questionable outlier payments -- to a $15.7 million loss last year. Some, including Skolnick, now see a possible fire sale on the way.

Of course, she worries about other Tenet facilities as well.

"This move by the OIG likely casts a further cloud over THC, especially in its attempt to convince physicians to refer more of their patients to THC facilities, not just Alvarado," she wrote. Already, "THC is attempting to attract physicians and their patients while their relocation agreements are under scrutiny and while admissions are falling for its peers.

"There aren't enough patients to fill the beds of the hospitals the doctors like and trust -- much less the Tenet facilities that doctors may be wary of."

Based on Tenet's latest regulatory filings, the government continues to investigate physician agreements at company-owned hospitals in El Paso, Texas, Memphis, Tenn., New Orleans, St. Louis and Southern California. The last of those probes is criminal in nature.

A former Tenet executive who spoke on condition of anonymity insists that the company has knowingly broken the law -- but has covered its tracks well enough to confuse juries. Indeed, he claims that Tenet actually terminated one Alvarado CEO for bribing doctors before going on to hire a replacement who now faces criminal charges for doing the same.

"This has been going on for a long time," he says. "Tenet found a way to restructure the agreements so that, on the surface, they looked legitimate. That's what confused the jurors. They didn't know the intent -- the documents that went behind -- those agreements."

A Tenet spokesman was tied up with the company's earnings call on Tuesday morning and didn't immediately return a call from TheStreet.com seeking comment.

Tenet has portrayed its physician agreements as legal, if complicated, all along. Meanwhile, the company continues to point out that no jury has been able to decide whether its Alvarado facility intended to violate the law.

Still, the company reminds in its regulatory filings, potentially serious risks remain.

"We believe that all aspects of our relationships with physicians are potentially under review," the company states in its latest annual report. "Proceedings in this area may be criminal, civil or both."

Following the OIG's latest move, Skolnick says she feels especially worried.

"The government is sending a signal to Tenet, saying 'We're not going to let you get away with this. We think you're bad boys,'" she told TheStreet.com on Tuesday. "I recognize this is extreme. ... (But) why doesn't the OIG just put a 'for sale' sign on the entire company?"