'Troubling' Turn for Tenet

Tenet (THC Quote) took its medicine Wednesday, putting an end a long-running federal bribe case.

The ailing hospital chain agreed to pay $21 million to end a long-running criminal case against its Alvarado Hospital Medical Center in San Diego. The company spent three years fighting through two criminal trials, both of which ended in mistrials due to hung juries, before a recent threat from government officials finally forced its hand.

Following the latest mistrial, the Office of Inspector General last week stepped in and threatened to ban Alvarado from treating Medicare patients. In response, Tenet agreed to sell or close the hospital -- and to ink an unusually tough settlement that could signal rocky negotiations ahead.

"I would bet that the guys at OIG are doing a victory dance today," says CRT Capital analyst Sheryl Skolnick, who has a sell recommendation on Tenet's stock and has no position in the stock. "They brought Tenet to the table -- if not its knees -- in nine days. ... Tenet capitulated."

After spending huge sums to defend itself in court, Tenet will now pay the government $21 million to drop criminal charges and forgo civil litigation against Alvarado, the subsidiary that owns it and the CEO who used to run the hospital. The fine ranks as the second-largest ever levied against a single hospital, Skolnick says, trailing only the $54 million Tenet forked over to settle charges involving unnecessary heart surgeries at its former Redding Medical Center in Northern California.

Moreover, Tenet has been forced to shed the government-targeted hospitals -- on top of paying steep penalties -- in both cases. Skolnick now expects Alvarado, like Redding before it, to sell for a fraction of its former value.

"Tenet invested significant dollars in that facility -- and its defense -- based on the theory that it could turn it around," Skolnick says. "Now, they have to sell it in a fire sale instead. ... And if Tenet doesn't play ball with the feds, the feds could threaten this again" if the sides fail to settle Tenet's other legal issues.