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Best in Class: Why Tenet Is the Healthiest Play in Hospitals

Stocks in this article: THC CYH HLS LPNT

NEW YORK ( TheStreet) -- Back in July, a group of hospital leaders joined Vice President Joe Biden in announcing a big agreement. As a part of President Obama's larger agenda to remake health care in the U.S., hospitals agreed to contribute some $155 billion in Medicare and Medicaid savings over the next 10 years.

But the reason why says more about the hospital industry's current state. Growing unemployment means more uninsured. More uninsured means fewer people able to pay their hospital bills. So, in agreeing to cut Medicare and Medicaid costs, many hospitals are essentially making a bet that whatever health reform legislation passes will ultimately result in more insured patients able to pay their bills.

This episode demonstrates the realities of the for-profit hospital industry -- a heavily regulated sector with so much in flux. Debates may go back and forth about which company reigns supreme here, but an intriguing argument could be made for Tenet Healthcare (THC), and not for the typical financial reasons. Instead, Tenet is the leading hospital operator that puts quality at the heart of its business model -- and may also be the one who understands its own company best.

There are, however, certain realities about Tenet that need to be recognized up front. The hospital operator, which controls around 50 hospitals and more than 13,000 beds in mostly urban locales, is still recovering from some of the darkest episodes in the company's history.

Beginning in 2002, a slew of government investigations struck at the core of Tenet's management. There were allegations that doctors were billing for unnecessary surgeries. Others alleged that the hospital operator was providing kickbacks to doctors in order to win Medicare referrals. Class-action lawsuits followed. There were issues with the Internal Revenue Service. Hundreds of millions of dollars in settlement money has been paid over the years as a result and more than a few Tenet executives were shown the door.

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