-- a company already in critical condition -- new complications just keep piling up.
In recent days, the company has seen its regulatory exposure spread to other parts of its system and an old wound reopen to become a serious threat.
Late Thursday, Tenet fielded new requests for a broad range of documents about three of its Los Angeles-area hospitals, including its high-profile teaching facility at the University of Southern California. Federal prosecutors, who originally excluded Tenet's USC University Hospital from a physician kickback probe, are now seeking information about the facility's billing practices, coronary procedures and arrangements with cardiac physicians. Tenet's Centinela Medical Center and Daniel Freeman Memorial Hospital, already subjects of the kickback probe launched in July, are also targeted in the broadened investigation.
Meanwhile, Tenet itself is under a sweeping probe for aggressively collecting generous "outlier" payments for complicated -- but potentially unnecessary -- procedures covered by Medicare.
The new investigation "appears aimed at identifying physicians' participation in a possible scheme related to the high level of outliers," said Peter Young, a business consultant at HealthCare Strategic Issues. "It certainly appears it is likely physicians will be charged as part of building the larger case against Tenet."
Tenet shares, virtually immune to bad news by now, inched up a penny to $13.79 in Friday afternoon trading.
Word of the expanded probe came on the heels of a crippling legal setback for the company. Just hours before meeting Thursday with federal prosecutors, Tenet revealed that it had lost a huge court decision -- with damages exceeding the cash now on its balance sheet -- favoring one of the company's original founders.
The California Court of Appeals, which had already ruled against Tenet once, calculated that the company now owes John C. Bedrosian more than $250 million in damages and interest for failing to honor the co-founder's employment contract. Bedrosian originally filed a $35 million lawsuit against Tenet a decade ago, just after the company fired him during its last big scandal. Bedrosian was the last of the company's three founders -- all attorneys -- to depart after the company came under fire for allegedly locking juvenile patients in mental hospitals just to loot their insurance policies.
But Bedrosian was apparently the only founder to leave without his severance arrangements settled. Fellow co-founders Richard Eamer and Leonard Cohen scored $9 million and $2.9 million respectively -- in addition to generous consulting contracts and pension benefits -- but Bedrosian wound up in court fighting for what would, over time, become extraordinary stock benefits.
Bedrosian originally won damages of less than $10 million in 1999. But Tenet failed to pay the former executive and instead pursued another trial ruled as unauthorized by the court.
"There is no question that the issues involved in this litigation were enormously complex, difficult and novel, and required 10 years of hard-fought litigation including multiple appeals to resolve," Judge John C. Segal wrote in an uncertified draft of his opinion. "The last four years of litigation required the plaintiff and his attorneys to go through a second reference trial and subsequent appeal that they never should have had to endure, causing according to the Court of Appeal by defendant's 'intransigence' in protracting litigation."
In calculating Bedrosian's new award, the court used a much higher share price of $52.50 -- due to its appreciation during the legal battle -- and factored in stock splits as well. The total $253 million award, $112 million of it for interest alone, surpasses the $200 million Tenet recently said it has in the bank.
The company, which plans to reserve for the full award in the third quarter, is nevertheless seeking a review of the decision.
"We do not believe the evidence in this case justifies this huge award, and we will ask the court to promptly review it," said Gary W. Robinson, Tenet's deputy general counsel.
In the meantime, Tenet will be busier than ever supplying government officials with documents. Tenet hospitals, particularly in the company's stronghold of California, have been accused of vigorously hiking retail prices in an effort to collect fat outlier checks from Medicare.
Nearly a year ago, when Tenet's outlier dependence came to light, the
Orange County Register
singled out USC University Hospital -- one of the three hospitals caught up in the new federal probe -- for collecting up to five times more than average in Medicare outlier checks. The outlier payments rose as USC aggressively expanded its high-margin cardiac program.
Shortly after Tenet came under fire last fall, the USC Medical School defended its parent company in the
Los Angeles Business Journal
. But in late January -- less than two months later -- hospital CEO Paul Viviano abruptly departed after just a couple of years on the job. One of his predecessors, Ted Schreck, went on to preside over the Southern California region now under scrutiny. Meanwhile, yet another former USC hospital executive -- Sylvia Kelly -- also has ties to a second Tenet facility involved in the new probe. In the past, Sylvia has served as operating chief at both the USC hospital and Centinela Hospital Medical Center.
Like many Tenet hospitals, Centinela has been singled out as particularly expensive by critics. Citing various documents, the
Los Angeles Times
last year pegged Centinela's operating margin at 34% -- or 10 times the California average -- due to aggressive price hikes and generous outlier payments.
When questioned about the hospital's pricing strategy, Centinela CEO Michael Rembis shifted the blame elsewhere.
"Rembis, who has run Centinela since 1999, was aware his hospital received a larger share of outlier payments than some others," the
Los Angeles Times
reported. "But he said he had no idea how much that affected the hospital's bottom line and that directions on raising hospital charges came from corporate headquarters."
Several former Tenet executives -- including the operating chief allegedly responsible for the billing strategy -- are currently among those now being questioned by federal officials.