A court filing by federal prosecutors could point to more pain for

Tenet

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.

The hospital chain stands accused of having overcharged Medicare by more than $1.6 billion to pump up profits. Some people on Wall Street have assumed that Dallas-based Tenet, which has changed its pricing policies and has denied any wrongdoing, could settle any liability by making a payment in that neighborhood to the government.

But the Justice Department said last week that it believes Tenet engaged in a practice called "turbo-charging" -- meaning that it sought lucrative so-called outlier payments from Medicare when smaller payments were justified. The government also indicated it is probing whether Tenet's actions could entitle the U.S. to seek additional damages. Justice, which laid out its case when responding to a Tenet motion to dismiss a

Florida state racketeering lawsuit, hasn't sued Tenet over the outlier payments.

But the comments suggest the feds could be taking a hard line on the outlier case, raising the prospect of a heftier settlement bill.

"We suspect that the consensus view among investors is that a universal settlement on outliers would run about $1-$2 billion," wrote Morgan Stanley analyst Gary Lieberman, who has an equal-weight rating on Tenet's shares. "However, if the government is using the $1.6 billion as the floor and then includes an additional penalty -- let alone adjusts for accrued interest -- the $1-$2 billion estimate may prove too low."

UBS analyst Kenneth Weakley exposed the company's aggressive pricing strategy in late 2002. Since then, Tenet has weathered a long string of losing quarters and has seen its stock, once a $50 highflier, lose 75% of its value. The shares inched up 9 cents to $12.59 on Monday.

"The brief provides the first look the outside world has had at the DOJ investigation into Tenet's outlier abuse," says Peter Young, a business consultant at HealthCare Strategic Issues. "It appears the DOJ investigation is seemingly headed toward both civil and criminal action."

'Turbo-Charging'

The Justice Department claims Tenet artificially inflated its hospital charges and, as a result, wound up improperly pocketing generous "outlier" payments that were intended to cover especially expensive Medicare cases. In reality, the government claims, the company was simply charging a lot for cases that should have generated regular Medicare payments instead.

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"The United States emphatically disputes Tenet's assertions that it was entitled to claim outlier payments based on whatever it wanted to charge and without any consideration of its actual costs," the court filing states. "To the contrary, the Medicare laws make clear that hospitals are eligible for outlier payments only for extraordinarily costly cases, and that any receipt by Tenet of outlier payments for cases that failed to meet this criteria was unlawful and improper."

The federal government is investigating whether Tenet violated the False Claims Act when collecting the payments. If that proves to be the case, Tenet could pay double damages to settle the probe or triple damages if the company goes all the way to trial and loses in court.

Given its financial condition, Tenet could ill afford such an outcome. Thus, analysts seem concerned. Even after selling numerous hospitals and collecting a big tax refund, the company has $1.5 billion in cash and equivalents listed on its balance sheet.

"Importantly, settlements of Medicare false claims typically involve the refunding of all overpayments as well as some level of penalty," noted Merrill Lynch analyst A.J. Rice, who recommends selling Tenet's stock. "This suggests the ultimate outlay for Tenet is likely to be quite large and would necessitate increased liquidity."

The latest development also suggests that a global settlement -- sought by Tenet for two years -- could remain elusive for some time. A criminal trial against the company, currently under way in San Diego, could be stalling settlement talks as well. A first trial ended in mistrial.

'Unambiguous'

Meanwhile, the government continues to build its case.

For starters, it says, the outlier statute "unambiguously limits" payments for cases that truly cost an excessive amount to treat. Moreover, it says, that limitation already has been supported by legislative history as well as case law. Finally, it says, Tenet itself has previously acknowledged that such a limitation exists.

The government then attempts to discredit Tenet's own arguments. It claims that the company failed to interpret the outlier regulations in context. It says that Tenet's own reading of the regulations is "unreasonable because it conflicts with the express terms of the outlier statute." Even if Tenet's reading could be supported, the government concludes, it should be rejected because it would lead to "absurd results."

"If a hospital were to have increased charges high enough, the hospital could have radically disrupted -- or even bankrupted -- the Medicare Trust Fund," the government states. "Such an interpretation of the outlier regulations cannot be squared with any rational intention of Congress or the Department of Health and Human Services."

Lehman Brothers analyst Adam Feinstein found that last argument to be "one of the more entertaining sections of the filing." He also said that, at first glance, the government seems to have a strong case against the company.

However, he ultimately believes the case is a complex one filled with gray areas and that the government -- already in the process of retrying one case against the company -- could find it "difficult and time-consuming" to prove Tenet guilty in court. Thus, he expects to see a settlement in the end.

"We believe Tenet will have to make a sizable payment to settle these issues," he wrote. But "we don't anticipate any near-term resolution."