Updated from 1 p.m.

Complications continue to spoil

Tenet's

(THC) - Get Report

labored recovery.

After surviving a dangerous threat in California, the company has weathered a fresh setback in another part of the country. The hospital chain, which just resolved a potentially crippling dispute with Blue Cross of California, now faces new questions about its practices in New Orleans.

In a special 8-K filing on Monday, Tenet revealed that it has received three new subpoenas from federal prosecutors who are expanding their criminal probe of Tenet subsidiaries that operate in the New Orleans area. For the first time, federal authorities have singled out Tenet's flagship New Orleans hospital -- Memorial Medical Center -- as a target of scrutiny. They have also issued two new subpoenas seeking additional information about Tenet's relationship with physicians who partially own a company that manages Tenet's New Orleans-based health maintenance organization.

The company disclosed the fresh wave of subpoenas just after it filed a separate 8-K report announcing that it had resolved a big dispute with California's largest insurer. Investors chose to shrug off the widening probe -- by now one of many -- and instead celebrate the victory with Blue Cross of California. Shares of Tenet rocketed 4.4% to $14.35 after Tenet revealed that Blue Cross had changed its mind about canceling its contract with one of Tenet's busiest hospitals in the state.

Earlier, Blue Cross had

threatened to sever its contract with Doctors Medical Center of Modesto -- and scrutinize cardiac programs at other Tenet facilities -- after it concluded that a huge percentage of its patients had undergone unnecessary heart surgeries at the busy hospital. But Tenet quickly sought out its own independent experts, who determined that all of the procedures were justified.

Since then, Blue Cross has backed off its original threat and agreed to maintain its relationship with Doctors Medical.

Big Easy

In the meantime, however, Tenet faces mounting problems outside its home state. The latest subpoenas indicate that federal prosecutors are now questioning Tenet's relationship with physicians in New Orleans as well as California. By now, the feds have already charged Tenet's Alvarado hospital -- and two hospital executives there -- with bribing physicians in exchange for patient referrals. Now, the government is seeking detailed information about Tenet's relationship with New Orleans physicians who, together with Tenet, own a company that manages Tenet's local HMO.

Specifically, the government has asked for documents "related to payments to and contractual matters related to physicians and others" involved in People's Health Network, the HMO management company jointly owned by Tenet and some of its physicians. It is also seeking specific information "related to certain medical staff committees and other medical staff entities" at Memorial Medical Center.

Memorial Medical Center ranks as the largest of Tenet's seven New Orleans-area hospitals. The hospital -- now being probed for activities dating back to 1999 -- was led by former CEO David Dunlap until he joined the crowd of executives leaving Tenet facilities earlier this year. It is now being run by L. Rene Goux, a Tenet veteran and two-time winner of the internal "Circle of Excellence" awards that recognize, among other things, strong financial performance.

In the meantime, another profitable Tenet hospital has escaped a brutal blow. Doctors Medical Center of Modesto will continue to treat Blue Cross patients even though it has been accused of the same aggressive practices that have come under fire at Tenet's nearby hospital in Redding, Calif.

For its part, Tenet has fiercely defended the bustling heart program at Modesto.

"When Blue Cross presented us with these allegations, we took them very seriously," said Stephen Newman, a medical doctor and CEO of Tenet's California operations. But "in every case Blue Cross questioned, this independent panel of respected cardiologists and cardiac surgeons -- using the most up-to-date, most widely accepted guidelines for cardiac care -- concluded that the care provided ... was appropriate."

Tenet did acknowledge that one patient's treatment was "too aggressive for that patient's level of heart disease." But the company said that even that case, along with 22 others questioned by Blue Cross, was deemed acceptable by its panel of independent experts.

Blue Cross's own medical experts had previously determined that all 23 cases -- or more than half of those it studied -- revealed unnecessary heart bypasses. Tenet quickly pounced on the study as flawed, saying it was small and biased, and hinted that Blue Cross was simply trying to play hardball at a time when it still owed $50 million for services already rendered by Tenet hospitals. Tenet also threatened to use any means possible, including litigation, to resolve the situation.

Nasty Business

Fulcrum analyst Sheryl Skolnick found the entire dispute alarming.

"Why would a sophisticated organization like BCCA expose itself to the risk of a lawsuit and potential public criticism by making very, very public allegations and by basing its allegations on not only a small sample but an admittedly biased one?" Skolnick questioned two weeks ago. "Is $50 million so important to an organization as large as BCCA and its parent

WellPoint

(WLP)

that it would go public in this way?"

At the time, Skolnick worried that Blue Cross had a "trump card" that could prove devastating to Tenet.

"Only if there is something really shocking would the small sample and sample bias issues become irrelevant," wrote Skolnick, who has a sell rating on Tenet shares. "And the only thing we can come up with is to wonder whether the patients died or whether the physicians involved are so highly placed within DMCM's hierarchy as to effectively be representations of the DMCM heart program itself."

But Tenet's own study, released the following day, seemed to eliminate that possibility.

"In all 23 of these cases, there were no patient deaths and no unexpected complications," Newman announced on Nov. 12. "Every one of these patients had demonstrated heart disease symptoms and required treatment."

Blue Cross did not return a phone call Monday seeking information about its new decision to continue its relationship with Tenet's hospital in Modesto.