A big Medicare settlement has sparked fresh hopes for ailing

Tenet

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Federal prosecutors said Thursday they have fined a major not-for-profit hospital system $265 million for collecting excessive bonus payments from the Medicare program. The settlement, which amounts to 40 cents on the dollar based on what the government originally sought to recover, is the first involving alleged abuse of so-called outlier payments.

Some experts now believe that Tenet could follow up with a similar deal soon. But at least one veteran health care analyst believes resolution remains far off for Tenet.

"It's an interesting data point," says Sheryl Skolnick, senior vice president of CRT Capital Group, who has a sell recommendation on Tenet's stock. "But the alleged facts in these cases are very, very different."

Like Tenet, New Jersey's Saint Barnabas health system allegedly manipulated a loophole in the Medicare program that allowed it to collect far more in outlier payments than it should have. But Skolnick says the similarities in the two cases begin and end there.

Saint Barnabas is a not-for-profit system. As such, Skolnick says, the hospital has no access to the equity markets, limiting its means to finance a huge penalty.

Moreover, she stresses, Saint Barnabas has not been operating under a so-called "corporate integrity agreement" like Tenet has in the past.

In contrast, Skolnick notes, Tenet is a for-profit hospital company with ready access to the capital markets for needed financing. The company also faces multiple investigations, she says, with the outlier probe simply being the largest. Finally, she adds, Tenet has violated government rules in the past and therefore stands out as a two-time offender.

Thus, Skolnick believes, Tenet could wind up on the hook for more of its alleged outlier overcharges -- which total an estimated $1.6 billion -- and have to sell some hospitals as an added form of punishment to boot. Already, she points out, the government has forced the company to sell two of its hospitals targeted by investigations.

"Tenet has already been party to a corporate integrity agreement and then, almost immediately, began its aggressive pricing" anyway, Skolnick says. "Clearly, that corporate integrity agreement didn't have its desired effect -- which was to change the culture of the company and get people used to doing things that don't get them in trouble."

Tenet investors held back from celebrating news of the Saint Barnabas settlement. They pushed the stock down 3 cents to $7.34 Friday.

Credit Suisse analyst Glen Santangelo probably expected better. In a research note published late Thursday, Santangelo portrayed the Saint Barnabas settlement as "encouraging" and reiterated his outperform rating on Tenet's stock.

"Although there seems to be more reasons against using the outcome at Saint Barnabas as a proxy for how to assess the Tenet situation, we believe the reasons for using it as a proxy are more compelling," wrote Santangelo, whose firm counts Tenet as a client. "We believe the U.S. attorney's office in Newark, in conjunction with the

Department of Justice, has created a framework on how they view these outlier cases, which in their purest form are all based on the same underlying issue. What seems to be obviously different is the timing and magnitude" of the settlements that result.

Despite appearances, Saint Barnabas didn't necessarily get off cheap. The health system has already wound up closing two of its original nine hospitals because of losses it suffered after its excess outlier payments dried up. It has since slashed costs and, next month, faces a big $45 million down payment on its $265 million fine. After that, Skolnick says, it will spend years paying "every drop of free cash flow" it has just to settle the score.

Moody's on Thursday placed the hospital system's debt under review for a possible downgrade as a result.

Technically, Skolnick says, the government could seek triple damages -- or $4.8 billion -- from Tenet. She, like most, doubts that will happen. Still, she believes the company faces a sizable fine and some hospital sales that Wall Street has not anticipated. The company itself hopes to reach a fair monetary settlement and then turn around its core 69-hospital chain.

Based on financial reports obtained by the Tenet Shareholder Committee, a group long critical of management, most of those hospitals clearly need some help. Indeed, those figures show, some 64% of Tenet's hospitals have been losing money.

Skolnick says the performance of some of those hospitals -- helped by managed care pricing hikes -- has probably improved. Still, she says, the company has a long way to go before it recovers. In the meantime, she believes that Tenet fans keep grasping at straws and simply hoping for the best.

"How bad news is sometimes made into good news never ceases to amaze me," she says. "But eventually, logic, order and discipline do prevail in the stock market."