Tenet Suit Comes Out of Left Field - TheStreet

The latest blow to

Tenet Healthcare

(THC) - Get Report

sure has left some heads spinning.

Florida Attorney General Charlie Crist accused Tenet on Wednesday of overcharging Medicare by $1 billion and violating racketeering laws -- originally aimed at organized crime -- in the process. Crist claims that Tenet jacked up its hospital prices in order to collect generous "outlier" payments that should have gone to others instead.

Medicare establishes a limited outlier pool to compensate hospitals for especially expensive cases.

Although the feds have been investigating Tenet's past outlier collections for years, Crist is the first prosecutor to claim that the company broke the law when pocketing the special Medicare payments. Moreover, he can ultimately seek triple damages by claiming that Tenet violated the Racketeer Influenced Corrupt Organization, or RICO, Act with its aggressive pricing strategy.

The complaint seemed to rattle investors in Tenet, which called the allegations unwarranted, as well as analysts who follow the company. Even those who questioned Crist's motives saw clear reason for concern.

Prudential analyst David Shove suggested that Crist may have filed the lawsuit for political gain but nevertheless warned investors to be wary.

"The charges are serious and will add to Tenet's legal woes, with the outcome unclear," wrote Shove, who has a neutral rating on the stock. "RICO lawsuits are powerful tools, and investors should pay close attention to the developments here."

Shares of Tenet fell 2.3% to $11.17 on Thursday after investors digested the news.

Hardball

By now, complaints against Tenet have grown almost routine.

Multiple government agencies have launched investigations of Tenet, and a federal prosecutor has even formally charged one of the company's hospitals with criminal wrongdoing. But Crist's action signals a whole new ballgame that could extend Tenet's losing streak even further.

"The suit came out of left field," declared Fulcrum analyst Sheryl Skolnick, who has a neutral rating on the company's stock. "We have more questions than answers, but we reach one conclusion: THC needed this like a hole in the head."

Tenet has been trying to ink a global settlement with the feds that would allow the company to finally put its past behind it and move on. Instead, the company seems to keep striking out. A four-month criminal trial, accusing a Tenet hospital of illegally bribing doctors, recently ended in a mistrial and has been scheduled to start all over again. Now, the new RICO charges have set the company back as well.

Like Shove, Skolnick raises questions about the latest case.

For starters, she wonders why Crist is acting now. She points out that the federal government has already been investigating the outlier issue for more than two years. Thus, she wonders whether Crist stepped in because he knew of an imminent settlement that he viewed as insufficient. Or, she asks, did he simply grow tired of waiting for the feds to act?

For her part, Skolnick doubts that the facts will end up supporting Crist's legal argument. She also remains unsure whether Crist really has the power to pursue the RICO allegations. And she wonders how he will prove damages even if he does.

Still, Skolnick worries about the case regardless of its merits.

"Nuisance or real trouble, it will prolong the recovery of the company and any settlement of its federal issues," Skolnick wrote on Thursday. "We do not see how anyone could conclude that this suit is positive for the company or the stock."

Warnings

Actually, Tenet's stock posted a gain when news of the RICO suit first surfaced.

But Skolnick attributed the stock's recent strength to something else. She said that investors were hoping for new legislation that would mandate health care coverage for uninsured workers in Tenet's former home base of California. But she portrayed that optimism as misplaced and called the proposed bill "dead on arrival" already.

She also warned investors against establishing a long position in the stock before Tenet reports its fourth-quarter results and possibly updates its earnings guidance next week. Analysts don't expect the company to start making money any time soon.

The Tenet Shareholder Committee, a group long critical of the company, has cast serious doubts about the company's long-term future as well. The group believes the company's resources will prove "wholly insufficient" to fund both its legal issues and its money-losing operations. Thus, it warns of potentially serious pain ahead.

"We believe that a financial restructuring is inevitable, sooner or later," the group wrote on Tuesday. "Failing (success with) that, we believe a Chapter 11 bankruptcy in late '06 or '07 is a significant possibility."