Tenet

(THC) - Get Report

has found an expensive cure for one of its biggest headaches.

The ailing hospital chain will pay $395 million to settle hundreds of lawsuits that accuse its former Redding Medical Center of profiting from unnecessary heart surgeries. The settlement brings closure to an open wound that has been festering for more than two years.

However, the deal also may trigger some unpleasant side effects. The company has now violated its bank agreement and, given its deteriorating condition, could find capital harder to come by in the future.

Peter Young, a business consultant at HealthCare Strategic Issues, foresees "less funding availability and significantly changed terms" -- along with the possibility of a formal restructuring -- ahead.

By now, Tenet has already paid a record $54 million government fine to settle allegations that Redding performed unnecessary surgeries on Medicare patients. It also sold the hospital, once among its most profitable, for just $55 million after Medicare threatened to stop doing business with the facility.

Now, Tenet can use those proceeds along with some of its $1.2 billion in cash on hand to settle the 750-plus lawsuits at Redding. But the company still faces significant liabilities that, some say, its remaining $850 million will not even begin to cover.

The company -- which hopes to break even, at best, next year -- may need around $1.5 billion to settle numerous government investigations into its business practices, says Caymus Partners analyst Jeff Villwock, who conducts research on behalf of the Tenet Shareholder Committee. It also faces hundreds of millions of dollars of legal exposure at hospitals outside of Redding, he adds.

"Unless Tenet can borrow some more money, it seems to me the writing is on the wall," Villwock says. "There will be a liquidity problem at some point."

For now, however, investors see reason to cheer. They pushed shares of Tenet up 1.9% to $10.63 on Tuesday's settlement news.

Mixed Diagnosis

Tenet itself is looking on the bright side, too.

"We believe this settlement agreement is the fair and honorable way to conclude this very sad chapter," Tenet CEO Trevor Fetter said. Now, "we are building a new Tenet on a solid foundation of quality, transparency, compliance and integrity, so that the safety and efficacy of the patient care our hospitals deliver is always above approach."

But some critics fear that Tenet's problems already have spread well beyond Redding. For example, they point out that Hilton Head Medical Center -- another highly profitable Tenet facility -- seems to be performing an awfully lot of heart procedures.

"Frankly, the local population base and the available facilities suggest it is impossible to do, or justify, as many caths claimed," or billed, a former professor of medicine wrote in a letter cited on the Tenet Shareholder Committee's Web site. "How can one reconcile these numbers?"

Villwock sees reason for alarm.

"It's not just Redding," he says. "Somebody needs to take a look at potentially half a dozen other Tenet hospitals

with very, very high" operating margins.

Tenet could now wind up footing the bill for the entire $395 million settlement. So far, its insurance carrier has refused to cover the damages.

Tenet downplayed the coverage dispute as "common practice." But Villwock believes the company wound up with a bigger bill than it expected.

"I think it's very clear -- since Tenet is breaking bank covenants put in place in 2004 -- that perhaps the company has not been realistic about what its true liability is here," Villwock says.

Tenet plans to negotiate a new credit line early next year. It also anticipates receiving a "significant" tax refund that will further bolster its liquidity.

'Real Money'

Still, some analysts remain uneasy. They see a company bleeding cash with no cure-all in sight.

"As the late Illinois U.S. Sen. Everett Dirksen used to say when discussing the federal budget, 'A billion here, a billion there, and pretty soon you're talking real money,'" Argus bond analyst William Eddleman wrote last week. "That is what we're waiting for the market to figure out about Tenet."

For the second straight year, Eddleman notes, Tenet is set to lose well over $1 billion. Meanwhile, he says, shareholder equity continues to spiral -- falling to just over half of what it was in 2002 -- while the company's debt-to-equity ratio has doubled.

"In our opinion, these trends are very, very negative," Eddleman wrote, "and the credit implosion occurring is quite significant."

Moreover, things could get worse. Villwock points out that Tenet is currently embroiled in a criminal trial that could significantly impact the company's future. Tenet has been accused of paying illegal kickbacks to physicians in exchange for patient referrals at its Alvarado Hospital Medical Center in San Diego. The company has denied any wrongdoing.

Still, the resulting trial has already hindered Tenet's ability to negotiate a global settlement with the government.

"If Tenet loses, that will be a very significant event for this company," Villwock says. "Then it doesn't have a leg to stand on."

Given all of Tenet's exposure, Eddleman fears the worst.

"It is highly likely that these potential legal liabilities will turn into significant real liabilities and cash expenses in the future," he says. And "I think there is still a high probability that this company will wind up in Chapter 11" bankruptcy.