took its medicine Wednesday, putting an end a long-running federal bribe case.
The ailing hospital chain agreed to pay $21 million to end a long-running criminal case against its Alvarado Hospital Medical Center in San Diego. The company spent three years fighting through two criminal trials, both of which ended in mistrials due to hung juries, before a recent threat from government officials finally forced its hand.
Following the latest mistrial, the Office of Inspector General last week stepped in and threatened to ban Alvarado from treating Medicare patients. In response, Tenet agreed to sell or close the hospital -- and to ink an unusually tough settlement that could signal rocky negotiations ahead.
"I would bet that the guys at OIG are doing a victory dance today," says CRT Capital analyst Sheryl Skolnick, who has a sell recommendation on Tenet's stock and has no position in the stock. "They brought Tenet to the table -- if not its knees -- in nine days. ... Tenet capitulated."
After spending huge sums to defend itself in court, Tenet will now pay the government $21 million to drop criminal charges and forgo civil litigation against Alvarado, the subsidiary that owns it and the CEO who used to run the hospital. The fine ranks as the second-largest ever levied against a single hospital, Skolnick says, trailing only the $54 million Tenet forked over to settle charges involving unnecessary heart surgeries at its former Redding Medical Center in Northern California.
Moreover, Tenet has been forced to shed the government-targeted hospitals -- on top of paying steep penalties -- in both cases. Skolnick now expects Alvarado, like Redding before it, to sell for a fraction of its former value.
"Tenet invested significant dollars in that facility -- and its defense -- based on the theory that it could turn it around," Skolnick says. "Now, they have to sell it in a fire sale instead. ... And if Tenet doesn't play ball with the feds, the feds could threaten this again" if the sides fail to settle Tenet's other legal issues.
Investors are still hoping for a decent global settlement instead. They pushed shares of Tenet up 4.5% to $7.54 on Wednesday, as the Alvarado saga finally came to an end.
Still, the government cracked down hard on Alvarado. Perhaps more striking than the steep fine is the "explanatory statement" Tenet made as part of the deal.
Tenet begins by describing the Alvarado case as a "sobering event" for the company, saying that it sparked major changes in the way the company -- and, in fact, the industry -- recruits physicians. The company then goes on to admit that Alvarado offered "relocation" payments that wound up in the hands of established physicians who never used the money for relocation purposes at all.
"We were distressed to learn that certain host physicians had obtained excessive payments by representing that they needed money to make tenant improvements to accommodate new physicians when in fact they never made improvements," Tenet stated as part of the settlement. "We regret that the hospital did not take adequate steps to assure that money provided to relocated doctors, including money earmarked for tenant improvements and office overhead, was in fact used for those purposes and in all instances was justified."
Tenet continues in the statement, "We have always had a disagreement with the government over whether anyone at Alvarado knowingly set out to violate the law in connection with these physician recruitments, but we have never disputed that there are aspects of how the recruitment program operated that are troubling."
Skolnick finds the rare confession telling.
"It wasn't just the feds making things up," she points out. "Clearly, there were problems at this facility."
Selling it won't solve everything.
If anything, one former Tenet executive insists, other company-owned hospitals in Southern California -- particularly in the Los Angeles region -- offered even more troubling bribes. Tenet did not immediately respond to a question from
on this matter.
Still, several of Tenet's Los Angeles hospitals face an ongoing criminal investigation for allegedly paying kickbacks to physicians. Moreover, Tenet hospitals in four other markets face civil probes on supposed kickbacks.
Meanwhile, the entire company remains under fire for allegedly collecting outsized "outlier" payments from Medicare. Wall Street has long estimated that the company could wind up paying more than $1 billion under a global settlement with the government as a result.
But Tenet's huge cash pile -- hit by an earlier legal settlement -- slipped below $1 billion in the latest quarter. Thus, some have started to question whether the company can in fact still fund a global settlement with the cash it has on hand.
Tenet stopped short of making any full-blown promises last week.
"I think that it's important for all parties to recognize that Tenet's financial position has deteriorated in the past year," CEO Trevor Fetter said during last week's quarterly conference call. And "I would only say that our objective is to reach a fair settlement and move on from that fair settlement in a manner in which we have not imperiled the company, in which we have sufficient liquidity for our operations and sufficient capital to invest appropriately in our hospitals. ... (But) I can't give you some prediction as to whether we will meet that objective or not."
Skolnick, for one, has started to wonder just how much of Tenet will be left in the end.
After selling dozens of hospitals -- and building just one new one -- Tenet will be left with 68 facilities after the Alvarado transaction. Yet, Skolnick notes, five of those hospitals operate in a tough Philadelphia market that Tenet would probably love to leave. Another five are located in New Orleans, she says, including two that remain closed and three now catering to an increasingly uninsured population.
Thus, Skolnick feels that both of those markets will continue to drag down results and hinder any turnaround of the company. But she worries about other regions, too.
Last quarter, for example, Tenet reported mounting competitive pressures at its hospitals in both Dallas and Houston. Meanwhile, the company continues to struggle in its two biggest markets -- Florida and California -- as well.
Tenet says that it continually frets about 20% of its entire portfolio itself.
"I've got about 15 hospitals that the managers and I are working on, and which we believe that we have got to find a way to move their volumes and earnings up to something that's more reasonable and makes a fair contribution," Reynold Jennings, the company's operating chief, told investors last week. "As I sit here today, that number is still pretty much close to 15 that cause me to stay awake at night and figure out what is the next solution and how do we speed up the resolution of certain issues they have."
But Skolnick has started to wonder if the future of those hospitals -- and even stronger ones -- remains in the company's hands. She has now watched the feds force the company to sell two hospitals, and believes that history could repeat itself.
"The Street continues to believe that the feds don't want to bankrupt this company because they want patients treated in these hospitals," Skolnick says. "I think the feds want patients treated in these hospitals, too. But I don't think they give a hoot about what happens to Tenet."