Tenet

(THC) - Get Report

knows how to cover its bases.

In recent days, the beleaguered hospital chain has created a buzz by hiring legal heavyweight Mac Thornton -- who led the government's massive investigation of

HCA

(HCA) - Get Report

-- to guide it through its own regulatory minefield. But the company has quietly enjoyed powerful ties for years.

Perhaps most notably, Tenet has friends inside the nonprofit organization charged with policing the hospital industry. Tenet director Lawrence Biondi -- a priest who chairs Tenet's ethics, quality and compliance committee -- also serves on the board of the Joint Commission on Accreditation of Healthcare Organizations. And at least one Tenet physician, who holds a leadership position at a Tenet hospital accused of risking patient lives, sits together with Biondi at the Joint Commission boardroom table.

The two men are among just six Joint Commission directors -- out of 28 -- who also fill board seats at Joint Commission Resources, the consulting arm of the nonprofit agency. Hospitals regularly pay the consulting firm thousands of dollars just to prepare them for routine, but crucial, Joint Commission visits.

Tenet says the arrangement has brought no favors to its hospitals. And the Joint Commission itself sees no potential for conflict.

The Joint Commission board is "a governing body that provides policy leadership and oversight," said Joint Commission spokesman Mark Forstneger. "They're not involved in the day-to-day operations. ... We're very dedicated to a very objective, thorough accreditation process."

Buie Seawell, a professor of business ethics at the University of Colorado, sees no "smoking gun" in the arrangement. He says oversight boards often benefit from the business knowledge of experts in the industry. Still, he feels industry insiders -- who fill more than 80% of the commission's board seats -- should make a lot more room for outside representation. And he admits that a corporate director like Biondi would need to be "pretty careful" to avoid potential conflicts of interest.

Fulcrum analyst Sheryl Skolnick is more troubled. The veteran health care analyst-- who's tough to rattle after following hospital scandals for years -- expressed some clear discomfort about Tenet's ties to the Joint Commission board.

"The longer an entity exists, the cozier it tends to get," she admitted. "But this doesn't look very good ... It's just not right."

Tenet shares, hit hard by accusations of corporate wrongdoing, have been trading near multiyear lows. But after slipping 11 cents to $13.05 Wednesday, the stock was poised for a big bounce Thursday on news of a favorable settlement with federal prosecutors.

'Toothless Watchdog'

Through a private/public sector partnership, the Joint Commission has been inspecting hospitals -- and essentially clearing them for government funding -- since Medicare was born nearly 40 years ago. Although accreditation can be sought elsewhere, the Joint Commission handles the bulk of health care inspections across the country. The organization portrays itself as the "nation's pre-eminent standard-setter in health care" with a "well-established track record in improving the safety and quality of care in hospitals." But its record is far from perfect.

To begin, the Joint Commission awards accreditations to almost every hospital that regularly pays for inspections. And it has given some especially high marks to Tenet hospitals that are now accused of irresponsibly harming -- and even killing -- dozens of patients.

Last November, Tenet boasted that Redding Medical Center had scored "quite admirably" on a Joint Commission inspection carried out shortly before federal agents raided the facility. Even a follow-up surprise visit of the hospital, now suspected of performing unnecessary -- but highly profitable -- heart surgeries, turned up no real problems. A second unannounced visit detected some lapses, unrelated to heart activity, but still left Redding's accreditation firmly in place.

Nine months after the federal raids, Tenet surprised the market this week by inking a deal with the government to

settle the probe of Redding for just $54 million. But by now, the hospital -- once among Tenet's most profitable -- has already lost so much business that it's been forced to shut down its once-bustling cardiac unit. And the company still faces a slew of lawsuits from former patients and survivors.

In the meantime, Tenet has drawn fire for refusing to share the results of an independent probe of Redding that's suspected of turning up far more than the Joint Commission surveys.

"You know, with absolute certainty, that they would have reported any good news," said Jim Moriarty, a Houston attorney representing dozens of former Redding heart patients.

Instead, Tenet has chosen to highlight recent Joint Commission surveys that found problems at 19 randomly inspected hospitals but left all accreditations intact.

"The inspections are farces," said Cal Warriner, a Florida attorney representing more than 100 heart surgery patients who contracted serious chest infections at Tenet's Palm Beach Gardens Medical Center. "You should take absolutely no comfort in knowing that a hospital is JCAHO-accredited."

The Joint Commission defends its reputation. But it has also pledged to revamp its entire accreditation program because of "the need for major changes in the quality oversight process."

Palm Beach Gardens, for example, was fully accredited when federal Medicare authorities nearly shut the hospital down last year. Even as Medicare issued its rare death threat, warning that Palm Beach Gardens patients were in "immediate jeopardy," the Joint Commission continued to offer its powerful stamp of approval.

Skolnick has seen other health care facilities -- mostly nursing homes -- stripped of Medicare funding before. But she remembers the Palm Beach infection problem as unusual.

"You typically see these problems in hospitals that don't have any money, not hospitals that are swimming in cash flow," Skolnick said.

Ties That Bind

But critics have long accused Tenet of pumping up hospital volumes -- and cutting back on expenses such as infection control -- in order to fatten the bottom line. Indeed, they say that Tenet's very business model requires corporate profits to come ahead of patient care.

At yet another Tenet hospital, the chief of surgery actually went straight to the Joint Commission with reports of such a strategy. He told hospital inspectors that Garden Grove Medical Center had knowingly placed surgery patients at risk of serious infections by allowing doctors to operate with instruments cleaned by potentially faulty sterilizers. He went on to say that the hospital had intentionally concealed the problem from surgeons -- triggering his own resignation -- and that hospital staffers were told to destroy incriminating records ahead of the Joint Commission visit.

Despite the doctor's alarming testimony, corroborated in part by others at Garden Grove, the Joint Commission cited no major problems and gave the hospital a stellar 94 rating. Recently contacted by

TheStreet.com

about the matter, the Joint Commission confirmed that it had received the doctor's complaint, accepted the hospital's explanation and promptly closed the case.

But since then,

TheStreet.com

TST Recommends

has discovered that Tenet -- and even Garden Grove Medical Center itself -- had powerful ties inside the inspection agency at the time of the Joint Commission visit. Biondi had joined the boards of both Tenet and the Joint Commission two years earlier. And Garden Grove internist Richard Frankenstein, who served two terms as the hospital's chief of staff and now chairs its governing board, held a board seat at the powerful agency as well.

For its part, Tenet says it didn't benefit from those relationships.

"Neither Father Biondi nor Dr. Frankenstein ever participated in any discussion involving any Tenet hospital, including Garden Grove," said Tenet spokeman Gary Hopkins, who went on to indicate that leaders at other for-hospital hospitals have been tapped to govern the Joint Commission as well.

But a sampling of proxy statements at other major hospital chains -- including

Community Health

(CYH) - Get Report

,

Health Management

(HMA)

,

LifePoint

(LPNT)

,

Triad

(TRI) - Get Report

and

Universal Health

(UHS) - Get Report

-- shows no such arrangements. Even industry giant HCA, Tenet's larger peer, has no corporate directors on the commission's board.

Biondi wasn't a veteran Joint Commission director when Tenet tapped him for a spot on its own board in the summer of 1998. The university president -- who arranged the sale of a campus hospital to the Tenet chain -- had barely spent a month at the commission when Tenet offered him a board seat as well.

Moriarty was quick to shake his head at the arrangement.

"What an outrageous conflict," he said. "What a toothless watchdog."

Despite his ties to Tenet, absent from his Joint Commission bio, Biondi is among a small minority of commission board members who represent the public instead of the healthcare industry. The scant commission bios -- which also lack disclosures about committee memberships on the Joint Commission itself -- make it difficult to track a director's links to other organizations.

Asked this week about committee assignments for Biondi and Frankenstein, Forstneger revealed that both men served on the accreditation committee the year the Garden Grove controversy erupted. Forstneger also singled out that particular committee as the only one that ever gets involved in inspection disputes. But he said committee members must sign a "conflict of interest" form and recuse themselves from any vote affecting facilities with which they have ties.

"Did they do anything informal to influence the vote?" Seawell posed. "That's the piece you don't know."

Skolnick, for one, calls the situation a "troubling" one that could undermine the inspection process.

"It's like you know something's wrong, but you don't know who to tell," she said. "It's bad enough when the only thing at stake is money -- which is very hard to come by -- but it's much worse when it's somebody's health."

Ready for Combat

For its part, Tenet has pledged to beef up its compliance department and refocus on quality patient care. The company has hired Thornton -- former lead counsel for the inspector general's office -- to help it establish and meet "industry-leading standards." It has also separated the positions of lead counsel and chief compliance officer, considered conflicting roles by some, by promoting one of its veteran compliance employees to become the new compliance chief. As head of compliance, Tenet's Cheryl Wagonhurt will now report directly to Biondi, the Tenet director and ethics committee chairman who doubles as a director for both the Joint Commission and its consulting firm.

But by now, Biondi has already drawn sharp criticism for his performance as Tenet's ethics chair.

"When you look at all the scandals, the government lawsuits, the government investigations, the allegations of unnecessary patient deaths at Redding and Palm Beach Gardens, can anyone say the Ethics, Quality and Compliance Committee was doing its job?" asked M. Lee Pearce, a physician and shareholder who chairs the Tenet Shareholder Committee.

Although the committee withheld support for Biondi at Tenet's recent shareholder meeting, the busy priest -- endorsed by the company itself -- sailed to re-election. Since then, Tenet has expressed full confidence in its revamped compliance program.

"With Cheryl Wagonhurst's leadership and Mac Thornton's able counsel, I believe our compliance department has the experience, guidance and resources to achieve the very important goals we have set for ourselves," said Trevor Fetter, a Tenet veteran who's seeking to permanently fill the CEO post vacated when Jeffrey Barbakow was ousted earlier this summer. The company has maintained all along that it hasn't engaged in any illegal wrongdoing.

"A strong focus on compliance is a cornerstone of everything we will do to achieve future growth," Fetter said.

Moriarty doubts Tenet's sincerity. The Houston attorney, who scored big against Tenet the last time it came under government heat, says the company will never change its ways. And he's convinced that powerful friends won't be enough to save Tenet this time around.

He predicts that Tenet physicians -- and ultimately Tenet itself -- will pay handsomely for what he calls "absolute, overt criminal activity."

"Either all of our cases are totally without merit -- and a lot of people don't believe they're frivolous -- or some doctors are going to jail for a long, long time," he said. "And Tenet understands how profitable this fraud is. ... This is the most amazing case of denial I've ever seen."