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Updated from 2:23 p.m. EST

Troubled hospital chain

Tenet Healthcare

(THC) - Get Tenet Healthcare Corporation Report

dealt yet another blow to investors Thursday, saying that the federal government has searched two of its administrative offices at Alvarado Hospital Medical Center in San Diego.

The nation's No. 2 hospital chain identified the offices as those of the hospital's chief executive and director of business development.

The firm said it believes the searches relate to physician recruitment, relocation and consulting issues. "To the company's knowledge, no patient care or Medicare outlier issues are involved," Tenet said in a statement. The company added that it is fully cooperating with the federal authorities.

Shares were recently halted but last traded down 0.64% to $17.04.

In late October, federal agents raided the offices of one of Tenet's medical centers in Redding, Calif., amid complaints that two doctors had made false billings for unnecessary coronary bypasses and other heart procedures.

Earlier Thursday, the firm said it isn't close to settling a Department of Justice investigation of billing practices dating back to the 1990s and may take the case to court, if necessary.

Analysts said the decision was unsurprising, noting that other hospitals under similar investigations also have gone to trial and occasionally have even won. The Department of Justice investigation is separate from a more recent and more specific investigation into Tenet's Medicare outlier payments.

"Going to court has always been a possibility," said Peter Costa, an analyst at Leerink Swann & Co.

In a letter to shareholders Thursday, Chief Executive Jeffrey Barbakow said that the firm has had lengthy negotiations and mediation with the government in recent days, but has been unable to resolve issues relating to how the firm billed the government for certain inpatient stays.

During the 1990s, the Department of Justice began global investigations of almost all U.S. hospitals' clinical laboratory test billing and Medicare diagnosis-related groups

DRGs for inpatient stays, Tenet said. DRGs are subsidiaries that determine Medicare's payment for hospital operating expenses.

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While Tenet settled the lab issues last June for $17 million, issues relating to the firm's inpatient stays are still outstanding.

"We are hopeful that we can achieve resolution, as we did on the lab issues. However, Tenet and the DOJ remain far apart on settlement terms," Barbakow said.

Sheryl Skolnick, an analyst at Fulcrum Partners, said that under the circumstances, Tenet might be better off acquiescing to the government's demands.

"I think it might be better for them to settle right now because presumably the Justice Department is looking at aspects of their business and you could argue it might be more prudent for them to be conciliatory rather than aggressive," she said.

The government is already investigating the two physicians at Tenet's Redding medical center.

In addition, the firm faces a federal audit of so-called outlier reimbursement at some of its hospitals. The term is a reference to procedures that are expensive enough to require government reimbursement above what is covered by Medicare -- a kind of payment that Tenet receives more frequently than its average peer.

Still, Damon Ficklin, an analyst at Morningstar, said that with all the pressure Tenet is under, it's unlikely that the firm would take a stand on an issue if it didn't have a strong position. "I don't see this

DRG investigation has having a big impact on Tenet, it's somewhat of a regular process for these hospitals," he said.

Tenet is challenging the government on billings made for four specific DRGs from September 1992 through December 1998.

"As you know, we strive to work actively and cooperatively with all regulatory agencies -- and we have been doing so diligently in recent weeks," Barbakow said. "However, we feel very strongly about the merits of our position on these DRG issues and, while we remain hopeful about a resolution, we are prepared to try this case if necessary."

Last month, Barbakow said Tenet had been too aggressive in some of its pricing practices, and said the new management team would take a "fresh look" at how the company charges for hospital services. Both the chief operating officer and chief financial officer left the company after the revelations sent Tenet shares into a tailspin.

Since then, calls have grown for Barbakow to resign.

"I'm not at this point a huge supporter of the CEO or the company, I think he's got a lot of things he needs to change," Skolnick said.

Most notably, the board of directors needs to take away Barbakow's accelerated pension benefits and "stop rewarding him for performance that doesn't exist," she said.

A spokesman for Tenet said that the CEO has no plans to resign.

Separately,, a Web site that follows issues related to Tenet Healthcare, criticized Tenet's board for granting stock options to executives despite a 70% drop in the firm's share price. The company's board granted 975,000 stock options to four executives worth between $10.8 million and $27.3 million, according to the Web site. "Even in this lean year for Tenet shareholders, the company increased the combined number of options granted to the four officers by 45% compared with the previous year," the Web site said, noting that none of the options granted went to the CEO.