Tenet ( THC) has swallowed another dose of medicine. The ailing hospital chain agreed to pay more than $30 million to settle two government probes that have been dogging the company for years. It is paying $22.5 million to end an investigation at one hospital alone. It will pay an additional $8.25 million to settle a government probe of certain Medicare claims submitted by virtually all of its facilities. Tenet pointed to the latest settlements, which it first discussed during last week's conference call, as progress toward recovery. "The resolution of these two matters is an important step forward as Tenet works to rebuild its business and its reputation," said Peter Urbanowicz, Tenet's new general counsel. "Our resolution of this case should serve as a clear demonstration of our desire to establish a more cooperative and collaborative tone with our federal health program partners." Tenet's stock, which fell during the regular session on Medicare shortage fears, jumped 4.3% to $10.69 following the company's after-hours announcement. Tenet is paying the larger fine to settle a whistleblower lawsuit filed seven years ago against its North Ridge Medical Center in Fort Lauderdale, Fla. A former employee there raised questions about the hospital's physician employment contracts, its practice acquisitions and its coding procedures. The hospital must now operate under a new "corporate integrity agreement," assuring future compliance, as part of the settlement. Tenet paid the smaller fine to settle allegations that its hospitals improperly billed the government for transferring Medicare patients during an eight-year period ending in 2000. The company announced last week that it had already reserved $30 million to cover the anticipated settlements. But Tenet still faces numerous government probes that could trigger much larger penalties in the future. The company is suspected of collecting roughly $2 billion in questionable "outlier" payments from Medicare in recent years. It also has been accused of profiting from hundreds of unnecessary surgeries and paying illegal kickbacks to doctors who send the company business. With limited cash on hand -- and its business operating in the red -- the company would probably depend on the capital markets to finance any major settlement going forward.
In the meantime, Tenet still must address a big tax penalty this year. The Internal Revenue Service is demanding $275 million from the company. Rather than paying the fine -- and then appealing it -- Tenet has indicated that it will take the matter to federal tax court. Although it can avoid an immediate payment by doing so, it could face additional interest costs as it fights to prove that the IRS has, in essence, misinterpreted its own tax laws. "It's almost a theoretical tax code argument," said Caymus Partners analyst Jeff Villwock. "And I think, from what
CEO Trevor Fetter said in the conference call, they're clearly going to go that route. ... They can't write the check" right now. But Tenet has already learned that legal problems can fester. The company recently wound up paying one of its founders $150 million after dragging that case through the court system for years. The penalty finally came at a time when Tenet, struggling with negative cash flow and limited credit, could least afford it. It still faces hundreds of other lawsuits that accuse the company of profiting from unnecessary -- and sometimes fatal -- heart surgeries. Those lawsuits, which could cost the company an estimated $1 billion, are scheduled to start going to trial later this year.