When Tenet ( THC - Get Report) last month announced another federalinvestigation of its business practices, it hardly seemed like news. After all, the latest probe centers on thehospital operator's financial arrangements with physicians at asingle, relatively small facility in NorthernCalifornia. And Tenet had long warned thatinvestigators seemed interested in its relationshipswith physicians companywide. But the stakes could prove higher this timearound. Until now, federal authorities have primarilyfocused on Tenet's "relocation agreements" with newlyrecruited physicians. Now, however, they are startingto question medical directorships -- often filled bypowerful, established doctors -- at the company's SanRamon Regional Medical Center as well. Some health care analysts and attorneys view thephysician-related probes as the biggest threat tothe company. They believe the mounting scrutiny fromregulators has already hurt patient referrals,and they fully expect the pain to intensify. Mark Kleiman, a Los Angeles attorney who focuseson health care fraud, says medical directors can be bigpatient admitters who generate substantial revenue.But much of that cash could be at risk, he says, ifthe government proves that the directors have beenimproperly rewarded for their patient referrals. Kleiman says that prosecutors can force hospitalsto return any Medicare funds they have collected as aresult of referrals by physicians who pocketed illegal kickbacks. "This should be alarming from an investor'sstandpoint," Kleiman says. "I would be very nervous." Tenet itself seems less concerned. Indeed, thecompany portrays the latest investigation at San Ramonas little different from other reviews previouslydisclosed to investors. And the company's currentlegal counsel -- once a high-level attorney for thegovernment -- has pledged to resolve the probes in theend. Tenet refused to answer questions about itsmedical directors for this story. The company's stock,once a $50 highflier, slipped a dime Tuesday to$11.09.
To be fair, the hospital once enjoyed a stellarreputation, boasting everything from robot-assistedsurgeries to scenic views of the San Ramon valley. But threeyears ago, nurses there complained about understaffingand sought to unionize. Diane Ganzell, CEO of the hospital, failed tocalm the storm and departed after less than two yearson the job. Just weeks later, a powerful nurses unionalleged "massive care violations" at the facility.The California Nurses Association claimed that healthofficials had cited San Ramon for, among other things,failure to both adequately staff operating roomsand dispose of outdated or mislabeled drugs. A subpoena from the government soon followed. TheOffice of Inspector General, inside the Department ofHealth and Human Services, requested documents aboutarrangements between a group of physicians, San Ramonand four other Tenet-owned hospitals in the region.Then-general counsel Christi Sulzbach quickly downplayed the probe. "Civil subpoenas for information from the OIG arenot uncommon in the highly regulated healthcareindustry," Sulzbach said. "And we will cooperate fullyso that the agency may complete its inquiry in atimely fashion." Instead, federal prosecutors have since steppedin, seeking a broader range of information from SanRamon. In addition to "a small number" of physicianrelocation agreements, they have asked for documentsrelating to medical directorships that date back toJanuary 2000. While legal and often useful, medicaldirectorships can also be abused, observers say.Hospitals have come under fire in the past forillegally offering directorships in exchange forpatient referrals. If asked, they must supply thegovernment with evidence showing that directors havebeen paid a reasonable amount for work performed. "Doctors are supposed to keep track of theiractivities and document what they're being paid todo," Kleiman explains. "You can imagine how muchphysicians like keeping time records. Unfortunately,those are the rules of the game." At least one industry source believes theprobe could eventually spread beyond San Ramon. "I think it's the low-hanging fruit that's beingtargeted right now," says Peter Young, a businessconsultant at HealthCare Strategic Issues. "But itdoesn't mean that problems haven't been identifiedelsewhere."
At another Tenet hospital, in fact, such"problems" have already triggered punishment. Ending a lengthy kickback investigation, theJustice Department announced in March that it hadlevied a multimillion-dollar fine against Tenet'sNorth Ridge Medical Center in Fort Lauderdale, Fla.The government had accused North Ridge of improperlyrewarding a number of doctors -- including threemedical directors -- for their patient referrals. For example, the government's complaint stated,North Ridge agreed to pay one of the doctors $25,000to replace a director who had received nothing forfilling the same post previously. The complaint went on to saythat the hospital paid another doctor the same amount-- on top of a $225,000 salary -- to serve as"director of international marketing" for promotingthe hospital's services in the Caribbean islands. Young recalls worse. In the past, he says,companies have offered such frivolous directorshipsthat some people used to joke that hospitals would"appoint someone director of the ingrown toenailcenter" if it meant boosting patient referrals. In the end, the feds singled out just one of theNorth Ridge directorships as improper. But thegovernment spotted problems with 10 other physiciancontracts and secured a $22.5 million fine -- thehighest of its kind -- from the hospital. Some former Tenet employees foresee bigger penalties to come.Specifically, they view Century City Hospital -- amongthe first of many California facilities Tenet recentlyshed -- as a source of major exposure. Gil Mileikowsky, a fertility specialist whopracticed at the hospital for years, claims thatCentury City paid some of his competitors $5,000 amonth for "totally phony" directorships. Indeed, hesays that the vast majority of the physicianspracticing in a building adjacent to Century Cityreceived some kind of financial assistance "inexchange for bringing in patients." Joel Bergenfeld, who once steered the hospital for Tenet,is now running Century City for its new owners. Bergenfeld did notreturn a phone call seeking comment for this story.
To be fair, Mileikowsy is embroiled in a legalbattle with Tenet. Still, in July of 2003, the fedsbegan investigating physician contracts at CenturyCity and six other Tenet-owned hospitals in Southern California.Four months later -- even before laying out plans to sell a numberof California hospitals -- Tenet decided against renewing itslease at Century City. "The Department of Justice clearly knows about themedical directorships at Century City," Mileikowskysays. "They have known for many years."
noted in previous stories in TheStreet.com, and is especially complex -- involvingfar more than physician contracts. The federalgovernment is also seeking to discover whether Tenetused an aggressive pricing strategy to bilk Medicare.In addition, the government wonders if the companycharged Medicare for procedures that were unnecessaryin the first place.
Young, for one, sees a long wait ahead. "It is very premature to talk about a settlementwhen the government is still handing out subpoenas,"Young says. "Recent activity by the government showsthat this isn't anywhere near over."