Health care companies can't seem to shake their legal headaches. Even managed care players -- which have rallied hard for years -- are feeling some pain. On Monday, the U.S. Supreme Court upheld a lower-court ruling that could lead to huge settlement bills for some giant health management organizations. The ruling opens the door for a September trial against six HMOs accused of conspiring to violate federal law by failing to properly pay physicians. Two major HMOs, Aetna ( AET) and Cigna ( CI), have already paid about $500 million each to settle their portion of the five-year-old lawsuit. Goldman Sachs analyst Matthew Borsch warned on Tuesday that the remaining defendants -- Coventry ( CVH), Health Net ( HNT), Humana ( HUM), Pacificare ( PHS), UnitedHealth ( UNH) and Wellpoint ( WLP) -- could take an even bigger hit. "Plaintiffs are seeking billions in damages for claims paid over the past 10 to 15 years," wrote Borsch, who has a cautious view on the sector. And "settlement amounts going forward may be somewhat higher than for AET and CI, as is usually the case with this type of litigation, and because the plaintiffs have a stronger case now that the industry's appeal has been denied." Still, Borsch portrayed the appeal as a long shot anyway and predicted that the ruling would come as no surprise to the market. Most HMO stocks barely budged on Tuesday morning.
Two years later, Tenet remains one of the sickest patients in the challenged hospital sector. It faces not only industry pressures -- such as bad debt from the uninsured -- but also a slew of legal problems. Most notably, the company is now embroiled in a criminal trial that could have far-reaching implications. It has been accused of violating physician kickback laws at its San Diego-based Alvarado Hospital Medical Center. The case is considered pivotal for a number of reasons. For starters, Alvarado is just one of many Tenet-owned hospitals where the company's financial arrangements with physicians are under scrutiny. A guilty verdict would be considered a huge setback for the company and, some believe, a threat to the industry as a whole. Certainly, most agree, it would hurt the company's chances for a reasonable "global settlement" with the government. Unfortunately for Tenet, however, the trial took a turn for the worse last week when a former Alvarado employee agreed to plead guilty and, many believe, began cooperating with the government in its case against the company. Fulcrum analyst Sheryl Skolnick viewed the development as a "likely setback" for the hospital chain. "Tenet clearly was surprised by this and not just a little perplexed," wrote Skolnick, who has a neutral rating on the company's stock. "A trial that appeared to be going well from THC's perspective is now at best uncertain and at worst more likely to result in a conviction, at least in our view." Tenet's stock slipped 4 cents to $10.52 halfway through Tuesday's session.
Percher noted that Chuck Clapton, chief health policy counsel for the Congressional Energy and Commerce Committee, recently said, "Typically when Congress has been called upon to reduce entitlement spending, one of the first places historically we've always looked has been hospitals." And Percher is worried about more than just cuts to Medicare. "We are extremely concerned that budget reduction efforts could lead to reductions in Medicaid funding," he wrote on Tuesday. And "reduced Medicaid funding bodes poorly for hospital profitability and bad-debt levels."