Tenet ( THC) has yet to close a particularly messy wound.

After spending two years in negotiations and paying nearly $450 million in legal settlements, the company still faces possible payouts for questionable heart surgeries performed at a hospital it once owned. What's more, critics of the hospital chain say they think cash is growing so tight that Tenet may have trouble paying off any remaining liabilities.

News of the continuing legal exposure could surprise investors who assumed that a recent settlement -- which squeezed Tenet's liquidity -- would be the last payment for alleged wrongdoing at its former hospital in Redding, Calif. Instead, the company still faces a lingering courtroom challenge.

In August 2003, Tenet paid $54 million to settle Justice Department charges that the company profited from unnecessary heart surgeries performed on Medicare patients at Redding. Last year the company sold the hospital -- once among its most profitable operations -- after the government sought to exclude it from the Medicare program for performing cardiac services that, it claimed, "were medically unnecessary and failed to meet professionally recognized standards of health care." As 2004 drew to a close, Tenet agreed to shell out $395 million to settle a class-action suit with hundreds of patients and survivors who suffered as a result of allegedly unnecessary medical procedures.

But the bleeding may not end there. The company still faces a civil lawsuit filed by the same priest who helped the federal government land its $54 million fine. And this case, which accuses Tenet of bilking private insurers, could be even more expensive.

"There is a ton of money at stake," says Mark Kleiman, a California attorney who specializes in whistle-blower lawsuits but is not involved in this case. "Just do the math."

Paul Dauer, the attorney representing Father John Corapi in the case, already has. On the basis of rough estimates, Dauer believes that Tenet faces between $120 million and $345 million in damages.

But Tenet appears to have little extra cash to spare. The company tripped the covenants on its $800 million credit line when settling the Redding patient lawsuits, and under a new bank agreement it has seen its borrowing power evaporate.

Tenet CFO Stephen Farber told Bloomberg News that the new bank deal, offering just $250 million in letters of credit, represents an "interim step" in securing a more permanent credit facility. He also told Bloomberg that the company "continues to maintain very strong liquidity and a strong credit posture." He went on to say that Tenet currently has $800 million in cash and expects to collect another $400 million in tax refunds during the second quarter.

But the Tenet Shareholder Committee, a longtime critic of the company, sees clear deterioration. Because Tenet must pledge cash to access the letter of credit, the group estimates the company's current liquidity at just $600 million -- down two-thirds from $1.8 billion last fall. Moreover, the committee warns that Tenet could burn through another $200 million in cash this year and find itself struggling to fund the government settlements it hopes to arrange.

To be sure, Tenet could prevail in the pending Redding whistle-blower case. The company expressly denied any wrongdoing when settling with the feds in 2003. It also says that a recent court order, denying a motion filed by Dauer due to insufficient evidence, "speaks for itself" about the weakness of the case.

Corapi filed both federal and state whistle-blower complaints after a Redding doctor urged him to undergo a heart bypass that, he discovered through a second opinion, he clearly didn't need. Corapi and a friend, certified public accountant Joseph Zerga, have already received $8.1 million through the federal settlement with Tenet. Zerga recommended the second opinion that spared Corapi from surgery. Their tips to the FBI helped lead to a government raid -- and the ultimate sale -- of the Redding facility.

Tenet's stock, once a $50 highflier, rose 9 cents to $10.59 Wednesday.

Solo Tune

Normally, companies would not face additional exposure after settling a big whistle-blower complaint.

They would simply repay the government and move on. However, this particular case was filed under a California law that allows whistle-blowers to pursue damages on the basis of false claims submitted to private insurers instead of just government payers. Any recovery is split between the whistle-blowers and the state, which then uses the funds to combat future insurance fraud, Dauer explains.

Because private insurers field one-third of all medical claims submitted in California, the plaintiffs say, the stakes are clearly high.

Nevertheless, the California Department of Insurance has declined to join the lawsuit. Zerga, a co-plaintiff in the case, feels stunned by the state's decision.

"We were kind of flabbergasted," he admits. "This happened after Tenet settled almost instantaneously with the feds."

But Tenet spokesman Steven Campanini sees clear evidence that the pending case is unfounded. He says Corapi's original lawyer has already abandoned the case. And he is quick to note that the insurance commissioner has elected against pursuing the suit.

Gary Cohen, general counsel for the California Department of Insurance, says the state did in fact give "very serious consideration" to the case. In the end, however, he says the lack of resources needed to pursue the lawsuit looked "almost insurmountable."

The department maintained its stand even after Rep. Henry Waxman -- a California Democrat heavily involved in health-care issues -- urged it to consider pursuing Tenet on its own. Moreover, the whistle-blowers say they even offered to bear the brunt of the litigation expenses.

Thus, Zerga believes the state's position makes little sense.

"It's like seeing a stack of gold on the sidewalk," he says, "and saying, 'Gee, I don't have a wheelbarrow to pick it up."

Surgery City

Regardless, Zerga believes the Redding hospital injured many people. But he says the hospital's former star cardiologist made the mistake of regularly diagnosing patients like Corapi with a condition so rare -- mostly seen in pregnant girls and young women -- that many doctors have only read about it in textbooks.

Tom Moore Jr., a health-care consultant who conducts research for organized labor, began warning about problems at Redding long ago. Moore has spent years conducting "small-area analyses" that identify places where an unusual number of procedures are being carried out. He says that Redding jumped out years ago because of its high numbers of both gynecological and cardiac surgeries.

"The gynecology rates were way beyond any credible understanding," Moore says, adding that many of the gynecological procedures were hysterectomies performed on women in their 20s and 30s. "And the cardiology rates were unbelievable."

Moore based his findings on official discharge data submitted by hospitals to the state of California. Nevertheless, Tenet describes the researcher's claims as "purely speculative" in nature.

"We can't imagine what reputable researcher would purport to know this," Campanini says of the hysterectomy claims. "As we've said before, Redding Medical Center was a catch basin for a very large geographic area, and it would not be surprising if its numbers might skew high."

To be sure, Moore isn't the only one who has singled out Redding. Back in 1999, Dartmouth Medical School -- which is especially well-known for its small-area analyses -- spotlighted the rural hospital for having the highest rate of bypass procedures in the country.

Kleiman says the information from Redding "stands out like a sore thumb." And he believes the plaintiffs can prove their case even without help from the state.

Dauer calls the case a "factually strong" one that should be easier to prove than the federal case that already settled. He explains that under the special state law, he must show only that Redding submitted false claims for payment by insurers instead of establishing actual damages.

Thus, he and his clients won't be backing down.

"I think Tenet was counting on the fact that we would not go forward with this thing," Zerga says. But "we're going ahead full-bore. ... We will take it to trial."