Questions about billings, medicare charges have Tenet stock in a dive. (Up Front).

Suddenly, Tenet Healthcare Corp. has become Wall Street's latest basket case, as questions about the hospital company's billing practices were quickly upstaged late last week by a federal investigation into allegations of false billings and unnecessary medical procedures.

As recently as Oct. 25, Santa Barbara-based Tenet was a Wall Street darling, with a lofty price-earnings ratio, significant analyst support and a take-no-prisoners expansion strategy.

Now it's fighting off allegations that two of its doctors performed unnecessary angioplasties, coronary bypasses and heart catheterizations, and submitted false billings.

The stock lost more than $10 on Oct. 31--adding to several days of losses triggered by the earlier analyst report. Mutual funds were said to be selling Tenet's stock, en masse to remove it from their month-end reports of top holdings.

"The No. 1 question raised by the report is, has the company done something improper?" said Gary Lieberman, an analyst with Morgan Stanley. "It's up to the company to refute it. Tenet needs to give specific data that backs up why that is (not) the case."

Slow recovery

The first blow came on Oct. 28, when UBS Warburg analyst Kenneth Weakley issued a report showing that Tenet's so-called Medicare "outlier" payments were running at much higher levels than those of its competitors.

Such payments occur when an elderly patient receives services that exceed government estimates--for example, if a patient gets a coronary artery bypass, but requires more lengthy treatment than usual. The payments are intended to protect hospitals from big losses in treating difficult cases.

Tenet, the nation's No. 2 hospital chain, doesn't release its outlier data; Wenkley combed through Medicare records to gather his own. His report raises the question of whether Tenet gamed the Medicare system to generate additional revenues -- revenues that helped spur a 67 percent increase in Tenet's share price since the beginning of 2000.

"If a material portion of (their earnings growth) was related to outliers, and if those won't continue to grow in the same fashion, what can we expect?" said Gary Taylor, a Bank of America Securities analyst.

Weakley's report estimated that Tenet's outlier payments constituted 16.7 percent, or $418 million, of its total Medicare reimbursements in the year ended Sept. 30. It projected the payments would reach 23.5 percent, or $657 million, in the year ending September 2003.

The average industry ratio is projected to decline to 4.54 percent in 2003, from 4.76 percent in 2000.

Tenet said it hasn't abused Medicare's outlier rules. "Tenet is confident that its hospitals are fully compliant with Medicare rules and regulations, including those governing outlier payments," said Gary Hopkins, a company spokesman.

New allegations

Then, on Oct. 31, Tenet disclosed that U.S. prosecutors were investigating allegations that two doctors at a center in Redding, Calif., conducted unnecessary heart procedures and billed falsely for them. Tenet was forced to issue a statement denying that the Federal Bureau of Investigation had raided its headquarters.

"This is the most unfortunate coincidence of timing that I can think of," said Andreas Dirnagl, a Gerard Klauer Mattison analyst who still rates Tenet a buy. He said the federal investigation was probably in progress before the UBS Warburg report came out, and the two are likely unrelated.

Tenet said it was conducting its own investigation into allegations regarding the two doctors in Redding. It said it had "no reason to believe the allegations are true," adding that attending physicians, not hospitals, make the decision on whether to perform medical procedures on patients.

The denials didn't appease investors.

Tenet shares closed at $28.75 on Oct. 31, down 41.7 percent from $49.31 on Oct. 25, the last trading day before the UBS Warburg report came out. The market loss represents a decline in market value of more than $10 billion.

One question is whether the outlier payments could lead to a separate government investigation, which would leave a cloud hanging over Tenet's head for months or years.

"I would think it would be very politically difficult not to," said Peter Boland, a health care consultant. "(The payments) certainly exploited to the limit what available reimbursement formulas there were."

Similar problems nearly caused the collapse of the nation's largest hospital company, Columbia/HCA Healthcare Corp. (The company paid a record $840 million in civil and criminal penalties and was reconstituted as HCA Inc.)

Tenet itself paid $55.8 million earlier this year to settle allegations of overbilling Medicare and government programs.

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RELATED ARTICLE: Tenet Inks Deal for University Hospital

Tenet Healthcare Corp. has cut a deal to acquire another Los Angeles hospital, even as it copes with the fallout from its last local acquisition.

The Santa Barbara-based company has agreed to buy the USC/Kenneth Norris Jr. Cancer Hospital in East Los Angeles from the University of Southern California for $35 million.

Tenet already has a contract to manage the 60-bed specialty hospital and owns the university's flagship USC University Hospital. This deal would take USC entirely out of the hospital ownership business--where it does not want to be--while funding an upgrade for the 20-year-old facility.

"We see this as a way to leverage and enhance our cancer work," said Dr. Stephen Ryan, dean of the university's Keck School of Medicine.

USC estimated that without the sale it would have to spend $60 million to expand and upgrade the hospital over the next five years.

Terms of the agreement, which must be ratified by the state Attorney General, call for Tenet to move the inpatient beds at Norris to a new $90 million tower it is building for the expansion of USC University Hospital. It would then renovate the existing Norris facility for expanded outpatient services in breast and urological cancers.

Tenet has committed to spending $10 million on hospital capital improvements over five years, while the university plans to spend some of the funds it receives for additional research and educational initiatives.

The deal, given Tenet's on-going relationship with USC, is a far cry from its purchase of the Daniel Freeman Memorial and Marina hospitals last year for $57 million, a purchase that still haunts Tenet.

The company has found itself in a fight with community activists, doctors and the attorney general over plans to close the Marina facility and sell it for its real estate value.

"Tenet will probably face more scrutiny (of this purchase) than it would have last December" when the Freeman deal had yet to be completed, said Leslie Bennett, a staff attorney with Consumers Union.

Attorney General Bill Lockyer, who sued to stop Tenet from closing the Marina hospital, said he would look at the deal closely but indicated it was different from the Daniel Freeman purchase.

"There are existing public benefits from the current partnership (between Tenet and USC) that may be enhanced by the investment Tenet intends to make," he said in an interview.

Greg Harrison, a Tenet spokesman, said the company planned to work closely with Lockyer to address any concerns he might have.