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By Bill Mann (TMF Otter)
August 8, 2003

Stoking the flames of its legal and regulatory woes, Tenet Healthcare (NYSE: THC) announced yesterday that it is being investigated by the Florida Medicaid Fraud Control Unit. This comes one day after Tenet reported a quarterly loss of $195 million, or $0.42 per share.

A big part of that loss was the $54 million Tenet paid to settle with the federal government and California over a series of unnecessary heart procedures performed by two doctors employed at Redding Medical Center in Northern California.

The Florida investigation and its timing has to be a kick in the teeth for Tenet, which had just thrown off the yoke of another big investigation. CEO, Trevor Fetter, stated in yesterday's conference call that Tenet had put one of the "most serious issues facing the company" behind it.

But the problems for Tenet and its cohort are, to my mind, more structural. The company owes an enormous amount of its profits to "outlier" payments -- reimbursements made by Medicare and Medicaid for particularly risky, high-cost procedures.

Tenet has been besieged by claims of wrongdoing. One whistleblower from Tenet's Garden Grove California hospital stated that the company failed to repair or replace flash sterilizers used to clean surgical instruments and then gave him instructions on how to explain the malfunctioning equipment when the hospital received a surprise inspection. The whistleblower, a doctor who left the company in 2000, called Tenet's business model "incompatible with good health care."

Now that the Florida Medicaid investigation has cropped up, we are left to ponder whether the problems with Tenet are more systemic and less individual incidents of poor judgment. To some extent this, and the scandals and subsequent collapse of Healthsouth among others, reflect the intense pressures healthcare companies face from growth-hungry investors.

Put plainly, a model that delivers growth and profitability by pulling one over on Medicare should be of little use to shareholders. Tenet apparently has substantially more work to do. I'm beginning to wonder whether the problem isn't a whole lot deeper than these latest scandals let on.

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