Tenet Healthcare Agrees to $395 Million Settlement of Lawsuit Filed Over Alleged Unnecessary Heart Surgeries

Officials for Tenet Healthcare, the second-largest U.S. hospital chain, on Tuesday announced plans to establish a $395 million fund for more than 769 cardiac patients and their families to settle a civil lawsuit filed over allegations that two physicians at Tenet-owned Redding Medical Center performed unnecessary heart bypass and other surgeries between 1992 and 2002, the San Francisco Chronicle reports (Wallack, San Francisco Chronicle, 12/22).

Since October 2002, the Senate Finance Committee, the Securities and Exchange Commission, the HHS Office of Inspector General, the Department of Justice and the Federal Trade Commission have launched separate investigations into Tenet related to alleged Medicare fraud and other issues. The company also faces an investigation by the Florida Medicaid Fraud Control Unit.

The U.S. attorney's office in Los Angeles has requested documents related to heart surgeries and billing practices at three Los Angeles-area hospitals. The Department of Health Services has announced plans to audit billing practices at all 40 Tenet-owned hospitals in the state based on information that Redding overbilled state programs by almost $12 million.

Last year, Tenet officials agreed to pay $54 million to settle federal allegations that the two Redding physicians performed unnecessary heart surgeries and defrauded Medicare. Under the settlement, Tenet retained all liability for damages related to lawsuits filed since October 2002 over the alleged unnecessary heart surgeries.

In addition, Tenet in March paid $30.7 million to settle two federal investigations into improper financial arrangements with physicians and Medicare beneficiary discharges and transfers (California Healthline, 6/11).

Under the settlement announced on Tuesday, without legal fees, patients would receive average payments of about $500,000, the Los Angeles Times reports. However, Tenet will determine final payments based on factors such as the severity of injuries, economic losses and age. Tenet must establish the fund by Dec. 31 (Girion, Los Angeles Times, 12/22).

According to Tenet officials, the settlement "breaches some covenants in the firm's bank credit line," which will require the company to "terminate the credit line by year's end and try to negotiate a new one in 2005," USA Today reports (McCoy, USA Today, 12/22). In addition, Tenet officials said that the company might have to cover the full cost of the settlement because insurers likely would not provide coverage. Tenet has $1.2 billion in cash (Los Angeles Times, 12/22).

The settlement does not resolve civil lawsuits filed against the two Redding physicians who performed the allegedly unnecessary heart surgeries (San Francisco Chronicle, 12/22).

According to the Wall Street Journal, "Investors ... are unlikely to breathe easier until the company reaches a global settlement of the federal investigations, including those surrounding its previous aggressive pricing policy for severely ill Medicare 'outlier' patients and certain payments to physicians" (Rundle/Brin, Wall Street Journal, 12/22).

Robert Mains, an analyst at Advest, said, "Some of the other stuff they are being sued for are more systemic issues. Is Tenet over the hump? They have to get some of the others settled first" (Reuters/New York Times, 12/22).

Frank Morgan, an analyst at Jefferies, said, "This removes one of many legal issues facing the company, and to the extent they can wrap up those issues, it's good for Tenet in the long term" (Ryerson-Cruz, Bloomberg/Philadelphia Inquirer, 12/22).

Analysts at Merrill Lynch said that the settlement might cost Tenet more than expected because the company will have to renegotiate a credit line. The settlement likely will have a net cost of about $200 million to $210 million before insurance recoveries, according to Merrill Lynch (Wall Street Journal, 12/22).

Analysts also said that Tenet faces an estimated $1.5 billion in additional liabilities. Tenet officials earlier this month said that fourth-quarter charges could exceed $1 billion and that the company, which has not reported a profit in the last eight quarters, likely would not report a profit in 2005 (Los Angeles Times, 12/22).

Tenet CEO Trevor Fetter said that the settlement is a "fair and honorable way to conclude this very sad chapter. It would likely have taken multiple trials and many years to assess liability in these cases. By settling all the cases at once, we put this matter behind both the plaintiffs and us." Fetter added that the settlement would help establish "a new Tenet on a solid foundation of quality, compliance and integrity" (USA Today, 12/22).

Dugan Barr, an attorney for the plaintiffs in the lawsuit, said, "It gets (patients) resolution, and it's going to make a huge difference in the way that an awful lot of them can live."

However, M. Lee Pearce, a Florida physician and leader of the Tenet Shareholder Committee, said that the settlement was "another example of checkbook justice, which does nothing to deter future cases of health care fraud and abuse" (Los Angeles Times, 12/22).