Acute Care Industry Review

As Tenet was holding its discussions, the federal agency that manages the Medicare program said it would scrutinize the billing of any hospital receiving excessive payments - a practice that appears to be widespread.

Tenet, one of the nation's largest commercial hospital chains, also told analysts that it planned to change how it contracts with managed care companies to rely more heavily on fixed payments.  Any the company said it planned to offer substantial discounts to patients without insurance so that they do not bear the brunt of high hospital prices.

Jeffrey C. Barbakow, Tenet's chief executive, tried to persuade investors that the company's prospects remained bright.  "Tenet's operations are fundamentally strong," he said.  But he acknowledged that he should have delved more deeply into the company's pricing practices.  Mr. Barbakow also told analysts that his compensation, given the company's recent performance, was "on the table" and being discussed by Tenet's directors.

Tenet's stock has been pummeled since its strategy of aggressively raising its hospitals' list prices, known as hospital charges, came under intense scrutiny in late October.

Tenet and other hospitals have been on a quest to increase their charges after suffering for years from deep cuts in Medicare reimbursement and tightly monitored payments from managed care companies.  The average charge to treat someone with a heart attack, for example, has climbed by about a third over the last five years, according to the Agency for Healthcare Research and Quality, from $19,179 in 1993 to $28,663 in 2000, although patients are spending fewer days in the hospital.

Medicare typically pays hospitals a fixed amount to care for a specific disease, but hospitals also received special payments, which are partly calculated based on hospital charges, for very costly cases.  By sharply increasing charges, Tenet was able to receive several hundred million dollars in special Medicare payments each year, accounting for roughly one-third of its spectacular earnings growth last year.

Federal regulators already plan to audit some of those special payments to Tenet, but Medicare officials also expressed concern yesterday that some other hospitals might have been trying to manipulate the system to maximize payments.  Many hospital executives and lawyers say the practice is not illegal under current rules, but regulators plan to take a hard look.

In addition to making changes to the current rules over the next several months, Medicare asked the insurers that process Medicare claims to identify those 3 hospitals that receive a significant share of revenue from these special payments, known as outlier payments, and proceed to look closely at all their billing practices.

Many hospitals deserve their special payments, said Thomas Scully, the administrator for the Centers for Medicare and Medicare Services, the agency that administers the Medicare program.  But some hospitals may have been receiving some payments inappropriately, he said.  "If they are gaming the system, they better look out," he said.  "Tenet wasn't the only one doing this."

In fact, while Tenet appears to have been the most aggressive in collecting these payments, hospital consultants and analysts say that many other hospitals have also benefited under the rules.  Dozens of hospitals, most of which are not-for-profit, collected significant amounts, according to an analysis of 2002 payments by Raymond James & Associates, a Florida brokerage firm.

Hospital systems that collected large amounts of special payments include the St. Barnabas Health Care System in New Jersey, the Crozer-Keystone Health System in Pennsylvania and the University of California Davis Medical Center.  The hospitals all say they followed Medicare rules in obtaining these payments and did not raise their prices just to collect more payments.

But Medicare rules appear to have encouraged some hospitals to raise these charges, according to hospital consultants and lawyers.  "Some were clearly motivated by Medicare considerations," said Dennis Barry, a lawyer at Vinson & Elkins in Washington.

Such rules have always been open to abuse, said Joshua Nemzoff, a consultant in New Hope, Pa.  "The Medicare regulations are like the tax regulations," said Mr. Nemzoff, who said reimbursement experts had routinely advised hospitals to raise prices to take advantage of the rules.  "Somebody always finds a way to maximize their benefits."

But many hospital executives and consultants argue that hospitals broke no rules in increasing charges, and they said they had to do anything they could to increase revenue at a time when so many hospitals are struggling financially.  "There are fewer and fewer academic medical centers operating in the black, and we are one of them," said Robert Chason, the chief operating officer for University of California David Medical Center, who said the hospital complied with all Medicare rules.

Give the larger question of how to reimburse hospitals for the care they are delivering, "closing loopholes is not necessarily the answer," he said.  Mr. Chason also said that hospitals needed to be reimbursed more for the cost of providing charity care.  Deciding to cut reimbursements for costly cases could hurt hospitals like his, he said.

Tenet is already bracing for the effect of such a change. Earlier this year, the company indicated that earnings could increase 25 percent next year.  But yesterday, company officials told analyst that Tenet's decision to hold hospital charges steady at least until the spring and the chance that federal officials would lower Medicare payments to the company could translate into operating earnings next year of $2.38 to $2.78 a share, compare with last year's $2.34.  Tenet also said its earning per share for 2004 should be in the rage of $2.

Analysts and investors have also raised concerns about the impact of Tenet's new stance on its dealings with managed care plans.  Many of the company's managed care contracts have provisions similar to the Medicare rules, in which extremely costly cases are eligible for additional reimbursements.

The company said its new contacts, like the one it recently negotiated with Health Net of California, would rely more on fixed payments and less on these special payment provisions.  But Tenet insisted that its overall ability to negotiate with health plans and obtain attractive prices would not be affected.  Still, Sheryl Skolnick, an analyst with Fulcrum Global Partners, an independent research firm, said she was concerned that the company could suffer if some of the patients in its hospitals proved to be highly costly to treat.  She said it was unclear what impact the new contracts would have on the company's earnings.  "It is too early to make the call," she said.

The fundamental issue, Ms. Skolnick said, is whether the overall strategy of Tenet is successful, given that so much of its recent profitability was a result of the increase in Medicare payments.  "The big question is just how much do they grow?" she asked.

Other analysts also cautioned that significant uncertainty still surrounds Tenet's earnings potential.  "My guess is they are going to have to renegotiate a lot of contracts" with managed care companies, said Rita Freedman, an analyst with PNC Advisers in Philadelphia.

Hospital companies over all may be also be less successful in demanding higher prices from insurers, Ms. Freedman warned.  The year after next "looms large for these companies because they've enjoyed very good pricing for the last couple of years," she said.

If health plans, some of which paid hospitals partly on the basis of charges, have a newfound caution about excessive payments, negotiations over all are likely to be tougher, said Mr. Nemzoff, the consultant.

"Every managed care company in America is looking at this right now," he said.

"I think the door's been shut on this."