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Don’t mess with Medicare

Helen Palmer Jun 29, 2006

TESS VIGELAND: Almost exactly a year ago a jury acquitted the former CEO of HealthSouth of fraud charges. Richard Scrushy was accused of helping orchestrate a 2.7 billion dollar accounting fraud at the hospital chain. But today another jury convicted him of bribery in a corruption case that also netted former Alabama Governor Don Siegelman. Meanwhile another hospital chain agreed to a 900 million dollar settlement with the Justice Department today. Tenet Healthcare was accused of fraudulent Medicare billing. In the words of company CEO Trevor Fetter: we made mistakes. Helen Palmer has more from the Health Desk at WGBH.

HELEN PALMER: Tenet has to fork out a big lump of cash, but it doesn’t admit its inflated Medicare billing broke the law. It will in the future commit itself to abide by a new corporate integrity agreement. Getting out from under the Justice Department’s fraud probe is a big deal.

FRANK MORGAN: It removes a major overhang over the company’s outlook and over their liquidity structure.

That’s Frank Morgan, an analyst with Jeffries. He says Tenet’s already promising more investment, as much as $800 million to upgrade facilities and equipment. Hospitals with shiny new technology can entice doctors to refer their patients there, and so boost earnings. But Cowen and Company analyst Kemp Dolliver still sees dangers ahead:

KEMP DOLLIVER: It’s a company that still has some significant risk. We will have to wait and see if that investment generates the additional revenue and earnings that management anticipates.

Tenet’s spokesman says the company will finance its new investment from cash on hand and cash flow. Jeffries analyst Frank Morgan says one move Tenet’s making is to sell off eleven hospitals.

MORGAN: It will generate proceeds, probably somewhere between $250 and $300 million, that can be applied to that settlement. But I think there are also strategic reasons behind those divestitures.

Tenet’s going to concentrate on its core markets — California, Texas and Florida — and get rid of weaker performers like hospitals on the Gulf Coast. Morgan says he’s bullish on the company. Its stock’s undervalued, he says. The market today didn’t seem convinced though. It traded down a couple of points or more all day in New York.

And Cowen’s Kemp Dolliver calls it at best “fairly valued.”

In Boston, I’m Helen Palmer for Marketplace.

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