Tenet to Pay $553 Million to Settle Kickback Allegations; Culture of Corruption Dates Back Decades

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Tenet Healthcare Corp. (Dallas TX) and two of its Atlanta subsidiaries have agreed to pay more than $513 million to resolve criminal and civil claims accusing the chain of paying kickbacks to steer pregnant Medicaid patients to their hospitals.

Tenet Healthcare agrees to pay more than $513 million to resolve criminal/civil kickback claims Click To Tweet

Under a settlement announced Monday, the Tenet subsidiaries that previously operated Atlanta Medical Center and North Fulton Medical Center agreed to plead guilty in federal court to conspiracy to defraud the government, according to a statement from the U.S. Department of Justice.

The two subsidiaries will forfeit $145 million in Medicaid and Medicare funds. The hospitals are no longer run by Tenet subsidiaries; WellStar Health System (Marietta GA) now owns them. Tenet also agreed to pay a total $368 million to the federal government, Georgia and South Carolina to resolve civil claims in a whistleblower lawsuit, according to the Associated Press.

The criminal investigation, which dates back to 2012, arose out of a civil lawsuit filed under the qui tam provision of the False Claims Act. The suit alleges four Tenet hospitals paid illegal kickbacks to clinics that referred undocumented pregnant patients to them for Medicaid-covered deliveries. Undocumented patients are not eligible for regular Medicaid coverage. However, they typically qualify for emergency medical assistance when they deliver their babies.

The criminal investigation centers on the relationship the four Tenet hospitals had with Hispanic Medical Management (HMM), according to Becker’s Hospital Review. The hospitals contracted with HMM for translation, marketing, management and Medicaid eligibility determination services, but the true purpose was to obtain the referrals for patients, according to the court filing.

In 2014, federal investigators filed criminal charges against two people involved in the kickback scheme, a former owner of HMM and a former employee of a Tenet hospital. On April 10, 2015, the DOJ informed Tenet that four of its hospitals had become targets of the criminal investigation.

“Tenet cheated the Medicaid system by paying bribes and kickbacks to a prenatal clinic to unlawfully refer over 20,000 Medicaid patients to the hospitals,” U.S. Attorney John Horn of the Northern District of Georgia said in a statement. “In so doing, they exploited some of the most vulnerable members of our community and took advantage of a payment system designed to ensure that underprivileged patients have choices in receiving care.”

Ralph Williams, a Georgia resident who filed a whistleblower suit against Tenet, will receive $84 million of the civil settlement.

“The conduct in this matter was unacceptable and failed to live up to our high expectations for integrity,” Tenet Chairman and CEO Trevor Fetter said in a statement. “We take seriously our responsibility to operate our business in accordance with the highest ethical standards, every day and in every interaction.”

Steve’s Take: I once worked for Tenet Healthcare as a consulting attorney back in the early 1980’s. I got to know Richard (Dick) Eamer, the founder and CEO of the company when it was known as National Medical Enterprise (NME).

Dick was a brilliant lawyer/entrepreneur who early on saw the potential of bundling hospitals together into a “chain” and operating them as a for-profit enterprise. His competitors were Hospital Corp. of America, now called HCA, which has always been the top dog in the business and American Medical International (AMI), no longer around.

Dick tooled around the aisles of the NME corporate offices in Santa Monica on a scooter back then, and as I recall wore a headband, plaid shirt and wholly jeans. He and rivals at HCA and AMI figured out that with Medicare paying the companies’ cost of providing care to Medicare beneficiaries PLUS 2 PERCENT, you couldn’t fail to make a profit, even if you tried.

Eventually, Medicare changed its reimbursement methodology and very quickly the for-profit chains realized that you could make a decent profit on some cost centers, like the operating room but suffer losses on others, like the emergency room, no matter what you did.

All of a sudden a hospital’s Cost Report showed exactly which components of the entire operation were profitable–in which case you wanted more of those types of hospitals–and which weren’t–in which case you started dumping those units, quickly.

The heady days of the early 80’s for execs like Dick Eamer and his partners and friends Leonard Cohen and John Bedrosian–both also lawyers–came to an end a decade later. Troubles started brewing in 1991 when Texas state investigators and several major commercial insurers started filing lawsuits charging tens of thousands of illegal kickback payments had been made for patient referrals.

NME’s trustees eventually moved Eamer and Cohen out of the company and Jeffrey Barbakow, followed by current CEO, Trevor Fetter took over. Prior to being installed as CEO, Fetter was the company’s CFO, but unlike Eamer & Co., he wasn’t a lawyer.

His MBA from Harvard apparently was an asset as it perhaps helped him focus on running the business as a business rather than doing deal after deal to grow the nascent enterprise back in the early days. It apparently didn’t contribute to a more law-abiding mentality in some corners of the company, however.

Every company makes mistakes, as pointed out by Dallas News columnist Mitchell Schnurman in a comprehensive summary of Tenet’s recent and, quite frankly, shameful, reprehensible history. But just how many situations involve fraud, span two decades and two management teams, and result in almost $2 billion in fines and settlements?

The latest case, stemming from a long-running kickback scheme, has helped shave a quarter of Tenet’s market cap in the past month. It also raises questions about Tenet’s culture and competency, in part because Tenet is a repeat offender, Schnurman points out.

In the early 2000s, Tenet faced a stream of lawsuits and indictments, plus a Senate investigation. Most of the charges focused on overbilling Medicare and performing unneeded surgeries. Tenet brought in new management, hired over 100 compliance officers and submitted to five years of federal oversight. It even moved its headquarters from California to Dallas.

Yet the latest corruption case continued through all that–until a whistleblower sued in 2013. To settle, Tenet agreed to pay over half a billion dollars, plead guilty to defrauding the United States and submit to two federal monitors. One monitor is for the criminal charge, the other for civil violations.

Tenet also vastly underestimated (or under-reported) its exposure from the case, according to Schnurman. Last December, Tenet reserved $20 million to cover it. Two months later, Tenet offered $238 million to settle. In March, it increased the reserve to $407 million. By the end of June, Tenet reserved $516 million.

How could Tenet be so off on its financial exposure, Schnurman marvels? Its leaders probably didn’t realize the scope of the fraud until negotiations began with the Justice Department, said David Kwok, an assistant professor at the University of Houston Law Center.

When a company benefits from such misconduct, rather than an employee individually, the company is liable for the actions. And under the False Claims Act, Tenet could be penalized up to $11,000 for every claim filed with Medicaid, he said. “That can run up the numbers pretty fast,” Kwok said, especially when the fraud covers 13 years.

Huge penalties are not rare in the industry. Pfizer and Johnson & Johnson both agreed to pay over $2 billion, and GlaxoSmithKline, $3 billion, according to the Justice Department. Since 2009, over $18 billion has been recovered from cases involving fraud against federal healthcare programs, the department said. Tenet officials should have known better. In the early 2000s, the company faced huge penalties, lost billions in market value and was shamed publicly, says Schnurman.

In 2006, it agreed to pay over $900 million to settle charges primarily related to overbilling Medicare years earlier. In 2004, it also paid over $400 million to patients, largely for performing unnecessary cardiac surgeries.

In November 2003, two months after taking over as CEO, Trevor Fetter called Tenet “a troubled company” and “an arrogant corporation.” “Something went very wrong at Tenet,” Fetter told analysts at the time. “I am committed to changing our culture.”

He replaced much of the management team and named a chief compliance officer who reports directly to the board. Earlier, senators investigating the company had criticized Tenet for having the same person oversee the legal department and compliance.

“It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement,” Sen. Charles Grassley (R-IA) wrote to Fetter at the time.

After the executive resigned, analysts praised Fetter for cleaning house. That was the start of the compliance push, says Schnurman. Tenet reworked its standards of conduct in 2003 and 2006, and adopted many aspects of the federal oversight program after it expired in 2011.

Since 2006, Tenet has conducted over 1 million hours of compliance training. In 2007, its compliance department found overpayments for Medicare patients at its rehab facilities, and Tenet paid almost $43 million in a voluntary settlement.

Despite all these steps, no one reported the kickback scheme that started before Fetter arrived and continued a decade longer, Schnurman notes. That’s not surprising, said Nathan Cortez, a professor at Southern Methodist University’s Dedman School of Law.

More waves of misconduct have emerged among big pharma companies, medical device-makers and hospital systems, he said. The penalties from false claims and whistleblower suits haven’t stopped the problems. He said there’s often a deep-seated divide within large healthcare companies. While many employees focus on providing treatment and reaching out to the community, others must boost revenue and the bottom line.

For Tenet, a Fortune 500 company, there’s also pressure to please Wall Street.

“For every compliance officer who wants the company to play by the rules, there are counter forces to be more aggressive in sales and marketing,” Cortez said. “The financial incentives can be overwhelming.”

Steve's Take: Tenet's founder, Dick Eamer, had nothing to do with their recent moral/legal lapses Click To Tweet

Richard K. Eamer passed away on May 2, 2016 at the age of 88. I had lost touch with him many years ago. But my recollection was that he lived his life to the fullest and when his time came, he bowed out gracefully and quickly. Nothing about Tenet’s recent moral and legal lapses can or should be associated with him. At least that’s my take.