Tenet Settles for $84M in Damages

Zacks

As per an agreement with the federal government, Tenet Healthcare Corp. (THC) recently announced that it will receive $84 million in damages related to inadequate Medicare reimbursements over the past several years. The agreement is a part of anindustry-wide settlement initiative undertaken by the U.S. Department of Health and Human Services and the Centers for Medicare & Medicaid Services (CMS) to compensate for past underpayments in the Medicare inpatient prospective payment system.

Tenet expects to receive the settlement amount by the end of the second quarter of 2012. The transaction is projected to have an incremental impact of $77 million on the company’s operating earnings in fiscal 2012.

Consequently, Tenet expects to witness an upward revision in adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) while reporting its first quarter 2012 financial results on May 8, 2012. Tenet’s adjusted EBITDA guidance for 2012 currently stands at $1.225–1.350 billion. The guidance includes an adjustment of $25–$50 million related to estimated receipts from various settlements.

Concurrently, Tenet also revealed its projection of an unfavorable adjustment of $2 million related to Medicare disproportionate share hospital Supplemental Security Income (“SSI”) during the first quarter of 2012. The adjustment comes on the back of the recent release of SSI ratios by CMS. However, the adjustment is not expected to have a significant impact on Tenet’s first quarter earnings as the company already has $49 million in reserves for SSI adjustments.

The announcement offers a bit of respite for Tenet as it had to enter a $42.75 million civil settlement deal with the U.S. Attorney’s Office, Northern District of Georgia and the Departments of Justice and Health and Human Services earlier this week. The company allegedly admitted several Medicare patients to 25 of its inpatient rehabilitation facilities from May 2005 to December 2007, even though the patients did not qualify for such treatment.

Inpatient rehabilitation units are generally reimbursed at a higher rate compared to other facilities covered under Medicare plans, as such units are for patients who require high degree of medical supervision and skilled nursing and medical team. Thus, Tenet received higher Medicare reimbursement from the government for unnecessarily admitting patients in the inpatient rehabilitation facilities.

Shares of Tenet, which competes with HCA Inc. (HCA) and Community Health Systems Inc. (CYH), surged 5.3% following the announcement on Thursday, to close at $5.35 on the New York Stock Exchange.

Tenet currently carries a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. We maintain a long-term ‘Neutral’ recommendation on the stock.

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