Tenet Says SEC Has Launched Informal Probe

Hospital chain Tenet Healthcare Corp., already under federal scrutiny for its Medicare reimbursements, said Monday that the Securities and Exchange Commission has begun an informal inquiry into the company, including examining the unusually high volume of Tenet stock trades in the last few weeks.

In an open letter to shareholders, Tenet’s chairman and chief executive, Jeffrey C. Barbakow, said company officials met with regional SEC representatives last week. Tenet officials said the two-hour-long meeting included questions about Tenet’s Medicare payments and about sales of Tenet shares by company insiders.

Barbakow said he did not know whether the SEC intends to launch a formal investigation, but he said the Santa Barbara-based company was cooperating fully. In a formal investigation the SEC typically obtains subpoena powers to gather additional information.

SEC officials on Monday declined to comment.

Tenet’s disclosure of the SEC meeting was not a surprise to investors, given the recent series of high-profile events that have battered the credibility and stock price of the nation’s second-largest hospital chain.

During the last three weeks the FBI has raided a Tenet hospital in Redding, Calif., where two doctors are being investigated for allegedly performing numerous unnecessary heart operations, and the Department of Health and Human Services has launched an audit of Tenet’s sizable Medicare billings. And on Nov. 7, Barbakow replaced two of his top executives as part of a management shake-up at the company.

The two Redding doctors, Chae Hyun Moon and Fidel Realyvasquez, have not been charged with wrongdoing. But Tenet has retained outside physicians to review pending cases of the doctors’ patients before allowing them to perform new procedures. So far, three bypass surgeries that Realyvasquez approved have been rejected by an outside cardiac doctor, a source at Redding Medical Center said.

The federal audit of Tenet focuses on Medicare funds known as “outlier payments.� These payments are made in addition to fixed Medicare reimbursements to help hospitals defray expense for unusually costly treatments, such as cardiac procedures.

Tenet has acknowledged that it pursued an ill-advised strategy of aggressively raising retail hospital prices, which are used to calculate outlier payments. But the company has maintained that it did not break any Medicare rules.

On Monday, Tom Scully, administrator of the federal Centers for Medicare and Medicaid Services, said he expected to announce as early as this week some limited steps to exert more control over Medicare’s outlier payments. Scully said broader changes in outlier regulations would take at least three months.

In an interview, Scully sharply criticized Tenet for boosting hospital prices, allowing it to collect an unusually large amount of the outlier payments. Scully said Tenet’s practices may not have been illegal, “but they were clearly inappropriate and unethical.�

On the whole, Barbakow’s letter Monday was received favorably by investors and analysts, largely because it included news that the company last week bought 10 million shares under a previously authorized stock repurchase plan.

Despite a tough day on Wall Street, Tenet shares rose $2.42, or 15%, to $18.75 on the New York Stock Exchange. The stock has inched up since dropping to $13.70 last week, but it remains well below a 52-week high of $52.30 in early October.

“It was comforting to know that management was back in the open market buying shares,� said Darren Lehrich, an analyst at SunTrust Robinson Humphrey in New York. Still, Lehrich said he would continue to advise investors to avoid Tenet’s stock.

Some analysts said they thought the SEC might be looking at the timing of Tenet’s disclosure of the hospital raid and Medicare audit.

On Monday Christi R. Sulzbach, Tenet’s executive vice president and general counsel, said that SEC officials did not ask questions about these disclosures during their meeting last Tuesday, which she attended. Rather, she said, they asked about any unusual trading by investors. Tenet does not track third-party stock trades, Sulzbach said, and although the SEC raised the issue of insider trading, the company did not believe that was a problem.

In the last couple of months some Tenet directors and senior management exercised stock options. On Oct. 4, for example, Thomas B. Mackey, Tenet’s chief operating officer, exercised options on 277,500 shares at $51.50, grossing about $10 million.

A month later, Mackey and Tenet Chief Financial Officer David Dennis left the company after Barbakow, who said he didn’t know about the company’s heavy reliance on outlier payments, expressed a loss of confidence in the executives.

In his letter to shareholders, Barbakow wrote that “many have questioned whether the cause of those departures was some deeper problem than what we had disclosed. The answer, emphatically, is NO.�

Barbakow also disclosed Monday that the organization that accredits hospitals nationally has begun a separate review of Tenet.

Charlene Hill, a spokeswoman for the Joint Commission on Accreditation of Healthcare Organizations, said her group has an “aggressive plan� to look at some of Tenet’s hospitals to make sure they are in compliance with quality and patient-safety standards.