|reprinted from December 4, 2002 issue of
The New York Times
Copyright© The New York Times
by Reed Abelson
High hospital prices came under further scrutiny yesterday when Tenet
Healthcare told analysts to expect significantly lower profits than they had
anticipated as the company moves away from its aggressive pricing strategy.
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
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
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
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