Tenet Under Closer Exam

Even before Tenet Healthcare Corp. disclosed last week that it was facing a federal audit of Medicare billing practices, Clark Dresser suspected that something was going on with Tenet’s hospital prices.

In August, the 80-year-old Dresser checked into Tenet’s Centinela Hospital Medical Center in Inglewood for an angioplasty, to open up a clogged artery. Dresser had the procedure at 3 p.m., and with no complications, went home at 9:30 the next morning.

But when Dresser, who used to price medical supplies for a living, got an itemized bill, he was stunned: The charges exceeded $50,000. A single coronary stent, a small tube inserted in a heart valve or artery, was listed at $12,000 -- about 10 times the actual cost to hospitals. Among other charges: $21 for one aspirin.

“The markup is too much,” Dresser complained.

Tenet officials said they won’t comment about a patient’s bill but suggested there was little harm done. Dresser, after all, didn’t have to pay for all of that, just an $810 deductible because he’s covered by Medicare. And Medicare pays the hospital a fixed rate that is typically only a fraction of its sticker prices. So do private insurers, which negotiate big discounts from hospital list prices.

Even so, the fact that Tenet has been aggressively pushing up retail hospital charges -- which the company acknowledged last week -- does matter for patients, hospitals and the health-care industry. Wall Street analysts say they think Tenet deliberately raised its list prices to maximize special payments it receives from Medicare.

And now some of them are questioning whether Tenet’s pricing policy allowed it to collect excessive amounts of certain payments from another government program: Medicaid, the state- and federally funded insurance for the poor and disabled. Those Medicaid funds, known as DSH payments, are based on a formula that includes a hospital’s uncollected debts and charity care, which are influenced by retail charges.

Tenet denies that it intentionally hiked prices to game Medicare or the DSH program.

Others say that one group of patients who may be most affected by Tenet’s price increases is those without insurance. “They are as aggressive in collections as they are in pricing,” said K.B. Forbes, who has been helping a group of uninsured patients sue Tenet for allegedly refusing to offer them discounts from retail charges.

Tenet spokesman Harry Anderson says the firm’s hospitals rarely collect money from the uninsured, and when they do those patients typically pay only a small portion of the list price.

As for DSH, he said, Tenet’s payments have changed little in the last two years.

Steep hospital charges have been an issue not only at the 40 Tenet hospitals in California; rapid hospital inflation nationally has been a big driver in soaring health-care costs.

Recently, federal regulators have begun to review whether past hospital mergers and consolidation may have led to monopoly pricing.

But by its own admission and public filings, Tenet pushed the envelope further than most. In the last year alone, company insiders say, Tenet hospitals raised their prices twice.

Senior Tenet officials huddled over the weekend in Santa Barbara, where the company is based, to begin a thorough review of financial operations.

Anderson said Sunday that it probably would take two to three weeks “to determine how a situation of this magnitude was not properly vetted in the organization, and to figure out exactly what the pricing situation was at every hospital.”

The focus of the federal audit of Tenet is Medicare funds known as “outlier payments.” These payments, so named because they refer to cases that lie outside the norm, are made in addition to fixed Medicare reimbursements to help hospitals defray expenses for unusually costly treatments, such as cardiac procedures. The method for calculating outliers is complex. But the higher the retail charges, the more cases that will qualify for these payments.

For example, suppose a Medicare patient has a coronary procedure and the hospital files a claim with Medicare for $100,000 in retail charges. Medicare will pay the hospital a fixed rate for that procedure, regardless of how many days the patient stayed in the hospital. If Medicare pays $20,000 for that procedure, the hospital will have $80,000 of unpaid charges.

That’s where outliers come in. That $80,000 is then multiplied by a ratio, and if that resulting amount exceeds a pre-set threshold -- in 2002 it was $21,025 -- the hospital would receive additional payments. So, if the hospital raised its retail charge for the coronary procedure to $120,000, and the Medicare reimbursement remained the same at $20,000, the hospital could calculate its outlier payments based on the higher $100,000 unpaid charge. Thus, the greater the increase in retail charges, the greater the outlier payments.

Tenet said last week that although it did not break Medicare rules, it did receive a growing and unusually large share of outlier payments -- $763 million in the last year. Of that amount, more than half came from 11 of its 113 hospitals. Among those 11 are seven in California, including Centinela and Redding Medical Center, now at the center of a separate federal probe of two doctors who allegedly performed unnecessary heart procedures.

All seven of these California hospitals, which also include Desert Regional Medical Center in Palm Springs and Garfield Medical Center in Monterey Park, are highly profitable and have been driving significant earnings to the corporation. And sharp price increases were a core factor in that.

Although hospitals closely guard the retail rates for procedures and supplies, public records show how rapidly prices have been rising at some Tenet hospitals.

At the 384-bed Centinela hospital, for example, the retail charge per patient per day totaled $12,186 in the second quarter of this year. That was up 72% from the same quarter two years earlier, according to company filings with California’s Office of Statewide Health and Planning Department.

By comparison, for all 400-plus California hospitals, the average retail charge per patient per day rose 33% in that same two-year period, to $5,389 -- less than half the retail charge at Centinela.

Anderson, the Tenet spokesman, said that some of the patient revenue increases at Centinela reflect the introduction of specialized procedures, such as cardiology. He said Tenet did not know how much Medicare outlier payments contributed to Centinela’s profit, but it is probably substantial.

Centinela’s operating margin -- or the percent of revenue that is kept as income after expenses -- was 34% in the second quarter. That was 10 times the average for 436 for-profit and nonprofit California hospitals.

Anderson said each hospital sets its own prices based on the market. “There was guidance from Tom Mackey that hospitals should be aggressive,” Anderson said. Mackey, Tenet’s former chief operating officer, left the company last week, as did David Dennis, chief financial officer.

Anderson said Jeff Barbakow, Tenet’s chairman and chief executive, asked both men to leave because they had not kept him informed about hospital pricing strategy and the effect that had on boosting Medicare outlier payments to an unacceptable level. Barbakow said the company will back away from such aggressive price increases, which analysts say will weaken Tenet’s hand in negotiating rates with insurers.

Retail hospital charges are used as a starting point for negotiations, and health insurance companies have noticed the rapid run-up in prices.

A sudden price hike matters because insurers, which pay a flat daily rate for hospital procedures, pay a percent of retail charges when they exceed a threshold -- just as with Medicare outliers.

Bob Rosefsky, 66, who lives in the Palm Springs area, said he was “flabbergasted” when he inadvertently got a copy of his hospital bill. Rosefsky had gone to Tenet’s Desert Regional Medical Center for radiation therapy after a high reading on a prostate cancer test. He spent no more than four hours at the hospital, he said.

His retail charges came to $57,833. About $23,000 was for medicine, which, Rosefsky’s physician told him, was five times what it actually cost the hospital.

Then there were smaller charges: $250 for one drape sheet, $15 for a disposable glove.

“It just offends me to know something like this is going on,” Rosefsky said. Even if Medicare isn’t paying full price, why is the hospital charging such rates? he asked. “I’m upset they’re excessively billing, hoping to get more than they’re entitled to.”