4K U S "';STRICT COURT .stopher Kim (Bar No. 082080) a J. Yang (Bar No. 208971) .M RUGER & KIM LLP // fi^ Y23 055 West Seventh Street, Suite 2800 HAL 01 LOS Angeles CA 90017 Rt 0 CALIFORNIA Telephone: (213) 955-9500 [Liaison Counsel for Lead Plaintiff, the State of New Jersey, and tl\e Class] 5 Richard S. Schiffrin (Pro Hac Vice) Allyn Z. Lite (Pro Hac Vice) 6 Andrew L. Barroway (Pro Hac Vice) Joseph J. DePalma (Pro Hac Vice) Jacob A. Goldberg (Pro Hac Vice) Mary Jean Pizza 7 Stuart L. Berman (Pro Hac Vice) Susan D. Pontoriero SCHIFFRIN & BARROWAY, LLP Katrina Blumenkrants 8 Three Bala Plaza Suite 400 LITE DEPALMA GREENBERG Bala Cynwyd PA 19004 & RIVAS, LLC 9 Telephone: (^l0) 667-7706 Two Gateway Center, 12" Floor Newark, New Jersey 07102 10 Telephone : (973) 623 -3000 ' - 11 [Co-Lead Counsel for Lead Plaintiff, the State of New Jersey, and the$ lass] 12 UNITED STATES DISTRICT COURT X- 13 CENTRAL DISTRICT OF CALIFORNI\
14 WESTERN DIVISION
15 In re TENET HEALTHCARE CORP. No. CV-02-8462-RSWL SECURITIES LITIGATION I 16 CLASS ACTION 17 This Document Relates To: CONSOLIDATED AMENDED 18 CLASS ACTION COMPLAINT ALL ACTIONS. FOR VIOLATION OF 19 SECTIONS 10b( (a), AND 20(A) OF THE SORITIES 20 EXCHANGE ACT OF 1934 AND SECTIONS 11 AND 15 21 OF THE SECURITIES ACT OF 1933 22 JURY TRIAL DEMANDED 1603 23 Date: 24 Time: Judge: The Hon. Ronald Lew 25 ^ e :at ` ;GOON Courtroom: 21
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28 ` : 7- KAI880'u02\Amcnded Complaint (2003-05-23).wpd I AMENDED CLASS ACTION COMPLAINT 1 TABLE OF CONTENTS
2 1. INTRODUCTION ...... 1 3 II. SUMMARY OF THE ACTION ...... I 4 III. JURISDICTION AND VENUE ...... 9 5 IV. PARTIES ...... 10 6 V. DEFENDANTS' INSIDER SELLING ...... 16 7 VI. CLASS ALLEGATIONS ...... 21 8 VII. BACKGROUND ...... 24 9 A. The Tenet Organization ...... 24 10 B. Tenet' s Financial Results and Performance Sputter ...... 27 11 C. Defendants ' False Claims That Strategic Initiatives Caused Tenet's 12 Results to Improve Dramatically ...... 34
13 D. The Medicare Inpatient Prospective Payment System ...... 37
14 1. Traditional Medicare ...... 38
15 2. Medicare Outlier Payments ...... 44
16 E. Tenet ' s Corporate Culture ...... 49
17 VIII. DEFENDANTS' WRONGDOING DURING THE CLASS PERIOD 52
18 A. Tenet' s Abuse of Medicare Outlier Payments ...... 53 19 B. Tenet's Improper Upcoding ...... 68 20 C. Wrongdoing at Redding Medical Center ...... 72 21 D. Tenet's Violations of Generally Accepted Accounting Principles73 22 1. Defendants Caused Tenet Improperly to Recognize Revenue ...... 74 23 2. Defendants Failed to Accrue A Reserve for Unasserted 24 Claims Resulting from Tenet 's Improper or Illegal Cond uct 25 IX. FALSE AND MISLEADING STATEMENTS ...... 81 26 X. THE TRUTH BEGINS TO EMERGE ...... 125 27 XI. CLAIMS FOR RELIEF ...... 161 28
I K:\1880\02\Amended Complaint (2003-03 -23).wpd 2 AMENDED CLASS ACTION COMPLAINT 1 A. FIRST CLAIM FOR RELIEF For Violations of §10(b) of the 1934 Act and Rule 10b-5 Against 2 Tenet and the Management Defendants ...... 161
3 B. SECOND CLAIM FOR RELIEF For Violations of20(a) of the 1934 Act Against Tenet and the 41 Management Defendants ...... 163
5 C. THIRD CLAIM FOR RELIEF For Violations of §20A of the 1934 Act Against Defendants 6 Barbakow, Mackey, Mathiasen, and Sulzbach ...... 164
7 D. FOURTH CLAIM FOR RELIEF For Violations of § 11 and 15 of the 1933 Act Against All 8 Defendants (Except Sulzbach) ...... 165
9 PRAYER FOR RELIEF ...... 168
10 JURY DEMAND ...... 169
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I K:\1880\02\Amended Complaint (2003 -05-23).wpd 3 AMENDED CLASS ACTION COMPLAINT I 1. INTRODUCTION
2 1. Lead Plaintiff, the State of New Jersey and its Division of Investment
3 ("Plaintiff' or "New Jersey"), brings this class action individually and on behalf of
4 all persons and entities who purchased the securities of Tenet Healthcare
5 Corporation ("Tenet" or the "Company") between January 11, 2000, and
6 November 7, 2002 (the "Class Period"), against Tenet and its current or former top
7 officers and directors. Representative Plaintiffs, Floyd Stevens, Jr. and Joseph
8 Masters ("Representative Plaintiffs") allege violations of federal securities laws on
9 behalf of a sub-class of all Class Members who purchased or sold Tenet securities
10 contemporaneous with certain Defendants' (defined later as "Insider Trading
11 Defendants") purchases and sales of Tenet stock during the Class Period. Plaintiff
12 alleges violations of the federal securities laws arising from defendants' false and
13 misleading statements to investors throughout the Class Period related to Tenet's
14 financial results, growth, sustainability of growth, and its operations. Plaintiff
15 files this Consolidated Amended Class Action Complaint, incorporating the causes
16 of action of all parties who filed cases consolidated herein.
17 II. SUMMARY OF THE ACTION
18 2. Throughout the Class Period and before, Tenet represented - and, 19 until recently, investors believed - that it had distanced itself from its sordid 20 history. In 1991, state and federal authorities investigated Tenet, then known as 21 National Medical Enterprises, Inc., for abusive and fraudulent practices at its 22 psychiatric hospitals. In addition, private parties filed 135 lawsuits, claiming that 23 Tenet had improperly induced doctors to admit patients to those hospitals and kept 24 them hospitalized until their insurance benefits expired. In 1992, eight insurance 25 companies filed suit against Tenet, alleging fraudulent billing for psychiatric 26 services. The insurance companies obtained almost $215 million from Tenet in 27 settlement of these suits. 28 3. In 1993, the FBI began investigating allegations that Tenet's
K:\1880\02\Amended Complaint ( 2003 -05-23).«pd 1 AMENDED CLASS ACTION COMPLAINT psychiatric hospitals had improperly induced physicians to refer patients, admitted
2 patients who needed no treatment, and forced the patients, against their wills, to
3 remain hospitalized until their insurance proceeds expired. Ultimately, on June
4 29, 1994, pursuant to the terms of a settlement agreement among Tenet, the United
5 States Department of Justice ("DOJ") and the Department of Health and Human
6 Services ("HHS"), Tenet pleaded guilty to an eight-count federal indictment and
7 paid what was then the largest health care related fraud fine in history. Tenet was
8 also prohibited from operating psychiatric hospitals for five years.
9 4. Pursuant to the terms of the settlement with DOJ and HHS, the
10 Company entered into a corporate integrity agreement ("Integrity Agreement").
11 The Integrity Agreement was designed to ensure that Tenet maintained high
12 standards of business integrity required of a participant in a federally funded
13 health care program. The Integrity Agreement required Tenet to implement
14 certain review procedures, including its billing policies and practices, to ensure 15 that its hospitals complied with federal law, regulations, guidelines, and policies. 16 The Integrity Agreement also required Tenet to investigate and report any credible 17 evidence of misconduct that may have constituted any material violation of the 18 law, rules, and regulations governing federally funded health care programs, and 19 to take corrective action and reimburse the Government for any such wrongdoing. 20 5. In the Company's 10-K for fiscal year 2002, filed with the SEC on 21 August 14, 2002 ("2002 10-K"), long after the Integrity Agreement expired, 22 Defendants asserted that Tenet continued voluntarily to maintain "a multifaceted 23 corporate compliance and ethics program that meets or exceeds all applicable 24 federal guidelines and industry standards." Similarly, Tenet's Chairman and CEO, 25 defendant Jeffrey C. Barbakow's ("Barbakow") Letter to Shareholders contained 26 in the Company's 2002 Annual Report emphasized Tenet's focus on "high ethical 27 standards" over "many, many years." "Ethical behavior," he wrote, "is central to 28 our culture and we continually reinforce it in many ways.... With all the
K:\I880\02Wmended Complaint (2003-0S-231.wpd 2 AMENDED CLASS ACTION COMPLAINT questions that have been raised about corporate credibility in recent months, I take
2 considerable comfort in that." During the Class Period and before, a profound
3 disconnect existed between Tenet's aspirations to ethical corporate behavior and
4 its corporate culture and operations.
5 6. Despite Barbakow's perfunctory words, Defendants knew or were
6 deliberately reckless in not knowing that Tenet was involved since as early as
7 1992 in systematic "upcoding" - an illegal practice by which Tenet received
8 material amounts from Medicare in excess of what it should have received.
9 Flouting the Integrity Agreement, according to a False Claims Act complaint filed
10 by the DOJ in January, 2003, Defendants either actively promoted or deliberately
11 recklessly allowed this systematic upcoding to continue, until at least September,
12 1998, infecting Tenet's then current and future results.
13 7. According to one analysis, if the DOJ prevails on its False Claims Act
14 claims, Tenet will be subject to liability of between approximately $400 million to
15 $ 500 million for over 19,000 illegally or otherwise improperly coded claims.
16 Defendants failed to alert the government that Tenet was engaged in these
17 practices, in clear violation of the Integrity Agreement . In addition, Defendants
18 caused Tenet to file materially false financial statements, in violation of generally
19 accepted accounting principles ("GAAP") for both improperly recognizing
20 revenue from illegally coded claims and for failing to accrue for the penalties,
21 fines and other liabilities to which their illegal behavior subjected Tenet. At no
22 time during the Class Period , which according to the Government, commenced
23 more than a year after systematic upcoding at Tenet ceased, did Defendants accrue
24 for the probable and estimable contingency that Tenet would incur substantial 25 fines and penalties as a result of its illegal conduct. Nor did Tenet restate its prior
26 year' s results and the results of the interim periods during those years.
27 8. After Tenet apparently ceased its systemic upcoding, namely,
28 sometime on or around December 31, 1998, its stock price sunk and remained
K:\1880\02\4mcndcd Complaint ( 2003-05 -23).wpd 3 AMENDED CLASS ACTION COMPLAINT depressed for several quarters. Defendants blamed federal legislation aimed at
2 curtailing the reimbursement amounts providers would receive from federal
3 programs like Medicare and pressure from managed care payors such as health
4 maintenance organizations ("HMO"). By late 1999, Tenet's stock price
5 languished in the mid to high teens and investors were generally displeased with
6 Tenet's performance.
7 9. For example, a January 13, 1999 Bear Stearns analyst report noted
8 that Tenet's second quarter, ended November 30, 1998, was disappointing, with
9 the "swing factors that affected" the Company's results likely to continue to affect
10 Tenet's results at least through the end of fiscal 1999, ending May 31, 1999. On
11 October 5, 1999, a J.P. Morgan Securities analyst issued a report noting that
12 Tenet's bad debt as a percentage of revenue had risen. That analyst noted that
13 Tenet's management had identified key initiatives to bolster Tenet's results
14 including focusing on pricing and timing of collections with managed care payors
15 and controlling costs. 16 10. In response to this period of lagging results, Tenet disclosed to
17 investors that it had implemented strategies and initiatives to return the company
18 to healthy and sustainable levels of growth. Further, Tenet changed its senior
19 management, hiring new CFO, defendant David L. Dennis ("Dennis"). Dennis, a
20 former investment banker who had worked closely with Tenet in the past, assumed 21 the position of CFO at a time when Tenet was not the darling of Wall Street that it 22 later became as a direct result of the fraudulent practices alleged herein. 23 11. By April of 2001 , having reported several quarters of respectable
24 growth, Tenet had seemingly turned the tide. Defendants boasted that the
25 initiatives and strategies they had implemented had worked. Investors showed 26 their appreciation pushing up the price of Tenet's common stock. According to an
27 April 9, 2001 ABN AMRO analyst report, Tenet had achieved its seventh straight
28 quarter of better than expected performance and second quarter in a row of 25%
K:\I880\02\Amended Complaint (2003.05.23).w,d 4 AMENDED CLASS ACTION COMPLAINT 1 growth in earnings per share.
2 12. By the end of its fiscal 2002, ended May 31, 2002, Tenet appeared
3 fully healed, and was riding a wave of investor confidence. Management claimed
4 that the strategies and programs Defendants had instituted had paid off. According
5 to Barbakow's Letter to Shareholders in Tenet's 2002 Annual Report, for the
6 Company's fiscal year ended May 31, fiscal 2002 it was a "terrific year for Tenet,"
7 "the best in corporate history - so far." The letter also noted that "[w]e've now
8 delivered 10 straight quarters of growth in earnings per share of 20 percent or
9 better. The most recent five quarters have been even more impressive - exceeding
10 30 percent." Thus, based on information Tenet provided to the investing public, it
11 appeared that Tenet had successfully distanced itself both from its history of
12 wrongdoing and from the problems that plagued it through early 2000. To
13 investors' knowledge, Tenet had become an upstanding corporate citizen and was
14 reaping the financial benefits of outstanding performance. That, however, was all
15 an illusion.
16 13. Beginning in late October, 2002, a deluge of adverse, sordid 17 revelations beset the Company, causing the price of Tenet's common stock to
18 plummet. In rapid succession, the market learned (1) that Tenet had deliberately
19 engaged in a scheme to "game" Medicare, grossly inflating its charges for the 20 services it performed; (2) that it faced potentially massive liability because one of
21 its facilities failed to prevent two doctors from prescribing and performing 22 invasive coronary procedures on healthy patients; (3) that one of its facilities was 23 under investigation for paying illegal physician referrals; and (4) that the 24 Government filed suit, alleging systemic upcoding concentrated around four 25 diagnosis groups which led to Tenet's fraudulent receipt of excess reimbursements 26 from Medicare. 27 14. With respect to Tenet' s scheme to "game" Medicare, Tenet's inflated 28 charges bore no direct relationship to the costs Tenet incurred to treat its patients.
K.\1880\02\Amended Complaint (2003-05-23).wpd 5 AMENDED CLASS ACTION COMPLAINT Senior officers at Tenet, including at least Mackey and Dennis, purposely caused
2 Tenet to implement across the board charge increases and to keep Tenet's charges
3 increasing materially and dramatically throughout the Class Period. By grossly
4 inflating its charges, Tenet converted common Medicare claims, for which
5 payments were set in advance, into claims justifying "outlier payments," an
6 enhancement to the regular medicare reimbursement payment based on a
7 hospital's expenditure of "extraordinarily high costs" in treating a patient. By
8 raising its charges beyond any relation to its actual costs, Defendants caused
9 ordinary treatments to become "extraordinary" without Tenet's incurring any to incremental cost increase. Further, because Tenet's costs remained fixed, a it substantial majority, if not the entirety, of every improperly earned outlier payment
12 went directly to Tenet's pre-tax operating earnings - the very measure of growth 13 that had catapulted Tenet's stock price to a high of $52.50 in October, 2002.
14 15. On October 28, 2002, a UBS Warburg analyst report thoroughly
15 analyzed the outlier payments Tenet had received and concluded that a material, 16 even dramatic, amount of Tenet's earnings growth since mid-fiscal 2002 was
17 directly attributable to outlier payments to which Tenet was not entitled. Thus,
18 Defendants had successfully created the illusion that their strategies and programs
19 resulted in tremendous financial gain when, in fact, such growth was linked to an
20 abusive and fraudulent scheme.
21 16. The discovery that Tenet had improperly obtained a material and
22 dramatic amount of its earnings from improper outlier payments, however, was
23 only the beginning. In rapid succession over the next three months, scandal after
24 scandal rocked Tenet and its hospital subsidiaries.
25 17. On October 30, 2002, forty agents from the FBI, the Office of
26 Inspector General of the HHS and the Internal Revenue Service raided Tenet's 27 Redding Medical Center ("RMC") in California for evidence regarding "a scheme
28 to cause patients to undergo unnecessary invasive coronary procedures," including
K:11880\02\Amcnded Complaint ( 2003.05-23).apd 6 AMENDED CLASS ACTION COMPLAINT 1 artery bypass surgery and heart valve replacement surgery, according to an
2 affidavit from the F.B.I. According to a November 2, 2002 San Francisco
3 Chronicle article, physicians had warned executives at the facility, long one of
4 Tenet's most profitable hospitals, of the unnecessary procedures as early as 1997
5 and 1998.
6 18. On November 6, 2002, Tenet issued a press release announcing its
7 receipt of an audit request from the Office of Audit Services of the HHS ("OAS")
8 in Kansas City relating to the Company's outlier payments.
9 19. On November 7, 2002, defendants Thomas B. Mackey, Tenet's Chief
10 Operating Officer, and David L. Dennis, the CFO, two of Tenet's top executives
11 integral to Tenet's recent turnaround, purportedly "retired" and "resigned"
12 respectively. During an analyst conference call on that date, Tenet disclosed an
13 "intensive review" of the Company's strategies, "particularly [its] pricing
14 strategies" and noted that the Company's "aggressive pricing strategy" has had a
15 "real impact on outlier payments." In a November 7, 2002 press release issued by
16 the Company, Barbakow asserted that although those pricing strategies are
17 "entirely consistent with the Medicare regulations," Tenet's pricing strategy "was
18 inconsistent with the position and posture that we want Tenet to have in the
19 industry." Barbakow made a similar statement during a November 7, 2002
20 conference call with analysts.
21 20. On December 3, 2002, Tenet issued a press release describing the 22 results of the Company's new executive management team's review of Tenet's 23 "charges, pricing and overall business strategy." As quoted in the press release, 24 Barbakow admitted that the Company's "charging practices, combined with the
25 formula prescribed by the Medicare program, in large part caused Tenet's total
26 outlier payments to exceed industry averages." In fact, as set forth in detail below, 27 Tenet's outlier payments exceeded national averages by astronomical amounts. 28 21. On top of that, on January 2, 2003, Tenet issued a press release
K:U880',02\ArmndcdComplaint (2003 -05-23)yd 7 AMENDED CLASS ACTION COMPLAINT 1 announcing receipt of a subpoena from the DOJ for documents from Tenet and 19
2 hospitals owned by its subsidiaries, relating to outlier payments. On January 6,
3 2003, Tenet issued a press release announcing its voluntary adoption of a new
4 policy on Medicare outlier payments that would reimburse its hospitals in
5 accordance with anticipated government changes. The release noted that Tenet
6 estimated that by adopting this policy, outlier payments to its hospitals would drop
7 from approximately $65 million per month to approximately $8 million per month.
8 22. On January 9, 2003, Defendants issued a press release announcing
9 that "recent talks with DOJ representatives regarding a long-standing
10 investigation" of Tenet' s illegal upcoding practices "had hit a stand-still and that
11 the DOJ had indicated it would file a lawsuit." The DOJ filed the False Claims
12 Act Complaint brought under the False Claims Act, 31 U.S.C. §§ 3729 - 3733, 13 several days later. 14 23. Between November 7, 2002 and May 14, 2003, when Tenet issued a 15 press release disclosing its results for its new fiscal first quarter ended March 31, 16 2003,' Tenet revealed the shocking truth behind its outlier scheme. Having 17 "voluntarily" modified its pricing strategy, essentially ceasing its gaming of 18 Medicare, Tenet's results provided a stark contrast to the Class Period earnings 19 disclosures. According to the May 14, 2003 Company press release, because of its 20 dramatic reduction in outlier payments and the inclusion of certain restructuring 21 charges, Tenet "posted operating income of $146 million for the quarter, compared 22 with $524 million in the year-ago quarter. Operating income margins were 4.2 23 percent in the current quarter and 15.5 percent in the year-ago quarter. Income 24 from continuing operations was $15 million, compared with $261 million in the 25 prior-year quarter." Further, as indicated in the Company's 10-Q for the quarter
26
27 'Tenet announced in April, 2003, that it was shifting its fiscal year to match the calendar year, supposedly to make comparisons with other for-profit hospital companies easier. 28 Throughout the Class Period, however, Tenet's fiscal year ended May 31.
K:\1880\02\Amended Complaint ( 2003.05-23).wpd 8 AMENDED CLASS ACTION COMPLAINT ended March 31, 2003, filed with the SEC on May 14, 2003, the reduction in 2 outliers caused a material shift in payor mix, with government programs falling to 3 27.3% of patient revenue, and managed care representing 49.2%. Stunningly, 4 Tenet reported a net loss for the quarter ended March 31, 2003 of $20 million or
5 $0.04 per share, down from a gain of $278 million or $0.55 per share for the same
6 period in 2002. 7 24. As a direct result of Defendants ' false and misleading statements, 8 Tenet's stock price, which had been as high as $52.50 per share in October, 2002, 9 fell to as low as $13.81 per share in the days following the October 28, 2002 UBS 10 Warburg analyst report. At the same time, while the Insider Trading Defendants 11 (defined below) possessed material, adverse, non-public information, they 12 unloaded their personal holdings for huge personal proceeds exceeding $ 188 13 million collectively. Alone, Barbakow reaped proceeds in excess of $130 million, 14 trading those shares knowing or with deliberate recklessness disregarding that 15 Tenet's astounding growth during the Class Period and the successes that stemmed 16 directly therefrom were completely illusory.
17 III. JURISDICTION AND VENUE 18 25. Plaintiffs claims, on behalf of itself and the Class, arise under and 19 pursuant to the Securities Exchange Act of 1934 ("the Exchange Act"), Sections 20 10(b) and 20(a), 20 (A), 15 U.S.C. §§ 78j(b), 78t(a), 78t- 1, Rule IOb-5 21 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 22 C.F.R. § 240. 1Ob-5. 23 26. This Court has jurisdiction over the subject matter of this action 24 pursuant to 28 U.S.C. § 1331 and Section 27 of the Exchange Act, 15 U.S.C. § 25 78aa, and Section 22 of the 1933 Act, 15 U.S.C. § 77v. 26 27. Venue in this District is proper under Section 27 of the Exchange Act, 27 Section 22 of the 1933 Act and 28 U.S.C. § 1391(b). Tenet maintains its principal 28 place of business in this District, with its executive offices located at 3820 State
K:\1880\02\Amcndcd Complaint (2003.05 -23) µpd 9 AMENDED CLASS ACTION COMPLAINT 1 Street, Santa Barbara, California. Further, many of Defendants ' acts and practices 2 of which Plaintiff complains occurred in whole or in substantial part in this
3 District.
4 28. Defendants directly or indirectly employed the means and
5 instrumentalities of interstate commerce in connection with the acts alleged in this
6 Complaint, including, without limitation, the mails, interstate telephone
7 conversations and the facilities of the national securities markets.
8 IV. PARTIES 9 29. Plaintiff the State of New Jersey and its Division of Investment 10 ("New Jersey") purchased Tenet common stock during the Class Period as set 11 forth in various filings with the Court and incorporated herein by reference, and 12 suffered a loss as a direct or proximate result of Defendants' wrongful conduct. 13 The State of New Jersey, through its Division of Investment is a large institutional 14 investor, managing in excess of $72 billion for the benefit of over 600,000 current 15 and former public employees of the State of New Jersey. On February 14, 2003, 16 the Court appointed New Jersey as Lead Plaintiff and instructed it to file a 17 Consolidated Amended Complaint. 18 30. Representative Plaintiff Floyd Stevens, Jr. purchased Tenet stock 19 during the Class Period, as set forth in the Certification attached hereto as Exhibit 20 A. 21 31. Representative Plaintiff Joseph Masters purchased Tenet stock during 22 the Class Period, as set forth in the Certification attached hereto as Exhibit B. 23 32. Defendant Tenet, through its subsidiaries, owns or operates general 24 hospitals and general healthcare facilities serving communities in the United 25 States. The Company operates rehabilitation hospitals, speciality hospitals, long- 26 term care facilities, psychiatric facilities, and medical office buildings near its 27 general hospitals. During the Class Period, Tenet had approximately 488 million 28 shares of common stock outstanding, which shares traded in an efficient market on
K:U880\02WmendedComplaint (2003-05-23) pd 10 AMENDED CLASS ACTION COMPLAINT the New York stock exchange. 33. Together, the following defendants are the "Management Defendants": a. Defendant Jeffrey C. Barbakow ("Barbakow") has served as 5 Chairman and CEO of the Company since June 1993. During the Class Period,
6 while in the possession of adverse undisclosed information about the Company, 7 Barbakow sold 3,000,000 shares of Tenet stock, totaling $130,060,000, netting
8 $111,060,000 in illegal insider trading proceeds. Barbakow did not sell any stock 9 before the Class Period and did not sell any stock after January 16, 2002. Thus, to Barbakow's Class Period sales were unusual, suspicious, dramatically out of line 11 with his previous trading history and calculated to maximize his personal benefit 12 from undisclosed inside information. 13 b. Defendant David L. Dennis ("Dennis") served as Vice Chair 14 and Chief Financial Officer ("CFO") of the Company during the Class Period, 15 having been appointed on February 24, 2000. During the Class Period, while in 16 possession of adverse undisclosed information about the Company, Dennis 17 received bonus payments of approximately $4 million, in addition to his salary for 18 2000, 2001, and 2002, based on Tenet's false financial reports and reported 19 earnings growth. 20 c. Defendant Trevor Fetter ("Fetter") has served as President of 21 Tenet since November 2002. Fetter first joined Tenet in 1995. He served as 22 Tenet's Executive Vice President and then Chief Financial Officer and Chief 23 Corporate Officer in the Office of the President. Fetter left Tenet from February 24 2000 until November 202 to serve as Chairman and Chief Executive Officer of 25 Broadlane, Inc., a Tenet affiliate. 26 d. Defendant Thomas B. Mackey ("Mackey") served as Vice 27 Chief Operating Officer ("COO") of the Company from January 13, 1999, until his 28 "retirement" on November 7, 2002. Mackey was elevated to the position of COO
K:U 880\02\Amended Complaint (2003-05-23).wpd I I AMENDED CLASS ACTION COMPLAINT 1 upon the May 31, 1999 resignation of Michael Focht. Prior to that, Mackey had
2 served as Vice President for Operations in the Western half of the country. As
3 COO, Mackey was responsible for the Company's operating functions. During the
4 Class Period, while in possession of adverse undisclosed information about the
5 Company, Mackey sold 735,000 shares of Tenet stock, totaling $32,748,119 and
6 netting $21,828,397 in illegal insider trading proceeds. Mackey did not sell any
7 stock before the Class Period and did not sell any stock after October 4, 2002.
8 Thus, Mackey's Class Period sales were unusual, suspicious, dramatically out of
9 line with his previous trading history and calculated to maximize his personal
10 benefit from undisclosed inside information. Mackey also received bonus
11 payments of approximately $4.7 million, in addition to his salary for 2000, 2001,
12 and 2002, based on Tenet's false financial reports and reported earnings growth. 13 e. Defendant Raymond L. Mathiasen ("Mathiasen") has served as 14 Executive Vice President of Tenet since March 22, 1999, and as Chief Accounting 15 Officer since March 1996. From September 1993 to March 1996, Mathiasen 16 served as Senior Vice President and Chief Financial Officer of the Company. 17 During the Class Period, while in the possession of adverse undisclosed 18 information about the Company, Mathiasen sold 285,750 shares of Tenet stock, 19 totaling $10,411,640 and netting $7,166,972 in illegal insider trading proceeds. 20 Other than sales on February 10, 1997 and June 3, 1997, Mathiasen did not sell 21 any stock before the Class Period and did not sell any stock after January 11, 22 2002. Thus, Mathiasen's Class Period sales were unusual, suspicious, 23 dramatically out of line with his previous trading history and calculated to 24 maximize his personal benefit from undisclosed inside information. Mathiasen 25 also received bonus payments of approximately $2.2 million, in addition to his 26 salary for 2000, 2001, and 2002, based on Tenet's false financial reports and
27 reported earnings growth. 28 f. Defendant Barry P. Schochet ("Schochet") serves as Vice
K:\I880\02\Amended Complaint (2003-05 -23).wpd 12 AMENDED CLASS ACTION COMPLAINT 1 Chairman of Tenet Healthcare Corporation and is a member of Tenet Healthcare
2 Corporation's executive management team. Schochet was promoted to his current
3 position in 1999. Schochet joined National Medical Enterprises, Tenet's
4 predecessor company, in 1979. He held a variety of executive positions, including
5 President and Chief Operating Officer of the Company's Hospital Division.
6 g. Defendant Christi R. Sulzbach ("Sulzbach") has served as
7 Tenet's Executive Vice President and General Counsel since February 22, 1999.
8 Prior to that, Sulzbach served as Tenet's Associate General Counsel in charge of
9 compliance and litigation and as Senior Vice President, Public Affairs, having
10 joined Tenet's legal department in 1983. During the Class Period, while in the
11 possession of adverse undisclosed information about the Company, Christi R.
12 Sulzbach sold 502,199 shares of Tenet stock, totaling $14,962,297 and netting 13 $7,118,367 in illegal insider trading proceeds. Sulzbach did not sell any stock
14 before the Class Period and did not sell any stock after April 25, 2002. Thus,
15 Sulzbach's Class Period sales were unusual, suspicious, dramatically out of line 16 with her previous trading history and calculated to maximize her personal benefit 17 from undisclosed inside information. Sulzbach also received bonus payments of 18 approximately $2.2 million in addition to her salary for 2000, 2001, and 2002, 19 based on Tenet's false financial reports and reported earnings growth. 20 34. The "Insider Trading Defendants" are all Management Defendants 21 except for defendants Dennis, Fetter and Schochet. 22 35. Together, the following defendants are the "Outside Director 23 Defendants": 24 a. Defendant Michael H. Focht, Sr. ("Focht") served as a director 25 of Tenet from 1990 through August, 2002. Focht also served as Tenet's COO 26 from April 8, 1993 through December 31, 1999, having joined Tenet in 1978. 27 Until December 31, 2002, Focht was on retainer as a consultant to the Company 28 pursuant to a Consulting and Non-Compete Agreement effective January 1, 2000
K:\1880\02\Amended Complaint (2003-05-23).mpd 13 AMENDED CLASS ACTION COMPLAINT 1 concerning "any matter with which he previously had experience at the
2 Company," receiving $43,666 per month plus expenses.
3 b. Defendant Maurice J. DeWald ("DeWald") served as a Director
4 of Tenet throughout the Class Period.
5 c. Defendant J. Robert Kerrey ("Kerrey") served as a Director of
6 Tenet throughout the Class Period.
7 d. Defendant Bernice B. Bratter ("Bratter") served as a Director of
8 Tenet throughout the Class Period.
9 e. Defendant Sanford Cloud, Jr. ("Cloud") served as a Director of
10 Tenet throughout the Class Period.
11 f. Defendant Van B. Honeycutt ("Honeycutt") served as a
12 Director of Tenet throughout the Class Period.
13 g. Defendant Lester B. Korn ("Korn") served as a Director of
14 Tenet throughout the Class Period.
15 h. Defendant Raymond A. Hay ("Hay") served as a Director of
16 Tenet from 1985 through July 25, 2001.
17 i. Defendant Lawrence Biondi, S.J. ("Biondi") served as a
18 Director of Tenet throughout the Class Period.
19 j. Defendant Floyd D. Loop, M.D. ("Loop") served as a Director
20 of Tenet throughout the Class Period.
21 36. Together, Tenet, the Management Defendants and the Outside
22 Director Defendants shall be collectively referred to as "Defendants." It is
23 appropriate to treat the Management Defendants as a group for pleading purposes
24 and to presume that the false, misleading and incomplete information conveyed in
25 the Company's public filings, press releases and other publications, as alleged
26 herein, are the collective actions of the [Management Defendants identified above.
27 Each of the above officers and directors of Tenet, by virtue of their high-level
28 positions with the Company had knowledge of its business, operations, financial
K:\I880\02Wmcndcd Complaint ( 2003 -05-23 ). %%pd 14 AMENDED CLASS ACTION COMPLAINT 1 statements, and financial condition as alleged herein. Each of the Management
2 Defendants is responsible for the accuracy of the public reports and releases
3 detailed herein and is therefore primarily liable for the representations contained
4 therein.
5 37. The Management Defendants, because of their positions of authority
6 as officers and/or directors of the Company, were able to and did control the
7 content of various SEC filings, press releases and other public statements
8 pertaining to the Company during the Class Period. Each Management
9 Defendants was provided with copies of the documents alleged herein to be
10 misleading prior to or shortly after their issuance and/or had the ability and/or
11 opportunity to prevent their issuance or cause them to be corrected. Tenet's press
12 releases, reports to shareholders, SEC filings and the like are "group published"
13 materials of Tenet and the Management Defendants.
14 38. The Management Defendants, by reason of their stock ownership and
15 positions with and relations to Tenet, were controlling persons of Tenet and are
16 liable under §20(a) of the 1934 Act.
17 39. As officers, directors and/or controlling persons of a publicly held
18 company whose stock is registered with the SEC under the 1933 Act and traded on
19 the New York Stock Exchange, the Individual Defendants have a duty to promptly
20 disseminate accurate and truthful information with respect to the Company's
21 operations, business, products, markets, management, earnings, and present and
22 future business prospects, to cause Tenet's financial statements to fairly present its
23 financial condition and results from operations in conformity with GAAP, to
24 correct any previously issued statements that had become untrue and to disclose
25 any adverse trends that would materially affect the present and future financial
26 operating results of the Company, so that the market prices of the Company's 27 securities would be based upon truthful and accurate information.
28 40. Moreover, each of the Management Defendants and Outside Director
K:\1880\02\Amcnded Complaint ( 2003.05-23).upd 15 AMENDED CLASS ACTION COMPLAINT 1 Defendants signed various Registration Statements filed with the SEC throughout
2 the Class Period.
3 V. DEFENDANTS' INSIDER SELLING
4 41. "Insider trading" occurs when a corporate insider trades stock on the
5 basis of non-public information. Plaintiffs here allege an unusual pattern of
6 insider trading by demonstrating that stock sales of the Insider Trading Defendants
7 (all Management Defendants except Dennis, Fetter and Schochet) increased
8 throughout the Class Period through the sale of stock and stock options, which
9 sales were completely inconsistent with their prior economic behavior.
10 42. During the Class Period, the Insider Trading Defendants engaged in
11 illegal insider trading, selling over 4.5 million shares of their Tenet stock at prices 12 inflated by their fraudulent scheme while in possession of material adverse non- 13 public information. The Insider Trading Defendants grossed $188,182,056 14 million and netted $147,173,736 in illegal insider trading proceeds. The collective 15 insider selling by the Insider Trading Defendants during the Class Period is 16 summarized as follows:
17
18
19
20
21
22
23
24
25
26
27
28
K:\I880\02\Amended Complaint (2003.05-23 ).wpd 16 AMENDED CLASS ACTION COMPLAINT 1 SUMMARY OF CLASS PERIOD INSIDERS SALES BY INSIDER TRADING DEFENDANTS 2
3 INSIDER SHARES SOLD TOTAL NET (Adjustedfor PROCEEDS PROCEEDS 4 3:2 Stock Slit in June 2002) 5 Jeffrey C. Barbakow 3,000,000 $130,060,000 $111,060,000 6 Chairman/CEO
7 Thomas B. Mackey 735,000 $32,748,119 $21,828,397 President and Chief 8 Operating Officer Raymond L. Mathiasen 285,750 $10,411,640 $7,166,972 9 Chief Accounting 10 Officer Christi R. Sulzbach 502,199 $14,962,297 $7,118,367 11 General Counsel 12 TOTALS 4,522,949 $188,182,056 $147,173,736
13 43. As alleged in further detail herein, the insider stock sales were well 14 timed by the Insider Trading Defendants to take advantage of the artificially 15 inflated price of Tenet's common stock which resulted from the Defendants' false 16 and misleading statements. None of the Insider Trading Defendants traded any 17 Tenet common stock between June 3, 1997, when Mathiasen executed a sale, and 18 January 8, 2001, when Sulzbach executed a sale. Nor did any Insider Trading 19 Defendant sell after the close of the Class Period. Thus, the flurry of massive 20 insider trading during the Class Period, after an extended period of inactivity, is 21 unusual and suspicious in timing. 22 44. During the Class Period, while in the possession of adverse 23 undisclosed information about the Company, defendant Barbakow sold 3,000,000 24 shares of Tenet common stock, totaling $130,060,000, and netting $111,060,000 25 in illegal insider trading proceeds. All of these shares were sold on January 16, 26 2002. Barbakow timed this sale to take advantage of Tenet's artificially inflated 27 common stock price, prior to revelations of the Company's illegal and improper 28 activities and false financial statements and growth outlook. Barbakow did not
K:\I880\02'A mcndcd Complaint (2003-05-23).wpd 17 AMENDED CLASS ACTION COMPLAINT sell any stock before the Class Period or after January 16, 2002. Pursuant to
2 Tenet's August 20, 2001 Proxy Statement, as of October 19, 2001 , Barbakow
3 beneficially owned 1,669,536 split-adjusted shares of Tenet common stock and
4 7,497,000 split-adjusted exercisable options, for total holdings of 9,166,536 split-
5 adjusted shares. The one-time sale of 3,000 ,000 shares during the Class Period
6 represented approximately 33% of Barbakow' s holdings at that time, and thus was
7 unusual, suspicious, dramatically out of line with Barbakow ' s previous trading
8 history and calculated to maximize his personal benefit from undisclosed inside
9 information.
10 45. During the Class Period, while in possession of adverse undisclosed
11 information about the Company, Mackey sold 735,000 shares of Tenet stock,
12 totaling $32,748,119 and netting $21,828,397 in illegal insider trading proceeds.
13 Mackey's largest single sale of 277,500 occurred just weeks prior to the late
14 October/early November, 2002 disclosures of adverse facts that sent the price of
15 Tenet commons stock tumbling. Mackey did not sell any stock before the Class
16 Period and did not sell any during the Class Period after October 4, 2002. On July
17 26, 2001, Mackey sold 28,950 shares of Tenet common stock for a split-adjusted
18 $37 per share. On July 31, 2001, Mackey sold 46,050 shares of Tenet common
19 stock for an average split-adjusted price ofjust over $37 per share. On August 22, 20 2001, Mackey sold 155,001 shares of Tenet common stock for an average split- 21 adjusted price of $37.43 per share. On January 15, 2002, Mackey sold 154,899 22 shares of Tenet common stock for a split-adjusted price of $43.33 per share. On 23 January 16, 2002, Mackey sold 72,600 shares of Tenet common stock for a split
24 adjusted price of $43.58 per share. And, on October 4, 2002, Mackey sold 25 277,500 shares of Tenet common stock for $51.50 per share. Mackey timed these 26 sales to take advantage of Tenet's artificially inflated common stock price, prior to 27 revelations of the Company's illegal and improper activities and false financial
28 statements and growth outlook. Pursuant to Tenet's August 15, 2000 Proxy
K:\I880\02\Amcnded Complaint (2003-05 -23)..-.pd 18 AMENDED CLASS ACTION COMPLAINT 1 Statement, Mackey owned 10,297 shares of Tenet common stock and 399,998
2 exercisable options for total holdings of 410,295. Thus, his sales of 230,001
3 shares in 2001 amounted to approximately 56% of his total holdings at that time.
4 Further, pursuant to Tenet's August 14, 2002 Proxy Statement and other public
5 documents, Mackey owned 1,562,499 exercisable options. Therefore, Mackey's
6 sales of 504,999 shares during the Class Period amounted to approximately 32.3%
7 of his total holdings during the Class Period, and thus were unusual, dramatically
8 out of line with Mackey's previous trading history and calculated to maximize his
9 personal benefit from undisclosed inside information.
10 46. During the Class Period, while in the possession of adverse
11 undisclosed information about the Company, Mathiasen sold 285,750 shares of
12 Tenet stock, totaling $10,411,640 and netting $7,166,972 in illegal insider trading
13 proceeds. Until his February 5, 2001 sales of 135,750 shares of Tenet common
14 stock, Mathiasen had sold no other shares of Tenet common stock since June 3,
15 1997, nor did he sell any during the Class Period after January 11, 2002. On
16 February 5, 2001, Mathiasen sold 135,750 shares of Tenet common stock for
17 $29.92 per share. On January 11, 2002, Mathiasen sold 150,000 shares of Tenet
18 common stock for a split-adjusted $42.33 per share. Mathiasen timed these sales
19 to take advantage of Tenet's artificially inflated common stock price, prior to
20 revelations of the Company's illegal and improper activities and false financial
21 statements and growth outlook. Pursuant to Tenet's August 15, 2000 Proxy
22 Statement, Mathiasen owned 38,546 shares of Tenet common stock and 352,965
23 exercisable options for total holdings of 391,511. Thus, his sales of 135,750
24 shares in 2001 amounted to approximately 34.7% of his total holdings at that time.
25 Further, pursuant to Tenet's August 24, 2002 Proxy Statement, Mathiasen owned
26 529,700 exercisable options. Therefore, Mathiasen's sales of 150,000 shares in
27 2002 amounted to approximately 28.3% of his total holdings at that time, and thus
28 were unusual, dramatically out of line with Mathiasen's previous trading history
K:\I880\02\Amcndcd Complaint ( 2003-05-23).wpd 19 AMENDED CLASS ACTION COMPLAINT and calculated to maximize his personal benefit from undisclosed inside
2 information.
3 47. During the Class Period, while in the possession of adverse
4 undisclosed information about the Company, Sulzbach sold 502,199 split-adjusted
5 shares of Tenet common stock, netting $7,250,747 in illegal insider trading
6 proceeds. Sulzbach did not sell any stock before the Class Period after April 25, 7 2001. On January 8, 2001, Sulzbach sold 99,999 shares of Tenet common stock
8 for $28.67 per share. On April 17, 2001, Sulzbach sold 169,200 shares of Tenet
9 common stock for $31.33 per share. On April 24, 2001, Sulzbach sold 150,000
10 shares of Tenet common stock for $29 per share. And, on April 25, 2001,
11 Sulzbach sold 83,000 shares of Tenet common stock for $29.45 per share.
12 Sulzbach timed these sales to take advantage of Tenet's artificially inflated
13 common stock price, prior to revelations of the Company's illegal and improper
14 activities and false financial statements and growth outlook. Pursuant to Tenet's 15 August 20, 2001 Proxy Statement, prior to May 31, 2001, Sulzbach sold 509,698 16 split-adjusted shares of Tenet common stock, representing the entirety of her
17 exercisable options through that date. According to the August 14, 2002 Proxy
18 Statement, as of October 14, 2002, Sulzbach had 192,501 exercisable options. 19 Thus, during the Class Period, Sulzbach had exercisable options of 702,199. Her 20 sale of 509,698 split-adjusted shares represents 72.6% of her total holdings during 21 the Class Period, and thus were unusual, dramatically out of line with her previous
22 trading history and calculated to maximize her personal benefit from undisclosed
23 inside information. 24 48. Every Insider Trading Defendant had a strong motive to engage and 25 participate in the scheme to defraud and to conduct Tenet's business in a manner 26 that operated as a fraud or deceit on purchasers of Tenet's securities. Every 27 Insider Trading Defendant sold substantial amounts, either in absolute or relative 28 terms, of his or her Tenet stock, pocketing significant proceeds from his or her
K:\I880\02Wrtmndcd Complaint ( 2003-05 - 23).wpd 20 AMENDED CLASS ACTION COMPLAINT 1 illegal insider trading. In addition, Tenet's officers were in a position to also
2 pocket huge cash bonuses if, but only if, Tenet achieved certain preset earnings
3 targets and earnings growth targets.
4 49. The unusual insider trading during the Class Period can only be
5 explained by the Insider Trading Defendants' possession and use of inside
6 information.
7 50. The timing of the stock sales is suspect because the Insider Trading
8 Defendants, in most cases, voluntarily exercised stock options, although they were
9 under no obligations to exercise them given that the expiration of the options were
10 years later than when exercised.
11 51. The most typical course for executives is to hold a portion of shares
12 obtained via options for later sale, as there is no obligation to immediately
13 exercise stock options. Yet, the Insider Trading Defendants exercised their right
14 to buy Tenet stock in order to simultaneously sell. This prompt sale of shares is
15 highly suspicious and indicative of inside knowledge of Tenet's fraudulent
16 activity.
17 52. The suspicious nature of the insider trades shows that the Insider
18 Trading Defendants ' economic behavior was inconsistent with the sales of shares
19 for mere wealth-diversification purposes and strongly consistent with the sale of
20 shares with foreknowledge that the shares were inflated in value.
21 53. The history of Insider Trading Defendants' stock trades also
22 demonstrates that the transactions made during the Class period were atypical and
23 indicative of scienter. Prior to the Class Period, the insiders never sold their stock,
24 despite the fact that, in many cases, that shares and options were owned during the
25 pre-Class-Period time frame. This stark contrast between no pre-Class-Period and
26 overwhelming Class-Period sales substantially infers scienter.
27 VI. CLASS ALLEGATIONS 28 54. Plaintiff brings this action as a class action pursuant to Federal Rules
K_\1880\02\Amended Complaint (2003-05-23)-wpd 21 AMENDED CLASS ACTION COMPLAINT 1 of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class") of all 2 persons and entities who purchased or otherwise acquired Tenet securities
3 between January 11, 2000 and November 7, 2002, inclusive, and who were 4 damaged thereby.
5 55. Representative Plaintiffs bring a claim on behalf of a sub-class of all 6 persons and entities who purchased or sold Tenet securities contemporaneous with 7 Insider Trading Defendants' purchases and sales of Tenet stock during the Class
8 Period. 9 56. Excluded from the Class and sub-class are: Defendants, members of 10 the families of each of the Management Defendants, the Outside Director 11 Defendants, any parent subsidiary, affiliate, partner, officer, executive or director 12 of any defendant; any entity in which any such excluded person has a controlling 13 interest; and the legal representatives, heirs, successors and assigns of any such 14 excluded person or entity. 15 57. The members of the Class and sub-class are so numerous that joinder 16 of all members is impracticable. While the exact number of Class and sub-class 17 members is unknown to Plaintiff and Representative Plaintiffs at the present time 18 and can only be ascertained from Tenet's or its agent's books and records, Plaintiff 19 and Representative Plaintiffs believe the Class and sub-class number in the 20 thousands. As of August 12, 2002, Tenet had 488,453,936 shares of common 21 stock outstanding which, at all relevant times, traded on the New York Stock 22 Exchange. 23 58. Further, Tenet had a series of debt securities which also traded on the 24 New York Stock Exchange, including as listed on the cover page of various forms 25 10-K Defendants caused Tenet to file during the Class Period. On the disclosure 26 of the adverse news a majority of these securities plummeted in value as did the 27 common stock price. 28 59. The market for Tenet common stock was efficient. Among the
K:\1880\02\Amended Complaint (2003-03-23).wvpd 22 AMENDED CLASS ACTION COMPLAINT 1 indicia of the efficient market in which Tenet traded were Tenet's ability to file
2 registration statements on Form S-3, that numerous securities analysts followed
3 the stock, that the market instantly absorbed information about Tenet, and that
4 millions of shares of Tenet stock were traded daily. Because Tenet's stock traded
5 in an efficient market, Plaintiff and members of the Class are entitled to avail
6 themselves of the fraud-on-the-market theory including the presumption of
7 reliance.
8 60. Common questions of law and fact exist as to all members of the
9 Class and predominate over any questions solely affecting individual members of
10 the Class. Such questions include:
11 a. Whether Defendants violated one or more provisions of the
12 federal securities laws by virtue of their acts and omissions as alleged herein;
13 b. Whether Defendants participated in and pursued the common
14 course of conduct and fraudulent scheme complained of herein;
15 c. Whether the information Defendants disseminated or caused to
16 be disseminated during the Class Period misrepresented or omitted material facts
17 about Tenet's business and financial performance;
18 d. With respect to Plaintiff's claims under Section 10(b) of the
19 Exchange Act, whether Tenet and the Management Defendants acted knowingly
20 or with deliberate recklessness in misrepresenting material facts;
21 e. With respect to claims brought for violation of the Securities
22 Act, whether Tenet' s registration statements filed with the SEC misrepresented
23 material facts about Tenet and its financial results;
24 f. Whether the prices of Tenet' s securities were artificially
25 inflated during the Class Period as a direct or proximate cause of Defendants' false
26 and misleading statements;
27 g. Whether Plaintiff and other members of the Class have suffered
28 damages, and, if so, the appropriate measure thereof.
K:\1880\02\Amended Complaint ( 2003-05 -23).wpd 23 AMENDED CLASS ACTION COMPLAINT I 61. Common questions of law or fact exist as to all members of the sub-
2 class, including, whether the Insider Trading Defendants possessed material, 3 adverse, non-public information about Tenet at the time these Defendants sold
4 their shares and the measure of damages resulting from the Insider Trading
5 Defendants' violation.
6 62. Plaintiff and Representative Plaintiffs will fairly and adequately
7 represent and protect the interests of the members of the Class and sub-class.
8 Plaintiff and Representative Plaintiffs have retained competent counsel
9 experienced in class and securities litigation and intend to prosecute this action
10 vigorously. Plaintiff and Representative Plaintiffs are members of the Class and
11 do not have any interest antagonistic to, or in conflict with, the interests of the
12 other members of the Class and sub-class.
13 63. Plaintiff' s claims are typical of the claims of the members of the
14 Class. Plaintiff and all members of the Class purchased and/or acquired Tenet
15 securities during the Class Period at artificially inflated prices and have sustained
16 damages arising out of Defendants' wrongful course of conduct alleged herein.
17 64. A class action is superior to other available methods for the fair and
18 efficient adjudication of this controversy. Since the damages suffered by the
19 individual Class and sub-class members may be relatively small, the expense and
20 burden of individual litigation make it virtually impossible for individual Class
21 and sub-class members to seek redress for the Defendants' wrongful conduct
22 alleged herein. Plaintiff and Representative Plaintiffs know of no difficulty that
23 will be encountered in the management of this litigation that would preclude its
24 maintenance as a class action.
25 VII. BACKGROUND
26 A. The Tenet Organization
27 65. Tenet is the second largest investor-owned health care services
28 company in the United States. At May 31, 2002, Tenet' s subsidiaries and affiliates
K:\I880\02Wmended Complaint (2003-05-23 ).wpd 24 AMENDED CLASS ACTION COMPLAINT 1 (collectively "subsidiaries") owned or operated 116 domestic general hospitals
2 with 28,667 licensed beds and related health care facilities serving urban and rural
3 communities in 17 states, owned one general hospital and related health care
4 facilities in Barcelona, Spain, and held investments in other health care
5 companies.' The Company's Securities traded on the New York Stock Exchange
6 during the Class Period. As of September 30, 2002, there were 487,702,672
7 shares of $0.05 par value common stock outstanding.
8 66. All of Tenet's operations are conducted through its subsidiaries. Each
9 of Tenet's general hospitals offers acute care services, operating and recovery
10 rooms, radiology services, respiratory therapy services, pharmacies and clinical
11 laboratories, and most offer intensive care, critical care and/or coronary care units,
12 and physical therapy, orthopedic, oncology and outpatient services. A number of
13 the hospitals also offer tertiary care services such as open-heart surgery, neonatal
14 intensive care and neuroscience. Eight of the Company's hospitals - - Memorial
15 Medical Center, USC University Hospital, St. Louis University Hospital,
16 Hahnemann University Hospital, Sierra Medical Center, Western Medical Center,
17 St. Christopher's Hospital for Children and the Cleveland Clinic Florida Hospital -
18 - offer quaternary care in such areas as heart, lung, liver and kidney transplants.
19 The largest concentrations of the Company's hospital beds are in California
20 (29.7%), Florida (16.3%) and Texas (12.2%).
21 67. In its 1998 Annual Report on Form 10-K, filed with the SEC on
22 August 28, 1998, Tenet noted that "innovative management" was the key to its
23 success, and that Tenet sought to, and did, develop "integrated networks" of health
24 care providers. Tenet noted that it sought to use its networks of local hospitals to
25
26 2"Related health care facilities" include a small number of rehabilitation hospitals, specialty hospitals, long-term-care facilities, a psychiatric facility and medical office buildings 27 located on the same campus as, or nearby, its general hospitals, physician practices and various ancillary health care businesses, including outpatient surgery centers, home health care agencies, 28 occupational and rural health care clinics and health maintenance organizations.
K:\1880\021Amcnded Complaint (2003-05-23).wpd 25 AMENDED CLASS ACTION COMPLAINT 1 assert its market power, increasing its purchasing power and achieving cost
2 efficiencies in services like laundry and security. Thus, Tenet claimed it could
3 "wring[ ] out excess administration" unrelated to direct patient care. Tenet also
4 claimed that through such initiatives it could protect the quality of care while
5 meeting payors' demands that it cut costs.
6 68. In Tenet's Annual Report on Form 10-K for the period ending May
7 31, 2000, filed with the SEC on August 15, 2000 ("2000 10-K"), Defendants
8 characterized Tenet's strategic objective as providing "quality health care services
9 responsive to the needs of each community or region within the current managed
10 care environment." In that document, Defendants stated that health care providers
11 primarily compete at the local level and that because of that, "the Company tailors
12 its local strategies to address the specific competitive characteristics of each
13 region in which it operates. . ."
14 69. According to Defendants, Tenet derives its revenues from caring for
15 patients in a number of ways. It receives payment for patient care from private
16 insurance carriers, health maintenance organizations, preferred provider
17 organizations, federal Medicare programs for elderly patients and patients with
18 disabilities and state Medicaid programs for indigent and cash grant patients,
19 among other programs. For the fiscal years ended 1996 through 2002, Tenet's
20 revenue mix by payor changed materially. In fiscal year 1996 Tenet recorded
21 revenue from Medicare of 39.7%. By 1999, that number decreased to 34.2% of
22 revenue, falling to an average of 31.73 % for fiscal years 2000 through 2002.
23 During the same periods, managed care as a percentage of total revenues increased
24 from 27.6% in 1996 to 40.7 % in 2000, rising to an average of 43.6% for fiscal
25 years 2001 and 2002.
26 70. In the 2002 10-K, Defendants discussed the significance of Medicare
27 to Tenet's revenue stream. While disclosing the significance of government payor
28 programs, however, Tenet acknowledged that legislative initiatives such as the
K:\1880\02\Amended Complaint ( 2003-05-23).wpd 26 AMENDED CLASS ACTION COMPLAINT 1 Balanced Budget Act of 1997 ("BBA") had led directly to "significant reductions
2 in levels of payments to health care providers" from government programs.
3 71. In the 2002 10-K, although recognizing the uncertainty surrounding
4 these government programs, Defendants stated that by 1999, "[t]he savings to the
5 federal government that resulted from the BBA was much greater than
6 anticipated," leading to the passage of the Balanced Budget Refinement Act (the
7 "BBRA") in fall of 1999. In the same document, Defendants noted that Congress
8 passed the BBRA "to provide hospitals some relief from the impact of the BBA."
9 Later, in December 2000, Defendants recounted, Congress enacted the Medicare to and Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (the
11 "BIPA"), further amending the BBA and providing "additional relief to hospitals 12 from some of the key provisions of the BBA." Thus, Defendants knew that in 13 relatively short periods of time, Congress intended to refine the Medicare and 14 Medicaid systems to avoid both overpayment and underpayment to hospitals and
15 other health care providers.
16 72. Prior to the passage of the BBRA in 1999, however, the effects of the 17 BBA-mandated reduction in Medicare reimbursements and the shift to managed
18 care had a material adverse effect on Tenet.
19 B. Tenet' s Financial Results and Performance Sputter
20 73. On July 28, 1998, Defendants caused Tenet to issue a press release 21 disclosing Tenet's earning from operations for the quarter and fiscal year ended 22 May 31, 1998. In that document, Defendants disclosed that diluted EPS from 23 operations for the fourth quarter of fiscal 1998 were $0.47, up 15% from $0.41 in 24 the same quarter of fiscal 1997. The release also noted that for the full year, 25 diluted EPS from operations were $1.73, up 18 % from $1.46 for fiscal 1997, and 26 net operating revenues for the quarter were up 9% to $2.57 billion over $2.35 27 billion in the prior-year's quarter. The release also noted that earnings before 28 income tax, depreciation and amortization, ("EBITDA") rose 14% to $477 million
KAI880\02\Amcnded Complaint (2003-05 -23).wpd 27 AMENDED CLASS ACTION COMPLAINT from $419 million in the fourth quarter of 1997, and EBITDA margins rose .8% 2 from 17.8% to 18.6% from the year-ago quarter. At that time, Tenet's stock traded
3 in low $19 range.
4 74. Despite the "ongoing reductions in reimbursement from Medicare," 5 the July 28, 1998 press release quoted Barbakow as calling Tenet's earnings 6 "solid." Barbakow stated that the key to Tenet's success was "innovative 7 management of a strong portfolio of hospitals" and that Tenet planned "to
8 continue on this same course, strengthening [its] existing markets and opening 9 new markets where strategically beneficial." Barbakow also boasted that Tenet's 10 "profitability from operations was excellent in the fourth quarter, with higher 11 EBITDA margins resulting from synergies in our larger markets and effective 12 efforts to control costs."
13 75. In its Annual Report on Form 10-K for the period ended May 31, 14 1998, filed with the SEC on August 28, 1998, ("1998 Annual Report"), the 15 Company discussed the challenges facing the healthcare industry, themes they 16 would reiterate over and over again throughout the Class Period. Tenet noted that 17 competition for patients and pressure on reimbursement rates by both private and 18 government payors had adversely affected Tenet. In an effort to overcome the 19 increased competition and payor pressures, among other things, Tenet engaged in 20 efforts to reduce its costs - efforts Defendants would describe in glowing terms 21 throughout the Class Period. In spite of the hostile payor environment, however, 22 in the 1998 10-K, Tenet boasted that it "performed well, generating solid growth 23 in admissions and profitability." 24 76. But in early fiscal 1999, Tenet began to feel the pinch from reduced 25 government reimbursements. According to an August 6, 1998 Bear Stearns report, 26 Tenet management predicted that BBA mandated reductions would negatively 27 impact Tenet's fiscal 1999 revenue growth by about $100 million. Defendants 28 attempted to put a positive spin on the Medicare cuts. For example, in a July 28,
K:\1880102 \Amcnded Complaint ( 2003 -05-23 ).«pd 28 AMENDED CLASS ACTION COMPLAINT 1998 Tenet press release, while announcing fourth quarter and fiscal year results
2 for the period ended May 31, 1998, Barbakow touted Tenet's "solid earnings
3 growth, despite ongoing reductions in reimbursement from Medicare." Tenet's
4 stock price, however, languished in the low $20 range.
5 77. On October 7, 1998, Defendants caused Tenet to issue a press release
6 disclosing its earnings from operations for the quarter ended August 31, 1998.
7 The same document disclosed that diluted EPS was up 16% to $0.44 from $0.38 in
8 the first quarter of fiscal 1998, net operating revenues were up 9% and EBITDA
9 was up over 13%. About these results, Barbakow lauded his management team for
10 capturing market share and holding "the line on overhead costs in order to mitigate
11 the effect of significant Medicare cuts." Barbakow stated that it was clear that
12 Tenet's "strategies are working. This is the first quarter of the fiscal year in which
13 we will take the hardest hit from the Medicare cuts, and we still continued to post
14 solid gains in admissions, revenues, margins and earnings." Tenet's stock price
15 traded in the low $18 range.
16 78. On January 7, 1999, Tenet issued a press release disclosing its
17 earnings from operations for the quarter ended November 30, 1998. Defendants
18 disclosed that diluted EPS was down to $0.40 from $0.41 in the second quarter of
19 fiscal 1998. Net operating revenues increased 5.5%, and EBITDA increased only 20 1.6%, with EBITDA margins falling by 0.7%. The release quoted Tenet as 21 characterizing the year-ago quarter as a "particularly strong period." 22 79. In the January 7, 1999 release, Barbakow described Tenet's
23 "particularly challenging operating environment," noting that expected cuts in
24 Medicare reimbursements mandated by the BBA reduced Tenet's revenues and 25 earnings materially. While Tenet's cost control efforts were successful, the were 26 offset by a "significantly higher bad debt expense that ultimately depressed 27 EBITDA and earnings." In the same document, Defendants attributed Tenet's 28 increased bad debt to factors including "the continuing shift of business from
K_ I880\02\Amended Complaint (2003-05-23)-wpd 29 AMENDED CLASS ACTION COMPLAINT 1 traditional Medicare - which has no associated bad debt - to Medicare managed
2 care programs[, and] a rise in care provided to uninsured patients." As quoted in
3 the release, Barbakow noted that while Tenet was "taking a number of steps to
4 better control bad debt," the expense was likely to continue to exceed the same
5 expense in prior periods "to the extent that we continue to experience a
6 fundamental shift in our payor mix." In that release, Defendants also forecast that
7 EPS from operations for the full 1999 fiscal year would range from between flat to
8 up 5% from fiscal 1998. On this news, Tenet's stock fell from a close of $18.00
9 on January 6 to close at $15.67 on volume of 14.4 million shares.
10 80. A January 8, 1999 Philadelphia Inquirer article quoted Barbakow as
11 acknowledging during a January 7, 1999 conference call with analysts that Tenet
12 failed to "perform according to our expectations." According to the article,
13 analysts had expected Tenet's EPS from operations to remain flat at $0.41 and the
14 "miss" caused Tenet's stock price to lose 13% of its value. According to the
15 article, during the conference call, Defendants noted that bad debt expense,
16 stemming directly from an increasing number of managed care and uninsured
17 patients negatively affected EPS from operations by $0.09 for the quarter.
18 81. According to Sheryl R. Skolnick, a health-care analyst for
19 BancBoston Robertson Stephens, quoted in the Philadelphia Inquirer article, "[a]t
20 a time when they [Tenet] are having to spend cash to support the Philadelphia
21 operations, we analysts keep a close eye on cash and bad debt." According to the
22 article, during the January 7, 1999 conference call, Defendants blamed Tenet's
23 lackluster performance on reduced Medicare reimbursements resulting from the
24 BBA, "exacerbated by a shift in the company's payor mix toward Medicare
25 managed care; the company's hospitals had more patients who were covered by
26 health maintenance organizations that administer benefits for participants in the
27 government health insurance plan for the elderly." According to the article, during
28 the conference call Barbakow stated that, Tenet still intended to pursue
K:U880\02Wmendcd Complaint ( 2003 -05-23) .v. 30 AMENDED CLASS ACTION COMPLAINT 1 acquisitions,"but at a slower pace." Thus, Tenet's lackluster performance had
2 hampered its ability to acquire at a time when government and private payors alike
3 were putting enormous downward pressure on its ability to grow earnings.
4 82. On April 8, 1999, Defendants caused Tenet to issue a press release
5 disclosing Tenet's earnings from operations for the quarter ended February 28,
6 1999. Defendants disclosed that diluted EPS was down to $0.40 from $0.47 in the
7 third quarter of fiscal 1998 - nearly a 15 % decline. The release also disclosed
8 that net operating revenues increased 10.1%, but EBITDA fell 4.2%, with
9 EBITDA margins also falling by 2.4%, and same facility admissions declined
10 0.6%, "the low end of a 15 quarter range in which same facility admissions have
11 varied between a decline of 0.6 percent and 4.0 percent growth."
12 83. In the April 8, 1999 press release , Barbakow blamed these anemic
13 results on "on-going margin pressure from Medicare cuts, high bad debt expense
14 and short-term dilution from our Philadelphia acquisition, all of which was
15 compounded by unusually light admissions in the third quarter." Barbakow then
16 optimistically stated that those factors were, however, "improving." According to
17 Barbakow, Tenet was taking steps "to enhance the company's strategic position."
18 He continued by noting that "[m]ajor initiatives are already underway to improve
19 our operations, including streamlining our corporate structure, cutting costs and
20 creating other operating efficiencies . A key part of this effort is the possible sale of
21 certain hospitals that do not fit our strategic profile ." Not withstanding
22 Barbakow ' s admission , Tenet' s stock price was as anemic as its results, hovering
23 in the low $14 range.
24 84. An April 9, 1999 Los Angeles Times article recounted that before
25 Tenet's earnings conference call on April 8, 1999, the Company's common stock
26 price fell to its lowest level since 1995. As quoted in the article, analyst Jeffrey
27 Villwock of Robinson-Humphrey Co. noted that during the quarter, Tenet "had a
28 lot of things working against them simultaneously," including " Medicare
K:\1880\02\Amended Complaint ( 2003.05 - 23).wpd 31 AMENDED CLASS ACTION COMPLAINT 1 reductions and slower payments from HMOs as well as the Philadelphia
2 turnaround. Given they had two weak months of admissions , that's a lot to
3 overcome."
4 85. In a press release issued on July 28, 1999, Tenet disclosed its
5 earnings from operations for the quarter and fiscal year ended May 31, 1999. As
6 set forth therein, diluted EPS from operations was down, once again, to $0.42 from
7 $0.47. Net operating revenues increased 14.4%, while EBITDA lagged,
8 increasing only 1.5 %, with EBITDA margins shrinking by 2%. Bad debt
9 expense rose to 7.1 % and 6.8% of revenues for the fourth quarter and fiscal year
10 respectively, up from 5.5% and 5.9% during fiscal 1998. In the same release,
11 Tenet attributed its material increase in bad debts primarily to the "maturation of
12 receivables in the company's Philadelphia hospitals."
13 86. In the July 28, 1999 release, Barbakow called fiscal 1999 "a tough
14 year, marked by deeper-than-expected cuts from our largest payor, Medicare," cuts 15 which adversely affected EPS by approximately $0.20. Boasting strong core
16 operations, Barbakow stated that Tenet had "the right strategy in place -- building 17 integrated networks of hospitals to leverage our strengths and reduce costs. As a
18 result, our hospitals gained market share and showed exemplary expense control
19 throughout the year, with the one exception of bad debt expense." Barbakow 20 continued that "[t]he rise in bad debt is consistent with an industrywide trend, 21 brought on by changes in payor mix and 'slow pay' initiatives by certain payors." 22 87. Assuming that further Medicare reimbursement cuts would cost Tenet 23 approximately $100 million in fiscal 2000 pre-tax earnings, the same release 24 quoted Barbakow as stating that Tenet had "strategies in place to not only make up 25 for this reduction, but to grow above it." Forecasting a slow start to fiscal 2000, 26 falling off the first quarter of fiscal 1999 by 10-15 %, Barbakow noted that "After 27 this slow start, we expect the year to improve as many of our initiatives for growth 28 will have a greater effect on earnings in the second half of the year. This is a time
KAI880'02'Amendcd Complaint (2003 -05-23 ). wkpd 32 AMENDED CLASS ACTION COMPLAINT 1 of transition for the entire industry." He then concluded, claiming that " Tenet has
2 the right strategy, the right assets and the expertise to thrive as we emerge from the
3 transition." Notwithstanding Barbakow's reassuring words, Tenet's stock price
4 fell even further, trading at just over $11 per share.
5 88. Tenet's stock price did not materially improve as fiscal 1999 wore
6 into fiscal 2000. By January, 1999, Tenet announced a disappointing second 7 quarter as, according to a January 13, 1999 Bear Stearns report, it "felt the brunt of
8 the adverse effect of Medicare cuts" from the BBA and experienced a significant 9 and unexpected increase in bad debts. According to the Bear Stearns report,
10 management believed that "many of the swing factors that affected Tenet's results
11 in the second quarter are likely to adversely impact the company's results in the
12 third and fourth quarters of fiscal 1999 as well."
13 89. By the end of fiscal 1999, Tenet's debt was high and its balance sheet 14 ratios mediocre. In the beginning of fiscal 2000, Tenet's stock price continued to 15 languish as a result of the Company's uninspiring results. Defendants were faced 16 with declining revenues from government payors as private payors continued to
17 squeeze concessions from Tenet in the contracting process.
18 90. In an October 6, 1999 press release, Tenet disclosed still more 19 disappointing results for the quarter ended August 31, 1999. Diluted EPS was 20 down, once again, to $0.39 from $0.44 in the first quarter of 1999 and, while net
21 operating revenues continued to increase at a healthy 12.5%, EBITDA fell yet 22 again by 1.7%, with EBITDA margins lagging behind the prior year's quarter by 23 2.3%. 24 91. According to Barbakow as quoted in the October 6, 1999 release, in 25 fiscal 2000, Tenet faced "significant reductions in Medicare and other 26 government-funded healthcare programs," but "the actual reductions are tracking 27 with our earlier estimates," and management was "working hard to mitigate the 28 effect of these cuts and [is] pleased with the progress of our strategies to date,"
K:\1880\02\Atncndcd Complaint ( 2003-05 -23).wpd 33 AMENDED CLASS ACTION COMPLAINT 1 including efforts to control costs. Indeed, according to Barbakow, Tenet
2 demonstrated "excellent cost controls on a same-facility basis." As quoted in the
3 release, Barbakow noted that, Tenet however, faced still higher bad debt expenses
4 "driven by fundamental changes in our business." According to the release,
5 Barbakow also noted that, management had "initiated numerous strategies to
6 attack this problem from various fronts, including changes to systems, policies,
7 organization, training and contracting, and we are using litigation where
8 necessary. Success will not come overnight, nor will improvement be steady, but
9 we do hope to abate the rate of growth in this line item." After the release was
10 issued, Tenet's stock price continued to trade in the range of $13 per share.
11 C.
12
13 92. Between the middle of fiscal 2000 and the end of fiscal 2002,
14 however, Tenet experienced a profound turnaround. Barbakow hired Dennis in
15 early 2000 to assist in jump starting Tenet and its stock price. In his letter to
16 shareholders, included in Tenet's 2002 Annual Report, as an Exhibit to the 2002
17 10-K, Barbakow described Tenet's meteoric rise noting that Tenet had undergone
18 a "financial transformation" since 1999, "paying down $2.4 billion in debt and
19 dramatically strengthen[ing its] balance sheet." In turn, major rating agencies
20 raised Tenet's debt to investment grade and the Company availed itself of new
21 ratings and low interest rates to refinance most of its public debt, locking in lower
22 interest rates and pushing out maturity dates. As a direct result, Tenet reduced its
23 2002 interest expense to $327 million from $456 million in 2001 - a $129 million
24 reduction amounting to 6.4% of operating income. The Company also materially
25 improved its "balance sheet ratios" as its debt-to-EBITDA ratio dropped from 3.5
26 in 1999 to 1.4 in 2002, and Tenet's EBITDA-to-net-interest expense rose from 3.8
27 to 8.6 during the same period. Barbakow also stated that "admissions have begun
28 to increase as the baby boomer generation enters the stage of life where hospital
K:\1880\02\Amended Complaint (2003 -05-23).wpd 34 AMENDED CLASS ACTION COMPLAINT 1 utilization increases." 2 93. According to the 2002 10-K, sometime during fiscal 1999, Tenet had 3 adopted a "`back to basics' approach to improving its operations and financial 4 performance." As part of that approach, Defendants had caused Tenet to embark 5 on certain initiatives that they claimed "helped Tenet to significantly improve its 6 operations and financial performance." Defendants claimed, among other things, 7 to shift Tenet's focus to improving patient, physician and employee satisfaction, 8 acquiring and enhancing health care delivery systems, improving its balance sheet 9 and cash flow, focusing on "core services such as cardiology, orthopedics and 10 neurology designed to meet the health care needs of the aging baby boomer 11 generation," better attending to recruiting and retaining nurses, identifying and 12 implementing "best practices and exporting those best practices to all of its 13 hospitals" and focusing on operating efficiencies without compromising patient 14 care. 15 94. Also in Tenet's 2002 10-K, Defendants boasted that Tenet's hospitals 16 were "well-positioned to compete effectively in the rapidly evolving health care 17 environment." Defendants further claimed that among the ways of maintaining its 18 competitive position, "Tenet continually analyzes whether each of its hospitals fits 19 within its strategic plans and has and will continue to analyze ways in which such 20 assets may best be used to maximize shareholder value." 21 95. As Barbakow stated in his Letter to Shareholders in Tenet's 2002 22 Annual Report, Tenet had succeeded in "creating a true service culture in its 23 hospitals, making [them] the preferred places for the best caregivers to work...." 24 He continued that Tenet had created "demonstrable ways to improve the quality of 25 care, developing and enhancing core clinical programs, and carefully managing 26 the complexities of our business to ensure that we are paid appropriately for the 27 care we provide and that we have the financial resources available to reinvest and 28 continually improve our operations." (Emphasis added).
K:11880102Wmended Complaint (2003-05-23).wpd 35 AMENDED CLASS ACTION COMPLAINT 96. In the same Letter to Shareholders, Barbakow expressed satisfaction 2 with Tenet's "Partnership for Change" initiative. For 2 'V2 years prior to the end of 3 2002, 38 Tenet hospitals had afforded their physicians "real-time evidence about 4 their practice patterns, as well as comparisons with accepted clinical standards, 5 using clinical data that our proprietary data collection system gathers from the 6 participating hospitals and from other clinical studies." Barbakow continued that 7 "[w]ith this data, we can develop and track best practice protocols and tailor 8 hospital processes to meet these protocols." 9 97. In the same document, Barbakow also discussed Tenet's initiative to 10 improve hospitals "by developing and enhancing core clinical programs like 11 cardiology. . . ." Barbakow then related that "...high-acuity services generate 12 higher revenues. . . ," and that during 2002 Tenet's shift in its mix of cases to 13 higher acuity services "contributed to robust revenue trends throughout the year. 14 This effect, combined with continued strong reimbursement trends, pushed same 15 facility patient revenue per admission up 12.9 percent in the year. This, in tum, 16 helped generate very strong top-line trends. This is no accident, but a very 17 deliberate part of our strategy." (Emphasis added). 18 98. According to Barbakow' s statements in the same Letter to 19 Shareholders, Tenet sought to capitalize on the healthcare needs of the aging baby 20 boom population. To address "capacity constraints" disabling hospitals from 21 meeting the needs of baby boomers, Tenet "invested in several capacity and 22 service expansions at hospitals that were struggling to meet the demand for their 23 services." As an example of expansion, Barbakow touted the completion of a $55 24 million project at Tenet's now notorious Redding, California facility, "adding 25 additional beds to a four-story patient tower that opened in fiscal 2000." In these 26 ways, Tenet disclosed that management was focused on best practices, cardiology, 27 and RMC. 28 99. Whatever efforts Defendants engaged in to optimize Tenet's reported
K_U 880`\02\Amended Complaint ( 2003-05 -231.wpd 36 AMENDED CLASS ACTION COMPLAINT results, however, it was clear that Medicare reimbursements were critical to its
2 success. As set forth herein, from the passage of the BBA until the
3 commencement of the Class Period, the health care environment was unfriendly to
4 providers, forcing them to reduce costs and to accept lower reimbursements from
5 both government and private payors. Instead of experiencing the purported
6 general success of various strategies and initiatives, however, Defendants
7 concocted yet another scheme to materially and improperly enhance Tenet's
8 Medicare reimbursements and, in turn, its financial results. In doing so,
9 Defendants focused on the one area of Medicare reimbursement over which Tenet
10 had complete control - gross charges.
11 D. The Medicare Inpatient Prospective Payment System
12 100. Medicare, established as Title XVIII of the Social Security Act, is the
13 federal entitlement program that provides health care insurance to the nation's
14 aged and disabled. According to the Centers for Medicare and Medicaid Services
15 ("CMS"), the agency within the Department of Health and Human Services
16 responsible for administering Medicare, there are nearly 40 million Medicare
17 beneficiaries. See
18 Medicare beneficiaries can choose one of two forms of Medicare-the original,
19 fee-for-service Medicare, and a managed care option known as Medicare+Choice.
20 The original or traditional Medicare consists of two parts-parts A and B. The
21 Hospital Insurance program, known as part A, provides certain benefits covering
22 inpatient hospital, nursing facility, home health and hospice services. The
23 Supplemental Medical Insurance program, known as part B, provides benefits for
24 outpatient hospital visits, physician services, whether provided to an inpatient or
25 not, the services of the designated health care professionals, diagnostic tests,
26 durable medical equipment, and certain pharmaceuticals. Parts A and B, when
27 taken together, resemble a "fee-for-service" or indemnity insurance program. In 28 contrast, the Medicare+Choice program, known as part C, enables Medicare
K.\I880\02Wmcndcd Complaint (2003 -05-23 ).wpd 37 AMENDED CLASS ACTION COMPLAINT 1 beneficiaries to participate voluntarily in one of a variety of managed care health
2 programs operating under contract with the federal government.
3 101. Generally, an individual is eligible for Medicare benefits under parts
4 A and B if the individual or the individual's spouse worked for ten years in
5 Medicare-covered employment and the individual (1) is 65 years of age or older,
6 (2) suffers from certain disabilities, irrespective of age, (3) suffers from End Stage
7 Renal Disease, irrespective of age, or (4) is diagnosed with Amyotrophic Lateral
8 Sclerosis ("ALS"), irrespective of age. The aged and disabled are also eligible to
9 enroll in Medicare+Choice program in lieu of enrolling traditional fee-for-service
10 Medicare.
11 1. Traditional Medicare
12 102. Traditional Medicare covers only those items and services, including
13 hospitalizations, that are "reasonable and necessary for the diagnosis or treatment 14 of illness or injury or to improve the function of a malformed body member." 15 Social Security Act § 1862(a)(1)(A), 42 U.S.C. § 1395y(a)(1)(A). When a 16 physician submits a claim to Medicare, that physician must "certif[y]" that the 17 "services shown on this form were medically indicated and necessary for the 18 health of the patient and were personally furnished by me or were furnished 19 incident to my professional service by my employee under my immediate personal 20 supervision, except as otherwise expressly permitted by Medicare or CHAMPUS 21 regulations." Reverse of Form CMS-1500 (12/90) 22
K:\I880\02\Amended Complaint ( 2003.05 -23).wpd 38 AMENDED CLASS ACTION COMPLAINT most outpatient prescription drugs, and provides only limited nursing home 2 coverage. Different deductibles and copayments apply to those who opt to
3 participate in Medicare+Choice. 4 104. Hospitals that wish to participate in the Medicare Program must 5 execute a provider agreement with the Secretary of HHS in which they agree to
6 adhere to all Medicare rules and regulations. 7 105. Prior to 1983, Medicare reimbursed hospitals for the reasonable costs 8 that they incurred. Cost reimbursement was also the method used by most private 9 insurers. The cost reimbursement system not only proved difficult to 10 administer-there were frequent disputes between hospitals and the Health Care 11 Financing Administration (the predecessor to CMS) - but more significantly, 12 inefficient hospitals were rewarded at the expense of efficient hospitals. Under 13 cost reimbursement, for example, as a hospital's average length of stay for its 14 Medicare patients increased, so did its Medicare reimbursement; as it costs 15 increased, so did its Medicare reimbursement. In the late 1970s and early 1980s, 16 Medicare costs began to spiral upward owing in part to an increase in the 17 Medicare population, inflation, and the lack of any incentive on the private sector 18 to hold costs down.
19 106. In 1983, Congress repealed cost reimbursement for virtually all acute 20 care hospitals and replaced it with an inpatient prospective payment system 21 ("PPS"). Rather than reimbursing hospitals for their spiraling costs, the new 22 system paid hospitals fixed, predetermined prices for defined services. Efficient 23 hospitals could prosper, while inefficient hospitals would be forced to improve. 24 107. Under PPS, each patient's condition is classified into one of over 520 25 diagnosis-related groups ("DRG") to which CMS has assigned a numeric weight 26 reflecting the resources needed, on average, to treat that patient. Each DRG 27 weight represents the average resources required to care for cases in that particular 28 DRG relative to the average resources used to treat cases in all DRGs. Greatly
K_\I880102\Amended Complaint (2003-05-23 ).wwpd 39 AMENDED CLASS ACTION COMPLAINT 1 simplified, a hospital's payment for treating a specific condition is determined by
2 multiplying the numeric weight for that DRG by a standardized amount, adjusted
3 to take into account regional wage rates and other geographic specific factors.
4 The PPS payment actually consists of two pieces - - an operating payment and a
5 capital payment. The calculations in the example in the next paragraph, focus on
6 the operating payment, because that payment tends to be much larger than capital
7 payment.
8 108. For example, suppose that a patient undergoes an adrenal gland
9 procedure at a San Francisco hospital. The DRG for this surgical procedural is
10 DRG 286 and it had an assigned weight in 2002 of 2.0937. The standardized
11 amount for a hospital in a large urban area was $4,251.20 consisting of a labor
12 component ($3,022.60) and a non-labor component ($1,228.60). To compute the
13 payment to the hospital for treating this patient, one multiplies the labor
14 component by the by the wage index for the San Francisco area (i.e., $3,022.60 x
15 1.4142), adds that to the non-labor component to yield the hospital's base amount,
16 and multiples that sum by the DRG weight (i.e., payment = 2.0937 x ($3,022.60 x
17 1.4142) + $1,228.60) = $11,521.97). To this amount, CMS supplements the
18 normal operating PPS payment with add-ons for teaching hospitals and hospitals
19 that treat a disproportionately large share of low-income patients. Further,
20 hospitals can recover capital expenditures through a separate DRG calculation.
21 109. Hospitals do not classify their cases directly into DRGs, but instead,
22 using the International Classification of Diseases, Ninth Revision, Clinical
23 Modification (ICD-9-CM), report a series of diagnostic codes reflecting the
24 patient's principal and secondary diagnoses and procedures performed on the
25 patient during the hospital stay. A hospital can list, in addition to the principal and
26 secondary diagnoses, up to seven additional diagnoses, and up to six procedures
27 performed during the stay. In a small number of DRGs, classification is also based
28 on the age, sex, and discharge status of the patient. The diagnoses and procedure
K:\1880\02'Amended Complaint ( 2003-05-23).apd 40 AMENDED CLASS ACTION COMPLAINT 1 information are reported by the hospital on a CMS-Form 1450 (UB-92) to a fiscal 2 intermediary ("Fl"), usually an insurance company under contract with CMS. The 3 FI uses proprietary computer software called "GROUPER" to process the various 4 ICD-9-CM codes and other information and to generate a single DRG for that 5 patient. The codes used by hospital personnel to describe a patient's condition and 6 treatment are critical to determining the proper DRG. If inappropriate codes are 7 used by the hospital, then an inappropriate DRG will be generated. 8 110. Indeed, many hospitals purchase GROUPER-like software in an 9 attempt to emulate the government's calculations. This permits financially 10 sophisticated hospitals to predict payments; it also permits unscrupulous hospitals 11 to engage in unsavory practices, such as "upcoding." Upcoding is the use of an 12 inappropriate DRG to obtain a greater payment than that to which the hospital 13 would be entitled using the appropriate DRG 14 111. Hospitals are also required to comply with the terms of the "Hospital 15 Manual," a CMS publication. The Hospital Manual instructs hospitals how to 16 implement Medicare regulations as they relate to hospital benefits, supplementing 17 the basic statutory provisions for coverage for Medicare services and 18 reimbursement for those services. The Hospital Manual requires that all Form 19 1450s contain the appropriate ICD-9 codes before a hospital receives 20 reimbursement for patient discharges. Form 1450s can only include ICD-9 codes, 21 using definitions included within the Uniform Hospital Discharge Data Set 22 ("UHDDS").' 23 112. The Hospital Manual also describes the "GROUPER" computer 24 programs which are used by the FIs to verify DRGs that the hospital had assigned 25 using the appropriate ICD-9 codes. This software is able to detect mistakes, 26 rejecting incomplete codes or "impossible" codes. GROUPER software is unable, 27
28 3Coders are required to follow UHDDS definitions when assigning ICD-9 codes.
K:\1880\02Wmended Complaint (2003 -05-23 ).wpd 41 AMENDED CLASS ACTION COMPLAINT however, to detect when a valid code is incorrect because it fails to represent the
2 actual diagnosis of the patient. For this reason, providers know, and the Hospital
3 Manual expressly states that "[t]he responsibility for accuracy rests with" the
4 provider.
5 113. Providers are also aided by "Coding Clinic," a publication of the
6 American Hospital Association ("AHA"), of which Tenet is a member. Coding
7 Clinic provides additional, specific guidelines and guidance to hospital personnel,
8 called "coders," for diagnostic coding.4 Both Coding Clinic, on a repeated basis, 9 and OGCR (see note 4) emphasize that coders must base coding decisions only 10 upon physicians' documentation of the diagnosis and treatment in the medical
11 records. Coders must also avoid basing ICD-9 code assignments on diagnostic
12 tests or solely on the basis of medications administered, because such practices 13 lead to coding errors. Nor should coders code conditions that did not exist at the 14 time of hospitalization, or assign separate codes for conditions that were integral 15 to the disease process that constituted the principal diagnosis. Moreover, coders 16 are not free to assign codes they believe to be appropriate where physicians have 17 not documented such a diagnosis and/or treatment. Rather, for any coding 18 decision, the physician is required to diagnose and document that diagnosis and 19 treatment in a patient's medical record. The coder is to submit only those codes 20 that correlate with the physician's diagnosis and treatment, as supported by the 21 medical record, adhering strictly to the coding guidelines when assigning principal 22 and secondary diagnoses. 23 114. By employing GROUPER-like software and through their ability to
24 'Coding Clinic's Editorial Advisory Board is comprised of representatives of the 25 "cooperating organizations," including CMS, AHA, American Health Information Management 26 Association, and the National Center for Health Statistics. CMS officially endorsed Coding Clinic and no other publication offering coding advice. Coding Clinic is published quarterly. In 27 1990, Coding Clinic also published the "Official Guidelines for Coding and Reporting" ("OGCR"). 28
K:\I880',02\Anxnded Complaint ( 2003-05-23).wpd 42 AMENDED CLASS ACTION COMPLAINT 1 select ICD-9 codes, hospitals are able to determine the DRG that the FI will assign
2 and verify on each claim. Thus, hospitals are able to predict estimated
3 reimbursement for each claim by multiplying the relative weight of the DRG times
4 that hospital' s base rate (i.e., adjusted standardized amount).
5 115. Each Tenet hospital staffs and maintains a Health Information
6 Management ("HIM") Department. Certain Tenet hospitals referred to HIM
7 departments as Medical Records departments. For purposes of this Complaint,
8 HIM means both HIM and Medical Records departments. While the majority of
9 Tenet hospitals had similar HIM structures, some may have differed slightly. In
10 general, however, one or more members of Tenet's HIM departments were coders,
11 whose duties included coding inpatient medical records. A "director" of each
12 hospital's HIM department reported to that hospital's CFO. Tenet's HIM
13 departments also contained "coding supervisors," "DRG validators," and "DRG
14 coordinators" who, among other things, reviewed the work of coders to ensure the
15 appropriate DRG was assigned to each medical record.
16 116. According to Tenet's Annual Report for fiscal year 1998 on Form 10-
17 K, ("1998 10-K"), filed with the SEC on August 28, 1998, Tenet hospitals
18 received fixed amounts based on each Medicare patient's assigned DRG. In that
19 document, Defendants stated:
20 DRG payments are adjusted for area wage differentials
21 but otherwise do not consider a specific hospital's
22 operating costs. As discussed below, DRG payments
23 exclude the reimbursement of (a) capital costs, including
24 depreciation, interest relating to capital expenditures,
25 property taxes and lease expenses, and (b) outpatient
26 services. Payments for those items are made in advance
27 based on
28 estimates and later are increased or decreased, as the case
K:\I 880\02\Amcnded Complaint (2003 -05-23 ).wpd 43 AMENDED CLASS ACTION COMPLAINT 1 may be, based on the final audit of the cost report by
2 program auditors. Payments from state Medicaid
3 programs are based on reasonable costs with certain
4 limits or are at fixed rates. Substantially all Medicare
5 and Medicaid payments are below the retail rates
6 charged by Tenet 's facilities. Payments from other
7 sources usually are based on the hospital's
8 established charges, a percentage discount from such
9 charges or all-inclusive per-diem rates.
10 Historically, DRG rates were increased each year to take
11 into account the increased cost of goods and services
12 purchased by hospitals and non-hospitals (the "Market
13 Basket"). With the exception of federal fiscal year 1997
14 (which ended on September 30, 1997), in which the
15 increase in DRG rates was equal to the 2.5% Market
16 Basket, the percentage increases to the DRG rates for the
17 past several years have been lower than the Market
18 Basket and, as a result, payments received by general
19 hospitals under the DRG-PPS [have] not kept up with the 20 cost of goods and services. Moreover, the [BBA] froze
21 DRG rates at their 1997 levels through federal fiscal year
22 1998 (which ends September 30, 1998).... Payments to
23 be received by general hospitals under the DRG-PPS
24 continue to be below the increases in the cost of goods 25 and services purchased by hospitals. (Emphasis added).
26 2. Medicare Outlier Payments
27 117. Although PPS assumes that fixed payments based on cases of average 28 complexity will adequately compensate efficiently run hospitals, Congress
K:\I 880\02\Amended Complaint (2003-05-23).wpd 44 AMENDED CLASS ACTION COMPLAINT 1 recognized that an extremely costly case could undermine any averaging.
2 Accordingly, for discharges after October 1, 1994, the Social Security Act requires
3 extra payments for especially costly stays, referred to as "outliers." The outlier
4 provision permits hospitals to "request additional payments in any case where
5 charges, adjusted to cost," exceed an amount specified by the Secretary. Social
6 Security Act § 1886(d)(5)(A)(ii), 42 U.S.C. § 1395ww(d)(5)(A)(ii). According to
7 CMS, "[t]his additional payment is designed to protect the hospital from large
8 financial losses due to unusually expensive cases ." 68 Fed. Reg. Vol. 68, No.
9 43, 10421 (March 5, 2003) (Emphasis added). Congress had mandated that CMS
10 limit outlier payments to between 5% and 6% of total DRG payments. CMS has
11 set the target at 5.1 %. CMS charges annually the threshold used to determine the
12 cases for which a hospital will receive outlier payments in order to bring expected
13 outlier payments within this target. The intended effect of an increase in the cost
14 threshold is to reduce total outlier payments by reducing (1) the number of cases
15 that qualify for such payments and (2) the amount of outlier payments for cases
16 that continue to qualify. By gaming the system, as Tenet did by drastically
17 increasing charges, hospitals which abuse the system may still receive greater
18 outlier payments even as the threshold increases.
19 118. Under PPS, hospitals are entitled to outlier payments when their costs 20 of caring for a patient exceed the normal PPS payment plus a threshold established 21 annually. The higher the threshold the fewer the number of outliers and the lower
22 the outlier payments. According to CMS:
23 The actual determination of whether a case qualifies for
24 outlier payments takes into account both operating and 25 capital costs and DRG payments. That is, the combined 26 operating and capital costs of a case must exceed the 27 fixed-loss outlier threshold to qualify for an outlier 28 payment. The operating and capital costs are computed
K_\1880\02\Amended Complaint (2003 -05-23).wpd 45 AMENDED CLASS ACTION COMPLAINT 1 separately by multiplying the total covered charges by
2 the operating and capital cost-to-charge ratios. The
3 estimated operating and capital costs are compared with
4 the fixed-loss threshold after dividing that threshold into
5 an operating portion and a capital portion.... The
6 thresholds are also adjusted by the area wage index (and
7 capital geographic adjustment factor) before being
8 compared to the operating and capital costs of the case.
9 Finally, the outlier payment is equal to 80 percent of the
10 combined operating and capital costs in excess of the
11 fixed-loss threshold. Fed. Reg. Vol. 68, No. 43, March
12 5, 2003 at 10422.
13 119. Calculating an outlier payment is complex. In general, the provider is
14 entitled to 80 percent of the difference between its costs, calculated by adjusting
15 its charges by its cost-to-charge ratio ("CCR"), less the sum of its PPS payments
16 and the Threshold amount, as follows:
17 Outlier = (. 80) x ((charges x CCR) - PPS payment - Threshold)
18 In the equation, the charges are the hospital's actual charges for services provided
19 to the patient, the CCR is derived from the provider's latest "settled cost report,"
20 the PPS payment is the standard DRG payment plus all add-ons (e.g., indirect
21 medical education, disproportionate share), and the Threshold is the amount
22 established annually by CMS.
23 120. As every provider including Tenet knows, however, outliers are cost-
24 based, supplementing standard payments "for extraordinarily high-cost cases." 42
25 C.F.R. § 412.84. (Emphasis added) As CMS has indicated, in September of 1988,
26 at the time of the final rule, "[w]e indicated ... that the use of hospital-specific
27 cost-to-charge ratios is essential to ensure that outlier payments are made only for
28 cases that have extraordinarily high costs, and not merely high charges." 68
K:\1880\02\Anxnded Complaint ( 2003.05-23).wpd 46 AMENDED CLASS ACTION COMPLAINT I Fed. Reg. Vol. 68, No. 43, 10423 (March 5, 2003 ) (Emphasis added).
2 121. Inasmuch as every Medicare-participating hospital, such as those in
3 the Tenet system, has agreed to adhere to the provisions of Title 42, Code of
4 Federal Regulations, Defendants knew or were deliberately reckless in not
5 knowing that the outlier system was cost-based. The method of calculating
6 outliers may be imperfect, however, and is ripe for rampant abuse. As CMS noted
7 in outlining and explaining a proposed new rule:
8 Congress intended that outlier payments would be made
9 only in situations where the cost of care is
10 extraordinarily high in relation to the average cost of
11 treating comparable conditions or illnesses . Under our
12 existing outlier methodology, if a hospitals' charges
13 are not sufficiently comparable in magnitude to their
14 costs, the legislative purpose underlying the outlier
15 regulations is thwarted.
16 Recent analysis indicates that some hospitals have taken
17 advantage of two vulnerabilities in our methodology to
18 maximize their outlier payments. One vulnerability is
19 the time lag between the current charges on a submitted
20 bill and the cost-to-charge ratio taken from the most
21 recent settled cost report. The second vulnerability, in
22 some cases, is that hospitals may increase their charges
23 so far above costs that their cost-to-charge ratios fall
24 below 3 standard deviations from the geometric mean of
25 cost-to-charge ratios and a higher statewide average cost-
26 to-charge ratio is applied. In this proposed rule, we are 27 proposing to implement new regulations to ensure outlier
28 payments are paid only for truly high-cost cases.
K:\I 880\02\Amended Complaint (2003-05-23).wpd 47 AMENDED CLASS ACTION COMPLAINT 1
2 Currently, we use the most recent settled cost report
3 when determining cost-to-charge ratios for hospitals.
4 The covered charges on bills submitted for payment
5 during FY 2003 are corrected to costs by applying a cost-
6 to-charge ratio from cost reports that began in FY 2000
7 or, in some cases, FY 1999. These covered charges
8 reflect all of a hospital's charge increases to date, in
9 particular those that have occurred since FY 2000 and
10 are not reflected in the FY 2000 cost-to-charge ratios. If
11 the rate-of-charge increases since FY 2000 exceed[ ] the
12 rate of the hospital's cost increases during that time, the
13 hospital's cost-to-charge ratio based on its FY 2000 cost
14 report will be too high, and applying it to current charges
15 will overestimate the hospital's cost per case during
16 fiscal 2003. Overestimating costs may result in some
17 cases qualifying for outlier payments that, in actuality,
18 are not high cost cases. Fed. Reg. Vol. 68, No. 43,
19 March 5, 2003 at 10423. (Emphasis added).
20 122. As noted, the CCR is derived from the latest settled cost report. If,
21 therefore, the provider increases its charges substantially, the cost structure from
22 which the provider's CCR is calculated would lag behind its current charge
23 structure. Because the CCR does not reflect the increase in charges, a hospital can
24 increase its outlier payment simply by increasing its charges.' By increasing its
25
26 3 The second part of the outlier equation, involving the PPS payment, remains fairly constant. It is the first part that increases the payment when a provider increases its charges. For 27 example, looking at the first part of the equation, set forth in 1119, if the charge is $10,000 and the CCR is .5, the payment would be $4,000, or (.80) x ($10,000 x .5). If the charge is increased 28 to $15,000 while the CCR remains the same, the outlier for the same service will be materially
K:\1880\02\1mcndcd Complaint ( 2003-05 -23).wpd 48 AMENDED CLASS ACTION COMPLAINT II charges, therefore, a hospital can transform a "normal" PPS patient into an outlier 21 even if the costs of treating that patient fall within the norm , clearly an 31 unintended result.
4 123. Federal regulations require FI's to update CCR's as the cost reports
5 are settled "to ensure that the ratios used to calculate cost outlier payments are as
6 up to date as possible ." 42 C.F.R. §§ 412.80(a)(2) & 412. 84(h). But when the
7 CCR's are updated as a result of dramatic charge increases which far outpace cost
8 increases, a hospital 's CCR will fall very low, below the range considered
9 reasonable under the regulations . When this occurs , the Fl will substitute the
10 hospital 's CCR with a statewide average CCR ("SWA"). The SWA will be
11 considerably higher than the provider's CCR. For example, if a California
12 provider's CCR falls below 0. 19, that provider will be assigned the SWA, which
13 in the case of California is about 0 .34. Thus, when a hospital drastically increases
14 charges over time, as Tenet did, the hospital gets an immediate boost in outlier
15 payments, and eventually will have the SWA used in place of its CCR, further
16 increasing payments from Medicare.
17 E. Tenet's Corporate Culture
18
19 124. In the letter to shareholders in Tenet's 2002 Annual Report,
20 Barbakow also discussed Tenet's emphasis on "high ethical standards" over
21 "many years." "Ethical behavior," he wrote, "is central to our culture and we
22 continually reinforce it in many ways.... With all the questions that have been
23 raised about corporate credibility in recent months, I take considerable comfort in
24 that." Defendants explained, however, that prior to 1999, Tenet had been plagued
25 by corporate scandal and its aftermath.
26 125. In 1991, state and federal authorities investigated Tenet (then known
27
28 increased to $6,000, or (.80) x ($15,000 x .5).
K:U880\02Wmended Complaint (2003-05 -23).wpd 49 AMENDED CLASS ACTION COMPLAINT 1 as National Medical Enterprises, Inc. or NME) for abusive and fraudulent
2 practices at its psychiatric hospitals. In addition, private parties filed 135 lawsuits,
3 claiming that Tenet had improperly induced doctors to admit patients and keep
4 them hospitalized until their insurance benefits expired. In 1992, eight insurance
5 companies filed suit against Tenet, alleging that Tenet fraudulently billed for
6 psychiatric services. The insurance companies were ultimately successful in
7 recovering nearly $215 million from Tenet.
8 126. In 1993, the FBI began investigating allegations that Tenet's
9 psychiatric hospitals had improperly induced physicians to refer patients, admitted
10 patients who needed no treatment, and forced patients, against their wills, to
11 remain hospitalized until their insurance proceeds expired. Ultimately, in a June
12 28, 1994 press release, Tenet, then NME, disclosed that it intended to execute an
13 agreement with the government, settling claims that certain Tenet psychiatric
14 facilities conspired to and paid "illegal remuneration for referral of Medicare
15 patients." Tenet agreed to pay $362.7 million, subject to the approval by a federal
16 judge. By settling the claims, Tenet sought " to ensure that the company's
17 remaining hospitals will continue to be eligible to participate in all federally
18 funded health-care programs." Tenet also agreed to refrain from owning
19 psychiatric facilities for five years and to divest itself of its psychiatric operations
20 acquired incidental to other acquisitions. At the same time, Tenet settled claims
21 with 28 states, agreeing to pay an additional $16.3 million. In the June 28, 1994
22 press release, Barbakow stated that "[t]his settlement will signify that NME is
23 taking full responsibility for past conduct in certain of its businesses." Tenet was
24 also prohibited from operating psychiatric hospitals for five years.
25 127. Pursuant to the terms of the settlement agreement with DOJ and HHS,
26 the Company entered into the Integrity Agreement, designed to ensure that Tenet
27 maintained high standards of business integrity required of a participant in a
28 federally funded health care program. The Integrity Agreement required Tenet to
K:\1880\02\Amended Complaint (2003-05-23).wpd 50 AMENDED CLASS ACTION COMPLAINT 1 implement certain review procedures, including its billing policies and practices to
2 ensure that its hospitals complied with federal law, regulations, guidelines, and
3 policies. The Integrity Agreement also required Tenet to investigate and to report
4 any credible evidence of misconduct that may have constituted any material
5 violation of the law, rules, and regulations governing federally funded health care
6 programs, and to take corrective action and reimburse the government for any such
7 wrongdoing.
8 128. In the 2002 10-K, well beyond the end of the Integrity Agreement,
9 however, Management Defendants claimed that they conducted regular reviews of
10 those subsidiaries "to assess performance and allocate resources." "All of Tenet's
11 operations are conducted through its subsidiaries." Along those lines, in its 1998
12 10-K, Tenet stated:
13 The Company maintains a multi-faceted corporate
14 compliance and ethics program. A portion of the
15 program results from a 1994 settlement between the 16 Company and HHS. The mandated portion of the
17 program, which is in effect until June 1999, provides, in
18 part, that the Company will not own or operate
19 psychiatric facilities (defined for the purposes of the 20 agreement to include residential treatment centers and 21 substance abuse facilities) except as specifically 22 provided for under the terms of the agreement (which 23 permits the Company's subsidiaries to own and operate a 24 small number of psychiatric facilities on the same 25 campus as or nearby certain of Tenet's general hospitals) 26 and requires self-reporting of credible evidence of 27 violations of criminal law or material violations of civil 28 laws, rules or regulations governing federally funded
K:\1880\02\Amcndcd Complaint (2003.05-23 ).wpd 51 AMENDED CLASS ACTION COMPLAINT 1 programs. The Company now has in place a program
2 designed to provide annual ethics training to every
3 employee and to encourage all employees to report any
4 ethical violations to a toll-free telephone hotline.
5 Tenet would repeat similar disclosures throughout the Class Period.
6 129. As described below, however, Tenet's compliance program utterly
7 failed to prevent widespread and diverse schemes to improve financial results
8 through improper, abusive and even fraudulent conduct. Indeed, Tenet's
9 corporate culture, according to a December 31, 2002 article in the Wall Street
10 Journal , "was too aggressive for its own good."
11 130. In a January 13, 2003 Modern Healthcare article, Thomas Atchison, a
12 healthcare consultant with Atchison Consulting Group, Oak Park, Illinois stated
13 that "corporate culture can explain the recurrence of the problems.... I think that
14 the healthcare culture of pursuing a profit is a toxic phenomenon that has poisoned
15 the fundamental mission of healthcare." Atchison added "[t]hat won't change until
16 hospitals refocus on why they are in the business to begin with: to take care of
17 patients." About Tenet's corporate culture, former Justice Department attorney
18 Michael Ruggio, who worked on the settlement concerning Tenet's psychiatric
19 hospitals stated that while HCA was experiencing its problems, Tenet's stock
20 soared "and many of the people who were around from NME and AMI remained
21 in power.... Tenet also used a number of revenue-maximizing consultants. It's
22 extremely difficult to modify an existing culture when thousands of employees are
23 ingrained in one way of doing things.... You don't turn it on a dime. It takes
24 years."
25 VIII. DEFENDANTS' WRONGDOING DURING THE CLASS PERIOD
26 131. Defendants engaged in several schemes and devices throughout the
27 Class Period to artificially inflate Tenet's financial results and to create the image
28 of sustainable growth. These included Tenet's abuse of Medicare outlier
K:\1880\02\Amen&d Complaint (2003-05-23).wpd 52 AMENDED CLASS ACTION COMPLAINT 1 payments, improper upcoding, wrongdoing at RMC and violations of Generally
2 Accepted Accounting Principles ("GAAP").
3 A. Tenet's Abuse of Medicare Outlier Payments
4 132. As noted in the Company's 2002 10-K, in the private payor
5 environment in which Tenet operated, the focus on government programs was
6 particularly important due to private payors' "continuing to demand discounted fee
7 structures and to place significant limits on the scope of services covered." In the
8 same document, Defendants noted that private payors such as managed care
9 companies, which accounted for between 40% and 44% of Tenet's revenues from
10 fiscal 2000 to fiscal 2002, were exerting continuous pressure on providers,
11 including Tenet, to reduce costs of medical care. According to Tenet, managed
12 care companies were mandating "preadmission authorization and utilization
13 review... to maximize outpatient and alternative health care delivery services for
14 less acutely ill patients...." Again, according to Tenet, these cost reducing
15 measures negatively affected inpatient utilization, average lengths of stay and
16 occupancy rates. By May 31, 2002, however, Tenet had achieved increased
17 payments from managed care companies in their contract negotiations and
18 Defendants knew and expected as noted in the 2002 10-K, that "efforts by
19 government and other payors to impose reduced allowances, greater discounts and
20 more stringent cost controls" would continue.
21 133. In the 2002 10-K, Defendants boiled down the risk of payment from
22 both government and managed care payors as follows:
23 Tenet is unable to predict the effect that the changes and
24 trends discussed above will have on its operations. If the
25 relief under the BBRA and the BIPA continues, rates 26 paid under managed care contracts continue to increase 27 and the scope of services covered by government and
28 private payors is not further curtailed, the Company's
K:\1880\02Wmended Complaint ( 2003-05-23).upd 53 AMENDED CLASS ACTION COMPLAINT 1 business, financial position or results of operations will
2 continue to improve. If the rates paid by government or
3 private payors are reduced or the scope of services
4 covered by such payors is reduced, such actions could
5 have a material adverse effect on the Company's
6 business, financial position or results of operations.
7 134. In the 2002 10-K, Defendants recognized that the health care industry
8 was a lightning rod, continuing "to attract much legislative interest and public
9 attention." In the same document and in the context of recognizing that the BBA
10 had a "significant impact on the Company's revenues under Medicare programs,"
11 Defendants stated that "there continue to be federal and state proposals that would,
12 and actions that do, impose more limitations on payments to providers such as
13 Tenet and proposals to increase co-payments and deductibles from patients."
14 135. Also according to the 2002 10-K, at the same time they forced cost
15 reductions , government and private payors also insisted on controls "designed to
16 reduce admissions and lengths of stay." These "utilization reviews," required for
17 all Medicare and Medicaid providers and many managed care providers, involve a
18 third party peer review organization ("PRO") review of the admission and course
19 of treatment of a patient. Overall, according to Tenet's 2002 10-K, controls such
20 as "utilization review[s] ... resulted in fewer treatments and procedures being
21 performed ." See Social Security Act §§ 1151 et seq., U.S.C. §§ 1320c et seq.
22 136. Not only were payors insisting on less costly healthcare, but, in the
23 2002 10-K, Defendants manifested their awareness of a stringent regulatory
24 environment to assist the Government in holding costs of healthcare down.
25 Defendants noted that § 1128B(b) of the Social Security Act prohibits "certain
26 business practices and relationships that might affect the provision and cost of
27 health care services payable under the Medicare, Medicaid and other government
28 programs, including the payment or receipt of remuneration for the referral of
K:\1880\02\Amended Complaint ( 2003-05 -23).wpd 54 AMENDED CLASS ACTION COMPLAINT 1 patients whose care will be paid for by such programs." In the same document,
2 Defendants further recognized that criminal penalties and civil sanctions assessed
3 under this anti-abuse statute could directly and materially affect Tenet's financial
4 results.
5 137. Further, in a November 7, 2002 conference call with analysts,
6 Barbakow admitted that:
7 Higher charges have been a part of our managed care
8 pricing strategy, particularly in California. California is a
9 mature managed care market with per diem rates that are
10 often below what the real market rate is. The difference
11 is made up by additional payment such as pass-throughs
12 and stop-loss provisions tied to charges. Contract
13 structures in California are changing rapidly, however.
14 Recent major contract negotiations are resulting in
15 significant per diem increases and lower stop-loss
16 payments but still give us higher overall commercial
17 payments. This is a more sound contract structure for
18 both Tenet and our managed care customers.
19 138. Thus, in negotiations with private payors, Defendants were made
20 aware that their pricing strategy, which was, in reality, a charging strategy and
21 which resulted in higher stop-loss payments, was fundamentally unsound and
22 unsustainable in that payors had incentive to limit or eliminate those payments
23 which providers could game by raising charges. 24 139. According to a November 11, 2002 article in the Wall Street Journal ,
25 in early fiscal 2000, Tenet acquired a significant number of new hospitals in
26 California. Tenet's increased market presence in its strongest market coupled with
27 managed care companies that were weakened by widespread consumer
28 dissatisfaction gave Tenet "more clout in negotiating deals to treat the HMOs'
K:U 880\02\Amended Complaint ( 2003 -05-23 ).wpd 55 AMENDED CLASS ACTION COMPLAINT 1 patients." Defendant Mackey, a long time Tenet executive, assumed responsibility
2 for "the nuts and bolts of Tenet's hospital operations nationwide." In response to
3 Medicare cutbacks, Tenet's stagnant growth, and its languishing stock price,
4 "Mackey developed a policy to raise so-called chargemaster prices , a kind of
5 health-care equivalent of the sticker price at car lots." (Emphasis added.) The
6 article continued that neither private insurers nor the government actually pay
7 chargemaster rates, but they are used to calculate outlier payments, triggering in
8 turn the use of the SWA.
9 140. According to the Wall Street Journal article, when Dennis arrived at
10 Tenet he transformed the elevation of chargemaster into an art-form. The article
11 stated:
12 Tenet's price increases became more aggressive in 2000
13 after Mr. Dennis, a veteran investment banker, became
14 Tenet's chief financial officer. He stepped up pressure to
15 keep Tenet's revenue growing swiftly and instituted high
16 performance targets at the corporate level, people close
17 to the situation say. That set up a race between Mr.
18 Mackey and Mr. Dennis to achieve ever-better financial
19 results, those people say. They add that tensions
20 developed inside Tenet's headquarters as some managers
21 started to feel uncomfortable with the hard-charging
22 style of Mr. Barbakow's two top lieutenants. Mr.
23 Barbakow says, "I'm not arguing with that, but I didn't
24 see that..."
25 141. The article further disclosed that Barbakow was made aware of the
26 outlier issue no later than October 14, 2002 by way of an investor relations
27 executive whom UBS Warburg analyst Kenneth Weakley had contacted about
28 Tenet's outlier payments. Once he was made aware of the issue, Barbakow
K_ I880\02\Amended Complaint (2003-05-23).wpd 56 AMENDED CLASS ACTION COMPLAINT 1 explained that he confronted Dennis and Mackey, expressing to each separately
2 that he had lost confidence in them. Barbakow stated, "I expect people to flag the
3 headaches and things I should be getting involved in. I guess I didn't hammer
4 away enough on these individuals." According to Harris Bank analyst David
5 Woodyatt, however, Barbakow "obviously fumbled the ball to some degree by not
6 asking the right questions. You get into a situation where either he knew and
7 didn't tell us, so you can't trust him, or he didn't know something he should have
8 known."
9 142. In the 2002 10-K, Defendants also acknowledged the "heightened and
10 coordinated" scrutiny of the healthcare industry by the federal and state
11 governments and their understanding that such increased scrutiny would continue.
12 They reassured investors, however, that "Tenet has a voluntary regulatory
13 compliance program and systematically reviews all of its operations to ensure that
14 they comply with federal and state laws related to health care ..."
151' 143. Tenet' s scheme to use grossly inflated charges, without regard to its
16 actual costs, to improperly generate outlier payments, is inconsistent with the
17 legislation requiring that "charges" be "adjusted to cost[s]." Social Security Act §
18 1886(d)(5)(A)(ii). This scheme resulted in two major ill-gotten gains to Tenet. By
19 grossly inflating charges without regard to costs, Tenet achieved an immediate,
20 substantial boost in outlier payments. Then, when the increased charges eventually
21 skewed Tenet's settled cost reports, the higher SWA was substituted for its CCR
22 (¶123), further boosting outlier payments. In this regard, once a hospital's CCR
23 ceases being accurate, it is no longer capable of providing a proper outlier
24 payment. Defendants knew or were deliberately reckless in not knowing, at the
25 time they devised and implemented this scheme, that CMS would not only view
26 these extraordinary outlier payments as improper, but could administratively
27 reopen each outlier determination, patient-by-patient, adjusting such payments to
28 reflect actual costs, and declaring an "overpayment" to Tenet which could then be
K:\1880\02\Amended Complaint (2003-05-23).wpd 57 AMENDED CLASS ACTION COMPLAINT 1 liquidated through offsets.
2 144. Specifically, claims for outlier payments are submitted to the Fl, 3 reviewed and then paid, on a patient-by-patient basis. These determinations by the 4 FI "must be reopened and revised by the intermediary if, within the 3-year period 5 specified in paragraph (a) of this section," CMS provides notice to the 6 intermediary that the intermediary's determination "is inconsistent with the 7 applicable law" and "[e]xplicitly directs the intermediary to reopen and revise" its 8 earlier determination. 42 CFR § 405.1885(b). The intermediary, can of course,
9 reopen and revise a determination sua sponte within three years. See 42 CFR §
10 405.1885(a). 11 145. According to Tenet's 1998 Annual Report, "the health care industry 12 is governed by a framework of federal and state laws, rules and regulations that are 13 extremely complex and for which the industry has the benefit of little or no 14 regulatory or judicial interpretation." Ample regulatory guidance, however, was 15 available to Tenet. First, Tenet officials could have met with CMS officials before 16 increasing their charges to ascertain whether it would be appropriate to permit an 17 Fl to continue to use an outdated CCR to calculate outlier payments or whether 18 some other method ought to be used. Second, Tenet officials could have consulted 19 with the OIG which frequently provides its views either over the telephone or in a 20 meeting. 21 146. Abuses of the outlier payment system, of which Tenet was by far the 22 greatest abuser in the United States, were so monumental that CMS determined to 23 change the formula for outlier payments , as acknowledged in Tenet's Quarterly 24 Report on Form 10-Q for the period ended November 30, 2002, filed with the SEC 25 on January 13, 2003 (" 2Q 2003 10-Q"): 26 CMS is currently reviewing the formula used to calculate 27 each hospital 's outlier payments and we expect that CMS 28 will shortly announce a major change in the formula.
K:\1880\02\Arntnded Complaint ( 2003.05 -23).wyd 58 AMENDED CLASS ACTION COMPLAINT 1 Currently, if a hospital's specific cost-to-charge ratio
2 falls below a threshold cost-to-charge ratio for all
3 hospitals nationwide, the hospital defaults to the
4 statewide average cost-to-charge ratio ("SWA"). In these
5 cases, CMS will not use the hospital's own cost-to-
6 charge ratio but will use the higher SWA. In addition,
7 CMS utilizes the SWA for certain acquired hospitals
8 until a settled cost report is available. We expect that
9 CMS will eliminate the use of SWA's in the future.
10 147. In the 2Q 2003 10-Q, Tenet revealed that 29 of its hospitals received
11 outlier payments determined by the fiscal intermediary that were based on the 12 SWA. These accounted for "approximately 68%" of Tenet's total for the three 13 months ended November 30, 2002. This statistic is remarkable in the context of a 14 "Program Memorandum" CMS issued on December 2, 2002, requesting that fiscal 15 intermediaries identify all hospitals receiving the statewide average operating or 16 capital cost-to-charge ratio. In response to the Program Memorandum, CMS 17 received a list of 43 hospitals for which the SWA was substituted for hospital 18 specific operating CCR and 14 hospitals for which the SWA was substituted for 19 hospital specific capital CCR. Three hospitals were on both lists. Thus, of the 20 roughly 5,000 hospitals in the United States, only 57 calculated outlier payments 21 using the SWA. Of those 57 hospitals, 29 (51%) were Tenet hospitals. 22 148. In an astounding about-face in how Tenet calculates its outlier 23 payments, Tenet's 2Q 2003 10-K disclosed: 24 CMS currently utilizes the most recently settled cost 25 report to set the hospital's cost-to-charge ratio. Those 26 cost reports typically are two to three years old. We 27 expect that CMS also will use more recent information to 28 establish the cost-to-charge ratio. We expect these
KAI880\02Wmendcd Complaint (2003 -05-23 ).wpd 59 AMENDED CLASS ACTION COMPLAINT 1 changes to have a material effect on the amount of
2 outlier payments we currently receive. We are currently
3 unable to predict the ultimate changes that will be made
4 by CMS and when they would become effective. On 5 January 6, 2003, we sent a letter to CMS volunteering to
6 adopt a new policy on Medicare outlier payments for our
7 hospitals, retroactive to January 1, 2003, that would have
8 the effect of reimbursing our hospitals in accordance
9 with changes we anticipate CMS will eventually make. 10 To the extent, however, that CMS ultimately adopts a 11 different approach to modifying its outlier policy, or
12 imposes alternative adjustments, such as changing the 13 outlier threshold, we would reconcile the payments 14 received under our interim arrangement to the payments 15 that would have been made if CMS's new policy had 16 gone into effect on January 1, 2003 and a settlement 17 would be made for any difference. The settlement could 18 result in our eventually receiving additional outlier 19 payments or having to repay some of the outlier 20 payments received for the interim period from January 1, 21 2003 until the date the anticipated new rules become 22 effective. We made this voluntary proposal in order to 23 show our good faith and to support CMS's likely . 24 industry-wide solution to the Medicare outlier issue. 25 149. According to the 2Q 2003 l0-Q, Defendants stated that Tenet's 26 "proposal would involve utilizing current filed cost reports for our hospitals and 27 eliminating the SWA from the outlier calculations . We estimate that by adopting 28 these two changes, Medicare outlier payments to our hospitals will drop from
K:U 880\02\Amended Complaint (2003-05-23 ).wpd 60 AMENDED CLASS ACTION COMPLAINT 1 approximately $65 million per month to approximately $8 million per month. This
2 is consistent with our current earnings guidance."
3 150. In a November 7, 2002 conference call with analysts, Barbakow
4 disclosed that Tenet's "aggressive pricing" was "a key part of [Tenet's] operating
5 strategy," was outside industry norms, and had "resulted in unusually high outlier
6 payments." Tenet also disclosed that 56% of its $763 million in outlier payments
7 came from just 11 hospitals, seven in California, three in Pennsylvania and one in
8 Texas. Thus, Defendants acknowledged that their pricing strategy, a clear abuse
9 of the Medicare system, had played a direct and substantial role in Tenet's
10 meteoric return to growth.
11 151. Tenet's Pennsylvania hospitals provide evidence confirming Tenet's
12 overly aggressive pricing strategy. For instance, the Pennsylvania Health Care
13 Cost Containment Council ("PH4C") publishes a yearly study on hospital charges
14 and usage. In this report, PH4C lists: (i) procedures by specific DRG; (ii) the
15 number of cases of each hospital in Pennsylvania; and (iii) the charges for each
16 procedure. The study also reports averages for both Southwestern and
17 Southeastern Pennsylvania against which to compare any individual hospital's
18 charges. This study confirms that at least three of Tenet's hospitals imposed steep
19 charge increases far in excess of the Southeastern Pennsylvania average. One
20 example of Tenet's grossly excessive charges relates to DRG 079, "lung
21 infections, complicated." In 1999, the Southeastern Pennsylvania average charge
22 for DRG 079 was $23,081. Tenet's three Philadelphia hospitals, Hahnemann,
23 Graduate, and Medical College of Pennsylvania ("MCP") charged, on average,
24 $35,333, $40,855, and $37,125 respectively - 53%, 77% and 61 % above the
25 Southeastern Pennsylvania average. In 2000, the Southeastern Pennsylvania
26 average increased 11% to $25,940. Hahnemann raised its charge to $47,207, a 27 34% increase, Graduate raised its charge to $53,147, a 30 % increase and MCP
28 raised its charge to $48,728, a 30% increase. The three hospital's respective
K:\I 880\02\Amended Complaint (2003.05 -23).wpd 61 AMENDED CLASS ACTION COMPLAINT 1 charges were 82 %, 105 % and 88% above the Southeastern Pennsylvania average.
2 152. Defendants, however, did nothing to moderate Tenet's average
3 charge. Indeed in 2001, the Southeastern Pennsylvania average for DRG 079
4 increased to $29,436, a 13.5 % increase over 2000. During the same period,
5 Hahnemann's average charge for the same DRG increased to $78,796, while
6 Graduate's increased to $65,547 and MCP's to $56,257, a 67 % increase, a 23%
7 increase and a 15.5% increase over 2000, respectively. Once again, the three
8 hospitals' charges were, respectively, 167 %, 123 % and 91 % above the
9 Southeastern Pennsylvania average.
10 153. To put this PH4C study in perspective, looking only at 2001,
11 Hahnemann's average length of stay for this procedure was 10 days, Graduate's
12 10.8 days and MCP's 7.6 days. The Southeastern Pennsylvania average length of
13 stay was 8.3 days. The Southeastern Pennsylvania average charge per day for
14 DRG 079 was $3,546. By contrast, Hahnemann's charge per day for the same
15 diagnosis was $ 7,879, Graduate's was $6,069 and MCP's was $7,402. On its
16 face, this indicates that Tenet was increasing its charges in gross disproportion to
17 its local competitors and is evidence that Tenet raised charges without regard to
18 costs in order to game Medicare.
19 154. According to a November 9, 2002 Philadelphia Inquirer article,
20 "outlier payments to Hahnemann are expected to reach 144 percent over base
21 Medicare payments next year," while "Graduate Hospital will receive a 25 percent
22 boost from outliers, [and] Medical College of Pennsylvania will receive 22
23 percent. Hahnemann, Graduate and MCP all rank within the top 11 in outlier
24 payments among Tenet's 113 hospitals, the company said. Tenet would not release
25 statistics for each hospital."
26 155. According to patient discharge data from California's Office of 27 Statewide Health Planning and Development ("OSHPD"), Tenet's California
28 pricing was equally as stark in comparison to that of its competitors. For example,
K:\I880\02Wmended Complaint (2003-05 -23).wpd 62 AMENDED CLASS ACTION COMPLAINT 1 in 2000, Tenet's general acute care hospitals in California charged, on average,
2 $156,769 for DRG 475, "Respiratory System Diagnosis." For the same procedure,
3 all non-Tenet general acute care hospitals in California charged on average
4 $87,809, a 79% difference. Similarly, with respect to a pacemaker implant, DRG
5 116, in 2000 Tenet's California hospitals charged, on average, $73,038 versus the
6 average charge of $40,452 for non-Tenet hospitals, an 81% difference.
7 156. Equally telling are the charge increases for Tenet hospitals in 2000
8 over 1999 in comparison to all other hospitals in California. The general hospital
9 average in 1999 for the pacemaker implant was $36,844 and for the respiratory
10 system diagnosis, $71,721. The non-Tenet statewide average increases for these
11 procedures were 10% and 22% respectively. In 1999, the Tenet hospital average
12 charges for those procedures in 2000 were $59,401 and $106,921 respectively,
13 representing average increases in 2000 of 23 % and 47% respectively. Clearly,
14 Tenet's prices and its price increases were outpacing those of all other California
15 hospitals.
16 157. Further evidence of Tenet's California price-gouging exists. In his
17 October 28, 2002 report, in an effort to determine the impact of Tenet's pricing on
18 its outlier payments, UBS Warburg analyst Kenneth Weakley surveyed available
19 data from California to determine how outliers affected Tenet's results. Using
20 data from the California OSHPD, Weakley loosely derived CCR's using Tenet's
21 gross revenue growth and its operating expenses for each hospital and compared it
22 to hospitals throughout California. He noted that between fiscal 1998 and fiscal
23 2001, Tenet's total gross revenues and Medicare gross revenues grew by 99% and
24 85% respectively. At the same time, Tenet experienced far lower increases in net 25 patient revenue and Medicare net patient revenue of 32.8% and 20.1 %. On an
26 actual basis, Tenet's California facilities gross revenues increased by more than $9 27 billion from fiscal 1998 through fiscal 2001 while its net revenues increased by
28 $900 million. While the complexities of Medicare prevented Weakley from
K:\I880\02\Amended Complaint (2003-05-23 ).wpd 63 AMENDED CLASS ACTION COMPLAINT 1 stating his conclusion with certainty, the statistics seemed to show an increase in
2 Tenet's "chargemaster" pricing, a list of Tenet's "sticker prices" for services
3 performed.6
4 158. Moreover, and significantly, Weakley noted that he requested
5 information from the Company on its gross revenues which the Company
6 "declined to provide."
7 159. Using Tenet' s operating expenses, Weakley created a CCR for each
8 fiscal year from 1998 through 2001. He created similar ratios for other hospitals.
9 According to Weakley, Tenet's CCR for its combined facilities in California fell
10 from 26% in 1998 to 16 % in 2001. The next highest decline was that of Catholic
11 Healthcare West which declined from 36% to 32%. Thus, Tenet CCR was half of
12 the next highest hospital's ratio. During the same period, the California
13 Operations of HCA, Tenet's largest competitor, combined CCRs rose from 34% to
14 37% over the same period. Weakley noted that of California's 400+ hospitals, 25
15 of Tenet's facilities represented the lowest 25 CCRs and 39 of the lowest 45. Thus
16 Weakley developed the connection between Tenet's gross charges, its low CCRs
17 and its accompanying higher estimated outlier ratio. The report provides empirical
18 data to indicate that Tenet was increasing its charges at key facilities far in excess
19 of the average increases and that, as a result, the CCRs for the affected facilities
20 fell, in turn triggering application of the SWA. Because of this, Tenet received
21 extraordinary high outlier payments for fiscal years 2000 to 2003.
22 160. Further, Defendants had reason to know no later than just after they
23 implemented their abusive charge strategy, that it would be perilous and short-
24 lived. Each year, the HHS Office of the Inspector General ("OIG") creates a
25
26 6In a December 3, 2002 conference call, Barbakow stated that "[c]harges, or gross charges 27 are the retail price list on a hospital charge-master. These charges apply to all payors, but bear no resemblance to revenues actually received from any payor group. Pricing relates to actual trends 28 in realized rates."
K:1I880\021Amendcd Complaint (2003-05-231.wpd 64 AMENDED CLASS ACTION COMPLAINT 1 "work plan," entitled the "HHS/OIG Fiscal Year Work Plan" ("Work Plan"). In
2 the Work Plan, the OIG states its mission as the improvement of HHS programs
3 and operations and protecting those programs "against fraud, waste and abuse."
4 The OIG conducts independent and objective audits, evaluations and
5 investigations, offering information and advice to HHS, Congress and the public.
6 161. For example, during the course of one such OIG review of Blue Cross
7 of Rhode Island, in its capacity as a Fiscal Intermediary, the OIG sought to
8 determine if the FI correctly calculated outlier payments for 1992-1994. See OIG,
9 "Review of Hospital Outlier Payments under the Medicare Program - Blue Cross
10 of Rhode Island," No. A-01-94-00519 (March 1995). The OIG determined that
11 the Fl had misunderstood the Medicare regulations governing cost outlier
12 payments, resulting in the misapplication of the SWA. Ultimately, the Fl was 13 required to recoup the overpayments to hospitals as a result of its mistake. Thus, 14 Defendants knew, or were deliberately reckless in not knowing that if CMS 15 audited Tenet and discovered that it had purposely, grossly and improperly raised
16 its charges, enabling it to avail itself of the benefit of the SWA, Tenet would be
17 forced not only to adjust its CCR and lose material amounts of unearned outlier
18 payments, but to repay any amounts it received based thereon.
19 162. Beginning with its 2000 Work Plan, the OIG stated that it would 20 examine the financial impact of outlier payments. In the 2001 Work Plan, OIG 21 stated that it would continue to examine the financial impact of outlier payments. 22 Still again, in the 2002 Work Plan, the OIG stated that it would continue to
23 examine the financial impact of outlier payments. 24 163. In the 2003 Work Plan, the OIG stated that it planned to "review 25 Medicare inpatient claims for cost outliers." OIG stated its focus as "whether 26 these payments were appropriate and review the adequacy of controls over outlier 27 claims." 28 164. The OIG describes its yearly review of outlier payments as a
K:1I880\02Wmcndcd Complaint (2003-05 -23).wpd 65 AMENDED CLASS ACTION COMPLAINT "program inspection." OIG's Office of Evaluation and Inspection ("OAI") is
2 charged with examining issues and seeking "to improve the effectiveness and
3 efficiency of departmental programs by conducting program inspections to provide
4 timely, useful, and reliable information and advice to decision-makers." These
5 inspections require OAI to evaluate the specific program at issue and its
6 management, focusing on specific areas of concern to HHS, Congress and the
7 public. OAI's overall goal is to "generate accurate and up-to-date information on
8 how well those programs are operating and offer specific recommendations to
9 improve their overall efficiency and effectiveness."
10 165. While the language OIG uses to describe the outlier program review
11 is identical for the Work Plans issued fiscal years 2000-2002, it changes in fiscal
12 2003. It is, however, still an OAI review, and not a Legal Counsel Focus Area
13 ("Counsel Focus") of the Office of Counsel to the Inspector General ("OCIG").
14 Among other things, OCIG coordinates OIG's role in fraud and abuse cases,
15 including litigation and administrative sanctions, Civil False Claims Act
16 settlements, and "the development and monitoring of corporate integrity
17 agreements" for False Claims Act violators. Providers, including the Defendants,
18 knew of the OIG's yearly Work Plans and the OIE inspection programs to combat
19 fraud and abuse.
20 166. Further, Defendants knew or were deliberately reckless in not
21 knowing that CMS itself was focused on the issue of outlier payments. Noting the
22 recent increase in hospital charges over the past years and the accompanying rise
23 in outlier payments beyond the expectations of CMS, CMS dramatically boosted
24 the threshold by 59.6% increase for fiscal year 2003. Each year, CMS calculates
25 the outlier threshold or a specified cost of services at which a discharge becomes
26 an outlier payment. In 1999, the outlier threshold was $12,000. In 2000, CMS
27 raised the outlier threshold to $14,050, increasing it to $$17,550 in 2001, $21,025
28 in 2002 and $33,560 in 2003. Thus, providers, including Defendants, knew that
K\I 880'',02\Amendcd Complaint (2003-05-23).,.%pd 66 AMENDED CLASS ACTION COMPLAINT 1 CMS was trying to limit outlier payments by adjusting the threshold, manifesting
2 the Congressional mandate that outlier payments not exceed 5% to 6% of
3 Medicare PPS budget reimbursement.'
4 167. On December 3, 2002, CMS issued both a Program Memorandum for
5 its Fl's ("PM") and a press release, regarding CCR's and outlier payments. In the
6 PM, CMS noted that analysis of charges revealed that since 1999, some hospitals
7 had raised charges far faster than the national average, a practice CMS termed 8 "gaming" the outlier system, to maximize the payments they receive. In the press
9 release, CMS stated that companies using strategies "to obtain excessively high
10 Medicare outlier payments will be presumed to be billing for more than they are
11 entitled to and will be referred to" the CMS Program Integrity Unit and/or the OIG 12 for investigation. CMS Administrator Thomas Scully stated that "indications of 13 inappropriate reimbursements" will trigger FI review into "all operations of 14 targeted hospitals" to uncover "any other improper conduct." Scully continued
15 that CMS would ensure that hospitals were not "inappropriately gaming the 16 system. Any hospital billing very high outlier rates better be absolutely sure that
17 they-are right or they are likely to be very sorry."
18 168. No hospital in the United States "gamed" the system more than Tenet 19 did. In fact, no other hospital came close to Tenet's aggressive pricing strategies. 20 169. The initiatives CMS announced on December 3, 2002, did not spring 21 full-formed from the head of some regulatory Zeus. Rather, according to its press 22 release, CMS spoke of ongoing efforts "to further reduce inappropriate billing for 23 Medicare services." Surely, CMS had Tenet--Medicare's biggest outlier abuser-- 24 in mind. 25 170. In the January 13, 2003 Modem Healthcare article, former DOJ
26
27 'Because CMS did not accurately anticipate the dramatic increase in hospital charges, CMS paid $1.5 billion more in outlier payments in 2002 than it had projected, and $8.5 billion 28 more in outlier payments since 1997 than it projected.
K:\18W02G1mwndcd Complaint ( 2003 -05-23 ). wpd 67 AMENDED CLASS ACTION COMPLAINT 1 attorney Michael Ruggio, who worked on the settlement of Tenet's psychiatric
2 hospital debacle, stated that Tenet's troubles were only beginning. According to
3 Ruggio, "the outlier payment issue will be very big for them, and there's almost no
4 defense for that. This may not reach the magnitude of HCA, but it could be
5 close."
6 171. In a February 28, 2003 CMS press release, Administrator Scully
7 stated, "obviously, this system is badly broken.... CMS did not understand why
8 spending was escalating beyond Congress' allotment and kept raising the outlier
9 threshold." Scully continued, "[n]ow that CMS understands the gaming that led to
10 this unintended spending, we are acting to end these practices." Thus, Scully
11 amplified a longstanding policy of CMS to adhere to its legislative mandate by 12 limiting outlier payments. Defendants knew or were deliberately reckless in not 13 knowing the efforts of CMS to limit these payments, and the serious consequences 14 of abusing the Medicare system.
15 172. Defendants embarked on their strategy to increase Tenet's charges in 16 gross disproportion to its costs which, Defendants boasted, were holding steady. 17 They did so with knowledge that Tenet's charges were untethered from its costs 18 and bore no relationship to whether Tenet was entitled to an outlier payment for 19 particular patients for extraordinary costs incurred. Defendants intentionally 20 increased Tenet's charges in order to maintain a high level of outlier payments 21 despite knowing that CMS had raised the threshold substantially to hold down 22 increasing outlier payments. Moreover, Defendants did so with knowledge that 23 Tenet's revenue growth and many of its key financial indicators during the Class 24 Period, were fueled by excessive outlier payments and were illusory and 25 unsustainable.
26 B. Tenet's Improper Upcoding 27 173. Tenet also engaged in other improper or illegal behavior aimed at 28 achieving higher reimbursements from Medicare than those to which it was
K:\1880\02Wmended Complaint (2003-05-23).wpd 68 AMENDED CLASS ACTION COMPLAINT entitled. These too served to artificially enhance Tenet's financial results during 2 the Class Period. 3 174. For example, prior to the Class Period, Tenet engaged in a systematic 4 practice known as "upcoding." Upcoding is the improper assigning of diagnostic 5 or procedure codes to yield a richer DRG (i.e. one with a higher weight), thereby 6 increasing the amount of a hospital's payment for that patient. Many hospitals 7 engage in DRG optimization programs! If, however, a hospital assigns codes that 8 it knows will yield a richer DRG, but which are unsupported by a patient's
9 medical condition and the physician's documentation of the diagnosis and
10 treatment in the patient's medical records, or improperly designates a secondary
11 diagnosis as the principal diagnosis in contravention of coding rules, it has
12 engaged in upcoding.9
13 175. Tenet hospitals maintained "Focus Lists" of DRGs that Tenet
14 determined could be "optimized," in other words, increased to other, higher-
15 paying DRGs. Company policy recommended that if a DRG was on a focus list,
16 the HIM department should engage in a multi-level review by another coder, the
17 hospital's HIM Director, coding supervisor, DRG validator, or DRG coordinator.
18 If, after this review, the ICD-9 code did not change, Tenet policy recommended
19 that the patient records be submitted to an external coding consultant vendor and
20 to a corporate level "Clinical Finance Specialist" to determine if a higher weighted
21 'Optimization programs are designed to ensure that hospitals assign the highest DRG that 22 the patient's condition and the physician's documentation of the diagnosis in the patient's 23 medical records justify.
24 "For example, in diagnosing pneumonia, a physician can assign any one of several codes depending on the condition. ICD-9 code 486, for instance, covered "pneumonia, organism 25 unspecified," referring to those instances where the physician had diagnosed pneumonia but had 26 not identified the cause of the pneumonia, whether bacterial, viral or other. A patient with this code and an accompanying complication or comorbidity but no procedure code was assigned to 27 DRG 089. DRG 089 had a lower relative weight, and a commensurately lower reimbursement rate, than DRG 079, which was derived from similar codes. On average, reimbursement for 28 DRG 079 exceeded that of DRG 089 by $4,000 per patient.
K:\1880\02\Amended Complaint ( 2003-05 -23).apd 69 AMENDED CLASS ACTION COMPLAINT 1 DRG could be assigned to the particular medical record. These reviews were
2 either performed pre-billing or post-billing. After such review, a final ICD-9 code
3 would be assigned, HIM would submit the coding information to the hospital's
4 billing department and that department would submit a Form 1450 to the FI for
5 reimbursement. Rather than to ensure compliance with applicable Medicare
6 regulations, Tenet performed these reviews solely to optimize "unoptimal DRGs."
7 176. According to the False Claims Act Complaint, corporate level
8 Clinical Financial Specialists encouraged coders to substitute their judgment for
9 that of a treating physician and, in turn, to enter false ICD-9s. Tenet also
10 encouraged coders to improperly sequence principal and secondary diagnosis,
11 leading ultimately to the assignment of a more lucrative DRG. For example, in
12 April, 1997, the then-newly hired coding supervisor at Tenet's Brotman Medical
13 Center ("Brotman") reported to the Brotman's HIM director that the "DRG
14 optimization/validation module" that Brotman had adopted was "fraudulently
15 inadequate." In June, 1997, a Tenet corporate Clinical Finance Specialist
16 conducted a coding review at Brotman and found that Brotman had only a 51 %
17 coding accuracy rate and that all coding errors resulted in enhanced
18 reimbursements from Medicare.
19 177. According to the False Claims Act Complaint, between September 6,
20 1992 and December 31, 1998, Tenet submitted at least 16,900 false claims for the
21 patients with ICD-9 diagnoses that were grouped to DRGs 079, 415, 416, and 475.
22 According to the Complaint, Tenet achieved these "error rates," employing the
23 following manipulative devices:
24 (a) utilizing a focus review process that placed undue emphasis on
25 "optimizing DRGs and hospital revenue and little or no emphasis on
26 compliance with coding regulations; (b) having a corporate-level
27 review process that selected for review only or primarily those
28 records with DRGs that were "unoptimal;" (c) having their corporate
K:\I880\02Wmended Complaint (2003-05-23 ).wpd 70 AMENDED CLASS ACTION COMPLAINT 1 level clinical finance specialists and external coding consultants train
2 coders and hospital level HIM Directors to code patient records in a
3 manner that was inconsistent with Medicare statutes, regulations,
4 rules and guidelines; (d) in certain instances, giving incentives to
5 coders and HIM Directors based on achieving high casemix indi[ces];
6 and (e) distributing coding manuals that provided coding advice in
7 contravention of Medicare regulations and the coding rules.
8 OrNda, a hospital company that merged with Tenet in 1997, also (1) established
9 coding goals and targets that could only be met by improperly upcoding medical
10 records; and (2) distributed comparative charts of hospital performance so that
11 OrNda hospitals could measure themselves against each other.
12 178. Moreover, Tenet failed to adhere to the terms of the Integrity
13 Agreement, mandating that it disclose potential violations. The Integrity
14 Agreement specifically required Tenet to review its billing practices and to report
15 any material violations of civil laws, rules, and regulations, to make restitution for
16 any damages to the government, and to certify its continued compliance. The
17 False Claims Act Complaint alleges that Tenet was aware, through its "coding
18 compliance audits" that significant coding errors resulting in overpayments to
19 Tenet existed. Tenet, however, failed to report these violations as the Integrity
20 Agreement mandated.
21 179. By upcoding, Tenet was able to inflate its revenues artificially in
22 violation of GAAP prior to the Class Period. During the Class Period, Defendants
23 knew that Tenet had engaged in illegal upcoding and that CMS and the DOJ were
24 investigating claims against Tenet. While Tenet did disclose the existence of the 25 investigation, it failed to disclose the amount by which it overstated its revenues 26 for fiscal 1998 and fiscal 1999. 27 180. Again, in the False Claims Act Complaint, 19,300 claims are at issue, 28 16,900 under the False Claims Act. A maximum judgment under the False Claims
KA I880102Wmrnded Complaint (2003-05 -23).wpd 71 AMENDED CLASS ACTION COMPLAINT Act would entitle the government to between $5,500-$11,000 per claim or
2 between $93 million and $185.9 million. In addition, the False Claims Act claims
3 involved payments by Medicare of $103.9 million. Under the claims asserted,
4 Medicare would be entitled to treble what it paid or $311.6 million. In addition,
5 Tenet could be forced to repay $11 million for improperly coded claims. Tenet's
6 total potential exposure in the Government's Complaint is, therefore, between
7 $416 million and $509 million, none of which was disclosed by Tenet. Thus, as
8 stated below, Tenet should have accrued for over $300 million as a reserve for
9 fines and penalties it may ultimately pay as a result of its fraudulent practices.
10 C. Wrongdoing at RMC
11 181. Tenet encouraged, mandated, or with knowledge or reckless disregard
12 of its existence failed to stop the "utilization manipulation" at RMC. Utilization
13 manipulation occurs any time a decision about a patient's medical care is not made
14 on the basis of what is medically necessary, but instead, is made to maximize
15 provider revenues and/or minimize costs. Utilization manipulation can involve
16 unnecessary hospital admissions, questionable surgical procedures, length of stay,
17 redundant or unnecessary specialist referrals, decisions and transfers in and out of
18 various hospital units or excessive laboratory, radiology or other diagnostic tests.
19 182. In late October, 2002, the FBI executed search warrants at RMC as
20 part of its investigation of two cardiologists based at that hospital who, it is
21 alleged, performed hundreds of unnecessary procedures for which the hospital
22 billed millions of dollars to Medicare. The FBI initiated its investigation after a
23 local priest, Father John Corapi learned that his scheduled triple bypass surgery,
24 was, according to five other cardiologists, completely unnecessary.1° According to
25 the FBI, hundreds of people may have undergone unnecessary heart procedures at
26 RMC. These procedures and allegations were the subject of a 60 Minutes segment
27 10 The two doctors are Chae Moon and Fidel Realyvasquez. Dr. Moon is the Director of 28 Cardiology at RMC and Dr. Realyvasquez is Chairman of the Cardiac Surgery Program at RMC.
K:\1880\021Amended Complaint (2003 -05-23 ).wpd 72 AMENDED CLASS ACTION COMPLAINT 1 entitled, Unhealthy Diagnosis, airing February 16, 2003. 2 183. Throughout the Class Period Defendants had touted Tenet's system of 31 utilization reviews in documents filed with the SEC. In a November 4, 2002 press 4 release on the RMC investigation, Barbakow identified "the depth of our internal 5 review structures" as one of Tenet's strengths. RMC was performing the
6 procedures in question at a far higher rate than normal. Defendants were,
7 themselves, focused on higher acuity services and, during the Class Period, were
8 focused enough on cardiac procedures at RMC to expand the facility in a $50
9 million renovation.
10 184. RMC, however, is not the only Tenet facility under investigation for
11 utilization manipulation. In September, 2002, Federal authorities cited Queen of
12 Angels Hospital in Los Angeles for failing to exercise proper oversight over its
13 medical staff, which performed unnecessary surgeries. Tenet claims to be unaware
14 of these practices, blaming rogue physicians instead. It is clear, however, as noted
15 above and in Tenet's 2002 Annual Report, that among Tenet's primary corporate
16 goals, in response to various pricing pressures was to focus "on core services, such
17 as cardiology, orthopedics and neurology, to meet the health care needs of the
18 baby boomer generation" and to implement best practices for patient health. Thus,
19 defendants were, at a minimum, deliberately reckless in failing to detect and put an
20 end to the illegal and immoral practices at Tenet's Redding facility.
21 D. Tenet's Violations of Generally Accepted Accounting Principles
22 185. SEC Regulation S-X, 17 C. F.R. § 210.4-01(a)(1), provides that
23 financial statements filed with the SEC that are not prepared in compliance with
24 GAAP are presumed to be misleading and inaccurate, notwithstanding footnotes
25 or other disclosures. The accounting profession recognizes GAAP as the
26 conventions, rules and procedures necessary to define accepted accounting
27 practice at a particular time. Regulation S-X requires that interim financial
28 statements must also comply with GAAP, with the exception that an issuer need
K:\1880`,02\Amended Complaint ( 2003-05 -23).wpd 73 AMENDED CLASS ACTION COMPLAINT not include in interim financial statements disclosures that would be duplicative of 2 disclosures accompanying annual financial statements. 17 C.F.R. § 210.10-01(a). 3 According to the Professional Standards of the American Institute of Certified 4 Public Accountants ("AICPA") an issuer's management is responsible for preparing financial statements in conformity with GAAP because the issuer's 6 "transactions and the related assets , liabilities , and equity are within the direct 7 knowledge and control of management ." It is management that must adopt "sound
8 accounting policies" and establish and maintain "internal control that will, among
9 other things , record process, summarize, and report transactions (as well as events
10 and conditions) consistent with management ' s assertion embodied in the financial
11 statements."
12 186. Pursuant to these requirements, Defendants caused Tenet to represent
13 in its quarterly reports on Forms 10-Q and in its annual reports on Forms 10-K,
14 throughout the Class Period that its financial statements complied with SEC
15 regulations and were prepared in conformity with GAAP in all material respects.
16 In turn, Defendants caused the financial reports to be incorporated by reference in
17 the various registration statements Tenet filed with the SEC during the Class
18 Period.
19 187. Directly contrary to those representations, Tenet's financial
20 statements and various comments about them were false and misleading as
21 Defendants failed to prepare them in conformity with GAAP and, as a result,
22 failed to present fairly Tenet' s operations, inflating results by improperly
23 recognizing revenue that was unearned , and by failing to accrue for contingencies
24 that were probable and estimable.
25 1. Defendants Caused Tenet Improperly to Recognize
26 Revenue
27 188. Defendants knowingly or with deliberately reckless disregard caused
28 Tenet to manipulate its charges to obtain higher outlier payments for treatments
K:\I880'02Wmended Complaint (2003.05 -23).%pd 74 AMENDED CLASS ACTION COMPLAINT 1 that would not have otherwise qualified for outlier payments. Defendants knew or 2 deliberately recklessly disregarded that the revenue Tenet received as a result of 3 the Company's manipulation and abuse of the Medicare outlier system, as 4 quantified below, was not "earned," since Tenet had not incurred "extraordinarily 5 high costs" for which Congress and HHS intended the outlier payments to
6 compensate. Further, Defendants knew or were deliberately reckless in
7 disregarding that from the time they caused Tenet to engage in its aggressive
8 charging strategy: (1) the OIG was auditing outlier payments; (2) CMS was raising
9 the outlier threshold, indicating its efforts to control rising outlier payments, and,
10 therefore, it was probable that CMS would ultimately correct the outlier system
11 disabling Defendants from continuing to "game" the system; and (3) CMS would
12 ultimately require Tenet to repay improperly calculated outlier payments resulting
13 from its abuse of the Medicare system.
14 189. In each quarter of the Class Period, Defendants caused Tenet
15 materially to overstate its revenue in violation of GAAP. Specifically, Tenet
16 improperly recorded revenue that was only attained by manipulating the Medicare
17 outlier system through grossly excessive charges. Defendants knew or were
18 deliberately reckless in not knowing that Tenet had not incurred extraordinarily
19 high costs, but rather qualified a vast number of patients as outlier cases solely by
20 grossly inflating its charges. As a direct result of Tenet's failing to perform the
21 services necessary to collect the increased outlier payment, it should never have
22 earned the material amount of the outlier payments it recognized as revenue.
23 190. GAAP, in the form of Statement of Financial Accounting Concepts
24 ("FASCON") 5: Recognition and Measurement in Financial Statements of
25 Business Enterprises, states that revenue "recognition involves consideration of
26 two factors (a) being realized or realizable and (b) being earned..." (1183). The
27 FASCON describes the concept of "earned"' in relevant part as follows:
28 Revenues are not recognized until earned . An entity's
K:U 880`02\Amended Complaint (2003-05-23 ).wpd 75 AMENDED CLASS ACTION COMPLAINT 1 revenue-earning activities involve delivering or 2 producing goods, rendering services, or other activities 3 that constitute its ongoing major or central operations, 4 and revenues are considered to have been earned when 5 the entity has substantially accomplished what it must do 6 to be entitled to the benefits represented by the revenues. 7 ... Emphasis added, CON5, Par. 84).
8 191. Further, the FASCON states:
9 The two conditions (being realized or realizable and
10 being earned) are usually met by the time product or
11 merchandise is delivered or services are rendered to
12 customers, and revenues from manufacturing and selling
13 activities and gains and losses from sales of other assets
14 are commonly recognized at time of sale (usually
15 meaning delivery). (Emphasis added) (CON 5).
16 192. Additionally, the SEC provided its views in applying GAAP to
17 selected revenue recognition issues through the issuance of Staff Accounting
18 Bulletin ("SAB") No. 101 - Revenue Recognition in Financial Statements in
19 December 1999. SAB 101 states, in relevant part, as follows:
20 The staff believes that revenue generally is realized or
21 realizable and earned when all of the following criteria
22 are met:
23 Persuasive evidence of an arrangement exists,
24 Delivery has occurred or services have been rendered,
25 The seller's price to the buyer is fixed or determinable, and
26 Collectibility is reasonably assured. (Emphasis added)
27 193. Therefore, Tenet violated GAAP by recording revenue from services
28 it had not performed and to which it was not entitled. Accordingly, Tenet was
K:U880\02\Amcnded Complaint (2003-05-23).wpd 76 AMENDED CLASS ACTION COMPLAINT 1 required to restate any previously issued financial statement to correct for 2 revenues improperly recognized. 3 194. Accounting Principles Board Opinion ("APB") No. 20: Accounting 4 Changes, provides the guidance for when a Company is required to restate its 5 previously issued financial statements. APB No. 20 states, in relevant part, as 6 follows: 7 Restating financial statements of prior periods may dilute 8 public confidence in financial statements and may 9 confuse those who use them. Financial statements 10 previously prepared on the basis of accounting principles 11 generally accepted at the time the statements were issued 12 should therefore be considered final except for changes 13 in the reporting entity or corrections of errors . (11 14. 14 Emphasis added). 15 195. Further APB No. 20 defines an error in financial statements as 16 follows: 17 Errors in financial statements result from mathematical 18 mistakes, mistakes in the application of accounting 19 principles, or oversight or misuse of facts that existed at 20 the time the financial statements were prepared. 21 196. Still further, APB No. 20 specifically states that it applies to material 22 corrections of errors as follows: 23 If a change or correction has a material effect on 24 income before extraordinary items or on net income of 25 the current period before the effect of the change, the 26 treatments and disclosures described in this Opinion 27 should be followed. Furthermore, if a change or 28 correction has a material effect on the trend of earnings,
K:11880102Wmended Complaint ( 2003-05-23 ).wpd 77 AMENDED CLASS ACTION COMPLAINT the same treatments and disclosures are required. ¶ 38 2 (Emphasis added). 3 2. Defendants Failed to Accrue A Reserve for Unasserted Claims Resulting from Tenet's Improper or Illegal Conduct 4
5 197. As set forth above, Tenet did in fact collect payments from the 6 inflated outlier reimbursements from Medicare, from its illegal upcoding scheme 7 and from revenues obtained at RMC for unnecessary procedures . Defendants 8 knew or deliberately were reckless in disregarding probability that Tenet would
9 incur material fines, penalties or other liabilities as a result of its fraudulent or
10 improper conduct , and that Tenet' s financial statements were materially false and
11 misleading and in violation of GAAP. Tenet failed to accrue for and record a
12 charge to income for the probable and measurable amount of fines, penalties or
13 other liabilities Defendants knew or deliberately recklessly disregarded that Tenet
14 would have to pay.
15 198. GAAP, in the form of Statement of Financial Accounting Board
16 ("SFAS") No. 5: Accountingfor Contingencies, provides the guidance for the
17 recording and disclosure of loss contingencies. SFAS No. 5 defines a loss
18 contingency as "an existing condition, situation, or set of circumstances involving
19 uncertainty as to possible... loss... to an enterprise that will ultimately be resolved
20 when one or more future events occur..." (¶ 1). Further the SFAS provides
21 examples of loss contingencies including "...actual or possible claims and
22 assessments...." That the government would require payment in satisfaction of
23 fines, penalties or liabilities for Defendants' illegal or improper conduct is just
24 such a possible claim or assessment. Specifically, SFAS 5 states, with respect to
25 the recording of a loss contingency, in relevant part, as follows:
26 An estimated loss from a loss contingency (as defined in
27 paragraph 1) shall be accrued by a charge to income if
28 both of the following conditions are met:
K:\1880\02\Amrnded Complaint (2003-05-23).µpd 78 AMENDED CLASS ACTION COMPLAINT 1 a. Information available prior to 2 issuance of the financial statements 3 indicates that it is probable that an asset had 4 been impaired or a liability had been 5 incurred at the date of the financial
6 statements. It is implicit in this condition
7 that it must be probable that one or more
8 future events will occur confirming the fact
9 of the loss.
10 The amount of loss can be reasonably
11 estimated.
12 ¶ 8 (emphasis in original).
13 199. Therefore, Tenet violated GAAP when it failed to accrue by a charge
14 to income amounts for fines, penalties or other liabilities that it knew or should
15 have known it would have to pay when such amounts became probable and
16 measurable.
17 200. Further, Tenet's financial statements violated GAAP because they
18 failed to even disclose this loss contingency with respect to Defendants' outlier
19 scheme or RMC. FAS 5 states that disclosure may be necessary for the financial
20 statements not to be misleading (19) and is required:
21 ...when there is at least a reasonable possibility that a
22 loss or an additional loss may have been incurred. The
23 disclosure shall indicate the nature of the contingency
24 and shall give an estimate of the possible loss or range of
25 loss or state that such an estimate cannot be made.
26 Disclosure is not required of a loss contingency
27 involving an unasserted claim or assessment when there
28 has been no manifestation by a potential claimant of an
K:\I880\D2\Amended Complaint (2003-05-23).wpd 79 AMENDED CLASS ACTION COMPLAINT 1 awareness of a possible claim or assessment unless it is 2 considered probable that a claim will be asserted and
3 there is a reasonable possibility that the outcome will be
4 unfavorable. (110, Emphasis added).
5 201. Tenet's obligation to repay Medicare is considered an unasserted
6 claim . FAS 5 specifically addresses the issue of when to accrue and disclose
7 unasserted assessments and states, in relevant part, as follows:
8 With respect to unasserted claims and assessments, an
9 enterprise must determine the degree of probability that
10 a suit may be filed or a claim or assessment may be asserted and the possibility of an unfavorable
12 outcome. For example, a catastrophe, accident, or other
13 similar physical occurrence predictably engenders claims
14 for redress, and in such circumstances their assertion
15 may be probable; similarly, an investigation of an
16 enterprise by a governmental agency, if enforcement
17 proceedings have been or are likely to be instituted, is
18 often followed by private claims for redress, and the
19 probability of their assertion and the possibility of loss
20 should be considered in each case.... If the judgment is
21 that assertion is not probable, no accrual or disclosure
22 would be required. On the other hand, if the judgment is
23 that assertion is probable, then a second judgment must
24 be made as to the degree of probability of an unfavorable
25 outcome. If an unfavorable outcome is probable and
26 the amount of loss can be reasonably estimated,
27 accrual of a loss is required by paragraph 8. If an
28 unfavorable outcome is probable but the amount of loss
K:1I880\021Amendcd Complaint ( 2003-05-23).wpd 80 AMENDED CLASS ACTION COMPLAINT cannot be reasonably estimated, accrual would not be 2 appropriate, but disclosure would be required by 3 paragraph 10. If an unfavorable outcome is reasonably 4 possible but not probable, disclosure would be required 5 by paragraph 10. (138, Emphasis added). 6 202. Therefore, Tenet's financial statements violated GAAP, since they
7 did not contain the appropriate accrual for or disclose the nature and amount of the
8 Company' s obligation to Medicare as a result of its improper or fraudulent
9 conduct, or the liability the Company would incur as a result of the problems at
10 RMC. By the beginning of the Class Period, Defendants knew or with deliberate
11 recklessness disregarded that it was probable that Tenet would incur a significant
12 liability for fines and penalties related to its improper or illegal courses of conduct,
13 and medical malpractice liability for performing unnecessary medical procedures.
14 IX. FALSE AND MISLEADING STATEMENTS
15 203. On January 11, 2000, Defendants caused Tenet to issue a press
16 release disclosing Tenet's earnings from operations for the quarter ending
17 November 30, 1999. Defendants disclosed that EPS from continuing operations
18 rose 7.5 % to $0.43 from $0.40 in the prior-year's quarter. Net operating revenues
19 increased 8.5% to $2.78 billion over $2.56 billion during the same period in the
20 previous year. EBITDA increased 4.0% from $451 million during the prior year's
21 quarter to $469 million. According to Barbakow, the second quarter marked "the
22 resumption of earnings growth after a particularly difficult 1999." After
23 mentioning that the Company "had embarked on an aggressive agenda in fiscal
24 2000, Barbakow stated that "[i]t's no secret that the government's cuts to the
25 Medicare program have hurt hospitals across the country." Barbakow continued
26 that Tenet had "worked exceptionally hard to devise innovative strategies to lower
27 our costs and raise our revenues from other sources. We've implemented
28 numerous initiatives to lower our bad debt expense and improve our cash flow.
K:11880 'A24>,mended Complaint ( 2003-05 -23).wpd 81 AMENDED CLASS ACTION COMPLAINT 1 Clearly, these strategies are working." 2 204. On January 14, 2000, Defendants caused Tenet to file with the SEC 3 its Quarterly Report on Form 10-Q for the quarter ended November 30, 1999 ("2Q 4 2000 10-Q"), which defendants Fetter and Mathiasen signed. The 2Q 2000 10-Q 5 reiterated the numbers Tenet disclosed in its January 11, 2000 press release. Tenet 6 reported net operating revenues of $2.780 billion for the quarter, an 8.5% increase 7 over $2.563 billion for the same period in fiscal 1999. Tenet also reported net
8 operating income of $337 million for the quarter (as opposed to $317 million for
9 the year-ago quarter), and net income of $135 million for the quarter (as opposed
10 to $125 million for the year-ago quarter). In the 2Q 2000 10-Q, Defendants also
11 reported basic and diluted earnings of $0.40 per common share, a decrease of
12 $0.03 from the same period in fiscal 1999. According to Defendants, Tenet
13 achieved net inpatient revenues of $1.7 billion in net inpatient revenues for the
14 Company's domestic general hospitals for the quarter, an increase of 10.5% over
15 the $1.538 billion for the year-ago quarter. Net inpatient revenue exceeded net
16 outpatient revenues of $823 million by 86%, constituting by far the more
17 important segment of revenues for Tenet. For the quarter, Medicare revenues were
18 31.6 % of the mix, down from 33.8% in the same quarter of fiscal 1999.
19 205. In the 2Q 2000 10-Q, Defendants again recounted the adverse effects
20 that the BBA had on Tenet's revenues and earnings. In the face of those adverse
21 effects, however, Defendants touted as significant a trend indicating the
22 improvement of Tenet's net inpatient revenue per admission. Defendants boasted
23 of a 7.5% total increase and a 4.8% increase on a "same store" basis, "the largest
24 periodic increases in recent years. While increases in any quarter will vary, there
25 now appears to be an upward trend that the Company expects will continue."
26 Defendants also boasted of strategies designed to enable Tenet to weather the
27 changes impacting the healthcare industry such as "strategies to reduce
28 inefficiencies, create synergies, obtain additional business and control costs. In the
K:\1880 '02\Anhndcd Complaint ( 2003-05-23).wpd 82 AMENDED CLASS ACTION COMPLAINT 1 past 12 months, such strategies have included hospital cost-control programs and
2 overhead reduction plans and the enhancement of integrated health care delivery
3 systems."
4 206. Defendants further caused Tenet to discuss the its business outlook,
5 stating:
6 The ongoing challenge facing the Company and the
7 health care industry as a whole is to continue to provide
8 quality patient care in an environment of rising costs,
9 strong competition for patients and continued pressure
10 on payment rates by government and other payors.
11 Because of national, state and private industry efforts
12 to reform health care delivery and payment systems,
13 the health care industry as a whole faces increased
14 uncertainty . The Company is unable to predict whether
15 any other health care legislation at the federal and/or
16 state level will be passed in the future and what action it
17 may take in response to such legislation, but it continues
18 to monitor all proposed legislation and analyze its
19 potential impact in order to formulate its future
20 business strategies.
21 (Emphasis added). Thus Defendants manifested their focus on, among other
22 things, government efforts to reform payment systems.
23 207. The foregoing statements were false and misleading for the following
24 reasons:
25 a. Defendants knowingly or deliberately recklessly established an
26 aggressive and abusive charging strategy which they failed to disclose to
27 investors. Defendants knew or deliberately recklessly disregarded that their
28 aggressive, abusive charging strategy led directly to Tenet's receiving material
K:U880\02Wmended Complaint (2003-05 -23).wpd 83 AMENDED CLASS ACTION COMPLAINT outlier payments from Medicare to which it was not entitled. [Further, because
2 Tenet was required to charge every patient the same amount, Defendants also
3 knew or deliberately recklessly disregarded that Tenet recognized material stop-
4 loss provisions from its managed care contracts to which it otherwise would not
5 have been entitled absent it's aggressive, abusive pricing strategy. According to a
6 December 20, 2002 Lehman Brothers report, the elimination of stop loss payments
7 as a direct result of Tenet's aggressive and abusive charging strategy would
8 constitute a loss of revenues and earnings bigger in scope than monies Tenet
9 would lose by virtue of a Medicare clampdown.
10 b. Defendants knew or deliberately recklessly disregarded that the
11 Medicare statutes and regulations promulgated thereunder entitled Tenet hospitals
12 to outlier payments only if the costs of treating a particular patient were
13 "extraordinarily high." Defendants knew or were reckless in not knowing that
14 Tenet's aggressive, abusive charges were untethered from the actual costs of
15 treating patients, were unrelated to what any patient paid, and were thus merely a
16 device to increase the amount of outlier payments and stop loss payments that
17 Tenet received.
18 c. Tenet's financial statements for the period were materially false
19 and misleading. By virtue of having improperly received and recorded as revenue
20 outlier payments to which Tenet was not entitled, Tenet materially inflated several
21 key indicators, including operating income, net inpatient revenue per admission,
22 EBITDA and EBITDA margins. For example, according to a December 20, 2002
23 Lehman Brothers report, discussing Tenet's December 3, 2002 post Class Period
24 disclosures:
25 One interesting item disclosed at the meeting was the
26 company's "real" EBITDA margins, excluding Medicare
27 outlier payments. As highlighted below, Tenet
28 suggested that its EBITDA margins would have been
K:U880\02\Amendcd Complaint ( 2003-05-23 ). wpd 84 AMENDED CLASS ACTION COMPLAINT 15.% in FY02, versus the 20.4% reported figure. In 2 other words, Tenet had been overstating its margins by 3 almost 500 basis points. This amount compares to 4 16.8% margins in FY98, implying that Tenet's margins
5 would have declined in the past four years (excluding
6 outlier payments). This disclosure was important, since
7 it calls into question the appropriate margin levels Tenet
8 can achieve on a steady basis.
9 d. Defendants knew or deliberately recklessly disregarded that the
10 aggressive, abusive charging strategy they had instituted enabled Tenet to receive
11 outlier payments and stop loss payments for patients for which its hospitals did not
12 expend extraordinarily high costs. Defendants further knew or deliberately
13 recklessly disregarded that CMS and OIG had begun to pay close attention to
14 outlier payments and had taken measures to stem the tide of such payments.
15 Defendants knew or deliberately recklessly disregarded that , therefore, they
16 caused Tenet to recognize revenue and income on a material amount from outlier
17 payments to which Tenet was not entitled in violation of GAAP. Defendants
18 knew or deliberately recklessly disregarded that CMS would ultimately not only
19 force Tenet to cease abusing the Medicare system, but likely force it to repay a
20 substantial amount of outlier payments it received improperly.
21 e. Defendants knew or deliberately recklessly concealed from
22 investors that Tenet's outlier payments, of which improperly received outlier
23 payments based on the SWA made up a dramatic and material amount, comprised
24 a material amount of Tenet's EPS growth, particularly after fiscal 1999, a time
25 when Tenet's financial results and its common stock price both languished, and
26 that their claims that their own strategic initiatives had generated impressive
27 growth were false:
28
K:\1880\02\Amended Complaint ( 2003-05 -23).wpd 85 AMENDED CLASS ACTION COMPLAINT 1 1998 1999 2000 2001 2002
2
3 EPS Excluding $0.91 $0.80 $0.73 $0.84 $1.28
4 Outliers
5
6 EPS Boost from $0.24 $0.30 $0.48 $0.69 $0.89
7 Outliers
8
9 EPS, including $1.15 $1.10 $1.21 $1.53 $2.17
10 Outliers
11
12 Outliers as % of Total 21% 27% 40% 45% 41%
13 EPS
14
15 f. Outlier payments had a similar effect on EBITDA margins as
16 follows:
17 1998 1999 2000 2001 2002
18
19 Reported EBITDA 18.3% 17.1% 17.0% 18.6% 20.1%
20 Margins
21
22 EBITDA Margins, 16.8% 15.3% 14.2% 14.6% 15.5%
23 Excluding Outliers
24
25 g. Tenet's outlier payments grew materially and dramatically year
26 over year from fiscal 2000 on as follows:
27
28
K:\I880\02Wmended Complaint ( 2003 -05-23).apd 86 AMENDED CLASS ACTION COMPLAINT Outlier SWA Growth Growth for Payments Growth Outlier For SWA SWA FY (SMM) ($MMD Payments Hospitals hospitals ex. aquisitions 2000 $351 --- $163 ------
2001 $564 $213 $303 $141 $93
2002 $763 $199 $481 $178 $147
2003E $750E ($13E) $515 $34 ---
h. Based on these figures , Tenet 's outlier payments that were based on the SWA, as a percentage of total outlier payments ("SWA % of Total Outlier"), were 53 .6% in 2000 , 46.3% in 2001 , and 39.6% in 2002 . 11 Applying these percentages to the EPS figures above yields startling facts about Tenet's earnings growth. Of Tenet ' s $1.21 EPS in fiscal 2000 , it should have recorded no more than $0 .95, a 27% inflation of EPS . 12 Had Tenet received appropriate amounts of outlier payments not affected by its grossly excessive charging strategy, EPS for fiscal 2000 would have dropped below EPS for fiscal 1999. The results for fiscal years 2001 and 2002 were equally as material and dramatic. Of Tenet ' s $1.53 of fiscal 2001 EPS , it should have only recorded no more than $1.21, a 26% inflation . Of Tenet ' s $2.17 of fiscal 2002 EPS , it should have recorded no more than $ 1.82, a 19% inflation. In violation of GAAP, Defendants
The formula for calculating the "SWA % of Total Outlier" is: "SWA Outlier Payments"/ "Outlier Payments."
'2The formula used to calculate the amount of EPS inflation resulting from the improper use of the SWA is: "% of EPS inflation" = (SWA % of Total Outlier x "EPS Boost from Outlier")/ "EPS, including outlier" - (SWA % of Total Outlier x "EPS Boost from Outlier").
K:\I 880\02\Amended Complaint (2003-05-23).wpd 87 AMENDED CLASS ACTION COMPLAINT 1 knew or deliberately recklessly disregarded these material overstatements and the
2 accompanying overstatements of their quarterly reports throughout the Class
3 Period.
4 i. By virtue of their causing Tenet to record improperly received,
5 unearned outlier payments as revenue, Defendants knew or were deliberately
6 reckless in not knowing that Tenet affirmatively misrepresented that it had
7 materially skewed its payor mix by approximately 5%. Tenet's payor mix was
8 material to investors because every material increase in the percentage of revenue
9 derived from non-governmental payors meant a material increase in Tenet's bad
10 debt expense - an expense that would have materially eroded margins.
11 j. Defendants knew or deliberately recklessly disregarded that
12 Tenet's projections of future earnings growth were false and misleading. At the
13 time Defendants made those projections, they did so with actual knowledge that
14 the outlier payments on which Tenet became dependent to show growth were
15 materially in excess of those to which Tenet was entitled. As such, Defendants
16 knew that, ultimately, CMS would require repayment of those improper outlier 17 payments. Further, Defendants knew by virtue of being in possession of their own 18 contracts with managed care payors, that their aggressive, abusive charging 19 strategy would enable Tenet to reap material amounts of stop loss payments from 20 managed care payors to which, absent that charging strategy, Tenet would not 21 have been entitled. Defendants knew that upon discovering their abusive charging 22 strategy, Tenet's managed care payors would seek to alter contracts, stripping 23 them or materially reducing the amount of stop loss payments to which Tenet 24 would be entitled in the future. Thus, Defendants' knew that their projections 25 throughout the Class Period were unsustainable. 26 k. Defendants knew or deliberately recklessly disregarded that 27 utilization at RMC related to cardiac procedures was being manipulated, and that 28 as a result, Tenet would be subjected to material medical malpractice claims.
K:\1880\02Wnunded Complaint (2003.05 -23).wpd 88 AMENDED CLASS ACTION COMPLAINT 1 Defendants knew or deliberately recklessly disregarded that doctors at its Redding
2 facility, with the full knowledge of Redding's administrators, had, throughout the
3 Class Period, performed a material number of unnecessary cardiac procedures. By
4 virtue of RMC doctors performing those procedures, Tenet recognized material
5 amounts of revenue which it did not earn, in violation of GAAP.
6 1. Defendants knew or deliberately recklessly disregarded that the
7 material number of unnecessary procedures performed at RMC subjected Tenet to
8 liability for medical malpractice claims in an amount material to Tenet and that
9 GAAP required Defendants to establish a loss contingency to cover those claims.
10 By virtue of their failure to establish such a reserve, Defendants caused Tenet's
11 financial results to be materially overstated in violation of GAAP.
12 M. Defendants knew or deliberately recklessly disregarded that
13 Tenet's liability for upcoding violations described in the False Claims Act
14 Complaint required Tenet to accrue a reserve. In violation of GAAP, Defendants
15 knew or deliberately recklessly disregarded, at least as early as Tenet's second
16 quarter of fiscal 2000, ended November 30, 1999, that it was probable, and not
17 merely possible, that the government would seek fines and penalties in a material
18 amount. By November 30, 1999, Defendants knew or deliberately recklessly
19 disregarded that during the period 1992 through the end of 1998, Tenet had over- 20 billed Medicare on 19,300 claims with a penalty for each claim of between $5,500 21 and $11,000 or cumulatively between $93 million and $185.9 million. Further, 22 Defendants knew or deliberately recklessly disregarded that as a result of Tenet's 23 systemic upcoding violations, the government would force Tenet repay three times 24 the amount it received in payment, cumulatively $311.6 million. Thus, throughout 25 the Class Period, Defendants knew or deliberately recklessly disregarded that 26 Tenet failed to accrue a reserve for liability exceeding $508 million and to take a 27 charge against earnings, reflecting that accrual. 28 n. Further, beginning no later than the second quarter of fiscal
K:\1880\02\Amendcd Complaint ( 2003-05-23).apd 89 AMENDED CLASS ACTION COMPLAINT 1 2000, ended November 30, 1999, Defendants knew or deliberately recklessly
2 disregarded that by virtue of their aggressive, abusive charging strategy, each
3 outlier claim they submitted was subject to the same fine and penalty under the
4 False Claims Act, $5,500-$11,000 per claim, for at least each outlier payment
5 Tenet received based solely on the S WA and to repay the amounts of those
6 outliers threefold. All tolled, therefore, Defendants knew or deliberately
7 recklessly failed to disclose, in violation of GAAP, that it was possible, if not
8 probable, that Tenet would have to repay the government at least $2.841 billion,
9 comprised of $489 million for improperly received outliers during fiscal 2000
10 ($163 million x 3), $909 million for improperly received outliers during fiscal
11 2001 ($303 million x 3), and $1.443 billion for improperly received outliers
12 during fiscal 2002 ($481 million x 3). Each of the reporting periods throughout
13 the Class Period was materially infected by Defendants' knowledge of or
14 deliberately reckless failure to accrue for this contingent liability in violation of
15 GAAP.
16 208. In a February 24, 2000 press release and a subsequent Current Report 17 on Form 8-K, filed with the SEC on February 25, 2000 and signed by Mathiasen, 18 Defendants caused Tenet to announce the resignation of Fetter as Chief Corporate 19 Officer and CFO. In Fetter's place, Tenet hired defendant Dennis who, according 20 to Barbakow was "an outstanding strategist and executive with broad experience 21 across many health care-related sectors." Barbakow continued that Dennis was 22 already familiar with Tenet and its management having worked with Tenet for 23 many years on major transactions. Indeed, Dennis was closely involved in two 24 major Tenet acquisitions and with most of its corporate financings over the 25 preceding five years. Speaking of the "great strides" Tenet had made over the 26 preceding year and the challenges that still faced it, Barbakow stated "David will 27 be an invaluable resource as we move forward and position ourselves to capitalize 28 on the technology revolution in health care. Working with Tom Mackey and Barry
!C\1880\02Wmended Complaint ( 2003-05-23 ). wpd 90 AMENDED CLASS ACTION COMPLAINT 1 Schochet, David will add an ideal complement to our top management team."
2 209. On March 31, 2000 , Defendants caused Tenet to issue a press release
3 announcing Tenet's results for the quarter ended February 29, 2000. Barbakow
4 stated that it was Tenet's "best quarter in a long time." Diluted earnings per share
5 grew by $0.08, or 20 %, to $0.48 for the quarter. Net operating revenues grew to
6 $2.85 billion from $2.82 billion during the same quarter of fiscal 1999, while
7 EBITDA grew to $500 million from $458 million during the same period of the
8 prior year. Barbakow further boasted that Tenet had successfully implemented
9 "strategies to improve our business." Further, he stated that "[n]o matter how you
10 look at it, our operations performed very well." Barbakow continued that "[c]ost
11 controls were excellent in the quarter" and Tenet's "[l]abor expense actually
12 dropped, reflecting productivity improvements and our outsourcing initiatives.
13 Supply expense also declined, reflecting the success of our BuyPower group
14 purchasing organization." Thus, in announcing earnings, Defendants conceded
15 that Tenet was succeeding in holding the line on costs.
16 210. On April 14, 2000, Defendants caused Tenet to file its Quarterly 17 Report on Form 10-Q for the third quarter of fiscal year 2000 ("3Q 2000 10-Q") 18 with the SEC, signed by Dennis and Mathiasen. Defendants caused Tenet to 19 report net operating revenues of $2.850 billion for the quarter, a $28 million 20 increase from $2.822 billion for the third quarter of fiscal year 1999. Operating 21 income of $135 million suffered by comparison, lagging behind the same quarter 22 of fiscal 1999 by $181 million. Net income of $38 million also lagged behind the 23 same quarter of fiscal 1999 by $86 million. Basic and diluted earnings of $0.12 24 per common share fell $0.28 from the same quarter a year earlier. 25 211. In the 3Q 2000 10-Q, once again, Defendants touted strong growth in 26 I patient volumes and revenues, continuing improvements in cost controls, 27 significant improvements in operating margins, among other factors, in its 28 improving performance. Defendants also caused Tenet to reiterate its disclosure
K:118S0\02 Amended Complaint ( 2003.05-23).xpd 91 AMENDED CLASS ACTION COMPLAINT 1 about the effects of the BBA and its increase in its allowance for bad debts.
2 Defendants stated that Tenet had made attempts "to mitigate the increase in bad
3 debt expense over the prior year, including improving the process for collecting
4 receivables, pursuing the acceleration of payments from managed care payors,
5 standardizing and improving billing systems and developing a set of best practices
6 in the patient admission and registration process." Omitted from this disclosure,
7 however, was the reference to the causes for the increase in Tenet's allowance for
8 doubtful accounts from 6.7% in the third quarter of fiscal 1999 to 7.5 % in the
9 third quarter of fiscal 2000. The reference to increased pricing as among the
10 causes of the increase in bad debts was gone.
11 212. Defendants knew or were deliberately reckless in not knowing that
12 the foregoing statements were materially false and misleading for the reasons
13 stated above in paragraph 12031.
14 213. On June 13, 2000, Defendants caused Tenet to issue a press release,
15 describing Tenet's private placement of $400 million of 10-year senior notes to 16 qualified institutional investors. Tenet expressed its intent to use the proceeds to 17 retire existing bank debt. The next day, on June 14, 2000, Fitch , the international 18 rating agency, rated these senior notes a BB+, reflecting "the company's strong 19 competitive position, broad geographic reach and solid financial profile." In 20 rating Tenet's senior notes BB+, Fitch focused on Tenet's recent successes in 21 reducing costs, in the face of continued pressure on government program 22 reimbursements. Fitch noted Tenet's "corporate initiatives to further improve 23 revenues and reduce its expense structure," including "overhead cuts, bad debt 24 reduction, asset divestitures, and non-government contract improvements." As a 25 result of those initiatives, according to Fitch, Tenet's EBITDA improved and with 26 it, its debt-to-EBITDA ratios. 27 214. On July 26, 2000, Defendants caused Tenet to issue a press release 28 announcing Tenet's results for the quarter and fiscal year ended May 31, 2000.
K_11880\02 Wnxnded Complaint (2003.05 -23).wpd 92 AMENDED CLASS ACTION COMPLAINT Defendants reported that EPS had risen 21 % for the quarter from $0.42 per share 2 to $0.51 per share. For the full year, EPS rose 10 % from $1.65 in fiscal 1999 to
3 $1.81 in fiscal 2000. After divesting itself of 20 hospitals during the fourth
4 quarter of fiscal 2000, Tenet's net operating revenues fell from $2.94 billion in
5 1999 to $2.91 billion. For the full year, net operating revenues increased to
6 $11.41 billion up 5% from $10.88 billion in fiscal 1999. More importantly, during
7 the fourth quarter, "[s]ignificant cost improvements spurred a 5 percent increase in
8 EBITDA and a full percentage point expansion in EBITDA margins..." For the
9 full year, EBITDA rose 4% from $1.86 billion in fiscal 1999 to $1.94 billion in
10 fiscal 2000, with EBITDA margins remaining virtually unchanged at 17.1 %. Thus
11 Defendants continued to disclose that Tenet was either reducing or holding the
12 line on costs. As Barbakow stated, "[o]perational cost controls were excellent
13 across the board. In the face of on-going cost pressures, we continue to generate
14 significant improvements..."
15 215. In the July 26, 2000 press release, Barbakow called these results 16 "very strong." Barbakow stated that Tenet continued "to see robust revenue and 17 pricing trends." He also boasted of "excellent" cost controls and of the expansion 18 of EBITDA margins by 1%. Barbakow continued that "[c]oming off of multiple 19 years of draconian cuts in government reimbursement, these results clearly 20 demonstrate the success of our strategies." According to Barbakow, Tenet had 21 built "great momentum" as fiscal 2001 began. Looking to the future, Barbakow 22 concluded: 23 The past few years have been a very difficult time for 24 health care providers across the country... We've faced 25 dramatic cuts from our largest payor: the government. 26 Now, we are finally getting some welcome relief. For 27 the first time in four years, we do not expect any 28 incremental reductions in government program
K:\1880\02\ Amcnded Complaint ( 2003-05-23).wpd 93 AMENDED CLASS ACTION COMPLAINT 1 reimbursement in fiscal 2001. This is a very significant
2 change.
3 At the same time, the strategies we've put in place to
4 further improve our operations should yield further
5 margin expansion and cash flow improvement.
6 We've weathered a very difficult period and are now
7 positioned for strong growth.
8 216. On August 15, 2000, Tenet filed its 2000 10-K with the SEC, signed
9 by Dennis, Mathiasen, Barbakow, Biondi, Bratter, Cloud, DeWald, Focht, Hay,
10 Honeycutt, Loop and Korn, and incorporating therein by reference Tenet's Annual
11 Report to Shareholders for Fiscal Year 2000 ("2000 Annual Report"). In the 2000
12 Annual Report, Defendants caused Tenet to reiterate the results from its July 26,
13 2000 press release. In the 2000 10-K Defendants further stated that Medicare
14 revenues had fallen from 38% of total revenues for fiscal 1998 to 34.2% in 1999 15 and 32.6% in 2000. Defendants again disclosed the adverse effects of the BBA 16 and the relief from the cutbacks to providers which Congress intended through the 17 BBRA. Defendants stated that "[a]lthough the impact of the BBRA on Tenet was
18 not significant it indicated a recognition by Congress that further reductions in 19 payments to hospitals were not necessary." Thus, Defendants continued to focus 20 on legislative and regulatory efforts and to understand that any movement toward 21 reimbursement control would lead to decreased revenues in the future. 22 217. The 2000 Annual Report, signed by Dennis and Mathiasen , contains 23 Barbakow's Letter to Shareholders. In that letter, Barbakow discussed how 24 Tenet's "integrated health care delivery systems" in the communities in which its 25 hospitals were concentrated was working. "The strength of our hospital 26 networks," Barbakow wrote, "gives us greater leverage in contract negotiations 27 with payers, enabling us to gain better prices and terms. In fact, in fiscal 2000 we 28 saw some of the best commercial pricing trends we've seen in years." At the same
KA I 8801021Amcnded Complaint ( 2003-05-23 ).wpd 94 AMENDED CLASS ACTION COMPLAINT 1 time Tenet saw advantageous commercial pricing, Barbakow also touted Tenet's
2 reduction of labor and supply costs, its reduction of bad debt expenses and its
3 improved cash flow. Barbakow also wrote of the success of the Partnership for
4 Change program, "improving hospital processes, identifying best clinical practices
5 and providing clinicians with the support and information they need to make
6 appropriate treatment decisions."
7 218. According to Barbakow's Letter to Shareholders, Tenet's future had
8 "never looked more promising." The health care industry had enormous growth
9 potential. Management was committed to "strong and effective ethics and
10 compliance programs." The political climate which had for three years led to
11 significant cuts in Medicare reimbursements was then thawing and "continued
12 commercial pricing improvements" would "spur strong top-line growth.
13 219. Also in the 2000 Annual Report, Defendants caused the Company to
14 set forth its audited, Consolidated Financial Statement for the year ended May 31,
15 2000. In its Consolidated Statements of Income, Defendants caused Tenet to
16 reproduce the financial results for fiscal years 1998 and 1999 and to compare
17 those with the financial results for fiscal 2000. Net operating revenues increased
18 from $9.895 billion in 1998 to $10.880 billion in 1999 and $11.414 billion in
19 2000. Operating income was $1.128 billion in 1998, fell to $0.939 billion in 1999
20 and rose again to $1.047 billion in 2000. Diluted EPS from continuing operations
21 were $1.22 in 1998, $0.79 in 1999 and $1.08 in 2000. Defendants recorded 22 salaries and benefits expenses of 41% of net operating revenues in 1998, 40.6 % in
23 1999 and 39.5% in 2000, indicating that labor costs were holding steady or
24 declining. Similarly, the supplies expense remained constant at 13.9% of net
25 operating revenues in 1998 and 14% in both 1999 and 2000. 26 220. Once again, in the 2000 Annual Report, Defendants caused Tenet to 27 disclose that its provision for doubtful accounts as a percentage of net operating
28 revenues had risen from 5.9% in 1998, to 6.8% in 1999, and to 7.5 % in 2000.
K.\I880\02\Amended Complaint (2003-05-23).wpd 95 AMENDED CLASS ACTION COMPLAINT 1 While they were unable to quantify to which of several factors the rise in bad debt
2 was attributable, among those factors was "improved pricing." According to
3 Defendants, even though increased pricing was a factor in the rise in bad debt,
4 they failed to consider pricing when considering actions to mitigate the increases
5 in bad debt expenses.
6 221. Defendants knew or were deliberately reckless in not knowing that
7 the foregoing statements were materially false and misleading for the reasons
8 stated above in ¶207.
9 222. On August 15, 2000, Defendants caused Tenet to file its Notice of
10 Annual Meeting and Proxy Statement ("2000 Proxy"). In response to that filing, a
11 group of dissident shareholders called the Tenet Shareholder Committee
12 ("Shareholder Committee") filed and issued a proxy of its own on August 18,
13 2000. In that proxy, the Shareholder Committee stated that it sought the election
14 of four directors to affect what it termed the isolation and entrenchment of Tenet's
15 managers. In particular, the Shareholder Committee was concerned with Tenet's
16 poor financial performance, its "bloated corporate staff and its exorbitant
17 executive compensation," and Tenet's poor corporate governance practices. The
18 Shareholder Committee compared Tenet to four other publicly traded companies
19 in the Hospital Management Index and complained of, among other things,
20 Tenet's poor return on assets, poor return on equity, declining profit margins for
21 EBITDA, a high debt to equity ratio, and exposure to legal claims some of which
22 related to Tenet's corporate integrity. The Shareholder Committee's conclusion
23 included:
24 The Committee believes that significant changes must be
25 made to address the serious economic issues facing
26 Tenet. In the Committee's view, current management has
27 produced a broken Tenet that cannot reach its full 28 potential without refocusing on quality of patient care,
K:\I 880\02Wmendcd Complaint (2003-05 -23).wpd 96 AMENDED CLASS ACTION COMPLAINT 1 physician relationships, improved occupancy and
2 internally generated growth. The Committee's nominees
3 for director pledge to focus on Tenet's financial health
4 by improving the Company in those areas and by
5 exploring ways to reduce the Company's debt load,
6 speed up collections on accounts receivable, and
7 improve the Company's cash flow.
8 223. Defendants waged a proxy battle with the Shareholder Committee
9 through August, September and early October, 2000. In the end, the Shareholder
10 Committee was able to place its candidates before the assembled shareholders at
11 Tenet's Annual Meeting.
12 224. In a public response to the Shareholders Committee attack, in a
13 September 12, 2000 press release, Defendants caused Tenet to preview its
14 earnings for the quarter ended August 31, 2000. Tenet disclosed that it expected
15 to exceed consensus analysts expectations of $0.44, a healthy increase over the 16 $0.39 per share Tent reported for the same quarter of fiscal 2000. Defendants 17 noted that the rise in earnings stemmed from "strong admissions trends and by 18 continuing upward trends in pricing." Defendants further stated that "the upward 19 trend in pricing stems from continued strong commercial pricing... Looking 20 forward, the company expects continued strength in commercial pricing, as well as 21 better Medicare reimbursement relative to the recent past." Barbakow attributed 22 Tenet's then recent earnings upswing to "the obvious success of our operating 23 strategies." He continued that "[i]nitiatives we implemented 19 months ago are 24 now producing results." 25 225. In a September 24, 2001 press release, Fitch upgraded Tenet 's senior
26 I unsecured debt from BB+ to BBB. Among other reasons for upgrading Tenet's 27 debt, Fitch cited "[t]he pricing environment for hospital providers, for-profits in 28 particular, is considered to be the most favorable in several years [and that c]uts in
K:\I880\02\Aniended Complaint (2003-05-23).wpd 97 AMENDED CLASS ACTION COMPLAINT 1 Medicare reimbursement (mandated by the Balanced Budget Act of 1997 (BBA
2 `97)) have been essentially restored." Fitch praised Tenet for using its increased
3 cash from operations and divestitures, which contributed $700 million, to decrease
4 its debt by $2.2 billion. Thus, directly by virtue of its scheme to achieve outlier
5 reimbursements greater than those to which it was entitled, Tenet was able to
6 reduce its debt and directly strengthen its debt rating.
7 226. On or about September 25, 2000, Tenet filed an Amendment No. 1 to
8 Form S-4 Registration Statement under the Securities Act of 1993 (the "9/00
9 Registration Statement"), pursuant to which Tenet issued $400 million in debt
10 securities. Barbakow, Dennis, Mackey, Mathiasen, Biondi, Bratter, Cloud,
11 DeWald, Focht, Hay, Honeycutt, Kom and Loop each signed the 9/00 Registration
12 Statement. The 9/00 Registration Statement, while including what purported to be
13 a comprehensive list of "Risk Factors," omitted reference to Tenet's improper
14 recognition of revenue reflected in the receipt of excessive outlier payments and
15 revenues obtained by billing for unnecessary medical procedures and revenues
16 obtained by paying illegal referral fees.
17 227. The 9/00 Registration Statement incorporated by reference the
18 following documents.
19 a. Tenet's Annual Report on Form 10-K for the fiscal year ended 20 May 31, 2000 filed August 15, 2000; and
21 b. All documents filed by Tenet pursuant to §§ 13(a), 13(c), 14 or
22 15(d) of
23 the 1934 Act, subsequent to the date of the 9/00 Registration Statement until the 24 offering of all debt securities being registered pursuant to the 9/00 Registration 25 Statement was completed. 26 228. On October 3, 2000, Defendants caused Tenet to issue a press release 27 announcing Tenet' s results for the quarter ended August 31, 2000. Diluted 28 earnings per share rose 23% from $0.39 in fiscal 2000 to $0.48 in fiscal 2001. Net
K:\1880\02\Amendcd Complaint (2003 -05-23).wpd 98 AMENDED CLASS ACTION COMPLAINT 1 operating revenues grew to $2 .89 billion from $2.87 billion during the same
2 quarter of fiscal 2000, driven primarily by "strong volumes, as well as on-going
3 increases in pricing and improvements in managed care contracting." (Emphasis
4 added). According to Defendants, Tenet achieved "excellent cost controls" that
5 generated a 13% EBITDA increase from $457 million in the first quarter of fiscal
6 2000 to $517 million in 2001. EBITDA margins rose from 15.9% to 17.9%.
7 229. In the October 3, 2000 press release, Barbakow called the first quarter
8 "exceptionally strong," stating that "[v]irtually every metric showed momentum in
9 the right direction." Growth in same-facility volume to a record high, expansion
10 of EBITDA margins, improved cash flows from operations were all, according to
11 Barbakow the result of Defendants' strategies working. Barbakow boasted that in
12 fiscal 1999 Defendants had "developed and implemented a number of initiatives to
13 improve our operations, reduce bad debt and improve cash flow.. .Those initiatives
14 have taken hold and have been generating strong results for the past few quarters.
15 This quarter is just further evidence of their success and bodes well for the periods
16 ahead." Barbakow concluded with a bullish projection about strong top-line
17 growth due, once again to volume and pricing gains, continued "excellent cost
18 controls" and continued efforts to reduce debt. Defendants expressed its comfort
19 with expectations of growth in EPS from operations of the "mid-teens" from the
20 $1.81 Tenet posted in fiscal 2000.
21 230. On October 12, 2000, Tenet filed its Form 10-Q for the quarter ended
22 August 31, 2000 ("IQ 2001 10-Q") with the SEC, signed by Defendants Dennis
23 and Mathiasen and reiterating the results it stated in the October 3, 2000 press
24 release. 25 231. On November 15, 2000, Defendants caused Tenet to issue a press
26 release, previewing Tenet's "strong second quarter trends." Defendants disclosed
27 that following a record first quarter ended August 31, 2000, admissions trends in
28 the September and October, 2000, were up, that cash flow was strong and that they
K:11880102 Amended Complaint (2003-05-23).wpd 99 AMENDED CLASS ACTION COMPLAINT 1 were "pleased with [Tenet's] progress to date during the quarter and [] optimistic
2 about results for the full fiscal year." Defendants concluded, affirming their
3 previous guidance of "mid-teens growth in earnings per share from operations for
4 the full fiscal year 2001, above the $1.81 per share reported in fiscal 2000" and
5 stating that it might revise that guidance once results for the second quarter
6 became available.
7 232. Defendants knew or were deliberately reckless in not knowing that
8 the foregoing statements were materially false and misleading for the reasons
9 stated above in ¶ 207.
10 233. On January 4, 2001, Defendants caused Tenet to issue a press release
11 announcing Tenet's results for the quarter ended November 30, 2000. Diluted
12 earnings per share rose 26% from $0.43 in fiscal 2000 to $0.54 in fiscal 2001. Net 13 operating revenues grew 4.9% to $2.92 billion from $2.78 billion during the same
14 quarter of fiscal 2000, driven primarily by "volume and reimbursement gains."
15 Defendants no longer referred to "on-going increases in pricing" as a reason for 16 net operating revenue improvements. For the second quarter of fiscal 2001, 17 Defendants achieved "effective cost controls," enabling Tenet to generate a 14.5% 18 EBITDA increase from $469 million in fiscal 2000 to $537 million in 2001. 19 EBITDA margins rose 1.5% to 18.5%. Defendants also touted volume increases 20 due to, among other things, Tenet's ongoing "physician relations strategy and 21 program development" and Tenet's "efforts to further develop core service lines 22 such as cardiology, orthopedics and neurology." According to Barbakow, cash 23 flow was "spectacular" and Tenet continued to whittle away at its debt, reducing it 24 $377 million during the quarter, reducing total debt to $5.1 billion and 25 strengthening "key balance sheet ratios." 26 234. In the January 4, 2001 press release, Barbakow stated that, "[f]or the 27 second consecutive quarter, virtually every metric is going in the right direction." 28 He exclaimed that "[e]xceptionally strong volumes and pricing generated robust
K:\I880\02\Amended Complaint (2003 -05-23).wpd 100 AMENDED CLASS ACTION COMPLAINT 1 top line growth, which, combined with good cost controls, produced significant
2 margin expansion." He attributed Tenet's then strong operations to the success of
3 management's "strategies and initiatives," upon which Tenet embarked during
4 fiscal 1999. While "[r]ecent periods have proven difficult for many of our
5 competitor hospitals in the communities we serve," claimed Barbakow, "Tenet is
6 posting the best fundamental trends I can remember." Defendants concluded that
7 the positive results in the second quarter had caused them further to revise their
8 fiscal 2001 earnings projections upward from mid-teens growth over fiscal 2000
9 EPS of $1.81 to an increase of 20 percent or more.
10 235. On January 8, 2001, ABN AMRO analysts reported that Defendants
11 had touted "strong pricing increases in [Tenet's] commercial business" of 3-6%
12 which "bodes well for the rest of FYO 1 and FY02...." ABN AMRO reiterated its
13 "Buy" rating and increased its price target to $54 from $47 per share. "We would
14 be aggressive buyers of the stock at current levels considering the strong
15 fundamentals and attractive valuation," the ABN AMRO analysts stated.
16 According to this report, Defendants relied on "the strength of I HO I results and
17 the continuing momentum expected to proceed for the remainder of FY01" to
18 revise earnings expectations of "mid-teens EPS growth to 20% or more over the
19 $1.81 recorded in fiscal 2000. This implies a minimum EPS for FY01 of $2.17."
20 236. On January 12, 2001, Tenet filed its Form l 0-Q for the quarter ended
21 November 30, 2000 ("2Q 2001 10-Q") with the SEC, signed by Dennis and
22 Mathiasen and reiterating the results it stated in the January 4, 2000 press release.
23 237. Defendants knew or were deliberately reckless in not knowing that 24 their foregoing statements were materially false and misleading for the reasons 25 stated above in [¶ 203]. 26 238. On March 1, 2001, Defendants caused Tenet to issue a press release 27 announcing the completion of a $2 billion credit facility. Comprised of a $500 28 million 364-day revolving line of credit and a $1.5 billion 5 year revolving line of
K:V 880`A21Amended Complaint (2003-05-23).wpd 101 AMENDED CLASS ACTION COMPLAINT credit, Tenet stated that it would "use the new facility to fund general operating
2 needs and, together with free cash flow, to fund acquisitions of more hospitals."
3 239. A March 23, 2001 American Health Line article stated that after
4 "`cleaning house"' for two years, Tenet was ready to begin acquiring hospitals
5 again. According to the article, pressures from managed care and the BBA had
6 placed enormous pressure on Tenet and had forced it materially to slow its 7 acquisitions. The article continued "Tenet recently has posted record cash flow,
8 with earnings from operations growing more than 20% in each of the past four
9 quarters." Even though the article quoted Barbakow as stating that Tenet did not
10 need acquisitions to "meet growth ambitions," the article called acquisitions
11 "critical" to Tenet's long term growth and "keeping shareholders happy." 12 240. On April 4, 2001 , Defendants caused Tenet to issue a press release
13 announcing Tenet's results for the third quarter ended February 28, 2001. Diluted
14 earnings per share rose 25% from $0.48 in fiscal 2000 to $0.60 in fiscal 2001.
15 Defendants touted that net patient revenue per admission at same facilities grew by 16 8.3%, "reflecting the impact of new Medicare pricing improvements and 17 continuing improvements in managed care contracts." Net operating revenues 18 grew 6.5% to $3.04 billion from $2.85 billion during the same quarter of fiscal
19 2000. For the third quarter of fiscal 2001, Defendants, once again, achieved 20 "excellent" cost controls, enabling Tenet to generate a 15.6% EBITDA increase 21 from $500 million in fiscal 2000 to $578 million in 2001. EBITDA margins rose 22 1.5% to 19%. Defendants exclaimed that "[e]very major expense line on the 23 income statement - labor, supplies, bad debt expense and other expense - declined 24 as a percentage of net revenue" during the third quarter of 2001. Once again, 25 defendant Barbakow exclaimed that "[c]ash flow trends [were] a particular 26 highlight again this quarter." All this resulted in still further erosion of Tenet's 27 debt by $188 million, reducing total debt to $4.87 billion, $1.14 billion less than 28 one year earlier.
K \I880102\Amended Complaint ( 2003 -05-23 ). wpd 102 AMENDED CLASS ACTION COMPLAINT 1 241. In the April 4, 2001 press release, Barbakow exclaimed that the third
2 quarter of fiscal 2001 was "superb,"stating that over three consecutive quarters,
3 Tenet had improved revenues, lowered costs, increased EPS, improved cash flow
4 and reduced debt - all as a direct result of "the strategies and initiatives we put in
5 place two years ago." Barbakow continued that Tenet saw "the strongest areas of
6 growth in core services like cardiology, orthopedics and neurology." "Cardiac
7 admissions," according to Barbakow, "rose more than 8 percent, while orthopedic
8 and neurologic admissions rose nearly 6 percent, all versus the prior-year quarter."
9 According to Barbakow, management's initiatives were working, generating
10 momentum and enabling Tenet to begin "acquiring new hospitals to add to our
11 networks in specific communities we serve, which will provide additional growth
12 in the future." On behalf of Defendants, Barbakow exclaimed, "[w]e simply
13 couldn't be more pleased."
14 242. On April 12, 2001, Tenet filed its Form 10-Q for the quarter ended
15 February 28, 2001 ("3Q 2001 10-Q") with the SEC, signed by Defendants Dennis
16 and Mathiasen and reiterating the results it stated in the April 4, 2000 press
17 release.
18 243. On April 9, 2001, ABN AMRO described Tenet' recently reported
19 results in glowing terms, stating that Tenet had "hit a homer to lead off earnings
20 season." ABN AMRO maintained its "Buy" rating and increased its EPS
21 estimates for Tenet's fiscal 2001, relying on Defendants' representations that
22 "[s]ame-facility net patient revenue rose 9.0%[, while s]ame facility admissions
23 rose only 0.7%...." ABN AMRO was further impressed by "Tenet's renewed
24 acquisition efforts [that] will continue to fuel its already-strong growth." Later, in
25 a June 7, 2001 report, ABN AMRO, described how Tenet's common stock price
26 had reached a new high but that "plenty of upside" still existed. Once again, ABN
27 AMRO based its glowing recommendation of Tenet on the Company's "near
28 record same facility admission trends and continued strong price growth."
K: I880\02\Amended Complaint ( 2003-05-23 ).wpd 103 AMENDED CLASS ACTION COMPLAINT 1 244. Defendants knew or were deliberately reckless in not knowing that
2 their foregoing statements were materially false and misleading for the reasons
3 stated above in [1203].
4 245. On June 12, 2001, Defendants caused Tenet to issue a press release,
5 previewing its results for the quarter and year ending May 31, 2001. Defendants
6 stated that they expected Tenet to exceed analysts' consensus $0.61 EPS estimate
7 for the quarter. Defendants credited Tenet's volume increase to strong growth in
8 admissions, which, in turn, they attributed to Tenet's "Target 100 initiative to
9 enhance customer service, its investments to expand capacity at certain hospitals,
10 particularly in core services like cardiology, neurology and orthopedics, and its
11 success in obtaining incremental managed care business." Barbakow stated, that
12 "[t]he continuing phenomenon of strong pricing trends combined with strong
13 admissions trends is a potent combination." (Emphasis added). Barbakow
14 concluded that "Tenet has generated consistently strong results, and the fourth
15 quarter promises to be another terrific quarter. Our growth is driven internally by
16 operational improvements, and we expect continued strong trends going forward,
17 particularly in reimbursement, admissions and cash flow."
18 246. On July 11, 2001, Defendants caused Tenet to issue a press release
19 announcing Tenet's results for the quarter and year ended May 31, 2001. Diluted
20 earnings per share for the quarter rose 33% from $0.51 in fiscal 2000 to $0.68 in
21 fiscal 2001. As Defendants promised in June, Tenet beat analysts' consensus EPS
22 expectations by $0.07. For the full year, income from operations rose 32 % from
23 $569 million to $752 million or from $1.81 per diluted share in fiscal 2000 to
24 $2.30 per diluted share in fiscal 2001.
25 247. In the July 11, 2001 press release, Defendants touted that same
26 facility admissions for the fourth quarter rose 5.5%, well above Tenet's historical
27 2% average rise, once again attributing the robust growth in admissions to Tenet's
28 Target 100 program and to its investments to expand capacity and in turn its focus
K:\I880\02'Amended Complaint (2003.05-23).wpd 104 AMENDED CLASS ACTION COMPLAINT 1 on high acuity services such as cardiology. Full year admissions same facility
2 admissions rose 3.6%. Net inpatient revenue per admission at same facilities grew
3 by 9.9%, "reflecting continued strong trends in commercial reimbursement rates as
4 well as the additional improvements in Medicare rates that took effect on April 1,
5 2001," and net operating revenues grew 10.2% to $3.21 billion from $2.91 billion
6 during the same quarter of fiscal 2000. For the full year, same-facility net
7 inpatient revenue per admission rose 7.7% from fiscal 2000 as net operation
8 revenues increased from $11.41 billion in fiscal 2000 to $12.05 billion in fiscal
9 2001, a 5.6% increase. For the quarter, Defendants claimed, once again, that
10 Tenet achieved "excellent" cost controls, enabling Tenet to generate a 20.2%
11 EBITDA increase from $509 million in fiscal 2000 to $612 million in 2001.
12 EBITDA margins rose 1.6% to 19.1 %. For the full year, Tenet's increased its
13 EBITDA to $2.24 billion, a 16% increase from $1.94 billion in fiscal 2000, with
14 the annual EBITDA margin up from 17% in fiscal 2000 to 18.6% in fiscal 2001.
15 As Barbakow explained, "[c]ash flow is the real highlight of a quarter filled with
16 highlights. Clearly, our initiatives to reduce bad debt expense, decrease receivable
17 days outstanding and increase cash flow have been successful." All this resulted
18 in still further erosion of Tenet's debt by $175 million. With Tenet's repurchase
19 of $514 million of its bonds in the open market, the Company's total debt at May
20 31, 2001 stood at $4.23 billion. According to Defendants, during fiscal 2001,
21 Tenet had eliminated $1.43 billion in debt, strengthening key balance sheet
22 rations, including the debt-to-EBITDA ratio which fell to 1.9 from 2.9 at the end
23 of fiscal 2000.
24 248. In the July 11, 2001 press release , Barbakow, once again glowed,
25 calling the quarter "outstanding" and the year "terrific." According to Barbakow,
26 "[p]rofitability has improved significantly, and we expect it will continue to
27 improve further. Cash flow has been truly spectacular, which enabled us to
28 dramatically strengthen our already strong balance sheet." Barbakow further
K:\1880\02Wmended Complaint (2003-05-23).apd 105 AMENDED CLASS ACTION COMPLAINT 1 expressed management's pleasure "with the consistency of [Tenet's] performance.
2 Each quarter" he stated, "has improved upon the previous one, and the strength
3 has been evident across our markets. The results are evident in the income
4 statement, the balance sheet and the cash flow statement, as well as in key
5 statistical indicators." Barbakow reaffirmed that Tenet had "the right assets, the
6 right strategies and a management team and staff capable of leveraging these
7 attributes to set the standards for our industry in quality, service and performance."
8 249. Looking ahead, in the July 11, 2001 press release, Defendants
9 predicted still more robust growth for Tenet in "[o]ver the next several years."
10 According to Defendants "operational improvements it has made internally and
11 the initiatives it is currently pursuing, combined with an improving external
12 environment, have set the stage for an extended period of outstanding growth."
13 Continued expansion in EBITDA margins, strong cash flow, reduction in debt and
14 the resumption of Tenet's ability to grow through acquisition prompted
15 Defendants to "anticipate[] that diluted earnings per share from operations will
16 grow at a rate in the mid-to-high teens each year for the next several years, and
17 potentially higher in some years." Barbakow concluded that "[a] year as
18 outstanding as the one just completed is the result of dedication and hard work by
19 many, many people...[o]ur 110,000 employees have embraced the many initiatives
20 we've launched, and are making them work better than we could have hoped."
21 250. On July 11, 2001, Wells Fargo analyst Andrew Heyward maintained
22 his "market perform" rating of Tenet, stating, "` Let the good times roll."'
23 Heyward, noting Tenet ' s "extraordinary string of improved quarterly results"
24 stated that "Tenet management also seems very confident that the good times will
25 continue to roll for at least the next year or so because the fundamental operations
26 continue to show substantial improvement." Among his reasons for this glowing
27 report, Heyward listed continued admissions growth , and strong same facility
28 patient revenue growth. Similarly, in another July 11, 2001 report, First Union
K:U 880\02\Amendcd Complaint (2003-05-23).wpd 106 AMENDED CLASS ACTION COMPLAINT 1 Securities analysts rated Tenet a "strong buy," attributing "[t]he upside variance"
2 to "stronger same-store growth both on the volume and pricing fronts." On July
3 12, 2001, ABN AMRO, reiterating its buy rating wrote a report titled, in part,
4 "THC Takes Us Higher." According to ABN AMRO, even though overall
5 admissions rose only 0.4%, net inpatient revenue per admission rose 9. 8% year
6 over year.
7 251. On August 10, 2001, Barbakow appeared on CNBC's "Market Week
8 with Maria Bartiromo," to discuss Tenet' s results . In response to a question about
9 whether Tenet could sustain its stock price which had risen by 80 % over the past
10 year, Barbakow answered:
11 Well, I can't talk five years, but I certainly can talk one
12 or two. And I think this 3 percent to 6 percent range will
13 continue for the next couple of years. Well - as we have
14 discussions with our customers, the managed care
15 companies, it looks as if that's going to continue for a
16 while. The capacity constraints are here today. We're
17 rebuilding hospitals. We're building new hospitals.
18 We're doing everything we can to keep up with demand.
19 So I think for the next couple of years, we're in a - pretty
20 good shape. As to five years, you know, one - many will 21 argue that this is a trend that ' s going to last the next 20 22 to 30 years. All of these individuals are getting older.
23 They' re living longer. The numbers are getting larger.
24 And I think we ' re in pretty good position from a
25 demographic point of view.
26 252. On August 21, 2001, Tenet filed its Annual Report on Form 10-K for 27 the year ended May 31, 2001 with the SEC, signed by Dennis, Mathiasen, 28 Barbakow, Biondi, Bratter, Cloud, DeWald, Focht, Hay, Honeycutt, Loop and
KA I880\02\Amended Complaint (2003-05 -23).wpd 107 AMENDED CLASS ACTION COMPLAINT 1 Korn, and incorporating therein by reference Tenet's Annual Report to
2 Shareholders for Fiscal Year 2001 ("2001 Annual Report").
3 253. Defendants knew or were deliberately reckless in not knowing that
4 the foregoing statements were materially false and misleading for the reasons
5 stated above in ¶207.
6 254. On September 19, 2001, Defendants caused Tenet to issue a press
7 release previewing the Company's results for the first quarter of fiscal 2002, ended
8 August 31, 2002, and announcing that Tenet would exceed analysts' consensus
9 EPS expectations of $0.61 per share by $0.04 to $0.06 per share, a 35 % increase
10 over the same quarter of fiscal 2001. Tenet also vowed to continue its share re-
11 purchase program announced in July, 2001. Barbakow described these results as
12 "excellent." He stated that "[t]his quarter will represent the strongest growth yet
13 in a string of seven consecutive quarters with growth in earnings per share from
14 operations exceeding 20 percent," attributing Tenet's successes to the "same
15 factors that contributed to this string of exceptional and accelerating increases in
16 earnings from operations...." According to Barbakow, "growth is driven
17 internally by operational improvements and we expect continued strong growth
18 trends going forward, particularly in admissions, pricing and cash flow." Tenet
19 credited its "above-average growth in admissions, a continued strong pricing
20 environment, effective cost controls and superb cash flow trends" for its continued
21 success. Same hospital admissions had grown by 3.5%, "significantly higher than
22 the company's historic long-term average of approximately 2 percent admissions
23 growth," confirming "accelerating admissions growth rate that began with the
24 year-ago quarter."
25 255. On September 24, 2001, Fitch announced that it had upgraded Tenet's
26 senior unsecured debt from BB+ to BBB and its senior subordinated notes to
27 BBB- from BB-, calling Tenet's rating "Rating Outlook" stable. Fitch cited
28 "positive industry dynamics, significant reduction of debt levels, robust cash flow,
K:\1880\02\Amended Complaint (2003-05-23).wpd 106 AMENDED CLASS ACTION COMPLAINT 1 improved operating performance and balanced financial policies" as the reasons
2 for the upgrade.
3 256. On October 3, 2001, Defendants caused Tenet to issue a press release
4 announcing Tenet's results for the quarter ended August 31, 2001. Diluted
5 earnings per share from operations rose 40% from $0.48 in fiscal 2001 to $0.67 in
6 fiscal 2002. Admissions to Tenet hospitals including both same facility volume
7 and new hospital volume rose by 5.9 %. Defendants stated that "[r]eflecting the
8 growth of higher acuity core services and on-going strong reimbursement trends,
9 same facility net inpatient revenue per admission rose 13.5 % in the quarter....
10 Management is confident that reimbursement trends will remain positive
11 throughout fiscal 2002 and into fiscal 2003." Net operating revenues grew 14% to
12 $3.30 billion from $2.89 billion during the same quarter of fiscal 2001. For the
13 first quarter of fiscal 2002, Defendants, once again, achieved "excellent" cost
14 controls, enabling Tenet to generate a 21.1% EBITDA increase from $517 million
15 in fiscal 2001 to $626 million in 2002. EB[TDA margins rose "1.1 percentage
16 points from 17.9 percent in the prior-year quarter to 19.0 percent." Cash flows
17 were at record highs, enabling the company to "repurchase approximately $1.12 18 billion aggregate principal of publically traded debt." Defendants also touted a
19 share repurchase program Tenet announced late in the first quarter under which 20 Tenet authorized to repurchase up to 10,000,000 shares. The Company had
21 repurchased 1,745,500 outstanding shares in the first quarter and another
22 1,625,000 shares in the second quarter.
23 257. About these results, Barbakow' s comments in the October 3, 2001 24 press release were characteristically upbeat. Marking Tenet's "strongest quarterly 25 growth ever in income from operations," Barbakow stated that Tenet had 26 "achieved across-the-board improvement in all measures of profitability and
27 returns," and that Defendants "expected still further improvement in the future."
28 Once again, he touted "continued strong pricing trends and above-average
K:\I880\02\Amended Complaint (2003-05 -23).wpd 109 AMENDED CLASS ACTION COMPLAINT 1 admissions growth" as "a powerful combination that improves the company's
2 outlook significantly." According to Barbakow, "efforts to grow core services,
3 such as cardiology, orthopedics and neurology, and sustained higher rates of
4 utilization among the Baby Boomer age group" were key drivers of Tenet's
5 exceeding its historical growth in admissions. Defendants remained upbeat about
6 the future, raising their projection of growth in EPS from operations to at least
7 25% for fiscal 2002, "driven by continued strong admission and pricing trends,
8 further EBITDA margin expansion, continued strong cash flow and continued debt
9 reduction."
10 258. On October 3, 2001, Deutsche Banc Alex Brown, Inc. analysts
11 affirmed their "Buy" rating on Tenet stock, citing same store admissions growth of
12 3.5%, positive reimbursement trends, and "[s]ame-store pricing trends were
13 equally strong as net revenue per patient day and net revenue per admission grew
14 11.6%... well ahead of historical growth rates in the 4%-8% ranges." According
15 to ABN AMRO's October 2, 2001 report, same-store admission growth and strong
16 net revenue per patient day growth propelled Tenet to a strong first quarter, fiscal
17 2002.
18 259. On October 12, 2001, analysts from both SunTrust Robinson
19 Humphrey ("SunTrust") and Legg Mason Wood Walker ("Legg Mason") reported
20 on an "upbeat" analyst meeting with Tenet executives in which Defendants
21 emphasized Tenet's growth prospects. According to Legg Mason, Defendants
22 attributed their expectations of revenue growth to rising demand and strong
23 pricing. According to SunTrust, Tenet's strong cash flow had provided it with 24 "increasing flexibility to pay down debt, buy back stock and step up its capital 25 spending. THC alluded to the fact that it may deploy as much as $800 million in 26 capex during the current fiscal year versus the budgeted $700 million...." 27 260. On October 12, 2001, Tenet filed its Form 10-Q for the quarter ended 28 August 31, 2001 ("IQ 2002 10-Q") with the SEC, signed by Dennis and
K_\I880\02Wmended Complaint (2003-05-23).wpd I t o AMENDED CLASS ACTION COMPLAINT 1 Mathiasen and reiterating the results it stated in the October 3, 2000 press release.
2 261. On November 14, 2001, Defendants caused Tenet to issue a press
3 release previewing the Company's performance for the second quarter of fiscal
4 2002, due to end on November 30, 2001. Defendants announced that they
5 expected Tenet's EPS to exceed analysts' consensus EPS estimates of $0.69. The
6 Company achieved "solid growth in same facility admissions" for the first two
7 months of the quarter, and "robust growth in unit revenues,... " crediting
8 "improvements in managed care contracts, improved Medicare reimbursement and
9 continued growth in high acuity, high revenue services as the major drivers of this
10 growth." By refinancing Tenet's debt, Defendants described how Tenet would
11 "achieve additional interest cost savings in future quarters..." Indeed in the then
12 current quarter, the Company boasted, it "completed a successful $2 billion
13 offering during the quarter, followed by a $1.7 billion tender offer to repurchase
14 six outstanding debt issues." Defendants concluded that they "remain[ed] very
15 optimistic about results for the full fiscal year," reconfirming their expectation that
16 Tenet's fiscal 2002 EPS would grow by 25% or more.
17 262. In a November 14, 2001 report discussing Tenet's preview of its
18 second quarter fiscal 2002 earnings, ABN AMRO stated that both solid growth in
19 same-facility admissions and "robust revenue growth... fueled by improvement in
20 managed care contracts, improved Medicare reimbursement and continued growth
21 in high acuity, high revenue services."
22 263. On or about November 29, 2001, Tenet filed a Form S-4 Registration
23 Statement pursuant to the Securities Act of 1933 (the "11/01 Registration 24 Statement"), in connection with sale of $2 billion in Tenet debt securities, signed 25 by Barbakow, Dennis, Mathiasen, Biondi, Bratter, Cloud, DeWald, Focht,
26 Honeycutt, Kerrey, Korn and Loop. The 11/01 Registration Statement, while
27 including what purported to be a comprehensive list of "Risk Factors," omitted 28 reference to Tenet's improper recognition of revenue reflected in the receipt of
K:11880\02\Amended Complaint (2003-05-23 ). wpd 1 1 1 AMENDED CLASS ACTION COMPLAINT 1 excessive outlier payments and revenues obtained by billing for unnecessary
2 medical procedures and revenues obtained by paying illegal referral fees.
3 264. The 11/01 Registration Statement incorporated by reference the
4 following documents:
5 a. Tenet's Annual Report on Form 10-K for the fiscal year ended
6 May 31, 2001; and
7 b. Tenet's Quarterly Report on Form 10-Q for the fiscal quarter of 8 fiscal 2002, ended August 31, 2001; and 9 c. All documents filed by Tenet pursuant to §§ 13(a), 13(c), 14 or
10 15(d) of
11 the 1934 Act, subsequent to the date of the 11/01 Registration Statement until the
12 offering of all debt securities being registered pursuant to this Registration
13 Statement was completed.
14 265. On or about December 6, 2001, Tenet filed a Form S-3 Registration
15 Statement pursuant to the Securities Act of 1933 (the " 12/01 Registration
16 Statement"), pursuant to which Defendants sold $1 billion in debt securities during
17 2002 ($600 million in March 2002 and $400 million in June 2002 ). The 12/02
18 Registration Statement was signed by Barbakow, Dennis, Mathiasen, Biondi,
19 Bratter, Cloud, DeWald, Focht, Honeycutt, Kerrey, Korn and Loop. The 12/02
20 Registration Statement, while including what purported to be a comprehensive list
21 of "Risk Factors," omitted reference to Tenet ' s improper recognition of revenue
22 reflected in the receipt of excessive outlier payments and revenues obtained by
23 billing for unnecessary medical procedures and revenues obtained by paying
24 illegal referral fees.
25 266. The 12/01 Registration Statement incorporated by reference the
26 following documents:
27 a. Tenet's Annual Report on Form 10-K for the fiscal year ended
28 May 31, 2001; and
K:U 880\02\Amended Complaint (2003-05-23 ).wpd 1 12 AMENDED CLASS ACTION COMPLAINT 1 b. Tenet's Quarterly Report on Form 10-Q for the first quarter of
2 fiscal 2002 ended August 31, 2001; and
3 c. All documents filed by Tenet pursuant to §§ 13(a), 13(c), 14 or
4 15(d) of
5 the 1934 Act, subsequent to the date of the 12/01 Registration Statement until the
6 offering of all debt securities being registered pursuant to this Registration
7 Statement was completed.
8 267. Defendants knew or were deliberately reckless in not knowing that
9 the foregoing statements were materially false and misleading for the reasons
10 stated above in ¶207.
11 268. On January 4, 2002, Defendants caused Tenet to issue a press release
12 announcing Tenet's results for the quarter ended November 30, 2001. Diluted
13 earnings per share from operations rose 43 % from $0.54 in fiscal 2001 to $0.77 in
14 fiscal 2002. Admissions to Tenet hospitals including both same facility volume
15 and new hospital volume rose by 5.9 %. Defendants stated that net inpatient
16 revenue per admission rose 14.9 % in the quarter, "spurred in large part by the
17 success of Tenet's strategy to grow high acuity services such as cardiology,
18 orthopedics and neurology." According to Barbakow, "[e]mphasizing the growth
19 of these and other specialty services has led us to convert sub-acute beds in many
20 of our hospitals to higher acuity medical/surgical and critical care beds...This has
21 the effect of replacing lower revenue services with higher revenue services with a
22 very positive result in unit revenue."
23 269. In the January 4, 2002 press release, Defendants further disclosed that 24 net operating revenues grew 16.4% to $3.39 billion from $2.92 billion during the
25 same quarter of fiscal 2001. For the second quarter of fiscal 2002, Defendants
26 touted the "effective cost controls," enabling Tenet to generate a 26.3% EBITDA 27 increase from $537 million in fiscal 2001 to $678 million in 2002. EBITDA 28 margins rose 1.6% to 20%. Cash flows were at yet another record high, enabling
K.\I880\02\Amrnded Complaint (2003-05 -23).wpd 113 AMENDED CLASS ACTION COMPLAINT 1 Tenet to repurchase $1.6 billion of public debt and issue $2 billion of new debt at
2 lower interest rates and with longer average maturities. With ratings upgrades by
3 Standard & Poors, Moody's and Fitch and the reduction in interest rates, Tenet
4 reduced its interest expense and strengthened its balance sheet ratios. According
5 to Barbakow, "[i]t was an ideal time to move from a high-yield to investment
6 grade issuer. We were able to refinance a significant portion of our long-term debt
7 in a historically low rate environment."
8 270. Still further, in the January 4, 2002 press release, Barbakow glowed
9 about the second quarter 2002 results. "Quite simply," he stated, "we continue to
10 experience the strongest fundamentals and prospects we can remember."
11 Barbakow reaffirmed his faith in management's strategies, claiming that they were
12 "driving robust top line growth," and enabling Tenet to achieve "across-the-board
13 improvement in all measures of profitability and returns." He predicted further
14 improvement, noting that greater cash flow led to reduced debt which in turn
15 reduced the debt expense and increased earnings. In turn, this enabled Tenet to
16 resume "growth opportunities through strategic acquisitions, which adds to our
17 already strong internal growth." According to Defendants, Tenet's exhibition of
18 strength and continuing momentum resulted in increased expectations for fiscal
19 2002. Defendants projected at least 35% EPS from operations growth over the
20 $2.30 Tenet recorded in fiscal 2001.
21 271. On January 7, 2002, Fox-Pitt Kelton analysts reported that Tenet had
22 blown past expectations on a 20% increase in in-patient revenues, same-store
23 admissions growth of 2.3% and same store patient revenues per in-patient
24 admissions up 14.9%. According to the report, Defendants attributed the growth
25 in revenues per in-patient admission to "an incremental shift toward more complex
26 cases, which generate higher revenues per patient day." Similarly, in a January 17, 27 2002 report Fulcrum Global Partners ("Fulcrum"), reinstated a "Buy" rating on
28 Tenet's common stock reflecting what Fulcrum believed to be low earnings
K:\1 880\02\Amended Complaint (2003-05-23).wpd 114 AMENDED CLASS ACTION COMPLAINT 1 estimates . Fulcrum stated:
2 THC beat the Street 's $0.70 consensus estimate by a
3 whopping 10% or $0.07 per share for the November
4 quarter. Same store revenue grew 15.5% on same store
5 admissions growth of 2.3%. Now, before anyone gets
6 hysterical that 2.3% doesn't seem all that high, we
7 remind investors that a year or so ago, we would have
8 been thrilled to get to 2% because historical rates were in
9 thel-2% range. Further, the company was up against a
10 4.6% comp last year.
11 The real key here is that the mix changed in the
12 company's favor. That's where the real leverage is: even
13 if the company admits the same number of patients, they
14 get revenue and earnings growth because they have
15 more high dollar heart, orthopedic and neurology
16 patients; a higher length of stay for managed care
17 patients ; are doing more surgeries and are adding new
18 programs every day.
19 Remember, it's not the same patient in these beds every
20 day. Every new patient brings a new opportunity for
21 margin leverage.
22 272. On January 14, 2002, Tenet filed its Form 10-Q for the quarter ended
23 November 30, 2001 ("2Q 2002 10-Q") with the SEC, signed by Dennis and
24 Mathiasen and reiterating the results it stated in the January 4, 2002 press release.
25 273. Defendants knew or were deliberately reckless in not knowing that
26 the foregoing statements were materially false and misleading for the reasons
27 stated above in ¶207.
28 274. On March 4, 2002, Defendants caused Tenet to issue a press release,
K:\1880\02\Amended Complaint (2003-05-23 ).wpd 115 AMENDED CLASS ACTION COMPLAINT announcing that it had issued $600 million in aggregate principal amount of its
2 6.5% Senior Notes due 2012, pursuant to its existing $2 billion shelf registration
3 statement. Tenet disclosed that it intended to use the net proceeds from the
4 offering to repay outstanding indebtedness and for other general corporate
5 purposes.
6 275. On March 11, 2002, Defendants caused Tenet to issue a press release,
7 previewing its results for the quarter ended February 28, 2002. According to
8 Barbakow, the third quarter of fiscal 2002 would represent Tenet's ninth
9 consecutive quarter of earnings growth exceeding 20%. In reaffirming
10 Defendants' prediction that 2002 earnings would eclipse those of 2001 by at least
11 35%, Defendants stated that same facility admissions increases, "robust unit
12 revenue trends, effective cost controls and excellent cash flow trends, as well as
13 reduced interest costs due to debt reduction and refinancing activities," all spurred
14 performance. Barbakow concluded, "[o]ur growth continues to be driven
15 internally by operational improvements and we expect continued strong trends
16 going forward."
17 276. In its March 11, 2002-March 18, 2002 issue, ManagedHealthcare. Info
18 wrote about lawsuits filed by Consejo de Latinos Unidos ("CDLU"), against Tenet
19 and some of its hospitals in Southern California . Tenet was billing uninsured
20 Hispanic patients full charges, as determined by Tenet' s chargemaster which,
21 according to the article , was four to seven times what managed care paid for its
22 members. According to CDLU, Tenet 's billing were significantly higher than for
23 insured patients , "but Tenet refused to negotiate lower payments with patients,
24 some of whom were offering thousands of dollars in cash to settle their accounts." 25 Tenet responded through spokesperson Greg Harrison , who called the CDLU 26 lawsuit "` unfair, misinformed , ill advised legal and media barrage ' designed by 27 lawyers to pressure the company into settling what are fairly routine billing 28 disputes." This highlights Tenet' s heartless reaction to the consequences of its
K:\I880102\Amended Complaint (2003-05-23).wpd 116 AMENDED CLASS ACTION COMPLAINT 1 aggressive pricing strategy which not only gamed Medicare, but took severe
2 advantage of the persons least able to afford coverage - the uninsured.
3 277. On April 2, 2002, Defendants caused Tenet to issue a press release
4 announcing Tenet's results for the quarter ended February 28, 2002. Diluted
5 earnings per share from operations rose 43% from $0.60 in fiscal 2001 to $0.86 in
6 fiscal 2002. Admissions to Tenet hospitals including both same facility volume
7 and new hospital volume rose by 7.4 %. Defendants stated that same facility net
8 inpatient revenue per admission rose 10.8 % in the quarter. Net operating
9 revenues grew 14.8% to $3.48 billion from $3.04 billion during the same quarter
10 of fiscal 2001. For the third quarter of fiscal 2002, Defendants reported "good
11 cost controls," enabling Tenet to generate a 24.7% EBITDA increase from $578
12 million in fiscal 2001 to $721 million in 2002. EBITDA margins rose 1.7% to a
13 new high of 20.7.
14 278. In the April 2, 2002 press release, Defendants reported cash flows "on
15 a rolling 12-month basis..." of $2.37 billion, another new record high. Defendants
16 caused Tenet to "repurchase approximately $145 million of various issues of its
17 senior subordinated notes...." Tenet reduced its total debt to $4.30 billion "down
18 sequentially from $4.36 billion in the second quarter and from $4.87 billion in the
19 prior-year quarter." Once again, Defendants announced the strengthening of key
20 balance sheet ratios, including its debt-to-EBITDA ratio and its coverage ratio or
21 EBITDA-to-net-interest expense. 22 279. In the April 2, 2002 press release , Barbakow stated that Tenet had
23 reported its "ninth consecutive quarter generating growth of 20 percent or higher
24 in EPS from operations." According to Barbakow, "strong admission and unit
25 revenue trends, good cost controls, exceptional cash flow and prudent balance
26 sheet management" all contributed to quarter after quarter of growth. He
27 continued that "[i]n any given quarter, one factor or another may be slightly more
28 or less important, but the only way the basic thesis has changed is to get even
K:\1880\02\Amendcd Complaint ( 2003 -05-23) . wpd 1 17 AMENDED CLASS ACTION COMPLAINT better over time." The ramifications of this growth were clear. According to
2 Barbakow, it enabled Tenet "to reinvest a record amount in our hospitals during
3 the current fiscal year... [to] create[] new services and expanded programs and
4 facilities to better meet our patients' health care needs." As a result of Tenet's
5 enhanced performance, Barbakow predicted over $800 million in capital
6 expenditures by the year end.
7 280. Once again, looking ahead in the April 2, 2002 relese, Defendants
8 increased their projection of Tenet's EPS from continuing operations. In the April
9 2, 2002 release, Defendants stated that they estimated diluted EPS of $0.90 for the
10 fourth quarter of 2002 and $3.20 for the full year - over $0.10 higher than
11 Defendants' guidance in January, 2002. Barbakow portrayed Tenet's success as
12 the culmination of his efforts over his tenure at Tenet. "After years spent
13 developing a strong portfolio of hospitals and honing our internal processes," he
14 stated, "we are now enjoying the results of our efforts." He continued:
15 Our strategies and the quality of our assets are driving
16 volume and revenue growth. Combined with good cost
17 controls, this leads to higher margins. Terrific cash flow
18 results in deleveraging, which in turn leads to lower
19 interest expense and even more earnings growth. All of
20 this enables us to continue to reinvest in our hospitals
21 and strengthen our networks, which leads to more
22 volume and revenue growth.
23 Barbakow concluded, describing how with capital infusion from Tenet, a group of 24 six hospitals the Company purchased after April of 2001 had an average EBITDA 25 margin above 8 percent, each having posted operating losses prior to Tenet's 26 acquiring them. Thus Tenet was able to turn around its own hospitals and new 27 acquisitions by infusions of capital derived directly from the stellar results it had
28 posted since early 2000.
K:\1880\O2\Amended Complaint (2003-05 -23).«pd 1 18 AMENDED CLASS ACTION COMPLAINT 1 281. On April 2, 2002, Wachovia Securities analysts reported on yet
2 another upside surprise for Tenet. Defendants attributed Tenet's exceeding its
3 earnings expectations, according to Wachovia, to "lower than expected operating
4 expenses, specifically bad debt and other operating expenses. Bad debt declined
5 to 6.8% of net revenue from 7.2% of net revenue in FQ3 2001, and other operating
6 expenses fell to 19.5% of net revenue form 21.1% in FQ3 2001." Again,
7 according to Defendants, "these declines to a continued focus on the
8 billing/collection process and increased leverage over its fixed costs as revenue
9 rises."
10 282. On April 15, 2002, Tenet filed its Form 10-Q for the quarter ended
11 February 28, 2002 ("3Q 2002 10-Q") with the SEC, signed by Dennis and
12 Mathiasen and reiterating the results it stated in the April 2, 2002 press release.
13 283. Defendants knew or were deliberately reckless in not knowing that 14 the foregoing statements were materially false and misleading for the reasons 15 stated above in ¶207.
16 284. On June 10, 2002, Defendants caused Tenet to issue a press release, 17 previewing fourth quarter and fiscal year results. Defendants announced that
18 Tenet would "comfortably exceed analysts' current consensus estimates." 19 Speaking of the tenth consecutive quarter of growth in excess of 20%, and the fifth 20 quarter in a row of growth in excess of 30%, Barbakow continued to credit 21 management's operating strategies. He stated that management believed that 22 growth trends would continue as Tenet's "momentum clearly demonstrates we 23 have the right strategies in place. . . ." Among the factors contributing to that 24 growth were a rise in admissions, "robust unit revenue trends, effective cost 25 controls, and reduced interest costs due to debt reduction and refinancing 26 activities. Together," Defendants continued, "these factors led to continued 27 margin expansion in the quarter. These are the same factors that spurred 28 performance in the earlier quarters."
K:11880\02\Amendcd Complaint (2003-05 -23).apd 119 AMENDED CLASS ACTION COMPLAINT 1 285. Defendants omitted, however, that Tenet's aggressive charging
2 strategy, deliberately set to increase outlier payments, directly enabled Tenet to
3 post robust unit revenue trends and to reduce interest costs as a result of debt
4 reduction.
5 286. According to a June 19, 2002 New York Times article, Tenet
6 announced that it had paid $55.75 million to settle allegations that two of its
7 hospitals over-billed the Medicare program.
8 287. In a June 20, 2002, press release, Defendants caused Tenet to
9 announce that it had issued $400 million in aggregate principal amount of its 5%
10 Senior Notes due 2007. Tenet intended to use the proceeds of the offering to
11 redeem its 6% Exchangeable Subordinated Notes and to repay other outstanding
12 indebtedness. According to Tenet's treasurer, Steven Farber, "[t]hese transactions
13 enable us to lower our interest costs and to extend our maturities... We saw and
14 opportunity in the market today and acted quickly to take advantage of it."
15 288. On July 11, 2002, Defendants caused Tenet to issue a press release
16 announcing Tenet's results for the quarter and year ended May 31, 2002. Diluted
17 earnings per share from operations for the quarter rose 42% from $0.45 in fiscal
18 2001 to $0.64 in fiscal 2002. As Defendants promised in June, Tenet beat
19 analysts' consensus EPS expectations by $0.04. For the full year, net income from
20 operations rose 45.1 % from $752 million to $1.09 billion or from $1.53 per
21 diluted share in fiscal 2001 to $2.17 per diluted share in fiscal 2002.
22 289. In that same release, Defendants touted that fourth quarter same
23 facility admissions rose 1.8%. Same facility net inpatient revenue per admission
24 grew by 12.7%, "again," according to Defendants, "reflecting a shift in Tenet's 25 business mix to higher acuity services and continued strong reimbursement
26 trends." For the full year, same facility admissions rose 2.4% over fiscal 2001 and
27 same facility net inpatient revenue per admission increased 12.9 % over fiscal
28 2001. Net operating revenues for the quarter grew 16.5% to $3.74 billion from
K:\I 880\02\Amended Complaint (2003-05-23 ).wpd 120 AMENDED CLASS ACTION COMPLAINT 1 $3.21 billion during the same quarter of fiscal 2001, fueled by growth in volumes
2 and unit revenue. For the full year, net operating revenues grew 15.4% from
3 $12.05 billion to $13.91 billion. With regard to EBITDA for the quarter, yet
4 again, Defendants touted the combination of Tenet's top line growth with
5 "excellent cost controls," enabling Tenet to generate a 26.12% EBITDA increase
6 from $612 million in fiscal 2001 to $772 million in 2002. EBITDA margins rose
7 1.6% to 21.7%. For the full year, EBITDA increased from $2.24 billion in fiscal
8 2001 to $2.8 billion in fiscal 2002, a 24.6% rise with EBITDA margins increasing
9 from 18.6% to 20.1 %. Defendants claimed to have taken advantage of robust cash
10 flow and low interest rates to refinance and reduce certain existing debt. As of
11 May 31, 2002, Tenet's debt stood at $4.02 billion, down $279 million from the
12 quarter ended February 28, 2002.
13 290. In the July 11, 2002 press release , Defendant Barbakow exclaimed
14 that "[w]ithout question, fiscal 2002 has been the best year in the company's
15 history -- so far." According to Barbakow, Tenet had shown "across-the-board
16 improvement in virtually all areas of our operations, and from the top to the
17 bottom of the income statement, the balance sheet and the cash flow statement.
18 And the fourth quarter was no exception." Barbakow stated that internal
19 operational improvements and "an improving external environment" had
20 converged, setting "the stage for an extended period of outstanding growth."
21 Looking to the future, Defendants continued to forecast "accelerating demand as
22 people in the Baby Boom generation continue to move into their high health care
23 utilization years." Tenet was, however, preparing for that demand by improving
24 operations and expanding to meet the demand for core services. Accordingly,
25 Defendants forecast "that diluted earnings per share from operations will grow at a
26 rate in the mid- to high-teens each year for the next several years, and potentially
27 higher in some years."
28 291. On August 23, 2002, Defendants caused Tenet to issue a press release
K:\1880\02Wmended Complaint (2003-05-23 ).wpd 121 AMENDED CLASS ACTION COMPLAINT 1 committing $1 billion during fiscal 2003 to "service and program expansions and
2 other capital investments at its 115 hospitals. . ." to alleviate expected capacity
3 constraints caused by the increasing admissions of Baby Boomers. In promising
4 that the enormous capital expenditures "would not hamper the company's ability
5 to make acquisitions in fiscal 2003, Barbakow touted Tenet's "financial strength
6 and our access to the capital markets" as a factor enabling the Company to acquire
7 hospitals that met Tenet's "strategic criteria." In that press release, Defendants
8 disclosed that Tenet would spend an additional "$16 million in new capital
9 projects are scheduled, including an expanded cardiovascular operating room,
10 increased outpatient services and a new medical office building. . . .".
11 292. On August 14, 2002, Tenet filed with the SEC the 2002 10-K, signed
12 by Barbakow, Dennis, Mathiasen, Barbakow. Biondi, Bratter, Cloud, DeWald,
13 Honeycutt, Kerry, Korn and Loop and reiterating the results Defendants
14 disseminated in the July 11, 2002 press release.
15 293. Defendants knew or were deliberately reckless in not knowing that
16 the foregoing statements were materially false and misleading for the reasons
17 stated above in ¶207.
18 294. On September 23, 2002, Defendants caused Tenet to issue a press
19 release, previewing Tenet's first quarter 2003 results. Defendants disclosed that
20 Tenet would exceed analysts consensus estimate of $0.63 EPS from operations by
21 $0.05. Once again, Defendants attributed Tenet's strong growth to " a
22 continuation of the same factors that have driven performance for the past several
23 quarters."
24 295. In the September 23, 2002 press release, Barbakow stated that Tenet's
25 "outstanding performance reflects the benefits of our continued investment in
26 people and facilities, our focus on clinical quality, and our commitment to patient
27 satisfaction. This is yet another in a long string of quarters that confirm the success
28 of these strategies."
K:\ 1880\02\Amended Complaint (2003-05-23 ).apd 122 AMENDED CLASS ACTION COMPLAINT 1 296. On September 24, 2002, Legg Mason issued a report, reaffirming its
2 buy rating for Tenet. Among the primary reasons Legg Mason maintained its
3 Tenet rating were growth in same store admissions which and the implication of
4 "strong sectorwide strength in utilization and pricing, effective cost controls, and
5 continuing benefits from debt reduction and refinancing activities."
6 297. On October 2, 2002, Defendants caused Tenet to issue a press release
7 announcing Tenet's results for the quarter ended August 31, 2002. Diluted
8 earnings per share from operations were $0.68 in fiscal 2003 up 39% over the
9 same period in fiscal 2002. Admissions to Tenet hospitals including both same
10 facility volume and new hospital volume rose by 4.1 %. Defendants also stated
11 that same facility net inpatient revenue per admission rose 9.9% in the quarter,
12 "[r]eflecting the growth of higher acuity services and on-going strong
13 reimbursement trends. . . ." Net operating revenues grew 12.3% to $3.70 billion
14 from $3.30 billion during the same quarter of fiscal 2002. For the first quarter of
15 fiscal 2003, Defendants reported "good cost controls," enabling Tenet to generate
16 a 20.8% EBITDA increase from $626 million in fiscal 2002 to $756 million in
17 2003. EBITDA margins rose 1.4% to a new high of 20.4%.
18 298. Also in the October 2, 2002 press release, Defendants reported
19 healthy cash flows, stating that, "[o]n a rolling 12-month basis cash flow from
20 operations was $2.52 billion and free cash flow, defined as cash flow from
21 operations less capital expenditures, reached $1.65 billion - both new record
22 highs." Tenet's total debt fell to $3.59 billion, down $423 million from May 31,
23 2002 and $757 million from August 31, 2001. Defendants also caused Tenet to
24 repurchase 2,791,500 of its outstanding shares and 20,972,250 of the 50 million
25 the board authorized for repurchase.
26 299. In the October 2, 2002 press release, Barbakow stated, that Tenet had,
27 in recent years, "significantly increased [its] investment in [its] hospitals,
28 expanding and enhancing the facilities and the services they offer." He noted that
K:I1880'02\Amended Complaint (2003-05-23 ).wpd 123 AMENDED CLASS ACTION COMPLAINT 1 Tenet expected to reinvest $1 billion into its hospitals during fiscal 2003, up 66%
2 from fiscal 2001. Barbakow continued that highest acuity services had yielded the
3 highest growth rates for Tenet and that the "shift to higher acuity business also
4 generates higher revenues, and [management believe] it account[ed] for as much
5 as one-half of [Tenet's] unit revenue growth." Yet again, Barbakow stated that the
6 move to high acuity services was "a deliberate part of [management's] strategy:
7 focusing our capital investment and physician recruitment on those high acuity
8 services, like cardiology, orthopedics and neurology, that the aging Baby Boomers
9 will need in ever greater numbers."
10 300. As of October 2, 2002, Tenet continued to issue bullish forecasts,
11 expecting at least 25% growth in EPS from continuing operations over fiscal 2002,
12 "driven by continued strong admissions trends, continued shift in the company's
13 business mix to higher acuity services, continued strong reimbursement trends,
14 further EBITDA margin expansion and continued strong cash flow trends."
15 301. On October 2, 2002, Wachovia Securities analysts issued a report,
16 discussing Tenet's exceeding analysts expectations for the quarter ended August
17 31, 2002. Wachovia focused on the 8.5% increase in revenue per patient, "driven
18 by the continued shift in business mix toward higher acuity services. . ."
19 Wachovia reported that Defendants "offered detailed guidance," expecting EPS
20 growth of 20-25% in both fiscal 2003 and fiscal 2004. Defendants projected
21 revenue growth of at least 10% and both "moderately expanded EBITDA margin 22 [and] sequential decline in interest expense as a result of reduce debt levels...."
23 302. On October 11, 2002, Tenet filed its Form 10-Q for the quarter ended
24 August 31, 2002 ("IQ 2003 10-Q") with the SEC, signed by Defendants Dennis 25 and Mathiasen and reiterating the results it stated in the October 2, 2002 press
26 release. 27 303. Defendants knew or were deliberately reckless in not knowing that 28 the foregoing statements were materially false and misleading for the reasons
K:\1880',02\Amcnded Complaint ( 2003.05-23).wpd 124 AMENDED CLASS ACTION COMPLAINT 1 stated above in ¶207.
2 X. THE TRUTH BEGINS TO EMERGE
3 304. On October 28, 2002, analyst Kevin Weakley ("Weakley") of UBS
4 Warburg's Global Equity Research, issued a report on Tenet, downgrading to
5 stock to "Reduce" from "Hold" (the "Warburg Report"). Weakley conducted
6 thorough research into the issue of Tenet's outlier payments. In short, he
7 discovered that it appeared that Tenet's outlier payments had gone from 8% in
8 fiscal 2000, materially above Tenet's closest peer's 5%, to an estimated 23.5% in 9 fiscal 2003. Weakley attributed Tenet's growth in revenue and profitability
10 directly to its rising Medicare outlier payments. He noted that if Tenet were really
11 treating higher acuity patients and incurring commensurately increased costs, then
12 the increase in outliers would not fall directly to pre-tax income. On the other
13 hand, he concluded that if Tenet were achieving greater outlier reimbursement
14 simply by raising prices, the impact would fall mostly to pre-tax income. Weakley
15 estimated that Tenet recorded revenue from outliers of $158 million in fiscal 2000,
16 $418 million in fiscal 2002, and an estimated $657 million in 2003. Noting the
17 OIG focus on outlier payments, Weakley opined that Medicare uncertainty
18 clouded Tenet's future - - a situation that was antithetical to a strong stock price.
19 305. Weakley unearthed a disturbing fact. Reducing Tenet' s outlier
20 payments to 5% of its Medicare reimbursement would have cost Tenet
21 approximately $56 million in pre-tax income in fiscal 2000, $143 million in pre-
22 tax income in 2001, and $294 million in pre-tax income in 2002, ranging between 23 9 % and 14 % of income from continuing operations before income taxes for the
24 respective years. According to Weakley, that translates into a 14% reduction in
25 operating income growth for fiscal 2001 over fiscal 2000, and a 19% reduction in
26 operating income growth for fiscal 2002 over fiscal 2001. Suddenly, Tenet's
27 growth over fiscal years 2000, 2001 and 2002 looked far worse than reported.
28 306. On Friday, October 25, 2002, Tenet's stock price closed at $48.54 on
K:\1880\02\An=dcd Complaint ( 2003-05 -23).wpd 125 AMENDED CLASS ACTION COMPLAINT 1 volume of 2,017,600 shares traded. The following Monday, October 28, 2002, the
2 day the Warburg Report was issued, Tenet's stock price closed at $42.50, a drop of
3 more than 12.4% on relatively large volume of nearly 19.6 million shares.
4 307. On the same day, in an October 28, 2002 press release, in response to
5 the Warburg Report, Defendants caused Tenet to reconfirm their projection of
6 EPS from operations growth of 25 % in fiscal 2003 and "its longer-term guidance
7 of mid-to-high-teens growth in diluted earnings per share each year for the next
8 several years . . . ." In confirming their prior projection, Defendants disclosed that
9 CMS had raised the outlier threshold on October 1, 2002. Defendants
10 acknowledged that the increased outlier threshold was intended to and "will 11 reduce Medicare outlier payments to all hospitals receiving Medicare outlier
12 payments, including Tenet hospitals." Defendants stated that changes to
13 Medicare's reimbursement formulae were routine and that Tenet had
14 "incorporated its best estimates of the net impact of all these changes in Medicare
15 reimbursement into its earnings guidance. Tenet's earnings estimate for fiscal 2003
16 includes a projection that its Medicare outlier reimbursement will comprise 17 approximately 5 percent of total projected net patient revenue for the year." 18 Defendants went on to downplay the outlier issue, discussing that the calculation
19 of outlier is "extremely complex" and "impacted by many different factors," 20 including charge structures. Defendants concluded that they were "confident that 21 [Tenet's] hospitals are fully compliant with Medicare rules and regulations, 22 including those governing outlier payments." 23 308. At a health care conference in New York on October 29, 2002, 24 Barbakow attacked the Warburg Report head on, stating: 25 An analyst issued a research report yesterday, suggesting 26 that Tenet receives a higher than average amount of 27 Medicare outlier payments and that those payments were 28 at risk for some future change in Medicare rules and
K:U 880\02\Amended Complaint (2003-05-23).wpd 126 AMENDED CLASS ACTION COMPLAINT 1 regulations.
2 First, let's get the facts straight.
3 Yes, Tenet undoubtedly receives more outlier payments
4 than the average. There are many factors that contribute
5 to this, including higher-than-average acuity at Tenet
6 hospitals , Tenet's many teaching hospitals and our
7 emphasis on large, urban hospitals.
8 Additional factors include the charge structure, specific
9 circumstances at certain hospitals, the timing of settling cost reports,
10 and the many factors in the complex formula used to
11 calculate outlier payments.
12 Outlier payments are determined on a case-by-case basis,
13 using numerous case-specific, hospital specific and other
14 factors. By their very nature, some hospitals will receive
15 more and some will receive less. Tenet happens to have a
16 number of hospitals that receive more.
17 For the record, we are confident that Tenet hospitals are
18 fully compliant with Medicare rules and regulations,
19 including those governing outlier payments, and that
20 Tenet hospitals are entitled to all the payments they
21 receive.
22 As to the supposed risk of a change to outliers - frankly,
23 this business is highly regulated and is always subject to
24 change. Medicare routinely makes changes to its
25 reimbursement formulas. That said, we are unaware of
26 any anticipated changes to outliers other than what
27 already went into effect at the beginning of this month.
28 On Oct. 1, Medicare implemented a significant increase
K:\1880\02\Amended Complaint (2003-05-23).wpd 127 AMENDED CLASS ACTION COMPLAINT 1 in the "outlier threshold." This increase will reduce
2 Medicare outlier payments to all hospitals receiving
3 them, including Tenet hospitals.
4 This is old news, and we've already incorporated our best
5 estimate of the net impact into our earnings guidance.
6 That guidance includes a projection that Tenet's
7 Medicare outlier reimbursement will comprise
8 approximately 5 percent of total projected net patient
9 revenue for the year.
10 309. On October 29, 2002, Gerard Klauer Martinson analysts reported that
11 Tenet's stock price fell amid concerns about its inability to sustain revenue and
12 profitability growth. The report cited "probable reductions in Medicare outlier
13 payments, from which the report suggests Tenet benefitted more than other
14 hospitals." The report rehashed Defendants' reaffirmation of Tenet's earnings
15 outlook for 2003 and their dismissal of the outlier issue because outliers
16 represented only 5% of Tenet's annual total revenue.
17 310. On October 29, 2002, Tenet's stock price closed at $39.25, down over
18 $10 from the close on October 25, 2002 on still higher trading volume of 22.5
19 million shares.
20 311. The foregoing statements were false and misleading for the following
21 reasons:
22 a. Defendants omitted that Tenet received a material amount of its
23 revenue and income from outlier payments and that a material amount of its
24 operating earnings growth was attributable directly to those payments.
25 b. Defendants failed to disclose that they had purposefully
26 instituted a pricing strategy specifically to increase the amount of outlier payments
27 that Tenet received but to which it was not entitled.
28 c. Defendants knew or were deliberately reckless in not knowing,
K:118801021Amended Complaint (2003.05-23).wpd 128 AMENDED CLASS ACTION COMPLAINT 1 that the Medicare statutes and regulations promulgated thereunder entitled Tenet
2 hospitals to outlier payments only if the costs of treating a particular patient were
3 "extraordinarily high."
4 d. Defendants knew or were deliberately reckless in not knowing
5 that Tenet's charges were untethered from the actual costs of treating patients,
6 were unrelated to what any patient paid, and were thus merely a device to increase
7 the amount of outlier payments that Tenet received.
8 e. Defendants knew or were deliberately reckless in not knowing
9 that the pricing strategy they had instituted enabled Tenet to receive outlier
10 payments for cases for which its hospitals did not expend extraordinarily high
11 costs.
12 f. Defendants knew or deliberately recklessly disregarded that
13 CMS and its OIG had begun to pay close attention to outlier payments and had
14 taken measures to stem the tide of such payments.
15 g. Defendants knew or deliberately recklessly disregarded,
16 therefore, that they caused Tenet to recognize revenue and income on a material
17 amount of outlier payments to which Tenet was not entitled in violation of GAAP.
18 h. Defendants knew or deliberately recklessly disregarded that
19 CMS would ultimately not only force Tenet to cease abusing the Medicare system,
20 but likely force it to repay a substantial amount of outlier payments it received
21 improperly.
22 312. On October 30, 2002, agents of the FBI, the OIG and the IRS served a
23 search warrant on Tenet's Redding Medical Center, seeking evidence related to a
24 fraud investigation involving two cardiologists accused of performing unnecessary
25 procedures on otherwise healthy patients. Tenet failed to disclose the fact of this
26 raid for over a day, leaving the local news stations and the Modern Healthcare
27 publication to break the news. In the absence of any disclosure from Defendants,
28 Tenet's stock price closed at $38.97, down only $0.28 from the day before.
K:\I880\02\Amcndcd Complaint (2003-05.23) .wpd 129 AMENDED CLASS ACTION COMPLAINT 1 313. In an October 31, 2002, press release, Defendants caused Tenet to
2 disclose:
3 That [Tenet] is deeply concerned by allegations
4 contained in an affidavit filed today by the U.S.
5 Attorney's Office in Sacramento, Calif., regarding two
6 physicians who practice at Tenet's Redding Medical
7 Center in Redding, Calif.
8 Tenet, which has no reason to believe the allegations are
9 true, said it plans to retain independent experts to
10 conduct its own internal investigation. Tenet is fully
11 cooperating with the U.S. Attorney regarding the matter,
12 which involves alleged false billings and unnecessary
13 angioplasties, coronary bypasses and heart
14 catheterizations by the two physicians. Tenet stressed
15 that the decision to perform any medical procedure is the
16 decision of the attending physician, and Tenet hospitals
17 must rely upon the professionalism of its physicians in
18 making these evaluations.
19 314. On October 31, 2002, Tenet' s stock price closed at $28 .75 down over
20 $10 from its October 30, 2002 close, and $20.50 from the October 25, 2002 close,
21 on huge daily trading volume of over 51.7 million shares.
22 315. On November 1, 2002, Fulcrum Global Partners ("Fulcrum") analysts
23 reported in a note that they "were directed by a source to the Modern Healthcare
24 website at approximately 2:05 p.m yesterday," to a story about the FBI-led raid of
25 Tenet's Redding facility. Fulcrum reduced its rating from buy to sell. Fulcrum
26 discovered from the Company, however, that Defendants "knew about the search
27 warrant and raid on the night of 10/30/02 and decided not to put out a press
28 release." Apparently, according to Fulcrum, Defendants believed that Tenet was
K: l880`02\Amended Complaint (2003-05-23 ).wpd 130 AMENDED CLASS ACTION COMPLAINT 1 unable to issue a press release because "it couldn't quote from the affidavit filed in
2 support of the search warrants...." In discussions with management, Fulcrum
3 learned that Defendants believed "that short of having doctors shadow each other,
4 there really isn't any practical way to prevent a physician from performing
5 unnecessary procedures.
6 316. During a November 1, 2002 conference call, Defendants continued to
7 obfuscate, attempting to cloud the issue surrounding its outlier payments. The
8 conference call, set specifically to discuss the Redding issue, portrayed a very
9 defensive management. Barbakow apologized to investors, admitting that local
10 news organizations and the publication Modern Healthcare had reported the
11 troubles with Redding prior to Defendants causing Tenet to announce it.
12 Barbakow stated that Tenet "should have acted more quickly" to inform investors,
13 conceding Defendants' knowledge of the adverse information and their failure
14 timely to disclose it.
15 317. During the conference call, Barbakow made the following comments
16 regarding outlier payments:
17 The turmoil of this week began with a research report
18 regarding Medicare outlier payments. This report
19 suggested Tenet receives a higher than average amount
20 of Medicare outlier payments and those payments were
21 at risk for some future change in Medicare rules and
22 regulations. As Tenet stated numerous time earlier in the
23 week, it does receive higher than average Medicare
24 outlier payments.
25 318. While Tenet's management team claimed to be scrambling to
26 "compile data" about outlier payments to satisfy investors' need to know the truth
27 about a material amount of Tenet's revenues, Defendants, through Barbakow,
28 admitted that they had some sense of the outlier issue because they knew that their
K:\I880142\Amended Complaint (2003-05-23).wpd 131 AMENDED CLASS ACTION COMPLAINT 1 payments were higher than average. In the face of the knowledge they already
2 possessed, their false and misleading statements are pronounced.
3 319. On November 4, 2002, Deutsche Bank-North America ("Deutsche
4 Bank") analysts reported in a note that "Tenet affirmed that it does have higher
5 than average exposure to outlier payment at 5% of its total net revenues versus
6 roughly I% of net revenues for the balance of the publicly traded hospital
7 universe." According to Deutsche Bank, Tenet management stated that all Tenet
8 hospitals had "abided by the rules and regulations of the Medicare program
9 including those related to outlier payments." Deutsche Bank wrote of
10 management's concession that while "Tenet is always subject to Medicare 11 reimbursement change risk, it is unaware of any changes other than the increase in 12 the outlier threshold that was implemented on Oct. 1, 2002 which is already 13 incorporated into its current FY03 earnings expectations." 14 320. The foregoing statements were false and misleading for the reasons 15 stated in ¶307 above. 16 321. On November 6, 2002, Tenet issued a press release disclosing that the 17 Office of Audit Services ("OAS") of HHS had requested to audit Tenet hospitals 18 to ascertain whether outlier payments to Tenet were paid in accordance with 19 Medicare regulations . According to Tenet, OAS will concentrate its audit "on 20 certain components of the formula used to calculate outlier payments." According 21 to Barbakow ' s comments reproduced in a November 7, 2002 press release, 22 "[q]uestions have been raised that test Tenet's credibility . I am confident that the 23 analysis now underway at Tenet and the steps that we will take to ensure Tenet's 24 continued progress will soon address any who might question this company's 25 commitment to the delivery of quality patient care with the utmost attention to 26 ethics." 27 322. In the November 7, 2002, press release, certain of the Defendants 28 caused Tenet to disclose a shake-up in senior management. According to Tenet,
K:11880102Wmendcd Complaint (2003-05 -23).wpd 132 AMENDED CLASS ACTION COMPLAINT 1 Mackey "retired" and Dennis "resigned." In announcing the management shake-
2 up, Barbakow stated,
3 As I carefully studied our Medicare outlier situation over
4 the last two weeks, it became clear to me that formulas
5 that drive these outlier payments were affected by our
6 overall pricing. In some cases, particularly aggressive
7 pricing strategies created increasing outlier payments.
8 That's simply not the way I want to do business at Tenet,
9 nor do I want such a perception to exist in anyone's
10 mind.
11 While our pricing approach was entirely consistent with the
12 Medicare regulations , it put us on a course that was
13 inconsistent with the position and posture we want Tenet to
14 have within our industry.
15 The actions I am taking to form a new management team
16 and to take a fresh look at our approach to pricing are not
17 a signal that our fundamental strategy is flawed or the
18 result of any impropriety. I believe these changes will
19 put us on a better track, and I am taking the necessary
20 steps to accomplish that.
21 In the context of this disclosure, Defendants stood by Tenet's earnings projections
22 for fiscal 2003, despite admitting that aggressive pricing had led to increased
23 outlier payments.
24 323. The statements set forth in [$11317-3181, above, statements were false
25 and misleading for the reasons expressed in ¶ 307 above.
26 324. After the November 7, 2002 disclosure, Tenet's stock price plunged
27 again, this time by 48%, from a November 7, 2002 close of $27.95, to a
28 November 8, 2002 close of $14.90 per share on huge volume of 115 million shares
K:1I880'A2'Amended Complaint ( 2003 -05-23 ).wpd 133 AMENDED CLASS ACTION COMPLAINT 1 traded. From a close of $49.31 on October 25, 2002, Tenet's share price fell
2 $34.41 or nearly 70%! Moreover, 10 day trading volume exceeded 406.5 million
3 shares - an incredible number given that as of August 12, 2002, Tenet had
4 488,453,936 outstanding shares of common stock. Over 41 % of the outstanding
5 shares were sold during that 10 day window.
6 325. Only several months before, in the Letter to Shareholders included
7 with the 2002 Annual Report, Barbakow had raved about Tenet's ability to care
8 for patients, to maximize the effectiveness and efficiency of physicians, to support
9 nurses and to maximize cash flow. Since 1999, Tenet's management team, of
10 which Mackey and Dennis were integral parts, increased "free cash flow - defined
11 as cash flow from operations, less capital expenditures -" from a negative to $1.43
12 billion" even after record reinvestment in 2002.
13 326. In that same Letter to Shareholders, after gushing over the quality of
14 Tenet' s earnings and cash flows for 2002, Barbakow added that 2002 "has been a 15 year to remember for all of us at Tenet. Together, we have seen the fruits of our 16 hard work and our disciplined focus.... I believe we're fortunate to have some of 17 the finest caregivers working in health care today. We also have outstanding
18 leaders who support the efforts of our caregivers - and challenge them to 19 achieve even greater results." (Emphasis added). By early November, those 20 "outstanding leaders" who led Tenet's "disciplined focus" were severed from 21 Tenet within days of the revelation of Tenet's outlier scheme. 22 327. On November 7, 2002, the New York Times reported that the federal 23 inquiry into Tenet's outlier payments was prompted not by the Warburg Report, 24 but by questions Tenet's FI raised in mid-October, suspiciously close to Mackey's 25 insider sales.
26 328. In a November 7, 2002 conference call, Defendants began to disclose 27 what they knew of the outlier payment situation. Barbakow began the conference 28 call discussing the separation of Mackey and Dennis , and the new management
K:11880102Wmcnded Complaint ( 2003-05 -23).wpd 134 AMENDED CLASS ACTION COMPLAINT 1 team that would "continue an intensive review of [Tenet's] strategies, particularly
2 our pricing strategies." Equivocating about the fraud he and the other
3 Management Defendants and Tenet had committed, Barbakow conceded that
4 "particularly aggressive pricing strategies resulted in increasing outlier payments.
5 This does not violate Medicare regulations; however, it is inconsistent with the
6 position and posture I want Tenet to have within our industry." After that
7 concession, Barbakow discussed the use of the SWA and how it "was the main
8 driver" of Tenet's outlier growth. Barbakow continued with a remarkable
9 revelation. He stated,
10 In fiscal '02, outlier payments to all Tenet hospitals
11 totaled $763m. Fifty-six percent of that amount was paid
12 to only 11 of our 113 hospitals. All 11 were on the
13 statewide average method of outlier calculations. In
14 fiscal '03, we estimate that outlier payments will decline
15 to about $750m. Even though our estimate of outlier
16 payments is no longer contributing to Tenet's growth of
17 fiscal 2003 compared to fiscal 2002, an elimination of
18 the statewide average method would expose Tenet to
19 earnings risk that other companies may not have. The
20 use of the statewide average method added as much
21 as 46 cents per share to our total earnings in fiscal
22 '02, and we expect it to add approximately 50 cents to
23 total earnings in fiscal '03. (Emphasis added).
24 329. In the context of Tenet's having reported $2.17 in EPS from
25 operations for fiscal 2002, up over fiscal 2001 EPS from operations of $1.53, this
26 revelation was remarkable. Without Tenet's abusive and improper outlier
27 payments, Tenet's 2002 over 2001 EPS increase of 41.8% would have been much
28 less, as improper outlier payments in 2001 were much less than those in 2002. But
KAI 880102\Amended Complaint (2003-05 -23).wpd 135 AMENDED CLASS ACTION COMPLAINT 1 the actual number is far worse. EPS from operations is not calculated in
2 accordance with GAAP. The correct EPS number for Tenet in fiscal 2002 was
3 $1.56 up from $1.31 in fiscal 2001. A $0.46 per share loss from that number as
4 Barbakow revealed, would wipe out nearly 30% of Tenet's EPS, a stunning figure.
5 330. When analysts at the November 7, 2002 conference call had the
6 opportunity to question management, many directly questioned management's
7 credibility. For example, analyst Ely Radinski of Jefferies & Co. questioned
8 Barbakow as to why "[g]iven that the company says that they believe, to date, that
9 pricing may have been aggressive, however, the company violated no rules or
10 regulations," the Company accepted or requested the resignations of Mackey and
11 Dennis. Radinski pointed out that "[i]t seem[ed] quite off the wall, given the
12 limited nature, potentially, of any event which may have occurred."
13 331. Barbakow responded that he thought the resignations were fairly
14 "straightforward." He stated that when he "discussed with both Tom and David
15 that I asked Trevor to take this newly created position as president and then
16 indicated that I'd be restructuring the company and executive management team,
17 both Tom and David decided at that point in time to step down." Another analyst,
18 Kevin Wink of Poliness Capital Management picked up on Barbakow's answer
19 and asked whether Dennis was asked to keep his position as CFO. Wink
20 questioned the absence of Dennis "because to have the chief financial officer of
21 the company resign during a series of events like this, even aside from the
22 potential billing issues, although I'm sure his replacement is capable, it also
23 suggests some amount of leadership gap in the financial area." Barbakow
24 responded, "I don't presume that. These departures are related to the management
25 restructuring we announced today. They are not related to the OIG's decision to
26 conduct an audit of Tenet hospitals or anything else you may be assuming."
27 332. In another exchange, analyst Bridget Collins of Bessemer Trust and
28 Paul Russell, Senior Vice President of Tenet, discussed the outlier data on which
KA I 880\02\Amended Complaint (2003-05-23).wpd 136 AMENDED CLASS ACTION COMPLAINT 1 Defendants claim they were not focused.
2 BRIDGET COLLINS..... I have a related question. I'm
3 trying to figure out - I can't do it mathematically with
4 what I have in front of me - but I'm trying to figure out in 5 my own mind how much did outlier issue contribute[] to 6 your revenue-per-admission growth in the past few 7 quarters? And, if so, in what light we should take your 8 prior remarks that increases in acuity as well as pricing, 9 and I would really consider this pricing more than 10 anything else, was driving your earnings growth? And 11 I'm wondering whether, in fact, you know, you should 12 have been questioning your own fundamentals the way 13 that analysts were on the conference calls in which these 14 admittedly extremely impressive figures were reported? 15 Could you give us a little bit more color on this issue? 16 PAUL RUSSELL: Bridget, higher acuity, indeed has 17 been a factor in our pricing growth - or our revenue-per- 18 admission growth. The outlier aspect certainly added to 19 that. I would have to - we would have to go back and do 20 some recalculations as to exactly what that impact was, 21 but we continue to get higher pricing from managed care 22 payors as well, which is a larger portion of our business. 23 BRIDGET COLLINS: I would like to say, by the way, 24 that I do very much appreciate the numbers and the 25 candid [sic] that are being provided on the call, but it 26 strikes me that since you were able to get this 27 information fairly quickly, why was it not available to 28 management in the first place? (Emphasis added).
K:\I880'D21Amended Complaint (2003-05-23).wpd 137 AMENDED CLASS ACTION COMPLAINT 1 JEFFREY C. BARBAKOW: I think one of the things
2 we've been trying to do over the course of the last couple
3 of weeks is just answer that question.
4 ****
5 PAUL RUSSELL: Bridget, Paul Russell again, with one
6 final comment. As those of you who attended some of
7 our meetings last week will know, we indicated that
8 because we don't even bill for outliers in the first place,
9 there literally is not a line on the general ledger to
10 capture that. We have to capture the data through
11 remittance information from our fiscal intermediaries.
12 That certainly is one of the reasons why this did not have
13 a higher profile. That's not necessarily an excuse. We
14 should have been watching it more closely than we
15 did. (Emphasis added).
16 BRIDGET COLLINS: Well, can I just say one more
17 thing, and after that I'll shut up. Outliers or not, it must
18 have been the case that, let's say, those I I hospitals that
19 you cited must have been experiencing very large
20 increases in their total Medicare payments in the fiscal
21 years that were detailed, weren't they? And wouldn't that
22 particular phenomenon have drawn management's
23 attention in some way?
24 PAUL RUSSELL: Well, many of these hospitals also
25 were very much central in our growth of core services
26 that we've talked about. You know, we've seen better
27 volumes, higher acuity of them, or certainly growth in
28 higher acuity programs, and we were tracking that a heck
K_U880'A21Amended Complaint (2003-05-23) .wpd 138 AMENDED CLASS ACTION COMPLAINT 1 of a lot more closely than the specific components of
2 Medicare reimbursement.
3 BRIDGET COLLINS: Okay, I'll leave it alone
4 333. On November 8, 2002, Prudential Financial ("Prudential") analysts
5 reported that Barbakow had stated on the November 7, 2002 conference call that
6 "We have been aggressive in our pricing. It has been a key part of our operating
7 strategy, but in recent weeks, it has come to my attention the effect this strategy
8 has had in certain markets and its real impact on outlier payments. . . ." For those
9 reasons, among others, Prudential analyst David H. Shove downgraded Tenet,
10 suggesting investors stay on the sidelines until the resolution of the outlier issue
11 became more clear. Shove wrote:
12 Tenet is suffering from a huge loss in investor faith. The
13 company has grown through aggressive pricing and
14 acquisitions, leading to much higher outlier payments
15 from Medicare. In fact, these special payments account
16 for approximately half of the earnings growth of the past
17 two years, and will likely account for $0.91 of earnings
18 in 2003, and management appears to have been unaware
19 of the unintended consequences of the aggressive pricing
20 strategy.
21 We think this alone is bad enough, but now Medicare
22 wants to know how this happened and other hospitals
23 might be miffed that Tenet got all this money because it
24 means they got less since the budget is a zero-sum game.
25 Some Congressional staffers want to look at this outlier
26 business and the plaintiff's bar is circling. Everyone
27 suspects that there may be other unintended
28 consequences of this aggressive pricing strategy.
KAI880\02\Anwnded Complaint (2003-05-23).wpd 139 AMENDED CLASS ACTION COMPLAINT 1 334. Despite the analysts' questions in the November 7, 2002 conference
2 call, Defendants have never explained why, if they believed they did nothing
3 wrong, two of Tenet's most senior officers left the Company, and why the
4 Company agreed to forbear from collecting approximately $684 million in
5 revenues for fiscal 2003, a large portion of which was pre-tax income.
6 335. Ina November 11, 2002 New York Times article, Barbakow denied
7 that the recent scandals that plagued Tenet were a "replay" of the 1993 scandals
8 that cost the company hundreds of millions of dollars and one of its operating
9 units. According to the Times, however, investors in the post-Enron environment
10 were wary. "Tenet delayed telling them about the federal inquiries it faces and
11 Mr. Barbakow created further anxiety by insisting in an often combative
12 conference call with analysts last week that the sudden departures of two
13 executives was voluntary." The Times quoted S.G. Cowen analyst Kemp Dolliver
14 as stating that Tenet's credibility "`had been damaged badly."'
15 336. Of Barbakow, the New York Times article stated:
16 Mr. Barbakow now says that he lost confidence in the
17 two executives, David L. Dennis, the chief financial
18 officer, who had worked with Mr. Barbakow in two
19 previous companies, and Thomas B. Mackey, the chief
20 operating officer who had worked at Tenet for 17 years.
21 He said he had been unaware until late October that so
22 much of Tenet's spectacular earnings growth might have
23 been the result of aggressive pricing. He said he had
24 begun to grasp that when an analyst from UBS Warburg,
25 Kenneth Weakley, asked the company about it.
26 "When I found out what was going on, it wasn't 27 acceptable, period," Mr. Barbakow said. He added that
28 Tenet would now be less aggressive.
K:U880\02\Amended Complaint ( 2003-05-23).wpd 140 AMENDED CLASS ACTION COMPLAINT 1 337. The New York Times article also detailed that California health plan 2 officials had disclosed that while Tenet was not alone, it was "among the most
3 aggressive in recent years in raising prices." 4 338. The New York Times article also recounted the CDLU litigation
5 protecting the rights of Hispanic patients, alleging that Tenet charged
6 unreasonably high prices to uninsured patients. According to a lawyer handling
7 one such action, "[t]he high list prices bear no relationship to what most people
8 really pay."
9 339. In a November 18, 2002 letter to shareholders, Barbakow wrote that
10 management and the Board of Directors were committed to resolving the issues
11 facing Tenet. According to Barbakow, among new management's top priorities
12 were reviewing pricing strategies in Tenet markets and to "develop a new and
13 sustainable approach to pricing" and ascertain the impact of that approach to
14 Tenet's revenues from different payor groups. The review of pricing strategies
15 was to consist of "an in-depth, market-by-market analysis" to create "a bottom-up
16 pricing model that will enable us to give guidance about Tenet's long-term
17 earnings expectations."
18 340. In the November 18, 2002 letter to shareholders about the audit of
19 outlier payments, Barbakow disclosed that OAS would develop an audit tool at
20 one hospital and then "expand to a sampling of other Tenet hospitals." The focus,
21 according to Barbakow would be on those Tenet hospitals that received the
22 highest amounts of outlier payments. Barbakow also discussed an internal
23 "review of compliance and quality at Tenet hospitals nationwide" in response to
24 questions that arose as a result of the probe of unnecessary procedures at RMC.
25 Tenet had retained an independent expert to conduct a quality and compliance
26 review "to ensure that [its] existing internal systems relating to quality, peer
27 review and compliance are operating correctly." Moreover, according to
28 Barbakow, Tenet had informal discussion with the SEC which focused primarily
K:\1880102 Amended Complaint ( 2003-05-23 ).wpd 141 AMENDED CLASS ACTION COMPLAINT 1 on the Company's outlier payments, but also focused on unusually heavy trading
2 of Tenet stock preceding Tenet's most recent developments. Also, the Joint
3 Commission on Accreditation of Healthcare Organizations - without whose
4 accreditation Tenet hospitals could not act as Medicare providers - is reviewing
5 quality systems within Tenet hospitals to ensure the quality of systems and
6 processes.
7 341. Finally, in the November 18, 2002 letter, Barbakow admitted that:
8 Certain Tenet markets and/or individual hospitals
9 pursued pricing strategies that, due to the formula
10 prescribed under Medicare regulations, resulted in large
11 outlier payments to these hospitals. The pricing structure
12 applied equally to all payor groups and we have no
13 reason to believe that the rules and regulations governing
14 Medicare were not followed. This pricing strategy,
15 combined with the mechanics of the outlier provisions of
16 the Medicare code, resulted in disproportionately large
17 outlier payments to Tenet.
18
19 Since we reported the departure of Tenet's former Chief
20 Operating Officer and Chief Financial Officer on
21 November 7, many have questioned whether the cause of
22 those departures was some deeper problem than what we
23 had disclosed. The answer, emphatically, is NO. Once I
24 became fully aware of the aggressiveness of pricing
25 strategies in certain markets and of the corollary impact
26 on outlier payments, I realized that the company's
27 credibility would be shattered. While this approach is
28 legal, it is not the way I want to run this company,
K:1I880\02\Amendcd Complaint (2003-05-23 ).wpd 142 AMENDED CLASS ACTION COMPLAINT 1 and it reflects poorly on our hospitals in the
2 communities we serve.
3 To effectively lead this company, I must have confidence
4 in the team I've built and be able to trust their judgment.
5 I had lost confidence in these two individuals, so they are
6 no longer with the company. It really is that simple. In
7 our announcement of these actions November 7, in an
8 effort to protect the reputations of my former colleagues,
9 I was not as clear as I could have been - I hope we can
10 now put any confusion to rest. (Emphasis added). 342. In the November 18, 2002, Letter to Shareholders, Barbakow
12 disclosed that the SEC had begun a formal investigation of sales of large blocks of 13 Tenet's common stock prior to the November 7t" announcement to determine if
14 Tenet had leaked information to certain investors.
15 343. On December 3, 2002, Tenet issued a press release, discussing its
16 new pricing strategy and issuing new earnings guidelines for fiscal years 2003 and
17 2004. All at once, relying on an "internal business review of its past pricing
18 strategies," Tenet introduced "a new pricing philosophy that includes substantial
19 proposed discounts for uninsured patients." Tenet announced that it would
20 discuss the new strategy at an investor conference that day. In conjunction with its
21 new pricing strategy, Tenet also issued revised earnings guidance.
22 344. In the December 3, 2002 press release, after reviewing its pricing
23 strategies and the resulting effect on Tenet's receipt of outlier payments well
24 beyond the industry average, Barbakow stated:
25 The company's charging practices, combined with the
26 formula prescribed by the Medicare program, in large
27 part caused Tenet's total outlier payments to exceed
28 industry averages .... In the hospital industry, "gross
K:U880\02\Amcnded Complaint (2003-05-23 ). wpd 143 AMENDED CLASS ACTION COMPLAINT charges" are not the same as "prices." Gross charges are
2 essentially retail list rates and are required by the
3 Medicare program to be the same for all patients. But
4 gross charges rarely bear any resemblance to what we are
5 actually paid for the services we provide.
6 To remedy the problem of Tenet's excessive outlier reimbursements, the Company
7 resolved to reduce its emphasis on gross charges and to "refocus on actual
8 pricing." Tenet's new pricing initiative sought to freeze gross charges through
9 May 31, 2003, and to shift managed care contracting structure, emphasizing
10 "negotiated per diem rates and reduced relative importance of `stop-loss' payments
11 tied to gross charges." Thus Tenet acknowledged that its purposeful pricing
12 strategy was designed not only to take advantage of Medicare outliers payments,
13 but also improperly to increase the amount of stop-loss payments it received from
14 managed care payors.
15 345. Also in the same release, Tenet acknowledged the adverse effect its
16 pricing strategy had on uninsured patients - - those least able to bear the burden of
17 the effects of that strategy. Tenet vowed to work with federal and state officials to
18 impose "a discounted price schedule at managed care rates for uninsured patients."
19 Tenet acknowledged that "[c]urrent regulations require hospitals to bill these
20 patients at gross-charge rates" but promised to press the issue with the appropriate
21 regulators. Implementing such a policy, according to Tenet, would benefit both
22 the uninsured patient and Tenet by significantly cutting a "hospitals'
23 administrative costs associated with billing and collecting from a relatively small
24 number of patients."
25 346. Barbakow stated that Tenet had already seen results from its new
26 pricing strategy with some managed care contracts it had recently renegotiated.
27 Tenet also acknowledged that CMS would likely alter the formula for calculating
28 outlier payments which, in turn, "will reduce the amount of outlier payments
K:\1880\02Wmcnded Complaint (2003-05-23).wpd 144 AMENDED CLASS ACTION COMPLAINT 1 received by its hospitals." According to Barbakow, Tenet had "a lot of work to do
2 to recover from the events of recent weeks, and I do not underestimate the task we
3 have ahead of us. I recognize the very real skepticism and anger among investors.
4 We intend to earn back their trust through hard work and solid results."
5 347. With regard to fiscal 2003 guidance , in the December 3, 2002 release,
6 Tenet expected to earn between $2.38 and $2.78 depending on its loss in outlier
7 payments. For fiscal 2004, however, Tenet expected to earn approximately $2.00
8 from operations, "a level from which it expects to resume its growth."
9 348. On December 3, 2002, Tenet conducted an investor presentation to
10 lend investors "better clarity about our business, its underlying strengths and some
11 recent issues." Despite their best efforts to the contrary, Barbakow and Fetter
12 served to confirm that Tenet and the other defendants knew of or were deliberately
13 reckless in not knowing of Tenet's outlier scheme. Barbakow led off the meeting,
14 drawing a distinction between pricing and charges. He explained that "[c]harges,
15 or gross charges are the retail list price on a hospital charge-master. These charges
16 apply to all payers, [sic] but bear no resemblance to revenues actually received
17 from any payor group. Pricing relates to actual trends in realized rates....
18 (Emphasis added). Barbakow continued, essentially confirming that Tenet had
19 stagnated in 1998 and 1999 as "earnings declined about 4%." To reinvigorate
20 Tenet, Barbakow claimed, "the company embarked on certain strategies to turn
21 itself around." Attributing Tenet's turnaround beginning in fiscal 2000 to the
22 success of those strategies, Barbakow described growth of 10% in 2000, 26% in
23 2001 and 42% in 2002, as "extraordinarily high for this industry." Barbakow
24 admitted that "[i]t is now clear that much of that extraordinary growth is driven by
25 increasing outlier payments." From 1999 to fiscal 2002, outlier increases
26 contributed 55% of Tenet's earnings growth and 31 % of its growth in 2002.
27 349. After discussing the importance of Medicare to Tenet, Barbakow
28 conceded that Tenet was acutely aware that CMS was attempting to control the
K:\1880\02\Amended Complaint (2003-05-23).wpd 145 AMENDED CLASS ACTION COMPLAINT 1 proliferation of total payments, including that the outlier threshold had tripled
2 since 1999. Barbakow again stated the importance of outlier payments to Tenet's
3 growth during fiscal 2000 through fiscal 2002, but claimed that Tenet had never
4 analyzed "the total impact of outlier on our Company." According to Barbakow,
5 "Outlier payments per share have tripled in three years. Had I known the
6 magnitude of these payments and where this was taking the company, I would
7 have never let the situation get to this point." In pleading ignorance of the outlier
8 scheme, Barbakow stated, "[a]t Tenet, we tended to dig deep whenever there was a
9 problem that caused a negative variance to our plan. In hindsight, I didn't dig
10 deep enough when things were going unusually well."
11 350. Despite Barbakow's denials, however, it is clear from the words of
12 Tenet management in the December 3, 2002 investor presentation, that
13 Defendants , at a minimum, were deliberately reckless in not knowing of the effect
14 of abusive outlier payments on Tenet' s earnings growth. For example, Barbakow
15 returned to Tenet' s lackluster results, attributing Tenet ' s poor performance in
16 fiscal 1998 and 1999 to a confluence of BBA mandated Medicare cuts and
17 pressure from capitated arrangements with managed care payors . A "key" part of
18 Tenet ' s strategy to revive its moribund results was to raise prices. In the context
19 of Barbakow ' s remarks about the difference between charges and pricing, he
20 conceded that Tenet implemented its pricing strategy "with a more or less, across
21 the board 15% increase in charges in June of 1999." After conceding that the
22 "strategy regarding pricing... ultimately was carried too far in the following three
23 years," Barbakow turned the conference over to Fetter.
24 351. Fetter began by reiterating that
25 Charges equate to list. Prices are what a hospital
26 actually gets paid for what it does. Charges are what
27 gross revenues are based on. Net revenues are based on
28 prices.
K.\1880`02\Amended Complaint (2003-05-23 ).wpd 146 AMENDED CLASS ACTION COMPLAINT Tenet's net patient revenues in fiscal 2002 were $13.2 billion. 2 Tenet's gross revenues for fiscal 2002 were $55 billion.
3 And you've never heard that number before and for good
4 reason. It doesn 't reflect the reality of what the
5 company gets paid. And that's why Tenet stopped
6 reporting gross revenues in 1986.
7 Regulations require that hospital charges be the same for
8 all patients, regardless of payor category. And yet, in the
9 hospital industry, no one actually pays hospital
10 charges . At one time charges equated to prices, but they
11 diverged many years ago.
12 (Emphasis added).
13 352. Fetter further conceded that Medicare reimbursements, since the
14 inception of the PPS in the early 1980s were less and less charge dependent,
15 moving "from a cost plus system of reimbursement to a fixed price system."
16 According to Fetter, however, "the outlier formula, in Medicare is still based, in
17 part, on charges. And some elements of HMO contract[s] are based on charges as
18 well." 13 Fetter then discussed how charges grew exponentially faster than prices
19 since fiscal 1998. According to Fetter, charges grew "substantially in excess of
20 inflation, medical cost increases and even increases in HMO premiums." Distilled
21 to its essence, while inpatient revenues per patient day grew only 8% during the
22 fiscal years 1999 through 2002, "the growth rate of increases in charges per day
23 was 22%."
24 353. Defendants expressly conceded over and over again that charges are
25
26 13In the December 3, 2002 investor presentation, Fetter explained that in managed care 27 contracts, "pricing is most often a function of the per diem rate or case rate, a stop-loss provision that is intended to compensate for the most expensive cases and act as a pass through provision 28 or a mark-up on costs on certain items."
K:\ 1880\02Wnxcnded Complaint (2003-05-23).wpd 147 AMENDED CLASS ACTION COMPLAINT 1 unrelated to anything but outlier payments and stop loss payments, explaining
2 Tenet's only rationale to increase its charges so dramatically was to affect the level
3 of outlier payments. Fetter stated that the Company did not abuse its managed
4 care payors, as stop-loss payments were 29% of fiscal 2002 managed care net
5 revenues, "generated through the cases that have over three times the length of
6 stay of non-stop-loss cases. These truly are the sickest patients." (Emphasis
7 added). Thus Defendants conceded that the only reason for Tenet's raising
8 charges was to receive outlier payments for patients who were not "the sickest
9 patients." Defendants, therefore, at a minimum, were deliberately reckless in
10 failing to discover the material effect of Tenet's abusive charging strategy and the
11 resulting effect of improperly received outlier payments on Tenet's growth.
12 354. During the December 3, 2002 investor conference, Fetter stated that
13 Tenet was forced to charge uninsured patients, those least able to afford payment,
14 the same gross charges it levied on government and managed care payors, and was
15 forced to pursue those patients for collection. "This means," he stated, "that the
16 uninsured patient receives a bill of gross charges. In other words, the entire
17 hospital industry renders its highest bill to customers who are least able or least
18 likely to pay." Fetter described this as "an issue that has bothered me for years."
19 But, he continued, these cases generated huge administrative costs for collection
20 and "huge" ill-will - "the whole situation is far from ideal from a social or
21 economic perspective." Clearly, therefore, Tenet could not have been motivated
22 to raise gross charges to take advantage of those least able to pay - even though
23 Fetter tacitly conceded that this was a direct consequence of Tenet's charging
24 strategy.
25 355. Fetter concluded his prepared remarks for the December 3, 2002
26 investor presentation, harkening back to fiscal 1999. After describing initiatives,
27 including cost-cutting, initiatives concerning ethical business practices and better
28 employee relations, Fetter acknowledged that Tenet would slow its rate of
K:U880\02\Anwnded Complaint ( 2003-05-23).wpd 148 AMENDED CLASS ACTION COMPLAINT 1 acquisitions, long its engine of growth, "to devote our resources to share
2 repurchases."
3 356. According to then new CFO Farber's prepared remarks during the 4 December 3, 2002 investor presentation, the effects of the abusive and improper 5 outlier payments Tenet received during the Class Period were profound. Contrary 6 to Defendants' disclosures during the Class Period, Tenet's margins, excluding 7 outlier payments, were flat - "meaningfully lower than some of [Tenet's] public
8 company competitors when you make the same adjustments." Further, according 9 to Farber, the improper outlier payments materially affected Tenet's EBITDA 10 which, in turn, allowed Tenet to post a lower debt-to-EBITDA ratio. In turn, that 11 lower ratio led directly to more favorable credit ratings and materially less
12 burdensome interest expenses. Thus, Tenet was able to grow through acquisition
13 during the Class Period and to avail itself of less expensive credit as a direct 14 consequence of its scheme improperly to increase the outlier payments it received. 15 357. On December 4, 2002, J.P Morgan issued a report discussing Tenet's
16 December 3, 2002 investor presentation. J.P. Morgan stated:
17 Tenet's conference call, hosted last night, provided
18 substantial additional detail with respect to the 19 contribution Medicare outlier payments have made to the 20 company's revenue and earnings and the steps the 21 company plans to take to restore stability to its 22 operations. Notably, the company also provided the first 23 financial guidance since its troubles began in late
24 October, eliminating an element of uncertainty that had 25 been overhanging the stock. Nonetheless, we believe 26 THC stock will continue to remain clouded for some 27 time, given that management faces serious credibility 28 issues that are likely to linger. Moreover, we continue to
K:U 880102.Amended Complaint (2003 -05-23 ).wpd 149 AMENDED CLASS ACTION COMPLAINT 1 expect the company will encounter negative news flow
2 near-term- such as the stepped up CMS scrutiny of
3 aberrant outlier payments announced last night- which
4 will likely contribute to ongoing volatility in the stock
5 longer-term, assuming FY04 of $1.78 and applying a
6 multiple of 13X-14X, we believe the shares should
7 appropriately be valued in the $23-$25 range.
8 358. J.P. Morgan summarized Tenet' s presentation of the effect of outlier
9 payments on its EPS . The J.P. Morgan analysts related that "[t]he EPS
10 contribution related to these payments expanded as well , as follows:
11 Fiscal Year 1999 2000 2001 2002
12 Core Earnings $0.80 $0.73 $0.84 $1.28
13 Outlier Contribution 0.30 0.48 0.69 0.89
14 Reported EPS $1.10 $1.21 $1.53 $2.17
15 359. Thus, outlier payments were responsible for Tenet's EPS growth by
16 27% in fiscal 1999, 39.6% in fiscal 2000, 45% in fiscal 2001, and 41% in fiscal
17 2002, without Tenet's having disclosed this material component of its earnings.
18 360. Similarly, in a December 4, 2002 report, Prudential Securities
19 analysts stated that:
20 After market close yesterday, Tenet hosted an investor
21 conference call to provide revised earnings guidance and
22 explain its new pricing strategy. Ironically, we found the
23 investor conference call did not improve earnings
24 visibility, but instead validated doubts about core
25 earnings power. Tenet's historical EBITDA margin
26 improvement was largely a product of its aggressive
27 pricing strategy and outlier payments. Though Tenet
28 management provided baseline earnings guidance for FY
KM 880\021Ancnded Complaint (2003-05-23 ).wpd 150 AMENDED CLASS ACTION COMPLAINT 1 2003 and FY 2004, we have low confidence in the
2 earnings guidance, because it is based on what we
3 believe to be aggressive cost and revenue assumptions.
4 During the investor conference call, Tenet management
5 spent nearly two hours explaining its new pricing
6 strategy. In the future, Tenet wants to move away from
7 variable driven pricing strategy toward one with a larger
8 fixed component. To accomplish this, Tenet will take
9 several actions. First, Tenet will freeze its charge
10 masters (the master pricing schedule). Second, Tenet
11 will adopt the new Medicare outlier payment system
12 when implemented by CMS. (Still a big unknown.)
13 Third, Tenet will negotiate new managed care pricing
14 contracts with higher fixed components and less "stop
15 loss" payments. The new Aetna and HealthNet contracts
16 are part of this strategy. Finally, Tenet will modify its
17 controversial self-pay or private pay pricing structure to
18 align better with its managed care pricing strategy.
19 Tenet management tried to improve earnings visibility by
20 providing base line earnings guidance , but the questions
21 about core earnings power persist. For FY 2003 and
22 beyond, Tenet foresees a dramatic decline in outlier-type
23 payments. In its place, Tenet envisions earnings growth
24 will come from its renewed focus on core services,
25 financial management and enhanced cost controls.
26 Basically, a repeat of Tenet's 1999 Back to Basics
27 Strategy. To support this outlook, Tenet provided some
28 historical EBITDA data, which excluded outlier type
K:\1880\02Wmcnded Complaint (2003 -05-23).wpd 151 AMENDED CLASS ACTION COMPLAINT 1 payments (See Exhibit 1). When examining the
2 historical data, we realized that Tenet's Back to Basics
3 Strategy did not deliver the improvements as originally 4 thought. Fast growth in outlier payments helped to mask
5 the modest earnings power enhancement that actually
6 occurred.
7 Exhibit 1 - Tenet's Historical EBITDA Margins
8 Year Including Outliers Excluding Outliers
9 FY 1998 18.3% 16.8%
10 FY 1999 17.1% 15.3%
11 FY 2000 17.0% 14.2%
12 FY 2001 18.6% 14.6%
13 FY 2002 20.1% 15.5%
14 FY 2003E 20.4% 14.7%
15 361. Still further, in a December 4, 2002 report, Legg Mason analysts, in 16 describing the December 3, 2002 investor meeting, referred to the effect of Tenet's 17 pricing strategy as "reimbursement distortions." The Legg Mason analysts wrote:
18 As the company transitions to a more transparent, more 19 predicable pricing system, with greater emphasis on 20 fixed payment structures, it is freezing its current gross 21 charges at hospitals, (i.e., the charge-master files at each 22 hospital can consist of 20,000 different items at each 23 hospital). It does not intend to make any rollbacks. 24 Management emphasized that the gross charges bear no 25 relation to what a hospital is actually paid, as illustrated 26 by the fact that in 2001, the company had net patient 27 revenues of $13.2 billion but gross revenues of $55
28 billion.
K:U880102 Amended Complaint (2003-05-23).wpd 152 AMENDED CLASS ACTION COMPLAINT 1 362. A December 12, 2002 Los Angeles Times article summarized
2 investor and analyst concerns that Tenet's crisis "stemm[ed] from an aggressive
3 corporate culture, fostered at the top, that encouraged hospital managers and
4 others to push short-term profits to the hilt." According to the article, Tenet's
5 hospital CEOs received, on average, $200,000 during fiscal 2002, and "doubled
6 their pay with cash bonuses, mostly for boosting their hospital's earnings. And
7 that doesn't include stock options." By contrast, to "get rid of short-term profit
8 incentives," Tenet's closest competitor, HCA, abandoned cash bonuses in 1997
9 after the commencement of a massive fraud investigation against that company.
10 According to one former senior executive of a Tenet hospital, "corporate 11 expectations to grow earnings were intense, and that failure to make budget goals
12 was sometimes met with a grilling at monthly meetings." The article also quoted a
13 current Tenet executive as stating that "hitting financial targets... was `how you
14 were judged, paid and evaluated."'
15 363. The same article summarized an interview with CEO Michael Rembis
16 ("Rembis") of Tenet's Centinela Hospital Medical Center in Los Angeles.
17 Centinela's net pretax income had increased 25% in 2002, driven by "a notable lift
18 from special Medicare `outlier payments'. .. ." According to Rembis, he "was
19 aware his hospital received a larger share of outlier payments than some others.
20 But," he continued, "he had no idea how much that affected the hospital's bottom
21 line and that directions on raising hospital charges came from corporate
22 headquarters ." (Emphasis added).
23 364. On December 19, 2002, Tenet issued a series of press releases,
24 announcing that the United States Attorney in San Diego, California, had obtained
25 and served search warrants on Tenet's Alvarado Hospital Medical Center.
26 Defendants disclosed that "[b]ased on information in the search warrants, the
27 company believes the searches relate to physician recruitment, relocation and
28 consulting issues. To the company's knowledge, no patient care or Medicare
K:\I880\02\Amended Complaint (2003-05-23).wpd 153 AMENDED CLASS ACTION COMPLAINT 1 outlier issues are involved." Later on December 19, 2002, Defendants clarified 2 that the subpoenas were served and executed by the OIG and the IRS and that the 3 search was completed and certain records removed from two administrative
4 offices.
5 365. On December 19, 2002, Barbakow also wrote an open Letter to 6 Shareholders, updating them on developments since his November 18, 2002 letter. 7 Barbakow reminded shareholders that several years ago DOJ began "global
8 investigations of virtually all U.S. hospital's coding practices ...." Barbakow
9 disclosed that Tenet had met with the DOJ regarding coding for inpatient stays and
10 that Tenet hoped it could resolve that issue as it had an issue of clinical lab test
11 billing. According to Barbakow, however, Tenet and the DOJ remained far apart
12 after lengthy negotiations. The government, Barbakow wrote, was focused on
13 four DRGs and billings related thereto from September 1992 through December
14 1998. Barbakow indicated that Tenet was confident in its position and would try
15 the case if necessary.
16 366. In the December 19, 2002 letter, Barbakow also discussed the early
17 December presentation relating to historical approaches, by payor category, and
18 outlining new and sustainable approaches for the future for charging and pricing in
19 Tenet markets. According to Barbakow, Tenet had already begun implementing
20 new approaches to pricing and was cooperating with regulatory agencies looking
21 into Tenet's current issues and past practices. Barbakow also discussed that the
22 Office of Audit Services of HHS had begun its audit of Tenet's outlier payments, a
23 process he anticipated would take months to complete. Barbakow acknowledged 24 an informal investigation by the SEC regarding trading in Tenet shares. Tenet was
25 also reviewing its own quality control systems at its subsidiaries nationwide,
26 stating:
27 We continue to have a dialogue with the Securities and
28 Exchange Commission, and we are providing the agency
K:U880142\Anunded Complaint ( 2003 -05-23). wpd 154 AMENDED CLASS ACTION COMPLAINT 1 with additional information regarding trading in Tenet 2 shares. In a letter to the Company requesting that 3 information, the Commission again referred to the status 4 of its action as "informal." 5 Barbakow assured investors that the new management team was working 6 assiduously to address issues confronting Tenet and to begin the process of 7 rebuilding shareholder value.
8 367. On January 2, 2003, Tenet announced that it had received "an
9 administrative investigative demand subpoena from the Department of Justice 10 seeking documents related to Medicare outlier payments." The DOJ sought
11 documents from January 1, 1997 through the present from Tenet and 19 of its
12 hospital subsidiaries. Fifteen of the hospitals were in California and the others in
13 Texas, Louisiana and Pennsylvania.
14 368. On January 6, 2003, Tenet issued a press release announcing that it
15 would voluntarily adopt a new proposed CMS regulation concerning outlier
16 payments. Tenet vowed to ensure that the CCR was based on the most recent cost
17 reports available and to work with its FI to ensure that Tenet's outlier
18 reimbursements were not calculated based on an SWA. By implementing this new
19 proposed regulation, Tenet estimated that its outlier payments would "drop from
20 approximately $65 million per month to approximately $8 million per month."
21 Tenet claimed to have adopted the new rule "as a show of good faith to the
22 agency, based on the company's conjecture that these changes may be central
23 components in any rule change CMS makes." According to Tenet's then-new
24 President Trevor Fetter, "Tenet has its own concerns regarding the level of
25 Medicare outlier payments certain of its hospitals have received.... We've stated
26 before our intention to address them expeditiously." He continued that, "[s]everal
27 weeks ago, we announced that we would freeze hospital charges while we
28 reviewed historical approaches and worked to develop a new and sustainable
K:\I880'A2\Amended Complaint ( 2003 -05-23 ).wpd 155 AMENDED CLASS ACTION COMPLAINT 1 approach to pricing . Our offer today is a second important step toward addressing
2 the outlier issue."
3 369. On January 7, 2003, Legg Mason analysts Clifford A. Hewitt and 4 John D. Wallace rated Tenet a "Hold/High Risk" because of "near term
5 uncertainties." Because of the outlier issue alone, the Legg Mason analysts
6 reduced Tenet's fiscal 2003 EPS target from $3.05 to $2.40, a 21 % decline.
7 370. On January 9, 2003, Tenet issued a press release , announcing that its
8 talks with the Government over the upcoding issue had failed and that the DOJ
9 would likely file suit within the next few days. According to Tenet, the
10 government had been investigating virtually all U.S. hospitals for improper coding
11 practices and that "Tenet had previously disclosed in its filings with the Securities
12 and Exchange Commission that it was among the providers being scrutinized as
13 part of these national initiatives." In fact, Tenet had already settled some lab-
14 billing related issues for $17 million.
15 371. On January 13, 2003, Tenet issued a press release announcing
16 earnings from the quarter ended November 30, 2002 and updating investors on its
17 fiscal 2003 guidance. Even though Tenet announced healthy growth in EPS from
18 operations of 28.6% to $0.72 per share, Barbakow stated that "[t]he financial
19 results in the second quarter are not indicative of what we expect beginning with
20 the third quarter, given the new Medicare outlier policy we've volunteered to
21 adopt as of Jan. 1." According to the Company, same-facility admissions grew 4.3
22 %, although total facility admissions grew only by 4.7%. Similarly, same-facility
23 net inpatient revenue per admission, measured by same-facility net inpatient
24 revenue per admission rose 7.2 % over fiscal 2002. For the first time, Tenet broke
25 out its outlier payments. During the quarter outlier reimbursements were $213
26 million up 31.5% from $162 million in the same quarter of fiscal 2002. Outlier
27 reimbursements, however, declined "18.1 percent sequentially from $260 million
28 in the first quarter of fiscal 2003," due primarily to "the impact of a new, higher
K.\I880\02\Amended Complaint (2003 -0 S-23).apd 156 AMENDED CLASS ACTION COMPLAINT 1 threshold for calculating Medicare outlier payments, which took effect Oct. 1, 2 2002." Further, Tenet disclosed that "[o]f the $213 million total, $144 million or
3 68 percent, was due to the statewide average method of calculation."
4 372. In that same press release, the Company announced EBITDA increase 5 for the quarter of 14.3 %, from $678 million to $775 million, with EBITDA 6 margins essentially flat. Similarly, net income from operations increased from 7 $279 million, or $0.56 per share, to $355 million, or $0.72 per share, a 27.2 % 8 increase. Thus, Tenet disclosed that its abuse of the Medicare system in the
9 quarter ended November 30, 2002, in the amount of approximately $144 million,
10 was the difference between healthy EBITDA and net income growth levels and
11 stagnation.
12 373. On January 13, 2003, Tenet filed with the SEC its Quarterly Report
13 on Form 10-Q for the period ended November 30, 2002. Tenet included a section
14 on pricing in which it stated that "the practices at certain of our hospitals of
15 significantly increasing their gross charges beginning in fiscal 2000, combined
16 with the Medicare-prescribed formula for determining Medicare outlier payments,
17 contributed to greater outlier payments to those hospitals." Tenet explained, once
18 again, that "[g]ross charges are not the same as prices and typically do not reflect
19 what the hospital ultimately gets paid. Rather, gross charges are retail list
20 charges."
21 374. On January 28, 2003, Tenet issued a press release, detailing its plan to
22 alleviate the burden its grossly excessive charges had placed on uninsured
23 patients. Tenet vowed to charge uninsured patients managed care rates, instead of
24 the gross charges, subject to regulatory approval regarding a hospital's standard
25 charges. Tenet also vowed to limit its "legal efforts to collect unpaid hospital
26 bills" from the uninsured. According to Tenet, its new policy "represent[ed]
27 another step in Tenet's strategy to offer solutions for the realities of today's
28 healthcare environment." According to Barbakow, Tenet had "heard the many
KAI880\\02\Amended Complaint (2003-05 -23).wpd 157 AMENDED CLASS ACTION COMPLAINT 1 voices in our communities seeking innovative answers for the problem of the 2 uninsured, and this Compact is a major step in the right direction." Barbakow
3 stated that:
4 Most of us in this industry have been troubled for years
5 by regulations and practices that meant uninsured
6 patients - those least able to afford their care - often
7 receive the largest bills and are subject to collection
8 efforts if they do not pay. The Compact is Tenet's own
9 solution to this challenge, and we hope others will join
10 us in this effort.
11 375. In the same press release, Tenet disclosed that it had agreed to settle
12 10 lawsuits coordinated by CDLU and filed by individual plaintiffs against the
13 company and some of its hospitals in Southern California. The plaintiffs in those
14 suits had argued that Tenet hospitals' billing and collection practices for uninsured
15 were unfair under California law. According to Tenet, "its decision not to pursue
16 legal action for non-payment against unemployed patients and not to place liens on
17 a home if that is a patient's only asset are part of its commitment to treat uninsured
18 patients with fairness and respect." Barbakow added that Tenet's new
19 commitment to uninsured patients was "simply the right thing to do." He
20 concluded that Tenet "strongly believe[s] that those who have an ability to pay for
21 their health care should do so. But pursuing legal action to collect from
22 unemployed patients or those who truly have no assets other than their home is no
23 longer something Tenet hospitals will do."
24 376. On February 10, 2003 , Tenet announced a settlement with the United
25 States Government related to allegations of upcoding at five Florida hospitals for
26 an aggregate amount of $4.15 million, plus interest. Tenet and the Government
27 had reached that settlement in May, 2002, but had held off announcing it in an
28 effort to resolve the massive upcoding allegations memorialized in the
KA18801A2\Amended Complaint (2003-05 -23). d 158 AMENDED CLASS ACTION COMPLAINT 1 government's January, 2003, False Claims Act Complaint. Tenet denied 2 "knowingly upcod[ing] any DRG billing." 3 377. On March 18, 2003, Tenet issued a press release, announcing new 4 initiatives "designed to sharpen its strategic focus, reduce operating expenses and 5 accelerate its repurchase of shares." Tenet pledged to divest or consolidate certain 6 of its hospitals outside of its "core operating strategy" and to use the proceeds
7 from those sales to repurchase shares. Tenet also announced that effective
8 immediately, it would change its fiscal year to match the calendar year to "align
9 Tenet's financial reporting with its new Medicare outlier policy which took effect
10 Jan.1, 2003, while establishing comparable financial reporting with other major
11 companies in the hospital industry and in corporate America." According to
12 Trevor Fetter, Tenet's new management was committed to "resolving the specific
13 challenges we face, operating the company with greater efficiency and assuring
14 the success of our core strategy - to build competitive networks of quality
15 hospitals principally in major markets." Thus, as of March, 2003, Tenet found
16 itself facing the same issues that had troubled it prior to the Class Period.
17 378. On April 10, 2003, Tenet issued a press release, announcing results
18 for the quarter ended February 28, 2003 under Tenet's former May 31 fiscal year -
19 the last such report. The results "incorporate[d] the impact of previously
20 announced recent actions taken by the company without changing underlying
21 operating assumptions." Without the benefit of abusive outlier payments, Tenet's
22 net income from operations fell from $3 10 million, or $0.62 per share, to $190
23 million, or $0.40 per share. The Company plainly discussed the impact of its
24 outlier scheme on its financial results, disclosing that outliers had dropped from
25 $191 million to $40 million and that "[r]eflecting this decline, and offset by
26 increases in other payor categories, overall unit revenue (measured by same-
27 facility net patient revenue per admission) rose 0.3 percent compared with the
28 prior-year quarter." Further, with the reduction in Medicare reimbursements by
K:\t880\02Wmended Complaint ( 2003-05-23).wpd 159 AMENDED CLASS ACTION COMPLAINT the amount that the abusive outlier payments comprised, Tenet's revenue mix was
2 materially altered with Medicare falling to 28% of net revenue versus managed
3 care which rose to 49%. EBITDA plummeted from $721 million in the prior- 4 year's quarter to $511, a 29 % decline with EBITDA margins falling to 13.9% 5 from 20.7% in the prior year's quarter. According to the Company, the EBITDA 6 erosion stemmed from $151 million less in total outlier payments and an increase 7 in Tenet's medical malpractice insurance reserves of $139 million. 8 379. In the April 10, 2003, press release, Tenet also gave preliminary 9 guidance for new fiscal 2003, ended December 31, 2003, expecting between $1.34 10 and $1.65 per share. The Company projections incorporated "a proposed rule 11 change regarding Medicare outlier payments and the $0.39 to $0.43 cumulative
12 net reduction from numerous previously announced actions the company has taken
13 in recent months." According to the Company, "[t]hese actions include the
14 decision to expense stock options, reclassification of earnings from pending asset
15 sales, the company's recent $1 billion financing and announced cost reductions."
16 380. On April 17, 2003, Tenet issued a press release, disclosing that the
17 OIG had served it with another subpoena, "seeking documents related to its
18 agreements with a physician group affiliated with five Tenet hospitals in
19 California and Nevada."
20 381. On May 14, 2003, Tenet issued a press release, disclosing its results
21 for the period ended March 31, 2003, the first quarter of its new fiscal year, ended
22 December 31. The contents of this press release provide powerful evidence of the
23 effects of Defendants' scheme on Tenet's financial results during the Class Period.
24 Tenet's adopting a new fiscal year essentially alleviated its burden of disclosing
25 fiscal 2003 over fiscal 2002 outlier payment comparisons in July, 2003. Even so, 26 Tenet's March 31, 2003 over March 31, 2002 financial results stood in stark 27 contrast to one another, one without the benefit of SWA based outlier payments. 28 The Company announced that for the period ended March 31, 2003, it would only
K:\1880102\Amended Complaint ( 2003 -05-23 ).wpd 160 AMENDED CLASS ACTION COMPLAINT 1 record revenue on outliers of $ 18 million versus $197 million in the period ended
2 March 31, 2002. According to Tenet, "[reflecting this decline in outlier revenue,
3 and partially offset by increases in other payor categories, same facility unit
4 revenue (GAAP same-facility net inpatient revenue per admission) declined 2.6%
5 versus the prior year quarter." Similarly, the Company also disclosed that without
6 outlier revenue, EBITDA for the March 31, 2003 quarter was $443 million a
7 decline of $34 million from the same period in 2002, with EBITDA margins
8 falling from 15% to 12.9% quarter-over-quarter.
9 382. In the May 14, 2003 press release , a subdued Barbakow stated:
10 Reported results for the quarter were impacted by a
11 number of factors, including our voluntary reduction in
12 Medicare outlier payments and pending hospital sales
13 that must be accounted for as discontinued operations.
14 In addition, as previously indicated, we recorded charges
15 in the quarter stemming from our aggressive actions to
16 address the challenges facing the company - actions that
17 in many respects make meaningful comparisons to prior
18 periods difficult. These steps are necessary as we work
19 to reposition the company and build a strong foundation
20 for the future.
21 XI. CLAIMS FOR RELIEF
22 A. FIRST CLAIM FOR RELIEF
23 For Violations of §10(b) of the 1934 Act and Rule 10b-5 Against Tenet and the Management Defendants 24 383. Plaintiff repeats and realleges each and every allegation contained in 25 the foregoing paragraphs as if fully set forth here. 26 384. Tenet and the Individual Defendants violated § 10(b) and Rule IOb-5 27 by: 28
K:\1880\02\Amended Complaint (2003-05-23).wpd 161 AMENDED CLASS ACTION COMPLAINT (a) Employing devices, schemes and artifices to defraud;
2 (b) Making untrue statements of material facts and omitting to
3 state material facts necessary in order to make the statements made, in light of the
4 circumstances under which they were made, not misleading; and
5 (c) Engaging in acts, practices and a course of business that
6 operated as a fraud or deceit upon the Class in connection with their purchases of
7 Tenet securities.
8 385. Throughout the Class Period, Defendants, using the means and
9 instrumentalities of interstate commerce and/or the mails, issued and otherwise
10 caused to be disseminated a series of materially false and misleading statements
11 and omitted material facts necessary to render statements made complete and
12 truthful.
13 386. The Management Defendants acted with scienter throughout the Class
14 Period. Each had actual knowledge of or was deliberately reckless in disregarding
15 the misrepresentations and omissions of material facts set forth herein.
16 Specifically, the Management Defendants were directly responsible for each of the
17 false statements set forth herein, as evidenced by their knowledge of or deliberate
18 recklessness in disregarding that Tenet was overstating its revenues, earnings and
19 growth rates by, among other things, its abuse of the Medicare system and its
20 failure to accrue a reserve for its illegal upcoding practices.
21 387. As a direct and or proximate result of the deceptive practices and
22 materially false and misleading statements and omissions that the Management
23 Defendants and Tenet issued or otherwise caused to be disseminated throughout
24 the Class Period, the market prices of Tenet securities during the Class Period
25 were artificially inflated during the Class Period. Unaware of the false and
26 misleading nature of the representations and omissions described above and the
27 deceptive and manipulative devices employed by defendants, Plaintiff and the
28 members of the Class, relying on either the integrity of the market or directly on
K:1t8801021Anecnded Complaint (2003-05-23).wpd 162 AMENDED CLASS ACTION COMPLAINT 1 the information Management Defendants and Tenet issued or otherwise caused to 2 be disseminated, purchased Tenet securities at artificially inflated prices and
3 suffered damages.
4 388. Had Plaintiff and members of the Class known of the material adverse 5 information not disclosed by Management Defendants and Tenet, or had been
6 aware of the truth behind their material misstatements they would not have
7 purchased Tenet securities at the artificially inflated prices.
8 389. By virtue of the foregoing, Management Defendants and Tenet
9 violated Section 10(b) of the Exchange Act and Rule I Ob-5 promulgated
10 thereunder.
11 B. SECOND CLAIM FOR RELIEF
12 For Violations of20(a) of the 1934 Act Against Tenet and the Management Defendants 13 390. Plaintiff repeats and realleges each and every allegation contained in 14 the foregoing paragraphs as if fully set forth herein. 15 391. The Management Defendants acted as controlling persons of the 16 Company within the meaning of §20(a) of the 1934 Act, 15 U.S.C. § 78t(a), as 17 alleged herein. By virtue of their stock ownership, and high-level positions, and 18 participation in and/or awareness of the Company' s operations, the Management 19 Defendants had the power to influence and control and did influence and control, 20 directly or indirectly, the decision-making of the Company, including the content 21 and dissemination of the various statements that Plaintiff contends are false and 22 misleading . The Management Defendants were provided with or had unlimited 23 access to copies of the Company ' s reports, press releases, public filings and other 24 statements alleged by Plaintiff to be misleading prior to and/or shortly after these 25 statements were issued and had the ability to prevent the issuance of the 26 statements or cause the statements to be corrected. 27 392. In particular, the Management Defendants had direct and supervisory 28
KA1880\02\Amcnded Complaint (2003-05-23).wpd 163 AMENDED CLASS ACTION COMPLAINT involvement in the day-to-day operations of the Company and are, therefore,
2 presumed to have had the power to control or influence the particular transactions
3 giving rise to the securities violations as alleged herein, and exercised the same.
4 393. Certain of these Defendants sat on Tenet's board committees that
5 were intimately involved in overseeing Tenet's compliance with Medicare
6 reporting requirements, and were aware of the excessive outlier payments Tenet
7 was receiving and the effect the application of the SWA multiplier was having on
8 those outlier payments, and knew Medicare would not permit this indefinitely.
9 Defendants were also aware of the allegations that Tenet hospitals were
10 performing unnecessary invasive coronary procedures and that the Company was
11 paying illegal referral fees to referring doctors.
12 394. The Management Defendants sold millions of shares of Tenet stock
13 for hundreds of millions of dollars and/or received cash bonuses paid based on
14 Tenet's overstated earnings and earnings growth.
15 395. By reason of such wrongful conduct, Defendants are liable pursuant
16 to §20(a) of the 1934 Act. As a direct and proximate result of the wrongful
17 conduct, Plaintiff and other members of the Class suffered damages in connection
18 with their purchases of the Company' s securities during the Class Period.
19 C. THIRD CLAIM FOR RELIEF
20 For Violations of §20A of the 1934 Act Against Defendants Barbakow, Mackey, Mathiasen, and Sulzbach 21 396. Representative Plaintiffs repeat and reallege each and every 22 allegation contained in the foregoing paragraphs as if fully set forth herein. 23 397. The Defendants named in this Claim for Relief are the Insider 24 Trading Defendants. 25 398. This Claim is brought by the Representative Plaintiffs against 26 Barbakow, Mackey, Mathiasen, and Sulzbach on behalf of themselves and a 27 subclass consisting of the Class who purchased shares of Tenet stock 28
K:\I880\02\Amended Complaint (2003-05-23).wpd 164 AMENDED CLASS ACTION COMPLAINT contemporaneously with the Class Period Sales of the Insider Trading Defendants. 2 Each Representative Plaintiff purchased Tenet stock contemporaneously with 3 certain sales of Tenet stock by the defendants named in this Claim. 4 399. By virtue of their of their positions as senior insiders of Tenet, the Insider Trading Defendants were in possession of material, non-public information 6 about Tenet at the time of their collective sales of more than $236 million of their 7 own Tenet stock to Plaintiff and members of the Class at artificially inflated
8 prices.
9 400. By virtue of their participation in the scheme to defraud investors
10 described herein, and/or their sales of stock while in possession of material, non-
11 public information about the adverse information detailed herein, Insider Trading
12 Defendants violated the 1934 Act and applicable rules and regulations thereunder.
13 401. The Representative Plaintiffs and all other members of the Class who
14 purchased shares of Tenet stock contemporaneous with the sales of Tenet stock by
15 the Insider Trading Defendants: (1) have suffered substantial damages in that they
16 paid artificially inflated prices for Tenet stock as a result of the violations of
17 § § 10(b) and 20(a) and Rule IOb-5 herein described; and (2) would not have
18 purchased Tenet stock at the prices they paid, or at all, if they had been aware that
19 the market prices had been artificially inflated by Defendants' false and
20 misleading statements.
21 402. The Insider Trading Defendants named in this Claim are required to
22 account for all such stock sales and to disgorge their profits or ill-gotten gains.
23 D. FOURTH CLAIM FOR RELIEF
24 For Violations of §11 and 15 of the 1933 Act Against All Defendants (Except Sulzbach) 25 403. Plaintiff repeats and realleges each and every allegation contained in 26 the forgoing paragraphs, as if fully set forth herein. However, purposes of this 27 claim, Plaintiff expressly excludes and disclaims any allegations that could be 28
K-\I880\02\Amended Complaint ( 2003 -05-23 ). wpd 165 AMENDED CLASS ACTION COMPLAINT construed as alleging fraud or intentional or reckless misconduct, as this claim is
2 based solely on claims of strict liability and/or negligence under the 1933 Act.
3 404. This Claim is brought pursuant to §§l 1 and 15 of the 1933 Act, 15
4 U.S.C. §§77k and 77o, by Plaintiff against Tenet, and defendants Barbakow,
5 Mackey, Dennis, Mathiasen, Biondi, Bratter, Cloud, DeWald, Focht, Honeycutt,
6 Kerrey, Korn and Loop. During the Class Period each of the Defendants caused to
7 be filed with the SEC and the Individual Defendants named in this Fourth Claim
8 for Relief each signed the Registration Statements in connection with the sale of
9 $400 million of Tenet 9 1/4% Series B Senior Notes due 2010 (declared effective
10 on or about October 24, 2000); $550 million of Tenet 5 3/8% Senior Notes due
11 2006 (declared effective on or about December 14, 2001); $1 billion of Tenet 6
12 3/8% Senior Notes due 2011 (declared effective on or about December 14, 2001);
13 $450 million of Tenet 6 7/8% Senior Notes due 2031 (declared effective on or
14 about December 14, 2001); $600 million Tenet 6 1/2% Senior Notes due 2012
15 (declared effective on or about March 6, 2002); $400 million of Tenet 5% Senior
16 Notes due 2007 (declared effective on or about June 21, 2003)(collectively the
17 "Registration Statements").
18 405. The Registration Statements were false and misleading, as they
19 misrepresented Tenet's financial status as previously detailed herein.
20 406. Tenet is the registrant for and the issuer of the debt securities issued 21 via the Registration Statements. As registrant and issuer of the debt securities,
22 Tenet is strictly liable to the Offering Subclass for each misstatement or omission
23 contained in the Registration Statements.
24 Management Defendants and Outside Director Defendants
25 407. The Individual Defendants named in this Fourth Claim for Relief
26 each signed the Registration Statements and participated in the preparation and
27 dissemination of the Registration Statements by preparing, reviewing and/or
28 signing of the Registration Statements and thereby causing their filing with the
K:\I880\02\Amended Complaint (2003 -05-23 ).wpd 166 AMENDED CLASS ACTION COMPLAINT SEC.
2 408. Each of the Individual Defendants named in this Fourth Claim for
3 Relief prepared, reviewed and/or signed the Registration Statements and
4 Prospectuses. None of the Individual Defendants named herein made a reasonable
5 investigation or possessed reasonable grounds for the belief that the statements
6 contained in the Registration Statements were true and did not omit any material
7 fact and were not misleading.
8 409. Each of the Individual Defendants named in this Fourth Claim for
9 Relief were control persons of Tenet, as defined in § 15 of the 1933 Act, by virtue
10 of their position as Tenet shareholders and senior officers and directors and each is
11 liable for violations of the 1933 Act. Each of them had substantial holdings in
12 Tenet stock.
13 410. Tenet was also a control person over the Individual Defendants
14 named in this claim and, in that capacity, is liable for violations of the 1933 Act.
15 411. Plaintiff and the members of the Class that purchased the Tenet
16 securities traceable to the false and misleading Registration Statements during the
17 Class Period. As a direct and proximate result of Defendants' acts and omissions
18 in violation of the 1933 Act, plaintiff and those members of the Class suffered
19 damages by reasons of the conduct herein alleged, each Defendant violated, and/or
20 in violation of § 15 of the 1933 Act controlled a person who violated, § 11 of the
21 1933 Act.
22 412. At the times they purchased Tenet debt securities traceable to the
23 defective Registration Statements, Plaintiff and such other members of the Class
24 were without knowledge of the facts concerning the false or misleading statements
25 or omissions alleged herein.
26 413. Less than two years have elapsed from the time that Plaintiff
27 discovered or reasonably could have discovered the facts upon which this
28 Complaint is based to the time that this action was commenced. Less than five
K:11880102Wmendcd Complaint (2003.05-23).%%pd 167 AMENDED CLASS ACTION COMPLAINT 1 years have elapsed from the time that the securities upon which this Claim is 2 brought were bona fide offered to the time this action was commenced. 3 PRAYER FOR RELIEF 4 WHEREFORE, Plaintiff and the Representative Plaintiffs pray for relief and 5 judgment, including preliminary and permanent injunctive relief, as follows: 6 A. Determining that this action is a proper class action, and certifying 7 Plaintiff as a class representative under Rule 23 of the Federal Rules of the Civil 8 Procedure; 9 B. Certifying a subclass consisting of all Class Members who purchased 10 shares of Tenet stock contemporaneously with the Class Period Sales of the 11 Insider Trading Defendants and certifying Representative Plaintiffs as 12 representatives of that subclass under Rule 23 of the Federal of Civil Procedures; 13 C. Awarding preliminary and permanent injunctive relief in favor of 14 Plaintiff and the Class against Defendants and their counsel, agents and all 15 persona acting under, in concert with, or for them, including an accounting and the 16 imposition of a constructive trust and/or an asset freeze on Defendants' insider-
17 trading proceeds; 18 D. Ordering an accounting of Defendants' insider-trading proceeds; 19 E. Ordering disgorgement of Defendants' insider-trading proceeds; 20 F. Ordering restitution of monies which investors were wrongfully
21 deprived of; 22 G. Awarding compensatory damages in favor of Plaintiff and the other 23 Class members against all Defendants, jointly and severally, for all damages 24 sustained as a result of Defendants' wrongdoing, in an amount to be proven at 25 trial, including interest thereon; 26 H. As to the § 11 and/or § 15 claims, awarding rescission or a 27 recessionary measure of damages; 28 I. Awarding Plaintiff and the other members of the Class s and expenses
K:\1880\02\Nnended Complaint ( 2003-05-23).wpd 168 AMENDED CLASS ACTION COMPLAINT incurred in this action, including counsel fees and expert fees; and 2 J. Ordering such other equitable/injunction or other and further relief as 3 the Court may deem just and proper, including but not limited to the imposition of 4 a constructive trust upon, or the disgorgement of, the proceeds gained from the 5 exercise of any repriced options.
6 JURY DEMAND 7 Plaintiff demands a trial by jury.
8 Dated: May 23, 2003 Respectfully submitted,
9 LI RUGER & KIM, LLP
10 By: KZ-111t^ 11 nstop er i Lisa J. Yang 12 1055 Seventh Street, Suite 2800 Los Angeles, California 90017 13 Telephone : (213) 955-9500 Facsimile : (213) 955-9511 14 Liaison Counsel to Lead Plaintiff and the Class 15 SCHIFFRIN & BARROWAY, LLP 16 Richard S. Schiffrin Andrew L. Barroway 17 Stuart L. Berman Darren J. Check 18 Three Bala Plaza East Suite 400 Bala Cynwyd Pennsyivania 19004 19 Telephone: (^10) 667-7706
20 LITE DEPALMA GREENBERG & RIVAS, LLC 21 Allyn Z. Lite Joseph J. DePalma 22 Mary Jean Pizza Susan D. Pontoriero 23 Katrina Blumenkrants Two Gateway Center, 12`' Floor 24 Newark, New Jersey 07102 Telephone : (973) 623-3000 25 Lead Counsel for Lead Plaintiff and the Class 26 [ADDITIONAL PLAINTIFFS' COUNSEL LIST FOLLOWS] 27
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K:\1880\02\Amended Complaint (2003-05-23 ).wwpd 169 AMENDED CLASS ACTION COMPLAINT William S. Lerach, Esq.** Martin D. Chitwood, Esq. Milberg Weiss, et al. Chitwood & Harley 401 B treet Suite 1700 2900 Promenade II San Diego, CAA 92101 1230 Peachtree Street, NE Atlanta, CA 30309
Jack Reise Esq. Stuart L. Berman, Esq. Caule Geller, et al. Schiffrin & Barroway, LLP One Boca Place Three Bala Plaza East Suite 400 2255 Glades Road Suite 421-A Bala Cynwyd, PA 19064 Boca Raton, FL 3431
David R. Scott, Esq. Joshua M. Lifshitz, Esq. Scott & Scott Bull & Lifshitz 108 Norwich Avenue 18 East 41" Street P.O. Box 192 New York, NY 10017 10 Colchester, CT 06415
11 James A. Caputo, Esq. Joseph J. Tobacco, Jr., Esq. 12 Spector Roseman & Kodroff Berman DeValerio, et al. 401 B Street Suite 1600 425 California Street Suite 2025 13 San Diego, CzA 92101 San Francisco, CA 94104
14 Charles J. Piven Esq. Jules Brody, Esq. Law Offices of Charles J. Piven Stull Stull & Brody 15 The World Trade Center - 6 East 45 Street Baltimore New York, NY 10017 16 401 East Pratt Street Suite 2525 MD 21201 17 Baltimore, Joseph Weiss, Esq. Michael D. Braun, Esq. 18 Weiss & Yourman Stull Stull & Brody The French Building 10940 Wilshire Blvd. Suite 2300 19 551 Fifth Avenue Los Angeles, CA 90014 New York, NY 10176 20
21 Kevin J. Yourman, Esq. Deborah R. Gross, Esq Weiss & Yourman Law Office of Bernard M. Gross, PC 22 10940 Wilshire Blvd. 24"' Floor 1515 Locust Street Los Angeles , CA 90014 Philadelphia , PA 19102 23
24 David Jaroslawicz, Esq. Arnold Levin, Esq. Jaroslawicz & Jaros Levin Fishbein, et al. 25 150 William Street 510 Walnut Street, Suite 500 New York, NY 10038 Philadelphia, PA 19106 26
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K:\1880'A2'Amended Complaint (2003-05-23).wpd 170 AMENDED CLASS ACTION COMPLAINT Mark McNair Es Francis A. Bottini, Esy. Law Office of'Mar1{ McNair Wolf Haldenstein, et al. 110130th Street NW, Suite 500 Symphony Tower Washington, R. 20007 750 B Street Suite 2770 San Diego, CzA 92101
Marc S. Henzel, Esq. Andrew M. Schatz, Esq. Law Office of Marc S. Henzel Schatz & Nobel 273 Montgomery Ave. Suite 202 330 Main Street Bala Cynwyd, PA 19064-2808 Hartford, CT 06106
Frederic S. Fox Esq. Laurence D. King, Esq. Kaplan Fox & kilsheimer Kaplan Fox & Kilsheimer 805 Third Avenue 22nd Floor 555 Montgomery Street New York, NY 10622 San Francisco , CA 94111
10 Bruce G. Murphy, Es . Brian P. Murray Es^q. 11 Law Office of Bruce G. Murphy Rabin & Peckel, LLP 265 Llwyd Lane 275 Madison Avenue 12 Vero Beach, FL 32963 New York, NY 10016
13 Lionel Z. Glancy, Esq. Jeffrey Neiman, Esc9. Glancy & Binkow, LLP The Neiman Law Firm 14 1801 Avenue of the Stars, Suite 1801 1412 Coney Island Avenue Brooklyn , NY 11230 15 Los Angeles, CA 90067
16 Mark C. Gardy, Esq. Curtis V. Trinko, Esq^ Abbey Gardgy LLP Law Office of Curtis V. Trinko 17 212 ast 39 street 16 West 46 Street New York, NY 10016 New York, NY 10036 18
19 Marc I. Gross, Esq Sherrie R. Savett, Esq. Pomerantz Haudek, ett al. Berger & Montague, PC 20 100 Park Avenue 26 Floor 1622 Locust Street New York, NY 10017 Philadelphia, PA 19103 21
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K:\ 880\02\Amendcd Complaint (2003-05-23).wpd 171 AMENDED CLASS ACTION COMPLAINT Solomon Cera, Esq. Ira M. Press Gold Bennett, et aT. Kirb McInerney & Squire LLP 2 595 Market Street, Suite 2300 830 Tiiird Aveneu 10th Floor Francisco 94105 New York, NY 3 San , CA 10d22 Venus Soltan Abraham Rappaport 4 Soltan & Associates Jayne Goldstein 555 Anton Blvd., Suite 1200 Maur, White & Goldstein, LLP Costa Mesa, CA 92626 2825 University Drive, Suite 350 Coral Springs, FL 33065 6 Sandy A. Liebhard Joseph Seidman, Jr. Alan Schulman 7 Bernstein, Liebhard & Lifshitz David R. Stickney 10 E. 40' Street 22nd Floor Robert S. Gans 8 New York, NY 10016 Bernstein, Litowitz, Berger & Grossmann 9 Kevin P. Roddy 12544 High Bluff Drive, Suite 150 Ha ens Berman San Diego, CA 92130 10 700S. Flower Street Suite 2940 Robin F. Zwerling Los Angeles , CA 90017-4101 Zwerling, Schachter & Zwerling 767 3 Avenue 12 Patrick J. Coughlin New York, NY 10017-2023 Milberg, Weiss, Bershad, Hynes & 13 Lerach Jeff S. Westerman 100 Pine Street, Suite 2600 Milberg, Weiss, Bershad, Hynes & 14 San Francisco, CA 94111 Lerach 355 S. Grand Avenue Suite 4170 15 Jeffrey C. Block Los Angeles, CA 90011-3172 Michael G. Lange 16 Berman DeValerio, Pease, Tabacco, James M. Orman et al. Law Offices of James M. Orman 17 One Liberty Square 1845 Walnut Street,14t'' Floor Boston, MA 02109 Philadelphia, PA 19103 18
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KA I 880\02\Amended Complaint ( 2003-05-23).wpd 172 AMENDED CLASS ACTION COMPLAINT