UPDATE: Tenet Accuses Community Health Of Overbilling Medicare
April 11 2011 - 11:37AM
Dow Jones News
Tenet Healthcare Corp. (THC) dramatically stepped up its defense
against Community Health Systems Inc.'s (CYH) hostile bid with a
federal lawsuit Monday accusing Community of boosting its financial
performance for years by unnecessarily converting emergency-room
visits into more lucrative inpatient admissions.
News of the suit sent both hospital stocks plunging, especially
Community Health, shares of which kept tripping the single-stock
circuit breaker on their way down. Community Health's stock fell as
much as 45% Monday to $22.32, its lowest point in nearly two
years.
Tenet, based in Dallas, has been fighting Community Health's
unsolicited $6 a share, $3.3 billion cash and stock offer since
late last year, calling the bid opportunistic and inadequate.
Filing a federal lawsuit accusing Community Health of improper
accounting practices goes beyond the standard takeover defense and
even has weakened other hospital stocks.
"We filed this complaint because our due diligence revealed that
Community Health has been systematically overbilling Medicare and
likely other payers by causing patients to be admitted to its
hospitals when industry practice is to treat them in outpatient
observation status," a Tenet spokesman said.
"We believe this unsustainable strategy has resulted in
Community Health overstating its inpatient admissions, revenues and
profits and has created substantial financial and legal liability.
We are seeking to provide Tenet stockholders with the information
they need to make an informed decision by asking the court to
compel Community Health to correct its false and misleading
statements and omissions," the company said.
Under federal securities laws, takeover target companies and
their shareholders are entitled to bring such claims, according to
a person familiar with the case.
Community Health representatives didn't immediately respond to
requests for comment. Community Health shares recently fell 31% to
$27.65.
Tenet shares also fell on the news, down 15% to $6.43, removing
some of the gains in the stock's price following Community Health's
offer in December.
Other hospital operators also fell Monday. HCA Holdings Inc.
(HCA) dropped 4.3%, while Health Management Associates Inc. (HMA)
lost 6.2%.
Because of Community's billing practices, its stock--which is
part of the offer--is worth less than stated, and its ability to
finance the cash portion of the bid may be impaired, according to
Tenet.
Tenet wants the court to force Community to disclose "its unique
and non-industry standard patient admissions criteria and billing
practices and the financial and legal implications arising from
them," Tenet said. Tenet alleges Community Health's admissions and
billing practices have resulted in "materially misleading financial
reports and statements."
Community Health's potential liability is well in excess of $1
billion for the years between 2006 and 2009 for the Medicare
fee-for-service portion of its business alone, Tenet alleged.
"Tenet's shareholders are at risk of being harmed by false and
misleading statements and omissions by CHS, a company whose
financial performance has, for many years, been driven by the
improper and undisclosed practice of systematically admitting into
CHS hospitals despite no clinical need," the lawsuit said.
Tenet previously delayed its 2011 shareholder meeting by some
six months and adopted a shareholder-rights plan, or poison pill,
that could dilute the holdings of a major acquirer of its stock in
attempts to fend off Community, which is based in Franklin,
Tenn.
Community, meanwhile, announced a full slate of 10 director
nominees to Tenet's board.
-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-982-5582;
dinah.brin@dowjones.com
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