Tenet Healthcare Corp. (THC) dramatically stepped up its defense
against Community Health Systems Inc.'s (CYH) hostile bid by
accusing the rival hospital operator of boosting its financial
performance for years by unnecessarily converting emergency-room
visits into more lucrative inpatient admissions.
Community Health called Tenet's federal lawsuit baseless and
proof of the company's "scorched-earth defense" against the
takeover bid. The company said it remains committed to its offer to
acquire Tenet and that its financial advisers--Credit Suisse and
Goldman Sachs--have reaffirmed their confidence in the
transaction.
Nonetheless, news of the suit damaged the stocks of both
companies and other hospital operators, and it threatened to expose
a potential loophole for the industry. Community Health was hurt
the most, with shares falling as much as 45% to $22.32, its lowest
point in nearly two years.
Ellen Griffith, spokeswoman for the Centers for Medicare &
Medicaid Services, said Medicare had no comment on the lawsuit and
that CMS doesn't confirm or deny the existence or likelihood of
investigations.
Since late last year, Dallas-based Tenet has been fighting
Community Health's unsolicited cash-and-stock offer of $3.3
billion, or $6 a share, calling the bid opportunistic and
inadequate. Monday, Tenet went on the offensive by accusing
Community Health of overbilling Medicare and likely other issuers
for "hundreds of millions--if not billions--of dollars for
unnecessary hospital admissions," the company said in the lawsuit,
filed in U.S. District Court in Dallas.
"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,"
the company said.
A Tenet spokesman said it filed the lawsuit because its due
diligence revealed that Community Health had been admitting
patients to its hospitals "when industry practice is to treat them
in outpatient observation status."
Community Health said in a press release, "Tenet's allegations
are completely without merit, and we intend to vigorously defend
ourselves against these unfounded and irresponsible claims."
Community called the "self-serving allegations" an attempt by
Tenet's management and board "to continue their entrenchment
strategy and to distract Tenet shareholders" from the offer.
"Providing high-quality patient care is the company's most
important priority. (Community) conducts its business with the
utmost integrity and adheres to the highest business practice
standards," Community said.
Community Health shares recently fell 34% to $26.57. Tenet
shares also retreated on the news, down 13.6% to $6.52, removing
some of the gains in the stock's price following Community Health's
announcement of the offer in December.
Other hospital operators also slid Monday. HCA Holdings Inc.
(HCA) dropped nearly 4%, while Health Management Associates Inc.
(HMA) lost almost 7%.
Tenet said consultants it hired found Community Health's
observation rate to be "significantly lower than the industry and
its peer companies," or less than half of the national average.
Community expanded admissions by dramatically reducing observation
status at hospitals it acquired, especially in the case of Triad
Hospitals, acquired in 2007, according to the lawsuit.
Tenet wants the court to force Community to disclose "its unique
and non-industry standard patient admissions criteria and billing
practices," Tenet said. Tenet alleged Community Health's admissions
and billing practices have resulted in "materially misleading
financial reports and statements."
Community Health's potential liability, including damages, 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.
Community Health disclosed in February that the Texas attorney
general's office had opened a civil probe involving its hospitals
in the state, focusing on emergency-department procedures and
billing. The agency, months earlier, had issued civil investigative
demands saying it was probing "misrepresentations and/or unlawful
acts" related to practices of health-care providers treating
Medicaid recipients.
Analysts took the lawsuit seriously.
"While Tenet clearly has an axe to grind, the allegations are
serious and cannot be dismissed by investors without a more
detailed analysis," Wells Fargo analyst Gary Lieberman said.
CRT Capital Group analyst Sheryl Skolnick said that by doing the
due diligence and filing the lawsuit, Tenet fulfilled its fiduciary
duty to its shareholders. "It could not risk [Community Health]
making a higher bid that would have persuaded [Tenet] shareholders
to vote" for Community's slate, she said.
Skolnick sees Tenet shares being worth $9 in a year even without
the takeover premium and sees Community Health as "untouchable for
the foreseeable future" as the company may become the subject of
investigations by the Justice Department and other federal
agencies.
The lawsuit is the latest move to fend off Community, which is
based in Franklin, Tenn. 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.
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
Tenet Healthcare (NYSE:THC)
Historical Stock Chart
From May 2024 to Jun 2024
Tenet Healthcare (NYSE:THC)
Historical Stock Chart
From Jun 2023 to Jun 2024
