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.
The move represented Tenet's boldest step yet in defending
itself against Community Health's takeover attempt, and it was felt
throughout the industry as shares of both companies and other
hospital operators suffered. Community Health was hurt the most,
with the stock 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. Donald White, spokesman for the Department of
Health and Human Services Office of Inspector General, echoed those
comments but added "we, of course, are concerned about any
allegations of Medicare fraud."
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 the company filed the lawsuit because its
due diligence revealed that Community Health--based in Franklin,
Tenn--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 ultimately fell 38% Monday to $24.89.
Tenet shares also retreated on the news, down 15% to $6.44,
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, reversing some of
their gains this year. Newly public HCA Holdings Inc. (HCA) dropped
nearly 3.2%, while Health Management Associates Inc. (HMA) lost
4.6%.
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 alleged Community is "alone among its peers in the
industry" in ignoring principles related to treating and billing
for Medicare patients. Medicare reimburses hospitals nearly $7,000
more for patients who are admitted rather than observed on an
outpatient basis, and the law requires that the program reimburses
hospitals only for medically necessary care, the lawsuit said.
Tenet accused Community of developing a "home-grown set of
patient admission criteria called the Blue Book" that it has used
to steer patients into "medically unnecessary inpatient
admissions."
About three-quarters of U.S. hospitals and almost all major
insurers use one of two sets of independent clinical criteria:
InterQual Criteria developed by McKesson Corp. (MCK) or Milliman
Inc.'s Milliman Care Guidelines, while only Community uses the Blue
Book, the lawsuit said.
Health Management Associates said it had reviewed Tenet's
complaint and confirmed that HMA hospitals use InterQual Criteria,
which it said more than 300 health plans, 3,700 hospitals, 30
Medicaid programs and Medicare use.
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.
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.
The lawsuit is the latest move to fend off Community. 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
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