UPDATE: Community Health: Tenet's Allegations Skewed, Wrong

Community Health Systems Inc. (CYH) reiterated its view Thursday that rival hospital operator Tenet Healthcare Corp.'s (THC) recent lawsuit against the company "has no merit" and said it will have no material effect on operations.

Tenet's lawsuit, which alleges Community Health has overbilled Medicare by improperly admitting patients who should be observed as outpatients, arose from Community's ongoing $3.3 billion hostile bid to acquire Tenet. Tenet based its case on data from two outside consultants.

"We believe that Tenet's lawsuit against (Community) in this proxy contest has negatively affected the entire health care sector," Community said in a roughly 110-page slide presentation accompanying an investor call Thursday. Community Health Chairman, President and CEO Wayne Smith started the call, and a lineup of other company executives were making presentations.

The Justice Department recently filed a court motion indicating the government has consolidated multiple federal investigations of billing practices at Community Health hospitals into a coordinated, nationwide probe, and will work with any states probing the company.

The Justice Department said in the filing that allegations in Tenet's lawsuit related to the government probe and to claims in a separate whistleblower case against a Community Health hospital. Separately, labor-affiliated shareholder CtW Investment Group has written to Community detailing its concerns about "aggressive" Medicare billing practices and last year forwarded its concerns to government investigators.

Community said it will cooperate with regulators and assist in any investigation. Nonetheless, it continued to dispute Tenet's allegations. Community said it expects a decision on its motion to dismiss Tenet's lawsuit before the Tenet shareholder meeting in November.

"Over the past two weeks, many independent financial analysts and industry consultants have reviewed and tested Tenet's hypothesis and found it implausible and unsupported. We have reconstructed and tested many of these analyses and done our own work which, while preliminary, leads us to believe that Tenet is misguided and wrong," Community said.

Tenet's allegations of inappropriate admissions "are based on contrived and biased metrics leading to a conclusion of implausibly inflated financial exposure," Community said. If Tenet believes a hospital's "observation rate," indicating patients classified as outpatients, is material statistics, "then why did Tenet not disclose this metric in its own SEC filings?" Community asked.

"Tenet's biased use of its selected statistical analysis and failure to review and apply relevant statistics lead to a series of materially false conclusions," Community said, adding that Tenet omitted an industry peer, Universal Health Services Inc. (UHS), with an observation rate close to Community's.

Tenet said in the lawsuit that 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.

Community, in its slide presentation, said that "Tenet's assertions and analyses regarding the Triad Hospitals transition ... are skewed and incorrect."

Tenet's allegation of 20,000 or more inappropriate admissions in 2009 is "illogical and not supported by the facts," Community said.

"Tenet's contrived 'observation rate' is not an industry term and we believe it is not a useful metric," while inpatient rates do matter, Community said. The company said its 2009 Medicare emergency-room admission rate of 26.8% is in line with its peer group, which spans 17.7% to 39.4%, and is near the average of 28.5%.

Tenet also failed to balance Medicare positions regarding use of observation status and inpatient admissions, Community said, noting that if a doctor determines care of the patient is likely to take more than 24 hours, the patient should be admitted.

Community took issue with Tenet's criticism of its use of home-grown clinical-review criteria, known as the Blue Book, instead of standards supplied by industry vendors.

"We believe that Tenet implies a requirement that hospitals use vendor-supplied clinical review criteria and that there is something nefarious about the clinical review criteria developed over time by (Community) physicians and other health care professionals," the company said.

Medicare "does not dictate or endorse any particular criteria. (Medicare) does not endorse any particular brand of screening guidelines," Community said. The company said its Blue Book guidelines for inpatient care aim to have one set of criteria for all insurers, be easy for the case manager to use, use current clinical practice and be affordable and cost-effective.

Deutsche Bank analyst Darren Lehrich said Community's data provides further evidence that the observation rate metric is "statistically irrelevant" on its own, and seems to dispel Tenet's allegations regarding the materiality of growth in one-day inpatient stays in Triad hospitals since the acquisition.

Gimme Credit senior high-yield bond analyst Vicki Bryan said the presentation "very effectively refuted Tenet's allegations and supported our initial view that the company is simply an efficient and profitable operator, which Tenet has not been for years."

A Tenet spokesman said the company would comment after Community's conference call addressing the matter.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-982-5582; dinah.brin@dowjones.com

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