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 during which Chairman,
President and CEO Wayne Smith and a lineup of other company
executives spoke.
Tenet's lawsuit "is a direct and unfair attack on the ethics and
judgment of 16,000 physicians and 87,000 employees," Smith said as
he closed the presentation on the Tenet matter after roughly an
hour, without taking any questions. The company did take questions
earlier on its first-quarter results.
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 whistle-blower case against a Community Health hospital;
the department is deciding whether to join in the whistle-blower
case. 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; CtW recently launched a vote-no campaign
against three Community directors, a spokeswoman told Dow Jones
Newswires on Thursday.
Community said it will cooperate with regulators and assist in
any investigation. The company also said its Audit and Compliance
Committee directed that a review of CtW's concerns be undertaken,
and that the review is ongoing.
Nonetheless, Community 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, "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 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 called Tenet's assertions about the Triad Hospitals
"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,"
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.
Shareholder CtW, citing Community Health's "failure to
decisively and immediately respond to the expanding scandal," has
launched a vote-no campaign against two members of the board's
audit committee and director and Chief Financial Officer W. Larry
Cash, said spokeswoman Rosanna Landis Weaver.
A Tenet spokesman said: "Nothing we heard today from Community
Health diminishes our confidence in our analysis or allegations. We
plan to vigorously pursue our claims in court."
Deutsche Bank analyst Darren Lehrich, however, said Community's
data provide 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."
-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-982-5582;
dinah.brin@dowjones.com
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