Rival Accuses CHS of Defrauding Medicare
April 12, 2011 6:10 a.m.
YOUNGSTOWN, Ohio -- Tenet Healthcare, a Dallas hospital company fighting a hostile takeover bid by Community Health Services, is accusing CHS of defrauding Medicare of at least $280 million over three years by systematically admitting more patients to its hospitals than clinically necessary.
CHS operates 130 hospitals in 29 states including three in the Mahoning Valley -- Northside Medical Center, Trumbull Memorial Hospital and Hillside Rehabilitation Hospital -- purchased last year from the bankrupt Forum Health Inc. for $120 million. CHS announced last month it would do business locally as ValleyCare Health System.
The Medicare fraud allegation is contained in a lawsuit filed by Tenet Monday in Dallas that accuses CHS of violating federal securities law and seeks to compel the Tennessee company to disclose its patient admission guidelines, which Tenet claims are based on "financial rather than clinical purposes. Tenet's shareholders are at risk of being harmed by false and misleading statements and omissions by CHS," the lawsuit states. "CHS's practice of greatly under-using 'observation' status and consequently overusing 'inpatient admission' status has served to overstate its growth statistics, revenues and profits, and has created a substantial undisclosed financial and legal liability to the federal government, numerous state governments, private insurance companies and patients."
CHS called the allegations "completely without merit ... unfounded and irresponsible" and accused Tenet of "adopt[ing] a scorched earth defense without regard for the best interests of its shareholders."
Community Health Systems has proposed a $7.3 billion takeover of Tenet -- or $6 per share, of which $1 would be paid in CHS stock. Tenet's board of directors rejected the unsolicited bid in December; CHS responded by announcing it would nominate 10 directors for election to Tenet's board.
In making its claims, Tenet relies on the findings of consultants it hired that concluded CHS rate of keeping patients under observation -- rather than admitting them -- was less than half the national average.
The lawsuit claims Community Health's "improper admission policy" has resulted in Medicare, Medicaid, private insurers and patients paying the company "untold hundreds of millions -- if not billions -- of dollars for unnecessary hospital admissions.""
Moreover, CHS could be "subject to liability and damages of well over $1 billion" for its Medicare admissions practices from 2006 to 2009, the period Tenet's consultants studied as part of the company's due diligence review of the CHS offer.
Tenet operates 49 hospitals in 11 states.
Both companies are publicly traded.
With the threat of Tenet's lawsuit potentially triggering a federal investigation, CHS shares fell 36% Monday -- the largest drop since the company went public in 2000. Heavy trading was halted periodically.
Tenet's shares fell 13%.