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Feds widen probe of Community Health Systems' outpatient billing methods

The U.S Justice Department has broadened its probe of Community Health Systems' outpatient billing practices, according to a company filing with the Securities and Exchange Commission.

Monday's filing from CHS, currently locked in a bitter hostile takeover attempt of Tenet Healthcare, comes in addition to a filing late Friday disclosing a two-year-old whistleblower (qui tam) lawsuit United States ex rel. Reuille vs. Community Health Systems Professional Services Corporation and Lutheran Musculosskeletal Center, LLC d/b/a Lutheran Hospital, filed in Indiana.

The lawsuit, which had been under seal, alleges CHS billed Medicare for "false 23-hour observation after outpatient surgeries and procedures, and intentional assignment of inpatient status to one-day stays for cases that do not meet Medicare criteria for inpatient intensity of service or severity of illness."

The Justice Department, which had previously declined to intervene in the case, filed a motion late Friday that contained information about how the government intends to proceed with its investigation regarding "allegations of improper billing for inpatient care at other hospitals associated with Community Health Systems, Inc. ... asserted in other qui tam complaints in other jurisdictions," according to today's SEC filing by CHS.

The filings come two weeks after Tenet filed a lawsuit in Texas alleging improper billing of inpatient stays to Medicare, as it looks to fend off CHS' hostile bid for the company. The motion filed Friday by the government considers the Tenet charges to be related to allegations in the qui tam and its now-consolidated investigation.

Government entities coordinating the investigation include the Civil Division of the Department of Justice, several United States Attorneys' offices and the Office of Inspector General for the Department of Health and Human Services.

Tenet's lawsuit seeks full disclosure of CHS' admitting practices, which Tenet contends inflated CHS' revenue and earnings – which in turn affects CHS' bid for Tenet, since the offer includes CHS stock. Tenet has maintained that the admissions practices weakened CHS stock and hence weakened its $6 per share offer for Tenet.

[See also: Tenet files lawsuit against Community Health Systems]

In an attempt to regain the initiative in the takeover bid, CHS last week eliminated this concern by revising its offer to $6 per share for Tenet stock, all cash. On Friday, Tenet rejected that bid.

"Community Health's proposal continues to undervalue Tenet," said Trevor Fetter, president and CEO of Tenet. "Since Community Health's original $6 per share proposal was made, Tenet has demonstrated improving business trends, including the best fourth quarter results in seven years. In addition, industry fundamentals are improving, and Tenet's outlook for 2011 and longer-term financial performance reflects strong growth."

CHS management's response to Tenet's repeated spurning has not changed much since its offer for Tenet was first rejected in December.

[See also: Tenet rejects $3.3B buyout offer from Community Health Systems]

"We are disappointed that the Tenet Board of Directors rejected our all-cash offer and refuses to engage with us. Instead of focusing on creating shareholder value, the Tenet board elected to bring an irresponsible lawsuit," the company said in a statement. "Despite the board's strategy of entrenchment, we remain ready to engage in constructive discussions to move this transaction forward. We would welcome the opportunity to review additional information Tenet can provide and are prepared to recognize any additional value it can demonstrate."

Wall Street analysts have speculated that in order to complete a merger, CHS would need to raise its offer to between $8 and $9 per share to generate any interest from Tenet management.

CHS stock has taken a battering as a result of the Tenet lawsuit and other revelations, trading more than 20 percent below its closing price before the lawsuit was filed. Midday trading today showed CHS stock trading flat at $30.69 per share.

With broader government inquiries of its billing practices, the company may be forced to change its tack. A recent investment note from Jefferies & Co. analyst Arthur Henderson indicated that if CHS shares should continue to suffer from the lawsuit and the new government probe, shareholders may pressure the company to drop its Tenet bid in favor of focusing on the current investigations.

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