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Tenet files lawsuit against Community Health Systems

Tenet Healthcare has taken its fight to stave off a hostile takeover bid by Community Health Systems to the next level – filing a lawsuit that alleges the hospital operator improperly bills cases as higher-paying admissions rather than lower-paying outpatient observations.

As a result, Tenet claims, Community Health's admissions policies lead to inflated revenue and earnings for the company – a practice that is unsustainable without a continued pipeline of acquisitions.

The lawsuit, filed in the U.S. District Court in the Northern District of Texas, seeks to have Community Health fully disclose its admissions practices.

"We filed this complaint because our due diligence revealed that Community Health has been systematically overbilling Medicare and likely other payers by causing patients to be admitted to its hospitals when industry practice is to treat them in outpatient observation status," Tenet officials noted in a statement. "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. We are seeking to provide Tenet stockholders with the information they need to make an informed decision by asking the court to compel Community Health to correct its false and misleading statements and omissions."

Community Health Systems did not respond to a request for comment before press time.

The action by Tenet is the latest in a series of moves the company has made to fend off a hostile takeover bid launched last December by Community Health Systems. At that time, Community Health offered Tenet $6 per share in cash and stock, a figure that was 40 percent above Tenet's trading price. Since Community Health took the bid public, Tenet shares have traded significantly higher than the offer price, recently hitting a 52-week high of $7.70 per share.

[See also: Tenet adopts 'poison pill' provision in attempt to block hostile takeover; Tenet rejects $3.3B buyout offer from Community Health Systems]

News of the lawsuit, however, has spooked investors. Tenet shares were taking a battering Monday morning, dropping nearly 19 percent to $6.13 shortly before 11 a.m., while Community Health shares were taking a much bigger hit, down nearly 40 percent to $24.52 after closing Friday at $40.30 per share.

In early January, Tenet adopted a "poison pill" shareholder rights plan designed to dilute the share price for any company or entity trying to acquire more than 4.9 percent of company stock. The company also moved its annual meeting to November to allow time to execute on its turnaround plans with the hope of driving its stock price higher by showing strong quarterly results.

In February Tenet released 2010 fourth quarter results showing that the company had more than tripled its earnings compared with the previous year, from 4 cents per shre in 2009 to 14 cents per share.

Community Health Systems, meanwhile, has stood firm on its $6-per-share offer. It has also nominated a full slate of Tenet directors for the annual shareholder meeting, with the intention of stacking the board with members who would vote in favor of the company's standing offer for Tenet.

Since the bid for Tenet includes a combination of cash and stock, the lawsuit contends that the admissions process used by Community Health is unsustainable and that winding it down to rates that are closer to industry norms would have a material effect on the offer  – through both a lower per-share price and a hampering of the company's ability to raise the cash necessary to complete a deal.

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