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Takeover target Tenet accuses suitor of Medicare fraud


DALLAS – In what Wall Street analysts are calling one of most contentious hostile takeover bids in recent memory, Tenet Healthcare filed a lawsuit in early April against Community Health Systems, charging CHS with admissions procedures that overbill Medicare.
The lawsuit is the latest salvo in a battle over control of Tenet, which is facing a hostile takeover bid from CHS that was initially launched late last year.
A few days after the suit was filed, Community Health sought dismissal of the lawsuit and revised the structure of its offer to an all-cash bid.
Tenet, which received an offer from CHS in early December of $6 per share (with $1 of each $6 to be proffered in CHS stock), alleges in the lawsuit that CHS systematically billed cases at its hospitals as higher-paying inpatient admissions versus lower-paying 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.
“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.”
The day after the lawsuit was filed in in the U.S. District Court in the Northern District of Texas, CHS shot back, calling the allegations “baseless” and claiming the lawsuit was merely a further entrenchment by Tenet management to fend off the takeover by employing a “scorched earth” defense.
Tenet contends that the lawsuit, which seeks full disclosure of CHS’ admissions practices, was necessary for Tenet shareholders to fairly evaluate the CHS bid since it included CHS stock. In answer, Community Health removed the stock element of its offer and instead offered $6 in cash for each Tenet share.
“Converting our offer to all cash underscores our commitment to completing this transaction and renders Tenet’s irresponsible and inaccurate lawsuit irrelevant to our offer,” said Wayne T. Smith, chairman, president and CEO of Community Health Systems.
Further complicating its defense of their admissions practices, though, was CHS’ disclosure later the same week that it had received a subpoena from the inspector general of the Department of Health and Human Services regarding potential improper Medicare and Medicaid billing.
Analysts in the investment community, which had been largely split on the merits of the Tenet lawsuit, did not look favorably on the fact that Community Health Systems had received the subpoena on April 8, three days before the news of the lawsuit was filed, and didn’t announce it until April 15.
“(CHS) appears to have had possession of said subpoena before (Tenet) filed its lawsuit on 4/11/2011 and while (CHS) issued a press release arguing that THC’s allegations were baseless and while having discussions with analysts and investors as to those allegations,” said Sheryl Skolnik, a principal with CRT Capital. “Investors should not mistake the importance of the timing, in our view: CHS apparently sat on the subpoena for a week while investors and analysts scrambled to understand the risks associated with THC’s allegations.”
Jason Gurda, a healthcare services analyst with Leerink Swan, noted that while the Tenet lawsuit infers that CHS admitted patients it shouldn’t have, he didn’t find the evidence presented by Tenet to be compelling.
“Because (Tenet's) data don't prove that patients were admitted who shouldn't have been, we believe (CHS') likely worst case exposure is a large civil fine and a new compliance program, without the admission of guilt,” Gurda said shortly after the suit was filed.
But after the disclosure of the subpoena, a research note from Leerink said: “Amazingly (Community Health) management spoke with shareholders and analysts during all of last week about the (Tenet) allegations without disclosing it was already under investigation for something potentially similar.”


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