(CN) – Shareholders can sue Community Health Systems for allegedly hiding a major driver of its profitability – Medicare fraud – which a competitor revealed in a 2011 lawsuit, the Sixth Circuit ruled.
In 2011, Tenet Healthcare Corp. sued Community Health Systems during an attempted hostile takeover of Tenet, claiming that Community’s profitability was in part due to rampant Medicare fraud at its hospitals.
Tenet claimed that Community, the largest for-profit hospital system in the country, treated 60 percent fewer patients as outpatients than the national average, a statistic that led to the “inescapable conclusion” that Community systematically admitted patients for more expensive inpatient treatment when more cost-efficient means of treatment were available.
For example, Community’s policy provided that any patient who came to the emergency room complaining of chest pain had to be admitted before running tests to determine whether or not they were at risk of a heart attack. This allegedly increased Community’s reimbursement from Medicare tenfold.
On news of these allegations, Community’s share price fell 35 percent, and continued to decline in the summer of 2011.
Community withdrew its offer to acquire Tenet, and issued a press release in the fall showing it admitted seven percent fewer inpatients, which analysts took as a sign that Tenet’s claims had some validity.
In total, Community shares lost more than half of their value in 2011, falling from $40 to under $18, and erasing $891 million in value.
Community also paid the federal government $98 million to settle multiple Medicare fraud suits.
Shareholders sued the company, claiming that it misrepresented the source of its profits and failed to disclose that it did not adhere to national standards regarding inpatient admissions.
A federal judge found the shareholders’ claims implausible, reasoning that the market would regard Tenet’s lawsuit as comprising mere allegations rather than the truth.
But the Sixth Circuit reversed the decision, ruling that shareholders adequately alleged Community executives soon corroborated much of what Tenet’s lawsuit claimed, causing shares to fall further.
“Whether the Funds’ losses flowed from the disclosures, Community’s failed merger with Tenet, or anything else is for the parties to dispute at the summary-judgment stage or at trial, rather than for us to decide on the pleadings here,” Judge Raymond Kethledge said, writing for the three-judge panel. “At this point it suffices to say that the complaint gives the defendants ample indication of the causation theory that the Funds intend to advance.”