DALLAS (CN) – Tenet Healthcare, trying to fight off acquisition by Community Health Systems, claims CHS overcharged Medicare $280 million and further inflated CHS stock prices by “systematically admitting, rather than observing, patients in CHS hospitals for financial, rather than clinical, purposes.”
Tenet Healthcare Corp. sued CHS, its CEO Wayne Smith and CFO Larry Cash in Federal Court.
“Now, as CHS attempts to acquire Tenet for $6 per share, $1 of which would be paid in CHS stock to Tenet’s shareholders, CHS is making false and misleading statements to Tenet’s shareholders in the hope that they will exert pressure upon Tenet to accept an inadequate offer, or elect CHS-nominated directors who will approve a transaction with CHS,” the complaint states.
Tenet says CHS, which calls itself an “industry leader in admissions growth,” lied to its own shareholders by claiming that a merged CHS-Tenet would improve quality of care and allow CHS to provide “cost-efficient” healthcare services.
“CHS has also claimed that there was ‘significant synergy potential’ in its proposed acquisition of Tenet, similar to the synergies CHS claims to have achieved through its acquisition of other hospitals,” according to the complaint.
It adds: “CHS has managed to improve the performance of its acquired hospitals not by growing the business, but by increasing margins through changing the acquired hospitals’ admissions criteria and drastically lowering the rate at which its hospitals utilize ‘observation’ status.”
Tenet says CHS increased the revenue of Triad, a hospital operator it acquired in 2007, through “CHS’s systematic reduction in the observation rate at the former Triad hospitals – a stunning 52 percent drop in one year following the acquisition.”
Tenet says CHS uses “liberal” criteria to decide whether to admit patients or treat them as outpatients, at a lower cost, and claims that “CHS artificially increases inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources. …
“CHS has reaped enormous sums through its admissions practices. Avalere, a leading healthcare advisory firm, estimates that, between 2006 and 2009, CHS received approximately $280 million to $377 million from treating inpatient admitted Medicare patients in CHS hospitals” who could have been treated in observation, the complaint states.
Tenet says Medicare pays as much as $7,000 more per hospitalized patient than it would for outpatient services for the same patient.
Tenet adds that by improperly billing Medicare, CHS has violated the False Claims Act, and may be liable for more than $1 billion in penalties.
Tenet says: “CHS accomplished this increase in patient admissions by implementing, in or around 2000, a home-grown set of patient admission criteria called the Blue Book.”
While 60 percent of U.S. hospitals use guidelines called InterQual Criteria, developed by McKesson Corp., to determine admission of patients, and another 16 percent use the Milliman Care Guidelines, developed by independent physicians, CHS hospitals use the internally generated 40-page Blue Book, which lacks references to medical journals or other authoritative sources, Tenet says.
It adds: “in many cases the Blue Book contains admissions criteria for which there is no clinical basis to admit the patient.”
Tenet says the Blue Book allows CHS doctors to admit patients for common problems such as chest pain, irregular heartbeat or pneumonia, though there are no other symptoms to warrant hospitalization.
“As a result of the revenues generated from these improper admissions, CHS’s stock price has for many years been artificially inflated. CHS now seeks to use its artificially inflated stock price to pay, in part, for the proposed acquisition of Tenet,” the complaint states.
Tenet says it is trying to prevent CHS from acquiring it at below-market price. It claims that CHS created disputes with Medicare, state programs and private insurers by applying “overly aggressive criteria to justify admitting patients” and may be excluded from participating in Medicare due to its improper billing practices.
Tenet wants CHS ordered to disclose fully its admissions practices to Tenet shareholders before the Nov. 3 annual shareholder meeting, and enjoined from making more false statements or omissions to inflate the price of CHS stock. It also seeks the costs it incurred to investigate CHS.
Tenet is represented by Robert Walters with Gibson, Dunn & Crutcher.