Community Health Systems, locked in a bitter hostile takeover bid for rival Tenet Healthcare, publicly defended itself Thursday, calling Tenet's allegations of improper patient admission practices "contrived and biased."
Tenet filed a lawsuit on April 11 against CHS, charging the system with illegal admissions practices, as it attempts to fend off a $6-per-share, $3.3 billion takeover bid by CHS that Tenet contends vastly undervalues the company.
During an April 28 conference call, CHS announced its first quarter earnings and presented 109 pages of statistical analysis and other details of the company's "Blue Book" admissions guide aimed at refuting Tenet's claims. In the lawsuit, Tenet alleges CHS systematically bills cases as higher-paying inpatient admissions that could have been billed as lower-paying outpatient observations, and that Community Health's observation rates were less than half the national average.
"The past several weeks have been challenging as we have worked through a number of issues presented by the Tenet litigation," said Wayne T. Smith, chairman and CEO of Community Health Systems. "We believe the lawsuit against Community Health Systems and the proxy contest could negatively affect the entire healthcare sector."
Smith said a number of analysts have concluded that the Tenet lawsuit "is both misguided and wrong."
"We believe that Tenet's allegations and calculations of inappropriate admissions are based on contrived and biased metrics," he said. "If Tenet believes that observation rate is a material statistic, why doesn't Tenet disclose this metric in their SEC filings?"
Tenet's response to the CHS defense was quick and to the point. "Nothing we heard today from Community Health diminishes our confidence in our analysis or allegations," said company spokesman Rick Black. "We plan to vigorously pursue our claims in court."
At the core of the Tenet lawsuit are claims that CHS deliberately admits more patients to its hospitals instead of classifying them for observation status, which are billed at lower rates. Using data from two outside firms, Tenet contends CHS' observation rates are less than half the industry standard and that, as a result, the company overbilled Medicare by $280 billion over a three-year period. It also calls into question the use of Community Health Systems' "Blue Book" internal patient admissions manual.
Using industry data from 2009, CHS noted the Tenet analysis failed to use data from an industry peer, United Health Services, which demonstrated similar observation rates. Further, it showed that while its observation rate was below industry average, this was not statistically significant since all peer group hospital groups including CHS fell within one standard deviation of the mean.
Community Health commented briefly on the ongoing and widening probe of its billing practices by federal and state investigators. CHS said it is cooperating with the investigations, which in the long term may prove more harmful to the company than the Tenet lawsuit.
In the wake of CHS' disclosure April 15 of a whistleblower lawsuit in Indiana of its billing practices and the investigation by the Justice Department, CtW Investment Group is urging shareholders to vote against three current board members at the CHS upcoming annual shareholder meeting on May 17. CtW cited concerns that the board has not adequately overseen "risks concerning compliance with Medicare billing practices (which) could have disastrous consequences for Community shareholders."
CtW first brought its concerns to CHS last September when it called on the company to establish a special committee of independent directors to investigate potential risks to future earnings created by CHS billing practices, which CtW characterized as "aggressive and unsustainable."
Some industry analysts have indicated that a lengthy federal probe of Community Health Systems would jeopardize its attempted takeover of Tenet. Arthur Henderson, an analyst with Jefferies & Co., said shareholders may eventually pressure the company to drop its Tenet bid in favor of focusing on the current investigations.
Since Tenet brought its lawsuit against CHS, company stock has fallen by roughly 25 percent.