Tenet Healthcare has opened an aggressive new front in its battle to ward off a takeover bid by Community Health Systems, claiming in a lawsuit that the rival hospital chain overbilled Medicare by perhaps $1 billion over three years.
Franklin-based Community Health said it remains committed to its offer to buy Tenet, however, and plans a vigorous defense. News of Tenet’s complaint — filed in federal court in Tenet’s hometown of Dallas — sent the stocks of both companies plummeting and hurt the shares of every other hospital chain on Wall Street.
“Its actions today prove that Tenet has adopted a ‘scorched earth’ defense without regard for the best interests of shareholders,” Community said as its stock collapsed by nearly 36 percent in Monday’s trading.
Community Health called Tenet’s claim a baseless attempt to distract shareholders from Community’s hostile multi-billion dollar takeover offer that Tenet’s board had rejected earlier this year.
Tenet’s legal claim, in effect, contends that Community Health squeezed more money out of Medicare by admitting thousands of patients that should have been kept in a less costly setting for observation only.
Tenet says that Community Health sets targets for its hospitals for converting emergency room visitors into admitted patients and bases bonuses for doctors in part on the number of patients admitted to the hospital. That inflates the take from Medicare, Tenet claims.
Investors were spooked by the dispute and the possibility that Tenet’s suit could attract the prying eyes of federal regulators.
Trey Crabb, president of mergers and acquisitions advisory firm Health Strategy Partners LLC in Nashville, called the lawsuit an extraordinarily aggressive move designed in part to cause Community Health to rethink its pursuit of Tenet.
“It creates a huge distraction, but I don’t think they (Community Health) are going to stop their pursuit of Tenet,” Crabb added.
Other offer rejected
After its offer to buy Tenet for $6 a share was rejected earlier this year, Community signaled plans to continue its pursuit by nominating a rival slate of 10 directors who would seek election to Tenet’s board at a shareholders meeting in November.
Citing federal securities laws that require potential acquirers to make truthful statements to targeted companies and shareholders, Tenet’s suit asks for an injunction to force Community Health to correct what the company sees as false statements, including claims of “industry-leading admissions statistics.”
“(Community) artificially increases inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources,” Tenet said.
Sheryl Skolnick, an analyst with CRT Capital in Stamford, Conn., said Community Health needs to lift up the curtains and show Wall Street, investors and others how it is able to have observation rates (of patients) much lower than the industry average.
“These are particularly harsh and bold claims, which also seem intent on inviting investigations of Community (Health) by regulatory authorities...,” said Vicki Bryan, a bond analyst at New York-based Gimme Credit.
Both companies’ stock plummeted on the news. Franklin-based Community Health Systems’ shares dropped nearly 36 percent, closing at $25.89 per share in New York Stock Exchange trading on Monday.
Tenet’s shares slipped $1.11, or nearly 15 percent.
“The whole industry is trading down today because people are worried about an open ended investigation,” said Oppenheimer stock analyst Michael Wiederhorn.
Tenet’s legal complaint estimates improper Medicare billings of between $280 million and $377 million a year over three years, starting in 2006, for as many as 82,000 patients.
Among other locally based hospital chains, HCA Holdings’ stock fell nearly 3.2 percent, or $1.05 per share, to $32.12 per share on Monday.
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