Tenet Healthcare alleges False Claims Act violations by Community Health Systems in effort to defeat takeover

by Ben Vernia | April 11th, 2011

In a complaint alleging violations of the securities laws, on April 11 Tenet Healthcare Corp. sued Community Health Systems, Inc., in Dallas. The complaint alleges that CHS routinely committed healthcare fraud:

But what CHS has failed to disclose—and what has made CHS’s proxy solicitation materials1 materially misleading—is how CHS has managed to realize “synergies” from its hospital acquisitions: for at least a decade, CHS has implemented admissions criteria utilized by CHS physicians to systematically steer medically unnecessary inpatient admissions at CHS hospitals. CHS artificially increases inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources. This admissions practice is the core “synergy” and driver of CHS’s strategy for acquiring hospitals. Specifically, 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. To take just one example, CHS trumpets the synergies that it created through its 2007 acquisition of Triad Hospitals, Inc. (“Triad”), but what CHS does not disclose is that it achieved these synergies by slashing the use of observation at the former Triad hospitals by more than 50% in one year, and instead admitting those would-be observation patients, generating far greater revenue for the hospital. This undisclosed conduct violates both Medicare rules and widely accepted standards of clinical care. It also subjects federal and state healthcare programs, insurance companies, local employers, and patients to excessive costs for needless hospital stays.

Tenet raises the specter of False Claims Act liability in a footnote:

As set forth in detail below, if CHS had utilized observation at the same rate as the industry average, over 62,000 CHS Medicare patients would have been treated and billed as observation patients rather than admitted to the hospital and billed to Medicare as inpatients between 2006 and 2009. That number jumps to nearly 82,000 if CHS had observed patients at the same rate of another hospital operator, LifePoint. As a result of CHS physicians improperly admitting approximately 62,000-82,000 patients to CHS hospitals, CHS received approximately $280-$377 million between 2006 and 2009. Because the United States Department of Justice may impose treble damages for false Medicare claims, and the federal False Claims Act imposes a penalty of up to $11,000 per claim for improperly billed claims, CHS may face well over $1 billion in undisclosed liabilities—and this is only for Medicare Fee-for-Service patients, which made up approximately 27% of CHS’s net operating revenue in 2010. These liabilities do not include CHS’s potential liability to other payers who may have been harmed by CHS’s admissions practices, including insurance companies, state Medicaid programs, employers, and patients.

Both companies’ share prices took a hit on the day the suit was filed and announced: Tenet’s dropped more than 13%, while CHS’s dropped over 30%.

Neither company is a stranger to the False Claims Act: both have previously been investigated for violating the law. In 2006, Tenet agreed to pay $900 million over four years to resolve allegations that it obtained undeserved outlier payments, paid kickbacks, and upcoded bills (submitted claims for more expensive procedures than were actually performed). The company remains under a Corporate Integrity Agreement with the Office of Inspector General of HHS for that settlement. Tenet also entered into smaller settlements in 2004 ($22.5 million for improper financial arrangements with physicians at a Fort Lauderdale hospital), 2003 ($4.3 million for upcoding at five Florida hospitals), and 2002 ($25 million for false home health care claims connected to ten hospitals in Florida). In 2009, DOJ intervened against CHS in a New Mexico case involving allegations of Medicaid fraud, and the company paid $31 million in 2000 for upcoding.

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