Tenet Healthcare Comes Out Guns Blazing on Community Health

I’d been talking with some friends lately about the “Pac-Man” merger arbitrage defense.  That’s where the target company, not wanting to be acquired, retorts by making its own bid to acquire the company that was bidding for them.  Imagine what happens when Pac-Man eats a power pellet and turns on the ghosts and you’ll understand the Pac-Man analogy.

Today, Tenet Healthcare implemented a different kind of defense: coming out guns blazing and trying to annihilate their acquirer – in this case, Community Health (CYH).  Back story: CYH made a hostile bid for $THC.  THC doesn’t want to be bought by CYH.  $CYH is moving to replace THC’s board.  Let’s go to the THC complaint: (emphasis mine, and note that CHS = Community Health Systems, while CYH is the stock ticker of the same company)

By failing to disclose its improper business practices and substantial liabilities, CHS has made false and misleading statements and material omissions to its own shareholders. Now, as CHS attempts to acquire Tenet for $6.00 per share, $1.00 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. Since late 2010, for example, CHS has stated that a combined CHS-Tenet would benefit patients by “improv[ing the] quality of care” and benefit payers and employers by providing “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. CHS also has called itself an “Industry Leader in Admissions Growth” since January 2011.”

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.

ZING!  Wow – This is a pretty damning accusation. THC is saying that CYH’s “synergies” result from their willingness to illegally manipulate Medicare payments by over-admitting patients who don’t need admission. THC’s complaint even puts numbers on the sum of the fraud that they are alleging, while noting that these number are based only on publicly available Medicare data, and may be even higher if other payers were treated the same way:

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.”

I’m not about to tell you that I’m an expert on Medicare rules and regulations, but I’ve seen my insurance company’s statement of reimbursement for hospital stays, which is to say that I can certainly see how hospitals could be incentivized to admit patients knowing that Medicare will foot the bill.  My gut instinct is that in times like these, where the Government is at war with itself over the budget, and specifically entitlement programs like Medicare, that any allegation of Medicare fraud will be taken quite seriously.

Rather than continue to quote mega-excerpts from the THC complaint, I encourage readers to take a look at it on their own – it’s plain English, not legal-ese, and pretty interesting…




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