Community Health Systems Inc.'s attempt to buy Tenet Healthcare Corp. failed in part because of a controversy that has erupted over Community Health's hospital-admissions practices.
Government investigations into those practices have led to questions about the company that could take a long time to resolve. In fending off the takeover, Tenet accused Community Health in an April 11 lawsuit of bilking Medicare of $280 million over three years through excessive hospital admissions.
Tenet operates Hahnemann University Hospital and St. Christopher's Hospital for Children in Philadelphia. Community operates Chestnut Hill Hospital in Philadelphia and others in Coatesville, Phoenixville, Jennersville, Pottstown, and Salem, N.J.
The suit drew attention to subpoenas from federal and state regulators dating to December 2009 and largely unnoticed in annual regulatory filings until the Tenet allegations. The probes also put the company at a disadvantage in competitive-bidding situations to buy hospitals, said Art Henderson, an analyst at Jefferies & Co. Inc.
"These investigations are a cloud over the company, and it may take Community a couple of years to dig itself out from under them," Henderson said.
The unsolicited Tenet bid has snowballed into a nationwide government audit of how Community Health decides which patients to admit.
Community Health, based in Franklin, Tenn., is the second-largest U.S. hospital company, owning, operating, or leasing 130 mostly rural and suburban hospitals in 29 states, predominantly in the South. It has grown rapidly - often through acquisition - since Wayne Smith, its chief executive officer, took over in 1997, increasing revenue from $742 million that year to $12.5 billion in 2010.
The Tenet acquisition would have added 49 acute-care hospitals and 84 outpatient centers. Instead, Community Health is dealing with subpoenas from the U.S. Department of Health and Human Services, the Securities and Exchange Commission, and the Texas Attorney General's Office, according to corporate filings.
The Justice Department has launched a federal inquiry, and there is at least one unsealed whistle-blower's suit filed by a former employee in Fort Wayne, Ind., which Justice said April 22 the government may join.
Accusations contained in the Tenet suit were previously raised by CtW Investment Group, representing unions holding about 0.5 percent of Community Health shares, in an analysis of the hospital company's Medicare data. Tenet, in its lawsuit, and CtW, in a report to Community Health's board, separately accused the hospital operator of putting emergency-room patients into hospital beds when their illness called for them only to be observed for a matter of hours.
That practice can translate into as much as $7,000 more in revenue per patient, based on data from the Medicare Payment Advisory Commission quoted in the Tenet lawsuit. A hospital may receive Medicare reimbursement of nearly 1,000 percent more for a chest-pain patient who is formally admitted to the hospital instead of being observed for a day, Tenet said in the suit.
The Tenet suit is based on "contrived and biased metrics," Community Health told shareholders in a regulatory filing April 28. The company said April 29 that CtW accusations were also "baseless."
Community Health raised its all-cash offer for Tenet to $7.25 a share May 2. Community Health withdrew May 9 after being rebuffed by Tenet.
In its analysis of the hospital company's Medicare billing data, CtW discovered that the one-day admissions rates from almost half of 108 Community Health emergency rooms placed them among the top 20 percent nationally of short-term, acute-care hospitals. Among facilities acquired by Community Health, rates shot up in the year after the purchase, sometimes even tripling in a matter of months, according to CtW's data.
Community Health rebutted similar accusations, contained in Tenet's lawsuit, in a filing with the Securities and Exchange Commission dated April 28. In the filing, Community Health said its emergency-admission rate was "in line" with those of other hospital companies.
The hospitals' previous owners had made mistakes that Community Health was correcting by training clerks to accurately code cases and through other efforts to standardize operations, the company said in the filing.
"CHS improved coding, case management documentation, streamlined observation stays, invested capital, recruited physicians and generally worked to improve customer service and patient care," Community Health said in the filing.