Tenet Claims CHS Overbilled Medicare $377M

Tenet Healthcare Corp., embroiled in a hostile takeover attempt by Community Health Systems Inc., has filed a federal complaint alleging that its bitter rival overbilled Medicare by as much as $377 million using medically unnecessary admissions that improved its bottom line and appeal to investors.

Franklin, TN-based CHS fire back that: "Tenet's allegations are completely without merit and we intend to vigorously defend ourselves against these unfounded and irresponsible claims."  

The allegations by Dallas-based Tenet are the latest chapter in a very public bare-knuckle brawl between the two for-profit hospital chains, who have exchanged charges and countercharges since November, when Tenet rejected what it said was CHS' "grossly undervalued" $6-a-share buyout offer. 

 "We filed this complaint because our due diligence revealed that Community Health has been systematically overbilling Medicare and likely other payers by causing patients to be admitted to its hospitals when industry practice is to treat them in outpatient observation status," Tenet spokesman Rick Black said in a statement. "We believe this unsustainable strategy has resulted in Community Health overstating its inpatient admissions, revenues and profits and has created substantial financial and legal liability. We are seeking to provide Tenet stockholders with the information they need to make an informed decision by asking the court to compel Community Health to correct its false and misleading statements and omissions."

According to the 70-page complaint filed Monday morning in U.S. District Court in Dallas, Tenet claimed that "CHS has for many years systematically billed cases as higher-paying inpatient admissions that would have been billed as lower-paying outpatient observations in most U.S. hospitals."

"CHS' strategy of driving up admissions and driving down observations is unsustainable," Tenet said. "It depends on a continuing pipeline of acquisitions of hospitals with normal observation rates that can be driven down." Tenet said its research shows that after CHS acquired Triad in 2007, Triad's observation rate dropped 52%.

Tenet said it identified 63,000 Medicare fee-for-service inpatient admissions from 2006-2009 at CHS hospitals that would have been outpatient observations if CHS was within the national average. The high volume and lowest acuity Medicare inpatient admissions paid on average more than $3,300 per patient than for outpatient observation.

Medicare FFS patients generated 27% of CHS' net operating revenue in 2010, Tenet alleged in the complaint. As a result of the alleged unnecessary admissions, Tenet said it identified between $280 million and $377 million in overbillings in 2006-2009.

If Tenet's allegations are true, CHS could be liable for triple damages under the False Claims Act that would be in excess of $1 billion.

CHS insisted in its statement that it "conducts its business with the utmost integrity and adheres to the highest business practice standards. The bottom line is that these self-serving allegations are an attempt by Tenet's management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS's pending offer. Its actions today prove that Tenet has adopted a 'scorched earth' defense without regard for the best interests of shareholders. CHS remains committed to its offer to acquire Tenet and both Credit Suisse and Goldman Sachs have reaffirmed their confidence in financing the transaction."

Tenet said it filed the federal complaint to "compel CHS to disclose fully its unique and non-industry standard patient admissions criteria and billing practices and the financial and legal implications arising from them. The allegedly unusually high admissions at CHS hospitals have resulted in "materially misleading financial reports and statements" that included overstated admissions, revenues, profits, and cash flow, Tenet said.