Community Health Systems, already fighting legal battles on several fronts including subpoenas from two federal oversight agencies, is facing another federal class action and securities fraud suit.
This time, it's the Minneapolis Firefighters' Relief Association that has filed the suit in the U. S District Court of Middle Tennessee in Nashville.
The plaintiff's attorney, Karen Hanson Riebel with Lockridge Grindal Nauen PLLP in Minneapolis, made the filed court documents available to HealthLeaders Media on Friday.
The shareholder suit alleges that the Franklin, TN-based CHS "failed to disclose or recklessly disregarded" that its financial performance was driven by "the improper and undisclosed practice of systematically admitting patients into Community Health Systems' hospitals despite no clinical need."
According to the suit, CHS "artificially increased inpatient admissions for the purpose of receiving substantially higher and unwarranted payments from Medicare and other sources that wrongly inflated its financial performance."
As a result, CHS's common stock traded at "artificially inflated prices" during the almost five-year class period (July 26, 2006 through April 11, 2011) reaching a high of $44.50 on July 18, 2007.
CHS has not issued a public statement is response to the suit and was unavailable for comment Friday.
This latest suit is based in part on the suit Tenet Healthcare filed in April 2011 alleging that CHS overbilled Medicare by as much as $377 million between 2006 and 2009. Tenet said it discovered the overbillings as part of the due diligence undertaken during Community Health Systems' hostile takeover attempt of the Dallas-based hospital system.
At that time a Tenet spokesperson said the complaint was filed "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."
In its suit, Tenet alleges that "CHS' strategy of driving up admissions and driving down observations is unsustainable. It depends on a continuing pipeline of acquisitions of hospitals with normal observation rates that can be driven down." Tenet said its research showed that after CHS acquired Triad in 2007 that Triad's observation rate dropped 52%.
The Minneapolis Firefighters' Relief Association is seeking damages in connection with its stock purchases.
The suit includes CHS president and CEO Wayne T. Smith, CFO W. Larry Cash and vice president and corporate controller Thomas M. Buford, who, the suit alleges, "lacked a basis for their positive statements about the company, its prospects and growth."
According to legal documents, the three officers each sold stock shares during the class period (July 26, 2006 through April 11, 2011) when the suit alleges the stock value was artificially inflated. Net proceeds of those sales totaled more than $37 million.
Plaintiff's attorney was unavailable for comment for comment Friday.
The Tenet suit places the cost of the potential monetary penalties and other exposures for CHS at more than $1 billion. In response to that suit CHS said "Tenet's allegations are completely without merit."
On the heels of the announcement of the Tenet suit, Community Health Systems' common stock dropped from a closing price of $40.30 per share on April 8 to close at $25.89 per share on April 11, 2011. On June 24, the stocked closed at $25.47 share in New York Stock Exchange trading.
See Also:
CHS Discloses Federal Subpoenas
CHS Opens Another Defense of Medicare Admissions
Tenet Rejects, CHS Withdraws 'Final Offer'
Tenet Claims CHS Overbilled Medicare $377M
Tenet Fires Back at Community Health
Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
