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Is Community’s Hostile Bid for Tenet Worth the Price?

 |  By Philip Betbeze  
   April 15, 2011

That's the question Wayne Smith and his board at Community Health Systems have to be asking themselves in the wake of a complaint filed in federal court by unwilling takeover target Tenet Healthcare. Tenet accuses Community of

systematically overbilling Medicare

for admitting patients that it claims should have been placed under observation. All of a sudden a nasty fight over the proposed acquisition has gotten much nastier. In effect, Tenet has said to government regulators: "Here's the evidence, go get them so they'll leave us alone."

Suddenly the rejected $6-a-share initial takeover bid by Community late last year looks awfully cheap. That's because the price of making this acquisition, should it succeed or fail, is going much higher, and not just in terms of Community's offering price per share.

I've covered healthcare for a long time, but I've not seen a proposed acquisition get any nastier than this one.

In an attempt to circumvent Tenet's management team, which contends the offering price by Community severely undervalues Tenet, Community is attempting to get its own slate of 10 directors elected to Tenet's board at the company's annual meeting scheduled for November. If they're able to do that, the acquisition faces few hurdles as far as shareholders are concerned.

In essence, a vote for Community's nominees is a vote for the merger. That means the opponents of the merger are effectively fighting for their corporate lives, and they're willing to use heavy artillery such as this complaint.

Speaking of which, in the allegations, edited lightly for style and brevity, Tenet claims that:

  • CHS systematically bills cases as higher-paying inpatient admissions that would have been billed as lower-paying outpatient observations in most U.S. hospitals. Tenet claims this is part of Community's strategy.
  • When patients present themselves to hospitals, they are seen and discharged; placed in outpatient observation status; or admitted as inpatients. Doctors make the treatment decision, with input from hospital employees. More than 75% of U.S. hospitals use one of two objective systems as the basis for these determinations. CHS uses its own set of "Admissions Justifications" called the "Blue Book."
  • The difference in Medicare payments between an outpatient observation stay and an inpatient admission is substantial. Medicaid and managed care generally pay more for inpatient admissions than for observations, but actual rates depend on contracts. Only Medicare fee-for-service data is publicly available.
  • CHS' use of observation status is less than half the national average rate for U.S. hospitals. There is no legitimate explanation for the difference.
  • No other publicly traded hospital company follows a similar practice.

Again, these are Tenet's claims, and Community has yet to respond to them systematically, which they certainly will. But they are potentially explosive—and expensive to deal with.

Maybe this lawsuit is a sign of desperation from Tenet. After all, if its management team were confident that shareholders view the takeover attempt as a severe undervaluation of Tenet, taking this fight to Defcon 1 would not be necessary.

Nevertheless, Community will have to spend significant resources attacking Tenet's case. Even if it dropped the acquisition bid today and there are no signs it will, Community might have to spend a lot of money not only defending itself against Tenet's claims, but should the feds want to conduct their own investigation, that's a whole other problem to deal with. Tenet's also going to get a big bill for this war, win or lose.

We've yet to see a coordinated response from Community, which saw its stock drop from around $40 per share to around $25 Monday after news of the filing broke. It had recovered to around $32.50 by yesterday, but that big drop, should Tenet prove its case, will likely cause a flood of pesky shareholder lawsuits from its Community's own shareholders to recover that lost value. 

You can be sure that Community's response to the complaint is coming. It'll be interesting reading, but if anyone is sure to get rich off this saga, you can bet many of them will have law degrees hanging in their offices. Because there's the price of acquisition, but there's an entirely different bill to pay when that acquisition is hostile.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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