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Breaking News: Failed Takeover Spawns Federal Inquiry

SoRelle, Ruth MPH

doi: 10.1097/01.EEM.0000405485.63051.07
Breaking News
A former employee at Lutheran Hospital in Fort Wayne, IN, above, filed a whistleblower suit against Community Health Systems alleging improper billing to enhance revenue.

A former employee at Lutheran Hospital in Fort Wayne, IN, above, filed a whistleblower suit against Community Health Systems alleging improper billing to enhance revenue.

Afailed hostile takeover and a lawsuit filed with it spotlight the ambiguities that exist between admission to an inpatient unit and admission to an observation unit, a topic of particular interest to emergency physicians. All this occurs at a time when the federal Centers for Medicare & Medicaid Services, are scrutinizing inpatient admissions to determine whether they should have been classified as observations instead.

As one federal official admitted, “This is a complicated issue.” It is so thorny, in fact, that CMS has published a pamphlet titled: “Are You a Hospital Inpatient or Outpatient? If You Have Medicare – Ask!” The cost of treating patients in inpatient units is usually much higher than those in observation units, and that is at the heart of the dispute between two hospital systems.

The facts in the failed hostile takeover of Dallas-based Tenet Healthcare by Community Health Systems, Inc., of Franklin, TN, are made even more knotty by the fact that company officials are constrained in what they can say by the pending litigation, and federal officials cannot comment on ongoing investigations. But the effects of the lawsuit may affect hospitals across the country, something Community Health Systems (CHS) noted in a first quarter earnings call in April: “We believe that Tenet's lawsuit against CHS in this proxy contest has negatively affected the entire health care sector.”

Yet Rick Black, a spokesman for Tenet, said filing the lawsuit was the only way the company could get CHS to disclose its business practices to shareholders. In the suit filed April 11 in the North Texas U.S. District Court, Tenet alleged that CHS has for many years systematically billed cases as higher-paying inpatient admissions that would have been lower-paying outpatient observations in most U.S. hospitals. The corporation also charged that CHS's use of observation status is less than half the national average for U.S. hospitals, and that its strategy of driving up admissions and driving down observation is unsustainable. Low observations, one-day stays, and related issues are already a focus of government investigators and contractors.

For the most part, this is a story told through the lawsuit, filings to the Securities and Exchange Commission, press releases, and presentations for financial analysts. State and federal government regulators and company officials refused to discuss the matter on the record, citing litigation and uncompleted investigations.

The sequence of events in the Community Health attempted takeover of Tenet began Dec. 9, 2010, when CHS made an unsolicited offer to buy Tenet Healthcare for $3.3 billion — $5 in cash and $1 in CHS stock for each share. CHS would also have assumed Tenet's debt, estimated at $4 billion. If the deal had gone through, CHS would have had more hospitals than the privately held Hospital Corporation of America, which would still have had more licensed beds. It currently has owns, operates, or leases 133 hospitals in 29 states, with approximately 19,500 beds.

Tenet rejected the bid on Dec. 10, 2010, but this past January, CHS nominated its own slate of directors to replace the 10 on Tenet board whose terms were expiring. Tenet then rescheduled its annual meeting from May to November, and adopted a “poison pill” to scare away those who would begin to buy large blocks of the company's stock.

On April 11, Tenet took the fight a step further, filing suit that accused Community Health Systems of overbilling Medicare for improper admission of patients, and tried to compel CHS to disclose its practice of systematically admitting rather than observing patients in its hospitals for financial gain. “Tenet's shareholders are at risk of being harmed by false and misleading statements and omissions by CHS, a company whose financial performance has, for many years, been driven by the improper and undisclosed practice of systematically admitting patients into CHS hospitals despite no clinical need. CHS's practice of greatly underusing ‘observation’ status and consequently overusing ‘inpatient admission’ status has served to overstate its growth statistics, revenues, and profits, and has created a substantial undisclosed financial and legal liability to the federal government, numerous state governments, private insurance companies, and patients,” the suit said. Tenet's filing also accused CHS of using its own criteria (the so-called Blue Book) for deciding which patients are admitted as inpatients and which are kept in an observation unit.

“Approximately three-quarters of hospitals in the country, including many publicly traded hospital operators other than CHS as well as nearly all major insurance companies, other payers, and Medicare auditors, utilize one of two sets of independent, evidence-based, clinical criteria to determine whether a patient requires inpatient treatment or instead can be treated in outpatient observation status and/or discharged shortly after initial treatment at the hospital,” the Tenet suit said. Those two criteria are InterQual, developed by McKesson Corporation and used by approximately 60 percent of hospitals, and the Milliman Care Guidelines developed by Milliman, Inc., which are used by roughly 16 percent of hospitals. “The Blue Book, on the other hand, is used only by CHS hospitals,” the Tenet suit said.

In response to the suit's claim that CHS's offer of $6 for the stock did not provide good value to Tenet stockholders, CHS changed its bid to all cash on April 18, 2011. Tenet refused the revised bid on April 22. CHS then raised its offer to $7.25 a share on May 2, and Tenet refused that offer as well. On May 10, CHS rescinded its offer estimated at $7.3 billion, and withdrew its slate for Tenet's board of directors.

On May 16, Tenet amended its suit against CHS seeking to recoup the “substantial sums of money” Tenet spent to fight off the takeover bid and to investigate “highly troubling facts about CHS's business practices that were brought to Tenet's attention.” The suit continues to accuse CHS of systematically admitting rather than observing patients in its hospitals. On June 29, CHS asked the court of dismiss the suit.

CHS is also the focus of a whistleblower suit filed Jan. 7, 2009, on behalf of the United States and Nancy Reuille, RN, who had worked at Lutheran Hospital in Fort Wayne, IN, from 1985 until 2008. She was employed as a nursing and medical denial specialist who worked to reverse coverage rejections related to medical criteria and billing problems. That suit alleged improper billing to enhance revenues, and was sealed to allow the federal government to intervene. When the government elected not to, the suit was unsealed last December, but Ms. Reuille and her attorneys filed for an extension in April because the government, after declining to intervene, became aware of significant overlap between her allegations and those under investigation elsewhere.

The United States is probing allegations of improper billing for inpatient care at other hospitals associated with CHS, and has consolidated its investigations of CHS with the Department of Justice, multiple United States Attorney's offices, and the Office of the Inspector General for the Department of Health and Human Services. The Attorney General of Texas also initiated an investigation, and the federal government said it will work with Texas and any other states investigating the allegations. The suit also said HHS is conducting a national audit of certain CHS Medicare claims.

Community Health Systems has made note of the investigations in its filings with the federal Securities and Exchange Commission. Various investor groups, including CtW Investment Group, which advises union-sponsored pension plans, have also questioned Community Health Systems practices. CtW first notified CHS of its concerns in a letter last September.

CHS has said it is changing some of its systems. In its first quarter 2011 earnings call on April 28, 2011, its leadership noted in a presentation that “prior to the filing of the Tenet lawsuit, CHS had made the decision and signed a contract to begin using third-party vendor criteria for admission and procedure appropriateness review.” In analyzing the Tenet suit, the presentation by CHS leadership stated that Tenet's contrived statistics lead to faulty and irresponsible conclusions, and that Tenet made unreliable and inaccurate statements. “We believe that Tenet's lawsuit is a direct and unfair attack on the ethics and judgment of 16,000 physicians and 87,000 employees,” the presentation said.

In a section called Community Health Analysis, CHS questioned Tenet's statistics, and said that the ultimate decision to admit patients relies on physician judgment and medical necessity. According to the presentation, CHS said it “remains stalwart in its defense against Tenet's allegations. We believe that the claim of lower ‘observation rate’ and Tenet's related allegations do not materially affect the CHS financial statements.”

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