Hospital Takeover Battle Turns Nasty with Medicare Fraud Allegations

There has been some nasty finger-pointing between for-profit hospitals Tenet Healthcare (NYSE: THC) and Community Health Systems (NYSE: CYH) since Community made an unwelcomed offer to buy Tenet last year.

Until now industry players watched the takeover bid with interest, as many on Wall Street speculated that Franklin-Tenn.-based Community would eventually take over its rival. But it became more personal when earlier this week Tenet filed a complaint in a federal court in Dallas that argues Community is an unfit acquirer because it has been bilking Medicare out of millions by unnecessarily admitting patients.

Industry and policy experts say the accusations could spark a government investigation into Community’s practices as well as invite scrutiny into the hospital industry’s reimbursement practices from regulators, lawmakers, commercial insurers, and consumer advocates.

In the complaint, Dallas-Tex.-based Tenet said Community developed and used more lenient standards from its “Blue Book” to determine admissions at its 130 rural and small urban hospitals, rather than hold patients for observations. As a result, inpatient admissions were higher and Community’s observation levels are one-half the national average for U.S. hospitals. Tenet estimates CHS overcharged Medicare between $280 million and $377 million between 2006 and 2009.

Tenet said it uncovered the data while conducting due diligence following CHS’s takeover bid. “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 said in a statement.

The accusations drove down both hospital providers stock substantially on Monday, with Community losing more than 35 percent and Tenet Tenet around 15 percent before recovering on speculation Tenet may still be acquired.

CHS said in a statement that “Tenet’s allegations are completely without merit and we intend to vigorously defend ourselves against these unfounded and irresponsible claims.”

Fitch Ratings Corporate Finance Director Megan Neuburger said there is nothing about Tenet’s lawsuit that specifically compels an investigation by the federal government into Community’s admissions practices. But she said it probably increases the potential for future investigations or at least generally heightened scrutiny in this area, not just for Community, but for the entire hospital industry.

“Regardless of whether the government decides to launch any investigation, it’s possible that commercial payers could also start to more closely scrutinize hospital admissions practices. This might also have the potential to impact hospital providers’ reimbursement,” Neuburger said.

Todd Cole, director of patient accounts for Cincinnati, Ohio-based TriHealth, Inc., said small community hospitals already operate in a tight reimbursement environment. He noted that Medicare, state Medicaid programs, and commercial carriers have maintained existing review processes for years to assure they pay appropriately for appropriate care, he said.  Medicare’s Recovery Audit Contractor (RAC) process, which now provides financial incentives to third party contractors to look for ‘inappropriate’ payments to providers, is another outgrowth of this oversight, he said.

“Generally speaking, hospitals provide care, get paid after the fact, and then – in many cases – expend additional resources just to justify and hang on to that payment,” Cole said.

With Democrats and Republicans both looking to slash Medicare spending as a way to reduce the national deficit, the issues between Tenet and CHS won’t help the situation, experts say.

“The issue between Tenet and CHS is a fight between giants.  The small community hospital that provides care under the direction of independent MDs may get caught in the fray,” Cole said.

Consumer advocates are also likely to chime in.

“If these allegations are true, if a hospital chain is billing for the most costly procedure and intentionally doing so, ultimately it would be fleecing both the consumer and taxpayer,” said Larry McNeely, health care advocate with US PIRG.