“It's an amazing case. It's amazing at every level,” said Marc Raspanti, a Philadelphia lawyer who represents both plaintiffs and defendants in healthcare fraud cases and represents plaintiffs in whistle-blower cases. Raspanti cited the explosive nature of the allegations, the evident rancor between the companies, the risk Tenet has taken that the lawsuit will generate allegations against it, and the virtual invitation the lawsuit delivers to federal fraud enforcers.
Seemingly caught flat-footed, Community responded with a statement hours after Tenet filed and disseminated the lawsuit on the morning of April 11. The Franklin, Tenn., company said Tenet's allegations were “completely without merit” and “unfounded and irresponsible claims.” Community derided Tenet's lawsuit as a “scorched-earth defense” in the takeover battle.
By then, however, a lot of damage had already been done. Community's stock closed April 8 at $40.30. By the end of regular trading April 11, it had plunged to $25.89, with an intraday low of $22.33, a decline of 35.8% for the day, on a torrent of volume—nearly 44.7 million shares traded hands April 11. Community's stock regained more than a third of that loss the next day and closed April 15 at $31.90.
The swift and severe investor reaction hit Tenet shares too—they dropped 14.7%, to $6.44 per share, on April 11 and ticked up only slightly for the rest of the week, closing at $6.66 on April 15. All stock quotes and trading figures are according to Commodity Systems.
Other for-profit chains were quick to try to reassure investors that they wouldn't be caught up in the maelstrom. Three for-profit chains—Health Management Associates, Naples, Fla.; Nashville-based Vanguard Health Systems; and Iasis Healthcare, Franklin, Tenn.—disclosed last week that they use the InterQual admissions criteria published by McKesson Corp., the most widely used guidelines among hospitals and also used by many payers, both government and private.
Neither Community nor Tenet would make its executives available last week for on-the-record interviews. In the case of Tenet, it had a 70-page lawsuit and an 18-page summary of the allegations to make its case. The complaint compared the Blue Book's guidelines to InterQual and the Milliman Care Guidelines, another widely used set of admissions criteria, for conditions that often come down to the observation-vs.-admission decision, including chest pain, faintness and pneumonia.
The complaint also alleges that Community sets admissions targets and incentives for admissions for physicians, and then holds both physicians and hospital administrators accountable for reaching the targets.
While Community said little publicly, the company did make its case to investors through healthcare stock analysts who published reports citing company management as the source. Reports by Frank Morgan of RBC Capital Markets, A.J. Rice of Susquehanna Financial Group and Whit Mayo of Robert Baird & Co. spelled out the company's positions as follows.
Community told the analysts that about a quarter of its hospitals already use InterQual, and the company decided about a month ago, at the urging of payers, to adopt InterQual at all of its hospitals over time. Community also suggested that its observation rate was lower in part because it does not bill for observation visits for outpatient surgeries that require just four to five hours of observation.
Morgan wrote that Community said its emergency room physicians mostly work for third parties whose contracts with Community prohibit incentives based on volume. Morgan also quoted Smith, Community's chairman, president and CEO, as starting his remarks to a group of investors led by Morgan by saying, “Welcome to Pearl Harbor. We've taken a direct hit, but we remain standing, and our response will be strong.”
Moreover, Community's hospitals in Florida and South Carolina were part of Medicare's recovery audit contractor demonstration project, and none of those hospitals were flagged for its observation visits. Rice wrote that RACs look at one-day stays as a percentage of total admissions, rather than Tenet's measure of observation rate, and RACs raise a red flag only if that percentage is 20% or greater.
Community also tried to poke holes in Tenet's analysis, which was conducted by consultancy Avalere Health. Community questioned why Universal Health Services was excluded from the analysis and suggested that the reason was that Universal's observation rate was similar to Community's.
The company also questioned the use of observation rate instead of the admissions rate from the emergency department, and reducing the sample of hospitals to about 3,000 instead of the commonly cited 5,000 figure for community hospitals. Supporting materials published by Tenet said the sample includes all hospitals with emergency departments that reported observation stays, except critical-access hospitals.
Analyst Kemp Dolliver of Avondale Partners credited Tenet with a thorough analysis, but wrote that it wasn't a given that Community's observation rate should be the same as the national average.
Dolliver also noted that Tenet already has tried unsuccessfully to discredit Community's accounting practices in this battle: Tenet suggested Community was overly aggressive in recording revenue from a California provider tax in the fourth quarter of 2010. Tenet recorded the revenue in the first quarter of this year.
Investors aren't the only ones watching Tenet's lawsuit keenly. Raspanti, a partner with Pietragallo Gordon Alfano Bosick & Raspanti in Philadelphia, said Tenet has outlined a compelling argument, but he said the complaint left out one very powerful point: that improperly admitting Medicare patients exposes them to hospital-borne infections. “Anybody who cares for a parent or grandparent knows that if you are admitted to a hospital for one thing and are 65 or older, there's a good chance that you'll pick up something else,” Raspanti said.
Mark Kleiman, a whistle-blower lawyer in Venice, Calif., said he would be stunned if the federal government doesn't open its own investigation of these allegations.
Tenet's well-written complaint, Kleiman said, points out an awful lot of smoke that suggests that federal fraud enforcers should search for the fire.
Tenet's complaint noted that Community itself has disclosed in securities filings that HHS' inspector general's office has subpoenaed admissions criteria, case management, coding, billing and compliance records for its hospital in Laredo, Texas, and that the Texas attorney general's office has issued civil investigative demands for emergency department procedures and billings records from all Community hospitals in Texas.
Stephen Meagher, a whistle-blower lawyer based in San Francisco, said there has been widespread scrutiny of these practices at many hospitals, including some of Community's. The CMS probably hasn't made any further rules because the admission decision varies so much patient to patient, he said.
The difficulty in civil fraud cases that hinge on the appropriateness of a treatment decision is that it's not practical to argue in court over medical charts for each patient, Kleiman said. No federal judge is going to allow a plaintiff to go over the medical charts for hundreds or thousands of patients, as the parties would call expert witnesses to argue over each and every one, Kleiman said.
Instead, federal fraud enforcers believe it practical to pursue civil cases only if a whistle-blower can find a pretty clear line and a common principle running through the cases, Kleiman said.
For Tenet's management, the lawsuit could be just a matter of job preservation, Meagher said. “If they can generate enough discomfort in the investor community, it's going to throw a wrench into this transaction,” he said. “I think it's more a public relations vehicle than an attempt to help the government collect hundreds of millions of dollars.”
Kleiman and Meagher both pointed out the irony of Tenet, with its history of fraud trouble dating back to one of its predecessor companies, National Medical Enterprises, walking a mile in the shoes of a whistle-blower.
“This is a company that understands exactly how to calibrate its admissions policies and its discharges to squeeze every last dime out of the taxpayer,” Kleiman said. “For them to be complaining that they are disadvantaged because a bigger fish has taken pages out of their playbook and adapted them is rather ironic.”