Community Health Systems faces new subpoena, reports 57% fall in net income

The U.S. Justice Department hit Community Health Systems with an additional subpoena and a request to interview two high-ranking executives, escalating a two-year Justice Department investigation into the company's admissions practices from its emergency departments.

The Franklin, Tenn.-based chain disclosed the revelations in an earnings preview that also showed a sharp 57.2% decline in net income, which it attributed to weak patient volume, higher-than-expected bad debt and an adverse payer mix.

Community said it has held two meetings this year with the Justice Department to “review and discuss the status of the investigation, the potential theories and defenses and the results of its joint medical necessity review.”

On July 9, shortly after its second meeting, it received the subpoena, which expanded on an earlier April 2011 subpoena to request “documents that support the factual refutations and defenses that the company has articulated during its discussions with the government.”

The documents include, for example, its criteria for observation status and its financial relationships with physicians who have admitting privileges, the company said.

The government also served “civil investigative demands” to interview two current employees, a division president and a senior vice president, according to the company. Community said it will cooperate with the investigation.

Health Management Associates, Naples, Fla., is also under investigation into its short-stay admissions, and received similar subpoenas in May and July 2011. The company used the same emergency department management software as Community.

The investigation is one issue that Glenview Capital Management has raised in its campaign to unseat HMA's current board of directors and install nominees that may be more receptive to a change of control.

While Community is rumored to be the lead suitor to buy HMA, the company said in its earnings preview that the negative second-quarter results have “intensified its focus on core operating strategies, volume initiatives and expense management”—which will likely heighten speculation about whether it has the focus and firepower for a deal.

The chain said it expects to report $65 million in net income on revenue of $3.2 billion for the second quarter, compared with net income of $151.7 million on revenue that was also $3.2 billion during the same period last year.

It also said it expects to report a 5.7% drop in same-facility admissions and a 2.6% decline in adjusted same-facility admissions, a measure that also accounts for outpatient activity.

The negative numbers come just days after HCA, the country's largest chain, seemed to reassure the market that patient volume may be returning, as it reported admissions and net income figures that were more upbeat than expected.

Community said it will report final earnings July 29 and discuss the results in a call July 30.