CHS' $891 million securities fraud lawsuit gets a second life

A federal appeals court on Wednesday revived an $891 million securities fraud lawsuit against Community Health Systems, saying the shareholders' allegations that the company intentionally inflated its financial health could move forward.

A three-judge panel for the 6th U.S. Circuit Court of Appeals unanimously ruled that the shareholders plausibly alleged that CHS' shares plummeted in value due to concealed health system practices surrounding a Medicare fraud scandal. The plaintiffs said CHS officials weren't forthcoming about the effect the scandal would have on the company's share value.

"The lulling misrepresentations thus served the same function as the earlier ones: to convince investors that (CHS') revenues were sustainable when in fact they were not," U.S. Circuit Judge Raymond Kethledge wrote for the panel. "All the misrepresentations served the same fraud."

The shareholders initially sued CHS, CEO Wayne Smith and former Chief Financial Officer Larry Cash in 2011, claiming that revelations about CHS' alleged practice of billing Medicare for unnecessary inpatient stays prompted the downturn that ultimately lost them money.

The shareholders say they lost $891 million, and claim that Smith and Cash avoided the shareholders' fate by selling their own CHS shares before their value dropped, netting each over $7 million.

But a federal trial court dismissed the suit, ruling that the shareholders had not adequately shown that misleading statements from CHS officials sparked the stock price fall.

Tomi Galin, a CHS spokeswoman, wrote in an email that the plaintiffs have presented no evidence to support their claims. "Community Health Systems strongly disagrees with the allegations in this lawsuit and we will continue to vigorously defend the company against these claims," she said.

Kethledge wrote in the appellate court's opinion that lots of securities claims fail to prove a "strong interference" of fraudulent intent. These plaintiffs do, "not least because of the remarkable timing of Smith's and Cash's stock sales," he wrote.

CHS was the country's third-largest for-profit health system based on 2016 revenue, according to Modern Healthcare data. That year, it drew $18.4 billion in revenue.

The alleged Medicare fraud was exposed in a separate, April 2011 lawsuit by Tenet Healthcare that accused CHS of billing Medicare for expensive hospital stays in cases where patients could have been treated in outpatient settings. Tenet claimed CHS, which derived 30% of its revenue from Medicare between 2006 and 2011, did so using its Blue Book, a guide that directed physicians to classify patients with certain conditions as inpatient, even though standard medical care would classify them as outpatient.

CHS stopped using the Blue Book and switched to a nationally recognized system in 2011, Galin said. The Blue Book wasn't used by doctors, but by case managers to help guide care based on a patient's symptoms, she said.

"Community Health Systems and its affiliated hospitals believe that the decisions about patient care, including when a patient should be admitted to a hospital is, and always has been, a matter of medical judgment by the individual physician responsible for a patient's care, based on that physician's medical expertise and evaluation of the patient," she said.

A U.S. District Court in Dallas dismissed Tenet's lawsuit in March 2012 on the grounds that Tenet did not have standing to recover damages; only shareholders could.

In the weeks following the lawsuit, CHS revealed it was being investigated on similar claims brought by an internal whistle-blower. The company paid the U.S. Justice Department $98 million in 2014 to settle the allegations, an agreement that included no admission of wrongdoing.

In an October 2011 earnings report, CHS disclosed that its revenues were lower and its inpatient admissions were down 7% year-over-year, according to the lawsuit. In a conference call with investors, Cash admitted the losses were related to phasing out the Blue Book. The next day, shares fell another 11%.

Among the allegations in the amended complaint, the plaintiffs say CHS officials asserted that the Blue Book was "fairly close" to the industry standard in its effect on inpatient admissions.

Attorneys representing CHS and the shareholders did not immediately return requests seeking comment Thursday.

An edited version of this story can also be found in Modern Healthcare's Dec. 18 print edition.