Shareholders of Community Health Systems and its spinoff Quorum Health Corp. have asked for preliminary approval of an $18 million settlement to resolve a class-action lawsuit accusing the hospital chains and several executives of artificially inflating stock prices through misleading statements.
The litigation stems from several shareholder lawsuits related to Quorum's 2016 spinoff from CHS. The complaint, filed that year in a Tennessee federal court, alleges that Brentwood, Tenn.-based Quorum didn't disclose that its hospitals were underperforming and as a result its public statements were false, among other accusations.
Share prices dropped nearly 50% after Quorum's second-quarter earnings report revealed a $259.3 million operating loss for the quarter. During the earnings call, executives said that "there were indicators of impairment" at the time of the spinoff—allegedly unbeknownst to shareholders—and that "there was a lack of focus on many of these matters leading up to the spin." Quorum declined to comment and Franklin, Tenn.-based CHS did not respond to an inquiry. CHS said in its 2019 earnings report that the "matter is without merit and (CHS) will vigorously defend this case."
In January, CHS agreed to pay $53 million to cap a nine-year legal battle and resolve a similar class-action lawsuit alleging that shareholders lost $891 million because executives overstated the hospital chain's financial health.
Shareholders initially sued CHS, CEO Wayne Smith and former Chief Financial Officer Larry Cash in 2011, claiming that CHS billed Medicare for unnecessary inpatient stays, which sunk share prices. Smith and Cash sold their CHS shares before the value dropped, netting each more than $7 million, according to the securities fraud lawsuit.
Tenet Healthcare Corp. exposed the alleged Medicare fraud in a separate 2011 lawsuit after the hospital chain rebuffed a buyout offer from CHS. The lawsuit accused CHS of fraudulently billing Medicare for hospital stays when the outpatient setting would have sufficed. CHS allegedly used its Blue Book, a guide that pushed physicians to classify patients as inpatient rather than outpatient. The scheme spanned at least 10 years, according to the lawsuit.
In 2014, company paid the U.S. Justice Department $98 million to settle an internal whistleblower's allegations that it billed for inpatient services that should have been billed as outpatient or observation services, although CHS did not admit to any wrongdoing.
Quorum had been losing money since its CHS spinoff, but has recently emerged from its Chapter 11 restructuring with a new CEO and $500 million less in debt.