CHICAGO (Reuters) - Tenet Healthcare Corp (THC.N) fired explosive charges against unwanted suitor Community Health Systems Inc (CYH.N), accusing the rival hospital operator of admitting patients for needless stays and bilking the U.S. government and private insurers.
The allegations come at a particularly sensitive time for the hospital industry, as the Obama administration and Congress are looking for ways to curb runaway healthcare costs to rein in the U.S. budget deficit and debt burden.
Shares of Community Health, which denied the charges, fell 36 percent on the New York Stock Exchange on Monday. Tenet shares also fell 15 percent as investors doubted a merger between the two leading hospital chains would now take place.
Fears that Tenet's move would cause regulators to deepen their scrutiny of the hospital industry dragged down the entire sector, including HCA Holdings (HCA.N), Health Management Associates HMA.N and Universal Health Services (UHS.N).
In a highly unusual lunge at a hostile suitor in a takeover battle, Tenet filed a lawsuit against Community Health accusing it of admitting up to 82,000 patients between 2006 and 2009 who would have been sent home by other hospitals.
For one patient group, Community Health received an average of $3,300 more per patient by admitting them instead of placing them under observation or sending them home, according to the complaint filed in U.S. District Court in Dallas.
Tenet, the third-largest U.S. hospital operator, charged Community Health, the No. 2, of filing misleading financial reports and claimed that Community Health could be liable for more than $1 billion in damages.
Tenet said Community Health's patient admission rates were higher than those of other hospital operators, basing its allegations on publicly available Medicare data that Tenet said it hired consultants to analyze. Medicare is the government health insurance program for the elderly and disabled.
Analysts said Tenet's allegations could prompt government regulators to scrutinize Community's admissions practices.
"Tenet has what looks to be a pretty robust and compelling statistical analysis," said CRT Capital Group analyst Sheryl Skolnick.
Donald White, a spokesman for the Department of Health and Human Services inspector general's office, said the agency was interested in Medicare fraud cases but he had no comment specifically on the Tenet allegations.
Tenet in December rejected Community Health's $3.3 billion takeover offer, saying it undervalued the company. The $6-a-share offer, of which $1 a share would be paid in Community Health stock to Tenet shareholders, represented a 40 percent premium to Tenet's share price at the time.
Tenet said it investigated Community Health's admissions practice in an effort to understand its assertion that a merger of the two hospital chains would improve the quality of patient care and provide "synergies" in their business operations.
Community Health, with 130 hospitals in 29 states, said Tenet's charges were unfounded and irresponsible, but added that Community remains committed to buying the company.
"The bottom line is that these self-serving allegations are an attempt by Tenet's management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS's pending offer," Community Health said.
Legal experts said Tenet's allegations are similar to whistleblower lawsuits that allege corporate fraud.
"While this desperate move may or may not be successful in killing a potential deal, this puts a cloud over Community Health and the industry as investors wait for more information on this explosive accusation," Oppenheimer analyst Michael Wiederhorn said in a note to clients.
Randall Thomas, professor at Vanderbilt University Law School, said very few mergers are challenged in this way and noted the unusually sharp fall in Community Health shares. Trading in the stock was halted multiple times on the NYSE on Monday.
"Typically the market would say it's them (Tenet) trying to muddy the waters a bit so they can buy some time do something about the tender offer. They must have noticed something no one else has picked up on," Thomas said.
Tenet itself had been at the center of fraud charges involving Medicare. In 2006, it agreed to pay $900 million to federal authorities to settle charges of fraud to Medicare.
Reporting by Susan Kelly, Additional reporting by David Gaffen, Bill Berkrot, Dan Levine, Tom Hals, Lisa Richwine and Doris Frankel; Editing by Matthew Lewis, Gunna Dickson and Richard Chang