April 25, 2011 / 12:06 PM / 8 years ago

U.S. coordinating probe of Community Health

NEW YORK/CHICAGO (Reuters) - The U.S. has consolidated an investigation into billing practices by Community Health Systems Inc as it steps up its scrutiny of the hospital operator’s patient admissions criteria.

The U.S. Department of Justice’s civil division, multiple federal prosecutors’ offices and the Office of the Inspector General for the Department of Health and Human Services are now “closely coordinating” their investigation, according to a securities filing by Community Health, which cites a court motion filed by the Justice Department.

According to the filing, the government considers recent allegations against Community by rival hospital company Tenet Healthcare Corp to be related to the government probe.

“It looks like it is a more extensive and multifaceted investigation than what people were thinking about two weeks ago when it was just Tenet,” said Raymond James analyst John Ransom.

Investors had been bracing for word of a deepening federal probe since Tenet earlier this month filed a lawsuit accusing its suitor of admitting patients for needless stays and bilking the government and private insurers.

“When the Tenet news originally came out, we all assumed something like this would be a likely consequence,” said Jessica Bemer, analyst with Snow Capital Management, a Community Health shareholder.

In the filing, Community Health also disclosed that the government is reconsidering whether to join a separate whistle-blower lawsuit involving its patient observation policies. The Department of Justice previously declined to join that suit, filed in 2009 in U.S. District Court for the Northern District of Indiana.

Tenet is trying to fight off a takeover bid from Community and filed a lawsuit against its suitor earlier this month. On Friday Tenet rejected Community’s latest $3.3 billion offer.

Community, the No. 2 hospital operator, had sweetened its $6-a-share bid by making it all cash, a move meant to protect Tenet shareholders from any risk associated with the stock of Community and its legal challenges.

But Tenet’s board said the price “grossly undervalues the company.”

Through Thursday, Community shares had fallen nearly 24 percent since Tenet filed its lawsuit on April 11. Tenet shares had fallen more than 10 percent since it announced its lawsuit, as some investors worry about broader government scrutiny of the hospital sector.

If Community’s share price continues to languish, its shareholders may soon start to pressure the company to drop its bid for Tenet and focus on the investigations, Jefferies & Co analyst Arthur Henderson said in a research note.

Shares of Community Health, the second-largest hospital operator, rose 7 cents to $30.76, while shares of No. 3 Tenet shares were up 11 cents at $6.88, still above Community’s offer price. Tenet is seen as still in play.

Reporting by Lewis Krauskopf and Susan Kelly, editing by Dave Zimmerman, John Wallace and Bernard Orr

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