Tenet Loses Out to Snooki in Virtue Department: Jonathan Weil

Imagine Snooki calling one of her “Jersey Shore” cast mates a trashy boozer, or Alex Rodriguez bemoaning the rampant use of steroids in baseball, or Bernard Madoff calling one of his old rivals a Ponzi schemer.

Now you have a rough idea of what it’s like for Tenet Healthcare Corp. (THC) to be accusing Community Health Systems Inc. (CYH) of overbilling the government’s Medicare program by hundreds of millions of dollars, as Tenet did this week in a lawsuit aimed at sabotaging Community Health’s unsolicited takeover attempt.

Tenet succeeded in knocking off $1.3 billion, or 36 percent, from Community Health’s stock-market value on April 11, the day Tenet’s complaint was filed. News of the lawsuit also sliced $539 million, or 15 percent, off Tenet’s market value that day. Grand acts of self-immolation aside, what makes this lawsuit comical is Tenet’s own history of ripping off the government, as well as its own shareholders.

Here’s a company that paid more than $900 million as part of a 2006 settlement with the Justice Department, after the government accused Tenet of fraudulently overbilling the nation’s Medicare and Medicaid programs. (The settlement was structured so there would be no formal finding that Tenet had engaged in illegal behavior.)

Tenet paid a $10 million fine to the Securities and Exchange Commission in 2007 to settle accounting fraud claims. That was about a year after the company agreed to a $216.5 million class-action settlement with Tenet investors.

Hurricane Horror

This also is the company that ran Memorial Medical Center in New Orleans during Hurricane Katrina, where the bodies of 45 patients were discovered after the storm hit in August 2005. Some doctors later acknowledged they had injected patients with drugs to hasten their deaths, as the news service ProPublica chronicled in a 2009 Pulitzer Prize-winning story. Tenet, led by Chief Executive Officer Trevor Fetter, settled a class-action complaint over the episode shortly after a trial in the case began last month.

And yet Tenet, the third-largest publicly traded U.S. hospital operator, has the audacity to accuse the second-largest chain of running a crooked outfit. Talk about gall. Perhaps Tenet could argue that it takes one to know one. A Tenet spokesman, Rick Black, declined to comment.

The backdrop here is that Community Health in November offered to buy Dallas-based Tenet for $6 a share in cash and stock, or about $3 billion, back when Tenet’s stock was trading for $4.65. Community Health, based in Franklin, Tennessee, disclosed the offer in December, after Tenet’s board had already rejected it. The news of the offer sent Tenet shares soaring.

Rising Shares

Community Health followed up in January by saying it would nominate its own slate of 10 directors for election at Tenet’s next annual meeting. Tenet’s stock had climbed as high as $7.70 this month, before the company filed its suit. It finished yesterday at $6.54, or 9 percent more than Community Health’s original offer. Community Health shares meanwhile have recovered some of their lost ground, ending yesterday at $32.83, up 27 percent since trading closed on April 11.

Some of Tenet’s largest investors got hit two ways by the market’s initial reaction to the suit. Both companies count Franklin Mutual Advisers as their largest shareholder. Franklin had a 10.4 percent stake in Tenet and a 9.5 percent stake in Community Health, as of Dec. 31, according to data compiled by Bloomberg. Vanguard Group owned 5.6 percent of Tenet and 4 percent of Community Health, while State Street Corp. held 3.3 percent of Tenet and 2.1 percent of Community Health.

Those are just shareholders of record, of course. The customers whose money they manage are the ones whose portfolios got hit.

Medicare Billing

Tenet said the purpose of its suit was to force Community Health “to disclose fully its practice of systematically admitting, rather than observing, patients in CHS hospitals for financial, rather than clinical, purposes.” Tenet estimated that Community Health improperly billed Medicare by $280 million to $377 million from 2006 to 2009 by improperly boosting patient admissions.

The upshot, Tenet said, is that Community Health is making false and misleading statements “in the hope that they will exert pressure upon Tenet to accept an inadequate offer, or elect CHS-nominated directors who will approve a transaction with CHS.” Community Health, as would be expected, denied Tenet’s allegations, calling them a “scorched earth defense.”

Whatever the merit of Tenet’s claims, they smack of a board and management team that will try anything to stay in power.

“In any case, Tenet has fired off all its cannons now in a last ditch effort to remain independent,” Vicki Bryan, an analyst at Gimme Credit, wrote in an April 11 research note. “If Tenet doesn’t prevail, its generals may have just shot themselves.”

They certainly didn’t make many new friends this week.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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