Federal court certifies $891M lawsuit against CHS

The U.S. District Court for Middle Tennessee has certified an $891 million class action filed in 2011 against Franklin-based Community Health Systems for an alleged Medicare fraud scheme. 

The certification verifies that all persons and entities who purchased CHS common stock from July 27, 2006 through April 8, 2011 were potentially damaged by the company's alleged misuse of an in-house admissions guide that incentivized physicians to admit Medicare patients to the hospital instead of lower-acuity outpatient facilities and, as a result, allegedly misled investors on the hospital operator’s success.

The securities fraud lawsuit stemmed from allegations made by executives of Dallas-based Tenet Healthcare, who at the time faced a potential buyout by CHS. In their anti-takeover complaint, Tenet's leaders alleged multiple counts of fraud through failing to disclose “improper” admissions practices that they said artificially inflated CHS' stock price, boosting its ability to pay for its proposed $7.3 billion acquisition of Tenet. CHS shares tumbled more than 30 percent on the news of Tenet's suit.

Tenet’s accusations left some analysts skeptical at the time, though, citing data that showed CHS having below-average observation stay rates. Still, that year, CHS discontinued the use of its so-called Blue Book for admissions at all of its hospitals and subsequently saw across-the-board declines in admissions. On an earnings call in October 2011, then-CFO Larry Cash admitted that drop was related to issues surrounding the lawsuit filed by Tenet. After the call, CHS shares fell another 10 percent.

The securities lawsuit was dropped in 2016 but resurfaced later that year after an appeals panel found that CHS executives’ admissions combined with the fraud allegations were enough to keep the shareholders’ case alive. 

The motion for certification was filed by lead plaintiff NYC Funds, who will now serve as the class representative.

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