The court system is reviving an $891 million securities fraud lawsuit against Community Health Systems. According to Modern Healthcare, the shareholder’s allegations of securities fraud deserve another look. A federal appeals court agrees the company may have intentionally inflated its financial outlook.
Modern Healthcare reports that the U.S. Sixth Circuit Court of Appeals ruled that the shareholders were correct to want answers to the plummet of Community Health Systems’ shares. The lawsuit alleges CHS hid practices surrounding a Medicare fraud scandal. The plaintiffs say CHS officials concealed the impact the scandal would have on the company’s share value.
The shareholders initially sued CHS, CEO Wayne Smith, and former CFO Larry Cash in 2011, according to the article. They claimed the scandal that Community Health Systems alleged practice of billing Medicare for more expensive and unnecessary inpatient stays lead to the drop in share prices. Shareholders are saying they lost $891 million, Smith and Cash made over $7 million, during the downturn. Modern Healthcare’s data shows that Community Health Systems was the country’s third-largest for-profit health system based on 2016 revenue, making $18.4 billion in revenue that year.
According to Modern Healthcare, a federal trial court did not agree that the shareholders had proven ground for a suit—but now the appeals court has given the allegations a second chance.
In a separate lawsuit from 2011, the Medicare fraud was exposed when Tenet Healthcare accused CHS of “billing Medicare for expensive hospital stays in cases where patients could have been treated in outpatient settings.” The article says that CHS made 30% of its revenue from Medicare between 2006 and 2011 by using its Blue Book. This is a guide that directed physicians to classify patients with certain conditions as inpatient, despite standard medical care classifying them as outpatient.
The article notes that Community Health Systems stopped using the Blue Book and switched to a nationally recognized system in 2011 and that the company claimed the Blue Book used by case managers to help guide care based on a patient’s symptoms—not doctors.
A U.S. District Court in Dallas dismissed Tenet’s lawsuit in March 2012 on the grounds that Tenet could not recover damages, instead ruling only the shareholders could recoup costs.
After the scandal broke, CHS revealed it was being investigated on similar claims brought by an internal whistleblower. The article says that Community Health Systems paid the Department of Justice $98 million in 2014 to settle the allegations. This agreement accepted no admission of wrongdoing.
Modern Healthcare says that’s when the shares took a tumble. In an October 2011 earnings report, CHS disclosed that its revenues were lower and its inpatient admissions were down 7% year-over-year. Then, Cash admitted the losses were related to phasing out the Blue Book. Shares continued to plummet.
Thanks to the revival of the lawsuit, shareholders may now get answers to why the shares continued to fall, resulting in the loss of nearly $1 billion.
Jeffrey A. Newman represents whistleblowers: 1-800-682-7157