$891 Million securities fraud class action suit against Community Health Systems revived by Appellate court

The Sixth Circuit U.S. Court of Appeals has revived a shareholder class-action lawsuit against Community Health Systems, alleging the for-profit hospital operator deceived shareholders by keeping secret that its profits were based on Medicare fraud. Shareholders sued CHS in 2011, claiming the company followed a policy that encouraged physicians to admit Medicare patients to the hospital instead of treating them in less lucrative outpatient settings. The Complaint was filed on April 11, 2011,  by Dallas-based Tenet Healthcare, which sued CHS to avoid a hostile takeover bid. Immediately after Tenet sued, CHS issued a press release stating Tenet’s allegations were meritless. However, Larry Cash, who then served as CHS’ CFO, allegedly admitted the company’s hospitals did use the Blue Book, a guide CHS created that prompted physicians to provide inpatient services for many conditions other hospitals would treat as outpatient cases. Mr. Cash said 30 of CHS’ hospital had already quit using the Blue Book, and the rest would do so by the end of 2011, according to court documents.

In October 2011, CHS released weaker-than-expected earnings. On an earnings call, Mr. Cash said inpatient admissions had declined at 75 percent of its hospitals after physicians phased out the Blue Book. On that same call, CHS Chairman and CEO Wayne Smith said, “there’s no question we’ve had some adverse impact related to issues … around the Tenet lawsuit,” according to court documents. After the admissions by executives, CHS’ stock price dropped another 11 percent. Shareholders subsequently sued CHS, claiming they lost a combined $891 million in the little more than six months between April 11, 2011, when Tenet sued, and Oct. 27, 2011, the day after the earnings call and the executive admissions.  Although CHS continued to deny Tenet’s allegations, the company paid  $98.15 million settlement with the Department of Justice in 2014 to resolve allegations it knowingly billed government payers for inpatient services that should have been billed as outpatient or observation services.

The district court dismissed the lawsuit filed by shareholders in 2016. The court said the shareholders failed to show Tent’s lawsuit caused CHS’ stock to drop and triggered their losses. On Wednesday, an appeals panel revived the shareholder suit, finding that CHS executives’ public admissions combined with the fraud allegations were enough to keep the shareholders’ lawsuit alive.

Jeffrey Newman represents whistleblowers.