Being asked to choose and recap the biggest health care story of 2011 did not leave us wanting for options.
Any other year, the award would have likely gone to HCA. The nation’s largest hospital operator jumped back onto the stock exchange in March with an initial public offering priced at $30 per share only to see that price fall by nearly half between July and August, before rebounding to just north of $20. The drop has left the company subject to a number of headaches, including lawsuits from investors over alleged accounting missteps.
But even a story that big was trumped by the continuing fallout from Community Health Systems’ failed bid to purchase Dallas-based Tenet Healthcare. Even though the original bid was made in December of last year, the company is still feeling the effects more than a year later.
On Dec. 9, 2010, Community Health made public an unsolicited (and already rebuffed) $7 billion offer to buy Tenet. The company had quietly approached Tenet’s board previously, but its offer was unanimously voted down. Tenet directors claimed the deal didn’t offer “even remotely fair value” for their shareholders.
Even though this was the first that the general public was hearing of the proposed deal, the two companies were already at each other’s throats. Trading letters and insults, the two companies left many observers wanting to step in and cry, “Girls! Girls! You’re both pretty!”
Tenet slung barbs about Community Health’s stock being overvalued and doubts that the Franklin-based company could integrate Tenet’s facilities. In a lengthy letter, Tenet CEO Trevor Fetter and Chairman Edward Kangas directly addressed CHS CEO Wayne Smith saying, “Wayne, you have been very direct in stating your ambition to acquire Tenet. Let us be equally direct that we could not be more certain in our belief that your proposal is opportunistic, and would serve only to transfer the value inherent in Tenet to Community Health at the expense of Tenet shareholders.”
Smith responded in a conference call, saying, “We’re having a difficult time understanding ‘Why not,’ and the five-page letter didn’t help us that much with that.”
And the punches were nowhere near done being thrown.
Undeterred, CHS planned to nominate a slate of directors to the Tenet board, hoping to have some more sympathetic ears listening to its proposal. Tenet responded by both pushing its annual shareholder meeting back, delaying any vote on new directors, and by adopting a “poison pill” provision that would dilute shares purchased by CHS.
Then, on April 14, Tenet landed a haymaker.
The company sued Community Health Systems for failing to disclose admission practices that, Tenet claims, artificially inflated its revenues, earnings and stock price and hence its ability to finance the Tenet deal.
According to the complaint, CHS overbilled Medicare by between $280 million and $377 million between 2006 and 2009 by admitting Medicare patients who should have been treated in observation. On the heels of the news, CHS’ stock was battered, falling more than 30 percent the morning the lawsuit became public.
CHS downplayed the move, saying that Tenet was merely employing a “scorched earth” defense, disregarding the best interest of its own shareholders.
“We believe Tenet’s lawsuit has no merit and, while distracting, will have no material impact on CHS operations going forward,” Smith said a couple of weeks later. “We have moved to dismiss that case in its entirety and expect a decision before the November 2011 Tenet shareholder meeting.”
In early May, Tenet announced that its board had rejected CHS’ “last and best offer” of $7.25 per share. To date, the company’s lawsuit has not been dismissed and has actually led to another.
In October, CHS shareholder Lambert Sweat filed a derivative complaint on behalf of the company against its top brass reiterating many of the claims outlined in Tenet’s complaint. Sweat’s filing asserted that executives knowingly encouraged admissions and treatment practices that unnecessarily increased CHS’ reimbursement from payers.
These “improper payments,” Sweat claims, leave the company open to penalties and fines that could climb as high as $1 billion.
While Smith and Co. have repeatedly downplayed the effect of the spat, CHS shares have more than struggled since it began. Prior to news of the Tenet lawsuit, they were floating around $40. Last week, you could buy them for roughly $16. The difference amounts to about $2 billion of lost market value.
To be fair, now some analysts are saying that Tenet may not have made the right choice. The timing of the deal came on the eve of unfavorable macro trends that have swept up a number of other operators. The shift in payer mix and acuity that pulled the rug from under HCA’s feet has taken a bite out of Tenet shares as well. Early last week, the stock was trading below $4.50.
In September, analyst Jason Gurda of Leerink Swann was quoted as saying, “We believe it’s pretty clear management should have accepted a deal.”
For its part, even with its shares battered by lawsuits, bad press and macro trends, CHS is going about its business. The company has made some small acquisitions and continues to put on a confident face concerning its future prospects.
Even so, everyone must admit that it’s been a rough year.