Updated 12:50 p.m. with a statement from CHS.

Tenet Healthcare is suing would-be acquirer Community Health Systems for failing to disclose “improper” admissions practices that it says have artificially inflated the company’s stock price and its ability to pay for its proposed $7.3 billion acquisition of Tenet.

According to Tenet’s 70-page complaint, the Texas-based company was conducting due diligence on CHS’ acquisition offer when it discovered that CHS has a proprietary system — outlined in its so-called “Blue Book” — for justifying inpatient admissions. The system, it says, results in markedly higher admission and lower observation stay rates than its industry peers, and potentially hundreds of millions of dollars in overbillings to Medicare and other payers.

Based on the analysis of two independent consulting firms, Tenet estimates that CHS overbilled Medicare by approximately $280 million to $377 million between 2006 and 2009 by admitting Medicare patients who should have been treated in observation. Those revenues from “improper admissions” have artificially inflated the company’s stock price, which it intents to use, in part, to pay for its acquisition of Tenet, the complaint reads.

Further, it argues that CHS may be subject to liability and damages “well over $1 billion for its practices during the 2006-2009 period, not to mention damages to other payers and to the tens of thousands of patients who should have never been admitted as inpatients in CHS hospitals.”

Tenet posted the complaint, and a summary of the filing, on its investor relations website this morning. It will file the suit in the U.S. District Court for the Northern District of Texas today.

Tenet is asking the court to compel CHS to fully disclose its admissions practices and the related financial and legal risks so Tenet’s shareholders can appropriately evaluate CHS’ acquisition proposal.

For example, Tenet argues that CHS is misleading Tenet shareholders by saying it can achieve “synergies” by acquiring Tenet that are similar to the $275 million in synergies it achieved after acquiring Triad Hospitals in 2007. According to the complaint, CHS achieved those synergies by “slashing the use of observation” at the Triad facilities by more than 50 percent in one year. It says CHS’ ability to achieve similar synergies by acquiring Tenet depend on “its ability to implement the same improper and unsustainable admissions practices.”

CHS issued the following statement Monday afternoon:

“Tenet’s allegations are completely without merit and we intend to vigorously defend ourselves against these unfounded and irresponsible claims. Providing high-quality patient care is the Company’s most important priority. CHS conducts its business with the utmost integrity and adheres to the highest business practice standards. The bottom line is that these self-serving allegations are an attempt by Tenet's management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS’s pending offer. Its actions today prove that Tenet has adopted a ‘scorched earth’ defense without regard for the best interests of shareholders. CHS remains committed to its offer to acquire Tenet and both Credit Suisse and Goldman Sachs have reaffirmed their confidence in financing the transaction.”

CHS made its unsolicited offer late last year to purchase Tenet for $6 per share in cash and stock. Tenet has rebuffed the offer multiple times and adopted a "poison pill" to prevent a hostile takeover. CHS has beden steadfast in its pursuit, nominating a new slate of directors for Tenet's board.

The Franklin company's false and misleading statements and omissions are intended to encourage Tenet shareholders to elect the CHS slate of directors who will approve the takeover, according to the complaint.

CHS' stock price (Ticker: CYH) plummeted on the news, falling more than 32 percent on extremely heavy volume by 11:12 a.m. That means Chairman, President and CEO Wayne Smith has taken a $19 million hit to his net worth.

Tenet's shares (Ticker: THC) have fallen more than 16 percent to about $6.30.