Shares of Community Health Systems fell more than 7 percent Monday morning following the company’s Friday disclosure of a federal investigation into its emergency department processes and procedures.
Although it’s unclear if the investigation relates directly to Tenet Healthcare’s allegations that the company has been defrauding Medicare by admitting patients who require only observation status, Avondale Partners’ Kemp Dolliver predicts CHS’ shares will remain under pressure due to continued “negative news flow” and a possibly long and expensive government investigation.
In a research note this morning, Dolliver lowered his ratings and cut the price targets on shares of both CHS and Tenet. He now rates both stocks as ‘market perform’ and has CHS’ shares at $34, down from $48, and Tenet’s at $7, instead of the previous $9.
“This downgrade does NOT reflect our opinion of the veracity of Tenet Healthcare’s allegations,” wrote Dolliver.
Community this morning announced a revised $6 per share acquisition bid for Tenet, which is doing all it can to avoid a takeover. Dolliver estimates the probability that Tenet and CHS will reach a friendly deal at “nil.”
Separately, Robert W. Baird analyst Whit Mayo reiterated his ‘outperform’ rating on CHS’ shares, nothing that the OIG investigation will likely weigh on CHS’ shares but that the “plausible perceived risk [is] dramatically higher than real risk, fueled by biases and drama.”
CHS’ shares (Ticker: CYH) opened at $27.37 but were recovering in mid-morning, trading at about $29.86 at 10:15 a.m. Monday, down about 6.3 percent from Friday's close. Tenet’s shares (Ticker: THC) were trading near $6.40 at that time, down about 4 percent. CHS’ shares fell to a low of $22.32 on April 11, the day Tenet made public its lawsuit.
Yesterday morning Tenet Healthcare filed a lawsuit against Franklin-based Community Health Systems — which has been pursuing an acquisition of Tenet, despite the company's protests — alleging hundreds of millions of dollars in Medicare overbilling.
Following the announcement, the companies' stock prices began to dive — with CHS's (Ticker: CYH) ending the day at $24.89, more than 38 percent below its opening price of $37.45 — and the analysis began. Here's a rundown of some of the interesting things we've read about the suit yesterday and this morning:
• At Gimmie Credit, Vicki Bryan described the suit as an "ugly turn" in Tenet's battle to avoid a takeover and indicated that CHS may now file a counter-claim. Bryan notes that CHS' days in acounts receivable and general and adjusted admission rates appear consistent with others in the industry, which doesn't appear to support Tenet's claims.
"In any case, Tenet has fired off all its cannons now in a last ditch effort to remain independent. If Tenet doesn't prevail, its generals may have just shot themselves," she writes.
• Sheryl Skolnick at CRT Capital writes in a note to investors that her group has "long been concerned by comments we have heard from managed care companies that CYH may not appropriately categorize low-acuity hospital visits as outpatient ‘observation’ days instead of higher-revenue inpatient admissions. Investors may have heard us refer to this, but since we don’t officially cover CYH, we haven’t put it in writing."
If the analysis is correct, the legitimacy of CHS' $6 per share bid for Tenet should be questioned, she writes. She suspects CHS will now come under "material and significant scrutiny" from RAC auditors and the OIG/DOJ.
• There were four trading halts on Community's shares yesterday as investors scrambled to unload the stock.
• Local Robert W. Baird analyst Whit Mayo called the suit a "declaration of war" in a research note this morning, and said there are likely reasonable explanations for the apparent discrepancy in CHS's observation data, for which there is no universal tool or framework. He writes:
"THC's analysis conspicuously excluded any measure of variability around the average (e.g., standard deviation) and UHS data is completely absent (what?). Additionally, CYH's Medicare revenue mix, admit growth, and margin profile are all constant with peers, but should be higher according to THC's analysis, all else equal. We anticipate CYH will provide a more thorough response over the near term, but investors are likely to assume the worst for now. CYH stock gave up $1.4 billion of market cap, well in excess of even THC's estimate of potential liability ("over $1B")."
Local companies RegionalCare Hospital Partners, Capella Healthcare and Transition Healthcare are officially in the running to buy Landmark Medical in Rhode Island. California's Prime Health Services also has its hat in the ring, and HealthSouth is hoping to buy the rehab hospital only. Read it here.
Mindy Tate is leaving her role as executive editor of the Williamson Herald to become the next executive director for Franklin Tomorrow.
Tate, who was selected from a nationwide pool of more than 50 applicants, was a co-founder of the Herald in 2005. She will lead the 10-year old community organizing group beginning in mid-April, filling the post vacated by Natalie Dodd Whitten, who resigned from the post earlier this year.
“Through my work in the community, I have developed a strong heart for service and I think the potential of an organization like Franklin Tomorrow to have a positive impact on this city's future is unrealized,” Tate said. “Under the leadership of a strong and active board, I look forward to implementing the plan for the future as we share the evolving vision of the citizens of Franklin for their hometown."
"It is said the only constant is change and here at the Williamson Herald we are experiencing a great deal of change. It is with great pride and excitement that we announce another change at the Herald, Mindy Tate, who has been at the editorial helm for the life of the paper, has been named to the position of executive director at Franklin Tomorrow, " Jones said. "Mindy was the driving force behind the start and success of the Williamson Herald. We would not be here today if not for her hard work, dedication, and love of covering and writing about this community.""She is the ideal choice for the leadership of Franklin Tomorrow. We know the passion and love she fosters for the city of Franklin will continue to grow and take the organization to new heights," he said. "Here at the Herald we have a talented staff and are excited about our next steps. We will not be able to replace Mindy's experience and relationships but we will continue to publish a quality product that covers the spirit of the diverse communities of Williamson County. We wish her all the best and look forward to working with her in a different capacity."
Community Health Systems' planned acquisition of Mercy Health Partners will go before a county judge in Pennsylvania on Monday. The court's approval is required for the nonprofit entity to sell to the for-profit, Franklin-based hospital operator.
Separately, Pennsylvania press reported that the Sisters of Mercy began moving out of one of the buildings that CHS would acquire with the purchase:
CHS spokeswoman Tomi Galen said the for-profit had no involvement in "any discussions or decisions about the sisters' relocation." She added that it was too soon to say what the building will be used for after the sale is finalized.
"We have not evaluated the properties or made any plans," she said.
(Yes, we know they spelled her name wrong.)
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