ernieTexas-based Tenet Healthcare filed suit in federal court against Tennessee-based Community Health Systems (CHS) on April 11, alleging that funding proposed for use in CHS’s ongoing attempt to purchase Tenet was raised by overbilling Medicare and other payers for inappropriate inpatient admissions using a proprietary set of admission criteria – a practice alleged to have fueled a growth-through-acquisition strategy adopted by CHS starting in 2000.


The criteria collectively are known as the “Blue Book,” which Tenet calls a 40-page “home-grown” set of patient admission guidelines only used by CHS hospitals. Utilization of the guidelines stands in contrast to the widespread use of other admission criteria systems available in the industry such as McKesson’s InterQual Criteria and Milliman Care Guidelines.


Tenet via the suit seeks “to compel CHS to fully and accurately disclose the risks and financial impact of its admissions strategy, and to prevent further misleading statements,” ostensibly so Tenet shareholders can accurately evaluate the unsolicited $7.3 billion acquisition proposal submitted by CHS last November.


After being rebuffed by Tenet’s board, CHS went public with its offer, calling the merger “both financially and strategically compelling” in a December 2010 letter to Tenet’s directors.


In early January the Tenet board responded by adopting a new stockholder-rights agreement with a so-called “poison pill” provision that allows the company to dilute an acquirer’s holdings by distributing preferred stock purchase rights to other stockholders. The Tenet board claimed that it was trying to protect $2 billion in net operating loss carry-forwards that would be lost (for tax purposes) if the company changed hands.


Days later, calling the current board “entrenched,” CHS announced plans to push forward with its proposed acquisition of Tenet, publishing a list of individuals it plans to nominate to Tenet’s board of directors at the 2011 annual meeting  – all of whom no doubt are in favor of the acquisition plan.


Wider Consequences


Tenet’s move of accusing CHS of systematic overbilling of payers appears to be a rather unusual defense against takeover, particularly since it has weakened both companies’ stocks. Tenet (THC) on April 11 was down 14 percent at close, while Community Health Systems (CYH) closed down 35 percent. According to a “Wall Street Journal” article April 11, 2011, the lawsuit “has weakened shares of the whole industry.”(1)


Tenet’s complaint estimates that CHS from 2006 to 2009 overbilled Medicare by $280 million to $377 million for Medicare inpatient admissions that should have been billed as outpatient, receiving an average of more than $3,300 more per claim than it would have received if the claims were billed appropriately. The additional revenues allegedly received by overbilling for these admissions have, according to Tenet, artificially inflated the company’s stock price – a notable factor being as stock shares constitute part of the acquisition offer made by CHS.


Tenet also alleges 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.”


Essentially, the complaint is based on the allegation that CHS has created its Blue Book system for “justifying inpatient admissions,” and that it uses the system to “drive admissions higher and observations lower.” The summary posted by Tenet even states that “Triad hospitals [a Texas hospital system acquired by CHS in 2007] experienced a one-year decrease of 52 percent in observation rates after the CHS acquisition.” The complaint alleges that the decrease was a direct result of the changeover from the use of industry-standard admission criteria to use of the Blue Book.


The Complaint filed by Tenet Healthcare Corporation includes data to demonstrate Community Health Systems, Inc.’s low observation rate relative to the industry and reduced observation rates at hospitals acquired by CHS, said Andrew B. Wachler, healthcare attorney in Royal Oak, Michigan.  “However, the Complaint does not include data to demonstrate a corresponding increase in inpatient admissions.”



(1) Wall Street Journal (link to April 11, 2011) has weakened shares of the whole industry


Concerns About Criteria


Anyone familiar with the current revenue cycle environment in the U.S. healthcare industry likely also is familiar with recent questions about what criteria will be used by Medicare contractors, particularly the CMS Recovery Audit Contractors (RACs), when reviewing documentation for medical necessity and the appropriateness of an inpatient admission. Since CMS endorses no specific criteria and the contractors are free to use whatever they choose when performing reviews, providers have been concerned that RACs might decide to use the criteria providing the easiest path to denial, and that such criteria might not correlate with the set used by the provider filing claim.


In response to these concerns, CMS on multiple occasions has made it clear that citing admission criteria alone is not sufficient justification for denial of a claim, noting that contractors must cite other factors, consistent with a physician’s judgment and in line with CMS coverage guidelines. As those of us in the industry know, the denial of a claim for an inpatient admission means the loss of substantial revenue, often thousands or even tens of thousands of dollars in reimbursement.


“The standards and criteria for inpatient hospital services and outpatient observation services are vague and circular which allows hospitals a fair degree of success when challenging Medicare claim denials for coverage of inpatient hospitalization services on the issue of medical necessity,” said Wachler.


During the RAC Demonstration Project, approximately 85 percent of denied claims were inpatient hospital claims. The RACs routinely would deny inpatient hospital claims for reasons of medical necessity, claiming that inpatient services could have been provided as outpatient services. CMS even published a list of inpatient hospital services it viewed as “high risk” for medical necessity denials in MLN Matters Article SE1027.(2)


“Apparently, CHS had hospitals operating in four of the states subject to the CMS Recovery Audit Contractor (RAC) demonstration program, said Wachler.  “It would be interesting to see how CHS performed during the RAC demonstration project as inpatient admission claims that were reviewed and approved could be helpful in defending against future claim denials.”


CMS also issued a Special Edition MLN Matters article entitled “Guidance on Hospital Inpatient Admission Decisions.”(3)  The article stated that “there are several commercially available screening tools that Medicare contractors in specific jurisdictions may use to assist in the review of medical documentation to determine if a hospital admission is medically necessary. These include Interqual, Milliman, and other proprietary systems.”


The Medicare Program Integrity Manual, Chapter 6, Section 6.5, Section 6.5(4), clarifies that in determining whether an inpatient admission is medically necessary, a CMS reviewer should use the hospital’s admission criteria, invasive procedure criteria, CMS coverage guidelines, published CMS criteria and practice guidelines that are well-accepted by the medical community.


Despite its assertion that contractors “may” use any of those criteria in reviewing the medical necessity of an inpatient admission, CMS also lists its own published criteria for inpatient admissions, including the Medicare Benefit Policy Manual, Chapter 1, Section 10. Section 10.(5)


The rule is clear: hospitals must ensure, as a foremost consideration, that inpatient admissions satisfy these CMS criteria.


Satisfying CMS


CMS allows all provider facilities to choose their own inpatient admissions criteria, usually one of the two commercially available tools already mentioned, and even allows providers to “roll their own” criteria. The criteria nevertheless must be applied uniformly to patients and must satisfy published CMS criteria.


The question then becomes, does the criteria being used by a provider or a contractor to judge the appropriateness of inpatient admissions actually satisfy the CMS criteria? That is the question Tenet, through its filing, attempts to answer about the CHS Blue Book. And the answer is a resounding “no.”





(2) MLN Matters Article SE1027

(3) Special Edition MLN Matters article

(4) Medicare Program Integrity Manual, Chapter 6, Section 6.5,

(5) Medicare Benefit Policy Manual, Chapter 1, Section 10.




Tenet has provided several statements and charts illustrating that CHS is indeed below or even well below the national average for use of observation status (of course, about half of all U.S. hospitals are below the average, or it wouldn’t be the average). Tenet also points out that some of the CHS hospitals are even 50 percent below the average. Again, about a quarter of all U.S. hospitals qualify as “50 percent below the average” since they collectively make up the bottom quarter of the pool.


While Tenet’s complaint asserts that “CHS has adopted a strategy of setting admission targets, incentivizing physicians to meet admission targets and holding physicians and hospitals accountable for failure to meet those targets,” missing from the 70-page filing is any discussion of two rather significant features of any hospital compliance plan. These features are designed to have a very direct bearing on the efficacy of the appropriateness of a facility’s admissions and continued stays – the Utilization Review Plan and the Utilization Review Committee. The committee is the one hospital committee actually required by federal law (42 CFR 482.30), and maintaining a plan is a Medicare condition of participation. The names of these “features” may differ by location, but their intent and purpose are defined by CMS.


Compliance Plans


A UR Plan is intended to promote a program within a facility, providing appropriate allocation of resources while striving to provide high-quality care to each patient in a cost-effective, timely manner. Such plans typically involve both retrospective and concurrent reviews. The overall purpose is to make sure that a process exists to conduct those reviews, that the hospital is providing quality care and to check charts for completeness, orders, coding, status and matching criteria. The plan establishes methods for addressing the appropriateness and medical necessity of admissions and stays.


A UR committee can have two or more practitioners as members, but at least two members must be doctors of medicine or osteopathy. Reviews conducted by the committee cannot be performed by anyone who has a direct financial interest in the hospital or was involved directly in the case being reviewed.


The point is, these required features serve a purpose – they are meant to help prevent hospitals from delivering sub-quality care and from inappropriately billing payers for unnecessary medical procedures and/or services.


RACmonitor will continue to report on further developments as they arise.


About the Author


Ernie de los Santos is the chief information officer for eduTrax®. He joined the company at its inception and has been responsible for the creation, development and maintenance of the eduTrax® portals – a set of Web site devoted to providing knowledge, resources and compliance aids for U.S. healthcare professionals who are involved in revenue cycle management.


Contact the Author


To comment on this article please go to


Helping Hospitals Help Their Homeless Patients: Some Basic Steps

Share This Article