Major hospital chain faces potential cash crisis after DOJ criminal fraud settlement, Moody's warns

  • Health Management Associates agreed to pay more than $260 million and entered a deferred prosecution agreement to settle criminal charges with the Justice Department.
  • The agreement will "severely weaken" parent company Community Health Systems, according to Moody's.
  • The agreement puts the company at risk of breaching its debt covenants in the next 12 to 15 months, Moody's said.
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One major hospital chain may be facing a cash crisis after agreeing to pay more than $260 million to settle criminal fraud charges, credit rating company Moody's warned Wednesday.

The Justice Department said Tuesday that Health Management Associates agreed to pay the penalties and entered a deferred prosecution deal for allegedly paying physicians kickbacks and defrauding Medicare, Medicaid and other federal programs.

The agreement will "severely weaken" parent company Community Health Systems, which bought HMA in 2014 and already has constrained liquidity, Moody's analyst Jessica Gladstone said Wednesday.

Gladstone warned that the payment could cause the company to violate its credit agreements.

"We expect the company will need to borrow on its revolvers in order to fund the settlement, reducing the cushion under the company's already tight financial covenant on its revolving credit facility, potentially leading to a covenant breach over the next 12 to 15 months," she said in a research note.

Community Health Systems did not respond to CNBC's requests for comment.

Federal prosecutors said HMA paid physicians in exchange for patient referrals and submitted inflated claims for emergency department fees to federal health insurance programs.

The agreement announced Tuesday also resolves several outstanding civil claims against the hospital operator, the DOJ said. An HMA subsidiary that operated under the name Carlisle Regional Medical Center additionally agreed to plead guilty to one count of conspiracy to commit health-care fraud.

Shares of Community Health Systems were up 2.4 percent Wednesday afternoon. Community Health Systems' shares have fallen nearly 18 percent so far this year.

The federal government has been cracking down on overbilling practices by health-care companies. Last year, the government sued UnitedHealth Group for allegedly overcharging Medicare by hundreds of millions of dollars.

The suit was eventually dropped.

— CNBC's Bertha Coombs contributed to this report.

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