Chemed Corp. (NYSE: CHE) is a very strange company. Imagine owning the Roto Rooter drain cleaning and plumbing company AND owning a for-profit hospice provider. Now a Department of Justice suit against the company for Medicare hospice violations has investors running scared.

The U.S. Department of Justice (DOJ) announced late on Thursday that it filed suit against Chemed and against its hospice subsidiaries. The subsidiaries being sued are Vitas Hospice Services and Vitas Healthcare, with the allegations being over false Medicare billings for hospice services.

Investors need to tread softly here because this could turn into criminal situation if the allegations are proven. The DOJ alleges that Vitas:

…knowingly submitted or caused the submission of false claims to Medicare for crisis care services that were not necessary, not actually provided, or not performed in accordance with Medicare requirements.

Another instance is even worse if it is true. The DOJ said:

In addition, the government’s complaint alleges that Chemed and Vitas knowingly submitted or caused the submission of false claims for hospice care for patients who were not terminally ill.

Shareholders are reacting to claims that Chemed and Vitas violated the False Claims Act and that the companies misspent tens of millions of taxpayer dollars. If proven, that goes well beyond just civil penalties for the executives who participated. Shareholders do need to know that the DOJ ended its release by saying, “The claims asserted against Chemed and Vitas are allegations only, and there has been no determination of liability.”

The DOJ said:

The companies allegedly paid bonuses to staff based on the number of patients enrolled in the program and based on patients who were admitted for longer lengths of stay, and took adverse employment actions against marketing representatives who did not meet monthly hospice admissions goals.”

Vitas is the largest for-profit hospice chain in the United States, with hospice services in 18 states. Chemed acquired Vitas back in 2004. Chemed’s shares are down 18% at $66.60, and the 2 million shares traded before noon are already more than 10 times the 150,000 or so shares traded on an average day. After the drop, Chemed is worth only about $1.23 billion, and its 52-week trading range is $54.06 to $82.00.

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