DALLAS (Reuters)—Tenet Healthcare Corp. said it has sued its suitor, Community Health Systems Inc., claiming the rival hospital operator inflated revenue and earnings by admitting patients for needless stays to overbill insurers, including Medicare.

Shares of Community Health plunged as much as 43% and Tenet shares fell as much as 20% in New York Stock Exchange trading on Monday. Shares of other hospital chains were also dragged lower.

The complaint, filed in U.S District Court in Dallas, accuses Community Health of admitting to its hospitals, for financial reasons, patients who had no clinical need, rather than placing them under observation.

The improper practice resulted in millions of dollars of payments for unnecessary hospital admissions, according to the complaint.

"CHS's practice of greatly underusing observation status and consequently overusing in-patient admission status has served to overstate its growth statistics, revenues and profits and has created a substantial undisclosed financial and legal liability to the federal government, numerous state governments, private insurance companies and patients," the lawsuit states.

Community Health, in a statement, said Tenet's allegations were without merit, unfounded and irresponsible.

According to Tenet, Community Health uses a set of criteria for determining patient admissions that is different from standard hospital industry practice.

The lawsuit seeks to compel Community Health to disclose details of its admissions practice that Tenet claims have resulted in higher patient admission rates at Community Health hospitals than for other hospital operators. Tenet said it based its analysis on publicly available Medicare data.

Analysts said the allegations by Tenet could trigger additional regulatory scrutiny of the industry.

Tenet in December rejected Community Health's $3.3 billion takeover offer, saying it undervalued the company. The $6-a-share offer, of which $1-a-share would be paid in Community Health stock to Tenet shareholders, represented a 40% premium to Tenet's share price at the time.

Community Health said it remains committed to its offer to acquire Tenet.

"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," Community Health said.

Shares of other hospital chains also fell sharply, with HCA Holdings down 3.6% at $31.98, Health Management Associates down 6.3% at $9.99, and Universal Health Services down 2% at $47.79 in midafternoon on Monday.

"While this desperate move may or may not be successful in killing a potential deal, this puts a cloud over Community Health and the industry as investors wait for more information on this explosive accusation," Oppenheimer analyst Michael Wiederhorn said in a note to clients.

Tenet said it investigated Community Health's admissions practice in an effort to understand its suitor's assertion that a merger of the two hospital chains would improve the quality of patient care and provide "synergies" in their business operations.

Community Health received between $280 million and $377 million between 2006 and 2009 by treating Medicare patients on an admitted inpatient basis who should have been treated in observation, Tenet alleges in the lawsuit.

"CHS may well be subject to liability and damages of 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 never have been admitted as inpatients in CHS hospitals," the lawsuit alleges.

Shares of Community Health Systems were halted multiple times as the stock plunged. Exchanges pause trading in a stock when it deviates 10 percent from a previous trade in a five-minute period. Community Health continued to fall even after resuming trading, necessitating additional time-outs for the stock.

"Today's lawsuit appears to be the most serious attempt by Tenet so far to block the merger and is designed to undermine the expected synergies of the tie-up," optionMonster analyst David Russell said in comments on the stock and options website in Chicago.

Tenet in 2006 agreed to pay $900 million to federal authorities to settle charges of fraud to Medicare, the U.S. health insurance program for the elderly and disabled.

Community Health shares were down 33.5% at $26.78 on Monday afternoon, off an earlier low at $23.12. Tenet shares were down 13.6% at $6.52, off an earlier low at $6.03.