What on Earth is Steven A. Cohen thinking? He’s authorized traders at his investment firm, SAC Capital, to quickly build a large position in Accretive Health (NYSE: AH). Roughly a week ago, SAC announced that it had already bought so many shares that it now owns 5% of the company. Is Cohen crazy? After all, Accretive has seen its shares plunge after a fairly nasty lawsuit was filed by Minnesota’s Attorney General.

Make no mistake, Cohen is no fool. He’s amassed a fortune exceeding $8 billion according to Forbes magazine, built largely on contrarian investment approaches. After looking into Accretive Health’s current legal woes, I think Cohen is on to something here. If he’s wrong, the stock may have 20% or 30% downside from here. But if he’s right, this stock could rise 50% or more. Let me explain…

Hospital profit pressures vs. patients’ rights
The economic troubles of the past few years have weighed heavily on hospitals. Not only are patients opting to defer lucrative elective surgeries, but they’ve also been slow to pay for non-elective medical attention. In response, hospitals and the companies that handle billing for them have been ratcheting up the pressure. As patients are set up for surgeries and other treatments, they’re being pressed to clear up past debts they might have incurred.
 
Accretive Health, which is one of the largest hospital billing services providers in the country, may have stepped over the line. In late April, Minnesota Attorney General Lori Swanson filed suit against the company, alleging a pattern of patient intimidation. Shares lost nearly half their value in one day, and still remain far from the 52-week high.



To be sure, harassing people in need of medical care is both illegal and immoral. There’s a time and place to present legal challenges to people that are delinquent with their bills. Heading into an operating room is not that place.

As a consumer, you should be thrilled that this lawsuit was filed. It is a wake-up call for hospitals and their vendors to immediately cease using these pressure tactics. As an investor, you should understand that since Accretive Health was not the only one pursuing these egregious practices, the company’s legal burdens are likely to weigh a lot less heavily then the share price implies.

Politics vs. government
Although this should be a strictly legal issue, it has become a political one. Chicago Mayor Rahm Emanuel is among several politicians that are said to have weighed in on the company’s behalf. Accretive is one of Chicago’s largest employers, and politicians need to protect their base of employers. Minnesota’s Swanson would like Emmanuel and others to mind their own business, but politics are part of the game.

There’s no way Emmanuel and others can get Accretive Health off the hook. The company will need to admit at least some wrongdoing and agree to change its ways. That will likely pressure profit margins a bit as more bad debts will go uncollected. And the company has already lost a major contract in Minnesota and could lose another one or two by the time the dust has settled. That’s why analysts have trimmed their 2012 EPS (earnings per share) forecasts by about a third to $0.47.

Yet since these industry pressure tactics are fairly widespread, it will be very hard for Minnesota’s Swanson to inflict a huge amount of damage on just one industry player. An ability to reach an out-of-court settlement is the most probable outcome, as both parties will save face and avoid years of costly lawsuits.

That’s the angle SAC’s Steven Cohen is likely playing. His firm is known for paying top dollar to get insights on topics that help show how a particular issue might play out. And his advisors are suggesting that Accretive’s mess is not quite as deep as the share price indicates.

That’s also the conclusion of analysts at Oppenheimer, who recently paid a Minnesota-based law firm to help them navigate the issues. Their conclusion: “While our legal consultants believe some claims may be thrown out in the dismissal phase, the lawyers expect many of the AG’s claims will survive the high burden inherent in the company’s motion to dismiss. However, our experts also believe the company has a strong defense.” They see shares rebounding to $17 (from a recent $11.50) when the legal process is sorted out.

Goldman Sachs injects a note of caution into the discussion. The firm’s analysts wonder if other customers will flee as Accretive’s legal woes continue. If that happens, they think shares could fall as low as $8. Yet “in the event of no additional attrition (beyond the one customer that cancelled a contract in late April after the lawsuit was filed), we see upside to our model and point to our bull case valuation of $17.”

Risks to Consider: Canada-based Ascension Health, which operates a network of Catholic not-for-profit hospitals, was an early investor in Accretive Health, and currently ranks as its largest customer. An erosion in that relationship would be devastating for Accretive, and bears close scrutiny.

Action to Take –> If you’ve got a longer-term time-frame, shares could go well past those $17 price targets noted above (which would already be a 43% gain). Just six months ago, Goldman Sachs cited Accretive Health as one of the firm’s top stock ideas, noting that it was a key aid in hospitals’ efforts to more efficiently manage revenue and expenses. The current pressure tactics the company had been using are surely mistaken, but the trend to outsource billing to companies like Accretive is a clear long-term trend. Back in late 2011, Goldman Sachs parlayed the long-term trends into a $31 price target (160% above current levels). Long after the dust has settled on this issue, Accretive Health may again be seen as a key player in a profit-stressed segment, and you could easily be sitting on a double or better if you were to take a flier on this stock.