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8-K - FORM 8-K - COMMUNITY HEALTH SYSTEMS INC | g26886e8vk.htm |
EX-99.1 - EX-99.1 - COMMUNITY HEALTH SYSTEMS INC | g26886exv99w1.htm |
EX-99.2 - EX-99.2 - COMMUNITY HEALTH SYSTEMS INC | g26886exv99w2.htm |
Exhibit 99.3
April 15, 2011
John A. Clerico
Chairman of the Audit & Compliance Committee
Community Health Systems
4000 Meridian Boulevard
Franklin, TN 37067
Chairman of the Audit & Compliance Committee
Community Health Systems
4000 Meridian Boulevard
Franklin, TN 37067
Dear Mr. Clerico:
The announcement on April 11th of Tenet Healthcares lawsuit filed against Community
Health Systems (Community) only heightens our concerns over the companys billing practices, which
we first expressed to you in our September 28, 2010 letter. Tenet points to longstanding procedures
and processes that are inconsistent with the practices of Communitys competitors, and which appear
to be closely related to the aggressive billing practices that our research previously described to
you. We received no substantive reply from the board following our initial communication with the
company, but the issues raised in the Tenet lawsuit and in our earlier correspondence demand a
response to shareholders. Should the Community board fail to provide a compelling response to the
claims concerning billing practices we will recommend that our fellow shareholders oppose the
reelection of CFO Larry Cash and Audit and Compliance Committee members James S. Ely and John A.
Fry at Communitys upcoming annual shareholder meeting.
Tenets suit clearly alarmed Communitys shareholders, precipitating a 36% one day drop in
Communitys share price. Although the shares have subsequently regained some of that loss, as of
COB April 14th they were still trading nearly 20% lower than before the suit was
announced. Moreover, it appears that regulators have also independently arrived at the conclusion
that Communitys billing practices are inappropriate: in November 2010 Community received subpoenas
from the Texas Attorney Generals office pursuant to its investigation of emergency room procedures
and admissions practices. Clearly, Communitys aggressive emergency admissions practices have set
long-term shareholders up for a potentially devastating loss of their investment.
The CtW Investment Group works with benefit funds sponsored by unions affiliated with Change to
Win, a federation of unions representing more than 5 million workers. CtW Investment Group is
itself a Community shareholder and the funds with which CtW Investment Group works collectively own
an estimated 470,000 shares of Community Health Systems common stock.
The Board has Failed to Respond to Past Concerns
Nearly six months ago, we urged Communitys board to examine the evidence that its emergency room
admissions and billings were excessive and invited regulatory scrutiny which could easily damage
the companys reputation and reduce shareholder value. In that letter, we urged Community to
initiate an independent process to review these billing
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John A. Clerico
April 15, 2011
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April 15, 2011
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practices in order to ensure that this potential was not realized to the detriment of
shareholders. Rather than a reply from the board, we received a letter on October 12, 2010, from
Rachel Seifert, Communitys Corporate Secretary and General Counsel. In that letter, Ms. Seifert
offered no substantive response, claiming that discussions with the CtW Investment Group
were somehow prohibited under the National Labor Relations Act (NLRA) because the Service
Employees International Union (SEIU) is one of the Change to Win affiliates and because numerous
contacts about billing practices had occurred between SEIU staff and employees at Community
acquisition prospects.
Ms. Seiferts assertion that contact between SEIU staff and hospital employees would implicate the
NLRA is flatly inaccurate. Indeed, given that various SEIU local unions have collective bargaining
agreements with numerous hospitals that are presumably acquisition prospects, not to mention with
Community itself, it is hardly surprising that such contacts occurred. And such contacts are
certainly no obstacle to the boards discussion with CtW Investment Group regarding shareholder
concerns over Communitys billing practices, nor for that matter, with any Community shareholder.
But putting aside the inaccuracy of Ms. Seiferts assertion, it is deeply troubling that the board
itself has taken no apparent action to address the issue.
We believe, in the face of Tenets lawsuit and the Texas Attorney Generals investigation, that it
is now critical for the board to engage with shareholders and show leadership in addressing these
concerns. Absent such a response we will recommend that shareholders join us in opposing the
reelection of those directors whose terms end this year and who are most culpable for the boards
failure to properly oversee compliance, regulatory, and reputational risk management.
The Audit and Compliance Committee is charged with overseeing the effectiveness of managements
enterprise risk management process as well as with overseeing the delegation of risk management
oversight to other board committees. Accordingly, Audit and Compliance Committee members James S.
Ely and John A. Fry must bear responsibility for that committees failure to timely respond to
shareholder concerns and address the issue of excessive emergency department admissions.
Additionally, as the executive with primary responsibility for ensuring the companys financial
stability, we believe that Mr. Cash must also be held accountable for his role in adopting the
aggressive billing practices that now threaten the investments of long-term shareholders.
Emergency Department Billing Practices
In our September 28, 2010 letter, we called on the board to establish a Special Committee to
investigate the risks to future earnings and potential liabilities created by Communitys Medicare
billing practices. As we outlined in our letter, the Center for Medicare & Medicaid Services and
the Office of the Inspector General (OIG) have identified one-day hospital stays as a potential
indicator of improper Medicare billing. In particular, hospitals that are at or above the
80th percentile for one-day-stays have been identified for further review to ensure that
billing practices are appropriate. Our analysis of Communitys Medicare billing data indicated that
for the past two fiscal years for which
John A. Clerico
April 15, 2011
Page 3 of 4
April 15, 2011
Page 3 of 4
data is available, half of Communitys hospitals have been at or above the
80th percentile
nationally in frequency of one-day-stays.
This finding suggested to us the need for further investigation. Using only publicly available
data, we found that 1) higher than average one-day stay rates for patients admitted through
Communitys emergency departments; 2) these high rates appear to be the direct result of
managements strategy to increase admissions from emergency departments; 3) emergency department
admissions greatly exceed expectations at Community facilities, taking into account their patient
case mix and location, and increasingly surpass these expectations as years under Community
ownership accrue.
Managements repeated assertion that increasing emergency department admissions is central to its
growth strategy strongly suggests to us the need for greater board oversight, given the OIGs view
that short stays are a primary indicator of unnecessary admissions, and given the close
relationship between short-stay admissions and emergency department admissions at Community.
Indeed, the fact that facilities acquired by Community see their emergency department one-day-stay
admission rate grow from 10% below the national average to 20% above the national average in their
first full year owned by Community, and grow further to 30% above average during their third and
later years, strongly suggests that management is deliberately taking on excessive compliance risk
and thereby endangering long-term shareholder value.
In our September letter, we estimated that in Federal Fiscal Year 2008, the last year for which
complete data were available, Community generated $60 million or 30% of 2008 net income from
Medicare billing for excessive one-day-stays and emergency admissions. Since at that time the Triad
hospitals had been under Community ownership for less than one year, and since Community has
asserted in presentations to shareholders that emergency admissions have been increasing in newly
acquired hospitals, we expect that an analysis of more recent data would indicate an even higher
excess billing total. Moreover, the investigation begun last year by the Texas Attorney General,
which appears to include the nine Texas hospitals Community acquired from Triad in 2007, reinforces
our view that you and your fellow independent directors have a duty to increase the scrutiny with
which Communitys emergency department practices are reviewed.
Tenet Acquisition Proposal
On December 9, 2010 Community disclosed that it had proposed to Tenets board of directors a
transaction in which Community would acquire Tenet at a price of $6 per share, including $5 cash
and $1 in Community stock. Including the cost of retiring Tenets debt, this proposed
transaction totaled $7.3 billion, which would lead to an increase in Communitys debt of $6.8
billion and the issuance of approximately 15 million new Community shares, equivalent to 16% of
shares outstanding. This proposal was rejected by Tenet as inadequately valuing its projected
future growth and its net operating loss (NOL) carry-forward, as well as underestimating the degree
to which
John A. Clerico
April 15, 2011
Page 4 of 4
April 15, 2011
Page 4 of 4
Tenet operates different kinds of facilities in different markets than those on which
Community has built its track record.
Since the announcement, Tenets share price has consistently traded above $6 a share, suggesting
that market participants believe that a higher price per share is warranted. Leading industry
analysts, including Kemp Dolliver of Avondale Partners and Sheryl Skolnick of CRT Capital Group,
have projected Community (or another acquirer) would need to offer at least $7.25, and up to
$9.50, in order to close a deal with Tenet. We note that while the $6 per share offer provided
Tenet shareholders with a premium of 41% compared to the closing price of the previous trading
day, and a premium of 20% compared to Tenets average price over the previous year, it offered a
discount of 7% compared to Tenets high price for the year.
We further note that the proposed Tenet transaction was structured so that Community shareholders
would not be entitled to a vote on the merger under Delaware law, which only requires such a vote
if new shares issued pursuant to a transaction amount to 20% or more of shares outstanding.
Communitys 2007 acquisition of Triad was structured similarly, with the result that Community
shareholders were not entitled to a vote on the transaction, and we are disappointed to see a
parallel approach being taken with respect to Tenet. In our view, Communitys inexplicable
unwillingness to allow its own shareholders to have a say in major transactions has led the company
to take on an extremely high debt load. Moreover, if Community continues to pursue the acquisition
of Tenet, and intends to raise its offering price in order to do so, it will have to either commit
to issuing enough new shares to trigger a shareholder vote, or take on additional leverage that
would put the companys future at risk.
To-date, Community has ignored our request for dialogue and refused to address the concerns weve
raised. Given the gravity of the allegations in Tenets lawsuit and its crushing effect on
Communitys stock price, a timely resolution of these matters is particularly important. Absent
your willingness to offer substantive responses to our concerns by April 20, we intend to recommend
a vote against Messrs. Cash, Ely and Fry at Communitys May 17th annual meeting. We look
forward to your response.
Sincerely,
William B. Patterson
Executive Director
Executive Director
CC: Community Health Systems Board of Directors