U.S. Securities and Exchange Commission
Washington, DC 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
COMMUNITY HEALTH SYSTEMS INC.
______________________________________________________________________________
2. Name of the person relying on exemption:
CTW INVESTMENT GROUP
______________________________________________________________________________
3. Address of the person relying on exemption:
1900 L STREET, NW, SUITE 900 WASHINGTON,DC 20036
______________________________________________________________________________
4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a-6(g)(1):
CTW INVESTMENT GROUP
April 21, 2011
Dear fellow Community Health Systems Shareholder:
WE URGE YOU TO VOTE "AGAINST" THE RE-ELECTION OF JAMES S. ELY III, JOHN A. FRY,
AND W. LARRY CASH GIVEN THEIR CULPABILITY FOR THE GROWING SCANDAL SURROUNDING
PROPER OVERSIGHT OF MEDICARE BILLING PRACTICES, WHICH HAS PRECIPITATED A 25%
DECLINE IN COMMUNITY'S MARKET VALUE.
With Community Health Systems' ("Community") May 17, 2011 annual shareholder
meeting rapidly approaching, the CtW Investment Group urges you to vote
"AGAINST" the re-election of James S. Ely III, John A. Fry, and W. Larry Cash
to the Community board of directors, Items numbers 1.(l)-(3) on Community's
April 8, 2011 proxy statement. Messrs. Ely and Fry, as members of the Audit and
Compliance Committee, bear responsibility for that committee's failure to
address the compliance risks generated by Community's excessive rate of
emergency department admissions and to respond to shareholder concerns outlined
in prior communications. Mr. Cash, as CFO, is responsible for guiding the
company's overall financial stability, which has already been severely impacted
by the billing practices scandal, as evidenced by the roughly 25% decline in
Community's share price since the April 11th announcement of a lawsuit
concerning these practices filed by Tenet Healthcare ("Tenet").
Events surrounding the Medicare billing practices scandal are cause for grave
concern to Community shareholders and are already the subject of at least three
legal and regulatory actions:
- On April 11th, paralleling concerns raised by CtW Investment Group in a
September 28, 2010 letter, Tenet filed a lawsuit against Community claiming
that the company maintains a practice of systematically admitting, rather
than treating as outpatients on observation status, patients in CHS
emergency rooms. Tenet's suit clearly alarmed Community's shareholders,
precipitating a 36% one day drop in Community's share price. Although the
shares have subsequently regained some of that loss, as of COB April 21st
they were still trading roughly 25% lower than before the suit was
announced.
- On April 8th Community received a subpoena from the U.S. Department of
Health and Human Services' Office of Inspector General in connection with
an investigation it is launching into the company's billing practices.
- In November 2010 Community received subpoenas from the Texas Attorney
General's office pursuant to its investigation of emergency room procedures
and admissions practices.
In our view, rebuilding credibility with regulators, shareholders and providers
begins with holding these directors to account for their failure to address
these concerns before the implications of the billing practices rose to such
alarming proportions.
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
1900 L Street NW, Suite 900 Washington, DC 20036 330 W. 42nd Street, Suite 900
New York, NY 10036
202-721-6060
www.ctwinvestmentgroup.com
Community Health Systems Shareholders Page 2 of 4
April 21, 2011
Investment Group is 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. More than six months ago we expressed
concerns to Community over its billing practices and the implications
heightened regulatory scrutiny would have for shareholder value. Our concerns
over Community's billing practices and why this matters to shareholders are
detailed below.
THE BOARD'S FAILURE TO ADEQUATELY OVERSEE RISKS CONCERNING COMPLIANCE WITH
MEDICARE BILLING PRACTICES COULD HAVE DISASTROUS CONSEQUENCES FOR COMMUNITY
SHAREHOLDERS.
Medicare reimbursement practices differentiate between patients admitted on an
inpatient basis rather than as outpatients on observation status; some
estimates price the difference in Medicare reimbursement between an inpatient
stay and an outpatient observation at approximately $5,000 greater per claim
for inpatient stays./1/ As such, one-day admissions clearly represent a great
deal of additional revenue for hospitals. Consequently, the incentive for these
companies to inappropriately assign patient status is present even if their
medical conditions do not warrant that level of care.
In our September 28, 2010 letter to the board, we pointed out that 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 Community's Medicare
billing data indicated that for the past two fiscal years for which data is
available, half of Community's hospitals have been at or above the 80th
percentile nationally in frequency of one-day-stays. This heavy concentration
of hospitals at the top of the national distribution of one-day stays invites
regulatory scrutiny, and may result in enforcement actions against Community.
Further analysis of one-day stay rates at Community reveal three worrisome
trends: (1) higher than average one-day stay rates for patients admitted
through Community's emergency departments; 2) these high rates appear to be the
direct result of Community's corporate 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.
INCREASING INPATIENT ADMISSIONS IS CENTRAL TO THE COMPANY'S GROWTH STRATEGY,
YET APPEARS UNSUSTAINABLE AND COULD LEAD TO LONG-TERM VALUE DESTRUCTION
Driving admissions growth is a critical component of Community's integration
strategy at acquired facilities, such as the Triad acquisition in 2007, as
management attempts to make these more profitable. As detailed in our September
letter, analysis reveals that facilities acquired by
_________________________
/1/ Report on Medicare Compliance, Vol. 15, Num. 37. "In Hospital
Observation Struggle, Uncertain Outcomes May Justify Inpatient Admissions."
October 23, 2006.
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Community Health Systems Shareholders Page 3 of 4
April 21, 2011
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. This sharp increase following acquisition by
Community strongly suggests that management is deliberately taking on excessive
compliance risk and thereby endangering long-term shareholder value.
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. At that time the Triad hospitals had been under Community ownership
for less than one year; 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.
In our view, these billing practices create reliance on an unsustainable
revenue stream and sets long-term shareholders up for a potentially devastating
loss of their investment, It is therefore the duty of the independent directors
to increase the scrutiny with which Community's emergency department practices
are reviewed. As members of the Audit and Compliance Committee, which is
charged with "overseeing the effectiveness of management's enterprise risk
management process that monitors key business risks for the company," Messrs.
Ely and Fry, bear responsibility for that committee's apparent acquiescence to
a growth strategy tied to unsustainable and potentially unlawful billing
practices. Similarly, Mr. Cash, as the company's chief financial executive,
bears responsibility for managing risks to financial stability and for setting
overall company strategy. Additionally, Mr. Cash "performs a substantial
portion of the investors relations function for the company," and so also bears
responsibility for Community's unwillingness to engage with shareholders
concerning its Medicare billing practices.
THE BOARD HAS FAILED TO RESPOND TO PAST COMMUNICATIONS OUTLINING THESE
CONCERNS.
We raised concerns paralleling the issues highlighted in the Tenet lawsuit as
far back as September 2010, when we sent a letter to Community's board
regarding the billing practices employed by CHS hospitals. At that point, we
called on the board to establish a Special Committee of independent directors
charged with investigating the risks to future earnings and potential
liabilities created by its aggressive Medicare billing practices. We also asked
the board to provide a preliminary report to shareholders on the findings of
the investigation including the special committee's outline of the steps
necessary to address this issue and a timeline on when the steps will be
completed.
Since sending that letter, we have received no substantive communication from
Community's board indicating any effort to assess or mitigate risks associated
with the company's Medicare billing practices. We believe, in the face of
Tenet's lawsuit and investigations at both the federal and state level, that it
is now critical for the board to engage with shareholders and show leadership
in addressing these concerns.
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Community Health Systems Shareholders Page 4 of 4
April 21, 2011
CONCLUSION: THE CTW INVESTMENT GROUP RECOMMENDS A VOTE "AGAINST" DIRECTORS ELY
III, FRY, AND CASH AT COMMUNITY'S MAY 17 ANNUAL MEETING
The failure of the Community board - and particularly James S. Ely III, John A.
Fry, and W. Larry Cash, as the directors with the greatest culpability - to
adequately oversee the regulatory risks entailed by Community's Medicare
billing practices leaves us no choice but to recommend that our fellow
shareholders oppose the reelection of these directors. Messrs Ely, Fry and Cash
have failed in their duty to shareholders to oversee management of compliance
risk, as evidenced in both our analysis and the recently disclosed federal and
state investigations. Further, the unwillingness of Community's board to engage
shareholders in a dialogue concerning the billing practice concerns only serves
to reinforce the perception that the board is ill-equipped to proactively
engage its stakeholders and respond to the growing scandal in an appropriate
and timely manner.
As such, in the wake of this scandal we believe Community's reputation with
regulators, shareholders and providers can only be salvaged by holding to
account Messrs. Ely, Fry, and Cash. We therefore urge you to vote "Against"
their re-election to the Community board at our Company's May 17th annual
meeting.
Please contact Richard Clayton at 202-255-6433 for additional information.
Also, please refer to www.ctwinvestmentgroup.com for CtW Investment Group's
communications with the board and new developments.
Sincerely,
/s/ William Patterson
William Patterson
Executive Director
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