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
May 3, 2011
Dear Community Health Systems Shareholders:
As you may be aware, Community Health Systems (CHS) filed a document Friday
with the SEC that purports to address concerns raised by the CtW Investment
Group regarding questionable Medicare billing practices - now the subject of
private litigation and investigations by the Texas Attorney General, the
Department of Health and Human Services Office of Inspector General, and the
Department of Justice - that could have disastrous consequences for long-term
shareholder value. Unfortunately, at no point in the course of CHS's filing
did management directly engage any of the substantive points raised in our
analysis, which was sent to the board in a September 28th, 2010 letter, nor
did they directly challenge our interpretation of Medicare data. Instead, CHS
simply repeats a number of assertions from its April 28th presentation, the
irrelevance and unreliability of which we noted in our April 29th response as
have other observers such as industry analyst, Sheryl Skolnick of CRT Capital
Group, in her April 29th note on Tenet Healthcare.
Rather than straightforwardly address the concerns CtW and others have raised,
CHS management's response appears to be focused on attacking the messenger,
since they apparently do not have a compelling response to the message itself.
In addition to calling CtW's analysis "meritless and self-serving," CHS made a
series of assertions that are inaccurate and misleading. We urge you, as a
CHS shareholder, to review the following facts - all of which are
substantiated in documents available on our website - and reach your own
conclusion as to who is making "meritless and self-serving allegations."
CHS'S ANALYSIS IGNORES CONTEXT AND TAKES WRONG UNIT OF ANALYSIS
In its April 29th filing, CHS repeats several assertions from its presentation
the day before, including:
* CHS DOES NOT HAVE AN EXCESSIVE RATE OF EMERGENCY DEPARTMENT ADMISSIONS
. . . CHS'S 2009 EMERGENCY ROOM ADMISSION RATE OF 26.8% IS BELOW THE
PEER GROUP AVERAGE OF 28.5%. As we have already noted, the more
appropriate unit of analysis for billing practices is the individual
hospital, and over half of CHS hospitals are at the 80th percentile
nationally (the "red flag" level identified by the U.S. Department of
Health and Human Services Office of Inspector General) for emergency
department one-day-stays. Additionally, the data CHS reports have not
been adjusted for acuity or geography, making accurate comparisons
between health systems impossible.
* CHS'S ONE-DAY STAYS ARE NOT OUT OF THE ORDINARY. OUR 2009 MEDICARE
ONE-DAY STAY RATE OF 14.7% IS NOT OUT OF LINE WITH THE NATIONAL AVERAGE
OF 12.4% AND IS WITHIN ONE STANDARD DEVIATION FROM THE AVERAGE. Again,
the refusal to consider either the individual hospital level or to
adjust data for acuity and geography renders this comparison
meaningless. As we showed in our September 28th letter, in FFY 2008
Community Health Systems Shareholders
May 3, 2011
Page 2 of 4
the vast majority of CHS hospitals were above the expected level of
emergency admissions, taking acuity and geography into account.
* CHS'S AVERAGE MEDICARE INPATIENT LENGTH OF STAY IN 2009 WAS IN LINE
WITH THE PEER GROUP, DEMONSTRATING THAT CHS DOES NOT HAVE AN INORDINATE
NUMBER OF ONE-DAY STAYS. IN ADDITION, THE RATIO OF MEDICARE ONE-DAY
STAYS TO TOTAL MEDICARE ER VISITS FOR CHS WAS 8.2%, WHICH IS ALSO IN
LINE WITH THE PEER GROUP AVERAGE OF 7.6%. In terms of inpatient length
of stay, CHS fails to disentangle emergency department admissions from
other in-patient admissions. Our analysis, as set forth in our
September 28th letter specifically focused on one-day-stays following
admission from the emergency department, and we estimate that such
excess admissions inflated FFY 2008 net income by 30%. Moreover, in
its reference to the ratio of Medicare one-day stays to total Medicare
ER visits, CHS is again to failing to adjust for acuity and geography,
and to consider the more appropriate unit of analysis (the individual
hospital).
* CHS DOES NOT MAKE ACQUISITIONS MORE PROFITABLE BY INFLATING ADMISSIONS
BUT INSTEAD MAKES OPERATIONAL IMPROVEMENTS INCLUDING A FOCUS ON CASE
MANAGEMENT. FOR INSTANCE, THE 43 TRIAD HOSPITALS ACQUIRED IN 2007 SAW A
DECREASE IN OVERLY LONG OBSERVATION STAYS AND MORE INPATIENT STAYS.
CHS's rather empty assertion does not engage our finding that hospitals
the company acquires go from being roughly 10% BELOW the national
average for emergency department one-day-stay admissions PRIOR to CHS
acquisition to 30% ABOVE the national average three years after being
purchased. Note that our analysis essentially compares each hospital to
itself over a period of years and so is effectively adjusted for acuity
and geography.
* CHS's "case mix index" is higher for short-stay admissions as compared
to the nationwide average, which is a different than expected result
considering the allegation of lower acuity short stay admissions. Here,
CHS has both shifted the goal posts - by including two-day stays along
with the one-day stays we addressed - and engaged in obfuscation by
failing to note that rural hospitals in general, and small rural
hospitals in particular, have much higher acuity for short-stay
admissions than the national average (see the bottom half of slide 43
from CHS's April 28th presentation). Since CHS owns quite a few
hospitals in rural areas, the company's presentation should
systematically take this fact into account in order to provide
shareholders with an accurate view of its performance.
CHS SPENDS MORE TIME ATTACKING CTW THAN ENGAGING SUBSTANCE
In its April 29th SEC filing, Mr. Smith attacks the CtW Investment Group's
analysis as "not based on valid stockholder concerns," making much of our
affiliation with Change to Win including the Service Employees International
Union (SEIU). Mr. Smith's letter is nothing more than a blatant and offensive
attempt to deflect attention from the substantive issues to which management
apparently cannot compellingly refute. That the board condoned such a letter
says more about the board than the letter says about management's antagonistic
approach to shareholders.
Community Health System Shareholders
May 3, 2011
Page 3 of 4
As clearly stated in our prior communications with CHS shareholders and with
the CHS board, the CtW Investment Group is a part of Change to Win, a
federation of five unions representing over five million members. The
Investment Group's mission is to protect and promote the long-term economic
interests of retirement and benefit plans sponsored by CtW affiliates.
Pension and benefit funds sponsored by unions affiliated with Change to Win
have more than $200 billion in assets and are substantial long-term CHS
shareholders. These funds, both independently and in conjunction with the CtW
Investment Group, have engaged hundreds of companies on governance matters and
are responsible for many of the most significant developments in corporate
best practice and regulatory reforms dealing with corporate governance over
the past two decades.
CHS's effort to attack our analysis as "not based on valid stockholder
concerns" is best seen for what it is - an effort to deflect criticism and
obscure the facts. We encourage you to consider the following:
* CHS states that "We responded to CtW's letter on October 12, 2010 and
invited them to meet with senior executives of the Company." In fact,
as you can see from the copy of CHS's response posted on our website,
www.ctwinvestmentgroup.com, CHS actually stated that "WE ARE
CONSTRAINED BY THE NATIONAL LABOR RELATIONS ACT IN FURTHERANCE OF YOUR
CORRESPONDENCE OTHER THAN BY THIS REPLY." This statement is a rebuff,
not an invitation.
* The company's assertion that contact between SEIU staff and hospital
employees would implicate the National Labor Relations Act (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 CHS itself, it
is hardly surprising that such contacts occurred. And such contacts are
certainly no obstacle to the board's discussion with CtW Investment
Group regarding shareholder concerns over CHS's billing practices, nor
for that matter, with any CHS shareholder.
* In that same response, CHS did allow that it would be willing to meet
with officials representing pension funds we work with, but that any
such meeting would be limited to "information [that] has been widely
and publicly disseminated to all stockholders." In other words, since
neither our analysis nor the consideration of that analysis by the
Audit and Compliance committee - which was only disclosed last week -
had been disclosed by the company, neither subject would be discussed
in any such meeting. Understandably, we interpreted this statement as
an additional rebuff to our efforts to protect long-term shareholder
value.
* Prior to recommending that shareholders vote against directors Cash,
Ely, and Fry, we again wrote to CHS on April 18th and urged to board to
meet with us to discuss our concerns. We have to date received no reply
to this letter.
Finally, CHS asserts that it properly disclosed the subpoenas served upon it
by the Texas Attorney General's office in November 15th, 2010 by including
that disclosure in its "next quarterly filing": its February 25th, 2011 10K.
However, Tenet Healthcare (with which CtW
Community Health System Shareholders
May 3, 2011
Page 4 of 4
Investment Group has no relationship and has had no communication whatsoever)
owns 10 hospitals in Texas (out of 49 total acute care facilities). Since
transfers of hospital licenses in Texas (as in other states) requires state
approval, the fact that the Texas AG had subpoenaed CHS would clearly have
been of material interest to both CHS and Tenet shareholders in December,
January, and February, during which time CHS made numerous filings pursuant to
its effort to acquire Tenet. The notion that its failure to disclose this
investigation until February 25th constitutes timely disclosure of material
developments simply beggars belief.
We are disappointed that the board of directors has not insisted that the
company present accurate and pertinent information to its shareholders, and
that company spokespeople refrain from innuendo, ad hominem attacks, and
outright misrepresentations. The continued refusal of CHS directors to address
the specific points raised in our analysis only reinforces our view that in
order to preserve value for the long term, shareholders must hold directors
accountable for their failure to properly oversee risk management. We urge you
to vote AGAINST James S. Ely III, John A. Fry and W. Larry Cash at the CHS
annual meeting on May 17, 2011. For further information, including copies of
all of our correspondence with CHS, please visit our website or contact
Richard Clayton at (202) 255-6433.
Sincerely,
/s/ William Patterson
William Patterson
Executive Director