Inside Baseball at HCA

UBS analyst Kenneth Weakley has warned that serious problems could lie ahead for the group.

"If CMS is successful in altering the (diagnostic-related group) system such that it achieves tight, normal distribution of profit margins across all DRG codes, then forward projections for hospital economics will likely lose ALL of their reliability," he wrote back in May. "Indeed should CMS implement this change for fiscal 2007 (which begins in October 2006), as it currently intends, it would not be unfair to say that few even in the hospital industry would be able to accurately predict the ultimate impact on hospital-by-hospital reimbursement."

CMS first recommended the change back in early March. Frist, by his own admission, sought permission to sell his HCA stock the following month. Grassley formally introduced his bill in May, and Frist executed his big transaction about six weeks later.

Moreover, Frist unloaded his stock during the biggest selling frenzy ever recorded -- for a company whose insiders who have a history of impeccable timing.

"Have they been very good at understanding when their stock is undervalued and when it is overvalued?" asks Fulcrum analyst Sheryl Skolnick. "You betcha!"

Shares of HCA, which peaked this summer at $58.60, tumbled 3.6% to $46.66 on Tuesday.

History Lesson

Market Profile Theorems, a Seattle-based investment research firm, has spent the past 17 years tracking insider transactions at big companies like HCA.

The firm's research director, Michael Painchaud, says that HCA insiders have always been regular sellers of the company's stock. However, he says, they grew even more aggressive during the summer time frame that has now come under scrutiny.

Indeed, Painchaud's data show, HCA insiders have cashed in more money on stock sales so far this year than they have during any full year in the company's history.

Ups and Downs HCA stock over the years

Massachusetts investment strategist Peter Cohan sees a pattern in Painchaud's data.

Back in the mid-1990s, he notes, HCA insiders spent several years aggressively selling their shares -- as they rose with investor hopes -- before a sweeping Medicare fraud investigation sent the stock reeling in 1997.