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HCA Buckles Down as Probe Deepens

The big hospital chain rolls out a wide-ranging reorganization as inside-selling questions linger.


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is feeling more pain.

The giant hospital operator has now been hit with a formal investigation by the

Securities and Exchange Commission

. Moreover, the company has dropped language indicating that the government seems focused primarily on stock sales carried out by Senate Majority Leader Bill Frist instead of those executed by its own executives.

Frist, a member of the family that originally founded HCA, unloaded all of his company stock during a flurry of insider selling just ahead of a profit warning this summer. For his part, the powerful Republican has insisted that he had access to no special knowledge when ordering his blind trust to exit the stock. But some critics have questioned why the senator had any control over a blind trust, which is designed to shield against possible conflicts of interest, in the first place.

"If he was really serious about being independent," says Massachusetts investment strategist Peter Cohan, "he would have had a real blind trust -- instead of a seeing-eye-dog trust -- and divested the shares before entering the political arena."

Both Frist and HCA have pledged to cooperate with government investigators. But Cohan, for one, believes the government has already gathered some telling information.

"Politics would suggest that the SEC wouldn't do this kind of investigation unless they believe they have something really solid that will stand up in court," says Cohan, who has no position in HCA's stock. "If it turns out the case they are bringing is flimsy, I would be shocked. ... Now I'm really curious about what kind of evidence they do have."

Indeed, as the

reported, HCA insiders began

aggressively selling their stock when it was in an upswing -- lifted by hopes for an industry recovery -- early this year. The insiders then continued that activity, with Frist joining in, through a tough second quarter that would come as a disappointment to investors.

After hitting a 52-week high of $58.60 in late June, HCA's stock plummeted nearly 10% on a profit warning a few weeks later. It has drifted even lower since, falling 1.1% to $47.40 on Thursday.

Peter Young, a business consultant at HealthCare Strategic Issues, took note of the insider selling back in the spring -- long before any government probe -- and predicted that HCA insiders would look either lucky or prescient down the road.

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"They were selling out and saying everything's OK -- and then it's not OK," he says. "So I think there's really a question of whether or not HCA was intentionally deceiving the investing public."

Company Shake-Up

Even now, HCA's future looks uncertain to some. Notably, the company has just laid out plans for its biggest organizational shake-up in some time.

HCA said late Wednesday that it will separate 58 of its hospitals into a new operating group. It also revealed a number of divisional leadership changes.

UBS analyst Kenneth Weakley immediately took notice. He pointed out that similar moves in the past have led to a much smaller HCA in the end. Thus, he questioned whether a spinoff of the newly formed "central" group -- with hospitals spread across nine states -- could be in the works.

"Obviously the potential spin-off of this new group, would that occur, would be very reminiscent of the formations of





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in 1999," wrote Weakley, who has a neutral rating on HCA's stock. "Unlike that time, however, when the operating environment was indeed strong, challenges abound."

As a result, Weakley went on to compare the possible spinoff to one involving the company's rural hospitals during a tough industry downturn in the late 1980s. He recalled that both HCA and its spun-off company then went private before being acquired by the former Columbia in the mid-1990s. Columbia later found itself targeted by a devastating government probe but ultimately emerged as a highly successful HCA.

Weakley now sees the possibility that HCA could be preparing to come full circle. Moreover, he suggests that such a move should come as no surprise to investors.

"In many respects, this willingness to restructure is obviously what shareholders should expect from their management teams, as history has shown that inertia is perhaps the least optimal strategy to adopt in a dynamic environment," Weakley writes. And "HCA would never be accused of sitting by while the world changed around them, as the history of 30-plus years would indicate."

Even so, Weakley still senses the need for caution right now.

"Why HCA chose to announce this change last night, on the verge of entering its quiet period before third-quarter reporting, is difficult to assess," he says. "We cannot conclude from this announcement, however, that operating trends at HCA are improving much -- that much seems certain."