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Insiders Cash Out at Community Health

The CEO and a top lieutenant join the hospital industry insider-selling trend.

Hospital insiders continue to dump stock in the face of looming Medicaid cuts.

Recently, executives at

Community Health

(CYH) - Get Report

have joined those at

HCA

(HCA) - Get Report

in carrying out multimillion-dollar insider sales. The transactions come at a time when Tennessee -- an important market for both companies -- is seeking to scale back the most generous Medicaid program in the country. Many other states, along with the federal government, have laid out plans to rein in their Medicaid spending as well.

Peter Young, a business consultant at HealthCare Strategic Issues, believes that some companies could suffer a material hit as a result of the cuts. He expresses particular concern about Community, which operates 11 hospitals -- or 15% of its total -- in the state of Tennessee.

"Once TennCare is normalized to more traditional reimbursement and eligible populations, a number of Community hospitals in Tennessee will face realistic questions related to viability," Young says.

For now, at least, Community's stock continues to perform quite well. The shares, although down 12 cents to $36.77 on Tuesday morning, have rocketed nearly 50% in a year.

Still, Community insiders have been bailing out of the stock. Through a string of option transactions, they have shed more than 1 million shares in the last six months alone.

The company didn't return a phone call Tuesday morning seeking comment on the sales.

Top Sellers

Last week, Community CEO Wayne Smith became the latest insider to sell.

After exercising 250,000 stock options early in the week, Smith turned around and sold most of the stock -- pocketing almost $3.5 million in profits -- just a few days later. CFO Larry Cash executed a multimillion-dollar stock sale this month as well. Other Community executives, including the controller and the general counsel, recently netted six figures through transactions of their own.

The flurry of activity came just before a court ruling, issued Friday, that cleared the way for Tennessee to begin cutting more than 300,000 people from its Medicaid program. Many of those people, who have enjoyed rich benefits in the past, could soon join the growing ranks of the uninsured.

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Currently, some 1.3 million people -- or one-fourth of the state's population -- depend on TennCare for health care. But without cutbacks, the Tennessee governor has argued, the state will soon be spending 91% of all new revenue on nothing but TennCare. Thus, the state plans to begin scaling back now with some $600 million worth of cuts this year.

"We're gratified the appeals court acted swiftly in approving our request," Tennessee Gov. Phil Bredesen said in a statement on Friday. "This ruling allows us to continue on a fiscally responsible course to gain control of the TennCare program and pass a balanced budget."

But the move could hurt some cash-strapped hospitals in the process. Young notes that more than half of Community's Tennessee-based hospitals treat an especially large Medicaid population. And some of those hospitals, he says, were marginal performers even before the state pursued its giant Medicaid cuts.

Life Lessons

Meanwhile, Young points to

LifePoint

(LPNT)

as another vulnerable company. LifePoint counts Tennessee as one of its biggest markets and, according to its most recent annual report, relies on the state for a full 25% of its total Medicaid revenue. The company depends on just one other state, Kentucky, for more Medicaid dollars. And that state is attempting to reform its generous Medicaid program as well.

For its part, LifePoint says the TennCare cuts should not materially hurt performance. LifePoint says that TennCare currently accounts for just 1.5% of revenue companywide.

But Young insists that TennCare alone has kept some of LifePoint's marginal Tennessee hospitals in the black.

"It was the profit margin," he says. "It's what is keeping those hospitals afloat."

Going forward, Young believes that LifePoint's acquisition of Province could hurt the company as well. He points out that Province's percentage of "self-pay" admissions -- who often fail to pay at all -- has doubled in the last two years alone.

Meanwhile, a couple of LifePoint executive have decided to pocket some of their recent stock gains now. Division President Jone Law Koford sold more than $6 million worth of stock earlier this month. And Senior Vice President Scott Raplee executed a seven-figure sale as well.

LifePoint declined to comment on the recent sales. The company's stock, while down 23 cents to $44.22 on Tuesday morning, has climbed more than 20% in a year.

But Young, for one, sees darker days ahead.

"Medicaid has been an important source of revenue for all hospitals in Kentucky and Tennessee -- and especially so for the public companies, with average Medicaid discharges well above the states' averages," he says. "Reform will cost hospitals both in revenue and in uninsured expenses."

Massachusetts investment strategist Peter Cohan views the recent flurry of insider stock sales as an "unusually clear signal" of looming industry problems. He just wonders when ordinary investors will start to catch on.

"This tells me that everybody in the industry must be seeing the same things," says Cohan, who has no position in hospital stocks. "Frankly, I'm a little surprised that this information is still out there for insiders to exploit. ... This is the type of thing that investors should be paying attention to."