If I had the grim challenge of explaining Bill Frist's sale of stock, the ownership of which he was ostensibly unaware, I might start with S.1002, a bipartisan bill introduced by Grassley and Baucus, the ranking members of the Senate Finance Committee, on May 11, 2005.
The Street describes the bill and its possible impact on health care stocks in an article from May 26:
The hospital industry could pay dearly to cure a festering sore spot.
The group has long cried out for relief from physician-owned specialty hospitals that snag lucrative cardiology and orthopedics cases for themselves. In response, however, the government is now poised to go a step further by reducing the profitability of such cases for regular and specialty hospitals alike.
Indeed, Congress is currently weighing a bipartisan bill that would dramatically alter the entire Medicare payment system. Under the proposal, Medicare would pay hospitals on the basis of their cost to treat patients rather than the amount they charge to do so.
"This bill would make corrections to the payment system so that certain cases and patients are not significantly more profitable or less profitable to treat than others," says Chuck Grassley, an Iowa Republican who chairs the powerful Senate Finance Committee. "This will improve payment accuracy for all hospitals and will better reflect the actual cost of delivering care."
Grassley's proposal, based in part on recommendations from the Centers for Medicare and Medicaid Services, would rein in the growth of specialty hospitals while undercutting certain business strategies at regular hospitals as well...
UBS analyst Kenneth Weakley... warns of an unexpected backlash for the industry.
"If CMS is successful in altering the [diagnosis-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," Weakley wrote last week. "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."
Already, industry executives look skittish. Since CMS first made its recommendations in early March, senior managers at a number of hospital chains -- including Community (CYH:NYSE - commentary - research), LifePoint (LPNT:Nasdaq - commentary - research), HCA (HCA:NYSE - commentary - research) and Triad (TRI:NYSE - commentary - research) -- have been shedding large amounts of stock. All of those stocks set new 52-week highs this spring but have since begun to retreat.
Shares of industry leader HCA, where insider selling has been especially pronounced, fell 1.2% to $53.01 on Wednesday. The stock is now off 6.5% from the peak it hit last month.
The obvious defense - this bill created a huge conflict of interest for Frist, so he did the responsible thing and sold his shares.
However - if this bill created a new and problematic conflict of interest for the Senate Majority Leader on May 11, why did he wait until June 13 to order the sale of his stock? And might one argue that, as Majority Leader, he had inside information about the legislative prospects for this bill, and might one speculate that this inside information prompted his sale?
Well, if I were defending Frist, I might get fired, because this is a pretty lackluster effort. But it may be that the status of the bill was public info and the potential impact on his pocket book was obvious, so he sold his shares.
Or it may be that this bill will be DOA in the House. I throw this idea out there as a possible motivation for Frist's sale - there is nothing else in the company announcements or news headlines that catches my eye.
The Captain and Jon Henke want Frist to step down pending a resolution of this; anyone feeling some love for First, be sure to leave a comment or trackback, but my guess is that if Frist were gone today, he would be forgotten tomorrow (and with a fine defense like this, tomorrow may be here by yesterday...)
More reaction at Memeorandum.