Why Community Health Systems faces unique risks

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Key risks

Community Health Systems (CYH) faces a unique combination of company risks in addition to the industry-specific risks of the hospital industry. Investors are exposed to these industry-specific risks when they invest in the Healthcare Select Sector SPDR ETF (XLV).

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Geographic risk

Community Health Systems’ operations concentrate mainly in non-urban markets, with a few operations in select urban markets. LifePoint Hospitals (LPNT) is another major player in the non-urban market. Both these companies face the risk of a higher proportion of uninsured patients as a percentage of their total patients.

Community Health Systems’ operations concentrate in Texas, Pennsylvania, and Indiana, all of which have opted out of Medicaid expansion. According to the US Census Bureau, the average uninsured rate in 2013 in the US was 14.5%. Texas had one of the highest uninsured rates in the country, at 22.1%, and led to higher bad debt expenses for the company.

Post-merger integration risk

Community Health Systems acquires hospitals in non-urban and selected urban markets as part of its competitive strategy. In 2013, the company acquired Health Management Associates at a total price of $7.6 billion. In case of absence of cost savings and efficiencies in operations and cultural clashes in the workforce of the two companies, Community Health Systems will suffer losses that will be detrimental to its shareholders. The company’s peer, Tenet Healthcare (THC), is also exposed to a high degree of post-merger risk, as it completed a $4 billion acquisition of Vanguard Health Systems in 2013.

Legal risks

Community Health Systems will have to pay penalties and compensations in various legal matters regarding payment issues for Medicare and Medicaid services from itself and LifePoint prior to the acquisition. These could severely affect the company’s profitability. As of September 2014, the total value of the liability arising from LifePoint legal matters is about $291 million. In 2012, a peer of the company, HCA Holdings (HCA), also faced penalties worth $1.7 billion for legal matters related to unnecessary cardiac procedures performed by the hospital.

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