e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15925
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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13-3893191
(IRS Employer
Identification No.) |
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4000 Meridian Boulevard
Franklin, Tennessee
(Address of principal executive offices)
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37067
(Zip Code) |
Registrants telephone number, including area code:
(615) 465-7000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock, $.01 par value
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New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of the Form 10-K or any amendment to the Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant was
$2,341,348,569. Market value is determined by reference to the closing price on June 30, 2009 of
the Registrants Common Stock as reported by the New York Stock Exchange. The Registrant does not
(and did not at June 30, 2009) have any non-voting common stock
outstanding. As of February 17,
2010, there were 93,110,682 shares of common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III of this annual report is incorporated by reference from
portions of the Registrants definitive proxy statement for its 2010 annual meeting of stockholders
to be filed with the Securities and Exchange Commission within 120 days after the end of the
Registrants fiscal year ended December 31, 2009.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
COMMUNITY HEALTH SYSTEMS, INC.
Year ended December 31, 2009
PART I
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Item 1. |
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Business of Community Health Systems, Inc. |
Overview of Our Company
We are the largest publicly traded operator of hospitals in the United States in terms of
number of facilities and net operating revenues. We were incorporated in 1996 as a Delaware
corporation. We provide healthcare services through these hospitals that we own and operate in
non-urban and selected urban markets throughout the United States. As of December 31, 2009, we
owned or leased 122 hospitals. These hospitals are geographically diversified across 29 states,
with an aggregate of 18,140 licensed beds. We generate revenues by providing a broad range of
general and specialized hospital healthcare services to patients in the communities in which we are
located. Services provided by our hospitals include general acute care services, emergency room
services, general and specialty surgery, critical care, internal medicine, obstetrics and
diagnostic services. As part of providing these services, we also own physician practices, imaging
centers, and ambulatory surgery centers. Through our management and operation of these businesses,
we provide: standardization and centralization of operations across key business areas; strategic
assistance to expand and improve services and facilities; implementation of quality of care
improvement programs; and assistance in the recruitment of additional physicians to the markets in
which our hospitals are located. In a number of our markets, we have partnered with local
physicians or not-for-profit providers, or both, in the ownership of our facilities. In addition to
our hospitals and related businesses, we also own and operate home care agencies, including four
home care agencies located in markets where we do not operate a hospital. Through our wholly-owned
subsidiary, Quorum Health Resources, LLC, or QHR, we also provide management and consulting
services to non-affiliated general acute care hospitals located throughout the United States. The
home care agencies and the management services businesses constitute operating segments but are not
considered reportable segments since they do not meet the quantitative thresholds for a separate
identifiable reportable segment. The financial information for our reportable operating segments is
presented in Note 14 of the Notes to our Consolidated Financial Statements included under Item 8 of
this Report.
Our strategy has also included growth by acquisition. We target hospitals in growing,
non-urban and select urban healthcare markets for acquisition because of their favorable
demographic and economic trends and competitive conditions. Because these service areas have
smaller populations, there are generally fewer hospitals and other healthcare service providers in
these communities and generally a lower level of managed care presence in these markets. We believe
that smaller populations support less direct competition for hospital-based services. Also, we
believe that these communities generally view the local hospital as an integral part of the
community.
Over the past three years, we have acquired 57 hospitals, including our July 25, 2007
acquisition of Triad Hospitals, Inc., or Triad, which owned and operated 50 hospitals with 49
hospitals located in 17 states in non-urban and middle market communities and one hospital located
in the Republic of Ireland. As of December 31, 2009, we still own 42 of the 50 hospitals acquired
from Triad. These acquisitions have expanded our operations into six states where we previously did
not own facilities.
Throughout this Form 10-K, we refer to Community Health Systems, Inc., or Parent Company, and
its consolidated subsidiaries in a simplified manner and on a collective basis, using words like
we and our. This drafting style is suggested by the Securities and Exchange Commission, or SEC,
and is not meant to indicate that the publicly traded Parent Company or any other subsidiary of the
Parent Company owns or operates any asset, business, or property. The hospitals, operations, and
businesses described in this filing are owned and operated, and management services provided, by
distinct and indirect subsidiaries of Community Health Systems, Inc.
Available Information
Our Internet address is www.chs.net and the investor relations section of our website is
located at www.chs.net/investor/index.html. We make available free of charge, through the investor
relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K as well as amendments to those reports, as soon as reasonably practical
after they are filed with the SEC. Our filings are also available to the public at the website
maintained by the SEC, www.sec.gov.
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We also make available free of charge, through the investor relations section of our website,
our Governance Principles, our Code of Conduct and the charters of our Audit and Compliance
Committee, Compensation Committee and Governance and Nominating Committee.
We have included the Chief Executive Officer and the Chief Financial Officer certifications
regarding the public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as
Exhibits 31.1 and 31.2 of this report.
Our Business Strategy
With the objective of increasing shareholder value and improving care, the key elements of our
business strategy are to:
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increase revenue at our facilities; |
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grow through selective acquisitions. |
Increase Revenue at Our Facilities
Overview. We seek to increase revenue at our facilities by providing a broader range of
services in a more attractive care setting, as well as by supporting and recruiting physicians. We
identify the healthcare needs of the community by analyzing demographic data and patient referral
trends. We also work with local hospital boards, management teams, and medical staffs to determine
the number and type of additional physician specialties needed. Our initiatives to increase revenue
include:
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recruiting additional primary care physicians and specialists; |
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expanding the breadth of services offered at our hospitals through targeted capital
expenditures to support the addition of more complex services, including orthopedics,
cardiovascular services, and urology; and |
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providing the capital to invest in technology and the physical plant at the facilities,
particularly in our emergency rooms, surgery departments, critical care departments, and
diagnostic services. |
Physician Recruiting. The primary method of adding or expanding medical services is the
recruitment of new physicians into the community. A core group of primary care physicians is
necessary as an initial contact point for all local healthcare. The addition of specialists who
offer services, including general surgery, OB/GYN, cardiovascular services, orthopedics and
urology, completes the full range of medical and surgical services required to meet a communitys
core healthcare needs. At the time we acquire a hospital and from time to time thereafter, we
identify the healthcare needs of the community by analyzing demographic data and patient referral
trends. As a result of this analysis, we are able to determine what we believe to be the optimum
mix of primary care physicians and specialists. We employ recruiters at the corporate level to
support the local hospital managers in their recruitment efforts. We have increased the number of
physicians affiliated with us through our recruiting efforts, net of turnover, by approximately 772
in 2009, 686 in 2008, and 440 in 2007. The percentage of recruited or other physicians commencing
practice with us that were specialists was over 50% in 2009. Although in recent years we have begun
employing more physicians, most of the physicians in our communities are in private practice and
are not our employees. We have been successful in recruiting physicians because of the practice
opportunities afforded physicians in our markets, as well as lower managed care penetration as
compared to larger urban areas.
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Emergency Room Initiatives. Approximately 55% of our hospital admissions originate in the
emergency room. Therefore, we systematically take steps to increase patient flow in our emergency
rooms as a means of optimizing utilization rates for our hospitals. Furthermore, the impression of
our overall operations by our customers is substantially influenced by our emergency rooms since
generally that is their first experience with our hospitals. The steps we take to increase patient
flow in our emergency rooms include renovating and expanding our emergency room facilities,
improving service and reducing waiting times, as well as publicizing our emergency room
capabilities in the local community. We have expanded or renovated 12 of our emergency rooms during
the past three years, including five in 2009. We have also implemented marketing campaigns that
emphasize the speed, convenience, and quality of our emergency rooms to enhance each communitys
awareness of our emergency room services.
One component of upgrading our emergency rooms is the implementation of specialized computer
software programs designed to assist physicians in making diagnoses and determining treatments. The
software also benefits patients and hospital personnel by assisting in proper documentation of
patient records and tracking patient flow. It enables our nurses to provide more consistent patient
care and provides clear instructions to patients at time of discharge to help them better
understand their treatments.
Expansion of Services. In an effort to better meet the healthcare needs of the communities we
serve and to capture a greater portion of the healthcare spending in our markets, we have added a
broad range of services to our facilities. These services range from various types of diagnostic
equipment capabilities to additional and renovated emergency rooms, surgical and critical care
suites and specialty services. For example, in 2009, we spent $260.4 million as a part of 34 major
construction projects. The 2009 projects included new emergency rooms, cardiac cathertization labs,
intensive care units, hospital additions, and surgical suites. These projects improved various
diagnostic and other inpatient and outpatient service capabilities. We continue to believe that
appropriate capital investments in our facilities combined with the development of our service
capabilities will reduce the migration of patients to competing providers while providing an
attractive return on investment. We also employ a small group of clinical consultants at our
corporate headquarters to assist the hospitals in their development
of surgery, emergency, critical care, cardiovascular, and hospitalist services. In addition to spending capital on
expanding services at our existing hospitals, we also build replacement facilities to better meet
the healthcare needs of our communities. In 2009, we spent $4.8 million on planning costs for
future construction projects related to three replacement hospitals, which we are required to build
pursuant to either a hospital purchase agreement or an amendment to a lease agreement. The total
cost of these three replacement hospitals is estimated to be $310.0 million.
Managed Care Strategy. Managed care has seen growth across the U.S. as health plans expand
service areas and membership in an attempt to control rising medical costs. As we service primarily
non-urban markets, we do not have significant relationships with managed care organizations,
including Medicare Advantage. We have responded with a proactive and carefully considered strategy
developed specifically for each of our facilities. Our experienced corporate managed care
department reviews and approves all managed care contracts, which are organized and monitored using
a central database. The primary mission of this department is to select and evaluate appropriate
managed care opportunities, manage existing reimbursement arrangements and negotiate increases.
Generally, we do not intend to enter into capitated or risk sharing contracts. However, some
purchased hospitals have risk sharing contracts at the time of our acquisition of them. We seek to
discontinue these contracts to eliminate risk retention related to payment for patient care. We do
not believe that we have, at the present time, any risk sharing contracts that would have a
material impact on our results of operations.
Improve Profitability
Overview. To improve efficiencies and increase operating margins, we implement cost
containment programs and adhere to operating philosophies that include:
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standardizing and centralizing our operations; |
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optimizing resource allocation by utilizing our company-devised case and resource
management program, which assists in improving clinical care and containing expenses;
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capitalizing on purchasing efficiencies through the use of company-wide standardized
purchasing contracts and terminating or renegotiating specified vendor contracts; |
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installing a standardized management information system, resulting in more efficient
billing and collection procedures; and |
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monitoring and enhancing productivity of our human resources. |
In addition, each of our hospital management teams is supported by our centralized
operational, reimbursement, regulatory and compliance expertise, as well as by our senior
management team, which has an average of over 25 years of experience in the healthcare industry.
Standardization and Centralization. Our standardization and centralization initiatives
encompass nearly every aspect of our business, from developing standard policies and procedures
with respect to patient accounting and physician practice management to implementing standard
processes to initiate, evaluate and complete construction projects. Our standardization and
centralization initiatives are a key element in improving our operating results.
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Billing and Collections. We have adopted standard policies and procedures with respect
to billing and collections. We have also automated and standardized various components of
the collection cycle, including statement and collection letters and the movement of
accounts through the collection cycle. Upon completion of an acquisition, our management
information system team converts the hospitals existing information system to our
standardized system. This enables us to quickly implement our business controls and cost
containment initiatives. |
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Physician Support. We support our newly recruited physicians to enhance their transition
into our communities. We have implemented physician practice management seminars and
training. We host these seminars bi-monthly. All newly recruited physicians who enter into
contracts with us are required to attend a three-day introductory seminar that covers issues
involved in starting up a practice. |
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Procurement and Materials Management. We have standardized and centralized our
operations with respect to medical supplies, equipment and pharmaceuticals used in our
hospitals. We have a participation agreement with HealthTrust Purchasing Group, L.P., or
HealthTrust, a group purchasing organization, or GPO. HealthTrust contracts with certain
vendors who supply a substantial portion of our medical supplies, equipment and
pharmaceuticals. Our agreement with HealthTrust extends to January 2011, with automatic
renewal terms of one year unless either party terminates by giving notice of non-renewal. |
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Facilities Management. We have standardized interiors, lighting and furniture programs.
We have also implemented a standard process to initiate, evaluate and complete construction
projects. Our corporate staff monitors all construction projects, and reviews and pays all
construction project invoices. Our initiatives in this area have reduced our construction
costs while maintaining the same level of quality and have shortened the time it takes us to
complete these projects. |
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Other Initiatives. We have also improved margins by implementing standard programs with
respect to ancillary services in areas, including emergency rooms, pharmacy, laboratory,
imaging, home care, skilled nursing, centralized outpatient scheduling and health
information management. We have reduced costs associated with these services by improving
contract terms and standardizing information systems. We work to identify and communicate
best practices and monitor these improvements throughout the Company. |
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Internal Controls Over Financial Reporting. We have centralized many of our significant
internal controls over financial reporting and standardized those other controls that are
performed at our hospital locations. We continuously monitor compliance with and evaluate
the effectiveness of our internal controls over financial reporting. |
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Case and Resource Management. Our case and resource management program is a company-devised
program developed with the goal of improving clinical care and cost containment. The program
focuses on:
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appropriately treating patients along the care continuum; |
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reducing inefficiently applied processes, procedures and resources; |
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developing and implementing standards for operational best practices; and |
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using on-site clinical facilitators to train and educate care practitioners on identified
best practices. |
Our case and resource management program integrates the functions of utilization review,
discharge planning, overall clinical management, and resource management into a single effort to
improve the quality and efficiency of care. Issues evaluated in this process include patient
treatment, patient length of stay and utilization of resources.
Under our case and resource management program, patient care begins with a clinical assessment
of the appropriate level of care, discharge planning, and medical necessity for planned services.
Beginning when a patient presents to the hospital, we conduct ongoing reviews for medical necessity
using appropriateness criteria. We reassess and adjust discharge plan options as the needs of the
patient change. We closely monitor cases to prevent delayed service or inappropriate utilization of
resources. Once the patient attains clinical improvement, we work with the attending physician to
evaluate further needs for acute care treatment through discussions with the facilitys physician
advisor. Finally, we refer the patient to the appropriate post-hospitalization resources.
Improve Quality
We have implemented various programs to ensure continuous improvement in the quality of care
provided. We have developed training programs for all senior hospital management, chief nursing
officers, quality directors, physicians and other clinical staff. We share information among our
hospital management to implement best practices and assist in complying with regulatory
requirements. We have standardized accreditation documentation and requirements. All hospitals
conduct patient, physician, and staff satisfaction surveys to help identify methods of improving
the quality of care.
Each of our hospitals is governed by a board of trustees, which includes members of the
hospitals medical staff. The board of trustees establishes policies concerning the hospitals
medical, professional, and ethical practices, monitors these practices, and is responsible for
ensuring that these practices conform to legally required standards. We maintain quality assurance
programs to support and monitor quality of care standards and to meet Medicare and Medicaid
accreditation and regulatory requirements. Patient care evaluations and other quality of care
assessment activities are reviewed and monitored continuously.
Grow Through Selective Acquisitions
Acquisition Criteria. Each year we intend to acquire, on a selective basis, two to four
hospitals that fit our acquisition criteria. Generally, we pursue acquisition candidates that:
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have a service area population between 20,000 and 400,000 with a stable or growing
population base; |
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are the sole or primary provider of acute care services in the community; |
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are located in an area with the potential for service expansion; |
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are not located in an area that is dependent upon a single employer or industry; and |
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have financial performance that we believe will benefit from our managements operating
skills. |
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In each year since 1997, we have met or exceeded our acquisition goals. Occasionally, we have
pursued acquisition opportunities outside of our specified criteria when such opportunities have
had uniquely favorable characteristics. In addition to two hospitals acquired from local
governmental entities in 2007, we also acquired Triad, which owned and operated 50 hospitals, of
which 49 hospitals were located in 17 states across the U.S. and one hospital was located in the
Republic of Ireland. Since our acquisition of Triads 50 hospital portfolio in July, 2007, we have
focused most of our efforts on integrating those hospitals, as opposed to pursuing further
acquisition opportunities. In the fourth quarter of 2008, we completed the acquisition of a two
hospital system located in Spokane, Washington. In 2009, we acquired two hospitals located in
Wilkes-Barre, Pennsylvania and Siloam Springs, Arkansas and purchased the remaining equity in a
hospital located in El Dorado, Arkansas in which we previously had a noncontrolling interest.
Disciplined Acquisition Approach. We have been disciplined in our approach to acquisitions.
We have a dedicated team of internal and external professionals who complete a thorough review of
the hospitals financial and operating performance, the demographics and service needs of the
market and the physical condition of the facilities. Based on our historical experience, we then
build a pro forma financial model that reflects what we believe can be accomplished under our
ownership. Whether we buy or lease the existing facility or agree to construct a replacement
hospital, we believe we have been disciplined in our approach to pricing. We typically begin the
acquisition process by entering into a non-binding letter of intent with an acquisition candidate.
After we complete business and financial due diligence and financial modeling, we decide whether or
not to enter into a definitive agreement. Once an acquisition is completed, we have an organized
and systematic approach to transitioning and integrating the new hospital into our system of
hospitals.
Acquisition Efforts. Most of our acquisition targets are municipal or other not-for-profit
hospitals. We believe that our access to capital, ability to recruit physicians and reputation for
providing quality care make us an attractive partner for these communities. In addition, we have
found that communities located in states where we already operate a hospital are more receptive to
us, when they consider selling their hospital, because they are aware of our operating track record
with respect to our hospitals within the state.
At the time we acquire a hospital, we may commit to an amount of capital expenditures, such as
a replacement facility, renovations, or equipment over a specified period of time. As obligations
under two hospital purchase agreements in effect as of December 31, 2009, we are required to build
a replacement facility in Valparaiso, Indiana by April 2011 and in Siloam Springs, Arkansas by
February 2013. Also, as required by an amendment to a lease agreement entered into in 2005, we
agreed to build a replacement hospital at our Barstow, California location. Estimated construction
costs, including equipment costs, are approximately $310.0 million for these three replacement
hospitals, of which approximately $12.6 million has been incurred to date. In addition, under other
purchase agreements in effect as of December 31, 2009, we have committed to spend $468.5 million,
generally over a five to seven year period after acquisition, for costs such as capital
improvements, equipment, selected leases and physician recruiting. Through December 31, 2009, we
have incurred approximately $171.4 million related to these commitments. In October 2008, after the
purchase of the noncontrolling owners interest in our Birmingham, Alabama facility, we initiated
the purchase of a site for a potential replacement to our existing Birmingham facility. The new
site includes a partially constructed hospital structure. This project is subject to the approval
of a certificate of need, or CON, expected to be granted by mid to late 2010. Upon receiving the
CON, and after resolution of any legal issues, we will complete our assessment of the costs to
complete construction of the unfinished facility and relocate our existing Birmingham facility to the new site.
Industry Overview
The Centers for Medicare and Medicaid Services, or CMS, reported that in 2008 total
U.S. healthcare expenditures grew by 4.4% to approximately $2.3 trillion. CMS also projected total
U.S. healthcare spending to grow by 5.5% in 2009 and by an average of 6.3% annually from 2010
through 2018. By these estimates, healthcare expenditures will account for approximately $4.4
trillion, or 20.3% of the total U.S. gross domestic product, by 2018.
Hospital services, the market in which we operate, is the largest single category of
healthcare at 30% of total healthcare spending in 2008, or
approximately $718.4 billion, as reported by CMS. CMS
projects the hospital services category to grow by at least 5.1% per year through 2018. It expects
growth in hospital healthcare spending to continue due to the aging of the U.S. population and
consumer demand for expanded medical services. As hospitals remain the
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primary setting for healthcare delivery, CMS expects hospital services to remain the largest
category of healthcare spending.
U.S. Hospital Industry. The U.S. hospital industry is broadly defined to include acute care,
rehabilitation, and psychiatric facilities that are either public (government owned and operated),
not-for-profit private (religious or secular), or for-profit institutions (investor owned).
According to the American Hospital Association, there are approximately 5,000 inpatient hospitals
in the U.S. which are not-for-profit owned, investor owned, or state or local government owned. Of
these hospitals, approximately 40% are located in non-urban communities. We believe that a majority
of these hospitals are owned by not-for-profit or governmental entities. These facilities offer a
broad range of healthcare services, including internal medicine, general surgery, cardiology,
oncology, orthopedics, OB/GYN, and emergency services. In addition, hospitals also offer other
ancillary services, including psychiatric, diagnostic, rehabilitation, home care, and outpatient
surgery services.
Urban vs. Non-Urban Hospitals
According to the U.S. Census Bureau, 21% of the U.S. population lives in communities
designated as non-urban. In these non-urban communities, hospitals are typically the primary source
of healthcare. In many cases a single hospital is the only provider of general healthcare services
in these communities.
Factors Affecting Performance. Among the many factors that can influence a hospitals
financial and operating performance are:
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facility size and location; |
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facility ownership structure (i.e., tax-exempt or investor owned); |
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a facilitys ability to participate in group purchasing organizations; and |
We believe that non-urban hospitals are generally able to obtain higher operating margins than
urban hospitals. Factors contributing to a non-urban hospitals margin advantage include fewer
patients with complex medical problems, a lower cost structure, limited competition, and favorable
Medicare payment provisions. Patients needing the most complex care are more often served by the
larger and/or more specialized urban hospitals. A non-urban hospitals lower cost structure results
from its geographic location, as well as the lower number of patients treated who need the most
highly advanced services. Additionally, because non-urban hospitals are generally sole providers or
one of a small group of providers in their markets, there is limited competition. This generally
results in more favorable pricing with commercial payors. Medicare has special payment provisions
for sole community hospitals. Under present law, hospitals that qualify for this designation can
receive higher reimbursement rates. As of December 31, 2009, 26 of our hospitals were sole
community hospitals. In addition, we believe that non-urban communities are generally
characterized by a high level of patient and physician loyalty that fosters cooperative
relationships among the local hospitals, physicians, employees and patients.
The type of third party responsible for the payment of services performed by healthcare
service providers is also an important factor which affects hospital operating margins. These
payors have increasingly exerted pressure on healthcare service providers to reduce the cost of
care. The most active payors in this regard have been HMOs, PPOs, and other managed care
organizations. The characteristics of non-urban markets make them less attractive to these managed
care organizations. This is partly because the limited size of non-urban markets and their diverse,
non-national employer bases minimize the ability of managed care organizations to achieve economies
of scale as compared to economies of scale that can be achieved in many urban markets.
Hospital Industry Trends
Demographic Trends. According to the U.S. Census Bureau, there are presently approximately
38.9 million Americans aged 65 or older in the U.S. who comprise approximately 12.8% of the total
U.S. population. By the year
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2030, the number of elderly is expected to climb to 72.1 million, or 19.3% of the total
population. Due to the increasing life expectancy of Americans, the number of people aged 85 years
and older is also expected to increase from 5.5 million to 8.7 million by the year 2030. This
increase in life expectancy will increase demand for healthcare services and, as importantly, the
demand for innovative, more sophisticated means of delivering those services. Hospitals, as the
largest category of care in the healthcare market, will be among the main beneficiaries of this
increase in demand. Based on data compiled for us, the populations of the service areas where our
hospitals are located grew by 24.8% from 1990 to 2008 and are expected to grow by 6.1% from 2008 to
2013. The number of people aged 65 or older in these service areas grew by 25.1% from 1990 to 2008
and is expected to grow by 11.3% from 2008 to 2013.
Consolidation. During recent years a significant amount of private equity capital has been
invested into the hospital industry. Also, in addition to our own acquisition of Triad in 2007,
consolidation activity, primarily through mergers and acquisitions involving both for-profit and
not-for-profit hospital systems is continuing. Reasons for this activity included:
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excess capacity of available capital; |
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financial performance issues, including challenges associated with changes in
reimbursement and collectability of self-pay revenue; |
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the desire to enhance the local availability of healthcare in the community; |
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the need and ability to recruit primary care physicians and specialists; |
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the need to achieve general economies of scale and to gain access to standardized and
centralized functions, including favorable supply agreements and access to malpractice
coverage; and |
As a result of the global economic conditions over this past year, we have seen a decline in
the trend of consolidation activity, including mergers and acquisitions. We anticipate that future
consolidation activity will be highly dependent on the availability of capital from the financial
markets, hospital valuation levels, as well as the impact from any healthcare reform.
Selected Operating Data
The following table sets forth operating statistics for our hospitals for each of the years
presented, which are included in our continuing operations. Statistics for 2009 include a full year
of operations for 119 hospitals and partial periods for two hospitals acquired during the year and
one hospital in which we previously had a noncontrolling interest and purchased the remaining
interest during the year. Statistics for 2008 include a full year of operations for 117 hospitals
and partial periods for two hospitals acquired during the year. Statistics for 2007 include a full
year of operations for 70 hospitals and partial periods for 46 hospitals acquired during the year.
Statistics for hospitals which have been sold are excluded from all periods presented.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
(Dollars in thousands) |
|
Consolidated Data |
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals (at end of period) |
|
|
122 |
|
|
|
119 |
|
|
|
116 |
|
Licensed beds (at end of period)(1) |
|
|
18,140 |
|
|
|
17,411 |
|
|
|
17,148 |
|
Beds in service (at end of period)(2) |
|
|
15,897 |
|
|
|
15,194 |
|
|
|
14,600 |
|
Admissions(3) |
|
|
692,569 |
|
|
|
668,526 |
|
|
|
461,058 |
|
Adjusted admissions(4) |
|
|
1,275,888 |
|
|
|
1,207,756 |
|
|
|
846,835 |
|
Patient days(5) |
|
|
2,937,194 |
|
|
|
2,835,795 |
|
|
|
1,934,120 |
|
Average length of stay (days)(6) |
|
|
4.2 |
|
|
|
4.2 |
|
|
|
4.2 |
|
Occupancy rate (beds in service)(7) |
|
|
51.3 |
% |
|
|
52.3 |
% |
|
|
52.1 |
% |
Net operating revenues |
|
$ |
12,107,613 |
|
|
$ |
10,919,095 |
|
|
$ |
7,095,861 |
|
Net inpatient revenues as a % of total net operating
revenues |
|
|
50.1 |
% |
|
|
50.2 |
% |
|
|
49.2 |
% |
Net outpatient revenues as a % of total net operating revenues |
|
|
47.6 |
% |
|
|
47.5 |
% |
|
|
48.8 |
% |
Net Income attributable to Community Health Systems, Inc. |
|
$ |
243,150 |
|
|
$ |
218,304 |
|
|
$ |
30,289 |
|
Net Income
attributable to Community Health Systems, Inc. as a % of
total net operating revenues |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity Data |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(8) |
|
$ |
1,671,397 |
|
|
$ |
1,513,329 |
|
|
$ |
810,066 |
|
Adjusted EBITDA as a % of total net operating
revenues(8) |
|
|
13.8 |
% |
|
|
13.9 |
% |
|
|
11.4 |
% |
Net cash flows provided by operating activities |
|
$ |
1,076,429 |
|
|
$ |
1,056,581 |
|
|
$ |
688,438 |
|
Net cash flows provided by operating activities as a % of total net
operating revenues |
|
|
8.9 |
% |
|
|
9.7 |
% |
|
|
9.7 |
% |
Net cash flows used in investing activities |
|
$ |
(867,182 |
) |
|
$ |
(665,471 |
) |
|
$ |
(7,498,858 |
) |
Net cash flows provided by (used in) financing activities |
|
$ |
(85,361 |
) |
|
$ |
(304,029 |
) |
|
$ |
6,903,428 |
|
|
|
|
See pages 10 and 11 for footnotes. |
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
(Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
Increase |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Same-Store Data(9) |
|
|
|
|
|
|
|
|
|
|
|
|
Admissions(3) |
|
|
658,215 |
|
|
|
668,526 |
|
|
|
(1.5 |
)% |
Adjusted admissions(4) |
|
|
1,215,606 |
|
|
|
1,207,750 |
|
|
|
0.7 |
% |
Patient days(5) |
|
|
2,768,470 |
|
|
|
2,835,795 |
|
|
|
|
|
Average length of stay (days)(6) |
|
|
4.2 |
|
|
|
4.2 |
|
|
|
|
|
Occupancy rate (beds in service)(7) |
|
|
51.1 |
% |
|
|
52.3 |
% |
|
|
|
|
Net operating revenues |
|
$ |
11,556,401 |
|
|
$ |
10,917,362 |
|
|
|
5.9 |
% |
Income from operations |
|
$ |
1,078,969 |
|
|
$ |
969,737 |
|
|
|
11.3 |
% |
Income from operations as a % of net
operating revenues |
|
|
9.3 |
% |
|
|
8.9 |
% |
|
|
|
|
Depreciation and amortization |
|
$ |
545,408 |
|
|
$ |
499,386 |
|
|
|
|
|
Equity in earnings of unconsolidated affiliates |
|
$ |
36,145 |
|
|
$ |
43,777 |
|
|
|
|
|
|
|
|
(1) |
|
Licensed beds are the number of beds for which the appropriate state agency licenses a facility
regardless of whether the beds are actually available for patient use. |
|
(2) |
|
Beds in service are the number of beds that are readily available for patient use. |
|
(3) |
|
Admissions represent the number of patients admitted for inpatient treatment. |
|
(4) |
|
Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed
adjusted admissions by multiplying admissions by gross patient revenues and then dividing that
number by gross inpatient revenues. |
|
(5) |
|
Patient days represent the total number of days of care provided to inpatients. |
|
(6) |
|
Average length of stay (days) represents the average number of days inpatients stay in our hospitals. |
|
(7) |
|
We calculated occupancy rate percentages by dividing the average daily number of inpatients by the
weighted average of beds in service. |
|
(8) |
|
EBITDA consists of net income attributable to Community Health Systems, Inc. before interest, income
taxes, depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to exclude discontinued
operations, gain/loss from early extinguishment of debt and net income attributable to
noncontrolling interests. We have from time to time sold noncontrolling interests in certain of our
subsidiaries or acquired subsidiaries with existing noncontrolling interest ownership positions. We
believe that it is useful to present adjusted EBITDA because it excludes the portion of EBITDA
attributable to these third party interests and clarifies for investors our portion of EBITDA
generated by continuing operations. We use adjusted EBITDA as a measure of liquidity. We have
included this measure because we believe it provides investors with additional information about our
ability to incur and service debt and make capital expenditures. Adjusted EBITDA is the basis for a
key component in the determination of our compliance with some of the covenants under our senior
secured credit facility, as well as to determine the interest rate and commitment fee payable under
the senior secured credit facility (although adjusted EBITDA does not include all of the adjustments
described in the senior secured credit facility). |
|
|
|
Adjusted EBITDA is not a measurement of financial performance or liquidity under generally accepted
accounting principles. It should not be considered in isolation or as a substitute for net income,
operating income, cash flows from operating, investing or financing activities, or any other measure
calculated in accordance with generally accepted accounting principles. The items excluded from
adjusted EBITDA are significant components in understanding and evaluating financial performance and
liquidity. Our calculation of adjusted EBITDA may not be comparable to similarly titled measures
reported by other companies. |
10
|
|
|
|
|
The following table reconciles adjusted EBITDA, as defined, to our net cash provided by operating
activities as derived directly from our consolidated financial statements for the years ended
December 31, 2009, 2008 and 2007 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Adjusted EBITDA |
|
$ |
1,671,397 |
|
|
$ |
1,513,329 |
|
|
$ |
810,066 |
|
Interest expense, net |
|
|
(648,964 |
) |
|
|
(652,468 |
) |
|
|
(362,065 |
) |
Provision for income taxes |
|
|
(141,325 |
) |
|
|
(125,273 |
) |
|
|
(39,860 |
) |
Deferred income taxes |
|
|
34,268 |
|
|
|
159,870 |
|
|
|
(39,894 |
) |
Income (loss) from operations of hospitals sold or held
for sale |
|
|
1,977 |
|
|
|
9,427 |
|
|
|
(4,199 |
) |
Income tax (expense) benefit on the non-cash impairment
and (gain) loss on sale of hospitals |
|
|
|
|
|
|
(8,107 |
) |
|
|
4,457 |
|
Depreciation and amortization of discontinued operations |
|
|
332 |
|
|
|
7,308 |
|
|
|
19,258 |
|
Stock compensation expense |
|
|
44,501 |
|
|
|
52,105 |
|
|
|
38,771 |
|
Income tax payable increase (excess tax benefits)
relating to stock-based compensation |
|
|
3,472 |
|
|
|
(1,278 |
) |
|
|
(1,216 |
) |
Other non-cash (income) expenses, net |
|
|
22,870 |
|
|
|
3,577 |
|
|
|
19,018 |
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable |
|
|
58,390 |
|
|
|
(49,578 |
) |
|
|
128,743 |
|
Supplies, prepaid expenses and other current assets |
|
|
(34,535 |
) |
|
|
(34,397 |
) |
|
|
(31,734 |
) |
Accounts payable, accrued liabilities and income taxes |
|
|
86,098 |
|
|
|
119,869 |
|
|
|
122,282 |
|
Other |
|
|
(22,052 |
) |
|
|
62,197 |
|
|
|
24,811 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
1,076,429 |
|
|
$ |
1,056,581 |
|
|
$ |
688,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
|
Includes former Triad hospitals data, as if we owned them as of
January 1, 2007 (acquisition date was July 25, 2007) and other
acquired hospitals to the extent we operated them during comparable
periods in both years. We have restated our 2008 and 2007 financial
statements and statistical results to include a hospital and related
businesses, which were previously reported as discontinued operations
and is now included in continuing operations. |
Sources of Revenue
We receive payment for healthcare services provided by our hospitals from:
|
|
|
the federal Medicare program; |
|
|
|
|
state Medicaid or similar programs; |
|
|
|
healthcare insurance carriers, health maintenance organizations or HMOs, preferred
provider organizations or PPOs, and other managed care programs; and |
11
The following table presents the approximate percentages of net operating revenue received
from Medicare, Medicaid, managed care, self-pay and other sources for the periods indicated. The
data for the years presented are not strictly comparable due to the significant effect that
hospital acquisitions have had on these statistics.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues by Payor Source |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medicare |
|
|
27.1 |
% |
|
|
27.5 |
% |
|
|
29.0 |
% |
Medicaid |
|
|
9.8 |
% |
|
|
9.1 |
% |
|
|
10.3 |
% |
Managed Care and other third party payors |
|
|
51.9 |
% |
|
|
52.7 |
% |
|
|
50.7 |
% |
Self-pay |
|
|
11.2 |
% |
|
|
10.7 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
As shown above, we receive a substantial portion of our revenue from the Medicare and Medicaid
programs. Included in Managed Care and other third party payors is net operating revenue from
insurance companies from which we have insurance provider contracts, Managed Care Medicare,
insurance companies for which we do not have insurance provider contracts, workers compensation
carriers, and non-patient service revenue, such as rental income and cafeteria sales.
Medicare is a federal program that provides medical insurance benefits to persons age 65 and
over, some disabled persons, and persons with end-stage renal disease. Medicaid is a federal-state
funded program, administered by the states, which provides medical benefits to individuals who are
unable to afford healthcare. All of our hospitals are certified as providers of Medicare and
Medicaid services. Amounts received under the Medicare and Medicaid programs are generally
significantly less than a hospitals customary charges for the services provided. Since a
substantial portion of our revenue comes from patients under Medicare and Medicaid programs, our
ability to operate our business successfully in the future will depend in large measure on our
ability to adapt to changes in these programs.
In addition to government programs, we are paid by private payors, which include insurance
companies, HMOs, PPOs, other managed care companies, employers, and by patients directly. Blue
Cross payors are included in Managed Care and other third party payors line in the above table.
Patients are generally not responsible for any difference between customary hospital charges and
amounts paid for hospital services by Medicare and Medicaid programs, insurance companies, HMOs,
PPOs, and other managed care companies, but are responsible for services not covered by these
programs or plans, as well as for deductibles and co-insurance obligations of their coverage. The
amount of these deductibles and co-insurance obligations has increased in recent years. Collection
of amounts due from individuals is typically more difficult than collection of amounts due from
government or business payors. To further reduce their healthcare costs, an increasing number of
insurance companies, HMOs, PPOs, and other managed care companies are negotiating discounted fee
structures or fixed amounts for hospital services performed, rather than paying healthcare
providers the amounts billed. We negotiate discounts with managed care companies, which are
typically smaller than discounts under governmental programs. If an increased number of insurance
companies, HMOs, PPOs, and other managed care companies succeed in negotiating discounted fee
structures or fixed amounts, our results of operations may be negatively affected. For more
information on the payment programs on which our revenues depend, see Payment on page 17.
As of December 31, 2009, Indiana and Texas represented our only areas of geographic
concentration. Net operating revenues as a percentage of consolidated net operating revenues
generated in Indiana were 10.9% in 2009, 10.9% in 2008 and 7.8% in 2007. Net operating revenues as
a percentage of consolidated net operating revenues generated in Texas were 13.2% in 2009, 13.3% in
2008 and 12.5% in 2007. As a result of our growth and expansion of services in other states,
Pennsylvania no longer represents an area of geographic concentration, as it did at December 31,
2007.
Hospital revenues depend upon inpatient occupancy levels, the volume of outpatient procedures,
and the charges or negotiated payment rates for hospital services provided. Charges and payment
rates for routine inpatient services vary significantly depending on the type of service performed
and the geographic location of the hospital. In recent years, we have experienced a significant
increase in revenue received from outpatient services. We attribute this increase to:
|
|
|
advances in technology, which have permitted us to provide more services on an outpatient
basis; and |
12
|
|
|
pressure from Medicare or Medicaid programs, insurance companies, and managed care plans
to reduce hospital stays and to reduce costs by having services provided on an outpatient
rather than on an inpatient basis. |
Government Regulation
Overview. The healthcare industry is required to comply with extensive government regulation
at the federal, state, and local levels. Under these regulations, hospitals must meet requirements
to be certified as hospitals and qualified to participate in government programs, including the
Medicare and Medicaid programs. These
requirements relate to the adequacy of medical care, equipment, personnel, operating policies
and procedures, maintenance of adequate records, hospital use, rate-setting, compliance with
building codes, and environmental protection laws. There are also extensive regulations governing a
hospitals participation in these government programs. If we fail to comply with applicable laws
and regulations, we can be subject to criminal penalties and civil sanctions, our hospitals can
lose their licenses and we could lose our ability to participate in these government programs. In
addition, government regulations may change. If that happens, we may have to make changes in our
facilities, equipment, personnel, and services so that our hospitals remain certified as hospitals
and qualified to participate in these programs. We believe that our hospitals are in substantial
compliance with current federal, state, and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state, and local authorities to
determine their compliance with applicable regulations and requirements necessary for licensing and
certification. All of our hospitals are licensed under appropriate state laws and are qualified to
participate in Medicare and Medicaid programs. In addition, most of our hospitals are accredited by
the Joint Commission on Accreditation of Healthcare Organizations. This accreditation indicates
that a hospital satisfies the applicable health and administrative standards to participate in
Medicare and Medicaid programs.
Healthcare Reform. In recent years, Congress and some state legislatures have introduced an
increasing number of proposals to make major changes in the healthcare system, including an
increased emphasis on the linkage between quality of care criteria and payment levels such as the
submission of patient quality data to the Secretary of Health and Human Services. In addition, CMS
conducts ongoing reviews of certain state reimbursement programs.
The American
Recovery and Reinvestment Act of 2009 has been signed into law providing for a
temporary increase in the federal matching assistance percentage (FMAP), a temporary increase in
federal Medicaid Disproportionate Share Hospital, or DSH, allotments, subsidization of health insurance premiums (COBRA) for up to nine
months, and grants and loans for infrastructure and incentive payments for providers who adopt and
use health information technology. The 2010 Department of Defense
Appropriations Bill signed into law expands the subsidization of health
insurance premiums (COBRA) to 15 months and extends the eligibility
period for individuals losing their jobs through February 28, 2010. Additionally, the Obama administration has stated as a top
priority its desire to reform the U.S. healthcare system with the goal of reducing the costs of
healthcare and reducing the current number of uninsured and underinsured Americans. Several
proposals have been considered, including cost controls on hospitals and insurance industry
reforms. Currently, separate bills have been passed in both the U.S. House of Representatives and
the U.S. Senate and debate in Congress is continuing in an attempt to draft a final piece of
legislation. The costs of implementing the American Recovery and Reinvestment Act of 2009 and these
other proposals being considered could be financed, in part, by reductions in payments to
healthcare providers under Medicare, Medicaid, and other government programs. In addition,
federal funding for existing programs may not be approved in the future.
The current administration and Congress have now debated healthcare reform for over one year
and, at this time, we cannot predict the outcome of this debate. A reduction in uninsured patients
may reduce our expense from uncollectible accounts receivable; however, legislative proposals to
achieve this reduction in uninsured patients may result in lower reimbursement from other payor
sources and/or a migration of patients from private payor sources to lower paying government payor
sources. Furthermore, we cannot predict the course of any other future legislation, changes the
current administration may seek to implement regarding healthcare or interpretations by the current
administration of existing governmental healthcare programs and the related effect that any
legislative or interpretive change may have on us.
Fraud and Abuse Laws. Participation in the Medicare program is heavily regulated by federal
statute and regulation. If a hospital fails substantially to comply with the requirements for
participating in the Medicare program, the hospitals participation in the Medicare program may be
terminated and/or civil or criminal penalties
13
may be imposed. For example, a hospital may lose its
ability to participate in the Medicare program if it performs any of the following acts:
|
|
|
making claims to Medicare for services not provided or misrepresenting actual services
provided in order to obtain higher payments; |
|
|
|
paying money to induce the referral of patients where services are reimbursable under a
federal health program; or |
|
|
|
|
paying money to limit or reduce the services provided to Medicare beneficiaries. |
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened the scope
of the fraud and abuse laws. Under HIPAA, any person or entity that knowingly and willfully
defrauds or attempts to defraud a healthcare benefit program, including private healthcare plans,
may be subject to fines, imprisonment or both. Additionally, any person or entity that knowingly
and willfully falsifies or conceals a material fact or makes any material false or fraudulent
statements in connection with the delivery or payment of healthcare services by a healthcare
benefit plan is subject to a fine, imprisonment or both.
Another law regulating the healthcare industry is a section of the Social Security Act, known
as the anti-kickback statute. This law prohibits some business practices and relationships under
Medicare, Medicaid, and other federal healthcare programs. These practices include the payment,
receipt, offer, or solicitation of remuneration of any kind in exchange for items or services that
are reimbursed under most federal or state healthcare program. Violations of the anti-kickback
statute may be punished by criminal and civil fines, exclusion from federal healthcare programs,
and damages up to three times the total dollar amount involved.
The Office of Inspector General of the Department of Health and Human Services, or OIG, is
responsible for identifying and investigating fraud and abuse activities in federal healthcare
programs. As part of its duties, the OIG provides guidance to healthcare providers by identifying
types of activities that could violate the anti-kickback statute. The OIG also publishes
regulations outlining activities and business relationships that would be deemed not to violate the
anti-kickback statute. These regulations are known as safe harbor regulations. However, the
failure of a particular activity to comply with the safe harbor regulations does not necessarily
mean that the activity violates the anti-kickback statute.
The OIG has identified the following incentive arrangements as potential violations of the
anti-kickback statute:
|
|
|
payment of any incentive by the hospital when a physician refers a patient to the
hospital; |
|
|
|
use of free or significantly discounted office space or equipment for physicians in
facilities usually located close to the hospital; |
|
|
|
provision of free or significantly discounted billing, nursing, or other staff services; |
|
|
|
free training for a physicians office staff, including management and laboratory
techniques (but excluding compliance training); |
|
|
|
guarantees which provide that if the physicians income fails to reach a predetermined
level, the hospital will pay any portion of the remainder; |
|
|
|
low-interest or interest-free loans, or loans which may be forgiven if a physician refers
patients to the hospital; |
|
|
|
payment of the costs of a physicians travel and expenses for conferences; |
|
|
|
payment of services which require few, if any, substantive duties by the physician, or
payment for services in excess of the fair market value of the services rendered; or |
|
|
|
purchasing goods or services from physicians at prices in excess of their fair market
value. |
14
We have a variety of financial relationships with physicians who refer patients to our
hospitals. Physicians own interests in a number of our facilities. Physicians may also own our
stock. We also have contracts with physicians providing for a variety of financial arrangements,
including employment contracts, leases, management agreements, and professional service agreements.
We provide financial incentives to recruit physicians to relocate to communities served by our
hospitals. These incentives include relocation, reimbursement for certain direct expenses, income
guarantees and, in some cases, loans. Although we believe that we have structured our arrangements
with physicians in light of the safe harbor rules, we cannot assure you that regulatory
authorities will not determine otherwise. If that happens, we could be subject to criminal and
civil penalties and/or exclusion from participating in Medicare, Medicaid, or other government
healthcare programs.
The Social Security Act also includes a provision commonly known as the Stark law. This law
prohibits physicians from referring Medicare patients to healthcare entities in which they or any
of their immediate family members have ownership interests or other financial arrangements. These
types of referrals are commonly known as self referrals. Sanctions for violating the Stark law
include denial of payment, civil money penalties, assessments equal to twice the dollar value of
each service, and exclusion from government payor programs. There are ownership and compensation
arrangement exceptions to the self-referral prohibition. One exception allows a physician to make a
referral to a hospital if the physician owns an interest in the entire hospital, as opposed to an
ownership interest in a department of the hospital. Another exception allows a physician to refer
patients to a healthcare entity in which the physician has an ownership interest if the entity is
located in a rural area, as defined in the statute. There are also exceptions for many of the
customary financial arrangements between physicians and providers, including employment contracts,
leases, and recruitment agreements. From time to time, the federal government has issued
regulations which interpret the provisions included in the Stark law. We strive to comply with the
Stark law and regulations; however, the government may interpret the law and regulations
differently. If we are found to have violated the Stark law or regulations, we could be subject to
significant sanctions, including damages, penalties, and exclusion from federal healthcare
programs.
Many states in which we operate also have adopted similar laws relating to financial
relationships with physicians. Some of these state laws apply even if the payment for care does not
come from the government. These statutes typically provide criminal and civil penalties as well as
loss of licensure. While there is little precedent for the interpretation or enforcement of these
state laws, we have attempted to structure our financial relationships with physicians and others
in light of these laws. However, if we are found to have violated these state laws, it could result
in the imposition of criminal and civil penalties as well as possible licensure revocation.
False Claims Act. Another trend in healthcare litigation is the increased use of the False
Claims Act, or FCA. This law makes providers liable for, among other things, the knowing submission
of a false claim for reimbursement by the federal government. The FCA has been used not only by the
U.S. government, but also by individuals who bring an action on behalf of the government under the
laws qui tam or whistleblower provisions and share in any recovery. When a private party
brings a qui tam action under the FCA, it files the complaint with the court under seal, and the
defendant will generally not be aware of the lawsuit until the government makes a determination
whether it will intervene and take a lead in the litigation.
Civil liability under the FCA can be up to three times the actual damages sustained by the
government plus civil penalties of up to $11,000 for each separate false claim submitted to the
government. There are many potential bases for liability under the FCA. Although liability under
the FCA arises when an entity knowingly submits a false claim for reimbursement, the FCA defines
the term knowingly to include reckless disregard of the truth or falsity of the claim being
submitted.
A number of states in which we operate have enacted state false claims legislation. These
state false claims laws are generally modeled on the federal FCA, with similar damages, penalties,
and qui tam enforcement provisions. An increasing number of healthcare false claims cases seek
recoveries under both federal and state law.
Provisions in the Deficit Reduction Act of 2005, or DRA, that went into effect on January 1,
2007 give states significant financial incentives to enact false claims laws modeled on the federal
FCA. Additionally, the DRA requires every entity that receives annual payments of at least
$5 million from a state Medicaid plan to establish written policies for its employees that provide
detailed information about federal and state false claims statutes and the whistleblower
protections that exist under those laws. Both provisions of the DRA are expected to result in
15
increased false claims litigation against health care providers. We have substantially complied
with the written policy requirements.
Corporate Practice of Medicine; Fee-Splitting. Some states have laws that prohibit unlicensed
persons or business entities, including corporations, from employing physicians. Some states also
have adopted laws that prohibit direct or indirect payments or fee-splitting arrangements between
physicians and unlicensed persons or business entities. Possible sanctions for violations of these
restrictions include loss of a physicians license, civil and criminal penalties and rescission of
business arrangements. These laws vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies. We structure our arrangements with healthcare
providers to comply with the relevant state law. However, we cannot assure you that
governmental officials responsible for enforcing these laws will not assert that we, or
transactions in which we are involved, are in violation of these laws. These laws may also be
interpreted by the courts in a manner inconsistent with our interpretations.
Emergency Medical Treatment and Active Labor Act. The Emergency Medical Treatment and Active
Labor Act imposes requirements as to the care that must be provided to anyone who comes to
facilities providing emergency medical services seeking care before they may be transferred to
another facility or otherwise denied care. Sanctions for failing to fulfill these requirements
include exclusion from participation in Medicare and Medicaid programs and civil money penalties.
In addition, the law creates private civil remedies which enable an individual who suffers personal
harm as a direct result of a violation of the law to sue the offending hospital for damages and
equitable relief. A medical facility that suffers a financial loss as a direct result of another
participating hospitals violation of the law also has a similar right. Although we believe that
our practices are in compliance with the law, we can give no assurance that governmental officials
responsible for enforcing the law or others will not assert we are in violation of these laws.
Conversion Legislation. Many states, including some where we have hospitals and others where
we may in the future acquire hospitals, have adopted legislation regarding the sale or other
disposition of hospitals operated by not-for-profit entities. In other states that do not have
specific legislation, the attorneys general have demonstrated an interest in these transactions
under their general obligations to protect charitable assets from waste. These legislative and
administrative efforts primarily focus on the appropriate valuation of the assets divested and the
use of the proceeds of the sale by the not-for-profit seller. While these reviews and, in some
instances, approval processes can add additional time to the closing of a hospital acquisition, we
have not had any significant difficulties or delays in completing the process. There can be no
assurance, however, that future actions on the state level will not seriously delay or even prevent
our ability to acquire hospitals. If these activities are widespread, they could limit our ability
to acquire additional hospitals.
Certificates of Need. The construction of new facilities, the acquisition of existing
facilities and the addition of new services at our facilities may be subject to state laws that
require prior approval by state regulatory agencies. These CON laws generally require that a state
agency determine the public need and give approval prior to the construction or acquisition of
facilities or the addition of new services. As of December 31, 2009, we operated 54 hospitals in
16 states that have adopted CON laws for acute care facilities. If we fail to obtain necessary
state approval, we will not be able to expand our facilities, complete acquisitions or add new
services in these states. Violation of these state laws may result in the imposition of civil
sanctions or the revocation of a hospitals licenses.
Privacy and Security Requirements of HIPAA. The Administrative Simplification Provisions of
HIPAA require the use of uniform electronic data transmission standards for healthcare claims and
payment transactions submitted or received electronically. These provisions are intended to
encourage electronic commerce in the healthcare industry. We believe we are in compliance with
these regulations.
The Administrative Simplification Provisions also require CMS to adopt standards to protect
the security and privacy of health-related information. The privacy regulations extensively
regulate the use and disclosure of individually identifiable health-related information. If we
violate these regulations, we could be subject to monetary fines and penalties, criminal sanctions
and civil causes of action. We have implemented and operate continuing employee education programs
to reinforce operational compliance with policy and procedures which adhere to privacy regulations.
The HIPAA security standards and privacy regulations serve similar purposes and overlap to a
certain extent, but the security regulations relate more specifically to protecting the integrity,
confidentiality and
16
availability of electronic protected health information while it is in our
custody or being transmitted to others. We believe we have established proper controls to safeguard
access to protected health information.
Payment
Medicare. Under the Medicare program, we are paid for inpatient and outpatient services
performed by our hospitals.
Payments for inpatient acute services are generally made pursuant to a prospective payment
system, commonly known as PPS. Under PPS, our hospitals are paid a predetermined amount for each
hospital discharge based on
the patients diagnosis. Specifically, each discharge is assigned to a diagnosis-related
group, commonly known as a DRG, based upon the patients condition and treatment during the
relevant inpatient stay. For the federal fiscal year 2008 (i.e., the federal fiscal year beginning
October 1, 2007), each DRG was assigned a payment rate using 67% of the national average cost per
case and 33% of the national average charge per case and 50% of the change to severity adjusted DRG
weights. Severity adjusted DRGs more accurately reflect the costs a hospital incurs for caring for
a patient and accounts more fully for the severity of each patients condition. Commencing with the
federal fiscal year 2009 (i.e., the federal fiscal year beginning October 1, 2008), each DRG is
assigned a payment rate using 100% of the national average cost per case and 100% of the severity
adjusted DRG weights. DRG payments are based on national averages and not on charges or costs
specific to a hospital. However, DRG payments are adjusted by a predetermined geographic adjustment
factor assigned to the geographic area in which the hospital is located. While a hospital generally
does not receive payment in addition to a DRG payment, hospitals may qualify for an outlier
payment when the relevant patients treatment costs are extraordinarily high and exceed a specified
regulatory threshold.
The DRG rates are adjusted by an update factor on October 1 of each year, the beginning of the
federal fiscal year. The index used to adjust the DRG rates, known as the market basket index,
gives consideration to the inflation experienced by hospitals in purchasing goods and services. DRG
payment rates were increased by the full market basket index, for the federal fiscal years 2007,
2008, 2009 and 2010 or 3.4%, 3.3%, 3.6% and 2.1%, respectively. The Deficit Reduction Act of 2005
imposes a two percentage point reduction to the market basket index beginning October 1, 2007, and
each year thereafter, if patient quality data is not submitted. We are complying with this data
submission requirement. Future legislation may decrease the rate of increase for DRG payments, but
we are not able to predict the amount of any reduction or the effect that any reduction will have
on us.
In addition, hospitals may qualify for Medicare disproportionate share payments when their
percentage of low income patients exceeds specified regulatory thresholds. A majority of our
hospitals qualify to receive Medicare disproportionate share payments. For the majority of our
hospitals that qualify to receive Medicare disproportionate share payments, these payments were
increased by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 effective
April 1, 2004. These Medicare disproportionate share payments as a percentage of net operating
revenues were 1.6%, 1.8% and 1.8% for the years ended December 31, 2009, 2008 and 2007,
respectively.
Beginning August 1, 2000, we began receiving Medicare reimbursement for outpatient services
through a PPS. Under the Balanced Budget Refinement Act of 1999, non-urban hospitals with 100 beds
or less were held harmless through December 31, 2004 under this Medicare outpatient PPS. The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 extended the hold harmless
provision for non-urban hospitals with 100 beds or less and for non-urban sole community hospitals
with more than 100 beds through December 31, 2005. The Deficit Reduction Act of 2005 extended the
hold harmless provision for non-urban hospitals with 100 beds or less that are not sole community
hospitals through December 31, 2008; however, that Act reduced the amount these hospitals would
receive in hold harmless payment by 10% in 2007 and 15% in 2008. Of our 119 hospitals in continuing
operations at December 31, 2008, 31 qualified for this relief. The Medicare Improvements for
Patients and Providers Act extends the hold harmless provision for non-urban hospitals with 100
beds or less, including non-urban sole community hospitals, through December 31, 2009, at 85% of
the hold harmless amount. Of our 122 hospitals at December 31, 2009, 44 qualified for this relief.
The outpatient conversion factor was increased 3.4% effective January 1, 2007; however, coupled
with adjustments to other variables with the outpatient PPS, an approximate 2.5% to 2.9% net
increase in outpatient payments occurred. The outpatient conversion factor was increased 3.3%
effective January 1, 2008; however, coupled with adjustments to other variables with the outpatient
PPS, an
17
approximate 3.0% to 3.4% net increase in outpatient payments occurred. The outpatient
conversion factor was increased 3.6% effective January 1, 2009; however, coupled with adjustments
to other variables with outpatient PPS, an approximate 3.5% to 3.9% net increase in outpatient
payments is expected to occur. The outpatient conversion factor was increased 2.1% effective
January 1, 2010; however, coupled with adjustments to other variables with outpatient PPS, an
approximate 1.8% to 2.2% net increase in outpatient payments is expected to occur. The Medicare
Improvements and Extension Act of the Tax Relief and Health Care Act of 2006 imposes a two
percentage point reduction to the market basket index beginning January 1, 2009, and each year
thereafter, if patient quality data is not submitted. We are complying with this data submission
requirement.
Skilled nursing facilities and swing bed facilities were historically paid by Medicare on the
basis of actual costs, subject to limitations. The Balanced Budget Act of 1997 established a PPS
for Medicare skilled nursing facilities and mandated that swing bed facilities must be incorporated
into the skilled nursing facility PPS. Skilled nursing facility PPS rates were increased by the
full SNF market basket index of 3.1%, 3.3% and 3.4% for the federal fiscal years 2007, 2008 and
2009, respectively. For the federal fiscal year 2010 (i.e., the federal fiscal year beginning
October 1, 2009), the skilled nursing PPS rates were increased by 2.2%; however, coupled with
adjustments to other variables, within the skilled nursing PPS, an approximate 1.1% net decrease in
skilled nursing payments is expected to occur.
The Department of Health and Human Services established a PPS for home health services (i.e.
home care) effective October 1, 2000. The home health agency PPS per episodic payment rate
increased by 3.3% on January 1, 2007. The home health agency PPS per episodic payment rate
increased by 3% on January 1, 2008; however, coupled with adjustments to other variables with home
health agency PPS, an approximate 1.5% to 1.9% net increase in home health agency payments
occurred. The home health agency PPS per episodic payment rate increased by 2.9% on January 1,
2009; however, coupled with adjustments to other variables with home health agency PPS, an
approximate 0.2% net increase in home health agency payments is expected to occur. The home health
agency PPS per episodic payment rate increased by 2.0% on January 1, 2010; however, coupled with
adjustments to other variables with home health agency PPS, an approximate 2.3% net increase in
home health agency payments is expected to occur. The Deficit Reduction Act of 2005 imposes a two
percentage point reduction to the market basket index beginning January 1, 2007, and each year
thereafter, if patient quality data is not submitted. We are complying with this data submission
requirement.
Medicaid. Most state Medicaid payments are made under a PPS or under programs which negotiate
payment levels with individual hospitals. Medicaid is currently funded jointly by state and federal
government. The federal government and many states are currently considering significantly reducing
Medicaid funding, while at the same time expanding Medicaid benefits. We can provide no assurance
that reductions to Medicaid fundings will not have a material adverse effect on our consolidated
results of operations.
Annual Cost Reports. Hospitals participating in the Medicare and some Medicaid programs,
whether paid on a reasonable cost basis or under a PPS, are required to meet specified financial
reporting requirements. Federal and, where applicable, state regulations require submission of
annual cost reports identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and some Medicaid programs are subject to
routine governmental audits. These audits may result in adjustments to the amounts ultimately
determined to be due to us under these reimbursement programs. Finalization of these audits often
takes several years. Providers can appeal any final determination made in connection with an audit.
DRG outlier payments have been and continue to be the subject of CMS audit and adjustment. The HHS
OIG is also actively engaged in audits and investigations into alleged abuses of the DRG outlier
payment system.
Commercial Insurance. Our hospitals provide services to individuals covered by private
healthcare insurance. Private insurance carriers pay our hospitals or in some cases reimburse their
policyholders based upon the hospitals established charges and the coverage provided in the
insurance policy. Commercial insurers are trying to limit the costs of hospital services by
negotiating discounts, including PPS, which would reduce payments by commercial insurers to our
hospitals. Reductions in payments for services provided by our hospitals to individuals covered by
commercial insurers could adversely affect us.
18
Supply Contracts
In March 2005, we began purchasing items, primarily medical supplies, medical equipment and
pharmaceuticals, under an agreement with HealthTrust, a GPO in which we are a noncontrolling
partner. Triad was also a noncontrolling partner in HealthTrust and we acquired their ownership
interest and contractual rights in the acquisition. As of December 31, 2009, we have an 18%
ownership interest in HealthTrust. By participating in this organization we are able to procure
items at competitively priced rates for our hospitals. There can be no assurance that our
arrangement with HealthTrust will continue to provide the discounts we expect to achieve.
Competition
The hospital industry is highly competitive. An important part of our business strategy is to
continue to acquire hospitals in non-urban markets and select urban markets. However, other
for-profit hospital companies and not-for-profit hospital systems generally attempt to acquire the
same type of hospitals as we do. In addition, some hospitals are sold through an auction process,
which may result in higher purchase prices than we believe are reasonable.
In addition to the competition we face for acquisitions, we must also compete with other
hospitals and healthcare providers for patients. The competition among hospitals and other
healthcare providers for patients has intensified in recent years. Our hospitals are located in
non-urban and selected urban service areas. Those hospitals in non-urban service areas face no
direct competition because there are no other hospitals in their primary service areas. However,
these hospitals do face competition from hospitals outside of their primary service area, including
hospitals in urban areas that provide more complex services. Patients in those service areas may
travel to these other hospitals for a variety of reasons, including the need for services we do not
offer or physician referrals. Patients who are required to seek services from these other hospitals
may subsequently shift their preferences to those hospitals for services we do provide. Those
hospitals in selected urban service areas may face competition from hospitals that are more
established than our hospitals. Certain of these competing facilities offer services, including
extensive medical research and medical education programs, which are not offered by our facilities.
In addition, in certain markets where we operate, there are large teaching hospitals that provide
highly specialized facilities, equipment and services that may not be available at our hospitals.
Some of our hospitals operate in primary service areas where they compete with another
hospital. Some of these competing hospitals use equipment and services more specialized than those
available at our hospitals and some of the hospitals that compete with us are owned by
tax-supported governmental agencies or not-for-profit entities supported by endowments and
charitable contributions. These hospitals can make capital expenditures without paying sales,
property and income taxes. We also face competition from other specialized care providers,
including outpatient surgery, orthopedic, oncology, and diagnostic centers.
The number and quality of the physicians on a hospitals staff is an important factor in a
hospitals competitive advantage. Physicians decide whether a patient is admitted to the hospital
and the procedures to be performed. Admitting physicians may be on the medical staffs of other
hospitals in addition to those of our hospitals. We attempt to attract our physicians patients to
our hospitals by offering quality services and facilities, convenient locations, and
state-of-the-art equipment.
Compliance Program
We take an operations team approach to compliance and utilize corporate experts for program
design efforts and facility leaders for employee-level implementation. Compliance is another area
that demonstrates our utilization of standardization and centralization techniques and initiatives
which yield efficiencies and consistency throughout our facilities. We recognize that our
compliance with applicable laws and regulations depends on individual employee actions as well as
company operations. Our approach focuses on integrating compliance responsibilities with
operational functions. This approach is intended to reinforce our company-wide commitment to
operate strictly in accordance with the laws and regulations that govern our business.
19
Our company-wide compliance program has been in place since 1997. Currently, the programs
elements include leadership, management and oversight at the highest levels, a Code of Conduct,
risk area specific policies and procedures, employee education and training, an internal system for
reporting concerns, auditing and monitoring programs, and a means for enforcing the programs
policies.
Since its initial adoption, the compliance program continues to be expanded and developed to
meet the industrys expectations and our needs. Specific written policies, procedures, training and
educational materials and programs, as well as auditing and monitoring activities have been
prepared and implemented to address the functional and operational aspects of our business.
Included within these functional areas are materials and activities for business sub-units,
including laboratory, radiology, pharmacy, emergency, surgery, observation, home care, skilled
nursing,
and clinics. Specific areas identified through regulatory interpretation and enforcement
activities have also been addressed in our program. Claims preparation and submission, including
coding, billing, and cost reports, comprise the bulk of these areas. Financial arrangements with
physicians and other referral sources, including compliance with anti-kickback and Stark laws,
emergency department treatment and transfer requirements, and other patient disposition issues are
also the focus of policy and training, standardized documentation requirements, and review and
audit. Another focus of the program is the interpretation and implementation of the HIPAA standards
for privacy and security.
We have a Code of Conduct which applies to all directors, officers, employees and consultants,
and a confidential disclosure program to enhance the statement of ethical responsibility expected
of our employees and business associates who work in the accounting, financial reporting, and asset
management areas of our Company. Our Code of Conduct is posted on our website at
www.chs.net/company_overview/code_conduct.html.
Employees
At December 31, 2009, we employed approximately 58,555 full-time employees and
20,659 part-time employees. In addition, we employed approximately 3,465 union members. We
currently believe that our labor relations are good.
Professional Liability Claims
As part of our business of owning and operating hospitals, we are subject to legal actions
alleging liability on our part. To cover claims arising out of the operations of hospitals, we
maintain professional malpractice liability insurance and general liability insurance on a claims
made basis in excess of those amounts for which we are self-insured, in amounts we believe to be
sufficient for our operations. We also maintain umbrella liability coverage for claims which, due
to their nature or amount, are not covered by our other insurance policies. However, our insurance
coverage does not cover all claims against us or may not continue to be available at a reasonable
cost for us to maintain adequate levels of insurance. For a further discussion of our insurance
coverage, see our discussion of professional liability claims in Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7
of this Report.
Environmental Matters
We are subject to various federal, state, and local laws and regulations governing the use,
discharge, and disposal of hazardous materials, including medical waste products. Compliance with
these laws and regulations is not expected to have a material adverse effect on us. It is possible,
however, that environmental issues may arise in the future which we cannot now predict.
We are insured for damages of personal property or environmental injury arising out of
environmental impairment for both above ground and underground storage tank issues under one
insurance policy for all of our hospitals. Our policy coverage is $5 million per occurrence with a
$50,000 deductible and a $20 million annual aggregate. This policy also provides pollution legal
liability coverage.
20
The following risk factors could materially and adversely affect our future operating results
and could cause actual results to differ materially from those predicted in the forward-looking
statements we make about our business.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund
our operations, limit our ability to react to changes in the economy or our industry and prevent
us from meeting our obligations under the agreements relating to our indebtedness.
We are significantly leveraged. The chart below shows our level of indebtedness and other
information as of December 31, 2009. In connection with the consummation of our acquisition of
Triad in July 2007, approximately $7.2 billion of senior secured financing under a new credit facility, or
Credit Facility, was obtained by our wholly-owned subsidiary, CHS/Community Health Systems, Inc.,
or CHS. CHS also issued 8.875% senior notes, or the Notes, having an aggregate principal amount
of approximately $3.0 billion. Both the indebtedness under the Credit Facility and the Notes are senior
obligations of CHS and are guaranteed on a senior basis by us and by certain of our domestic
subsidiaries. We used the net proceeds from the Notes offering and the net proceeds of the
approximately $6.1 billion term loans under the Credit Facility to pay the consideration under the merger
agreement with Triad, to refinance certain of our existing indebtedness and the indebtedness of
Triad, to complete certain related transactions, to pay certain costs and expenses of the
transactions and for general corporate uses. As of December 31, 2009, a $750 million revolving
credit facility was available to us for working capital and general corporate purposes under the
Credit Facility, with $90.0 million of the revolving credit facility being set aside for
outstanding letters of credit. With the exception of some small principal payments of our term
loans under our Credit Facility, representing less than 1% of the outstanding balance each year
through 2013, the term loans under our Credit Facility mature in 2014 and our Notes are not due
until 2015.
|
|
|
|
|
|
|
As of |
|
|
|
December 31, 2009 |
|
|
|
($ in millions) |
|
Senior secured credit facility |
|
|
|
|
Term loans |
|
$ |
6,043.8 |
|
Notes |
|
|
2,784.3 |
|
Other |
|
|
83.0 |
|
|
|
|
|
Total debt |
|
$ |
8,911.1 |
|
|
|
|
|
Community Health Systems, Inc. stockholders
equity |
|
$ |
1,950.6 |
|
|
|
|
|
The following table shows the ratio of earnings to fixed charges for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Ratio of earnings to fixed charges(1) |
|
|
3.79 x |
|
|
|
3.37 x |
|
|
|
1.22 x |
|
|
|
1.47 x |
|
|
|
1.59 x |
|
|
|
|
(1) |
|
There are no shares of preferred stock outstanding. |
As
of December 31, 2009, our approximately $5.4 billion notional amount of interest rate swap agreements
represented approximately 89% of our variable rate debt. On a prospective basis, a 1% change in
interest rates on the remaining unhedged variable rate debt existing as of December 31, 2009, would
result in interest expense fluctuating approximately $6.9 million per year.
21
The Credit Facility and/or the Notes contain various covenants that limit our ability to take
certain actions, including our ability to:
|
|
|
incur, assume or guarantee additional indebtedness; |
|
|
|
issue redeemable stock and preferred stock; |
|
|
|
repurchase capital stock; |
|
|
|
make restricted payments, including paying dividends and making investments; |
|
|
|
redeem debt that is junior in right of payment to the notes; |
|
|
|
sell or otherwise dispose of assets, including capital stock of subsidiaries; |
|
|
|
enter into agreements that restrict dividends from subsidiaries; |
|
|
|
merge, consolidate, sell or otherwise dispose of substantial portions of our assets; |
|
|
|
enter into transactions with affiliates; and |
|
|
|
guarantee certain obligations. |
In addition, our Credit Facility contains restrictive covenants and requires us to maintain
specified financial ratios and satisfy other financial condition tests. Our ability to meet these
restricted covenants and financial ratios and tests can be affected by events beyond our control,
and we cannot assure you that we will meet those tests.
The counterparty to the interest rate swap agreements exposes us to credit risk in the event
of non-performance. However, at December 31, 2009, we do not anticipate non-performance by the
counterparty due to the net settlement feature of the agreements and our liability position with
respect to the majority of our counterparties.
A breach of any of these covenants could result in a default under our Credit Facility and/or
the Notes. Upon the occurrence of an event of default under our Credit Facility or the Notes, all
amounts outstanding under our Credit Facility and the Notes may become due and payable and all
commitments under the Credit Facility to extend further credit may be terminated.
Our leverage could have important consequences for you, including the following:
|
|
|
it may limit our ability to obtain additional debt or equity financing for working
capital, capital expenditures, debt service requirements, acquisitions and general corporate
or other purposes; |
|
|
|
a substantial portion of our cash flows from operations will be dedicated to the payment
of principal and interest on our indebtedness and will not be available for other purposes,
including our operations, capital expenditures, and future business opportunities; |
|
|
|
the debt service requirements of our indebtedness could make it more difficult for us to
satisfy our financial obligations; |
|
|
|
some of our borrowings, including borrowings under our Credit Facility, are at variable
rates of interest, exposing us to the risk of increased interest rates; |
|
|
|
it may limit our ability to adjust to changing market conditions and place us at a
competitive disadvantage compared to our competitors that have less debt; and
|
22
|
|
|
we may be vulnerable in a downturn in general economic conditions or in our business, or
we may be unable to carry out capital spending that is important to our growth. |
Despite current indebtedness levels, we may still be able to incur substantially more debt. This
could further exacerbate the risks described above.
We may be able to incur substantial additional indebtedness in the future. The terms of the
indenture governing the Notes do not fully prohibit us from doing so. For example, under the
indenture for the Notes, we may incur up to approximately $7.8 billion pursuant to a credit facility or a
qualified receivables transaction, less certain amounts repaid with the proceeds of asset
dispositions. Our Credit Facility provides for commitments of up to
approximately $7.1 billion in the aggregate.
Our Credit Facility also gives us the ability to provide for one or more additional tranches of
term loans in aggregate principal amount of up to $600 million without the consent of the existing
lenders if specified criteria are satisfied. If new debt is added to our current debt levels, the
related risks that we now face could intensify.
If competition decreases our ability to acquire additional hospitals on favorable terms, we may be
unable to execute our acquisition strategy.
An important part of our business strategy is to acquire two to four hospitals each year.
However, not-for-profit hospital systems and other for-profit hospital companies generally attempt
to acquire the same type of hospitals as we do. Some of these other purchasers have greater
financial resources than we do. Our principal competitors for acquisitions have included Health
Management Associates, Inc. and LifePoint Hospitals, Inc. On some occasions, we also compete with
HCA Inc., or HCA, and Universal Health Services, Inc. In addition, some hospitals are sold through an
auction process, which may result in higher purchase prices than we believe are reasonable.
Therefore, we may not be able to acquire additional hospitals on terms favorable to us.
If we fail to improve the operations of acquired hospitals, we may be unable to achieve our growth
strategy.
Many of the hospitals we have acquired, had, or future acquisitions may have, significantly
lower operating margins than we do and/or operating losses prior to the time we acquired or will
acquire them. In the past, we have occasionally experienced temporary delays in improving the
operating margins or effectively integrating the operations of these acquired hospitals. In the
future, if we are unable to improve the operating margins of acquired hospitals, operate them
profitably, or effectively integrate their operations, we may be unable to achieve our growth
strategy.
If we acquire hospitals with unknown or contingent liabilities, we could become liable for
material obligations.
Hospitals that we acquire may have unknown or contingent liabilities, including liabilities
for failure to comply with healthcare laws and regulations. Although we generally seek
indemnification from prospective sellers covering these matters, we may nevertheless have material
liabilities for past activities of acquired hospitals.
State efforts to regulate the construction, acquisition or expansion of hospitals could prevent us
from acquiring additional hospitals, renovating our facilities or expanding the breadth of
services we offer.
Some states require prior approval for the construction or acquisition of healthcare
facilities and for the expansion of healthcare facilities and services. In giving approval, these
states consider the need for additional or expanded healthcare facilities or services. In some
states in which we operate, we are required to obtain CONs, for capital expenditures exceeding a
prescribed amount, changes in bed capacity or services, and some other matters. Other states may
adopt similar legislation. We may not be able to obtain the required CONs or other prior approvals
for additional or expanded facilities in the future. In addition, at the time we acquire a
hospital, we may agree to replace or expand the facility we are acquiring. If we are not able to
obtain required prior approvals, we would not be able to acquire additional hospitals and expand
the breadth of services we offer.
23
State efforts to regulate the sale of hospitals operated by not-for-profit entities could prevent
us from acquiring additional hospitals and executing our business strategy.
Many states, including some where we have hospitals and others where we may in the future
acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals
operated by not-for-profit entities. In other states that do not have specific legislation, the
attorneys general have demonstrated an interest in these transactions under their general
obligations to protect the use of charitable assets. These legislative and administrative efforts
focus primarily on the appropriate valuation of the assets divested and the use of the proceeds of
the sale by the non-profit seller. While these review and, in some instances, approval processes
can add additional time to the closing of a hospital acquisition, we have not had any significant
difficulties or delays in completing acquisitions. However, future actions on the state level could
seriously delay or even prevent our ability to acquire hospitals.
If we are unable to effectively compete for patients, local residents could use other hospitals.
The hospital industry is highly competitive. In addition to the competition we face for
acquisitions and physicians, we must also compete with other hospitals and healthcare providers for
patients. The competition among hospitals and other healthcare providers for patients has
intensified in recent years. Our hospitals are located in non-urban service areas. In approximately
65% of our markets, we are the sole provider of general healthcare services. In most of our other
markets, the primary competitor is a not-for-profit hospital. These not-for-profit hospitals
generally differ in each jurisdiction. However, our hospitals face competition from hospitals
outside of their primary service area, including hospitals in urban areas that provide more complex
services. Patients in our primary service areas may travel to these other hospitals for a variety
of reasons. These reasons include physician referrals or the need for services we do not offer.
Patients who seek services from these other hospitals may subsequently shift their preferences to
those hospitals for the services we provide.
Some of our hospitals operate in primary service areas where they compete with one other
hospital. One of our hospitals competes with more than one other hospital in its primary service
area. Some of these competing hospitals use equipment and services more specialized than those
available at our hospitals. In addition, some competing hospitals are owned by tax-supported
governmental agencies or not-for-profit entities supported by endowments and charitable
contributions. These hospitals can make capital expenditures without paying sales, property and
income taxes. We also face competition from other specialized care providers, including outpatient
surgery, orthopedic, oncology and diagnostic centers.
We expect that these competitive trends will continue. Our inability to compete effectively
with other hospitals and other healthcare providers could cause local residents to use other
hospitals.
The failure to obtain our medical supplies at favorable prices could cause our operating results
to decline.
We have a five-year participation agreement with a GPO. This agreement extends to January
2011, with automatic renewal terms of one year, unless either party terminates by giving notice of
non-renewal. GPOs attempt to obtain favorable pricing on medical supplies with manufacturers and
vendors who sometimes negotiate exclusive supply arrangements in exchange for the discounts they
give. To the extent these exclusive supply arrangements are challenged or deemed unenforceable, we
could incur higher costs for our medical supplies obtained through HealthTrust. These higher costs
could cause our operating results to decline.
There can be no assurance that our arrangement with HealthTrust will provide the discounts we
expect to achieve.
If the fair value of our reporting units declines, a material non-cash charge to earnings from
impairment of our goodwill could result.
At December 31, 2009, we had approximately $4.2 billion of goodwill recorded on our books. We
expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing
basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of
our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a
material non-cash charge to earnings.
24
Risks related to our industry
We are subject to uncertainties regarding healthcare reform.
In recent years, Congress and some state legislatures have introduced an increasing number of
proposals to make major changes in the healthcare system, including an increased emphasis on the
linkage between quality of care criteria and payment levels such as the submission of patient
quality data to the Secretary of Health and Human Services. In addition, CMS conducts ongoing
reviews of certain state reimbursement programs.
The American Recovery and Reinvestment Act of 2009 has been signed into law providing for a
temporary increase in the federal matching assistance percentage (FMAP), a temporary increase in
federal Medicaid DSH allotments, subsidization of health insurance premiums (COBRA) for up to nine
months, and grants and loans for infrastructure and incentive payments for providers who adopt and
use health information technology. The 2010 Department of Defense
Appropriations Bill signed into law expands the subsidization of health
insurance premiums (COBRA) to 15 months and extends the eligibility
period for individuals losing their jobs through February 28, 2010. Additionally, the Obama administration has stated as a top
priority its desire to reform the U.S. healthcare system with the goal of reducing the costs of
healthcare and reducing the current number of uninsured and underinsured Americans. Several
proposals have been considered, including cost controls on hospitals and insurance industry
reforms. Currently, separate bills have been passed in both the U.S. House of Representatives and
the U.S. Senate and debate in Congress is continuing in an attempt to draft a final piece of
legislation. The costs of implementing the American Recovery and Reinvestment Act of 2009 and these
other proposals being considered could be financed, in part, by reductions in payments to
healthcare providers under Medicare, Medicaid, and other government programs. In addition, federal
funding for existing programs may not be approved in the future.
The current administration and Congress have now debated healthcare reform for over one year
and, at this time, we cannot predict the outcome of this debate. A reduction in uninsured patients
may reduce our expense from uncollectible accounts receivable; however, legislative proposals to
achieve this reduction in uninsured patients may result in lower reimbursement from other payor
sources and/or a migration of patients from private payor sources to lower paying government payor
sources. Furthermore, we cannot predict the course of any other future legislation, changes the
current administration may seek to implement regarding healthcare or interpretations by the current
administration of existing governmental healthcare programs and the related effect that any
legislative or interpretive change may have on us.
If federal or state healthcare programs or managed care companies reduce the payments we receive
as reimbursement for services we provide, our net operating revenues may decline.
In 2009, 36.9% of our net operating revenues came from the Medicare and Medicaid programs.
Federal healthcare expenditures continue to increase and state governments continue to face
budget shortfalls as a result of the current economic downturn and accelerating Medicaid
enrollment. As a result, federal and state governments have made, and continue to make,
significant changes in the Medicare and Medicaid programs. Some of these changes have decreased, or
could decrease, the amount of money we receive for our services relating to these programs.
In addition, insurance and managed care companies and other third parties from whom we receive
payment for our services increasingly are attempting to control healthcare costs by requiring that
hospitals discount payments for their services in exchange for exclusive or preferred participation
in their benefit plans. We believe that this trend may continue and our inability to negotiate
increased reimbursement rates or maintain existing rates may reduce the payments we receive for our
services.
If we fail to comply with extensive laws and government regulations, including fraud and abuse
laws, we could suffer penalties or be required to make significant changes to our operations.
The healthcare industry is required to comply with many laws and regulations at the federal,
state, and local government levels. These laws and regulations require that hospitals meet various
requirements, including those relating to the adequacy of medical care, equipment, personnel,
operating policies and procedures, maintenance of adequate records, compliance with building codes,
environmental protection and privacy. These laws include the Health Insurance Portability and
Accountability Act of 1996 and a section of the Social Security Act, known as the anti-kickback
statute. If we fail to comply with applicable laws and regulations, including fraud and abuse laws,
25
we could suffer civil or criminal penalties, including the loss of our licenses to operate and
our ability to participate in the Medicare, Medicaid, and other federal and state healthcare
programs.
In addition, there are heightened coordinated civil and criminal enforcement efforts by both
federal and state government agencies relating to the healthcare industry, including the hospital
segment. The ongoing investigations of certain healthcare providers relate to various referral,
inpatient status cost reporting and billing practices, laboratory and home care services, and
physician ownership and joint ventures involving hospitals. For example, the Department of Justice
has alleged that we and three of our New Mexico hospitals have caused the state of New Mexico to
submit improper claims for federal funds in violation of the Civil False Claims Act. For a further
discussion of this matter, see Legal Proceedings in Item 3 of this Report.
In the future, different interpretations or enforcement of these laws and regulations could
subject our current practices to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services, capital expenditure programs, and
operating expenses.
A shortage of qualified nurses could limit our ability to grow and deliver hospital healthcare
services in a cost-effective manner.
Hospitals are currently experiencing a shortage of nursing professionals, a trend which we
expect to continue for some time. If the supply of qualified nurses declines in the markets in
which our hospitals operate, it may result in increased labor expenses and lower operating margins
at those hospitals. In addition, in some markets like California, there are requirements to
maintain specified nurse-staffing levels. To the extent we cannot meet those levels, the healthcare
services that we provide in these markets may be reduced.
If we become subject to significant legal actions, we could be subject to substantial uninsured
liabilities or increased insurance costs.
In recent years, physicians, hospitals, and other healthcare providers have become subject to
an increasing number of legal actions alleging malpractice, product liability, or related legal
theories. Even in states that have imposed caps on damages, litigants are seeking recoveries under
new theories of liability that might not be subject to the caps on damages. Many of these actions
involve large claims and significant defense costs. To protect us from the cost of these claims, we
maintain professional malpractice liability insurance and general liability insurance coverage in
excess of those amounts for which we are self-insured. This insurance coverage is in amounts that
we believe to be sufficient for our operations. However, our insurance coverage does not cover all
claims against us or may not continue to be available at a reasonable cost for us to maintain
adequate levels of insurance. Our expense related to malpractice and other professional liability
claims, including the cost of excess insurance, decreased in 2007 by 0.1%, decreased in 2008 by 0.2%
and increased in 2009 by 0.2% as a percentage of net operating revenues. If these costs rise
rapidly, our profitability could decline. For a further discussion of
our insurance coverage, see our discussion of professional liability claims in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this Report.
If we experience growth in self-pay volume and revenues, our financial condition or results of
operations could be adversely affected.
Like others in the hospital industry, we have experienced an increase in our provision for bad
debts as a percentage of net operating revenues due to a growth in self-pay volume and revenues.
Although we continue to seek ways of improving point of service collection efforts and implementing
appropriate payment plans with our patients, if we experience growth in self-pay volume and
revenues, our results of operations could be adversely affected. Further, our ability to improve
collections for self-pay patients may be limited by statutory, regulatory and investigatory
initiatives, including private lawsuits directed at hospital charges and collection practices for
uninsured and underinsured patients.
Currently, the global economies, and in particular the United States, are experiencing a
period of economic uncertainty and the related financial markets are experiencing a high degree of
volatility. This current financial turmoil is adversely affecting the banking system and financial
markets and resulting in a tightening in the credit
26
markets, a low level of liquidity in many financial markets and extreme volatility in fixed
income, credit, currency and equity markets. This uncertainty poses a risk as it could potentially
lead to higher levels of uninsured patients, result in higher levels of patients covered by lower
paying government programs and/or result in fiscal uncertainties at both government payors and
private insurers.
This Report includes forward-looking statements which could differ from actual future results.
Some of the matters discussed in this Report include forward-looking statements. Statements
that are predictive in nature, that depend upon or refer to future events or conditions or that
include words such as expects, anticipates, intends, plans, believes, estimates,
thinks, and similar expressions are forward-looking statements. These statements involve known
and unknown risks, uncertainties, and other factors that may cause our actual results and
performance to be materially different from any future results or performance expressed or implied
by these forward-looking statements. These factors include the following:
|
|
|
general economic and business conditions, both nationally and in the regions in which we
operate; |
|
|
|
legislative proposals for healthcare reform and universal access to healthcare coverage; |
|
|
|
risks associated with our substantial indebtedness, leverage and debt service
obligations; |
|
|
|
changes in, or the failure to comply with, governmental regulations; |
|
|
|
potential adverse impact of known and unknown government investigations, audits and
Federal and State False Claims Act litigation; |
|
|
|
our ability, where appropriate, to enter into and maintain managed care provider
arrangements and the terms of these arrangements; |
|
|
|
changes in, or the failure to comply with, managed care provider contracts could result
in disputes and changes in reimbursement that could be applied retroactively; |
|
|
|
changes in inpatient or outpatient Medicare and Medicaid payment levels; |
|
|
|
increases in the amount and risk of collectability of patient accounts receivable; |
|
|
|
increases in wages as a result of inflation or competition for highly technical positions
and rising supply costs due to market pressure from pharmaceutical companies and new product
releases; |
|
|
|
liabilities and other claims asserted against us, including self-insured malpractice
claims; |
|
|
|
our ability to attract and retain, without significant employment costs, qualified
personnel, key management, physicians, nurses and other healthcare workers; |
|
|
|
trends toward treatment of patients in less acute or specialty healthcare settings,
including ambulatory surgery centers or specialty hospitals; |
|
|
|
changes in medical or other technology; |
|
|
|
the availability and terms of capital to fund additional acquisitions or replacement
facilities; |
27
|
|
|
our ability to successfully acquire additional hospitals and complete the sale of
hospitals held for sale; |
|
|
|
|
our ability to successfully integrate any acquired hospitals or to recognize expected
synergies from such acquisitions; |
|
|
|
|
our ability to obtain adequate levels of general and professional liability insurance;
and |
|
|
|
|
timeliness of reimbursement payments received under government programs. |
Although we believe that these statements are based upon reasonable assumptions, we can give
no assurance that our goals will be achieved. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on these forward-looking statements. These forward-looking
statements are made as of the date of this filing. We assume no obligation to update or revise them
or provide reasons why actual results may differ.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Corporate Headquarters
We own our corporate headquarters building located in Franklin, Tennessee.
Hospitals
Our hospitals are general care hospitals offering a wide range of inpatient and outpatient
medical services. These services generally include internal medicine, surgery, cardiology,
oncology, orthopedics, OB/GYN, diagnostic and emergency room, laboratory, radiology,
respiratory therapy, physical therapy, and rehabilitation services. In addition, some of our
hospitals provide skilled nursing and home care services based on individual community needs.
For each of our hospitals owned or leased as of December 31, 2009, the following table shows
its location, the date of its acquisition or lease inception and the number of licensed beds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
|
|
|
|
|
Licensed |
|
Acquisition/Lease |
|
Ownership |
Hospital |
|
City |
|
Beds(1) |
|
Inception |
|
Type |
Alabama |
|
|
|
|
|
|
|
|
|
|
LV Stabler Memorial Hospital
|
|
Greenville
|
|
|
72 |
|
|
October, 1994
|
|
Owned |
South Baldwin Regional Medical Center
|
|
Foley
|
|
|
112 |
|
|
June, 2000
|
|
Leased |
Cherokee Medical Center
|
|
Centre
|
|
|
60 |
|
|
April, 2006
|
|
Owned |
Dekalb Regional Medical Center
|
|
Fort Payne
|
|
|
134 |
|
|
April, 2006
|
|
Owned |
Trinity Medical Center
|
|
Birmingham
|
|
|
560 |
|
|
July, 2007
|
|
Owned |
Flowers Hospital
|
|
Dothan
|
|
|
235 |
|
|
July, 2007
|
|
Owned |
Medical Center Enterprise
|
|
Enterprise
|
|
|
131 |
|
|
July, 2007
|
|
Owned |
Gadsden Regional Medical Center
|
|
Gadsden
|
|
|
346 |
|
|
July, 2007
|
|
Owned |
Crestwood Medical Center
|
|
Huntsville
|
|
|
150 |
|
|
July, 2007
|
|
Owned |
|
Alaska |
|
|
|
|
|
|
|
|
|
|
Mat-Su Regional Medical Center
|
|
Palmer
|
|
|
74 |
|
|
July, 2007
|
|
Owned |
|
Arizona |
|
|
|
|
|
|
|
|
|
|
Payson Regional Medical Center
|
|
Payson
|
|
|
44 |
|
|
August, 1997
|
|
Leased |
Western Arizona Regional Medical Center
|
|
Bullhead City
|
|
|
139 |
|
|
July, 2000
|
|
Owned |
Northwest Medical Center
|
|
Tucson
|
|
|
300 |
|
|
July, 2007
|
|
Owned |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
|
|
|
|
|
Licensed |
|
Acquisition/Lease |
|
Ownership |
Hospital |
|
City |
|
Beds(1) |
|
Inception |
|
Type |
Northwest Medical Center Oro Valley
|
|
Oro Valley
|
|
|
144 |
|
|
July, 2007
|
|
Owned |
|
Arkansas |
|
|
|
|
|
|
|
|
|
|
Harris Hospital
|
|
Newport
|
|
|
133 |
|
|
October, 1994
|
|
Owned |
Helena Regional Medical Center
|
|
Helena
|
|
|
155 |
|
|
March, 2002
|
|
Leased |
Forrest City Medical Center
|
|
Forrest City
|
|
|
118 |
|
|
March, 2006
|
|
Leased |
Northwest Medical Center Bentonville
|
|
Bentonville
|
|
|
128 |
|
|
July, 2007
|
|
Owned |
Northwest Medical Center Springdale
|
|
Springdale
|
|
|
222 |
|
|
July, 2007
|
|
Owned |
Willow Creek Womens Hospital (2)
|
|
Johnson
|
|
|
64 |
|
|
July, 2007
|
|
Owned |
Siloam Springs Memorial Hospital
|
|
Siloam Springs
|
|
|
73 |
|
|
February, 2009
|
|
Owned |
Medical Center of South Arkansas
|
|
El Dorado
|
|
|
166 |
|
|
April, 2009
|
|
Leased |
|
California |
|
|
|
|
|
|
|
|
|
|
Barstow Community Hospital
|
|
Barstow
|
|
|
56 |
|
|
January, 1993
|
|
Leased |
Fallbrook Hospital
|
|
Fallbrook
|
|
|
47 |
|
|
November, 1998
|
|
Operated (3) |
Watsonville Community Hospital
|
|
Watsonville
|
|
|
106 |
|
|
September, 1998
|
|
Owned |
|
Florida |
|
|
|
|
|
|
|
|
|
|
Lake Wales Medical Center
|
|
Lake Wales
|
|
|
160 |
|
|
December, 2002
|
|
Owned |
North Okaloosa Medical Center
|
|
Crestview
|
|
|
110 |
|
|
March, 1996
|
|
Owned |
|
|
Georgia |
|
|
|
|
|
|
|
|
|
|
Fannin Regional Hospital
|
|
Blue Ridge
|
|
|
50 |
|
|
January, 1986
|
|
Owned |
Trinity Hospital of Augusta
|
|
Augusta
|
|
|
231 |
|
|
July, 2007
|
|
Owned |
|
Illinois |
|
|
|
|
|
|
|
|
|
|
Crossroads Community Hospital
|
|
Mt. Vernon
|
|
|
57 |
|
|
October, 1994
|
|
Owned |
Gateway Regional Medical Center
|
|
Granite City
|
|
|
382 |
|
|
January, 2002
|
|
Owned |
Heartland Regional Medical Center
|
|
Marion
|
|
|
92 |
|
|
October, 1996
|
|
Owned |
Red Bud Regional Hospital
|
|
Red Bud
|
|
|
31 |
|
|
September, 2001
|
|
Owned |
Galesburg Cottage Hospital
|
|
Galesburg
|
|
|
173 |
|
|
July, 2004
|
|
Owned |
Vista Medical Center East/West
|
|
Waukegan
|
|
|
407 |
|
|
July, 2006
|
|
Owned |
Union County Hospital
|
|
Anna
|
|
|
25 |
|
|
November, 2006
|
|
Leased |
|
Indiana |
|
|
|
|
|
|
|
|
|
|
Porter Hospital
|
|
Valparaiso
|
|
|
301 |
|
|
May, 2007
|
|
Owned |
Bluffton Regional Medical Center
|
|
Bluffton
|
|
|
79 |
|
|
July, 2007
|
|
Owned |
Dupont Hospital
|
|
Fort Wayne
|
|
|
131 |
|
|
July, 2007
|
|
Owned |
Lutheran Hospital
|
|
Fort Wayne
|
|
|
432 |
|
|
July, 2007
|
|
Owned |
St. Josephs Hospital
|
|
Fort Wayne
|
|
|
191 |
|
|
July, 2007
|
|
Owned |
Dukes Memorial Hospital
|
|
Peru
|
|
|
25 |
|
|
July, 2007
|
|
Owned |
Kosciusko Community Hospital
|
|
Warsaw
|
|
|
72 |
|
|
July, 2007
|
|
Owned |
Lutheran Musculoskeletal Center(4)
|
|
Fort Wayne
|
|
|
39 |
|
|
July, 2007
|
|
Owned |
|
Kentucky |
|
|
|
|
|
|
|
|
|
|
Parkway Regional Hospital
|
|
Fulton
|
|
|
70 |
|
|
May, 1992
|
|
Owned |
Three Rivers Medical Center
|
|
Louisa
|
|
|
90 |
|
|
May, 1993
|
|
Owned |
Kentucky River Medical Center
|
|
Jackson
|
|
|
55 |
|
|
August, 1995
|
|
Leased |
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
|
|
|
|
|
Licensed |
|
Acquisition/Lease |
|
Ownership |
Hospital |
|
City |
|
Beds(1) |
|
Inception |
|
Type |
Louisiana |
|
|
|
|
|
|
|
|
|
|
Byrd Regional Hospital
|
|
Leesville
|
|
|
60 |
|
|
October, 1994
|
|
Owned |
Northern Louisiana Medical Center
|
|
Ruston
|
|
|
159 |
|
|
April, 2007
|
|
Owned |
Women & Childrens Hospital
|
|
Lake Charles
|
|
|
88 |
|
|
July, 2007
|
|
Owned |
|
Mississippi |
|
|
|
|
|
|
|
|
|
|
Wesley Medical Center
|
|
Hattiesburg
|
|
|
211 |
|
|
July, 2007
|
|
Owned |
River Region Health System
|
|
Vicksburg
|
|
|
341 |
|
|
July, 2007
|
|
Owned |
|
Missouri |
|
|
|
|
|
|
|
|
|
|
Moberly Regional Medical Center
|
|
Moberly
|
|
|
103 |
|
|
November, 1993
|
|
Owned |
Northeast Regional Medical Center
|
|
Kirksville
|
|
|
115 |
|
|
December, 2000
|
|
Leased |
|
Nevada |
|
|
|
|
|
|
|
|
|
|
Mesa View Regional Hospital
|
|
Mesquite
|
|
|
25 |
|
|
July, 2007
|
|
Owned |
|
New Jersey |
|
|
|
|
|
|
|
|
|
|
Memorial Hospital of Salem County
|
|
Salem
|
|
|
140 |
|
|
September, 2002
|
|
Owned |
|
New Mexico |
|
|
|
|
|
|
|
|
|
|
Mimbres Memorial Hospital
|
|
Deming
|
|
|
49 |
|
|
March, 1996
|
|
Owned |
Eastern New Mexico Medical Center
|
|
Roswell
|
|
|
162 |
|
|
April, 1998
|
|
Owned |
Alta Vista Regional Hospital
|
|
Las Vegas
|
|
|
54 |
|
|
April, 2000
|
|
Owned |
Carlsbad Medical Center
|
|
Carlsbad
|
|
|
112 |
|
|
July, 2007
|
|
Owned |
Lea Regional Medical Center
|
|
Hobbs
|
|
|
201 |
|
|
July, 2007
|
|
Owned |
Mountain View Regional Medical Center
|
|
Las Cruces
|
|
|
168 |
|
|
July, 2007
|
|
Owned |
|
North Carolina |
|
|
|
|
|
|
|
|
|
|
Martin General Hospital
|
|
Williamston
|
|
|
49 |
|
|
November, 1998
|
|
Leased |
|
Ohio |
|
|
|
|
|
|
|
|
|
|
Affinity Medical Center
|
|
Massillon
|
|
|
166 |
|
|
July, 2007
|
|
Owned |
|
Oklahoma |
|
|
|
|
|
|
|
|
|
|
Ponca City Medical Center
|
|
Ponca City
|
|
|
140 |
|
|
May, 2006
|
|
Owned |
Claremore Regional Hospital
|
|
Claremore
|
|
|
81 |
|
|
July, 2007
|
|
Owned |
Deaconess Hospital
|
|
Oklahoma City
|
|
|
313 |
|
|
July, 2007
|
|
Owned |
SouthCrest Hospital
|
|
Tulsa
|
|
|
180 |
|
|
July, 2007
|
|
Owned |
Woodward Regional Hospital
|
|
Woodward
|
|
|
87 |
|
|
July, 2007
|
|
Leased |
|
Oregon |
|
|
|
|
|
|
|
|
|
|
McKenzie-Willamette Medical Center
|
|
Springfield
|
|
|
114 |
|
|
July, 2007
|
|
Owned |
|
Pennsylvania |
|
|
|
|
|
|
|
|
|
|
Berwick Hospital
|
|
Berwick
|
|
|
101 |
|
|
March, 1999
|
|
Owned |
Brandywine Hospital
|
|
Coatesville
|
|
|
179 |
|
|
June, 2001
|
|
Owned |
Jennersville Regional Hospital
|
|
West Grove
|
|
|
59 |
|
|
October, 2001
|
|
Owned |
Easton Hospital
|
|
Easton
|
|
|
254 |
|
|
October, 2001
|
|
Owned |
Lock Haven Hospital
|
|
Lock Haven
|
|
|
49 |
|
|
August, 2002
|
|
Owned |
Pottstown Memorial Medical Center
|
|
Pottstown
|
|
|
215 |
|
|
July, 2003
|
|
Owned |
Phoenixville Hospital
|
|
Phoenixville
|
|
|
138 |
|
|
August, 2004
|
|
Owned |
Chestnut Hill Hospital
|
|
Philadelphia
|
|
|
164 |
|
|
February, 2005
|
|
Owned |
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
|
|
|
|
|
Licensed |
|
Acquisition/Lease |
|
Ownership |
Hospital |
|
City |
|
Beds(1) |
|
Inception |
|
Type |
Sunbury Community Hospital
|
|
Sunbury
|
|
|
92 |
|
|
October, 2005
|
|
Owned |
Wilkes-Barre General Hospital
|
|
Wilkes-Barre
|
|
|
553 |
|
|
April, 2009
|
|
Owned |
|
|
South Carolina |
|
|
|
|
|
|
|
|
|
|
Marlboro Park Hospital
|
|
Bennettsville
|
|
|
102 |
|
|
August, 1996
|
|
Leased |
Chesterfield General Hospital
|
|
Cheraw
|
|
|
59 |
|
|
August, 1996
|
|
Leased |
Springs Memorial Hospital
|
|
Lancaster
|
|
|
231 |
|
|
November, 1994
|
|
Owned |
Carolinas Hospital System Florence
|
|
Florence
|
|
|
420 |
|
|
July, 2007
|
|
Owned |
Mary Black Memorial Hospital
|
|
Spartanburg
|
|
|
209 |
|
|
July, 2007
|
|
Owned |
|
Tennessee |
|
|
|
|
|
|
|
|
|
|
Lakeway Regional Hospital
|
|
Morristown
|
|
|
135 |
|
|
May, 1993
|
|
Owned |
Regional Hospital of Jackson
|
|
Jackson
|
|
|
154 |
|
|
January, 2003
|
|
Owned |
Dyersburg Regional Medical Center
|
|
Dyersburg
|
|
|
225 |
|
|
January, 2003
|
|
Owned |
Haywood Park Community Hospital
|
|
Brownsville
|
|
|
62 |
|
|
January, 2003
|
|
Owned |
Henderson County Community Hospital
|
|
Lexington
|
|
|
45 |
|
|
January, 2003
|
|
Owned |
McKenzie Regional Hospital
|
|
McKenzie
|
|
|
45 |
|
|
January, 2003
|
|
Owned |
McNairy Regional Hospital
|
|
Selmer
|
|
|
45 |
|
|
January, 2003
|
|
Owned |
Volunteer Community Hospital
|
|
Martin
|
|
|
100 |
|
|
January, 2003
|
|
Owned |
Heritage Medical Center
|
|
Shelbyville
|
|
|
60 |
|
|
July, 2005
|
|
Owned |
Sky Ridge Medical Center
|
|
Cleveland
|
|
|
351 |
|
|
October, 2005
|
|
Owned |
Gateway Medical Center
|
|
Clarksville
|
|
|
270 |
|
|
July, 2007
|
|
Owned |
|
Texas |
|
|
|
|
|
|
|
|
|
|
Big Bend Regional Medical Center
|
|
Alpine
|
|
|
25 |
|
|
October, 1999
|
|
Owned |
Cleveland Regional Medical Center
|
|
Cleveland
|
|
|
107 |
|
|
August, 1996
|
|
Leased |
Scenic Mountain Medical Center
|
|
Big Spring
|
|
|
150 |
|
|
October, 1994
|
|
Owned |
Hill Regional Hospital
|
|
Hillsboro
|
|
|
92 |
|
|
October, 1994
|
|
Owned |
Lake Granbury Medical Center
|
|
Granbury
|
|
|
83 |
|
|
January, 1997
|
|
Leased |
South Texas Regional Medical Center
|
|
Jourdanton
|
|
|
67 |
|
|
November, 2001
|
|
Owned |
Laredo Medical Center
|
|
Laredo
|
|
|
326 |
|
|
October, 2003
|
|
Owned |
Weatherford Regional Medical Center
|
|
Weatherford
|
|
|
99 |
|
|
November, 2006
|
|
Leased |
Abilene Regional Medical Center
|
|
Abilene
|
|
|
231 |
|
|
July, 2007
|
|
Owned |
Brownwood Regional Medical Center
|
|
Brownwood
|
|
|
194 |
|
|
July, 2007
|
|
Owned |
College Station Medical Center
|
|
College Station
|
|
|
141 |
|
|
July, 2007
|
|
Owned |
Navarro Regional Hospital
|
|
Corsicana
|
|
|
162 |
|
|
July, 2007
|
|
Owned |
Longview Regional Medical Center
|
|
Longview
|
|
|
131 |
|
|
July, 2007
|
|
Owned |
Woodland Heights Medical Center
|
|
Lufkin
|
|
|
149 |
|
|
July, 2007
|
|
Owned |
San Angelo Community Medical Center
|
|
San Angelo
|
|
|
171 |
|
|
July, 2007
|
|
Owned |
DeTar Healthcare System
|
|
Victoria
|
|
|
308 |
|
|
July, 2007
|
|
Owned |
Cedar Park Regional Medical Center
|
|
Cedar Park
|
|
|
77 |
|
|
December, 2007
|
|
Owned |
|
Utah |
|
|
|
|
|
|
|
|
|
|
Mountain West Medical Center
|
|
Tooele
|
|
|
35 |
|
|
October, 2000
|
|
Owned |
|
Virginia |
|
|
|
|
|
|
|
|
|
|
Southern Virginia Regional Medical
Center
|
|
Emporia
|
|
|
80 |
|
|
March, 1999
|
|
Owned |
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
|
|
|
|
|
Licensed |
|
Acquisition/Lease |
|
Ownership |
Hospital |
|
City |
|
Beds(1) |
|
Inception |
|
Type |
Southampton Memorial Hospital
|
|
Franklin
|
|
|
105 |
|
|
March, 2000
|
|
Owned |
Southside Regional Medical Center
|
|
Petersburg
|
|
|
300 |
|
|
August, 2003
|
|
Owned |
|
Washington |
|
|
|
|
|
|
|
|
|
|
Deaconess Medical Center
|
|
Spokane
|
|
|
388 |
|
|
October, 2008
|
|
Owned |
Valley Hospital and Medical Center
|
|
Spokane Valley
|
|
|
123 |
|
|
October, 2008
|
|
Owned |
|
West Virginia |
|
|
|
|
|
|
|
|
|
|
Plateau Medical Center
|
|
Oak Hill
|
|
|
25 |
|
|
July, 2002
|
|
Owned |
Greenbrier Valley Medical Center
|
|
Ronceverte
|
|
|
122 |
|
|
July, 2007
|
|
Owned |
|
Wyoming |
|
|
|
|
|
|
|
|
|
|
Evanston Regional Hospital
|
|
Evanston
|
|
|
42 |
|
|
November, 1999
|
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
Total Licensed Beds at December 31, 2009
|
|
|
|
|
18,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Licensed beds are the number of beds for which the appropriate state agency licenses a facility
regardless of whether the beds are actually available for patient use. |
|
(2) |
|
In 2008, we segregated this entity from Northwest Medical Center Bentonville for reporting purposes. |
|
(3) |
|
We operate this hospital under a lease-leaseback and operating agreement. We recognize all operating
statistics, revenues and expenses associated with this hospital in our consolidated financial
statements. |
|
(4) |
|
In 2008, we segregated this entity from Lutheran Hospital for reporting purposes. |
The real property of substantially all of our wholly-owned hospitals is encumbered by
mortgages under the Credit Facility.
The following table lists the hospitals owned by joint venture entities in which we do not
have a consolidating ownership interest, along with our percentage ownership interest in the joint
venture entity as of December 31, 2009. Information on licensed beds was provided by the majority
owner and manager of each joint venture. A subsidiary of HCA is the majority owner of Macon
Healthcare LLC and a subsidiary of Universal Health Systems Inc. is the majority owner of Summerlin
Hospital Medical Center LLC and Valley Health System LLC.
|
|
|
|
|
|
|
|
|
|
|
Joint Venture |
|
Facility Name |
|
City |
|
State |
|
Licensed Beds |
Macon Healthcare LLC
|
|
Coliseum Medical Center (38%)
|
|
Macon
|
|
GA
|
|
|
250 |
|
Macon Healthcare LLC
|
|
Coliseum Psychiatric Center (38%)
|
|
Macon
|
|
GA
|
|
|
60 |
|
Macon Healthcare LLC
|
|
Coliseum Northside Hospital (38%)
|
|
Macon
|
|
GA
|
|
|
103 |
|
Summerlin Hospital Medical Center
LLC
|
|
Summerlin Hospital Medical
Center (26.1%)
|
|
Las Vegas
|
|
NV
|
|
|
454 |
|
Valley Health System LLC
|
|
Desert Springs Hospital (27.5%)
|
|
Las Vegas
|
|
NV
|
|
|
286 |
|
Valley Health System LLC
|
|
Valley Hospital Medical Center
(27.5%)
|
|
Las Vegas
|
|
NV
|
|
|
404 |
|
Valley Health System LLC
|
|
Spring Valley Hospital Medical
Center (27.5%)
|
|
Las Vegas
|
|
NV
|
|
|
231 |
|
Valley Health System LLC
|
|
Centennial Hills Medical Center
(27.5%)
|
|
Las Vegas
|
|
NV
|
|
|
165 |
|
32
Item 3. Legal Proceedings
From time to time, we receive various inquiries or subpoenas from state regulators, fiscal
intermediaries, the Centers for Medicare and Medicaid Services and the Department of Justice
regarding various Medicare and Medicaid issues. In addition, we are subject to other claims and
lawsuits arising in the ordinary course of our business. We are not aware of any pending or
threatened litigation that is not covered by insurance policies or reserved for in our financial
statements or which we believe would have a material adverse impact on us; however, some pending or
threatened proceedings against us may involve potentially substantial amounts as well as the
possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could
be material. Settlements of suits involving Medicare and Medicaid issues routinely require both
monetary payments as well as corporate integrity agreements. Additionally, qui tam or
whistleblower actions initiated under the civil False Claims Act may be pending but placed under
seal by the court to comply with the False Claims Acts requirements for filing such suits.
Community Health Systems, Inc. Legal Proceedings
In May 1999, we were served with a complaint in U.S. ex rel. Bledsoe v. Community Health
Systems, Inc., subsequently moved to the Middle District of Tennessee, Case No. 2-00-0083. This qui
tam action sought treble damages and penalties under the False Claims Act against us. The relator
has now dismissed this case.
In August 2004, we were served a complaint in Arleana Lawrence and Robert Hollins v. Lakeview
Community Hospital and Community Health Systems, Inc. (now styled Arleana Lawrence and Lisa Nichols
vs. Eufaula Community Hospital, Community Health Systems, Inc., South Baldwin Regional Medical
Center and Community Health Systems Professional Services Corporation) in the Circuit Court of
Barbour County, Alabama (Eufaula Division). This alleged class action was brought by the plaintiffs
on behalf of themselves and as the representatives of similarly situated uninsured individuals who
were treated at our Lakeview Hospital or any of our other Alabama hospitals. This case has now been
dismissed.
On March 3, 2005, we were served with a complaint in Sheri Rix v. Heartland Regional Medical
Center and Health Care Systems, Inc. in the Circuit Court of Williamson County, Illinois. This
alleged class action was brought by the plaintiff on behalf of herself and as the representative of
similarly situated uninsured individuals who were treated at our Heartland Regional Medical Center.
This case has now been dismissed.
On February 10, 2006, we received a letter from the Civil Division of the Department of
Justice requesting documents in an investigation it was conducting involving the Company. The
inquiry related to the way in which different state Medicaid programs apply to the federal
government for matching or supplemental funds that are ultimately used to pay for a small portion
of the services provided to Medicaid and indigent patients. These programs are referred to by
different names, including intergovernmental payments, upper payment limit programs, and
Medicaid disproportionate share hospital payments. The February 2006 letter focused on our
hospitals in three states: Arkansas, New Mexico, and South Carolina. On August 31, 2006, we
received a follow up letter from the Department of Justice requesting additional documents relating
to the programs in New Mexico and the payments to the Companys three hospitals in that state.
Through the beginning of 2009, we provided the Department of Justice with requested documents, met
with them on numerous occasions, and otherwise cooperated in its investigation. During the course
of the investigation, the Civil Division notified us that it believed that we and these three New
Mexico hospitals caused the State of New Mexico to submit improper claims for federal funds, in
violation of the Federal False Claims Act. At one point, the Civil Division calculated that the
three hospitals received ineligible federal participation payments from August 2000 to June 2006 of
approximately $27.5 million and said that if it proceeded to trial, it would seek treble damages
plus an appropriate penalty for each of the violations of the Federal False Claims Act. This
investigation has culminated in the federal governments intervention in a qui tam lawsuit styled
U.S. ex rel. Baker vs. Community Health Systems, Inc., pending in the United States District Court
for the District of New Mexico. The federal government filed its complaint in intervention on June
30, 2009. The relator filed a second amended complaint on July 1, 2009. Both of these complaints expand the time period during
which alleged improper payments were made. We filed motions to dismiss
all of the federal governments and the relators claims on August 28, 2009. The federal
government and the relator responded on October 16, 2009. We filed a reply to each response and
are waiting on the courts rulings. We are vigorously defending this action.
33
On June 12, 2008, two of our hospitals received letters from the U.S. Attorneys Office for
the Western District of New York requesting documents in an investigation it was conducting into
billing practices with respect to kyphoplasty procedures performed during the period January 1,
2002, through June 9, 2008. On September 16, 2008, one of our hospitals in South Carolina also
received an inquiry. Kyphoplasty is a surgical spine procedure that returns a compromised vertebrae
(either from trauma or osteoporotic disease process) to its previous height, reducing or
eliminating severe pain. We have been informed that similar investigations have been initiated at
unaffiliated facilities in Alabama, South Carolina, Indiana and other states. We believe that this
investigation is related to a recent qui tam settlement between the same U.S. Attorneys office and
the manufacturer and distributor of the Kyphon product, which is used in performing the kyphoplasty
procedure. We are cooperating with the investigation by collecting and producing material
responsive to the requests. At this stage, we do not have sufficient information to determine
whether our hospitals have engaged in inappropriate billing for kyphoplasty procedures. We are
continuing to evaluate and discuss this matter with the federal government.
On April 19, 2009, we were served in Roswell, New Mexico with an answer and counterclaim in
the case of Roswell Hospital Corporation d/b/a Eastern New Mexico Medical Center vs. Patrick
Sisneros and Tammie McClain (sued as Jane Doe Sineros). The case was originally filed as a
collection matter. The counterclaim was filed as a putative class action and alleged theories of
breach of contract, unjust enrichment, misrepresentation, prima facie tort, Fair Trade Practices
Act and violation of the New Mexico RICO statute. On May 7, 2009, the hospital filed a notice of
removal to federal court. On July 27, 2009, the case was remanded to state court for lack of a
federal question. A motion to dismiss and a motion to dismiss misjoined counterclaim plaintiffs
were filed on October 20, 2009. These motions were denied. Extensive discovery is under way. A
motion for class certification has been filed and is set to be heard on March 3, 2010. We are
vigorously defending this action.
On December 7, 2009, we received a document subpoena from the U.S. Department of Health and
Human Services, Office of the Inspector General, or OIG, requesting documents related to our
hospital in Laredo, Texas. The categories of documents requested included case management,
resource management, admission criteria, patient medical records, coding, billing, compliance, the
Joint Commission accreditation, physician documentation, payments to referral sources, transactions
involving physicians, disproportionate share hospital status, and audits by the hospitals Quality
Improvement organization. On January 22, 2010, we received a request for information or
assistance from the OIGs Office of Investigation requesting patient medical records
from Laredo Medical Center in Laredo, Texas for certain Medicaid patients with an extended length of stay. We are cooperating fully with these
investigations.
Triad Hospitals, Inc. Legal Proceedings
Triad, and its subsidiary, Quorum Health Resources, Inc. are defendants in a qui tam case
styled U.S. ex rel. Whitten vs. Quorum Health Resources, Inc. et al., which is pending in the
Southern District of Georgia, Brunswick Division. Whitten, a long-term employee of a two hospital
system in Brunswick and Camden, Georgia sued both his employer and Quorum Health Resources, Inc.
and its predecessors, which had managed the facility from 1989 through September 2000; upon his
termination of employment, Whitten signed a release and was paid $124,000. Whittens original qui
tam complaint was filed under seal in November 2002 and the case was unsealed in 2004. Whitten
alleges various charging and billing infractions, including charging for routine equipment supplies
and services not separately billable, billing for observation services that were not medically
necessary or for which there was no physician order, billing labor and delivery patients for
durable medical equipment that was not separately billable, inappropriate preparation of patients
histories and physicals, billing for cardiac rehabilitation services without physician supervision,
performing outpatient dialysis without Medicare certification, and performing mental health
services without the proper staff assignments. This case has been settled for $0.3 million and
final settlement documents are being prepared.
In a case styled U.S. ex rel. Bartlett vs. Quorum Health Resources, Inc., et al., pending in
the Western District of Pennsylvania, Johnstown Division, the relator alleges in his second amended
complaint, filed in January 2006 (the first amended complaint having been dismissed), that Quorum
conspired with an unaffiliated hospital to pay an illegal remuneration in violation of the
anti-kickback statute and the Stark laws, thus causing false claims to be filed. A renewed motion
to dismiss that was filed in March 2006 asserting that the second amended complaint did not cure
the defects contained in the first amended complaint. In September 2006, the hospital and one of
the other
34
defendants affiliated with the hospital filed for protection under Chapter 11 of the federal
bankruptcy code, which imposed an automatic stay on proceedings in the case. Relators entered into
a settlement agreement with the hospital, subject to confirmation of the hospitals reorganization
plan. The District Court conducted a status conference on January 30, 2009 and later convened
another conference on March 30, 2009 and heard arguments on whether to proceed with a motion to
dismiss, but did not make a ruling. We believe that this case is without merit and should the stay
be lifted, will continue to vigorously defend it.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the year
ended December 31, 2009.
35
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We completed an initial public offering of our common stock on June 14, 2000. Our common stock
began trading on June 9, 2000 and is listed on the New York Stock Exchange under the symbol CYH. At
February 17, 2010, there were approximately 40 record holders of our common stock. The following
table sets forth, for the periods indicated, the high and low sale prices per share of our common
stock as reported by the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
36.85 |
|
|
$ |
29.79 |
|
Second Quarter |
|
|
40.05 |
|
|
|
32.40 |
|
Third Quarter |
|
|
36.81 |
|
|
|
28.24 |
|
Fourth Quarter |
|
|
28.38 |
|
|
|
10.47 |
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
21.60 |
|
|
$ |
12.96 |
|
Second Quarter |
|
|
28.79 |
|
|
|
13.95 |
|
Third Quarter |
|
|
35.50 |
|
|
|
24.42 |
|
Fourth Quarter |
|
|
38.00 |
|
|
|
29.35 |
|
In 2009, we discovered that we had inadvertently not fully complied with the registration
requirements of the Securities Act of 1933 with respect to our common stock purchased in the open
market on behalf of participants in certain of our employee 401(K) plans. As a result, certain plan
participants who purchased these shares were offered rescission rights with respect to their
interests in our common stock held under these plans. Based upon a final review of the rescission
offer that ended on February 11, 2010, 793 shares of common
stock were repurchased by us and
other payments were made for a total of approximately $40,000. We have fulfilled the registration
requirements as of December 31, 2009 in order to become fully compliant on an ongoing basis.
36
Corporate Performance Graph
The following graph sets forth the cumulative return of our common stock during the five year
period ended December 31, 2009, as compared to the cumulative return of the Standard & Poors 500
Stock Index (S&P 500) and the cumulative return of the Dow Jones Healthcare Index. The graph
assumes an initial investment of $100 in our common stock and in each of the foregoing indices and
the reinvestment of dividends where applicable.
We have not paid any cash dividends since our inception, and do not anticipate the payment of
cash dividends in the foreseeable future. Our Credit Facility limits our ability to pay dividends
and/or repurchase stock and the Notes to an amount not to exceed $400 million in the aggregate (but
not in excess of $200 million unless we receive confirmation from Moodys and S&P that dividends or
repurchases would not result in a downgrade, qualification or withdrawal of the then corporate
credit rating). The indenture governing our Notes also limits our ability to pay dividends and/or
repurchase stock. As of December 31, 2009, under the most restrictive test under these agreements,
we have approximately $100 million remaining available with which to pay permitted dividends and/or
make stock and Note repurchases.
37
Item 6. Selected Financial Data
The following table summarizes specified selected financial data and should be read in
conjunction with our related Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements. The amounts shown below have been adjusted for discontinued
operations. We have restated our 2008 and 2007 financial statements and statistical results to
include a hospital and related businesses, which were previously reported as discontinued
operations and are now included in continuing operations.
Community
Health Systems, Inc.
Five Year Summary of Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
|
2008 |
|
|
2007(1) |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except share and per share data) |
Consolidated Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
12,107,613 |
|
|
$ |
10,919,095 |
|
|
$ |
7,095,861 |
|
|
$ |
4,180,136 |
|
|
$ |
3,576,117 |
|
Income from operations |
|
|
1,068,665 |
|
|
|
971,880 |
|
|
|
471,612 |
|
|
|
385,057 |
|
|
|
398,463 |
|
Income from continuing operations |
|
|
304,805 |
|
|
|
233,727 |
|
|
|
67,431 |
|
|
|
177,695 |
|
|
|
188,370 |
|
Net income
attributable to Community Health Systems, Inc. |
|
|
243,150 |
|
|
|
218,304 |
|
|
|
30,289 |
|
|
|
168,263 |
|
|
|
167,544 |
|
Income
from continuing operations attributable to Community Health Systems,
Inc. common stockholders per share (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.67 |
|
|
$ |
2.13 |
|
|
$ |
0.58 |
|
|
$ |
1.87 |
|
|
$ |
2.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.64 |
|
|
$ |
2.11 |
|
|
$ |
0.57 |
|
|
$ |
1.85 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations attributable to Community Health Systems, Inc. common stockholders per share (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
(0.25 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Community Health
Systems, Inc. common stockholders per share (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.68 |
|
|
$ |
2.34 |
|
|
$ |
0.32 |
|
|
$ |
1.77 |
|
|
$ |
1.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.66 |
|
|
$ |
2.32 |
|
|
$ |
0.32 |
|
|
$ |
1.75 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
90,614,886 |
|
|
|
93,371,782 |
|
|
|
93,517,337 |
|
|
|
94,983,646 |
|
|
|
88,601,168 |
|
Diluted (3) |
|
|
91,517,274 |
|
|
|
94,288,829 |
|
|
|
94,642,294 |
|
|
|
96,232,910 |
|
|
|
98,579,977 |
(4) |
|
|
Cash and cash equivalents |
|
$ |
344,541 |
|
|
$ |
220,655 |
|
|
$ |
133,574 |
|
|
$ |
40,566 |
|
|
$ |
104,108 |
|
Total assets |
|
|
14,021,472 |
|
|
|
13,818,254 |
|
|
|
13,493,644 |
|
|
|
4,506,579 |
|
|
|
3,934,218 |
|
Long-term obligations |
|
|
10,179,402 |
|
|
|
10,287,535 |
|
|
|
9,974,516 |
|
|
|
2,207,623 |
|
|
|
1,932,238 |
|
Community
Health Systems, Inc. stockholders equity |
|
|
1,950,635 |
|
|
|
1,611,029 |
|
|
|
1,687,293 |
|
|
|
1,718,697 |
|
|
|
1,564,577 |
|
|
|
|
(1) |
|
Includes the results of operations of the former Triad hospitals from July 25, 2007, the date of acquisition. |
|
(2) |
|
Total per share amounts may not add due to rounding. |
|
(3) |
|
See Note 12 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K. |
|
(4) |
|
Included 8,385,031 shares related to the convertible notes under the if-converted method of determining
weighted average shares outstanding. |
38
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read this discussion together with our consolidated financial statements and the
accompanying notes to consolidated financial statements and Selected Financial Data included
elsewhere in this Form 10-K.
Executive Overview
We are the largest publicly traded operator of hospitals in the United States in terms of
number of facilities and net operating revenues. We provide healthcare services through these
hospitals that we own and operate in non-urban and selected urban markets. We generate revenue
primarily by providing a broad range of general hospital healthcare services to patients in the
communities in which we are located. We currently have 122 general acute care hospitals. In
addition, we own four home care agencies, located in markets where we do not operate a hospital and
through our wholly-owned subsidiary, Quorum Health Resources, LLC (QHR), we provide management
and consulting services to non-affiliated general acute care hospitals located throughout the
United States. We are paid for our services by governmental agencies, private insurers and directly
by the patients we serve.
Over the past three years, we have acquired 57 hospitals, including the 50 hospitals owned by
Triad, which we acquired on July 25, 2007. Since our acquisition of Triad, we have focused most of
our efforts toward integrating the former Triad hospitals and realigning our hospital portfolio and
have taken a cautious approach in acquiring additional hospitals. Our realignment has resulted in
the selling of eight hospitals acquired from Triad and seven hospitals which we owned prior to the
acquisition of Triad. During 2008, we acquired a two hospital system located in Spokane,
Washington and in 2009 we acquired hospitals located in Siloam Springs, Arkansas, El Dorado,
Arkansas and Wilkes-Barre, Pennsylvania. In addition, on December 31, 2009, we entered into an
agreement with a multi-specialty physician clinic that has 32 locations across the Inland Northwest
region of the state of Washington. This agreement will allow our affiliated hospitals in Spokane,
Washington to work with this clinic to offer a fully integrated healthcare delivery system in that
market.
During 2009, we were challenged to navigate the uncertainties of the global and domestic
economies. Unemployment continued to increase, credit markets remained tightened and there
remained a low level of liquidity in the financial markets. Consequently, as previously disclosed,
we are continuing to take a cautious approach to our acquisition strategy during this uncertain
economic environment while focusing our efforts on increasing revenue and improving profitability
and quality.
Despite the uncertainties in the economy, our net operating revenues for the year ended
December 31, 2009 increased to approximately $12.1 billion, as compared to approximately $10.9 billion for the year ended
December 31, 2008. Income from continuing operations, before noncontrolling interests, for the year
ended December 31, 2009 increased 24.3% over the year ended December 31, 2008. This increase in
income from continuing operations during the year ended December 31, 2009, as compared to the year
ended December 31, 2008, is due primarily to an increase in surgeries performed at our hospitals,
strong outpatient growth, the realization of synergies from our acquisition of Triad and the
recognition of cost savings from our ability to effectively control costs. Our successful physician
recruiting efforts have also been a key driver in the execution of our operating strategies. Total
inpatient admissions for the year ended December 31, 2009 increased 3.6% compared to the year ended
December 31, 2008 and adjusted admissions for the year ended December 31, 2009 increased 5.6%
compared to the year ended December 31, 2008. This increase in inpatient and adjusted admissions
was due primarily to our recent acquisitions.
Self-pay revenues represented approximately 11.2% of our net operating revenues in 2009
compared to 10.7% in 2008. The value of charity care services relative to total net operating
revenues increased to 3.9% in 2009 from 3.5% in 2008. Uninsured and underinsured patients continue
to be an industry-wide issue, and we anticipate this trend will continue into the foreseeable
future. Legislative reform impacting the healthcare industry remains a priority of the current
presidential administration and various proposals continue to be strongly debated in Congress.
Given the current level of uncertainty of what may result from these reform proposals, it is not
possible, at this time, to accurately predict what impact any final legislation would have on us.
During the three months ended June 30, 2009, we decided to retain a hospital and related
businesses previously classified as held for sale. Results of operations for all periods presented
have been restated to include this retained
39
hospital and related businesses, which previously were reported as discontinued operations.
The consolidated balance sheets for each of the periods presented have been restated to present the
assets and liabilities previously reported as held for sale in the applicable financial statement
line items.
As a result of our current levels of cash, available borrowing capacity, long-term outlook on
our debt repayments and our continued projection of our ability to generate cash flows, we do not
anticipate a significant impact on our ability to invest the necessary capital in our business over
the next twelve months and into the foreseeable future. We believe there continues to be ample
opportunity for growth in substantially all of our markets by decreasing the need for patients to
travel outside their communities for healthcare services. Furthermore, we continue to benefit from
synergies from the acquisition of Triad as well as our more recent acquisitions and will continue
to strive to improve operating efficiencies and procedures in order to improve our profitability at
all of our hospitals.
Acquisitions and Dispositions
On December 31, 2009, we completed a transaction providing $54.2 million of financing to
Rockwood Clinic, P.S., a multi-specialty clinic with 32 locations across the Inland Northwest
region of Eastern Washington State and Western Idaho. This transaction was accounted for as a
purchase business combination as required by U.S. GAAP.
Effective
June 1, 2009, we acquired from Akron General Medical Center the
remaining 20% noncontrolling interest in Massillon Community Health System, LLC not then owned by us. This entity
indirectly owns and operates Affinity Medical Center of Massillon, Ohio. The purchase price for
this noncontrolling interest was $1.1 million in cash. Affinity Medical Center is now
wholly-owned by us.
Effective April 30, 2009, we acquired Wyoming Valley Health Care System in Wilkes-Barre,
Pennsylvania. This health care system includes Wilkes-Barre General Hospital, a 392-bed,
full-service acute care hospital located in Wilkes-Barre, Pennsylvania, and First Hospital Wyoming
Valley, a behavioral health facility located in Kingston, Pennsylvania, as well as other outpatient
and ancillary services. The total consideration for fixed assets and working capital of Wyoming
Valley Health Care System was approximately $179.1 million, of which $153.7 million was paid in
cash, net of $14.2 million of cash in acquired bank accounts, and approximately $25.4 million was
assumed in liabilities. This acquisition transaction was accounted for using the purchase method of
accounting. This preliminary allocation of the purchase price has been determined by us based upon
available information and the allocation is subject to the settlement of the amounts related to
purchased working capital. Adjustments to the purchase price allocation are not expected to be
material.
Effective April 1, 2009, we acquired from Share Foundation the remaining 50% equity interest
in MCSA L.L.C., an entity in which we previously had a 50% unconsolidated noncontrolling interest.
We provided MCSA L.L.C. certain management services. This acquisition resulted in us owning a 100%
equity interest in that entity. MCSA L.L.C. owns and operates Medical Center of South Arkansas (166
licensed beds) in El Dorado, Arkansas. The purchase price was $26.0 million in cash. As of the
acquisition date, we had a liability to MCSA L.L.C. of $14.1 million, as a result of a cash
management agreement previously entered into with the hospital. Upon completion of the acquisition,
this liability was eliminated in consolidation.
Effective February 1, 2009, we completed the acquisition of Siloam Springs Memorial Hospital
(74 licensed beds), located in Siloam Springs, Arkansas, from the City of Siloam Springs. The total
consideration for this hospital consisted of approximately $0.1 million paid in cash for working
capital and approximately $1.0 million of assumed liabilities. In connection with this acquisition,
we entered into a lease agreement for the existing hospital and agreed to build a replacement
facility at this location, with construction required to commence by February 2011 and be completed
by February 2013. As security for this obligation, we deposited $1.6 million into an escrow account
at closing and agreed to deposit an additional $1.6 million by February 1, 2010, which we deposited
in January 2010. If the construction of the replacement facility is not completed within the
agreed time frame, the escrow balance will be remitted to the City of Siloam Springs. If the
construction of the replacement facility is completed within the agreed time frame, the escrow
balance will be returned to us.
Effective March 31, 2009, through our subsidiaries Triad-Denton Hospital LLC and Triad-Denton
Hospital LP, we completed the settlement of pending litigation, which resulted in the sale of our
ownership interest in a partnership, which owned and operated Presbyterian Hospital of Denton (255
licensed beds) in Denton, Texas, to
40
Texas Health Resources for $103.0 million in cash. Also as part of the settlement, our
subsidiaries transferred certain hospital related assets to Texas Health Resources.
Sources of Revenue
The following table presents the approximate percentages of net operating revenues derived
from Medicare, Medicaid, managed care and other third party payors, and self-pay for the periods
indicated. The data for the years presented are not strictly comparable due to the significant
effect that hospital acquisitions have had on these statistics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Medicare |
|
|
27.1 |
% |
|
|
27.5 |
% |
|
|
29.0 |
% |
Medicaid |
|
|
9.8 |
% |
|
|
9.1 |
% |
|
|
10.3 |
% |
Managed care and other third party payors |
|
|
51.9 |
% |
|
|
52.7 |
% |
|
|
50.7 |
% |
Self pay |
|
|
11.2 |
% |
|
|
10.7 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net operating revenues include amounts estimated by management to be reimbursable by Medicare
and Medicaid under prospective payment systems and provisions of cost-based reimbursement and other
payment methods. In addition, we are reimbursed by non-governmental payors using a variety of
payment methodologies. Amounts we receive for treatment of patients covered by these programs are
generally less than the standard billing rates. We account for the differences between the
estimated program reimbursement rates and the standard billing rates
as contractual allowance adjustments,
which we deduct from gross revenues to arrive at net operating revenues. Final settlements under
some of these programs are subject to adjustment based on administrative review and audit by third
parties. We account for adjustments to previous program reimbursement estimates as contractual
allowance adjustments and report them in the periods that such adjustments become known. Contractual
allowance adjustments related to final settlements and previous program reimbursement estimates
impacted net operating revenues and net income by an insignificant amount in each of the years
ended December 31, 2009, 2008 and 2007. In the future, we expect the percentage of revenues
received from the Medicare program to increase due to the general aging of the population.
The payment rates under the Medicare program for inpatient acute services are based on a
prospective payment system, depending upon the diagnosis of a patients condition. These rates are
indexed for inflation annually, although the increases have historically been less than actual
inflation. Reductions in the rate of increase in Medicare reimbursement may cause our net operating
revenue growth to decline.
In addition, specified managed care programs, insurance companies, and employers are actively
negotiating the amounts paid to hospitals. The trend toward increased enrollment in managed care
may adversely effect our net operating revenue growth.
Results of Operations
Our hospitals offer a variety of services involving a broad range of inpatient and outpatient
medical and surgical services. These include orthopedics, cardiology, occupational medicine,
diagnostic services, emergency services, rehabilitation treatment, home care and skilled nursing.
The strongest demand for hospital services generally occurs during January through April and the
weakest demand for these services occurs during the summer months. Accordingly, eliminating the effect of new acquisitions, our net operating revenues and
earnings are historically highest during the first quarter and lowest during the third quarter.
41
The following tables summarize, for the periods indicated, selected operating data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Expressed as a percentage of net operating revenues) |
|
Consolidated (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses (b) |
|
|
(86.5 |
) |
|
|
(86.5 |
) |
|
|
(89.0 |
) |
Depreciation and amortization |
|
|
(4.7 |
) |
|
|
(4.6 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
8.8 |
|
|
|
8.9 |
|
|
|
6.6 |
|
Interest expense, net |
|
|
(5.4 |
) |
|
|
(6.0 |
) |
|
|
(5.1 |
) |
Gain (loss) from early extinguishment of debt (c) |
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
Equity in earnings of unconsolidated affiliates |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
3.7 |
|
|
|
3.3 |
|
|
|
1.5 |
|
Provision for income taxes |
|
|
(1.2 |
) |
|
|
(1.2 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2.5 |
|
|
|
2.1 |
|
|
|
0.9 |
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
0.2 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.5 |
|
|
|
2.3 |
|
|
|
0.6 |
|
Less: Net income attributable to noncontrolling interests |
|
|
(0.5 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Community Health Systems, Inc. |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Expressed in percentages) |
|
Percentage increase from same period prior year(a): |
|
|
|
|
|
|
|
|
Net operating revenues |
|
|
10.9 |
% |
|
|
53.9 |
% |
Admissions |
|
|
3.6 |
|
|
|
45.0 |
|
Adjusted admissions(d) |
|
|
5.6 |
|
|
|
42.8 |
|
Average length of stay |
|
|
|
|
|
|
|
|
Net income
attributable to Community Health Systems, Inc. (e) |
|
|
11.4 |
|
|
|
620.7 |
|
Same-store percentage increase (decrease) from same period prior year(a)(f): |
|
|
|
|
|
|
|
|
Net operating revenues |
|
|
5.9 |
% |
|
|
6.4 |
% |
Admissions |
|
|
(1.5 |
) |
|
|
1.8 |
|
Adjusted admissions(d) |
|
|
0.7 |
|
|
|
2.1 |
|
|
|
|
(a) |
|
We have restated our 2008 and 2007 financial statements and statistical
results to include a hospital and related businesses, which were
previously reported as discontinued operations and are now included in
continuing operations. |
|
(b) |
|
Operating expenses include salaries and benefits, provision for bad
debts, supplies, rent, and other operating expenses. |
42
|
|
|
(c) |
|
Gain (loss) from early extinguishment of debt was less than 0.1% for the
years ended December 31, 2009 and 2008. |
|
(d) |
|
Adjusted admissions is a general measure of combined inpatient and
outpatient volume. We computed adjusted admissions by multiplying
admissions by gross patient revenues and then dividing that number by
gross inpatient revenues. |
|
(e) |
|
Includes income or loss from discontinued operations. |
|
(f) |
|
Includes acquired hospitals to the extent we operated them in both years. |
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net
operating revenues increased by 10.9% to approximately
$12.1 billion in 2009, from approximately $10.9 billion in
2008. Growth from hospitals owned throughout both periods contributed $639 million of that increase
and $550 million was contributed by hospitals acquired in 2009 and 2008. On a same-store basis, net
operating revenues increased 5.9%. The increase from hospitals that we owned throughout both
periods was primarily attributable to higher acuity level of services provided and outpatient
growth, along with rate increases and favorable payor mix. These improvements were partially offset
by the stronger flu and respiratory season during the year ended December 31, 2008, as compared to
the year ended December 31, 2009, and the extra day from the leap year in 2008.
On a consolidated basis, inpatient admissions increased by 3.6% and adjusted admissions
increased by 5.6%. On a same-store basis, inpatient admissions decreased by 1.5% during the year
ended December 31, 2009. This decrease in inpatient admissions was due primarily to the strong flu
and respiratory season during the year ended December 31, 2008, which did not recur during 2009,
the 2008 period having one additional day because it was a leap year, and the impact of closing
certain less profitable services.
Operating expenses, excluding depreciation and amortization, as a percentage of net operating
revenues, remained consistent at 86.5% for 2008 and 2009. Salaries and benefits, as a percentage of
net operating revenues, remained consistent at 40.0% for 2008 and 2009. Provision for bad debts, as
a percentage of net revenues, increased from 11.2% in 2008 to 12.1% in 2009. This increase in the
provision for bad debts primarily represents an increase in self-pay revenues over the comparable
period of 2008 due to increased charges and the impact of current economic conditions on
individuals ability to pay. Supplies, as a percentage of net operating revenues, decreased from
14.0% in 2008 to 13.9% in 2009. Rent and other operating expenses, as a percentage of net operating
revenues, decreased from 21.3% in 2008 to 20.5% in 2009. This decrease in rent and other operating
expenses is due primarily to reductions in contract labor. As part of our acquisition of Triad, we
acquired noncontrolling ownership interests in several hospitals. Our percentage of ownership
interests in these joint ventures provided earnings of 0.3% in 2009 compared to 0.4% in 2008 of net
operating revenues. Prior to the Triad acquisition, we did not have any material noncontrolling
investments in joint ventures.
Depreciation and amortization increased from 4.6% of net operating revenues in 2008 to 4.7% of
net operating revenues in 2009. The increase in depreciation and amortization as a percentage of
net operating revenues is primarily due to the opening of three replacement hospitals in the second
and third quarters of 2008.
Interest expense, net, decreased by $3.5 million from $652.5 million in 2008, to $649.0
million in 2009. A decrease in interest rates during the year ended December 31, 2009, compared to
the year ended December 31, 2008, accounted for $9.9 million of this decrease. In addition, we
incurred an additional $1.8 million of interest expense in 2008, which was not incurred in 2009,
since 2008 was a leap year. These decreases were offset by an increase in our average outstanding
debt during the year ended December 31, 2009, compared to December 31, 2008, which resulted in a
$2.8 million increase in interest expense. Additionally, interest expense increased by $5.4
million as a result of more of the interest during the year ended December 31, 2008 being
capitalized interest due to more major construction projects during that period, compared to the
year ended December 31, 2009.
Impairment of long-lived and other assets of $12.5 million in 2009 and $5.0 million in 2008
resulted from our assessment of the recoverability of these assets.
43
The net results of the above mentioned changes resulted in income from continuing operations
before income taxes increasing $87.1 million from $359.0 million in 2008 to $446.1 million for
2009.
Provision for income taxes from continuing operations increased from $125.3 million in 2008 to
$141.3 million in 2009 due to the increase in income from continuing operations before income
taxes. Our effective tax rates were 31.7% and 34.9% for the years ended December 31, 2009 and 2008,
respectively. The decrease in our effective tax rate is primarily a result of the recognition of a
tax benefit of $3.0 million from adjustments and revaluation of deferred income tax accounts and a
decrease in our effective state tax rate.
Income from continuing operations as a percentage of net operating revenues increased from
2.1% in 2008 to 2.5% in 2009. Net income as a percentage of net operating revenues increased from
2.3% in 2008 to 2.5% in 2009. The increase in income from continuing operations as a percentage of
net operating revenues is primarily due to the decrease in interest expense as a percentage of net
operating revenues, discussed above.
Net income attributable to noncontrolling interests as a percentage of net operating revenues
increased from 0.3% for the year ended December 31, 2008 to 0.5% for the year ended December 31,
2009. The increase in net income attributable to noncontrolling interests is due primarily to
additional syndications entered into throughout 2008 and 2009.
Net income attributable to Community Health Systems, Inc. was $243.2 million in 2009 compared
to $218.3 million for 2008, an increase of 11.4%. The increase in net income attributable to
Community Health Systems, Inc. is reflective of the increase in net operating revenues while
maintaining substantially the same profit margin levels as discussed above.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net
operating revenues increased by 53.9% to approximately
$10.9 billion in 2008, from approximately $7.1 billion in 2007.
Growth from hospitals owned throughout both periods, including the former Triad Hospitals,
contributed approximately $3.6 billion of that increase and $219 million was contributed by hospitals acquired in
2008 and 2007. On a same-store basis, net operating revenues increased 6.4%. The increase from
hospitals that we owned throughout both periods was attributable to volume increases, rate
increases, payor mix and the acuity level of services provided.
On a consolidated basis inpatient admissions increased by 45.0% and adjusted admissions
increased by 42.8%. On a same-store basis, inpatient admissions increased by 1.8% during the year
ended December 31, 2008. This increase in inpatient admissions was due primarily to the strong flu
and respiratory season during the year ended December 31, 2008 and the 2008 period having one
additional day because it was a leap year.
Operating expenses, excluding depreciation and amortization, as a percentage of net operating
revenues, decreased from 89.0% in 2007 to 86.5% in 2008. Salaries and benefits, as a percentage of
net operating revenues, decreased from 40.8% in 2007 to 40.0% in 2008, primarily as a result of
efficiency improvements realized at hospitals owned throughout both periods. These improvements
were partially offset by an increase in the number of employed physicians as well as an increase in
salaries for certain IT employees who were previously treated as leased employees with related
expense previously being included in other operating expense. Provision for bad debts, as a
percentage of net revenues, decreased from 12.5% in 2007 to 11.2% in 2008, due primarily to $70.1
million of additional bad debt expense recorded as a change in estimate to increase the allowance
for doubtful accounts in 2007. Supplies, as a percentage of net operating revenues, increased from
13.3% in 2007 to 14.0% in 2008, primarily the result of the acquisition of the former Triad
hospitals whose higher acuity of services resulted in higher supply costs than our other hospitals
taken collectively, offsetting improvements from greater utilization of and improved pricing under
our purchasing program. Rent and other operating expenses, as a percentage of net operating
revenues, decreased from 22.4% in 2007 to 21.3% in 2008, primarily as a result of the hospitals
acquired from Triad having lower rent expense as a percentage of net operating revenues. As part of
our acquisition of Triad, we acquired noncontrolling ownership interests in several hospitals. Our
percentage of ownership interests in these joint ventures provided earnings of 0.4% of net operating revenues during both of the years
ended December 31, 2008 and 2007. Prior to the Triad acquisition, we did not have any material
noncontrolling investments in joint ventures.
44
Depreciation and amortization increased from 4.4% of net operating revenues in 2007 to 4.6% of
net operating revenues in 2008.
Interest expense, net, increased by $290.4 million from $362.1 million in 2007, to $652.5
million in 2008. The primary reason for the increase in interest expense is the increase in our
average outstanding debt during the year ended December 31, 2008, as compared to the year ended
December 31, 2007, resulting in an additional $309.7 million of interest expense. Interest expense
for the year ended December 31, 2008 includes a full year of interest expense from borrowings under
our Credit Facility and the issuance of Notes in connection with the acquisition of Triad in 2007.
Since 2008 was a leap year, one additional day in the year resulted in $1.8 million of the increase
in interest expense. These increases were offset by a decrease in interest expense of $3.1 million
as a result of more of the interest during the year ended December 31, 2008 being capitalized
interest due to more major construction projects during that period, compared to the year ended
December 31, 2007. In addition, a decrease in our effective interest rate during the year ended
December 31, 2008, as compared to the year ended December 31, 2007, resulted in a decrease in
interest expense of $18.0 million.
The net results of the above mentioned changes resulted in income from continuing operations
before income taxes increasing $251.7 million from $107.3 million in 2007 to $359.0 million for
2008.
Provision for income taxes from continuing operations increased from $39.9 million in 2007 to
$125.3 million in 2008 due to the increase in income from continuing operations before income
taxes. Our effective tax rates were 34.9% and 37.2% for the years ended December 31, 2008 and 2007,
respectively. The decrease in our effective tax rate is primarily a result of a decrease in our
effective state tax rate.
Income from continuing operations as a percentage of net operating revenues increased from
0.9% in 2007 to 2.1% in 2008. Net income as a percentage of net operating revenues increased from
0.6% in 2007 to 2.3% in 2008. The increase in income from continuing operations as a percentage of
net operating revenues is primarily due to the impact of the net decrease in expenses, as a
percentage of net revenues, discussed above.
Net income attributable to noncontrolling interests as a percentage of net operating revenues
was 0.3% for the year ended December 31, 2008, compared to 0.2% for the year ended December 31,
2007.
Net income attributable to Community Health Systems, Inc. was $218.3 million in 2008 compared
to $30.3 million for 2007, an increase of 620.7%. The increase in net income attributable to
Community Health Systems, Inc. is reflective of the impact of the net decrease in expenses
discussed above, including the effect of the change in estimate that increased bad debt expense in
2007.
45
Liquidity and Capital Resources
2009 Compared to 2008
Net
cash provided by operating activities increased $19.8 million,
from approximately $1.1 billion for the
year ended December 31, 2008 to approximately $1.1 billion for the year ended December 31, 2009. The increase is
due to an increase in cash flows from net income of $53.6 million and an increase in non-cash
depreciation and amortization expense of $59.8 million and an increase in cash generated from
accounts receivable of $108.0 million, a result of the reduction in days revenue outstanding. These
increases in cash flows outstanding were offset by decreases in cash flows from accounts payable,
accrued liabilities and income taxes of $33.8 million, primarily as a result of the timing of
payments and an increase in cash paid for income taxes during 2009. Also, other non-cash expenses
decreased $83.5 million, primarily attributable to a reduction in deferred income tax expense
resulting in a reduction to cash flows, and cash flows generated from the change in all other
assets and liabilities decreased $84.3 million.
The cash used in investing activities was $867.2 million for the year ended December 31, 2009,
compared to $665.5 million for the year ended December 31, 2008. The increase in cash used in
investing activities, in comparison to the prior year, is primarily attributable to an increase in
acquisitions of facilities and other related equipment of $101.9 million, a reduction in the amount
of proceeds from the disposition of hospitals and other ancillary operations of $276.1 million due
to the sale of one hospital in 2009 versus the sale of 11 hospitals in 2008, a reduction in the
amount of the proceeds from sale of property and equipment of $9.4 million. This increase in cash
used in investing activities was offset by a reduction in the amount of purchases of property and
equipment of $115.3 million and a net decrease in other non-operating assets of $70.4 million,
primarily attributable to a decrease in cash invested in our captive insurance subsidiary, a
decrease in cash used for physician recruiting and a decrease in cash used for software related
expenditures. We anticipate being able to fund future routine capital expenditures with cash flows
generated from operations.
In 2009, our net cash used in financing activities decreased $218.6 million from $304.0
million in 2008 to $85.4 million in 2009, primarily due to an increase in borrowing under our
Credit Facility. In January 2009, we drew down the remaining $200 million of the delayed draw term
loan.
In 2008, we used $90.0 million for the repurchase of 4,786,609 shares of our outstanding
common stock on the open market. We believed this to be a prudent use of cash as a result of the
severely depressed stock price. Our Credit Facility limits our ability to pay dividends and/or
repurchase stock and the Notes to an amount not to exceed $400 million in the aggregate (but not in
excess of $200 million unless we receive confirmation from Moodys and S&P that dividends or
repurchases would not result in a downgrade, qualification or withdrawal of the then corporate
credit rating). The indenture governing our Notes also limits our ability to pay dividends and/or
repurchase stock in an amount higher than permitted by our Credit Facility. As of December 31,
2009, under the most restrictive test under these agreements, we have approximately $100 million
remaining available with which to pay permitted dividends and/or make stock and Note repurchases.
With the exception of some small principal payments of our term loans under our Credit
Facility, representing less than 1% of the outstanding balance each year through 2013, the term
loans under our Credit Facility mature in 2014 and our Notes are not due until 2015. We believe
this four to five year period before final maturity allows sufficient time for the current
financial environment to improve and permits us to make favorable changes, including refinancing,
to our debt structure. Furthermore, we do not anticipate the need to use funds currently available
under our Credit Facility for purposes of funding our operations, although these funds could be
used for the purpose of making further acquisitions or for restructuring our existing debt.
Furthermore, we anticipate we will remain in compliance with our debt covenants through the next 12
months and beyond into the foreseeable future.
46
As
described in Notes 6, 9 and 15 of the Notes to Consolidated Financial Statements, at
December 31, 2009, we had certain cash obligations, which are due as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
Total |
|
|
2010 |
|
|
2011-2013 |
|
|
2014-2015 |
|
|
and thereafter |
|
Long Term Debt |
|
$ |
6,089,862 |
|
|
$ |
59,994 |
|
|
$ |
145,222 |
|
|
$ |
5,862,736 |
|
|
$ |
21,910 |
|
Senior Notes |
|
|
2,784,331 |
|
|
|
|
|
|
|
|
|
|
|
2,784,331 |
|
|
|
|
|
Interest on Bank Facility and Notes(1) |
|
|
2,057,292 |
|
|
|
400,140 |
|
|
|
1,194,089 |
|
|
|
463,063 |
|
|
|
|
|
Capital Leases, including interest |
|
|
49,777 |
|
|
|
8,399 |
|
|
|
12,436 |
|
|
|
5,653 |
|
|
|
23,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt |
|
|
10,981,262 |
|
|
|
468,533 |
|
|
|
1,351,747 |
|
|
|
9,115,783 |
|
|
|
45,199 |
|
Operating Leases |
|
|
927,106 |
|
|
|
176,755 |
|
|
|
375,135 |
|
|
|
155,362 |
|
|
|
219,854 |
|
Replacement
Facilities and Other Capital Commitments (2) |
|
|
594,440 |
|
|
|
127,936 |
|
|
|
379,326 |
|
|
|
50,000 |
|
|
|
37,178 |
|
Open Purchase Orders (3) |
|
|
201,078 |
|
|
|
201,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
for uncertain tax positions, including interest and penalties |
|
|
8,869 |
|
|
|
7,194 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,712,755 |
|
|
$ |
981,496 |
|
|
$ |
2,107,883 |
|
|
$ |
9,321,145 |
|
|
$ |
302,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimate of interest payments assumes the interest rates at December 31, 2009 remain
constant during the period presented for the Credit Facility, which is variable rate
debt. The interest rate used to calculate interest payments for the Credit Facility
was LIBOR as of December 31, 2009 plus the spread. The Notes are fixed at an
interest rate of 8.875% per annum. |
|
(2) |
|
Pursuant to purchase agreements in effect as of December 31, 2009 and where CON
approval has been obtained, we have commitments to build the following replacement
facilities and the following capital commitments. As required by an amendment to our
lease agreement entered into in 2005, we agreed to build a replacement hospital at
our Barstow, California location by November 2012. As part of an acquisition in
2007, we agreed to build a replacement hospital in Valparaiso, Indiana by April
2011. As part of an acquisition in 2009, we agreed to build a replacement hospital
in Siloam Springs, Arkansas by February 2013. Construction costs, including
equipment costs, for these three replacement facilities are currently estimated to
be approximately $310.0 million of which approximately $12.6 million has been
incurred to date. In addition, under other purchase agreements, we have committed to
spend approximately $468.5 million for costs such as capital improvements,
equipment, selected leases and physician recruiting. These
commitments are required to be fulfilled generally over a five to seven year period after acquisition.
Through December 31, 2009, we have incurred approximately $171.4 million related to
these commitments. |
|
(3) |
|
Open purchase orders represent our commitment for items ordered but not yet received. |
At December 31, 2009, we had issued letters of credit primarily in support of potential
insurance related claims and specified outstanding bonds of approximately $90.0 million.
Our debt as a percentage of total capitalization decreased from 85% at December 31, 2008 to
82% for December 31, 2009.
2008 Compared to 2007
Net cash provided by operating activities increased $368.1 million from $688.4 million for the
year ended December 31, 2007 to approximately $1.1 billion for the year ended December 31, 2008. This increase is
due to an increase in cash flow from net income of $208.0 million, increases in cash flows from
other assets of $37.4 million and a net increase in non-cash expenses of $306.1 million, of which
$174.1 million was related to depreciation and $199.8 million related to deferred income taxes.
These cash flow increases were offset by decreases in cash flows from supplies, prepaid expenses
and other current assets of $2.7 million, accounts receivable of $178.3 million and accounts
payable, accrued liabilities and income taxes of $2.4 million. The decrease in income taxes was
primarily a result of a prior year prepaid tax position which was used to offset taxes owed during
the current year.
47
The
use of cash in investing activities decreased approximately $6.8 billion from
approximately $7.5 billion in 2007 to
$665.5 million in 2008, primarily as a result of the Triad acquisition occurring in 2007. The
purchase of property and equipment in 2008 increased $169.4 million from $522.8 million in 2007 to
$692.2 million in 2008. This increase reflects the increased number of hospitals owned by us after
the acquisition of Triad.
In
2008, our net cash provided by financing activities decreased
approximately $7.2 billion from approximately $6.9
billion in 2007 to a net cash used in financing activities of $304.0 million in 2008, primarily due
to borrowings under our Credit Facility and issuance of Notes in connection with the acquisition of
Triad in 2007. During the fourth quarter of 2008, $100 million of delayed draw term loans had been
drawn by us.
Capital Expenditures
Cash expenditures for purchases of facilities were $263.8 million in 2009, $161.9 million in
2008 and approximately $7.0 billion in 2007. Our expenditures in 2009 included $182.2 million for the purchase of
two hospitals and the remaining equity in a hospital in which we previously had a noncontrolling
interest, $72.3 million for the purchase of clinics, surgery centers and physician practices, and
$9.3 million for the settlement of acquired working capital. Our expenditures in 2008 included
$149.1 million for the purchase of two hospitals and $12.8 million for the purchase of physician
practices and a home care agency. Our expenditures in 2007 included approximately $6.9 billion for the purchase
of Triad, $133.7 million for the purchase of two additional hospitals, $3.4 million for the
purchase of physician practices, $7.7 million for equipment to integrate acquired hospitals and
$8.5 million for the settlement of acquired working capital.
Excluding the cost to construct replacement hospitals, our cash expenditures for routine
capital for 2009 totaled $572.1 million compared to $569.4 million in 2008, and $344.1 million in
2007. These capital expenditures related primarily to the purchase of additional equipment, minor
renovations and information systems infrastructure. Costs to construct replacement hospitals
totaled $4.8 million in 2009, $122.8 million in 2008 and $178.7 million in 2007. The costs to
construct replacement hospitals for year ended December 31, 2009 represent planning costs for
future construction projects since there were no replacement hospitals under construction at year
ended December 31, 2009. In 2008, we completed construction of and opened three replacement
hospitals, accounting for the higher costs incurred during the year ended December 31, 2008.
Pursuant to hospital purchase agreements in effect as of December 31, 2009, as part of an
acquisition in 2007, we agreed to build a replacement hospital in Valparaiso, Indiana by April 2011
and as part of an acquisition in 2009, we agreed to build a replacement hospital in Siloam Springs,
Arkansas by February 2013. Also as required by an amendment to a lease agreement entered into in
2005, we agreed to build a replacement facility at Barstow Community Hospital in Barstow,
California. Estimated construction costs, including equipment costs, are approximately $310.0
million for these three replacement facilities. We expect total capital expenditures of
approximately $650 to $750 million in 2010 (which includes amounts which are required to be
expended pursuant to the terms of hospital purchase agreements), including approximately $595 to
$690 million for renovation and equipment cost and approximately $55 to $60 million for
construction and equipment cost of the replacement hospitals.
Capital Resources
Net
working capital was approximately $1.2 billion at
December 31, 2009 compared to approximately $1.1 billion at December
31, 2008, an increase of $121 million. This increase was primarily attributable to an increase in
working capital attributable to the acquisition of Siloam Springs Memorial Hospital, Wyoming Valley
Health Care System and a controlling equity interest in MCSA L.L.C., the entity that owns and
operates the Medical Center of South Arkansas in El Dorado, Arkansas, and an increase in cash as a
result of cash flows from operations.
48
In
connection with the consummation of the Triad acquisition in July 2007, we obtained approximately $7.2
billion of senior secured financing under a Credit Facility with a syndicate of financial
institutions led by Credit Suisse, as administrative agent and collateral agent. The Credit
Facility consists of an approximately $6.1 billion funded term loan facility with a maturity of seven years, a
$300 million delayed draw term loan facility (reduced by us from $400 million) with a maturity of
seven years and a $750 million revolving credit facility with a maturity of six years. During the
fourth quarter of 2008, $100 million of the delayed draw term loan had been drawn down by us
reducing the delayed draw term loan availability to $200 million at December 31, 2008. In January
2009, we drew down the remaining $200 million of the delayed draw term loan. The revolving credit
facility also includes a subfacility for letters of credit and a swingline subfacility. The Credit
Facility requires quarterly amortization payments of each term loan facility equal to 0.25% of the
outstanding amount of the term loans, if any, with the outstanding principal balance payable on
July 25, 2014.
The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds
of certain asset sales and dispositions by us and our subsidiaries, subject to certain exceptions
and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt obligations
or receivables based financing by us and our subsidiaries, subject to certain exceptions, and (3)
50%, subject to reduction to a lower percentage based on our leverage ratio (as defined in the
Credit Facility generally as the ratio of total debt on the date of determination to our EBITDA, as
defined, for the four quarters most recently ended prior to such date), of excess cash flow (as
defined) for any year, commencing in 2008, subject to certain exceptions. Voluntary prepayments and
commitment reductions are permitted in whole or in part, without any premium or penalty, subject to
minimum prepayment or reduction requirements.
The obligor under the Credit Facility is CHS/Community Health Systems, Inc., or CHS, a
wholly-owned subsidiary of Community Health Systems, Inc. All of our obligations under the Credit
Facility are unconditionally guaranteed by Community Health Systems, Inc. and certain existing and
subsequently acquired or organized domestic subsidiaries. All obligations under the Credit Facility
and the related guarantees are secured by a perfected first priority lien or security interest in
substantially all of the assets of Community Health Systems, Inc., CHS and each subsidiary
guarantor, including equity interests held by us or any subsidiary guarantor, but excluding, among
others, the equity interests of non-significant subsidiaries, syndication subsidiaries,
securitization subsidiaries and joint venture subsidiaries.
The loans under the Credit Facility bear interest on the outstanding unpaid principal amount
at a rate equal to an applicable percentage plus, at our option, either (a) an Alternate Base Rate
(as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by
Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of 1.0%, or (b) a
reserve adjusted London interbank offered rate for dollars (Eurodollar rate) (as defined). The
applicable percentage for term loans is 1.25% for Alternate Base Rate loans and 2.25% for
Eurodollar rate loans. The applicable percentage for revolving loans was initially 1.25% for
Alternate Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject
to reduction based on our leverage ratio. Loans under the swingline subfacility bear interest at
the rate applicable to Alternate Base Rate loans under the revolving credit facility.
We have agreed to pay letter of credit fees equal to the applicable percentage then in effect
with respect to Eurodollar rate loans under the revolving credit facility times the maximum
aggregate amount available to be drawn under all letters of credit outstanding under the
subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility
for letters of credit will also receive a customary fronting fee and other customary processing
charges. We were initially obligated to pay commitment fees of 0.50% per annum (subject to
reduction based upon on our leverage ratio), on the unused portion of the revolving credit
facility. For purposes of this calculation, swingline loans are not treated as usage of the
revolving credit facility. With respect to the delayed draw term loan facility, we were also
obligated to pay commitment fees of 0.50% per annum for the first nine months after the close of
the Credit Facility and 0.75% per annum for the next three months after such nine-month period and
thereafter 1.0% per annum. In each case, the commitment fee was based on the unused amount of the
delayed draw term loan facility. After the draw down of the remaining $200 million of the delayed
draw term loan in January 2009, we no longer pay any commitment fees for the delayed draw term loan
facility. We also paid arrangement fees on the closing of the Credit Facility and pay an annual
administrative agent fee.
49
The Credit Facility contains customary representations and warranties, subject to limitations
and exceptions, and customary covenants restricting our and our subsidiaries ability to, among
other things and subject to various exceptions, (1) declare dividends, make distributions or redeem
or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant
negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures,
(5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7)
engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9)
alter the nature of our businesses, (10) grant certain guarantees with respect to physician
practices, (11) engage in sale and leaseback transactions or (12) change our fiscal year. We and
our subsidiaries are also required to comply with specified financial covenants (consisting of a
leverage ratio and an interest coverage ratio) and various affirmative covenants.
Events of default under the Credit Facility include, but are not limited to, (1) our failure
to pay principal, interest, fees or other amounts under the credit agreement when due (taking into
account any applicable grace period), (2) any representation or warranty proving to have been
materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants,
to a grace period, (4) bankruptcy events, (5) a cross default to certain other debt, (6) certain
undischarged judgments (not paid within an applicable grace period), (7) a change of control, (8)
certain ERISA-related defaults and (9) the invalidity or impairment of specified security
interests, guarantees or subordination provisions in favor of the administrative agent or lenders
under the Credit Facility.
As of December 31, 2009, the availability for additional borrowings under our Credit Facility
was approximately $750 million pursuant to the revolving credit facility, of which $90.0 million
was set aside for outstanding letters of credit. We believe that these funds, along with internally
generated cash and continued access to the bank credit and capital markets, will be sufficient to
finance future acquisitions, capital expenditures and working capital requirements through the next
12 months and into the foreseeable future.
During the year ended December 31, 2008, we repurchased on
the open market and cancelled $110.5 million of principal amount
of the Notes. This resulted in a net gain from early
extinguishment of debt of $2.5 million with an after-tax impact of
$1.6 million.
During the year ended December 31, 2009, we repurchased on the open market and cancelled
$126.5 million of principal amount of the Notes. This resulted in a net gain from early
extinguishment of debt of $2.7 million with an after-tax impact of $1.7 million.
On April 2, 2009, we paid down $110.4 million of our term loans under the Credit Facility. Of
this amount, $85.0 million was paid down as required under the terms of the Credit Facility with
the net proceeds received from the sale of the ownership interest in the partnership that owned and
operated Presbyterian Hospital of Denton. This resulted in a loss from early extinguishment of debt
of $1.1 million with an after-tax impact of $0.7 million recorded in discontinued operations for
the year ended December 31, 2009. The remaining $25.4 million was paid on the term loans as
required under the terms of the Credit Facility with the net proceeds received from the sale of
various other assets. This resulted in a loss from early extinguishment of debt of $0.3 million
with an after-tax impact of $0.2 million recorded in continuing operations for the year ended
December 31, 2009.
As of December 31, 2009, we are currently a party to the following interest rate swap
agreements to limit the effect of changes in interest rates on approximately 89% of our variable
rate debt. On each of these swaps, we received a variable rate of interest based on the three-month
London Inter-Bank Offer Rate (LIBOR), in exchange for the payment by us of a fixed rate of
interest. We currently pay, on a quarterly basis, a margin above LIBOR of 225 basis points for
revolving credit and term loans under the Credit Facility.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Fixed Interest |
|
|
Termination |
|
|
Fair Value |
|
Swap # |
|
(in 000s) |
|
|
Rate |
|
|
Date |
|
|
(in 000s) |
|
1 |
|
$ |
200,000 |
|
|
|
2.8800 |
% |
|
September 17, 2010 |
|
$ |
(3,655 |
) |
2 |
|
|
100,000 |
|
|
|
4.9360 |
% |
|
October 4, 2010 |
|
|
(3,630 |
) |
3 |
|
|
100,000 |
|
|
|
4.7090 |
% |
|
January 24, 2011 |
|
|
(4,343 |
) |
4 |
|
|
300,000 |
|
|
|
5.1140 |
% |
|
August 8, 2011 |
|
|
(19,843 |
) |
5 |
|
|
100,000 |
|
|
|
4.7185 |
% |
|
August 19, 2011 |
|
|
(6,033 |
) |
6 |
|
|
100,000 |
|
|
|
4.7040 |
% |
|
August 19, 2011 |
|
|
(6,009 |
) |
7 |
|
|
100,000 |
|
|
|
4.6250 |
% |
|
August 19, 2011 |
|
|
(5,874 |
) |
8 |
|
|
200,000 |
|
|
|
4.9300 |
% |
|
August 30, 2011 |
|
|
(12,961 |
) |
9 |
|
|
200,000 |
|
|
|
3.0920 |
% |
|
September 18, 2011 |
|
|
(6,709 |
) |
10 |
|
|
100,000 |
|
|
|
3.0230 |
% |
|
October 23, 2011 |
|
|
(3,323 |
) |
11 |
|
|
200,000 |
|
|
|
4.4815 |
% |
|
October 26, 2011 |
|
|
(12,151 |
) |
12 |
|
|
200,000 |
|
|
|
4.0840 |
% |
|
December 3, 2011 |
|
|
(11,135 |
) |
13 |
|
|
100,000 |
|
|
|
3.8470 |
% |
|
January 4, 2012 |
|
|
(5,193 |
) |
14 |
|
|
100,000 |
|
|
|
3.8510 |
% |
|
January 4, 2012 |
|
|
(5,201 |
) |
15 |
|
|
100,000 |
|
|
|
3.8560 |
% |
|
January 4, 2012 |
|
|
(5,211 |
) |
16 |
|
|
200,000 |
|
|
|
3.7260 |
% |
|
January 8, 2012 |
|
|
(9,914 |
) |
17 |
|
|
200,000 |
|
|
|
3.5065 |
% |
|
January 16, 2012 |
|
|
(9,034 |
) |
18 |
|
|
250,000 |
|
|
|
5.0185 |
% |
|
May 30, 2012 |
|
|
(20,877 |
) |
19 |
|
|
150,000 |
|
|
|
5.0250 |
% |
|
May 30, 2012 |
|
|
(12,638 |
) |
20 |
|
|
200,000 |
|
|
|
4.6845 |
% |
|
September 11, 2012 |
|
|
(15,831 |
) |
21 |
|
|
100,000 |
|
|
|
3.3520 |
% |
|
October 23, 2012 |
|
|
(4,299 |
) |
22 |
|
|
125,000 |
|
|
|
4.3745 |
% |
|
November 23, 2012 |
|
|
(8,981 |
) |
23 |
|
|
75,000 |
|
|
|
4.3800 |
% |
|
November 23, 2012 |
|
|
(5,439 |
) |
24 |
|
|
150,000 |
|
|
|
5.0200 |
% |
|
November 30, 2012 |
|
|
(13,694 |
) |
25 |
|
|
200,000 |
|
|
|
2.2420 |
% |
|
February 28, 2013 |
|
|
1,219 |
(1) |
26 |
|
|
100,000 |
|
|
|
5.0230 |
% |
|
May 30, 2013 |
|
|
(9,575 |
) |
27 |
|
|
300,000 |
|
|
|
5.2420 |
% |
|
August 6, 2013 |
|
|
(31,724 |
) |
28 |
|
|
100,000 |
|
|
|
5.0380 |
% |
|
August 30, 2013 |
|
|
(9,887 |
) |
29 |
|
|
50,000 |
|
|
|
3.5860 |
% |
|
October 23, 2013 |
|
|
(2,282 |
) |
30 |
|
|
50,000 |
|
|
|
3.5240 |
% |
|
October 23, 2013 |
|
|
(2,165 |
) |
31 |
|
|
100,000 |
|
|
|
5.0500 |
% |
|
November 30, 2013 |
|
|
(10,077 |
) |
32 |
|
|
200,000 |
|
|
|
2.0700 |
% |
|
December 19, 2013 |
|
|
3,000 |
|
33 |
|
|
100,000 |
|
|
|
5.2310 |
% |
|
July 25, 2014 |
|
|
(11,157 |
) |
34 |
|
|
100,000 |
|
|
|
5.2310 |
% |
|
July 25, 2014 |
|
|
(11,157 |
) |
35 |
|
|
200,000 |
|
|
|
5.1600 |
% |
|
July 25, 2014 |
|
|
(21,694 |
) |
36 |
|
|
75,000 |
|
|
|
5.0405 |
% |
|
July 25, 2014 |
|
|
(7,744 |
) |
37 |
|
|
125,000 |
|
|
|
5.0215 |
% |
|
July 25, 2014 |
|
|
(12,803 |
) |
38 |
|
|
100,000 |
|
|
|
2.6210 |
% |
|
July 25, 2014 |
|
|
259 |
|
39 |
|
|
100,000 |
|
|
|
3.1100 |
% |
|
July 25, 2014 |
|
|
89 |
(2) |
40 |
|
|
100,000 |
|
|
|
3.2580 |
% |
|
July 25, 2014 |
|
|
153 |
(3) |
41 |
|
|
100,000 |
|
|
|
3.0050 |
% |
|
November 30, 2016 |
|
|
2,458 |
|
|
|
|
(1) |
|
This interest rate swap becomes effective September 17, 2010, concurrent with the termination of swap #1. |
|
(2) |
|
This interest rate swap becomes effective October 4, 2010, concurrent with the termination of swap #2. |
|
(3) |
|
This interest rate swap becomes effective January 24, 2011, concurrent with the termination of swap #3. |
51
The Credit Facility and/or the Notes contain various covenants that limit our ability to take
certain actions including; among other things, our ability to:
|
|
|
incur, assume or guarantee additional indebtedness; |
|
|
|
|
issue redeemable stock and preferred stock; |
|
|
|
|
repurchase capital stock; |
|
|
|
|
make restricted payments, including paying dividends and making investments; |
|
|
|
|
redeem debt that is junior in right of payment to the notes; |
|
|
|
|
create liens without securing the notes; |
|
|
|
|
sell or otherwise dispose of assets, including capital stock of subsidiaries; |
|
|
|
|
enter into agreements that restrict dividends from subsidiaries; |
|
|
|
|
merge, consolidate, sell or otherwise dispose of substantial portions of our assets; |
|
|
|
|
enter into transactions with affiliates; and |
|
|
|
|
guarantee certain obligations. |
In addition, our Credit Facility contains restrictive covenants and requires us to maintain
specified financial ratios and satisfy other financial condition tests. Our ability to meet these
restricted covenants and financial ratios and tests can be affected by events beyond our control,
and we cannot assure you that we will meet those tests. A breach of any of these covenants could
result in a default under our Credit Facility and/or the Notes. Upon the occurrence of an event of
default under our Credit Facility or the Notes, all amounts outstanding under our Credit Facility
and the Notes may become due and payable and all commitments under the Credit Facility to extend
further credit may be terminated.
We believe that internally generated cash flows, availability for additional borrowings under
our Credit Facility of $750 million (consisting of a $750 million revolving credit facility) and
our ability to add up to $300 million of borrowing capacity from receivable transactions (including
securitizations) and continued access to the bank credit and capital markets will be sufficient to
finance acquisitions, capital expenditures and working capital requirements through the next 12
months. We believe these same sources of cash flows, borrowings under our Credit Facility as well
as access to bank credit and capital markets will be available to us beyond the next 12 months and
into the foreseeable future. On December 22, 2008, we filed a universal automatic shelf
registration statement on Form S-3ASR that will permit us, from time to time, in one or more public
offerings, to offer debt securities, common stock, preferred stock, warrants, depositary shares, or
any combination of such securities. The shelf registration statement will also permit our
subsidiary, CHS, to offer debt securities that would be guaranteed by us, from time to time in one
or more public offerings. The terms of any such future offerings would be established at the time
of the offering.
Off-balance sheet arrangements
Our consolidated operating results for the years ended December 31, 2009 and 2008, included
$286.6 million and $282.0 million, respectively, of net operating revenues and $18.1 million and
$18.4 million, respectively, of income from continuing operations, generated from seven hospitals
operated by us under operating lease arrangements. In accordance with accounting principles
generally accepted in the United States of America, or U.S. GAAP, the respective assets and the
future lease obligations under these arrangements are not recorded in our consolidated balance
sheet. Lease payments under these arrangements are included in rent expense and totaled
approximately $16.5 million and $16.7 million for the years ended December 31, 2009 and 2008,
respectively. The current terms of these operating leases expire between June 2012 and December
2020, not including lease extension options. If we allow these leases to expire, we would no longer
generate revenues nor incur expenses from these hospitals.
52
In the past, we have utilized operating leases as a financing tool for obtaining the
operations of specified hospitals without acquiring, through ownership, the related assets of the
hospital and without a significant outlay of cash at the front end of the lease. We utilize the
same operating strategies to improve operations at those hospitals held under operating leases as
we do at those hospitals that we own. We have not entered into any operating leases for hospital
operations since December 2000.
As
described more fully in Note 15 of the Notes to Consolidated Financial Statements, at
December 31, 2009, we have certain cash obligations for replacement facilities and other
construction commitments of $594.4 million and open purchase orders for $201.1 million.
Noncontrolling Interests
We have sold noncontrolling interests in certain of our subsidiaries or acquired subsidiaries
with existing noncontrolling interest ownership positions. As of December 31, 2009, we have
hospitals in 23 of the markets we serve, with noncontrolling physician ownership interests ranging
from less than 1% to 40%, including one hospital that also had a non-profit entity as a partner. In
addition, we own three other hospitals with noncontrolling interests owned by non-profit entities.
During 2009, we sold noncontrolling interests in six of our hospitals, including additional
noncontrolling interests in hospitals with existing physician ownership, for total consideration of
$19.3 million. During 2008, we sold noncontrolling interests in seven of our hospitals, including
additional noncontrolling interests in hospitals with existing physician ownership, for total
consideration of $82.1 million. Effective June 1, 2009, we acquired from Akron General Medical
Center the remaining 20% noncontrolling interest in Massillon Community Health System, LLC not then
owned by us. This entity indirectly owns and operates Affinity Medical Center of Massillon, Ohio.
The purchase price for this noncontrolling interest was $1.1 million in cash. Affinity
Medical Center is now wholly-owned by us. Effective June 30, 2008, we acquired the remaining 35%
noncontrolling interest in Affinity Health Systems, LLC which indirectly owns and operates Trinity Medical
Center (560 licensed beds) in Birmingham, Alabama, from Baptist Health Systems, Inc. of Birmingham,
Alabama (Baptist), giving us 100% ownership of that facility. The purchase price to acquire this
interest was $51.5 million in cash and the cancellation of a promissory note issued by Baptist to
Affinity Health Systems, LLC in the original principal amount of $32.8 million. Effective November
14, 2008, we acquired from Willamette Community Health Solutions all of its noncontrolling interest
in MWMC Holdings, LLC, which indirectly owns a controlling interest in and operates
McKenzie-Willamette Medical Center of Springfield, Oregon. This acquisition resulted from a put
right held by Willamette Community Health Solutions in connection with the 2003 transaction
establishing the joint venture. The purchase price for this noncontrolling interest was $22.7
million in cash. Physicians affiliated with Oregon Health Resources, Inc. continue to own a
noncontrolling interest in the hospital. Redeemable noncontrolling interests in equity of
consolidated subsidiaries was $368.9 million and $348.8 million as of December 31, 2009 and 2008,
respectively, and noncontrolling interests in equity of consolidated subsidiaries was $64.8 million
and $61.5 million as of December 31, 2009 and 2008, respectively, and the amount of net income
attributable to noncontrolling interests was $63.2 million, $34.4 million and $14.4 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
53
Reimbursement, Legislative and Regulatory Changes
Legislative and regulatory action has resulted in continuing change in the Medicare and
Medicaid reimbursement programs which will continue to limit payment increases under these programs
and in some cases implement payment decreases. Within the statutory framework of the Medicare and
Medicaid programs, there are substantial areas subject to administrative rulings, interpretations,
and discretion which may further affect payments made under those programs, and the federal and
state governments might, in the future, reduce the funds available under those programs or require
more stringent utilization and quality reviews of hospital facilities. Additionally, there may be a
continued rise in managed care programs and future restructuring of the financing and delivery of
healthcare in the United States. These events could cause our future financial results to decline.
Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods
of inflation and when labor shortages occur in the marketplace. In addition, our suppliers pass
along rising costs to us in the form of higher prices. We have implemented cost control measures,
including our case and resource management program, to curb increases in operating costs and
expenses. We have generally offset increases in operating costs by increasing reimbursement for
services, expanding services and reducing costs in other areas. However, we cannot predict our
ability to cover or offset future cost increases.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of our consolidated financial statements. Actual
results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties, and potentially result in materially different results under different
assumptions and conditions. We believe that our critical accounting policies are limited to those
described below. For a detailed discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated Financial Statements included under Item 8 of
this Report.
Third Party Reimbursement
Net operating revenues include amounts estimated by management to be reimbursable by Medicare
and Medicaid under prospective payment systems and provisions of cost-reimbursement and other
payment methods. In addition, we are reimbursed by non-governmental payors using a variety of
payment methodologies. Amounts we receive for treatment of patients covered by these programs are
generally less than the standard billing rates. Contractual allowances are automatically calculated
and recorded through our internally developed automated contractual allowance system. Within the
automated system, actual Medicare DRG data and payors historical paid claims data are utilized to
calculate the contractual allowances. This data is automatically updated on a monthly basis. All
hospital contractual allowance calculations are subjected to monthly review by management to ensure
reasonableness and accuracy. We account for the differences between the estimated program
reimbursement rates and the standard billing rates as contractual allowance adjustments, which we
deduct from gross revenues to arrive at net operating revenues. The process of estimating
contractual allowances requires us to estimate the amount expected to be received based on payor
contract provisions. The key assumption in this process is the estimated contractual reimbursement
percentage, which is based on payor classification and historical paid claims data. Due to the
complexities involved in these estimates, actual payments we receive could be different from the
amounts we estimate and record. If the actual contractual reimbursement percentage under government
programs and managed care contracts differed by 1% from our estimated reimbursement percentage, net
income for the year ended December 31, 2009 would have changed by approximately $24.6 million, and
net accounts receivable would have changed by $40.0 million. Final settlements under some of these
programs are subject to adjustment based on administrative review and audit by third parties. We
account for adjustments to previous program reimbursement
54
estimates as contractual allowance adjustments and report them in the periods that such
adjustments become known. Contractual allowance adjustments related to final settlements and
previous program reimbursement estimates impacted net operating revenues and net income by an
insignificant amount in each of the years ended December 31, 2009, 2008 and 2007.
Allowance for Doubtful Accounts
Substantially all of our accounts receivable are related to providing healthcare services to
our hospitals patients. Collection of these accounts receivable is our primary source of cash and
is critical to our operating performance. Our primary collection risks relate to uninsured patients
and outstanding patient balances for which the primary insurance payor has paid some but not all of
the outstanding balance, with the remaining outstanding balance (generally deductibles and
co-payments) owed by the patient. At the point of service, for patients required to make a
co-payment, we generally collect less than 15% of the related revenue. For all procedures scheduled
in advance, our policy is to verify insurance coverage prior to the date of the procedure.
Insurance coverage is not verified in advance of procedures for walk-in and emergency room
patients.
We estimate the allowance for doubtful accounts by reserving a percentage of all self-pay
accounts receivable without regard to aging category, based on collection history, adjusted for
expected recoveries and, if present, anticipated changes in trends. For all other non self-pay
payor categories we reserve 100% of all accounts aging over 365 days from the date of discharge.
The percentage used to reserve for all self-pay accounts is based on our collection history. We
believe that we collect substantially all of our third-party insured receivables which include
receivables from governmental agencies. During the quarter ended December 31, 2007, in conjunction
with our ongoing process of monitoring the net realizable value of our accounts receivable, as well
as integrating the methodologies, data and assumptions used by the former Triad management, we
performed various analyses, including updating a review of historical cash collections. As a
result of these analyses, we noted deterioration in certain key cash collection indicators.
The primary key cash collection indicator that experienced deterioration during the fourth
quarter of 2007 was cash receipts as a percentage of net revenue less bad debts. This percentage
decreased to the lowest percentage experienced by us since the quarter ended September 30, 2006.
Further analysis indicated the primary causes of this deterioration were a continuing increase in
the volume of indigent non-resident aliens, an increase in the number of patients qualifying for
charity care and a greater than expected impact of the removal of participants from TennCare
(Tennessees state provided Medicaid program) which increased the number of uninsured patients with
limited financial means receiving care at our eight Tennessee hospitals. During the fourth quarter
of 2007, due to the deteriorating cash collections and the desire to standardize processes with
those of the former Triad hospitals, we undertook a detailed programming effort to develop data
around the deteriorating classes of accounts receivable needed to update our historical cash
collections percentages as well as enable us to estimate how much of certain self-pay categories
ultimately convert to Medicaid, charity and indigent programs. Triads processes for establishing
contractual allowances and allowances for bad debts related to accounts classified as Medicaid
pending, charity pending and indigent non-resident alien included inputs and assumptions based
on the historical percentage of these accounts which ultimately qualified for specific government
programs or for write-off as charity care.
We used these new inputs and assumptions regarding Medicaid pending, charity pending,
and indigent non-resident alien in conjunction with the new data developed in the fourth quarter of
2007 as described above to evaluate the realizability of accounts receivable and to revise our
estimate of contractual allowances for estimated amounts of self-pay accounts receivable that will
ultimately qualify as charity care, or that will ultimately qualify for Medicaid, indigent care or
other specific governmental reimbursement, resulting in an increase to our contractual reserves of
$96.3 million as of December 31, 2007. Previous estimates of uncollectible amounts for such
receivables were included in our bad debt reserves for each period.
55
Furthermore, in updating the historical collection statistics of all our hospitals, we also
took into account a detailed study of the historical collection information for the hospitals
acquired from Triad. The updated collection statistics of the hospitals acquired from Triad also
showed subsequent deterioration in cash collections similar to those experienced by the other
hospitals that we own. Therefore, we also standardized the processes for calculating the allowance
for doubtful accounts of the hospitals acquired from Triad to that of our other hospitals which,
along with the allowance percentages determined from the new collection data, resulted in the
recording of an additional $70.1 million of allowance for bad debts as of December 31, 2007.
The resulting impact of the above, net of taxes, for the year ended December 31, 2007 was a
decrease to income from continuing operations of $105.4 million. We believe this lower
collectability was primarily the result of an increase in the number of patients qualifying for
charity care, reduced enrollment in certain state Medicaid programs and an increase in the number
of indigent non-resident aliens. Collections are impacted by the economic ability of patients to
pay and the effectiveness of our collection efforts. Significant changes in payor mix, business
office operations, economic conditions or trends in federal and state governmental healthcare
coverage could affect our collection of accounts receivable. The process of estimating the
allowance for doubtful accounts requires us to estimate the collectability of self-pay accounts
receivable, which is primarily based on our collection history, adjusted for expected recoveries
and, if available, anticipated changes in collection trends. Significant change in payor mix,
business office operations, economic conditions, trends in federal and state governmental
healthcare coverage or other third party payors could affect our estimates of accounts receivable
collectability. If the actual collection percentage differed by 1% from our estimated collection
percentage as a result of a change in expected recoveries, net income for the year ended December
31, 2009 would have changed by $14.4 million, and net accounts receivable would have changed by
$23.5 million. We also continually review our overall reserve adequacy by monitoring historical
cash collections as a percentage of trailing net revenue less provision for bad debts, as well as
by analyzing current period net revenue and admissions by payor classification, aged accounts
receivable by payor, days revenue outstanding, and the impact of recent acquisitions and
dispositions.
Our policy is to write-off gross accounts receivable if the balance is under $10.00 or when
such amounts are placed with outside collection agencies. We believe this policy accurately
reflects our ongoing collection efforts and is consistent with industry practices. We had
approximately $1.5 billion at December 31, 2009 and 2008, being pursued by various outside
collection agencies. We expect to collect less than 3%, net of estimated collection fees, of the
amounts being pursued by outside collection agencies. As these amounts have been written-off, they
are not included in our gross accounts receivable or our allowance for doubtful accounts.
Collections on amounts previously written-off are recognized as a reduction to bad debt expense
when received. However, we take into consideration estimated collections of these future amounts
written-off in evaluating the reasonableness of our allowance for doubtful accounts.
All of the following information is derived from our hospitals, excluding clinics, unless
otherwise noted.
Patient accounts receivable from our hospitals represent approximately 95% of our total
consolidated accounts receivable.
Days revenue outstanding was 48 days at December 31, 2009 and 53 days at December 31, 2008.
Our target range for days revenue outstanding is from 46 to 56 days.
Total gross accounts receivable (prior to allowance for contractual adjustments and doubtful
accounts) was approximately $6.1 billion as of December 31, 2009 and approximately $5.5 billion as
of December 31, 2008.
The approximate percentage of total gross accounts receivable (prior to allowances for
contractual adjustments and doubtful accounts) summarized by payor is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Insured receivables |
|
|
62.4 |
% |
|
|
67.0 |
% |
Self-pay receivables (a) |
|
|
37.6 |
% |
|
|
33.0 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
56
|
|
|
(a) |
|
The increase in self-pay accounts receivable as a percentage of total gross accounts
receivable is primarily the result of the former Triad hospitals utilizing our internal
collection agency. This began for some hospitals in 2008 and others in 2009. Prior to
utilizing our internal collection agency, such accounts were written off and sent to outside
collection agencies. |
For the hospital segment, the combined total of the allowance for doubtful accounts and
related allowances for other self-pay discounts and contractuals, as a percentage of gross self-pay
receivables, was approximately 82% at December 31, 2009 and 80% at December 31, 2008. If the
receivables that have been written-off, but where collections are still being pursued by outside
collection agencies, were included in both the allowances and gross self-pay receivables specified
above, the percentage of combined allowances to total self-pay receivables would have been
approximately 89% at December 31, 2009 and 2008.
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill is
evaluated for impairment at the same time every year and when an event occurs or circumstances
change that, more likely than not, reduce the fair value of the reporting unit below its carrying
value. There is a two-step method for determining goodwill impairment. Step one is to compare the
fair value of the reporting unit with the units carrying amount, including goodwill. If this test
indicates the fair value is less than the carrying value, then step two is required to compare the
implied fair value of the reporting units goodwill with the carrying value of the reporting units
goodwill. We have selected September 30th as our annual testing date. Based on the results of our
most recent annual impairment test, we have concluded that we do not have any reporting units that
are at risk of failing step one of the goodwill impairment test.
Impairment or Disposal of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying values of certain
long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated
by these assets. If the projections indicate that the reported amounts are not expected to be
recovered, such amounts are reduced to their estimated fair value based on a quoted market price,
if available, or an estimate based on valuation techniques available in the circumstances.
Professional Liability Claims
As part of our business of owning and operating hospitals, we are subject to legal actions
alleging liability on our part. We accrue for losses resulting from such liability claims, as well
as loss adjustment expenses that are out-of-pocket and directly related to such liability claims.
These direct out-of-pocket expenses include fees of outside counsel and experts. We do not accrue
for costs that are part of our corporate overhead, such as the costs of our in-house legal and risk
management departments. The losses resulting from professional liability claims primarily consist
of estimates for known claims, as well as estimates for incurred but not reported claims. The
estimates are based on specific claim facts, our historical claim reporting and payment patterns,
the nature and level of our hospital operations, and actuarially determined projections. The
actuarially determined projections are based on our actual claim data, including historic reporting
and payment patterns which have been gathered over an approximate 20-year period. As discussed
below, since we purchase excess insurance on a claims-made basis that transfers risk to third party
insurers, the liability we accrue does not include an amount for the losses covered by our excess
insurance. Since we believe that the amount and timing of our future claims payments are reliably
determinable, we discount the amount we accrue for losses resulting from professional liability
claims using the risk-free interest rate corresponding to the timing of our expected payments.
The net present value of the projected payments was discounted using a weighted-average
risk-free rate of 1.3%, 2.6% and 4.1% in 2009, 2008 and 2007, respectively. This liability is
adjusted for new claims information in the period such information becomes known to us.
Professional malpractice expense includes the losses resulting from professional liability claims
and loss adjustment expense, as well as paid excess insurance premiums, and is presented within
other operating expenses in the accompanying consolidated statements of income.
Our processes for obtaining and analyzing claims and incident data are standardized across all
of our hospitals and have been consistent for many years. We monitor the outcomes of the medical
care services that we provide and
57
for each reported claim, we obtain various information concerning the facts and circumstances
related to that claim. In addition, we routinely monitor current key statistics and volume
indicators in our assessment of utilizing historical trends. The average lag period between claim
occurrence and payment of a final settlement is between 4 and 5 years, although the facts and
circumstances of individual claims could result in the timing of such payments being different from
this average. Since claims are paid promptly after settlement with the claimant is reached, settled
claims represent less than 1.0% of the total liability at the end of any period.
For purposes of estimating our individual claim accruals, we utilize specific claim
information, including the nature of the claim, the expected claim amount, the year in which the
claim occurred and the laws of the jurisdiction in which the claim occurred. Once the case accruals
for known claims are determined, information is stratified by loss layers and retentions, accident
years, reported years, geography, and claims relating to the acquired Triad hospitals versus claims
relating to our other hospitals. Several actuarial methods are used against this data to produce
estimates of ultimate paid losses and reserves for incurred but not reported claims. Each of these
methods uses our company-specific historical claims data and other information. This
company-specific data includes information regarding our business, including historical paid losses
and loss adjustment expenses, historical and current case loss reserves, actual and projected
hospital statistical data, a variety of hospital census information, employed physician
information, professional liability retentions for each policy year, geographic information and
other data.
Based on these analyses we determine our estimate of the professional liability claims. The
determination of managements estimate, including the preparation of the reserve analysis that
supports such estimate, involves subjective judgment of the management. Changes in reserving data
or the trends and factors that influence reserving data may signal fundamental shifts in our future
claim development patterns or may simply reflect single-period anomalies. Even if a change reflects
a fundamental shift, the full extent of the change may not become evident until years later.
Moreover, since our methods and models use different types of data and we select our liability from
the results of all of these methods, we typically cannot quantify the precise impact of such
factors on our estimates of the liability. Due to our standardized and consistent processes for
handling claims and the long history and depth of our company-specific data, our methodologies have
produced reliably determinable estimates of ultimate paid losses.
The following table presents the amounts of our accrual for professional liability claims and
approximate amounts of our activity for each of the respective years listed (excludes premiums for
excess insurance coverage) (in thousands):
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Accrual for professional liability claims, January 1 |
|
$ |
350,579 |
|
|
$ |
300,184 |
|
|
$ |
104,161 |
|
|
|
|
|
|
|
|
|
|
|
Liability acquired through acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability acquired |
|
|
|
|
|
|
|
|
|
|
197,453 |
|
Discount of liability acquired |
|
|
|
|
|
|
|
|
|
|
(26,309 |
) |
|
|
|
|
|
|
|
|
|
|
Discounted liability acquired |
|
|
|
|
|
|
|
|
|
|
171,144 |
|
|
|
|
|
|
|
|
|
|
|
Expense (income) related to(1): |
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
136,424 |
|
|
|
110,010 |
|
|
|
73,039 |
|
Prior accident years |
|
|
(6,702 |
) |
|
|
(15,826 |
) |
|
|
7,158 |
|
Expense (income) from discounting |
|
|
11,515 |
|
|
|
11,499 |
|
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
Total incurred loss and loss expense |
|
|
141,237 |
|
|
|
105,683 |
|
|
|
79,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid claims and expenses related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
(1,387 |
) |
|
|
(688 |
) |
|
|
(701 |
) |
Prior accident years |
|
|
(59,204 |
) |
|
|
(54,600 |
) |
|
|
(53,577 |
) |
|
|
|
|
|
|
|
|
|
|
Total paid claims and expenses |
|
|
(60,591 |
) |
|
|
(55,288 |
) |
|
|
(54,278 |
) |
|
|
|
|
|
|
|
|
|
|
Accrual for professional liability claims, December 31 |
|
$ |
431,225 |
|
|
$ |
350,579 |
|
|
$ |
300,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total expense, including premiums for insured coverage, was $176.4
million in 2009, $136.6 million in 2008 and $99.7 million in 2007. |
The increase in current accident year claims expense in each year from 2007 to 2009 is
consistent with the increase in net operating revenues during these periods. Income/expense related
to prior accident years reflects changes in estimates resulting from the filing of claims for prior
year incidents, claim settlements, updates from litigation, and our ongoing investigation of open
claims. Expense/income from discounting reflects the changes in the weighted-average risk-free
interest rate used and timing of estimated payments for discounting in each year.
We are primarily self-insured for these claims; however, we obtain excess insurance that
transfers the risk of loss to a third-party insurer for claims in excess of our self-insured
retentions. Our excess insurance is underwritten on a claims-made basis. For claims reported prior
to June 1, 2002, substantially all of our professional and general liability risks were subject to
a $0.5 million per occurrence self-insured retention and for claims reported from June 1, 2002
through June 1, 2003, these self-insured retentions were $2.0 million per occurrence. Substantially
all claims reported after June 1, 2003 and before June 1, 2005 are self-insured up to $4 million
per claim. Substantially all claims reported on or after June 1, 2005 are self-insured up to $5
million per claim. Management on occasion has selectively increased the insured risk at certain
hospitals based upon insurance pricing and other factors and may continue that practice in the
future. Excess insurance for all hospitals has been purchased through commercial insurance
companies and generally covers us for liabilities in excess of the self-insured retentions. The
excess coverage consists of multiple layers of insurance, the sum of which totals up to $95 million
per occurrence and in the aggregate for claims reported on or after June 1, 2003 and up to $145
million per occurrence and in the aggregate for claims incurred and reported after January 1, 2008.
For certain policy years, if the first aggregate layer of excess
coverage becomes fully utilized, then the
self-insured retention could increase to $10 million per claim for any subsequent claims in that
policy year until our total aggregate coverage is met.
Effective January 1, 2008, the former Triad hospitals are insured on a claims-made basis as
described above and through commercial insurance companies as described above for substantially all
claims occurring on or after January 1, 2002 and reported on or after January 1, 2008.
Substantially all losses for the former Triad hospitals in periods prior to May 1999 were insured
through a wholly-owned insurance subsidiary of HCA,
59
Triads owner prior to that time, and excess loss policies maintained by HCA. HCA has agreed to indemnify the former Triad hospitals
in respect of claims covered by such insurance policies arising prior to May 1999. After May 1999
through December 31, 2006, the former Triad hospitals obtained insurance coverage on a claims
incurred basis from HCAs wholly-owned insurance subsidiary with excess coverage obtained from
other carriers that is subject to certain deductibles. Effective for claims incurred after December
31, 2006, Triad began insuring its claims from $1 million to $5 million through its wholly-owned
captive insurance company, replacing the coverage provided by HCA. Substantially all claims
occurring during 2007 were self-insured up to $10 million per claim.
Income Taxes
We must make estimates in recording provision for income taxes, including determination of
deferred tax assets and deferred tax liabilities and any valuation allowances that might be
required against the deferred tax assets. We believe that future income will enable us to realize
these deferred tax assets, subject to the valuation allowance we have established. In 2009, we made
adjustments to our deferred tax assets and liabilities resulting from a revaluation of these items and a
decrease in our effective state tax rate that resulted in a net tax benefit of $3.0 million.
The
total amount of unrecognized benefit that would impact the effective tax rate, if
recognized, is approximately $9.4 million as of December 31, 2009. It is our policy to recognize
interest and penalties accrued related to unrecognized benefits in our consolidated statements of
income as income tax expense. Adjustments for purchase business
combinations generally impact goodwill and do not affect net income. During the year ended December 31, 2009, we decreased liabilities by
approximately $0.4 million and recorded $0.6 million in interest and penalties related to prior
state income tax returns through our income tax provision from continuing operations, which are
included in our liability for uncertain tax positions at December 31, 2009. A total of
approximately $2.0 million of interest and penalties is included in the amount of liability for
uncertain tax positions at December 31, 2009. During the year ended December 31, 2009, we released
$0.6 million for income taxes and $0.2 million for accrued interest of our liability for uncertain
tax positions, as a result of the expiration of the statute of limitations pertaining to tax
positions taken in prior years relative to state tax positions.
We believe it is reasonably possible that approximately $6.4 million of our current
unrecognized tax benefit may be recognized within the next twelve months as a result of a lapse of
the statute of limitations and settlements with taxing authorities.
We, or one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. We have extended the federal statute of limitations for Triad for the
tax periods ended December 31, 1999, December 31, 2000, April 30, 2001, June 30, 2001, December 31,
2001, December 31, 2002 and December 31, 2003. We are currently under examination by the IRS
regarding the federal tax return of Triad for the tax periods ended December 31, 2004, December 31,
2005, December 31, 2006 and July 25, 2007. We believe the results of this examination will not be
material to our consolidated results of operations or consolidated financial position. With few
exceptions, we are no longer subject to state income tax examinations for years prior to 2006 and
federal income tax examinations with respect to Community Health Systems, Inc. federal returns for
years prior to 2006.
Prior to January 1, 2009, income attributable to noncontrolling interests was deducted from
earnings before arriving at income from continuing operations. With the adoption of certain updates
to the U.S. GAAP related to consolidations effective January 1, 2009, the income attributable to
noncontrolling interests has been reclassified below net income and therefore is no longer deducted
in arriving at income from continuing operations. However, the provision for income taxes does not
change because those less than wholly-owned consolidated subsidiaries attribute their taxable
income to their respective investors. Accordingly, we will not pay tax on the income attributable
to the noncontrolling interests. As a result of separately reporting income that is taxed to
others, our effective tax rate on continuing operations before income taxes, as reported on the
face of the financial statements is 31.7%, 34.9% and 37.2% for the years ended December 31, 2009,
2008 and 2007, respectively. However, the actual effective tax rate that is attributable to our
share of income from continuing operations before income taxes (income from continuing operations
before income taxes, as presented on the face of the statement of income, less income from
continuing operations attributable to noncontrolling interests of $62.9 million, $34.9 million and
$13.4 million for the years ended December 31, 2009, 2008 and 2007, respectively) is 36.9%, 38.7%
and 42.4% for the years ended December 31, 2009, 2008 and 2007, respectively.
60
Recent Accounting Pronouncements
On January 1, 2010, we adopted the revisions to U.S. GAAP related to the accounting and
consolidation requirements for variable interest entities. These revisions significantly change
the criteria in determining the primary beneficiary of a variable interest entity, or VIE, from a
more quantitative model to both a quantitative and qualitative evaluation of the enterprise that
has (1) the power to direct the activities that most significantly affect the VIEs economic
performance and (2) the obligation to absorb losses or the right to receive returns that could be
potentially significant to the VIE. Additionally, this guidance requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a VIE and requires enhanced disclosures that
will provide users of financial statements with more transparent information about an enterprises
involvement in a VIE. Given our limited amount of activity with entities for which these provisions
would apply, the adoption of this standard is not expected to have a material effect on our
consolidated results of operations or financial position, either upon adoption or into the
foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes, primarily as a result of our Credit Facility which
bears interest based on floating rates. In order to manage the volatility relating to the market
risk, we entered into interest rate swap agreements described under the heading Liquidity and
Capital Resources. We do not anticipate any material changes in our primary market risk exposures
in 2010. We utilize risk management procedures and controls in executing derivative financial
instrument transactions. We do not execute transactions or hold derivative financial instruments
for trading purposes. Derivative financial instruments related to interest rate sensitivity of debt
obligations are used with the goal of mitigating a portion of the exposure when it is cost
effective to do so.
A 1% change in interest rates on variable rate debt in excess of that amount covered by
interest rate swaps would have resulted in interest expense
fluctuating approximately $2.5 million
in 2009, $13 million in 2008 and $14 million in 2007.
61
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
|
|
|
|
|
Page |
Community Health Systems, Inc. Consolidated Financial Statements: |
|
|
|
|
63 |
|
|
64 |
|
|
65 |
|
|
66 |
|
|
67 |
|
|
68 |
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Community Health Systems, Inc.
Franklin, Tennessee
We have audited the accompanying consolidated balance sheets of Community Health Systems, Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2009. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Community Health Systems, Inc. and subsidiaries as of December 31, 2009
and 2008, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company adopted revisions to
accounting principles generally accepted in the United States of America related to business combinations effective January 1, 2009.
As
discussed in Note 1 to the consolidated financial statements, the Company adopted revisions to
accounting principles generally accepted in the United States of America and changed its method of
accounting and financial statement presentation for noncontrolling
interests in equity of consolidated subsidiaries in
2009, 2008, and 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25,
2010 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/
Deloitte & Touche LLP
Nashville, Tennessee
February 25, 2010
63
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except share and per share data) |
|
Net operating revenues |
|
$ |
12,107,613 |
|
|
$ |
10,919,095 |
|
|
$ |
7,095,861 |
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
4,842,330 |
|
|
|
4,367,664 |
|
|
|
2,895,105 |
|
Provision for bad debts |
|
|
1,460,307 |
|
|
|
1,218,612 |
|
|
|
886,985 |
|
Supplies |
|
|
1,685,493 |
|
|
|
1,531,376 |
|
|
|
940,525 |
|
Other operating expenses |
|
|
2,237,475 |
|
|
|
2,099,010 |
|
|
|
1,434,617 |
|
Rent |
|
|
247,132 |
|
|
|
231,167 |
|
|
|
153,695 |
|
Depreciation and amortization |
|
|
566,211 |
|
|
|
499,386 |
|
|
|
313,322 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
11,038,948 |
|
|
|
9,947,215 |
|
|
|
6,624,249 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,068,665 |
|
|
|
971,880 |
|
|
|
471,612 |
|
Interest expense, net of interest income of $3,561, $7,057,
and $8,181 in 2009, 2008, and 2007, respectively |
|
|
648,964 |
|
|
|
652,468 |
|
|
|
362,065 |
|
(Gain) loss from early extinguishment of debt |
|
|
(2,385 |
) |
|
|
(2,525 |
) |
|
|
27,388 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(36,521 |
) |
|
|
(42,063 |
) |
|
|
(25,132 |
) |
Impairment of long-lived and other assets |
|
|
12,477 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
446,130 |
|
|
|
359,000 |
|
|
|
107,291 |
|
Provision for income taxes |
|
|
141,325 |
|
|
|
125,273 |
|
|
|
39,860 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
304,805 |
|
|
|
233,727 |
|
|
|
67,431 |
|
Discontinued operations, net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of hospitals sold
and hospitals held for sale |
|
|
1,977 |
|
|
|
9,427 |
|
|
|
(4,199 |
) |
(Loss) gain on sale of hospitals, net |
|
|
(405 |
) |
|
|
9,580 |
|
|
|
(2,594 |
) |
Impairment of long-lived assets of hospitals held for sale |
|
|
|
|
|
|
|
|
|
|
(15,947 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
1,572 |
|
|
|
19,007 |
|
|
|
(22,740 |
) |
Net income |
|
|
306,377 |
|
|
|
252,734 |
|
|
|
44,691 |
|
Less: Net income attributable to noncontrolling interests |
|
|
63,227 |
|
|
|
34,430 |
|
|
|
14,402 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Community Health Systems, Inc. |
|
$ |
243,150 |
|
|
$ |
218,304 |
|
|
$ |
30,289 |
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations attributable to Community Health Systems, Inc. common stockholders per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.67 |
|
|
$ |
2.13 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.64 |
|
|
$ |
2.11 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to Community Health Systems, Inc. common stockholders per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.21 |
|
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Community Health Systems, Inc.
common stockholders per share (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.68 |
|
|
$ |
2.34 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.66 |
|
|
$ |
2.32 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
90,614,886 |
|
|
|
93,371,782 |
|
|
|
93,517,337 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
91,517,274 |
|
|
|
94,288,829 |
|
|
|
94,642,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total per share amounts may not add due to rounding. |
See notes to consolidated financial statements.
64
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except |
|
|
|
share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
344,541 |
|
|
$ |
220,655 |
|
Patient accounts receivable, net of allowance for doubtful accounts of $1,417,188
and $1,111,131 at December 31, 2009 and December 31, 2008, respectively |
|
|
1,617,903 |
|
|
|
1,625,470 |
|
Supplies |
|
|
302,609 |
|
|
|
275,696 |
|
Prepaid income taxes |
|
|
45,414 |
|
|
|
92,710 |
|
Deferred income taxes |
|
|
80,714 |
|
|
|
91,875 |
|
Prepaid expenses and taxes |
|
|
89,475 |
|
|
|
73,792 |
|
Other current assets (including assets of hospitals held for sale of $0 and $25,505
at December 31, 2009 and 2008, respectively) |
|
|
194,339 |
|
|
|
224,852 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,674,995 |
|
|
|
2,605,050 |
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
537,307 |
|
|
|
510,292 |
|
Buildings and improvements |
|
|
4,806,542 |
|
|
|
4,495,568 |
|
Equipment and fixtures |
|
|
2,443,407 |
|
|
|
2,104,497 |
|
|
|
|
|
|
|
|
|
|
|
7,787,256 |
|
|
|
7,110,357 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
(1,655,010 |
) |
|
|
(1,215,952 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
6,132,246 |
|
|
|
5,894,405 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
4,157,927 |
|
|
|
4,166,091 |
|
|
|
|
|
|
|
|
Other assets, net of accumulated amortization of $197,880 and $158,532 in 2009 and
2008, respectively (including assets of hospitals held for sale of $0 and $145,799
at December 31, 2009 and 2008, respectively) |
|
|
1,056,304 |
|
|
|
1,152,708 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,021,472 |
|
|
$ |
13,818,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
66,470 |
|
|
$ |
33,904 |
|
Accounts payable |
|
|
428,565 |
|
|
|
532,595 |
|
Deferred income taxes |
|
|
28,397 |
|
|
|
6,740 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Employee compensation |
|
|
500,101 |
|
|
|
432,385 |
|
Interest |
|
|
145,201 |
|
|
|
153,234 |
|
Other (including liabilities of hospitals held for sale of $0 and $67,190
at December 31, 2009 and 2008, respectively) |
|
|
289,062 |
|
|
|
350,559 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,457,796 |
|
|
|
1,509,417 |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
8,844,638 |
|
|
|
8,938,185 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
475,812 |
|
|
|
460,793 |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
858,952 |
|
|
|
888,557 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
11,637,198 |
|
|
|
11,796,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests in equity of consolidated subsidiaries |
|
|
368,857 |
|
|
|
348,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
Community Health Systems, Inc. stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value per share, 100,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
Common stock, $.01 par value per share, 300,000,000 shares authorized; 94,013,537
shares issued and 93,037,988 shares outstanding at December 31, 2009 and 92,483,166
shares issued and 91,507,617 shares outstanding at December 31, 2008 |
|
|
940 |
|
|
|
925 |
|
Additional paid-in capital |
|
|
1,158,359 |
|
|
|
1,136,108 |
|
Treasury stock, at cost, 975,549 shares at December 31, 2009 and December 31, 2008 |
|
|
(6,678 |
) |
|
|
(6,678 |
) |
Accumulated other comprehensive income (loss) |
|
|
(221,385 |
) |
|
|
(295,575 |
) |
Retained earnings |
|
|
1,019,399 |
|
|
|
776,249 |
|
|
|
|
|
|
|
|
Total Community Health Systems, Inc. stockholders equity |
|
|
1,950,635 |
|
|
|
1,611,029 |
|
Noncontrolling interests in equity of consolidated subsidiaries |
|
|
64,782 |
|
|
|
61,457 |
|
|
|
|
|
|
|
|
Total equity |
|
|
2,015,417 |
|
|
|
1,672,486 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
14,021,472 |
|
|
$ |
13,818,254 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
65
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Health Systems, Inc. Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling |
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Retained |
|
|
Noncontrolling |
|
|
|
|
|
|
Interests |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006 (as
previously reported) |
|
$ |
|
|
|
|
95,026,494 |
|
|
$ |
950 |
|
|
$ |
1,195,947 |
|
|
|
(975,549 |
) |
|
$ |
(6,678 |
) |
|
$ |
5,798 |
|
|
$ |
527,656 |
|
|
$ |
|
|
|
$ |
1,723,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2007 adjustment to non-
controlling interests from adoption
of updates to U.S. GAAP |
|
|
23,478 |
|
|
|
|
|
|
|
|
|
|
|
(4,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,057 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 (as
adjusted) |
|
|
23,478 |
|
|
|
95,026,494 |
|
|
|
950 |
|
|
|
1,190,971 |
|
|
|
(975,549 |
) |
|
|
(6,678 |
) |
|
|
5,798 |
|
|
|
527,656 |
|
|
|
5,057 |
|
|
|
1,723,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
16,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,289 |
|
|
|
(1,841 |
) |
|
|
28,448 |
|
Net change in fair value of
interest rate swaps, net of tax
benefit of $51,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,063 |
) |
|
|
|
|
|
|
|
|
|
|
(91,063 |
) |
Net change in fair value of
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
237 |
|
Adjustment to pension liability,
net of tax of $496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,291 |
|
|
|
|
|
|
|
|
|
|
|
3,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,535 |
) |
|
|
30,289 |
|
|
|
(1,841 |
) |
|
|
(59,087 |
) |
Noncontrolling interests from
acquisition of Triad |
|
|
284,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,201 |
|
|
|
59,201 |
|
Net contributions (distributions)
to noncontrolling interests |
|
|
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,308 |
) |
|
|
(1,308 |
) |
Purchase of subsidiary shares from
noncontrolling interests |
|
|
(1,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of less than wholly-owned
subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,672 |
) |
|
|
(9,672 |
) |
Adjustment to redemption value of
redeemable noncontrolling interests |
|
|
18,535 |
|
|
|
|
|
|
|
|
|
|
|
(18,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,535 |
) |
Issuance of common stock in
connection with the exercise of
options |
|
|
|
|
|
|
321,535 |
|
|
|
3 |
|
|
|
8,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
1,263,056 |
|
|
|
13 |
|
|
|
38,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007 |
|
|
346,999 |
|
|
|
96,611,085 |
|
|
|
966 |
|
|
|
1,216,797 |
|
|
|
(975,549 |
) |
|
|
(6,678 |
) |
|
|
(81,737 |
) |
|
|
557,945 |
|
|
|
51,419 |
|
|
|
1,738,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
30,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,304 |
|
|
|
4,410 |
|
|
|
222,714 |
|
Net change in fair value of
interest rate swaps, net of tax
benefit of $112,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,737 |
) |
|
|
|
|
|
|
|
|
|
|
(200,737 |
) |
Net change in fair value of
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,613 |
) |
|
|
|
|
|
|
|
|
|
|
(2,613 |
) |
Adjustment to pension liability,
net of tax of $7,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,488 |
) |
|
|
|
|
|
|
|
|
|
|
(10,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,838 |
) |
|
|
218,304 |
|
|
|
4,410 |
|
|
|
8,876 |
|
Contributions from noncontrolling
interests, net of distributions |
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,931 |
|
|
|
29,931 |
|
Purchase of subsidiary shares from
noncontrolling interests |
|
|
(73,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,497 |
) |
|
|
(22,497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of less than wholly-owned
subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,806 |
) |
|
|
(1,806 |
) |
Adjustment to redemption value of
redeemable noncontrolling interests |
|
|
38,325 |
|
|
|
|
|
|
|
|
|
|
|
(38,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock |
|
|
|
|
|
|
(4,786,609 |
) |
|
|
(48 |
) |
|
|
(90,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,189 |
) |
Issuance of common stock in
connection with the exercise of
options |
|
|
|
|
|
|
281,831 |
|
|
|
3 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,806 |
|
Cancellation of restricted stock
for tax withholdings on vested
shares |
|
|
|
|
|
|
(310,806 |
) |
|
|
(3 |
) |
|
|
(5,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
687,665 |
|
|
|
7 |
|
|
|
52,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
348,816 |
|
|
|
92,483,166 |
|
|
|
925 |
|
|
|
1,136,108 |
|
|
|
(975,549 |
) |
|
|
(6,678 |
) |
|
|
(295,575 |
) |
|
|
776,249 |
|
|
|
61,457 |
|
|
|
1,672,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
46,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,150 |
|
|
|
16,511 |
|
|
|
259,661 |
|
Net change in fair value of
interest rate swaps, net of tax
benefit of $42,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,225 |
|
|
|
|
|
|
|
|
|
|
|
76,225 |
|
Net change in fair value of
available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
412 |
|
Adjustment to pension liability,
net of tax of $3,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,447 |
) |
|
|
|
|
|
|
|
|
|
|
(2,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,190 |
|
|
|
243,150 |
|
|
|
16,511 |
|
|
|
333,851 |
|
Distributions to noncontrolling
interests, net of contributions |
|
|
(27,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,582 |
) |
|
|
(13,582 |
) |
Purchase of subsidiary shares from
noncontrolling interests |
|
|
(5,439 |
) |
|
|
|
|
|
|
|
|
|
|
3,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396 |
|
|
|
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of less than wholly-owned
subsidiaries |
|
|
(21,691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to redemption value of
redeemable noncontrolling interests |
|
|
27,527 |
|
|
|
|
|
|
|
|
|
|
|
(27,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,527 |
) |
Issuance of common stock in
connection with the exercise of
options |
|
|
|
|
|
|
680,898 |
|
|
|
7 |
|
|
|
12,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,767 |
|
Cancellation of restricted stock
for tax withholdings on vested
shares |
|
|
|
|
|
|
(328,470 |
) |
|
|
(3 |
) |
|
|
(7,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
1,177,943 |
|
|
|
11 |
|
|
|
44,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
$ |
368,857 |
|
|
|
94,013,537 |
|
|
$ |
940 |
|
|
$ |
1,158,359 |
|
|
|
(975,549 |
) |
|
$ |
(6,678 |
) |
|
$ |
(221,385 |
) |
|
$ |
1,019,399 |
|
|
$ |
64,782 |
|
|
$ |
2,015,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
66
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
306,377 |
|
|
$ |
252,734 |
|
|
$ |
44,691 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
566,543 |
|
|
|
506,694 |
|
|
|
332,580 |
|
Deferred income taxes |
|
|
34,268 |
|
|
|
159,870 |
|
|
|
(39,894 |
) |
Stock-based compensation expense |
|
|
44,501 |
|
|
|
52,105 |
|
|
|
38,771 |
|
Loss (gain) on sale of hospitals and
partnership interest, net |
|
|
405 |
|
|
|
(17,687 |
) |
|
|
3,954 |
|
Income tax payable increase (excess tax
benefit) relating to stock-based
compensation |
|
|
3,472 |
|
|
|
(1,278 |
) |
|
|
(1,216 |
) |
(Gain) loss on early extinguishment of debt |
|
|
(2,385 |
) |
|
|
(2,525 |
) |
|
|
27,388 |
|
Impairment of long-lived and other assets |
|
|
12,477 |
|
|
|
5,000 |
|
|
|
19,044 |
|
Other non-cash expenses, net |
|
|
22,870 |
|
|
|
3,577 |
|
|
|
19,018 |
|
Changes in operating assets and
liabilities, net of effects of acquisitions
and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable |
|
|
58,390 |
|
|
|
(49,578 |
) |
|
|
128,743 |
|
Supplies, prepaid expenses and other
current assets |
|
|
(34,535 |
) |
|
|
(34,397 |
) |
|
|
(31,734 |
) |
Accounts payable, accrued liabilities
and income taxes |
|
|
86,098 |
|
|
|
119,869 |
|
|
|
122,282 |
|
Other |
|
|
(22,052 |
) |
|
|
62,197 |
|
|
|
24,811 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,076,429 |
|
|
|
1,056,581 |
|
|
|
688,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of facilities and other related
equipment |
|
|
(263,773 |
) |
|
|
(161,907 |
) |
|
|
(7,018,048 |
) |
Purchases of property and equipment |
|
|
(576,888 |
) |
|
|
(692,233 |
) |
|
|
(522,785 |
) |
Proceeds from disposition of hospitals and
other ancillary operations |
|
|
89,514 |
|
|
|
365,636 |
|
|
|
109,996 |
|
Proceeds from sale of property and equipment |
|
|
4,019 |
|
|
|
13,483 |
|
|
|
4,650 |
|
Increase in other non-operating assets |
|
|
(120,054 |
) |
|
|
(190,450 |
) |
|
|
(72,671 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(867,182 |
) |
|
|
(665,471 |
) |
|
|
(7,498,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
12,759 |
|
|
|
1,806 |
|
|
|
8,214 |
|
(Income tax payable increase) excess tax
benefit relating to stock-based compensation |
|
|
(3,472 |
) |
|
|
1,278 |
|
|
|
1,216 |
|
Deferred financing costs |
|
|
(82 |
) |
|
|
(3,136 |
) |
|
|
(182,954 |
) |
Stock buy-back |
|
|
|
|
|
|
(90,188 |
) |
|
|
|
|
Proceeds from noncontrolling investors in
joint ventures |
|
|
29,838 |
|
|
|
14,329 |
|
|
|
2,351 |
|
Redemption of noncontrolling investments in
joint ventures |
|
|
(7,268 |
) |
|
|
(77,587 |
) |
|
|
(1,356 |
) |
Distributions to noncontrolling investors in
joint ventures |
|
|
(58,963 |
) |
|
|
(46,890 |
) |
|
|
(6,645 |
) |
Borrowings under credit agreement |
|
|
200,000 |
|
|
|
131,277 |
|
|
|
9,221,627 |
|
Repayments of long-term indebtedness |
|
|
(258,173 |
) |
|
|
(234,918 |
) |
|
|
(2,139,025 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities |
|
|
(85,361 |
) |
|
|
(304,029 |
) |
|
|
6,903,428 |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
123,886 |
|
|
|
87,081 |
|
|
|
93,008 |
|
Cash and cash equivalents at beginning of period |
|
|
220,655 |
|
|
|
133,574 |
|
|
|
40,566 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
344,541 |
|
|
$ |
220,655 |
|
|
$ |
133,574 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
67
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies
Business. Community Health Systems, Inc. is a holding company and operates no business in its
own name. On a consolidated basis, Community Health Systems, Inc. and its subsidiaries
(collectively the Company) own, lease and operate acute care hospitals in non-urban and select
urban markets.
As of December 31, 2009, the Company owned or leased 122 hospitals, licensed for
18,140 beds in 29 states. Throughout these notes to the consolidated financial statements, Community Health Systems,
Inc., (the Parent), and its consolidated subsidiaries are referred to on a collective basis as
the Company. This drafting style is not meant to indicate that the publicly-traded Parent or any
subsidiary of the Parent owns or operates any asset, business, or property. The hospitals,
operations and businesses described in this filing are owned and operated, and management services
provided, by distinct and indirect subsidiaries of Community Health Systems, Inc. References to the
Company may include one or more of its subsidiaries.
As of December 31, 2009, Indiana and Texas represent the only areas of
geographic concentration. Net operating revenues generated by the Companys hospitals in Indiana,
as a percentage of consolidated net operating revenues, were 10.9% in 2009, 10.9% in 2008 and 7.8%
in 2007. Net operating revenues generated by the Companys hospitals in Texas, as a percentage of
consolidated net operating revenues, were 13.2% in 2009, 13.3% in 2008 and 12.5% in 2007. As a
result of the Companys growth and expansion of services in other states, Pennsylvania no longer
represents an area of geographic concentration, as it did at December 31, 2007.
Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates under different assumptions or conditions.
Principles of Consolidation. The consolidated financial statements include the accounts of
the Parent, its subsidiaries, all of which are controlled by the Parent through majority voting
control, and variable interest entities for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated. Noncontrolling interests
in less-than-wholly-owned consolidated subsidiaries of the Parent are presented as a component of
total equity to distinguish between the interests of the Parent and the interests of the
noncontrolling owners. Revenues, expenses and income from continuing operations from these
subsidiaries are included in the consolidated amounts as presented on the consolidated statements
of income, along with a net income measure that separately presents the amounts attributable to the
controlling interests and the amounts attributable to the noncontrolling interests for each of the
periods presented. Noncontrolling interests that are redeemable or may become redeemable at a fixed
or determinable price at the option of the holder or upon the occurrence of an event outside of the
control of the Company are presented in mezzanine equity on the consolidated balance sheets.
Cost of Revenue. The majority of the Companys operating expenses are cost of revenue
items. Operating costs that could be classified as general and administrative by the Company would
include the Companys corporate office costs at its Franklin, Tennessee offices and former offices
in Brentwood, Tennessee and Plano, Texas, which were $157.9 million, $167.2 million and $133.4
million for the years ended December 31, 2009, 2008 and 2007, respectively. Included in these
amounts is stock-based compensation of $44.5 million, $52.1 million and $38.8 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
Cash Equivalents. The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
Supplies. Supplies, principally medical supplies, are stated at the lower of cost (first-in,
first-out basis) or market.
68
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Marketable Securities. The Companys marketable securities are classified as trading or
available-for-sale. Available-for-sale securities are carried at fair value as determined by quoted
market prices, with unrealized gains and losses reported as a separate component of stockholders
equity. Trading securities are reported at fair value with unrealized gains and losses included in
earnings. Interest and dividends on securities classified as available-for-sale or trading are
included in net operating revenue and were not material in all periods presented. Accumulated other
comprehensive income (loss) included an unrealized gain of $0.4 million at December 31, 2009 and an
unrealized loss of $2.6 million at December 31, 2008, related to these available-for-sale
securities.
Property and Equipment. Property and equipment are recorded at cost. Depreciation is recognized
using the straight-line method over the estimated useful lives of the land and improvements (2 to
15 years; weighted average useful life is 14 years), buildings and improvements (5 to 40 years;
weighted average useful life is 24 years) and equipment and fixtures (4 to 18 years; weighted
average useful life is 8 years). Costs capitalized as construction in progress were $130.5 million
and $196.4 million at December 31, 2009 and 2008, respectively. Expenditures for renovations and
other significant improvements are capitalized; however, maintenance and repairs which do not
improve or extend the useful lives of the respective assets are charged to operations as incurred.
Interest capitalized related to construction in progress was $16.7 million, $22.1 million and $19.0
million for the years ended December 31, 2009, 2008 and 2007, respectively. Purchases of property
and equipment accrued in accounts payable and not yet paid were $39.6 million
and $31.6 million at December 31, 2009 and 2008, respectively.
The Company also leases certain facilities and equipment under capital leases (see Note 9).
Such assets are amortized on a straight-line basis over the lesser of the term of the lease or the
remaining useful lives of the applicable assets.
Goodwill. Goodwill represents the excess cost over the fair value of net assets acquired.
Goodwill arising from business combinations is not amortized. Goodwill is required to be evaluated
for impairment at the same time every year and when an event occurs or circumstances change such
that it is reasonably possible that an impairment may exist. The Company has selected September
30th as its annual testing date.
Other Assets. Other assets primarily consist of costs associated with the issuance of debt,
which are included in interest expense over the life of the related debt using the effective
interest method, and costs to recruit physicians to the Companys markets, which are deferred and
amortized in amortization expense over the term of the respective physician recruitment contract,
which is generally three years. Long-term assets held for sale at December 31, 2008 are also
included in other assets.
Third-Party Reimbursement. Net patient service revenue is reported at the estimated net
realizable amount from patients, third party-payors and others for services rendered. Net operating
revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under
prospective payment systems, provisions of cost-reimbursement and other payment methods.
Approximately 36.9% of net operating revenues for the year ended December 31, 2009, 36.6% of net
operating revenues for the year ended December 31, 2008 and 39.3% of net operating revenues for the
year ended December 31, 2007, are related to services rendered to patients covered by the Medicare
and Medicaid programs. Revenues from Medicare outlier payments are included in the amounts received
from Medicare and were approximately 0.43% of net operating revenues for 2009, 0.55% of net
operating revenues for 2008, and 0.42% of net operating revenues for 2007. In addition, the Company
is reimbursed by non-governmental payors using a variety of payment methodologies. Amounts received
by the Company for treatment of patients covered by such programs are generally less than the
standard billing rates. The differences between the estimated program reimbursement rates and the
standard billing rates are accounted for as contractual adjustments, which are deducted from gross
revenues to arrive at net operating revenues. These net operating revenues are an estimate of the
net realizable amount due from these payors. The process of estimating contractual allowances
requires the Company to estimate the amount expected to be received based on payor contract
provisions. The key assumption in this process is the estimated contractual reimbursement
percentage, which is based on payor classification and historical paid claims data. Due to the
complexities involved in these estimates, actual payments the Company receives could be different
from the amounts it estimates and records. Final settlements under certain of these programs are
subject to adjustment based on administrative review and audit by third parties. Adjustments to the
estimated billings are recorded in the periods that such adjustments become known. Adjustments to
previous program reimbursement estimates are accounted for as contractual allowance adjustments and
reported in the
69
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
periods
that such adjustments become known. Contractual allowance adjustments
related to final settlements and previous program reimbursement
estimates impacted net operating revenue and net income by an
insignificant amount in each of the years ended December 31,
2009, 2008 and 2007.
Amounts due to third-party payors were $78.1 million and $87.9 million as of December 31, 2009
and 2008, respectively, and are included in accrued liabilities-other in the accompanying
consolidated balance sheets. Amounts due from third party payors were $96.0 million and $73.6
million as of December 31, 2009 and 2008, respectively, and are included in other current assets in
the accompanying consolidated balance sheets. Substantially all Medicare and Medicaid cost reports
are final settled through 2006.
Net Operating Revenues. Net operating revenues are recorded net of provisions for contractual
allowance of approximately $31.5 billion, $26.6 billion and $16.7 billion in 2009, 2008 and 2007,
respectively. Net operating revenues are recognized when services are provided and are reported at
the estimated net realizable amount from patients, third-party payors and others for services
rendered. Also included in the provision for contractual allowance shown above is the value of
administrative and other discounts provided to self-pay patients eliminated from net operating
revenues which was $544.2 million, $456.0 million and $266.0 million for the years ended December
31, 2009, 2008 and 2007, respectively. In the ordinary course of business, the Company renders
services to patients who are financially unable to pay for hospital care. Included in the provision
for contractual allowance shown above is the value (at the Companys standard charges) of these
services to patients who are unable to pay that is eliminated from net operating revenues when it
is determined they qualify under the Companys charity care policy. The value of these services was
$472.4 million, $384.1 million and $322.2 million for the years ended December 31, 2009, 2008 and
2007, respectively. In the fourth quarter of 2007, in conjunction with an analysis of the net
realizable value of accounts receivable, which included updating the Companys analysis of
historical cash collections, as well as conforming estimation methodologies with those of the
hospitals acquired from Triad Hospitals, Inc. (Triad), the Company revised its methodology with
respect to its estimate of contractual allowances for estimated amounts of self-pay accounts
receivable that will ultimately qualify as charity care, or that will ultimately qualify for
Medicaid, indigent care or other specific governmental reimbursement. Previous estimates of
uncollectible amounts for such receivables were included in the Companys bad debt reserves for
each period. The impact of these changes in estimates decreased net
operating revenues approximately
$96.3 million for the year ended December 31, 2007.
Allowance for Doubtful Accounts. Accounts receivable are reduced by an allowance for amounts
that could become uncollectible in the future. Substantially all of the Companys receivables are
related to providing healthcare services to its hospitals patients.
During the quarter ended December 31, 2007, in conjunction with the Companys ongoing process
of monitoring the net realizable value of its accounts receivable, as well as integrating the
methodologies, data and assumptions used by the former Triad management, the Company performed
various analyses including updating a review of historical cash collections.
The primary key cash collection indicator that experienced deterioration during the fourth
quarter of 2007 was cash receipts as a percentage of net revenue less bad debts. This percentage
decreased to the lowest percentage experienced by the Company since the quarter ended September 30,
2006. Further analysis indicated the primary causes of this deterioration were a continuing
increase in the volume of indigent non-resident aliens, an increase in the number of patients
qualifying for charity care and a greater than expected impact of the removal of participants from
TennCare (Tennessees state provided Medicaid program) which increased the number of uninsured
patients with limited financial means receiving care at the Companys eight Tennessee hospitals.
During the fourth quarter of 2007, due to the deteriorating cash collections and desire to
standardize processes with those of the former Triad hospitals, the Company undertook a detailed
programming effort to develop data around the deteriorating classes of accounts receivable needed
to update its historical cash collections percentages as well as enable it to estimate how much of
certain self-pay categories ultimately convert to Medicaid, charity and indigent programs. Triads
processes for establishing contractual allowances and allowances for bad debts related to accounts
classified as Medicaid pending, charity pending and indigent non-resident alien included inputs
and assumptions based on the historical percentage of these accounts which ultimately qualified for
specific government programs or for write-off as charity care.
The Company used these new inputs and assumptions regarding Medicaid pending, charity
pending, and indigent non-resident alien in conjunction with the new data developed in the fourth
quarter of 2007, as described above to evaluate the realizability of accounts receivable and to
revise the Companys estimate of contractual allowances for estimated amounts of self-pay accounts
receivable that will ultimately qualify as charity care, or that
70
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
will ultimately qualify for Medicaid, indigent care or other specific governmental
reimbursement, resulting in an increase to the Companys contractual reserves of $96.3 million as
of December 31, 2007. Previous estimates of uncollectible amounts for such receivables were
included in the Companys bad debt reserves for each period.
Furthermore, in updating the historical collection statistics of all its hospitals, the
Company also took into account a detailed study of the historical collection information for the
hospitals acquired from Triad. The updated collection statistics of the hospitals acquired from
Triad also showed subsequent deterioration in cash collections similar to those experienced by the
other hospitals that the Company owns. Therefore, the Company also standardized the processes for
calculating the allowance for doubtful accounts of the hospitals acquired from Triad to that of its
other hospitals which, along with the allowance percentages determined from the new collection
data, resulted in the recording of an additional $70.1 million of allowance for bad debts as of
December 31, 2007.
The resulting impact of the above, net of taxes, for the year ended December 31, 2007 was a
decrease to income from continuing operations of $105.4 million. The Company believes this lower
collectability was primarily the result of an increase in the number of patients qualifying for
charity care, reduced enrollment in certain state Medicaid programs and an increase in the number
of indigent non-resident aliens. Collections are impacted by the economic ability of patients to
pay and the effectiveness of the Companys collection efforts. Significant changes in payor mix,
business office operations, economic conditions or trends in federal and state governmental
healthcare coverage could affect the Companys collection of accounts receivable. The process of
estimating the allowance for doubtful accounts requires the Company to estimate the collectability
of self-pay accounts receivable, which is primarily based on its collection history, adjusted for
expected recoveries and, if available, anticipated changes in collection trends. Significant change
in payor mix, business office operations, economic conditions, trends in federal and state
governmental healthcare coverage or other third-party payors could affect the Companys estimates
of accounts receivable collectability.
The Company believes the revised methodology provides a better approach to estimating changes
in payor mix, continued increases in charity and indigent care as well as the monitoring of
historical collection patterns. The revised accounting methodology and the adequacy of resulting
estimates will continue to be reviewed by monitoring accounts receivable write-offs, monitoring
cash collections as a percentage of trailing net revenues less provision for bad debts, monitoring
historical cash collection trends, as well as analyzing current period net revenue and admissions
by payor classification, aged accounts receivable by payor, days revenue outstanding, and the
impact of recent acquisitions and dispositions.
Physician Income Guarantees. The Company enters into physician recruiting agreements under
which it supplements physician income to a minimum amount over a period of time, typically one
year, while the physicians establish themselves in the community. As part of the agreements, the
physicians are committed to practice in the community for a period of time, typically three years,
which extends beyond their income guarantee period. The Company records an asset and liability for
the estimated fair value of minimum revenue guarantees on new agreements. Adjustments to the
ultimate value of the guarantee paid to physicians are recognized in the period that the change in
estimate is identified. The Company amortizes an asset over the life of the agreement. As of
December 31, 2009 and 2008, the unamortized portion of these physician income guarantees was $41.2
million and $49.1 million, respectively.
Concentrations of Credit Risk. The Company grants unsecured credit to its patients, most of
whom reside in the service area of the Companys facilities and are insured under third-party payor
agreements. Because of the economic diversity of the Companys facilities and non-governmental
third-party payors, Medicare represents the
only significant concentration of credit risk from payors. Accounts receivable, net of
contractual allowances, from Medicare were $241.3 million and $256.6 million as of December 31,
2009 and 2008, respectively, representing 7.9% and 9.4% of consolidated net accounts receivable,
before allowance for doubtful accounts, as of December 31, 2009 and 2008, respectively.
71
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Professional Liability Claims. The Company accrues for estimated losses resulting from
professional liability. The accrual, which includes an estimate for incurred but not reported
claims, is based on historical loss patterns and actuarially-determined projections and is
discounted to its net present value. To the extent that subsequent claims information varies from
managements estimates, the liability is adjusted when such information becomes available.
Accounting for the Impairment or Disposal of Long-Lived Assets. Whenever events or changes in
circumstances indicate that the carrying values of certain long-lived assets may be impaired, the
Company projects the undiscounted cash flows expected to be generated by these assets. If the
projections indicate that the reported amounts are not expected to be recovered, such amounts are
reduced to their estimated fair value based on a quoted market price, if available, or an estimate
based on valuation techniques available in the circumstances.
Income Taxes. The Company accounts for income taxes under the asset and liability method, in
which deferred income tax assets and liabilities are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the
consolidated statement of income during the period in which the tax rate change becomes law.
Comprehensive Income (Loss). Comprehensive income (loss) is the change in equity of a
business enterprise during a period from transactions and other events and circumstances from
non-owner sources.
Accumulated Other Comprehensive Income (Loss) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Change in Fair |
|
|
Change in Fair |
|
|
Adjustment |
|
|
Other |
|
|
|
Value of Interest |
|
|
Value of Available |
|
|
to Pension |
|
|
Comprehensive |
|
|
|
Rate Swaps |
|
|
for Sale Securities |
|
|
Liability |
|
|
Income (Loss) |
|
Balance as of December 31, 2007 |
|
$ |
(77,748 |
) |
|
$ |
1,021 |
|
|
$ |
(5,010 |
) |
|
$ |
(81,737 |
) |
2008 Activity, net of tax |
|
|
(200,737 |
) |
|
|
(2,613 |
) |
|
|
(10,488 |
) |
|
|
(213,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
(278,485 |
) |
|
|
(1,592 |
) |
|
|
(15,498 |
) |
|
|
(295,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Activity, net of tax |
|
|
76,225 |
|
|
|
412 |
|
|
|
(2,447 |
) |
|
|
74,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
(202,260 |
) |
|
$ |
(1,180 |
) |
|
$ |
(17,945 |
) |
|
$ |
(221,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Reporting. A public company is required to report annual and interim financial and
descriptive information about its reportable operating segments. Operating segments, as defined,
are components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Aggregation of similar operating segments into a single reportable
operating segment is permitted if the businesses have similar economic characteristics and meet the
criteria established by U.S. GAAP.
The Company operates in three distinct operating segments, represented by the hospital
operations (which includes the Companys acute care hospitals and related healthcare entities that
provide inpatient and outpatient healthcare services), the home care agencies operations (which
provide outpatient care generally in the patients home), and the hospital management services
business (which provides executive management and consulting services to independent acute care
hospitals). U.S. GAAP requires (1) that financial information be disclosed for operating segments
that meet a 10% quantitative threshold of the consolidated totals of net revenue, profit or loss,
or total assets; and (2) that the individual reportable segments disclosed contribute at least 75%
of total consolidated net revenue. Based on these measures, only the hospital operations segment
meets the criteria as a separate reportable segment. Financial information for the home care
agencies and management services segments do not meet the quantitative thresholds and are therefore
combined with corporate into the all other reportable segment.
Derivative Instruments and Hedging Activities. The Company records derivative instruments
(including certain derivative instruments embedded in other contracts) on the consolidated balance
sheet as either an asset or liability measured at its fair value. Changes in a derivatives fair
value are recorded each period in earnings or other comprehensive income (OCI), depending on
whether the derivative is designated and is effective as a hedged
transaction, and on the type of hedge transaction. Changes in the fair value of derivative
instruments recorded to OCI are reclassified to earnings in the period affected by the underlying
hedged item. Any portion of the fair value of a derivative instrument determined to be ineffective
under the standard is recognized in current earnings.
72
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has entered into several interest rate swap agreements. See Note 7 for further
discussion about the swap transactions.
New Accounting Pronouncement. On January 1, 2010, the Company adopted the revisions to U.S.
GAAP related to the accounting and consolidation requirements for variable interest entities.
These revisions significantly change the criteria in determining the primary beneficiary of a
variable interest entity (VIE) from a more quantitative model to both a quantitative and
qualitative evaluation of the enterprise that has (1) the power to direct the activities that most
significantly affect the VIEs economic performance and (2) the obligation to absorb losses or the
right to receive returns that could be potentially significant to the VIE. Additionally, this
guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of a
VIE and requires enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprises involvement in a VIE. Given the Companys limited
amount of activity with entities for which these provisions would apply, the adoption of this
standard is not expected to have a material effect on the Companys consolidated results of
operations or financial position, either upon adoption or into the foreseeable future.
Reclassifications. Certain amounts in the consolidated balance sheets and consolidated
statements of income for all periods presented have been reclassified to reflect the adoption of
changes to U.S. GAAP related to the presentation of noncontrolling interests, the provisions of
which, among other things, require that minority interests be renamed noncontrolling interests and
presented as a component of total equity on the consolidated balance sheets. Additionally, these
changes require the presentation of a consolidated net income measure that includes the amounts
attributable to both the controlling and noncontrolling interests for all periods presented. There
was no impact to net income attributable to the Company for all periods presented as a result of
these changes.
During the three months ended June 30, 2009, the Company decided to retain a hospital and
related businesses previously classified as held for sale. Results of operations for all periods
presented have been restated to include this retained hospital and related businesses, which were
previously reported as discontinued operations. The consolidated balance sheets for each of the
periods presented have been restated to present the assets and liabilities previously reported as
held for sale in the applicable financial statement line items.
2. Accounting for Stock-Based Compensation
Stock-based compensation awards are granted under the Community Health Systems, Inc. Amended
and Restated 2000 Stock Option and Award Plan (the 2000 Plan) and the Community Health Systems,
Inc. 2009 Stock Option and Award Plan (the 2009 Plan).
The 2000 Plan allows for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code (IRC), as well as stock options which do not so qualify,
stock appreciation rights, restricted stock, restricted stock units, performance-based shares or
units, phantom stock and other share awards. Persons eligible to receive grants under the 2000 Plan
include the Companys directors, officers, employees and consultants. To date, all options granted
under the 2000 Plan have been nonqualified stock options for tax purposes. Generally, vesting of
these granted options occurs in one-third increments on each of the first three anniversaries of
the award date. Options granted prior to 2005 have a 10 year contractual term, options granted in
2005 through 2007 have an eight year contractual term and options granted in 2008 and 2009 have a
10 year contractual term. The exercise price of all options granted under the 2000 Plan is equal to
the fair value of the Companys common stock on the option grant date. As of December 31, 2009,
4,064,612 shares of unissued common stock remain available for future grants under the 2000 Plan.
The 2009 Plan, which was adopted by the Board of Directors of the Parent as of March 24, 2009
and approved by stockholders on May 19, 2009, provides for the grant of incentive stock options
intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so
qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based
shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan
include the Companys directors, officers, employees and consultants. The duration of any
option granted under the 2009 Plan will be determined by the Companys compensation committee.
Generally, however, no option may be exercised more than 10 years from the date of grant, provided
that the
73
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
compensation committee may provide that a stock option may, upon the death of the grantee, be exercised for up
to one year following the date of death even if such period extends beyond 10 years. As of December
31, 2009, no grants had been made under the 2009 Plan, with 3,500,000 shares of unissued common
stock remaining reserved for future grants.
The following table reflects the impact of total compensation expense related to stock-based
equity plans on the reported operating results for the respective periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Effect on income from continuing operations before income taxes |
|
$ |
(44,501 |
) |
|
$ |
(52,105 |
) |
|
$ |
(38,771 |
) |
|
|
|
|
|
|
|
|
|
|
Effect on net income |
|
$ |
(26,986 |
) |
|
$ |
(31,655 |
) |
|
$ |
(23,541 |
) |
|
|
|
|
|
|
|
|
|
|
At
December 31, 2009, $40.3 million of unrecognized
stock-based compensation expense was
expected to be recognized over a weighted-average period of 20 months. Of that amount, $13.5
million related to outstanding unvested stock options expected to be recognized over a
weighted-average period of 17 months and $26.9 million relates to outstanding unvested restricted
stock, restricted stock units and phantom shares expected to be recognized over a weighted-average
period of 21 months. There were no modifications to awards during 2009, 2008, or 2007.
The fair value of stock options was estimated using the Black Scholes option pricing model
with the assumptions and weighted-average fair values during the years ended December 31, 2009,
2008 and 2007, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Expected volatility |
|
|
40.7 |
% |
|
|
24.9 |
% |
|
|
24.4 |
% |
Expected dividends |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Expected term |
|
4 years |
|
4 years |
|
4 years |
Risk-free interest rate |
|
|
1.64 |
% |
|
|
2.53 |
% |
|
|
4.48 |
% |
In determining the expected term, the Company examined concentrations of option holdings and
historical patterns of option exercises and forfeitures, as well as forward looking factors, in an
effort to determine if there were any discernable employee populations. From this analysis, the
Company identified two employee populations, one consisting primarily of certain senior executives
and the other consisting of all other recipients.
The expected volatility rate was estimated based on historical volatility. In determining
expected volatility, the Company also reviewed the market-based implied volatility of actively
traded options of its common stock and determined that historical volatility did not differ
significantly from the implied volatility.
The expected term computation is based on historical exercise and cancellation patterns and
forward-looking factors, where present, for each population identified. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting
forfeiture rate is based on historical rates and forward-looking factors for each population
identified. The Company adjusts the estimated forfeiture rate to its actual experience.
74
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Options outstanding and exercisable under the 2000 Plan as of December 31, 2009, and changes
during each of the years in the three-year period ended December 31, 2009 were as follows (in
thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Value as of |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
December 31, |
|
|
|
Shares |
|
|
Price |
|
|
(In Years) |
|
|
2009 |
|
Outstanding at December 31, 2006 |
|
|
5,482,528 |
|
|
$ |
26.48 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,544,000 |
|
|
|
37.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(295,854 |
) |
|
|
26.89 |
|
|
|
|
|
|
|
|
|
Forfeited and cancelled |
|
|
(291,659 |
) |
|
|
35.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
8,439,015 |
|
|
|
30.90 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,251,000 |
|
|
|
31.89 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(281,831 |
) |
|
|
22.10 |
|
|
|
|
|
|
|
|
|
Forfeited and cancelled |
|
|
(644,100 |
) |
|
|
35.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
8,764,084 |
|
|
|
30.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,313,000 |
|
|
|
19.43 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(680,898 |
) |
|
|
18.74 |
|
|
|
|
|
|
|
|
|
Forfeited and cancelled |
|
|
(442,105 |
) |
|
|
31.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
8,954,081 |
|
|
$ |
30.19 |
|
|
5.7 years |
|
$ |
59,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
6,089,995 |
|
|
$ |
30.94 |
|
|
4.7 years |
|
$ |
36,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted during the years ended
December 31, 2009, 2008 and 2007, was $6.61, $7.56 and $10.24, respectively. The aggregate
intrinsic value represents the number of in-the-money stock options multiplied by the difference
between the Companys closing stock price on the last trading day of the reporting period and the
exercise price of the respective stock options based on the closing market price of the Companys
common stock at December 31, 2009 of $35.60. This amount changes based on the market value of the
Companys common stock. The aggregate intrinsic value of options exercised during the years ended
December 31, 2009, 2008 and 2007 was $7.6 million, $3.4 million and $3.5 million, respectively. The
aggregate intrinsic value of options vested and expected to vest approximates that of the
outstanding options.
The Company has also awarded restricted stock under the 2000 Plan to its directors and
employees of certain subsidiaries. The restrictions on these shares generally lapse in one-third increments on each of the
first three anniversaries of the award date. Certain of the restricted stock awards granted to the
Companys senior executives contain a performance objective that must be met in addition to any
vesting requirements. If the performance objective is not attained, the awards will be forfeited in
their entirety. Once the performance objective has been attained, restrictions will lapse in
one-third increments on each of the first three anniversaries of the award date. Notwithstanding
the above-mentioned performance objectives and vesting requirements, the restrictions will lapse
earlier in the event of death, disability or termination of
employment by the Company for any reason other than for cause of the holder of the
restricted stock, or change in control of the
Company. Restricted stock awards subject to performance standards are not considered outstanding
for purposes of determining earnings per share until the performance objectives have been
satisfied.
75
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted stock outstanding under the 2000 Plan as of December 31, 2009, and changes during
each of the years in the three-year period ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
|
Fair |
|
|
|
Shares |
|
|
Value |
|
Unvested at December 31, 2006 |
|
|
969,691 |
|
|
$ |
36.05 |
|
Granted |
|
|
1,392,000 |
|
|
|
38.70 |
|
Vested |
|
|
(384,646 |
) |
|
|
35.47 |
|
Forfeited |
|
|
(20,502 |
) |
|
|
36.73 |
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007 |
|
|
1,956,543 |
|
|
|
38.04 |
|
Granted |
|
|
795,500 |
|
|
|
31.99 |
|
Vested |
|
|
(960,001 |
) |
|
|
37.64 |
|
Forfeited |
|
|
(107,835 |
) |
|
|
35.62 |
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
1,684,207 |
|
|
|
35.57 |
|
Granted |
|
|
1,188,814 |
|
|
|
18.45 |
|
Vested |
|
|
(965,478 |
) |
|
|
37.08 |
|
Forfeited |
|
|
(10,002 |
) |
|
|
32.52 |
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
1,897,541 |
|
|
$ |
24.09 |
|
|
|
|
|
|
|
|
|
On February 25, 2009, under the 2000 Plan, each of the Companys outside directors received a
grant of shares of phantom stock equal in value to $130,000 divided by the closing price of the
Companys common stock on that date ($18.18), or 7,151 shares per director (a total of 42,906
shares of phantom stock). Pursuant to a March 24, 2009 amendment to the 2000 Plan, future grants of
this type will be denominated as restricted stock unit awards. On May 19, 2009, the newly elected
outside director received a grant of 7,151 restricted stock units under the 2000 Plan, having a
value at the time of grant of $180,706 based upon the closing price of the Companys common stock
on that date of $25.27. Vesting of these shares of phantom stock and restricted stock units occurs
in one-third increments on each of the first three anniversaries of the award date. As of December
31, 2009, there were 50,057 shares of phantom stock and restricted stock units unvested at a
weighted-average grant date fair value of $19.19. None of these grants were vested or canceled
during the year ended December 31, 2009.
Under the Directors Fees Deferral Plan, the Companys outside directors may elect to receive
share equivalent units in lieu of cash for their directors fees. These units are held in the plan
until the director electing to receive the share equivalent units retires or otherwise terminates
his/her directorship with the Company. Share equivalent units are converted to shares of common
stock of the Company at the time of distribution. The following table represents the amount of
directors fees which were deferred and the equivalent units into which they converted for each of
the respective periods (in thousands, except units):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Directors fees earned and deferred into plan |
|
$ |
80 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent units |
|
|
3,284.028 |
|
|
|
3,410.470 |
|
|
|
|
|
|
|
|
At
December 31, 2009, a total of 20,103.030 units were deferred in the plan with an
aggregate fair value of $0.7 million, based on the closing market price of the Companys common
stock at December 31, 2009 of $35.60.
76
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and Divestitures of Hospitals
Triad Acquisition
On July 25, 2007, the Company completed its acquisition of Triad. Triad owned and operated 50
hospitals with 49 hospitals located in 17 states in non-urban and middle market communities and one
hospital located in the Republic of Ireland.
As of December 31, 2009, eight of the hospitals acquired from Triad have been sold. As a
result of its acquisition of Triad, the Company also provides management and consulting services on
a contract basis to independent hospitals, through its subsidiary, Quorum Health Resources, LLC.
The Company acquired Triad for approximately $6.9 billion,
including the assumption of approximately $1.7 billion
of existing indebtedness.
In connection with the consummation of the acquisition of Triad, the Companys wholly-owned
subsidiary CHS/Community Health Systems, Inc. (CHS)
obtained approximately $7.2 billion of senior secured
financing under a new credit facility (the Credit
Facility) and issued approximately $3.0 billion aggregate
principal amount of 8.875% senior notes due 2015 (the Notes). The Company used the net proceeds
of $3.0 billion from the Notes offering and the net proceeds of
approximately $6.1 billion of term loans under
the Credit Facility to acquire the outstanding shares of Triad, to refinance certain of Triads
indebtedness and the Companys indebtedness, to complete certain related transactions, to pay
certain costs and expenses of the transactions and for general corporate uses. This Credit Facility
also provides an additional $750 million revolving credit facility and had provided a $400 million
delayed draw term loan facility for future acquisitions, working capital and general corporate
purposes. As of December 31, 2007, the $400 million delayed draw term loan was reduced to $300
million at the request of the Company. As of December 31, 2008, $100 million of the delayed draw
term loan had been drawn by the Company, reducing the delayed draw term loan availability to $200
million at that date. In January 2009, the Company drew down the remaining $200 million of the
delayed draw term loan.
The total cost of the Triad acquisition has been allocated to the assets acquired and
liabilities assumed based upon their respective fair values. The purchase price represented a
premium over the fair value of the net tangible and identifiable intangible assets acquired for
reasons such as:
|
|
|
strategically, Triad had operations in five states in which the Company previously had
no operations; |
|
|
|
|
the combined company has smaller concentrations of credit risk through greater
geographic diversification; |
|
|
|
|
many support functions were centralized; and |
|
|
|
|
duplicate corporate functions were eliminated. |
The allocation process required the analysis of acquired fixed assets, contracts, contractual
commitments, and legal contingencies to identify and record the fair value of all assets acquired
and liabilities assumed. The Company completed the allocation of the total cost of the Triad
acquisition in the third quarter of 2008 and made a final analysis and adjustment as of December
31, 2008 to deferred tax accounts based on the final cost allocation, resulting in approximately
$2.8 billion of goodwill being recorded with respect to the Triad acquisition.
Other Acquisitions
On December 31, 2009, one or more subsidiaries of the Company completed a transaction
providing $54.2 million of financing to Rockwood Clinic, P.S., a multi-specialty clinic with 32
locations across the Inland Northwest region of Eastern Washington State and Western Idaho. This
transaction was accounted for as a purchase business combination as required by U.S. GAAP.
Effective June 1, 2009, one or more subsidiaries of the Company acquired from Akron General
Medical Center the remaining 20% noncontrolling interest in Massillon Community Health System, LLC
not then owned by one or more subsidiaries of the Company. This entity indirectly owns and operates
Affinity Medical Center of Massillon, Ohio. The purchase price for this noncontrolling
interest was $1.1 million in cash. Affinity Medical Center is now wholly-owned by these
subsidiaries of the Company.
Effective April 30, 2009, one or more subsidiaries of the Company acquired Wyoming Valley
Health Care System in Wilkes-Barre, Pennsylvania. This health care system includes Wilkes-Barre
General Hospital, a 392-bed,
77
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
full-service acute care hospital located in Wilkes-Barre, Pennsylvania, and First Hospital
Wyoming Valley, a behavioral health facility located in Kingston, Pennsylvania, as well as other
outpatient and ancillary services. The total consideration for fixed assets and working capital of
Wyoming Valley Health Care System was approximately $179.1 million, of which $153.7 million was
paid in cash, net of $14.2 million of cash in acquired bank accounts, and approximately $25.4
million was assumed in liabilities. This acquisition transaction was accounted for using the
purchase method of accounting. This preliminary allocation of the purchase price has been
determined by the Company based upon available information and the allocation is subject to the
settlement of the amounts related to purchased working capital. Adjustments to the purchase price
allocation are not expected to be material.
Effective April 1, 2009, one or more subsidiaries of the Company acquired from Share
Foundation the remaining 50% equity interest in MCSA L.L.C., an entity in which one or more
subsidiaries of the Company previously had a 50% unconsolidated noncontrolling interest. One or
more subsidiaries of the Company provided MCSA L.L.C. certain management services. This acquisition
resulted in these subsidiaries of the Company owning a 100% equity interest in that entity. MCSA
L.L.C. owns and operates Medical Center of South Arkansas (166 licensed beds) in El Dorado,
Arkansas. The purchase price was $26.0 million in cash. As of the acquisition date, one or more
subsidiaries of the Company had a liability to MCSA L.L.C. of $14.1 million, as a result of a cash
management agreement previously entered into with the hospital. Upon completion of the acquisition,
this liability was eliminated in consolidation.
Effective February 1, 2009, one or more subsidiaries of the Company completed the acquisition
of Siloam Springs Memorial Hospital (73 licensed beds), located in Siloam Springs, Arkansas, from
the City of Siloam Springs. The total consideration for this hospital consisted of approximately
$0.1 million paid in cash for working capital and approximately $1.0 million of assumed
liabilities. In connection with this acquisition, a subsidiary of the Company entered into a lease
agreement for the existing hospital and agreed to build a replacement facility at this location,
with construction required to commence by February 2011 and be completed by February 2013. As
security for this obligation, a subsidiary of the Company deposited $1.6 million into an escrow
account at closing and agreed to deposit an additional $1.6 million by February 1, 2010, which the
Companys subsidiary deposited in January 2010. If the construction of the replacement facility is
not completed within the agreed time frame, the escrow balance will be remitted to the City of
Siloam Springs. If the construction of the replacement facility is completed within the agreed
time frame, the escrow balance will be returned to one of these subsidiaries of the Company.
Effective November 14, 2008, one or more subsidiaries of the Company acquired from Willamette
Community Health Solutions all of its noncontrolling interest in MWMC Holdings, LLC, which
indirectly owns a controlling interest in and operates McKenzie-Willamette Medical Center of
Springfield, Oregon. This acquisition resulted from a put right held by Willamette Community Health
Solutions in connection with the 2003 transaction establishing the joint venture. The purchase
price for this noncontrolling interest was $22.7 million in cash. Physicians affiliated with Oregon
Healthcare Resources, Inc. continue to own a noncontrolling interest in the hospital, with the
balance owned by these subsidiaries of the Company.
Effective October 1, 2008, one or more subsidiaries of the Company completed the acquisition
of Deaconess Medical Center (388 licensed beds) and Valley Hospital and Medical Center (123
licensed beds) both located in Spokane, Washington, from Empire Health Services. The total
consideration for these two hospitals was approximately $193.1 million, of which $158.1 million was
paid in cash and approximately $35.0 million was assumed in liabilities. Based upon the Companys
purchase price allocation relating to this acquisition as of September 30, 2009, no goodwill has
been recorded. The acquisition transaction was accounted for using the purchase method of
accounting.
Effective June 30, 2008, one or more subsidiaries of the Company acquired the remaining 35%
noncontrolling interest in Affinity Health Systems, LLC, which indirectly owns and operates Trinity Medical
Center (560 licensed beds) in Birmingham, Alabama, from Baptist Health Systems, Inc. of Birmingham,
Alabama (Baptist), giving these subsidiaries 100% ownership of that facility. The purchase price
for this noncontrolling interest was $51.5 million in cash and the cancellation of a promissory
note issued by Baptist to Affinity Health Systems, LLC in the original principal amount of $32.8
million. Noncontrolling interests in Affinity Health Systems, LLC
were subsequently sold to physicians on the
hospitals medical staff.
78
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to January 1, 2009, U.S. GAAP for business combinations required certain
acquisition-related costs be recognized as part of the consideration paid for a business, resulting
in adjustments to the value of the acquired assets when recorded. As a result of revisions to U.S.
GAAP adopted as of January 1, 2009, such acquisition-related costs must be expensed for business
combinations that close subsequent to December 31, 2008. Approximately $6.7 million of acquisition
costs related to prospective and completed acquisitions were expensed during the year ended
December 31, 2009. The impact of this change in U.S. GAAP on the Companys consolidated results of
operations or consolidated financial position in future periods will be largely dependent on the
number of acquisitions pursued by the Company; however, it is not anticipated that such impact will
be material.
The table below summarizes the allocations of the purchase price (including assumed
liabilities) for these transactions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Current assets |
|
$ |
83,975 |
|
|
$ |
45,867 |
|
Property and equipment |
|
|
192,668 |
|
|
|
146,021 |
|
Goodwill |
|
|
12,233 |
|
|
|
|
|
Intangible assets |
|
|
11,244 |
|
|
|
|
|
Other long-term assets |
|
|
841 |
|
|
|
1,200 |
|
Liabilities |
|
|
53,756 |
|
|
|
34,966 |
|
The operating results of the foregoing transactions have been included in the consolidated
statements of income from their respective dates of acquisition, including net operating revenues
of $308.1 million for the year ended December 31, 2009 from acquisitions that closed during 2009
and net operating revenues of $77.8 million for the year ended December 31, 2008 from acquisitions
that closed during 2008. The following pro forma combined summary of operations of the Company
gives effect to using historical information of the operations of these entities in 2009 and 2008
as if the transactions had occurred as of January 1, 2009 and 2008 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
Pro forma net operating revenues |
|
$ |
12,372,299 |
|
|
$ |
11,697,865 |
|
Pro forma net income |
|
$ |
235,910 |
|
|
$ |
202,688 |
|
Pro forma net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.60 |
|
|
$ |
2.17 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.58 |
|
|
$ |
2.15 |
|
|
|
|
|
|
|
|
Pro forma adjustments to net income include adjustments to depreciation and amortization
expense, net of the related tax effect, based on the estimated fair value assigned to the
long-lived assets acquired, and to interest expense, net of the related tax effect, assuming the
increase in long-term debt used to fund the acquisitions had occurred as of January 1, 2008. These
pro forma results are not necessarily indicative of the actual results of operations.
79
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Discontinued Operations
Effective March 31, 2009, the Company, through its subsidiaries Triad-Denton Hospital LLC and
Triad-Denton Hospital LP, completed the settlement of pending litigation, which resulted in the
sale of its ownership interest in a partnership, which owned and operated Presbyterian Hospital of
Denton (255 licensed beds) in Denton, Texas, to Texas Health Resources for $103.0 million in cash.
Also as part of the settlement, these subsidiaries transferred certain hospital related assets to
Texas Health Resources.
Effective March 1, 2008, one or more subsidiaries of the Company sold Woodland Medical Center
(100 licensed beds) located in Cullman, Alabama; Parkway Medical Center (108 licensed beds) located
in Decatur, Alabama; Hartselle Medical Center (150 licensed beds) located in Hartselle, Alabama;
Jacksonville Medical Center (89 licensed beds) located in Jacksonville, Alabama; National Park
Medical Center (166 licensed beds) located in Hot Springs, Arkansas; St. Marys Regional Medical
Center (170 licensed beds) located in Russellville, Arkansas; Mineral Area Regional Medical Center
(135 licensed beds) located in Farmington, Missouri; Willamette Valley Medical Center (80 licensed
beds) located in McMinnville, Oregon; and White County Community Hospital (60 licensed beds)
located in Sparta, Tennessee, to Capella Healthcare, Inc., headquartered in Franklin, Tennessee.
The proceeds from this sale were $315.0 million in cash.
Effective February 21, 2008, one or more subsidiaries of the Company sold THI Ireland Holdings
Limited, a private limited company incorporated in the Republic of Ireland, which leased and
managed the operations of Beacon Medical Center (122 licensed beds) located in Dublin, Ireland, to
Beacon Medical Group Limited, headquartered in Dublin, Ireland. The proceeds from this sale were
$1.5 million in cash.
Effective February 1, 2008, one or more subsidiaries of the Company sold Russell County
Medical Center (78 licensed beds) located in Lebanon, Virginia to Mountain States Health Alliance,
headquartered in Johnson City, Tennessee. The proceeds from this sale were $48.6 million in cash.
Effective November 30, 2007, the Company sold Barberton Citizens Hospital (312 licensed beds)
located in Barberton, Ohio to Summa Health System of Akron, Ohio. The proceeds from this sale were
$53.8 million in cash.
Effective October 31, 2007, the Company sold its 60% membership interest in Northeast Arkansas
Medical Center, a 104 bed facility in Jonesboro, Arkansas to Baptist Memorial Health Care (Baptist
Memorial), headquartered in Memphis, Tennessee, for $16.8 million. In connection with this
transaction, the Company also sold real estate and other assets to a subsidiary of Baptist Memorial
for $26.2 million in cash.
Effective September 1, 2007, the Company sold its partnership interest in River West L.P.,
which owned and operated River West Medical Center (80 licensed beds) located in Plaquemine,
Louisiana, to an affiliate of Shiloh Health Services, Inc. of Lubbock, Texas. The proceeds from
this sale were $0.3 million in cash.
In connection with managements decision to sell the previously mentioned facilities, the
Company has classified the results of operations of the above mentioned hospitals as discontinued
operations in the accompanying consolidated statements of income. As of December 31, 2009, no
hospitals are held for sale.
80
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net operating revenues and loss reported for the hospitals in discontinued operations are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net operating revenues |
|
$ |
42,113 |
|
|
$ |
237,315 |
|
|
$ |
449,310 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of hospitals sold or held
for sale before income taxes |
|
|
3,024 |
|
|
|
15,956 |
|
|
|
(4,725 |
) |
(Loss) gain
on sale of hospitals, net |
|
|
(644 |
) |
|
|
17,687 |
|
|
|
(3,954 |
) |
Impairment of long-lived assets of hospitals held for sale |
|
|
|
|
|
|
|
|
|
|
(19,044 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, before taxes |
|
|
2,380 |
|
|
|
33,643 |
|
|
|
(27,723 |
) |
Income tax expense (benefit) |
|
|
808 |
|
|
|
14,636 |
|
|
|
(4,983 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax |
|
$ |
1,572 |
|
|
$ |
19,007 |
|
|
$ |
(22,740 |
) |
|
|
|
|
|
|
|
|
|
|
Interest
expense and loss from early extinguishment of debt was allocated to discontinued operations based on estimated sales proceeds
available for debt repayment and using the weighted-average borrowing rate for the year.
The assets and liabilities of the hospital held for sale as of December 31, 2008 are included
in the accompanying consolidated balance sheet as follows: current assets of $25.5 million,
included in other current assets; net property and equipment of $142.8 million and other long-term
assets of $3.0 million, included in other assets; and current liabilities of $67.2 million,
included in other accrued liabilities.
During the three months ended June 30, 2009, the Company decided to retain a hospital and
related businesses previously classified as held for sale. Results of operations for all periods
presented have been restated to include this retained hospital and related businesses, which were
previously reported as discontinued operations. The consolidated balance sheets for each of the
periods presented have been restated to present the assets and liabilities previously reported as
held for sale in the applicable financial statement line items.
4. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance, beginning of year |
|
$ |
4,166,091 |
|
|
$ |
4,247,714 |
|
Goodwill acquired as part of acquisitions during the year |
|
|
25,813 |
|
|
|
49,368 |
|
Consideration adjustments and purchase price
allocation adjustments for prior years acquisitions |
|
|
(144 |
) |
|
|
(119,650 |
) |
Adjustments
for acquisition-related deferred taxes |
|
|
(33,833 |
) |
|
|
|
|
Goodwill related to hospital operations segment written off
as part of disposals |
|
|
|
|
|
|
(11,161 |
) |
Goodwill related to home health agencies segment written off
as part of disposals |
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
4,157,927 |
|
|
$ |
4,166,091 |
|
|
|
|
|
|
|
|
The Companys goodwill was adjusted in 2009 for the effects of its deferred tax
analysis that reduced goodwill and acquisition-related deferred taxes by $33.8 million.
Goodwill is allocated to each identified reporting unit, which is defined as an operating
segment or one level below the operating segment (referred to as a component of the entity).
Management has determined that the Companys operating segments meet the criteria to be classified
as reporting units. At December 31, 2009, the hospital operations reporting unit, the home care
agency operations reporting unit, and the hospital management
services reporting unit had approximately $4.1
billion, $34.3 million and $33.3 million, respectively, of goodwill. At December 31,
81
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2008, the hospital operations reporting unit, the home care agency operations reporting unit,
and the hospital management services reporting unit had approximately $4.1 billion, $34.2 million, and $33.3
million, respectively, of goodwill.
Goodwill is evaluated for impairment at the same time every year and when an event occurs or
circumstances change that, more likely than not, reduce the fair value of the reporting unit below
its carrying value. There is a two-step method for determining goodwill impairment. Step one is to
compare the fair value of the reporting unit with the units carrying amount, including goodwill.
If this test indicates the fair value is less than the carrying value, then step two is required to
compare the implied fair value of the reporting units goodwill with the carrying value of the
reporting units goodwill. The Company has selected September 30th as its annual testing date. The
Company performed its last annual goodwill evaluation as of September 30, 2009, which evaluation
took place during the fourth quarter of 2009. No impairment was indicated by this evaluation.
The Company estimates the fair value of the related reporting units using both a discounted
cash flow model as well as an EBITDA multiple model.
The cash flow forecasts are adjusted by an appropriate discount
rate based on the Companys weighted average cost of capital.
These models are both based on the Companys
best estimate of future revenues and operating costs and are reconciled to the Companys
consolidated market capitalization, with consideration of the amount
a potential acquirer would be required to pay, in the form of a
control premium, in order to gain sufficient ownership to set
policies, direct operations and control management decisions.
Approximately $21.5 million of intangible assets were acquired during the year ended December
31, 2009. The gross carrying amount of the Companys other intangible assets subject to
amortization was $76.2 million at December 31, 2009 and $68.6 million at December 31, 2008, and
the net carrying amount was $47.0 million at December 31, 2009 and $54.1 million at December 31,
2008. The carrying amount of the Companys other intangible assets not subject to amortization was
$44.4 million and $35.2 million at December 31, 2009 and 2008, respectively. Other intangible
assets are included in other assets, net on the Companys consolidated balance sheets.
Substantially all of the Companys intangible assets are contract-based intangible assets related
to operating licenses, management contracts, or non-compete agreements entered into in connection
with acquisitions.
The weighted average amortization period for the intangible assets subject to amortization is
approximately nine years. There are no expected residual values related to these intangible assets.
Amortization expense for these intangible assets was $13.0 million, $6.2 million and $6.1 million
during the years ended December 31, 2009, 2008 and 2007, respectively. Amortization expense on
intangible assets is estimated to be $12.2 million in 2010, $6.4 million in 2011, $5.6 million in
2012, $4.3 million in 2013, $2.8 million in 2014 and $15.7 million thereafter.
5. Income Taxes
The provision for income taxes for income from continuing operations consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
93,496 |
|
|
$ |
2,129 |
|
|
$ |
26,014 |
|
State |
|
|
13,561 |
|
|
|
3,515 |
|
|
|
11,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,057 |
|
|
|
5,644 |
|
|
|
37,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
15,667 |
|
|
|
106,664 |
|
|
|
5,203 |
|
State |
|
|
18,601 |
|
|
|
12,965 |
|
|
|
(2,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
34,268 |
|
|
|
119,629 |
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes for income from continuing operations |
|
$ |
141,325 |
|
|
$ |
125,273 |
|
|
$ |
39,860 |
|
|
|
|
|
|
|
|
|
|
|
82
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles the differences between the statutory federal income tax rate and
the effective tax rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Provision for income taxes at statutory federal rate |
|
$ |
156,146 |
|
|
|
35.0 |
% |
|
$ |
125,650 |
|
|
|
35.0 |
% |
|
$ |
37,552 |
|
|
|
35.0 |
% |
State income taxes, net of federal income tax benefit |
|
|
9,090 |
|
|
|
2.0 |
|
|
|
10,720 |
|
|
|
2.9 |
|
|
|
5,618 |
|
|
|
5.2 |
|
Net income attributable to noncontrolling interests |
|
|
(22,006 |
) |
|
|
(4.9 |
) |
|
|
(12,216 |
) |
|
|
(3.4 |
) |
|
|
(4,680 |
) |
|
|
(4.4 |
) |
Change in valuation allowance |
|
|
1,113 |
|
|
|
0.3 |
|
|
|
(110 |
) |
|
|
0.0 |
|
|
|
3,825 |
|
|
|
3.6 |
|
Federal and state tax credits |
|
|
(4,241 |
) |
|
|
(1.0 |
) |
|
|
(2,270 |
) |
|
|
(0.6 |
) |
|
|
(2,625 |
) |
|
|
(2.4 |
) |
Deferred tax revaluation |
|
|
(2,996 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
Other |
|
|
4,219 |
|
|
|
1.0 |
|
|
|
3,499 |
|
|
|
1.0 |
|
|
|
170 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes and effective tax rate for
income from continuing operations |
|
$ |
141,325 |
|
|
|
31.7 |
% |
|
$ |
125,273 |
|
|
|
34.9 |
% |
|
$ |
39,860 |
|
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities under the provisions of the enacted tax
laws. Deferred income taxes as of December 31, 2009 and 2008 consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
As of December 31, 2008 |
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Net operating loss and credit carryforwards |
|
$ |
121,568 |
|
|
$ |
|
|
|
$ |
143,873 |
|
|
$ |
|
|
Property and equipment |
|
|
|
|
|
|
585,001 |
|
|
|
|
|
|
|
511,687 |
|
Self-insurance liabilities |
|
|
109,152 |
|
|
|
|
|
|
|
56,447 |
|
|
|
|
|
Intangibles |
|
|
|
|
|
|
171,070 |
|
|
|
|
|
|
|
147,669 |
|
Investments in unconsolidated affiliates |
|
|
|
|
|
|
45,570 |
|
|
|
|
|
|
|
51,557 |
|
Other liabilities |
|
|
|
|
|
|
15,395 |
|
|
|
|
|
|
|
7,315 |
|
Long-term debt and interest |
|
|
|
|
|
|
21,499 |
|
|
|
|
|
|
|
30,256 |
|
Accounts receivable |
|
|
44,691 |
|
|
|
|
|
|
|
23,490 |
|
|
|
|
|
Accrued expenses |
|
|
67,092 |
|
|
|
|
|
|
|
27,374 |
|
|
|
|
|
Other comprehensive income |
|
|
129,264 |
|
|
|
|
|
|
|
173,661 |
|
|
|
|
|
Stock-based compensation |
|
|
23,242 |
|
|
|
|
|
|
|
52,889 |
|
|
|
|
|
Other |
|
|
35,159 |
|
|
|
|
|
|
|
20,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530,168 |
|
|
|
838,535 |
|
|
|
497,804 |
|
|
|
748,484 |
|
Valuation allowance |
|
|
(115,128 |
) |
|
|
|
|
|
|
(124,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income taxes |
|
$ |
415,040 |
|
|
$ |
838,535 |
|
|
$ |
372,826 |
|
|
$ |
748,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Companys deferred tax liabilities have been revalued and adjusted in 2009 for the effects of its
deferred tax analysis, reducing acquisition-related deferred taxes
by $33.8 million, goodwill by $33.8
million, other deferred tax liabilities by $3.0 million and the
provision by $3.0 million. The effects of this adjustment on
previously issued consolidated financial statements were not material.
The Company believes that the net deferred tax assets will ultimately be realized, except as
noted below. Its conclusion is based on its estimate of future taxable income and the expected
timing of temporary difference reversals. The Company has state net operating loss carry forwards
of approximately $1.7 billion, which expire from 2010 to 2029. With respect to the deferred tax
liability pertaining to intangibles, as included above, goodwill purchased in connection with
certain of the Companys business acquisitions is amortizable for income tax reporting purposes.
However, for financial reporting purposes, there is no corresponding amortization allowed with
respect to such purchased goodwill.
83
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The valuation allowance decreased by $9.9 million during the year ended December 31, 2009 and
increased $56.4 million during the year ended December 31, 2008. In addition to amounts previously
discussed, the change in valuation allowance relates to a redetermination of the amount of, and
realizability of, net operating losses in certain state income tax jurisdictions.
The
total amount of unrecognized benefit that would impact the effective tax rate, if
recognized, is approximately $9.4 million as of December 31, 2009. It is the Companys policy to
recognize interest and penalties accrued related to unrecognized benefits in its consolidated
statements of income as income tax expense. Adjustments for purchase
business combinations generally impact goodwill and do not affect net
income. During the year ended December 31, 2009, the Company
decreased liabilities by approximately $0.4 million and recorded $0.6 million in interest and
penalties related to prior state income tax returns through its income tax provision from
continuing operations, which are included in its liability for uncertain tax positions at December
31, 2009. A total of approximately $2.0 million of interest and penalties is included in the amount
of liability for uncertain tax positions at December 31, 2009. During the year ended December 31,
2009, the Company released $0.6 million for income taxes and $0.2 million for accrued interest of
its liability for uncertain tax positions, as a result of the expiration of the statute of
limitations pertaining to tax positions taken in prior years relative to state tax positions.
The Company believes that it is reasonably possible that approximately $6.4 million of its
current unrecognized tax benefit may be recognized within the next twelve months as a result of a
lapse of the statute of limitations and settlements with taxing authorities.
The following is a tabular reconciliation of the total amount of unrecognized tax benefit for
the years ended December 31, 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Unrecognized Tax Benefit at beginning of year |
|
$ |
15,630 |
|
|
$ |
14,880 |
|
|
$ |
10,510 |
|
Gross (decreases) increases purchase business combination |
|
|
(4,173 |
) |
|
|
8,325 |
|
|
|
10,160 |
|
Gross increases tax positions in current period |
|
|
|
|
|
|
|
|
|
|
1,930 |
|
Gross increases tax positions in prior period |
|
|
|
|
|
|
223 |
|
|
|
1,820 |
|
Lapse of statute of limitations |
|
|
(663 |
) |
|
|
(7,460 |
) |
|
|
(6,700 |
) |
Settlements |
|
|
(1,560 |
) |
|
|
(338 |
) |
|
|
(2,840 |
) |
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefit at end of year |
|
$ |
9,234 |
|
|
$ |
15,630 |
|
|
$ |
14,880 |
|
|
|
|
|
|
|
|
|
|
|
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. The Company has extended the federal statute of
limitations for Triad for the tax periods ended December 31, 1999, December 31, 2000, April 30,
2001, June 30, 2001, December 31, 2001, December 31, 2002, and December 31, 2003. The Company is
currently under examination by the IRS regarding the federal tax return of Triad for the tax
periods ended December 31, 2004, December 31, 2005, December 31, 2006 and July 25, 2007. The
Company believes the results of this examination will not be material to its consolidated results
of operations or consolidated financial position. With few exceptions, the Company is no longer
subject to state income tax examinations for years prior to 2006 and federal income tax
examinations with respect to Community Health Systems, Inc. federal returns for years prior to
2006.
Prior to January 1, 2009, income attributable to noncontrolling interests was deducted from
earnings before arriving at income from continuing operations. With the adoption of certain updates
to the U.S. GAAP related to consolidations effective January 1, 2009, the income attributable to
noncontrolling interests has been reclassified below net income and therefore is no longer deducted
in arriving at income from continuing operations. However, the provision for income taxes does not
change because those less than wholly-owned consolidated subsidiaries attribute their taxable
income to their respective investors. Accordingly, the Company will not pay tax on the income
attributable to the noncontrolling interests. As a result of separately reporting income that is
taxed to others, the Companys effective tax rate on continuing operations before income taxes, as
reported on the face of the financial statements is 31.7%, 34.9% and 37.2% for the years ended
December 31, 2009, 2008 and 2007, respectively. However, the actual effective tax rate that is
attributable to the Companys share of income from continuing operations before income taxes
(income from continuing operations before income taxes, as presented on the face of
84
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the statement of income, less income from continuing operations attributable to noncontrolling
interests of $62.9 million, $34.9 million and $13.4 million for the years ended December 31, 2009,
2008 and 2007, respectively) is 36.9%, 38.7% and 42.4% for the years ended December 31, 2009, 2008
and 2007, respectively.
The Company paid income taxes, net of refunds received, of $57.3 million during 2009. Cash
paid for income taxes, net of refunds received, resulted in a net cash refund of $65.0 million
during 2008.
6. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
Credit Facilities: |
|
|
|
|
|
|
|
|
Term loans |
|
$ |
6,043,847 |
|
|
$ |
5,965,866 |
|
Tax-exempt bonds |
|
|
8,000 |
|
|
|
8,000 |
|
Senior notes |
|
|
2,784,331 |
|
|
|
2,910,831 |
|
Capital lease obligations (see Note 9) |
|
|
36,915 |
|
|
|
41,086 |
|
Other |
|
|
38,015 |
|
|
|
46,306 |
|
|
|
|
|
|
|
|
Total debt |
|
|
8,911,108 |
|
|
|
8,972,089 |
|
Less current maturities |
|
|
(66,470 |
) |
|
|
(33,904 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
8,844,638 |
|
|
$ |
8,938,185 |
|
|
|
|
|
|
|
|
Terminated Credit Facility and Notes
On
August 19, 2004, CHS entered into an approximately $1.6 billion senior secured credit facility with a
consortium of lenders which was subsequently amended on December 16, 2004, July 8, 2005 and
December 13, 2006 (the Terminated Credit Facility). The purpose of the Terminated Credit Facility
was to refinance and replace the Companys previous credit agreement, repay specified other
indebtedness, and fund general corporate purposes, including amending the credit facility to permit
declaration and payment of cash dividends, to repurchase shares or make other distributions,
subject to certain restrictions. The Terminated Credit Facility
consisted of an approximately $1.2 billion term
loan that was due to mature in 2011 and a $425 million revolving credit facility that was due to
mature in 2009. The First Incremental Facility Amendment, dated as of December 13, 2006, increased
the Companys term loans by $400 million (the Incremental Term Loan Facility) and also gave the
Company the ability to add up to $400 million of additional term loans. The full amount of the
Incremental Term Loan Facility was funded on December 13, 2006, and the proceeds were used to repay
the full outstanding amount (approximately $326 million) of the revolving credit facility under the
Terminated Credit Agreement and the balance was available to be used for general corporate
purposes. The Company was able to elect from time to time an interest rate per annum for the
borrowings under the term loan, including the incremental term loan, and revolving credit facility
equal to (a) an alternate base rate, which
would have been equal to the greatest of (i) the Prime Rate (as defined) in effect and (ii)
the Federal Funds Effective Rate (as defined), plus 50 basis points, plus (1) 75 basis points for
the term loan and (2) the Applicable Margin (as defined) for revolving credit loans or (b) the
Eurodollar Rate (as defined) plus (1) 175 basis points for the term loan and (2) the Applicable
Margin for Eurodollar revolving credit loans. The Company also paid a commitment fee for the daily
average unused commitments under the revolving credit facility. The commitment fee was based on a
pricing grid depending on the Applicable Margin for Eurodollar revolving credit loans and ranged
from 0.250% to 0.500%. The commitment fee was payable quarterly in arrears and on the revolving
credit termination date with respect to the available revolving credit commitments. In addition,
the Company paid fees for each letter of credit issued under the credit facility.
On December 16, 2004, the Company issued $300 million 6.50% senior subordinated notes due
2012. On April 8, 2005, the Company exchanged these notes for notes having substantially the same
terms as the outstanding notes, except the exchanged notes were registered under the Securities Act
of 1933, as amended (the 1933 Act). These exchanged notes were repaid in 2007.
85
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facility and Notes
On July 25, 2007, the Company entered into the Credit Facility with a syndicate of financial
institutions led by Credit Suisse, as administrative agent and collateral agent. The Credit
Facility consists of an approximately $6.1 billion funded term loan facility with a maturity of seven years, a
$400 million delayed draw term loan facility with a maturity of seven years and a $750 million
revolving credit facility with a maturity of six years. As of December 31, 2007, the $400 million
delayed draw term loan facility had been reduced to $300 million at the request of CHS. During the
fourth quarter of 2008, $100 million of the delayed draw term loan was drawn by CHS, reducing the
delayed draw term loan availability to $200 million at December 31, 2008. In January 2009, CHS drew
down the remaining $200 million of the delayed draw term loan. The revolving credit facility also
includes a subfacility for letters of credit and a swingline subfacility. In connection with the
consummation of the acquisition of Triad, CHS used a portion of the net proceeds from its Credit
Facility and the Notes offering to repay its outstanding debt under the previously outstanding
credit facility, the 6.50% senior subordinated notes due 2012 and certain of Triads existing
indebtedness. During the third quarter of 2007, the Company recorded a pre-tax write-off of
approximately $13.9 million in deferred loan costs relative to the early extinguishment of the debt
under the previously outstanding credit facility and incurred tender and solicitation fees of
approximately $13.4 million on the early repayment of the Companys $300 million aggregate
principal amount of 6.50% senior subordinated notes due 2012 through a cash tender offer and
consent solicitation.
The Credit Facility requires quarterly amortization payments of each term loan facility equal
to 0.25% of the outstanding amount of the term loans, if any, with the outstanding principal
balance payable on July 25, 2014.
The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds
of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain
exceptions and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt
obligations or receivables based financing by the Company and its subsidiaries, subject to certain
exceptions, and (3) 50%, subject to reduction to a lower percentage based on the Companys leverage
ratio (as defined in the Credit Facility generally as the ratio of total debt on the date of
determination to the Companys EBITDA, as defined, for the four quarters most recently ended prior
to such date), of excess cash flow (as defined) for any year, commencing in 2008, subject to
certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in
part, without any premium or penalty, subject to minimum prepayment or reduction requirements.
The obligor under the Credit Facility is CHS. All of the obligations under the Credit Facility
are unconditionally guaranteed by the Company and certain existing and subsequently acquired or
organized domestic subsidiaries. All obligations under the Credit Facility and the related
guarantees are secured by a perfected first priority lien or security interest in substantially all
of the assets of the Company, CHS and each subsidiary guarantor, including
equity interests held by the Company, CHS or any subsidiary guarantor, but excluding, among
others, the equity interests of non-significant subsidiaries, syndication subsidiaries,
securitization subsidiaries and joint venture subsidiaries.
The loans under the Credit Facility bear interest on the outstanding unpaid principal amount
at a rate equal to an applicable percentage plus, at CHSs option, either (a) an Alternate Base
Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined)
announced by Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of
1.0%, or (b) a reserve adjusted London interbank offered rate for dollars (Eurodollar Rate) (as
defined). The applicable percentage for term loans is 1.25% for Alternate Base Rate loans and 2.25%
for Eurodollar rate loans. The applicable percentage for revolving loans is 1.25% for Alternate
Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject to
reduction based on the Companys leverage ratio. Loans under the swingline subfacility bear
interest at the rate applicable to Alternate Base Rate loans under the revolving credit facility.
CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect
with respect to Eurodollar rate loans under the revolving credit facility times the maximum
aggregate amount available to be drawn under all letters of credit outstanding under the
subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility
for letters of credit will also receive a customary fronting fee and other customary processing
charges. CHS was initially obligated to pay commitment fees of 0.50% per annum (subject to
reduction based upon the Companys leverage ratio) on the unused portion of the revolving credit
facility. For purposes of this
86
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
calculation, swingline loans are not treated as usage of the revolving credit facility. With
respect to the delayed draw term loan facility, CHS was also obligated to pay commitment fees of
0.50% per annum for the first nine months after the closing of the Credit Facility, 0.75% per annum
for the next three months after such nine-month period and thereafter, 1.0% per annum. In each
case, the commitment fee was paid on the unused amount of the delayed draw term loan facility.
After the draw down of the remaining $200 million of the delayed draw term loan in January 2009,
CHS no longer pays any commitment fees for the delayed draw term loan facility. CHS paid
arrangement fees on the closing of the Credit Facility and pays an annual administrative agent fee.
The Credit Facility contains customary representations and warranties, subject to limitations
and exceptions, and customary covenants restricting the Companys
and its subsidiaries ability to, among other things and subject
to certain exceptions, (1) declare dividends, make distributions or
redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or
grant negative pledges, (4) make loans and investments and enter into acquisitions and joint
ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital
expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with
affiliates, (9) alter the nature of the Companys businesses, (10) grant certain guarantees with
respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the
Companys fiscal year. The Company is also required to comply with specified financial covenants
(consisting of a leverage ratio and an interest coverage ratio) and various affirmative covenants.
Events of default under the Credit Facility include, but are not limited to, (1) CHSs failure
to pay principal, interest, fees or other amounts under the credit agreement when due (taking into
account any applicable grace period), (2) any representation or warranty proving to have been
materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants,
to a grace period, (4) bankruptcy events, (5) a cross default to certain other debt, (6) certain
undischarged judgments (not paid within an applicable grace period), (7) a change of control, (8)
certain ERISA-related defaults and (9) the invalidity or impairment of specified security
interests, guarantees or subordination provisions in favor of the administrative agent or lenders
under the Credit Facility.
The Notes were issued by CHS in connection with the Triad acquisition in the principal amount
of approximately $3.0 billion. The Notes will mature on July 15, 2015. The Notes bear interest at the rate of
8.875% per annum, payable semiannually in arrears on January 15 and July 15, commencing January 15,
2008. Interest on the Notes accrues from the date of original issuance. Interest is calculated on
the basis of 360-day year comprised of twelve 30-day months.
Except as set forth below, CHS is not entitled to redeem the Notes prior to July 15, 2011.
On and after July 15, 2011, CHS is entitled, at its option, to redeem all or a portion of the
Notes upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as a
percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any,
to the redemption date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during the 12-month period
commencing on July 15 of the years set forth below:
|
|
|
|
|
|
|
Redemption |
Period |
|
Price |
2011 |
|
|
104.438 |
% |
2012 |
|
|
102.219 |
% |
2013 and thereafter |
|
|
100.000 |
% |
In addition, any time prior to July 15, 2010, CHS is entitled, at its option, on one or more
occasions to redeem the Notes (which include additional Notes (the Additional Notes), if any,
which may be issued from time to time under the indenture under which the Notes were issued) in an
aggregate principal amount not to exceed 35% of the
aggregate principal amount of the Notes (which includes Additional Notes, if any) originally
issued at a redemption price (expressed as a percentage of principal amount) of 108.875%, plus
accrued and unpaid interest to the redemption date, with the Net Cash Proceeds (as defined) from
one or more Public Equity Offerings (as defined) (provided that if the Public Equity Offering is an
offering by the Company, a portion of the Net Cash Proceeds thereof equal to the amount required to
redeem any such Notes is contributed to the equity capital of CHS); provided, however, that:
87
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1) at least 65% of such aggregate principal amount of Notes originally issued remains
outstanding immediately after the occurrence of each such redemption (other than the Notes
held, directly or indirectly, by the Company or its subsidiaries); and
2) each such redemption occurs within 90 days after the date of the related Public Equity
Offering.
CHS is entitled, at its option, to redeem the Notes, in whole or in part, at any time prior to
July 15, 2011, upon not less than 30 or more than 60 days notice, at a redemption price equal to
100% of the principal amount of Notes redeemed plus the Applicable Premium (as defined), and
accrued and unpaid interest, if any, as of the applicable redemption date.
Pursuant to a registration rights agreement entered into at the time of the issuance of the
Notes, as a result of an exchange offer made by CHS, substantially all of the Notes issued in July
2007 were exchanged in November 2007 for new notes (the Exchange Notes) having terms
substantially identical in all material respects to the Notes (except that the Exchange Notes were
issued under a registration statement pursuant to the 1933 Act). References to the Notes shall also
be deemed to include the Exchange Notes unless the context provides otherwise.
During the year ended December 31, 2008, the Company repurchased on the open market and
cancelled $110.5 million of principal amount of the Notes. This resulted in a net gain from early
extinguishment of debt of $2.5 million with an after-tax impact of $1.6 million.
During the year ended December 31, 2009, the Company repurchased on the open market and
cancelled $126.5 million of principal amount of the Notes. This resulted in a net gain from early
extinguishment of debt of $2.7 million with an after-tax impact of $1.7 million.
On April 2, 2009, the Company paid down $110.4 million of its term loans under the Credit
Facility. Of this amount, $85.0 million was paid down as required under the terms of the Credit
Facility with the net proceeds received from the sale of the ownership interest in the partnership
that owned and operated Presbyterian Hospital of Denton. This resulted in a loss from early
extinguishment of debt of $1.1 million with an after-tax impact of $0.7 million recorded in
discontinued operations for the year ended December 31, 2009. The remaining $25.4 million was paid on
the term loans as required under the terms of the Credit Facility with the net proceeds received
from the sale of various other assets. This resulted in a loss from early extinguishment of debt of
$0.3 million with an after-tax impact of $0.2 million recorded in continuing operations for the
year ended December 31, 2009.
As of December 31, 2009, the availability for additional borrowings under the Credit Facility
was $750 million pursuant to the revolving credit facility, of which $90.0 million was set aside
for outstanding letters of credit. CHS also has the ability to add up to $300 million of borrowing
capacity from receivable transactions (including securitizations) under the Credit Facility, which
has not yet been accessed. CHS also has the ability to amend the Credit Facility to provide for one
or more tranches of term loans in an aggregate principal amount of $600 million, which CHS has not
yet accessed. As of December 31, 2009, the weighted-average interest rate under the Credit
Facility, excluding swaps, was 2.85%.
The Term Loans are scheduled to be paid with principal payments for future years as follows
(in thousands):
|
|
|
|
|
Year |
|
Term Loans |
|
2010 |
|
$ |
43,471 |
|
2011 |
|
|
46,254 |
|
2012 |
|
|
46,471 |
|
2013 |
|
|
46,471 |
|
2014 |
|
|
5,861,180 |
|
Thereafter |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,043,847 |
|
|
|
|
|
88
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2009 and 2008, the Company had letters of credit issued, primarily in
support of potential insurance related claims and certain bonds, of approximately $90.0 million and
$93.6 million, respectively.
Tax-Exempt Bonds. Tax-Exempt Bonds bore interest at floating rates, which averaged 0.95% and
2.37% during 2009 and 2008, respectively.
As
previously described, in connection with the Triad acquisition, the
Company issued approximately $3.0
billion principal amount of Notes. These Notes bear interest at 8.875% interest and mature on July
15, 2015.
Other Debt. As of December 31, 2009, other debt consisted primarily of an industrial revenue
bond, the mortgage obligation on the Companys corporate headquarters and other obligations
maturing in various installments through 2019.
To limit the effect of changes in interest rates on a
portion of the Companys long-term borrowings, the Company is a party to 38 separate interest swap agreements in effect at December 31, 2009,
with an aggregate notional amount of approximately $5.4 billion, and to three forward-starting interest swap
agreements with an aggregate notional amount of $400 million that will become effective upon the
termination of three current agreements. On each of these swaps, the Company receives a
variable rate of interest based on the three-month London Inter-Bank Offer Rate (LIBOR) in
exchange for the payment of a fixed rate of interest. The Company currently pays, on a quarterly
basis, a margin above LIBOR of 225 basis points for revolver loans and term loans under the Credit
Facility. See Note 7 for additional information regarding these swaps.
As of December 31, 2009, the scheduled maturities of long-term debt outstanding, including
capital leases for each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2010 |
|
$ |
66,470 |
|
2011 |
|
|
53,960 |
|
2012 |
|
|
49,705 |
|
2013 |
|
|
49,913 |
|
2014 |
|
|
5,863,700 |
|
Thereafter |
|
|
2,827,360 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,911,108 |
|
|
|
|
|
The Company paid interest of $657 million, $654 million and $218 million on borrowings during
the years ended December 31, 2009, 2008 and 2007, respectively.
89
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Fair Values of Financial Instruments
The fair value of financial instruments has been estimated by the Company using available
market information as of December 31, 2009 and 2008, and valuation methodologies considered
appropriate. The estimates presented are not necessarily indicative of amounts the Company could
realize in a current market exchange (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Carrying |
|
|
Estimated Fair |
|
|
Carrying |
|
|
Estimated Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
344,541 |
|
|
$ |
344,541 |
|
|
$ |
220,655 |
|
|
$ |
220,655 |
|
Available-for-sale securities |
|
|
28,025 |
|
|
|
28,025 |
|
|
|
6,325 |
|
|
|
6,325 |
|
Trading securities |
|
|
22,777 |
|
|
|
22,777 |
|
|
|
24,325 |
|
|
|
24,325 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities |
|
|
6,043,847 |
|
|
|
5,681,216 |
|
|
|
5,965,866 |
|
|
|
4,653,375 |
|
Tax-exempt bonds |
|
|
8,000 |
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
8,000 |
|
Senior notes |
|
|
2,784,331 |
|
|
|
2,881,783 |
|
|
|
2,910,831 |
|
|
|
2,677,965 |
|
Other debt |
|
|
38,015 |
|
|
|
38,015 |
|
|
|
46,306 |
|
|
|
46,306 |
|
Cash and cash equivalents. The carrying amount approximates fair value due to the short-term
maturity of these instruments (less than three months).
Available-for-sale securities. Estimated fair value is based on closing price as quoted in
public markets.
Trading securities. Estimated fair value is based on closing price as quoted in public
markets.
Credit facilities. Estimated fair value is based on information from the Companys bankers
regarding relevant pricing for trading activity among the Companys lending institutions.
Tax-exempt bonds. The carrying amount approximates fair value as a result of the weekly
interest rate reset feature of these publicly-traded instruments.
Senior notes. Estimated fair value is based on the average bid and ask price as quoted by the
bank who served as underwriters in the sale of these notes.
Other debt. The carrying amount of all other debt approximates fair value due to the nature
of these obligations.
Interest Rate Swaps. The fair value of interest rate swap agreements is the amount at which
they could be settled, based on estimates calculated by the Company using a discounted cash flow
analysis based on observable market inputs and validated by comparison to estimates obtained from
the counterparty.
The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the
years ended December 31, 2009 and 2008, the Company completed an assessment of the cash flow hedge
instruments and determined the hedges to be highly effective. The Company has also determined that
the ineffective portion of the hedges do not have a material effect on the Companys consolidated
financial position, operations or cash flows. The counterparties to the interest rate swap
agreements exposes the Company to credit risk in the event of non-performance. However, at December
31, 2009, since the majority of the swap agreements entered into by the Company were in net
liability position so that the Company would be required to make the net settlement payments to the
counterparties, the Company does not anticipate non-performance by those counterparties. The
Company does not hold or issue derivative financial instruments for trading purposes.
90
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest rate swaps consisted of the following at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Fixed Interest |
|
|
Termination |
|
|
Fair Value |
|
Swap # |
|
(in 000s) |
|
|
Rate |
|
|
Date |
|
|
(in 000s) |
|
1 |
|
$ |
200,000 |
|
|
|
2.8800 |
% |
|
September 17, 2010 |
|
$ |
(3,655 |
) |
2 |
|
|
100,000 |
|
|
|
4.9360 |
% |
|
October 4, 2010 |
|
|
(3,630 |
) |
3 |
|
|
100,000 |
|
|
|
4.7090 |
% |
|
January 24, 2011 |
|
|
(4,343 |
) |
4 |
|
|
300,000 |
|
|
|
5.1140 |
% |
|
August 8, 2011 |
|
|
(19,843 |
) |
5 |
|
|
100,000 |
|
|
|
4.7185 |
% |
|
August 19, 2011 |
|
|
(6,033 |
) |
6 |
|
|
100,000 |
|
|
|
4.7040 |
% |
|
August 19, 2011 |
|
|
(6,009 |
) |
7 |
|
|
100,000 |
|
|
|
4.6250 |
% |
|
August 19, 2011 |
|
|
(5,874 |
) |
8 |
|
|
200,000 |
|
|
|
4.9300 |
% |
|
August 30, 2011 |
|
|
(12,961 |
) |
9 |
|
|
200,000 |
|
|
|
3.0920 |
% |
|
September 18, 2011 |
|
|
(6,709 |
) |
10 |
|
|
100,000 |
|
|
|
3.0230 |
% |
|
October 23, 2011 |
|
|
(3,323 |
) |
11 |
|
|
200,000 |
|
|
|
4.4815 |
% |
|
October 26, 2011 |
|
|
(12,151 |
) |
12 |
|
|
200,000 |
|
|
|
4.0840 |
% |
|
December 3, 2011 |
|
|
(11,135 |
) |
13 |
|
|
100,000 |
|
|
|
3.8470 |
% |
|
January 4, 2012 |
|
|
(5,193 |
) |
14 |
|
|
100,000 |
|
|
|
3.8510 |
% |
|
January 4, 2012 |
|
|
(5,201 |
) |
15 |
|
|
100,000 |
|
|
|
3.8560 |
% |
|
January 4, 2012 |
|
|
(5,211 |
) |
16 |
|
|
200,000 |
|
|
|
3.7260 |
% |
|
January 8, 2012 |
|
|
(9,914 |
) |
17 |
|
|
200,000 |
|
|
|
3.5065 |
% |
|
January 16, 2012 |
|
|
(9,034 |
) |
18 |
|
|
250,000 |
|
|
|
5.0185 |
% |
|
May 30, 2012 |
|
|
(20,877 |
) |
19 |
|
|
150,000 |
|
|
|
5.0250 |
% |
|
May 30, 2012 |
|
|
(12,638 |
) |
20 |
|
|
200,000 |
|
|
|
4.6845 |
% |
|
September 11, 2012 |
|
|
(15,831 |
) |
21 |
|
|
100,000 |
|
|
|
3.3520 |
% |
|
October 23, 2012 |
|
|
(4,299 |
) |
22 |
|
|
125,000 |
|
|
|
4.3745 |
% |
|
November 23, 2012 |
|
|
(8,981 |
) |
23 |
|
|
75,000 |
|
|
|
4.3800 |
% |
|
November 23, 2012 |
|
|
(5,439 |
) |
24 |
|
|
150,000 |
|
|
|
5.0200 |
% |
|
November 30, 2012 |
|
|
(13,694 |
) |
25 |
|
|
200,000 |
|
|
|
2.2420 |
% |
|
February 28, 2013 |
|
|
1,219 |
(1) |
26 |
|
|
100,000 |
|
|
|
5.0230 |
% |
|
May 30, 2013 |
|
|
(9,575 |
) |
27 |
|
|
300,000 |
|
|
|
5.2420 |
% |
|
August 6, 2013 |
|
|
(31,724 |
) |
28 |
|
|
100,000 |
|
|
|
5.0380 |
% |
|
August 30, 2013 |
|
|
(9,887 |
) |
29 |
|
|
50,000 |
|
|
|
3.5860 |
% |
|
October 23, 2013 |
|
|
(2,282 |
) |
30 |
|
|
50,000 |
|
|
|
3.5240 |
% |
|
October 23, 2013 |
|
|
(2,165 |
) |
31 |
|
|
100,000 |
|
|
|
5.0500 |
% |
|
November 30, 2013 |
|
|
(10,077 |
) |
32 |
|
|
200,000 |
|
|
|
2.0700 |
% |
|
December 19, 2013 |
|
|
3,000 |
|
33 |
|
|
100,000 |
|
|
|
5.2310 |
% |
|
July 25, 2014 |
|
|
(11,157 |
) |
34 |
|
|
100,000 |
|
|
|
5.2310 |
% |
|
July 25, 2014 |
|
|
(11,157 |
) |
35 |
|
|
200,000 |
|
|
|
5.1600 |
% |
|
July 25, 2014 |
|
|
(21,694 |
) |
36 |
|
|
75,000 |
|
|
|
5.0405 |
% |
|
July 25, 2014 |
|
|
(7,744 |
) |
37 |
|
|
125,000 |
|
|
|
5.0215 |
% |
|
July 25, 2014 |
|
|
(12,803 |
) |
38 |
|
|
100,000 |
|
|
|
2.6210 |
% |
|
July 25, 2014 |
|
|
259 |
|
39 |
|
|
100,000 |
|
|
|
3.1100 |
% |
|
July 25, 2014 |
|
|
89 |
(2) |
40 |
|
|
100,000 |
|
|
|
3.2580 |
% |
|
July 25, 2014 |
|
|
153 |
(3) |
41 |
|
|
100,000 |
|
|
|
3.0050 |
% |
|
November 30, 2016 |
|
|
2,458 |
|
|
|
|
(1) |
|
This interest rate swap becomes effective September 17, 2010, concurrent with the
termination of swap #1. |
|
(2) |
|
This interest rate swap becomes effective October 4, 2010, concurrent with the termination of
swap #2. |
|
(3) |
|
This interest rate swap becomes effective January 24, 2011, concurrent with the termination of
swap #3. |
91
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is exposed to certain risks relating to its ongoing business operations. The
primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are
entered into to manage interest rate risk associated with the term loans in the Credit Facility.
Companies are required to recognize all derivative instruments as either assets or liabilities at
fair value in the consolidated statement of financial position. The Company designates interest
rate swaps as cash flow hedges. For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative is reported as a component
of other comprehensive income and reclassified into earnings in the same period or periods during
which the hedged
transactions affects earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in
current earnings.
Assuming no change in December 31, 2009 interest rates, approximately $216.7 million of
interest expense resulting from the spread between the fixed and floating rates defined in each
interest rate swap agreement will be recognized during the next twelve months. If interest rate
swaps do not remain highly effective as a cash flow hedge, the derivatives gains or losses
resulting from the change in fair value reported through other comprehensive income will be
reclassified into earnings.
The following tabular disclosure provides the location of pre-tax loss recognized
in the consolidated balance sheet through other comprehensive income and reclassified into
interest expense on the consolidated statement of income during the year ended December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre-Tax |
|
|
Amount of Pre-Tax |
|
|
|
|
|
Loss Reclassified |
|
|
Loss Recognized in |
|
Location of |
|
from Accumulated |
|
|
OCI on Derivative |
|
Loss Reclassified |
|
OCI into Income |
Derivatives in Cash |
|
(Effective Portion) |
|
from Accumulated OCI |
|
(Effective Portion) |
Flow Hedging |
|
For the year ended |
|
into Income |
|
For the year ended |
Relationships |
|
December 31, 2009 |
|
(Effective Portion) |
|
December 31, 2009 |
Interest rate swaps |
|
|
($57,576 |
) |
|
Interest expense, net |
|
|
($176,677 |
) |
The fair values of derivative instruments in the consolidated balance sheets as of December
31, 2009 and 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
As
of December 31, 2009 |
|
As
of December 31, 2008 |
|
|
As
of December 31, 2009 |
|
As
of December 31, 2008 |
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
|
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
Derivatives
designated as hedging instruments |
|
Other assets, net |
|
$ |
|
|
|
Other assets net, |
|
$ |
|
|
|
|
Other long-term liabilities |
|
$ |
316,033 |
|
|
Other long-term liabilities |
|
$ |
435,134 |
|
8. Fair Value
Fair Value Hierarchy
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the assumptions that market participants would
use in pricing the asset or liability. As a basis for considering market participant assumptions in
fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that distinguishes
between market participant assumptions based on market data obtained from sources independent of
the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entitys own assumption about market participant assumptions (unobservable inputs
classified within Level 3 of the hierarchy).
The inputs used to measure fair value are classified into the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by
market data.
Level 3: Unobservable inputs that are supported by little or no market activity and are
significant to the fair value of the assets or liabilities. Level 3 includes values determined
using pricing models, discounted cash flow methodologies, or similar techniques reflecting the
Companys own assumptions.
In instances where the determination of the fair value hierarchy measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment
of factors specific to the asset or liability.
92
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth, by level within the fair value hierarchy, the financial assets
and liabilities recorded at fair value on a recurring basis as of
December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale securities |
|
$ |
28,025 |
|
|
$ |
28,025 |
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
22,777 |
|
|
|
22,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
50,802 |
|
|
$ |
50,802 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest
rate swap agreements |
|
$ |
316,033 |
|
|
$ |
|
|
|
$ |
316,033 |
|
|
$ |
|
|
Total liabilities |
|
$ |
316,033 |
|
|
$ |
|
|
|
$ |
316,033 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale securities |
|
$ |
6,325 |
|
|
$ |
6,325 |
|
|
$ |
|
|
|
$ |
|
|
Trading securities |
|
|
24,325 |
|
|
|
24,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,650 |
|
|
$ |
30,650 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest
rate swap agreements |
|
$ |
435,134 |
|
|
$ |
|
|
|
$ |
435,134 |
|
|
$ |
|
|
Contractual obligation |
|
|
48,985 |
|
|
|
|
|
|
|
|
|
|
|
48,985 |
|
Total liabilities |
|
$ |
484,119 |
|
|
$ |
|
|
|
$ |
435,134 |
|
|
$ |
48,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities and trading securities classified as Level 1 are measured using
quoted market prices. The valuation of the Companys interest rate swap agreements is determined
using market valuation techniques, including discounted cash flow analysis on the expected cash
flows of each agreement. This analysis reflects the contractual terms of the agreement, including
the period to maturity, and uses observable market-based inputs, including forward interest rate
curves. The fair values of interest rate swap agreements are determined by netting the discounted
future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or
payments). The variable cash receipts (or payments) are based on the expectation of future interest
rates based on observable market forward interest rate curves and the notional amount being hedged.
The Company incorporates credit valuation adjustments (CVAs) to appropriately reflect both
its own nonperformance or credit risk and the respective counterpartys nonperformance or credit
risk in the fair value measurements. In adjusting the fair value of its interest rate swap
agreements for the effect of nonperformance risk, the Company has considered the impact of any
netting features included in the agreements. The CVA on the Companys interest rate swap agreements
at December 31, 2009 resulted in a decrease in the fair value of the related liability of
$5.9 million and an after-tax adjustment of $3.8 million to other comprehensive income.
The majority of the inputs used to value its interest rate swap agreements, including the
forward interest rate curves and market perceptions of the Companys credit risk used in the CVAs,
are observable inputs available to a market participant. As a result, the Company has determined
that the interest rate swap valuations are classified in Level 2 of the fair value hierarchy.
The contractual obligation liability recorded during the year ended December 31, 2008,
represented the fair value of a put option assumed in connection with a business combination using
unobservable inputs and assumptions available to the Company. The contractual obligation
represented by this liability was settled during the three months ended March 31, 2009, as a result
of the sale of ownership interest in the partnership that owned Presbyterian Hospital of Denton.
The following table presents a rollforward of the
contractual obligation liability (in thousands):
|
|
|
|
|
|
|
Contractual |
|
|
|
Obligation |
|
Balance at January 1, 2008 |
|
$ |
|
|
Initial recognition of obligation |
|
|
61,000 |
|
Unrealized gain, included in discontinued operations |
|
|
(12,015 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
|
48,985 |
|
Settlement of contractual obligation liabililty |
|
|
(48,985 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
$ |
|
|
|
|
|
|
93
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Leases
The Company leases hospitals, medical office buildings, and certain equipment under capital
and operating lease agreements. During 2009, the Company entered into $3.3 million of capital
lease obligations. All lease agreements generally require the Company to pay maintenance, repairs, property
taxes and insurance costs. Commitments relating to noncancellable operating and capital leases for
each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Operating (1) |
|
|
Capital |
|
2010 |
|
$ |
176,755 |
|
|
$ |
8,399 |
|
2011 |
|
|
150,328 |
|
|
|
5,415 |
|
2012 |