Community Health Systems, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the year ended December 31,
2007
|
OR
|
o
|
|
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)
|
|
|
Delaware
(State of
incorporation)
|
|
13-3893191
(IRS Employer
Identification No.)
|
4000 Meridian Boulevard
Franklin, Tennessee
(Address of principal
executive offices)
|
|
37067
(Zip Code)
|
Registrants telephone number, including area code:
(615) 465-7000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $.01 par value
|
|
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 þ NO o
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 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):
|
|
|
|
|
|
|
Large accelerated filer
þ
|
|
Accelerated filer
o
|
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
|
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 $3,838,926,302. Market
value is determined by reference to the closing price on
June 30, 2007 of the Registrants Common Stock as
reported by the New York Stock Exchange. The Registrant does not
(and did not at June 30, 2007) have any non-voting
common stock outstanding. As of February 1, 2008, there
were 96,618,751 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 2008 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, 2007.
TABLE OF
CONTENTS
FORM 10-K
ANNUAL REPORT
COMMUNITY
HEALTH SYSTEMS, INC.
Year
ended December 31, 2007
PART I
|
|
Item 1.
|
BUSINESS
OF COMMUNITY HEALTH SYSTEMS
|
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 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, 2007,
included in our continuing operations, are 115 hospitals that we
owned, leased or operated. These hospitals are geographically
diversified across 27 states, with an aggregate of 16,971
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, but are not limited to,
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, outright or through partnerships with
physicians, physician practices, imaging centers, and ambulatory
surgery centers. In addition to our hospitals and related
businesses, we also own and operate home health agencies,
including four home health agencies located in markets where we
do not operate a hospital. Through our corporate ownership and
operation of these businesses we provide: standardization and
centralization of operations across key business areas; a
strategic direction to expand and improve services and
facilities at our hospitals; 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. Through our wholly-owned
subsidiary, Quorum Health Resources, LLC (QHR), we
also provide management and consulting services to
non-affiliated general acute care hospitals located throughout
the United States.
Our strategy also includes 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.
Effective July 25, 2007, we completed our acquisition of
Triad Hospitals, Inc., or Triad. Of the 115 hospitals
included in our continuing operations as of December 31,
2007, 43 of them were acquired as part of the acquisition of
Triad. The acquisition of Triad also expanded our operations
into five states where we previously did not own any facilities.
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 Securities and Exchange
Commission. Our filings are also available to the public at the
website maintained by the Securities and Exchange Commission,
www.sec.gov.
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, the Compensation Committee and the Governance and
Nominating Committee.
We have included the Chief Executive Officer and the Chief
Financial Officer certifications regarding the companys
public disclosure required by Section 302 of the
Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 of
this report. We timely submitted to the New York Stock Exchange
(the NYSE) the 2007 Annual
1
CEO certification regarding our compliance with the NYSEs
corporate governance listing standards as required by NYSE
Rule 303A.
Our
Business Strategy
With the objective of increasing shareholder value, the key
elements of our business strategy are to:
|
|
|
|
|
increase revenue at our facilities;
|
|
|
|
improve profitability;
|
|
|
|
improve quality; and
|
|
|
|
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:
|
|
|
|
|
recruiting additional primary care physicians and specialists;
|
|
|
|
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
|
|
|
|
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 440 in 2007, 300 in 2006 and
290 in 2005. The percentage of recruited or other physicians
commencing practice with us that were specialists was over 50%
in 2007. Although in recent years we have begun employing more
physicians, most of our physicians are in private practice in
their communities 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.
Emergency Room Initiatives. Given that
over approximately 55% of our hospital admissions originate in
the emergency room, 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 13 of our emergency rooms during the past three years,
including three in 2007. 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.
2
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 2007, we spent $61 million as a
part of 35 major construction projects. This includes
$15.1 million on 9 major construction projects which have
been started at the hospitals acquired in the Triad acquisition.
The 2007 projects included new emergency rooms, cardiac
cathertization labs, intensive care units, hospital additions,
and an ambulatory surgery center. 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 services, critical care and
cardiovascular services. In conjunction with an interest in a
joint venture that we acquired as part of the Triad acquisition,
pursuant to the terms of the joint venture agreement, we built
an acute care hospital in Cedar Park, Texas, which opened in
December 2007. The joint venture partner is a
not-for-profit
entity. Since the Triad acquisition, we spent approximately
$38.6 million in construction costs, including equipment
related to this hospital. We estimate approximately
$2 million will be spent in 2008 to complete this hospital.
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+Choice HMOs, now referred to as 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:
|
|
|
|
|
standardizing and centralizing our operations;
|
|
|
|
optimizing resource allocation by utilizing our company-devised
case and resource management program, which assists in improving
clinical care and containing expenses;
|
|
|
|
capitalizing on purchasing efficiencies through the use of
company-wide standardized purchasing contracts and terminating
or renegotiating specified vendor contracts;
|
|
|
|
installing a standardized management information system,
resulting in more efficient billing and collection
procedures; and
|
|
|
|
monitoring and enhancing productivity of our human resources.
|
3
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.
|
|
|
|
|
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.
|
|
|
|
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 are required to attend a
three-day
introductory seminar that covers issues involved in starting up
a practice.
|
|
|
|
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. (Health Trust), a group
purchasing organization (GPO). HealthTrust is the
source for a substantial portion of our medical supplies,
equipment and pharmaceuticals. This agreement extends to March
2010, with automatic renewal terms of one year unless either
party terminates by giving notice of non-renewal.
|
|
|
|
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.
|
|
|
|
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 health, 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.
|
|
|
|
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.
|
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:
|
|
|
|
|
appropriately treating patients along the care continuum;
|
|
|
|
reducing inefficiently applied processes, procedures and
resources;
|
|
|
|
developing and implementing standards for operational best
practices; and
|
|
|
|
using
on-site
clinical facilitators to train and educate care practitioners on
identified best practices.
|
4
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. Once a patient is admitted to the hospital, we conduct
a review for ongoing 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 encourage the
attending physician to consider alternatives to hospitalization
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:
|
|
|
|
|
have a service area population between 20,000 and 400,000 with a
stable or growing population base;
|
|
|
|
are the sole or primary provider of acute care services in the
community;
|
|
|
|
are located in an area with the potential for service expansion;
|
|
|
|
are not located in an area that is dependent upon a single
employer or industry; and
|
|
|
|
have financial performance that we believe will benefit from our
managements operating skills.
|
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, at the time of our acquisition,
owned and operated 50 hospitals in 17 states across the
U.S., with 1 hospital in Ireland. Although we intend to meet our
acquisition goal in 2008, by completing the previously announced
acquisition of a two hospital system in Spokane, Washington, we
do not anticipate actively pursuing acquisitions for the
remainder of 2008 as we continue to concentrate on the
integration of Triad. Beyond 2008, we intend on returning to our
strategy of growing through selective acquisitions. We currently
estimate that there are approximately 400 hospitals that meet
our acquisition criteria. These hospitals are primarily owned by
governmental, not-for-profit, or faith based agencies.
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
5
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. We have focused on
identifying possible acquisition opportunities through expanding
our internal acquisition group and working with a broad range of
financial advisors who are active in the sale of hospitals,
especially in the not-for-profit sector.
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 an
obligation under hospital purchase agreements in effect as of
December 31, 2007, we are required to build replacement
facilities in Petersburg, Virginia, by August 2008, Clarksville,
Tennessee by June 2009, Shelbyville, Tennessee by June 2009 and
Valparaiso, Indiana by April 2011. 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. In conjunction with a joint venture agreement with a
non-profit entity, we constructed an acute care hospital in
Cedar Park, Texas, which opened in December 2007. Estimated
construction costs, including equipment costs, are approximately
$761.4 million for these five replacement hospitals and one
de novo hospital of which approximately $362.1 million has
been incurred to date (including costs incurred by Triad prior
to our acquisition). In addition, other commitments under
purchase agreements, which include amounts for costs such as
capital improvements, equipment, selected leases and physician
recruiting in effect as of December 31, 2007, obligate us
to spend approximately $265.6 million through 2011.
Integration
of Triad
We believe we can improve and grow the operations of the
hospitals we acquired in the acquisition of Triad through our
standardization and centralization strategies related to billing
and collections, physician recruiting, emergency room
initiatives, managed care contracting and our various
improvement strategies, as previously discussed. We believe our
objective of increasing shareholder value through this
acquisition can be achieved through a combination of
standardization of the information systems, the implementation
of controls designed to enhance discipline over capital spending
and synergies in overhead costs obtained through economies of
scale.
Industry
Overview
The Centers for Medicare and Medicaid Services, or CMS, reported
that in 2006 total U.S. healthcare expenditures grew by
6.7% to $2.1 trillion. It projected total U.S. healthcare
spending to grow by 6.6% in 2007, by an average of 7.0% annually
from 2008 through 2010 and by 6.9% annually from 2011 through
2016. By these estimates, healthcare expenditures will account
for approximately $4.1 trillion, or 19.6% of the total
U.S. gross domestic product, by 2016.
Hospital services, the market in which we operate, is the
largest single category of healthcare at 31% of total healthcare
spending in 2006, or $648.2 billion, as reported by CMS.
CMS projects the hospital services category to grow by at least
6.8% per year through 2016. 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
6
hospitals remain the primary setting for healthcare delivery, it
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 4,900 inpatient hospitals in the
U.S. which are not-for-profit owned, investor owned, or
state or local government owned. Of these hospitals,
approximately 41% 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 health, 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:
|
|
|
|
|
facility size and location;
|
|
|
|
facility ownership structure (i.e., tax-exempt or investor
owned);
|
|
|
|
a facilitys ability to participate in group purchasing
organizations; and
|
|
|
|
facility payor mix.
|
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, 2007, 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 providers
have increasingly exerted pressure on healthcare service
providers to reduce the cost of care. The most active providers
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 economics 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
37.3 million Americans aged 65 or older in the
U.S. who comprise approximately 12.4% of the total
7
U.S. population. By the year 2030, the number of elderly is
expected to climb to 71.5 million, or 20% 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 5.3 million to 9.6 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 23.4% from 1990 to 2006 and are expected to grow by 6.1%
from 2006 to 2010. The number of people aged 55 or older in
these service areas grew by 34.4% from 1990 to 2006 and is
expected to grow by 14.1% from 2006 to 2010.
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 include:
|
|
|
|
|
excess capacity of available capital;
|
|
|
|
valuation levels;
|
|
|
|
financial performance issues, including challenges associated
with changes in reimbursement and collectability of self-pay
revenue;
|
|
|
|
the desire to enhance the local availability of healthcare in
the community;
|
|
|
|
the need and ability to recruit primary care physicians and
specialists;
|
|
|
|
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
|
|
|
|
regulatory changes.
|
8
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 2007 include a full
year of operations for 70 hospitals and partial periods for 45
hospitals. Statistics for 2006 include a full year of operations
for 63 hospitals and partial periods for 7 hospitals acquired
during the year. Statistics for 2005 include a full year of
operations for 59 hospitals and partial periods for 4 hospitals
acquired during the year less one hospital that was consolidated
with another hospital we own in the same community. Hospitals
which have been sold and hospitals which are classified as held
for sale are excluded from all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals (at end of period)
|
|
|
115
|
|
|
|
70
|
|
|
|
63
|
|
Licensed beds(1)
|
|
|
16,971
|
|
|
|
8,406
|
|
|
|
7,398
|
|
Beds in service(2)
|
|
|
14,604
|
|
|
|
6,753
|
|
|
|
5,986
|
|
Admissions(3)
|
|
|
463,212
|
|
|
|
307,964
|
|
|
|
275,044
|
|
Adjusted admissions(4)
|
|
|
848,707
|
|
|
|
570,969
|
|
|
|
508,037
|
|
Patient days(5)
|
|
|
1,941,887
|
|
|
|
1,264,256
|
|
|
|
1,140,605
|
|
Average length of stay (days)(6)
|
|
|
4.2
|
|
|
|
4.1
|
|
|
|
4.1
|
|
Occupancy rate (beds in service)(7)
|
|
|
52.4
|
%
|
|
|
54.3
|
%
|
|
|
54.4
|
%
|
Net operating revenues
|
|
$
|
7,127,494
|
|
|
$
|
4,180,136
|
|
|
$
|
3,576,117
|
|
Net inpatient revenues as a % of total net operating revenues
|
|
|
49.3
|
%
|
|
|
50.0
|
%
|
|
|
50.8
|
%
|
Net outpatient revenues as a % of total net operating revenues
|
|
|
48.6
|
%
|
|
|
48.8
|
%
|
|
|
48.0
|
%
|
Net Income
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
|
$
|
167,544
|
|
Net Income as a % of total net operating revenues
|
|
|
0.4
|
%
|
|
|
4.0
|
%
|
|
|
4.7
|
%
|
Liquidity Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(8)
|
|
$
|
827,032
|
|
|
$
|
564,339
|
|
|
$
|
555,725
|
|
Adjusted EBITDA as a % of total net operating revenues(8)
|
|
|
11.6
|
%
|
|
|
13.5
|
%
|
|
|
15.5
|
%
|
Net cash flows provided by operating activities
|
|
$
|
687,738
|
|
|
$
|
350,255
|
|
|
$
|
411,049
|
|
Net cash flows provided by operating activities as a % of total
net operating revenues
|
|
|
9.6
|
%
|
|
|
8.4
|
%
|
|
|
11.5
|
%
|
Net cash flows used in investing activities
|
|
$
|
(7,498,858
|
)
|
|
$
|
(640,257
|
)
|
|
$
|
(327,272
|
)
|
Net cash flows provided by (used in) financing activities
|
|
$
|
6,903,428
|
|
|
$
|
226,460
|
|
|
$
|
(62,167
|
)
|
See pages 9 through 11 for footnotes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Same-Store Data(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions(3)
|
|
|
434,317
|
|
|
|
439,056
|
|
|
|
(1.1
|
)%
|
Adjusted admissions(4)
|
|
|
792,190
|
|
|
|
789,184
|
|
|
|
(0.4
|
)%
|
Patient days(5)
|
|
|
1,824,399
|
|
|
|
1,872,581
|
|
|
|
|
|
Average length of stay (days)(6)
|
|
|
4.2
|
|
|
|
4.3
|
|
|
|
|
|
Occupancy rate (beds in service)(7)
|
|
|
52.6
|
%
|
|
|
54.4
|
%
|
|
|
|
|
Net operating revenues
|
|
$
|
6,571,528
|
|
|
$
|
6,308,656
|
|
|
|
|
|
Income from operations
|
|
$
|
460,110
|
|
|
$
|
550,519
|
|
|
|
|
|
Income from operations as a% of net operating revenues
|
|
|
7.0
|
%
|
|
|
8.7
|
%
|
|
|
|
|
Depreciation and amortization
|
|
$
|
293,972
|
|
|
$
|
279,485
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
$
|
23,627
|
|
|
$
|
20,105
|
|
|
|
|
|
9
|
|
|
(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 percentages by dividing the average daily number
of inpatients by the weighted average of beds in service. |
|
(8) |
|
EBITDA consists of net income (loss) before interest, income
taxes, depreciation and amortization. Adjusted EBITDA is EBITDA
adjusted to exclude discontinued operations, loss from early
extinguishment of debt and minority interest in earnings. We
have from time to time sold minority interests in certain of our
subsidiaries or acquired subsidiaries with existing minority
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, 2007, 2006, and 2005 (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Adjusted EBITDA
|
|
$
|
827,032
|
|
|
$
|
564,339
|
|
|
$
|
555,725
|
|
Interest expense, net
|
|
|
(364,533
|
)
|
|
|
(94,411
|
)
|
|
|
(87,185
|
)
|
Provision for income taxes
|
|
|
(43,003
|
)
|
|
|
(110,152
|
)
|
|
|
(119,804
|
)
|
Deferred income taxes
|
|
|
(39,894
|
)
|
|
|
(25,228
|
)
|
|
|
9,889
|
|
Loss from operations of hospitals sold or held for sale
|
|
|
(11,067
|
)
|
|
|
(6,873
|
)
|
|
|
(8,737
|
)
|
Income tax benefit on the non-cash impairment and loss on sale
of hospitals
|
|
|
4,457
|
|
|
|
1,378
|
|
|
|
924
|
|
Depreciation and amortization of discontinued operations
|
|
|
16,365
|
|
|
|
9,485
|
|
|
|
8,900
|
|
Stock compensation expense
|
|
|
38,771
|
|
|
|
20,073
|
|
|
|
4,957
|
|
Excess tax benefits relating to stock based compensation
|
|
|
(1,216
|
)
|
|
|
(6,819
|
)
|
|
|
|
|
Other non-cash (income) expenses, net
|
|
|
19,017
|
|
|
|
500
|
|
|
|
740
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
131,300
|
|
|
|
(71,141
|
)
|
|
|
(47,455
|
)
|
Supplies, prepaid expenses and other current assets
|
|
|
(31,977
|
)
|
|
|
(4,544
|
)
|
|
|
(16,838
|
)
|
Accounts payable, accrued liabilities and income taxes
|
|
|
125,959
|
|
|
|
52,151
|
|
|
|
84,956
|
|
Other
|
|
|
16,527
|
|
|
|
21,497
|
|
|
|
24,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
687,738
|
|
|
$
|
350,255
|
|
|
$
|
411,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
|
Includes former Triad hospitals data, as if they were
owned August 1 through December 31, for both comparable
periods and other acquired hospitals to the extent we operated
them during comparable periods in both years. |
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
|
|
|
|
patient directly.
|
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
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Medicare
|
|
|
29.0
|
%
|
|
|
30.4
|
%
|
|
|
31.8
|
%
|
Medicaid
|
|
|
10.3
|
%
|
|
|
11.1
|
%
|
|
|
11.2
|
%
|
Managed Care and other third party payors
|
|
|
50.7
|
%
|
|
|
46.7
|
%
|
|
|
45.6
|
%
|
Self-pay
|
|
|
10.0
|
%
|
|
|
11.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
As shown above, we receive a substantial portion of our revenue
from the Medicare and Medicaid programs. Other third party
payors includes 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 16.
As of December 31, 2007, Pennsylvania and Texas represented
the only areas of geographic concentration. Net operating
revenues as a percentage of consolidated net operating revenues
generated in Pennsylvania were 13.1% in 2007, 22.0% in 2006 and
23.1% in 2005. Net operating revenues as a percentage of
consolidated net operating revenues generated in Texas were
13.0% in 2007, 10.4% in 2006 and 11.6% in 2005.
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
|
|
|
|
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
12
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.
Recent Changes. In recent years, numerous
changes have been made in the oversight of health care providers
to provide an increased emphasis on the linkage between quality
of care criteria and payment levels. For example, hospital
Medicare payments are now impacted by the hospitals
accurate reporting of the basic elements of care provided to
patients with certain diagnoses. The federal government,
numerous states, and several managed care organizations have
begun to initiate payment prohibitions for care associated with
events considered preventable by the provider, such as falls,
incorrect blood transfusion matching, and wrong site surgeries.
As another indication of this trend and focus, the Joint
Commission no longer gives numerical scores at scheduled
triennial surveys; they now score hospitals and other accredited
providers on a pass-fail basis based on unannounced surveys.
Because hospitals no longer are able to prepare for a survey at
a time certain, it is possible that there will be an increase in
negative survey findings, which could lead to a loss of
accreditation. Other provider types are facing similar changes
in payment and quality oversight.
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 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,
13
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.
|
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 health
care programs.
14
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
(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 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.
15
Healthcare Reform. The healthcare industry
continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in
some state legislatures that would affect major changes in the
healthcare system. Proposals that have been considered include
cost controls on hospitals, insurance market reforms to increase
the availability of group health insurance to small businesses,
and mandatory health insurance coverage for employees. The costs
of implementing some of these proposals could be financed, in
part, by reductions in payments to healthcare providers under
Medicare, Medicaid, and other government programs. We cannot
predict the course of future healthcare legislation or other
changes in the administration or interpretation of governmental
healthcare programs and the effect that any legislation,
interpretation, or change may have on us.
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 certificate of need 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. We operate 59 hospitals in 15 states that
have adopted certificate of need 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 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 2007 (i.e., the federal fiscal year beginning
October 1, 2006), each
16
DRG was assigned a payment rate using 67% of the national
average charge per case and 33% of the national average cost per
case. For the federal fiscal year 2008, each DRG is 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. For the federal
fiscal year 2009, 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. Under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003,
DRG payment rates were increased by the full market basket
index, for the federal fiscal years 2005, 2006, 2007 and
2008 or 3.3%, 3.7%, 3.4% and 3.3%, respectively. The Deficit
Reduction Act of 2005 imposes a 2% reduction to the market
basket index beginning in the federal fiscal year 2007, and
thereafter, if patient quality data is not submitted. We intend
to comply 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 1.8% for the year ended
December 31, 2007 and 2.1% for each of the two years ended
December 31, 2006 and 2005.
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 5% in 2006, 10% in 2007 and
15% in 2008. Of our 115 hospitals in continuing operations at
December 31, 2007, 31 qualified for this relief. The
outpatient conversion factor was increased 3.3% effective
January 1, 2005; however, coupled with adjustments to other
variables within the outpatient PPS resulted in an approximate
4.8% to 5.2% net increase in outpatient PPS payments. The
outpatient conversion factor was increased 3.7% effective
January 1, 2006; however coupled with adjustments to other
variables with the outpatient PPS, an approximate 2.2% to 2.6%
net increase in outpatient payments occurred. 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 outpatient PPS,
an approximate 3.0% to 3.4% net increase in outpatient payments
is expected to occur.
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. For federal fiscal year 2005,
skilled nursing facility PPS payment rates were increased by the
full market basket of 2.8%. For federal fiscal year 2006,
skilled nursing facility PPS payment rates were increased 3.1%;
however coupled with adjustments to other variables within the
skilled nursing facility PPS, an approximate 3.9% to
17
4.3% net increase in skilled nursing facility PPS payments
occurred. Skilled nursing facility PPS rates were increased by
the full SNF market basket index of 3.1% and 3.3% for the
federal fiscal years 2007 and 2008, respectively.
The Department of Health and Human Services established a PPS
for home health services effective October 1, 2000. The
Medicare Prescription Drug, Improvement and Modernization Act of
2003 implemented an 0.8% reduction to the market basket increase
to the home health agency PPS per episodic payment rate
effective April 1, 2004 and for the federal fiscal years
2005 and 2006, and increased Medicare payments by 5.0% to home
health services provided in rural areas from April 1, 2004
through March 31, 2005. The Deficit Reduction Act of 2005
extended the 5.0% increase to home health services provided in
rural areas for an additional year effective January 1,
2006 and froze home health agency payments for 2006 at 2005
levels. The home health agency PPS per episodic payment rate
increased by 2.3% on January 1, 2005, 0% on January 1,
2006, and 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 is expected to occur.
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
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.
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 minority
partner. Triad was also a minority partner in HeathTrust and we
acquired their ownership interest and contractual rights in the
acquisition. As of December 31, 2007, we have a 19.3%
ownership 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
18
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.
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 health, 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
19
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, www.chs.net.
Employees
At December 31, 2007, we employed approximately 59,000
full-time employees and 23,200 part-time employees. Of
these employees, approximately 2,600 are union members. We
currently believe that our labor relations are good.
Professional
Liability
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 insurance claims in
Managements discussion and analysis of financial
condition and results of operations.
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.
Environmental
Insurance for the Former Triad Hospitals
We are insured for both storage tank and pollution issues for
the former Triad hospitals under one insurance policy. Our
policy coverage is $2 million per occurrence with a $25,000
deductible and a $10 million annual aggregate.
Environmental
Insurance for All Other Community Health Systems
Hospitals
We are insured for onsite and offsite third party bodily injury,
property damage and clean up costs including business
interruption coverage for actual losses or rental value
resulting from pollution issues. Our policy coverage for
pollution is $3 million per occurrence with a $100,000
deductible and a $6 million annual aggregate.
We are insured for damages of personal property or environmental
injury arising out of environmental impairment of both
underground and above ground storage tanks for all of our
hospitals (other than the former Triad hospitals). This policy
also pays for the clean up resulting from storage tanks. Our
policy coverage is $2 million per occurrence with a $25,000
deductible and a $5 million annual aggregate.
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,
2007. In connection with the consummation of our acquisition of
Triad, a $7.215 billion of senior secured financing under a
new credit facility, or New Credit Facility, was
obtained by our wholly-owned subsidiary, CHS/Community Health
Systems, Inc. or CHS. CHS also issued the 8.875% senior
notes, of the Notes, having an aggregate principal
amount of $3.021 billion. Both the indebtedness under the
New 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 $6.065 billion term
loans under the New 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, 2007, a $750 million revolving credit
facility and a $300 million delayed draw term loan facility
are available to us for working capital and general corporate
purposes under the New Credit Facility, with $36 million of
the revolving credit facility being set aside for outstanding
letters of credit.
Also, in connection with the consummation of the acquisition of
Triad, we completed an early repayment of the $300 million
aggregate principal amount of 6.5% Senior Subordinated
Notes due 2012 through a cash tender offer and consent
solicitation.
|
|
|
|
|
|
|
As of
|
|
|
|
December 31, 2007
|
|
|
|
($ in millions)
|
|
|
Senior secured credit facility
|
|
|
|
|
Term loans
|
|
$
|
5,965.0
|
|
Notes
|
|
|
3,021.3
|
|
Other
|
|
|
111.8
|
|
|
|
|
|
|
Total debt
|
|
|
9,098.1
|
|
|
|
|
|
|
Stockholder equity
|
|
|
1,710.8
|
|
|
|
|
|
|
As of December 31, 2007, our $3.750 billion notional
amount of interest rate swap agreements represented
approximately 63% 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, 2007, would
result in interest expense fluctuating approximately
$22 million per year.
The New Credit Facility agreement
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;
|
|
|
|
create liens;
|
21
|
|
|
|
|
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 New 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 New Credit Facility
and/or the
Notes. Upon the occurrence of an event of default under our New
Credit Facility or the Notes, all amounts outstanding under our
New Credit Facility and the Notes may become due and payable and
all commitments under the New 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 New
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
|
|
|
|
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 $7.815 billion
pursuant to a credit facility or a qualified receivables
transaction, less certain amounts repaid with the proceeds of
asset dispositions. Our New Credit Facility provides for
commitments of up to $7.115 billion in the aggregate. Our
New 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
22
Hospitals, Inc. On some occasions, we also compete with
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. We acquired 50 hospitals in the Triad
acquisition. In the past, we have not acquired this many
hospitals at one time. We may experience delays or difficulties
in improving the operating margins or effectively integrating
the operations of these acquired hospitals.
Given the number of hospitals acquired, senior management may
need to devote a significant amount of time to integration of
the acquired hospitals, which may detract from the ability of
senior management to execute our past acquisition strategy of
attempting to acquire two to four hospitals each year. Except
for a two hospital system, for which we currently have a
definitive agreement to acquire, we do not anticipate acquiring
more hospitals during 2008.
We may
not be able to successfully integrate our acquisition of Triad
or realize the potential benefits of the acquisition, which
could cause our business to suffer.
We may not be able to combine successfully the operations of
former Triad hospitals with our operations and, even if such
integration is accomplished, we may never realize the potential
benefits of the acquisition. The integration of former Triad
hospitals with our operations requires significant attention
from management and may impose substantial demands on our
operations or other projects. In addition, Triads
corporate officers did not continue their employment with us.
The integration of Triad also involves a significant capital
commitment, and the return that we achieve on any capital
invested may be less than the return that we would achieve on
our other projects or investments. Any of these factors could
cause delays or increased costs of combining former Triad
hospitals with us; and could adversely affect our operations,
financial results and liquidity.
Certain of Triads joint venture partners have put or call
rights, the exercise of which could affect our available cash
and/or
operating results. Triad entered into a number of joint venture
transactions that entitle its joint venture partners to require
Triad to purchase the partners interest or to require
Triad to sell its interest to the partner. The consideration
provided for in these contracts may not be at an advantageous
amount vis-à-vis the consideration paid for the Triad
acquisition. If these rights are exercised, we may be required
to make unanticipated payments, our operations at certain
facilities may be adversely affected, or we may be required to
divest certain facilities.
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. In the case of the Triad
acquisition, there was no indemnification provided given the
fact that Triad was a public company and the acquisition was
effective through a merger.
As a result of the Triad acquisition, on a consolidated basis,
we are subject to all of the potential liabilities relating to
the hospitals held by Triad, including liabilities relating to
pending or threatened litigation matters, which, if adversely
decided, could have a material adverse effect on our future
results and operations.
23
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 certificates of need, known as 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.
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 charitable assets from waste.
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 March 2010, with automatic renewal terms of
one year, unless either party terminates by giving notice of
non-renewal, which
24
replaced a similar arrangement with another GPO. 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. Recently
some vendors who are not GPO members have challenged these
exclusive supply arrangements. In addition, the U.S. Senate
has held hearings with respect to GPOs and these exclusive
supply arrangements. 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, 2007, we had approximately
$4.248 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.
Risks
related to our industry
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 2007, 39.3% of our net operating revenues came from the
Medicare and Medicaid programs. In recent years, federal and
state governments made significant changes in the Medicare and
Medicaid programs, including the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. Some of these changes
have decreased the amount of money we receive for our services
relating to these programs.
In recent years, Congress and some state legislatures have
introduced an increasing number of other 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. Federal funding for existing programs may not be
approved in the future. Future federal and state legislation may
further reduce the payments we receive for our services. For
example, the Governor of the State of Tennessee implemented cuts
in the second half of 2005 in TennCare by restricting
eligibility and capping specified services.
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 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,
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.
25
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 relate to various
referral, cost reporting, and billing practices, laboratory and
home healthcare services, and physician ownership and joint
ventures involving hospitals. 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. See
Item 3. Legal Proceedings.
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, 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. The cost of malpractice and other
professional liability insurance decreased in 2005 by 0.2%,
increased in 2006 by 0.1% and decreased in 2007 by 0.1% as a
percentage of net operating revenue. If these costs rise
rapidly, our profitability could decline. For a further
discussion of our insurance coverage, see our discussion of
professional liability insurance claims in
Managements discussion and analysis of financial
condition and results of operations.
If we
experience growth in self-pay volume and revenue, 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 revenue due to a growth in self-pay volume and
revenue. 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 revenue, 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.
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
26
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;
|
|
|
|
our ability to successfully integrate any acquisitions or to
recognize expected synergies from such acquisitions, including
the recently acquired former Triad hospitals;
|
|
|
|
risks associated with our substantial indebtedness, leverage and
debt service obligations;
|
|
|
|
demographic changes;
|
|
|
|
existing governmental regulations and changes in, or the failure
to comply with, governmental regulations;
|
|
|
|
legislative proposals for healthcare reform;
|
|
|
|
the impact of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which includes specific reimbursement
changes for small urban and non-urban hospitals;
|
|
|
|
potential adverse impact of known and unknown government
investigations;
|
|
|
|
our ability, where appropriate, to enter into managed care
provider arrangements and the terms of these arrangements;
|
|
|
|
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;
|
|
|
|
competition;
|
|
|
|
our ability to attract and retain 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;
|
|
|
|
changes in generally accepted accounting principles;
|
|
|
|
the availability and terms of capital to fund additional
acquisitions or replacement facilities;
|
|
|
|
our ability to successfully acquire additional hospitals and
complete the sale of hospitals held for sale;
|
|
|
|
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
27
Corporate
Headquarters
Pursuant to our lease agreement with a developer, construction
was completed on our corporate headquarters, located in
Franklin, Tennessee. In January 2007, we exercised our purchase
option with the developer and acquired the building by
purchasing the equity interests of the previous owner.
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
services, laboratory, radiology, respiratory therapy, physical
therapy, and rehabilitation services. In addition, some of our
hospitals provide skilled nursing and home health services based
on individual community needs.
For each of our hospitals owned or leased as of
December 31, 2007, including those twelve hospitals
classified as held for sale and included in discontinued
operations, 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
|
|
|
|
|
|
|
|
|
|
|
Woodland Community Hospital
|
|
Cullman
|
|
|
100
|
|
|
October, 1994
|
|
Owned
|
Parkway Medical Center Hospital
|
|
Decatur
|
|
|
108
|
|
|
October, 1994
|
|
Owned
|
LV Stabler Memorial Hospital
|
|
Greenville
|
|
|
72
|
|
|
October, 1994
|
|
Owned
|
Hartselle Medical Center
|
|
Hartselle
|
|
|
150
|
|
|
October, 1994
|
|
Owned
|
South Baldwin Regional 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
|
Jacksonville Medical Center
|
|
Jacksonville
|
|
|
89
|
|
|
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
|
Northwest Medical Center Oro Valley
|
|
Tucson
|
|
|
96
|
|
|
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
|
National Park Medical Center
|
|
Hot Springs
|
|
|
166
|
|
|
July, 2007
|
|
Owned
|
St. Marys Regional Medical Center
|
|
Russellville
|
|
|
170
|
|
|
July, 2007
|
|
Owned
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
Northwest Medical Center Springdale
|
|
Springdale
|
|
|
252
|
|
|
July, 2007
|
|
Owned
|
California
|
|
|
|
|
|
|
|
|
|
|
Barstow Community Hospital
|
|
Barstow
|
|
|
56
|
|
|
January, 1993
|
|
Leased
|
Fallbrook Hospital
|
|
Fallbrook
|
|
|
47
|
|
|
November, 1998
|
|
Operated(2)
|
Watsonville Community Hospital
|
|
Watsonville
|
|
|
106
|
|
|
September, 1998
|
|
Owned
|
Florida
|
|
|
|
|
|
|
|
|
|
|
Lake Wales Medical Center
|
|
Lake Wales
|
|
|
154
|
|
|
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
|
|
|
55
|
|
|
October, 1994
|
|
Owned
|
Gateway Regional Medical Center
|
|
Granite City
|
|
|
406
|
|
|
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
|
|
|
122
|
|
|
July, 2007
|
|
Owned
|
Lutheran Hospital
|
|
Fort Wayne
|
|
|
471
|
|
|
July, 2007
|
|
Owned
|
St. Josephs Hospital
|
|
Fort Wayne
|
|
|
191
|
|
|
July, 2007
|
|
Owned
|
Dukes Memorial Hospital
|
|
Peru
|
|
|
38
|
|
|
July, 2007
|
|
Owned
|
Kosciusko Community Hospital
|
|
Warsaw
|
|
|
72
|
|
|
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
|
Louisiana
|
|
|
|
|
|
|
|
|
|
|
Byrd Regional Hospital
|
|
Leesville
|
|
|
60
|
|
|
October, 1994
|
|
Owned
|
Northern Louisiana Medical Center
|
|
Ruston
|
|
|
159
|
|
|
April, 2007
|
|
Leased
|
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
|
Mineral Area Regional Medical Center
|
|
Farmington
|
|
|
135
|
|
|
June, 2006
|
|
Owned
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
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
|
Northeastern Regional Hospital
|
|
Las Vegas
|
|
|
54
|
|
|
April, 2000
|
|
Owned
|
Carlsbad Medical Center
|
|
Carlsbad
|
|
|
112
|
|
|
July, 2007
|
|
Owned
|
Lea Regional Medical Center
|
|
Hobbs
|
|
|
234
|
|
|
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
|
|
|
432
|
|
|
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
|
|
Owned
|
Oregon
|
|
|
|
|
|
|
|
|
|
|
Willamette Valley Medical Center
|
|
McMinnville
|
|
|
80
|
|
|
July, 2007
|
|
Owned
|
McKenzie-Willamette Medical Center
|
|
Springfield
|
|
|
114
|
|
|
July, 2007
|
|
Owned
|
Pennsylvania
|
|
|
|
|
|
|
|
|
|
|
Berwick Hospital
|
|
Berwick
|
|
|
101
|
|
|
March, 1999
|
|
Owned
|
Brandywine Hospital
|
|
Coatesville
|
|
|
175
|
|
|
June, 2001
|
|
Owned
|
Jennersville Regional Hospital
|
|
West Grove
|
|
|
59
|
|
|
October, 2001
|
|
Owned
|
Easton Hospital
|
|
Easton
|
|
|
254
|
|
|
October, 2001
|
|
Owned
|
Lock Haven Hospital
|
|
Lock Haven
|
|
|
59
|
|
|
August, 2002
|
|
Owned
|
Pottstown Memorial Medical Center
|
|
Pottstown
|
|
|
226
|
|
|
July, 2003
|
|
Owned
|
Phoenixville Hospital
|
|
Phoenixville
|
|
|
136
|
|
|
August, 2004
|
|
Owned
|
Chestnut Hill Hospital
|
|
Philadelphia
|
|
|
179
|
|
|
February, 2005
|
|
Owned
|
Sunbury Community Hospital
|
|
Sunbury
|
|
|
92
|
|
|
October, 2005
|
|
Owned
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
Marlboro Park Hospital
|
|
Bennettsville
|
|
|
102
|
|
|
August, 1996
|
|
Leased
|
Chesterfield General Hospital
|
|
Cheraw
|
|
|
59
|
|
|
August, 1996
|
|
Leased
|
Springs Memorial Hospital
|
|
Lancaster
|
|
|
200
|
|
|
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
|
White County Community Hospital
|
|
Sparta
|
|
|
60
|
|
|
October, 1994
|
|
Owned
|
Regional Hospital Of Jackson
|
|
Jackson
|
|
|
154
|
|
|
January, 2003
|
|
Owned
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
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
|
Bedford County Medical Center
|
|
Shelbyville
|
|
|
104
|
|
|
July, 2005
|
|
Leased
|
Sky Ridge Medical Center
|
|
Cleveland
|
|
|
351
|
|
|
October, 2005
|
|
Owned
|
Gateway Medical Center
|
|
Clarksville
|
|
|
206
|
|
|
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
|
|
|
59
|
|
|
January, 1997
|
|
Owned
|
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
|
|
|
196
|
|
|
July, 2007
|
|
Owned
|
College Station Medical Center
|
|
College Station
|
|
|
150
|
|
|
July, 2007
|
|
Owned
|
Navarro Regional Hospital
|
|
Corsicana
|
|
|
162
|
|
|
July, 2007
|
|
Owned
|
Presbyterian Hospital of Denton
|
|
Denton
|
|
|
255
|
|
|
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
|
Russell County Medical Center
|
|
Lebanon
|
|
|
78
|
|
|
September, 1986
|
|
Owned
|
Southampton Memorial Hospital
|
|
Franklin
|
|
|
105
|
|
|
March, 2000
|
|
Owned
|
Southside Regional Medical Center
|
|
Petersburg
|
|
|
408
|
|
|
August, 2003
|
|
Leased
|
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
|
Republic of Ireland
|
|
|
|
|
|
|
|
|
|
|
Beacon Hospital
|
|
Sandyford, Dublin
|
|
|
122
|
|
|
July, 2007
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
Total Licensed Beds at December 31, 2007
|
|
|
|
|
18,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
We operate this hospital under a lease-leaseback and operating
agreement. We recognize all operating statistics, revenue and
expenses associated with this hospital in our consolidated
financial statements. |
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, 2007. Information
on licensed beds was provided by the majority owner and manager
of each joint venture. A subsidiary of HCA Inc. is the majority
owner of Macon Healthcare LLC, a subsidiary of Universal Health
Systems Inc. is the majority owner of Summerlin Hospital Medical
Center LLC and Valley Health System LLC and the Share Foundation
is the other 50% owner of MCSA 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
|
|
Macon Northside Hospital (38%)
|
|
Macon
|
|
GA
|
|
|
103
|
|
Summerlin Hospital Medical Center LLC
|
|
Summerlin Hospital Medical Center (26.1%)
|
|
Las Vegas
|
|
NV
|
|
|
281
|
|
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
|
|
|
210
|
|
Valley Health Systems LLC
|
|
Centennial Hills Medical Center (27.5%)
|
|
Las Vegas
|
|
NV
|
|
|
165
|
|
MCSA LLC
|
|
Medical Center of South Arkansas (50%)
|
|
El Dorado
|
|
AR
|
|
|
166
|
|
|
|
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 Department of Justice did
not intervene in this action. The allegations in the amended
complaint were extremely general, but involved
32
Medicare billing at our White County Community Hospital in
Sparta, Tennessee. By order entered on September 19, 2001,
the U.S. District Court granted our motion for judgment on
the pleadings and dismissed the case, with prejudice. The qui
tam whistleblower (also referred to as a relator)
appealed the district courts ruling to the U.S. Court
of Appeals for the Sixth Circuit. On September 10, 2003,
the Sixth Circuit Court of Appeals rendered its decision in this
case, affirming in part and reversing in part the district
courts decision to dismiss the case with prejudice. The
court affirmed the lower courts dismissal of certain of
plaintiffs claims on the grounds that his allegations had
been previously publicly disclosed. In addition, the appeals
court agreed that, as to all other allegations, the relator had
failed to include enough information to meet the special
pleading requirements for fraud under the False Claims Act and
the Federal Rules of Civil Procedure. However, the case was
returned to the district court to allow the relator another
opportunity to amend his complaint in an attempt to plead his
fraud allegations with particularity. In May 2004, the relator
in U.S. ex rel. Bledsoe filed an amended complaint
alleging fraud involving Medicare billing at White County
Community Hospital. We then filed a renewed motion to dismiss
the amended complaint. On January 6, 2005, the District
Court dismissed with prejudice the bulk of the relators
allegations. The only remaining allegations involve a small
number of
1997-98
charges at White County. After further motion practice between
the relator and the United States Government regarding the
relators right to participate in a previous settlement
with the Company, the District Court again dismissed all claims
in the case on December 13, 2005. On January 9, 2006,
the relator filed a notice of appeal to the U.S. Court of
Appeals for the Sixth Circuit and on September 6, 2007, the
Court of Appeals issued its 25 page opinion affirming in part,
reversing in part (and in doing so, reinstating a number of the
allegations claimed by the relator), and remanding the case to
the District Court for further proceedings. The relator has
filed a motion for rehearing. That motion for rehearing was
denied and we are in the process of evaluating our next steps
with respect to 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. The
plaintiffs allege that uninsured patients who do not qualify for
Medicaid, Medicare or charity care are charged unreasonably high
rates for services and materials and that we use unconscionable
methods to collect bills. The plaintiffs seek restitution of
overpayment, compensatory and other allowable damages and
injunctive relief. In October 2005, the complaint was amended to
eliminate one of the named plaintiffs and to add our management
company subsidiary as a defendant. In November 2005, the
complaint was again amended to add another plaintiff, Lisa
Nichols and another defendant, our hospital in Foley, Alabama,
South Baldwin Regional Medical Center. After a hearing held on
June 13, 2007, on October 29, 2007 the Circuit Court
ruled in favor of the plaintiffs class action
certification request. We disagree with that ruling and have
pursued our automatic right of appeal to the Alabama Supreme
Court. We are vigorously defending this case.
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. The plaintiff alleges that
uninsured patients who do not qualify for Medicaid, Medicare or
charity care are charged unreasonably high rates for services
and materials and that we use unconscionable methods to collect
bills. The plaintiff seeks recovery for breach of contract and
the covenant of good faith and fair dealing, violation of the
Illinois Consumer Fraud and Deceptive Practices Act, restitution
of overpayment, and for unjust enrichment. The plaintiff class
seeks compensatory and other damages and equitable relief. The
Circuit Court Judge recently granted our motion to dismiss the
case, but allowed the plaintiff to re-plead her case. The
plaintiff elected to appeal the Circuit Courts decision in
lieu of amending her case. Oral argument was heard on this case
on January 9, 2008 and we await the ruling of the District
Appellate Court. We are vigorously defending this case.
33
On April 8, 2005, we were served with a first amended
complaint, styled Chronister, et al. v. Granite City
Illinois Hospital Company, LLC d/b/a Gateway Regional Medical
Center, in the Circuit Court of Madison County, Illinois.
The complaint seeks class action status on behalf of the
uninsured patients treated at Gateway Regional Medical Center
and alleges statutory, common law, and consumer fraud in the
manner in which the hospital bills and collects for the services
rendered to uninsured patients. The plaintiff seeks compensatory
and punitive damages and declaratory and injunctive relief. Our
motion to dismiss has been granted in part and denied in part
and discovery has commenced. Gateway Regional Medical
Center v. Holman is a companion case to the
Chronister action, seeking counterclaim recovery on a
collections case. Holman has been stayed pending the
outcome of the Chronister action. We are vigorously
defending these cases.
On February 10, 2006, we received a letter from the Civil
Division of the Department of Justice requesting documents in an
investigation they are conducting involving the Company. The
inquiry relates 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 10th letter focused on our hospitals in
3 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. We have provided
the Department of Justice with the requested documents. In a
letter dated October 4, 2007, the Civil Division notified
us that, based on its investigation to date, it preliminarily
believes that we and these three 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. The
DOJ asserted that these allegedly improper claims and payments
began in 2000 and may be ongoing, but provided no information
about the amount of any improper claims or the possible damages
or penalties it make seek. After a meeting between us and the
DOJ held in November 2007, by letter dated January 22,
2008, the Civil Division notified us that they continued to
believe that the False Claims Act had been violated and had
calculated that the three hospitals received ineligible federal
participation payments from August 2000 to June 2006 of
approximately $27.5 million. The Civil Division advised us
that if they proceeded to trial, they would seek treble damages
plus an appropriate penalty for each of the violations of the
False Claims Act. Discussions are continuing with the Civil
Division in an effort to resolve this matter. The Company
continues to believe that it has not violated the Federal False
Claims Act in the manner described in the governments
letter of January 22, 2008.
In August 2006, our facility in Petersburg, Virginia (Southside
Regional Medical Center) was notified of the pendency of a
federal False Claims Act case styled U.S. ex rel.
Vuyyuru v. Jadhav et al. filed in the Eastern District
of Virginia. In addition to naming the hospital, Community
Health Systems Professional Services Corporation, our management
subsidiary, has also been named. The suit alleges that
Dr. Jadhav, Southside Regional Medical Center, and other
healthcare providers performed medically unnecessary procedures
and billed federal healthcare programs and also alleges that the
defendants defamed Dr. Vuyyuru in the process of
terminating his medical staff privileges. Almost all of the
allegations pre-date our acquisition of this facility and the
sellers
successor-in-interest
has agreed to indemnify the Company and its affiliates. We
believe that the allegations in this case are without merit and
are vigorously defending the case. A motion to dismiss the case
has been granted and the relator has appealed the ruling to the
U.S. Court of Appeals for the Fourth Circuit.
On August 28, 2007, Texas Health Resources of Arlington,
Texas, or THR, notified us of its decision to exercise a call
right to acquire our 80% interest in the limited partnership
that owns Presbyterian Hospital of Denton, Texas, together with
certain land and buildings that we own in Denton (including
rights under a lease for such land and buildings). We acquired
these interests in connection with the Triad acquisition. This
call right became exercisable under the terms of the limited
partnership agreement by reasons of our acquisition of Triad.
Shortly after we initiated efforts to set the purchase price,
which is determined by various formulas set forth in the limited
partnership agreement and related documents, THR filed suit in
Texas state court seeking injunctive and declaratory relief to
extend the
90-day
closing date and to set the purchase price. We removed the case
to Federal District Court and proceedings are underway in that
court with respect to THRs renewed motions for relief.
Pursuant to the limited partnership agreement, the closing was
to occur on or before
34
November 26, 2007. The closing did not occur on
November 26, 2007, as THR failed to properly tender
adequate closing consideration. The case will proceed and trial
is set for August 2008.
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. In October 2005, the district court
granted Quorums motion for summary judgment on the grounds
that his claims were precluded under his severance agreement
with the hospital, without reaching two other arguments made by
Quorum, which included that a prior settlement agreement between
the hospital and the federal government precluded the claims
brought by Whitten as well as the doctrine of prior public
disclosure. On appeal to the 11th Circuit Court of Appeals,
the court reversed the findings of the district court regarding
the severance agreement, but remanded the case to the district
court for findings on Quorums other two defenses. Limited
discovery has been conducted and renewed motions by Quorum to
dismiss the action and to stay further discovery were filed in
September 2007. We await the district courts ruling on our
motion to dismiss. We continue to believe that the
relators claims are without merit and will continue to
vigorously defend this case.
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), alleges that Quorum
conspired with an unaffiliated hospital to pay a 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 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. We believe that this case is without merit and
should the stay be lifted, will continue to vigorously
defend it.
Quorum is a defendant in a qui tam case styled U.S. ex
rel. Mosby vs. Quorum Health Resources, Inc., et al, pending
in the Western District of Mississippi, Western Division. Mosby
was a long time medical records employee at a Quorum managed
facility. She alleges wrongful termination for being a
whistleblower and because of her race. Mosbys first
amended complaint was filed in May 2003 and contains allegations
of false claims related to non-allowable costs and cost reports.
In October 2003, Quorum filed a motion to dismiss, asserting
that Mosbys substantive allegations were lifted from the
1997 Alderson case filed in Tampa against Quorum, which was
resolved in a settlement with the federal government in 2001.
Without any predicate false claims being asserted, we believe
that Mosbys retaliatory discharge allegations are
unsupported. On January 16, 2008, at the request of the
relator, with the joinder of the defendants, the district court
dismissed the case.
|
|
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, 2007.
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 1, 2008, there were
approximately 48 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, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
39.96
|
|
|
$
|
35.33
|
|
Second Quarter
|
|
|
38.39
|
|
|
|
34.94
|
|
Third Quarter
|
|
|
39.18
|
|
|
|
35.70
|
|
Fourth Quarter
|
|
|
37.26
|
|
|
|
31.00
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
39.05
|
|
|
$
|
33.28
|
|
Second Quarter
|
|
|
41.72
|
|
|
|
34.86
|
|
Third Quarter
|
|
|
44.50
|
|
|
|
30.39
|
|
Fourth Quarter
|
|
|
37.50
|
|
|
|
27.70
|
|
36
Corporate
Performance Graph
The following graph sets forth the cumulative return of the
Companys common stock during the five year period ended
December 31, 2007, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2002
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
Community Health Systems
|
|
|
$
|
100.00
|
|
|
|
$
|
129.09
|
|
|
|
$
|
135.41
|
|
|
|
$
|
186.21
|
|
|
|
$
|
177.37
|
|
|
|
$
|
179.02
|
|
Dow Jones Health Care Index
|
|
|
$
|
100.00
|
|
|
|
$
|
117.77
|
|
|
|
$
|
121.55
|
|
|
|
$
|
129.90
|
|
|
|
$
|
136.86
|
|
|
|
$
|
146.12
|
|
S&P 500
|
|
|
$
|
100.00
|
|
|
|
$
|
126.38
|
|
|
|
$
|
137.75
|
|
|
|
$
|
141.88
|
|
|
|
$
|
161.20
|
|
|
|
$
|
166.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not paid any cash dividends since our inception, and do
not anticipate the payment of cash dividends in the foreseeable
future. Our New Credit Facility limits our ability to pay
dividends
and/or
repurchase stock 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, 2007, the amount of
permitted dividends
and/or stock
repurchases permitted under the indenture was
$348.7 million.
On December 13, 2006, we announced an open market
repurchase program for up to five million shares of our common
stock not to exceed $200 million in purchases. This
purchase program commenced December 13, 2006 and will
conclude at the earlier of three years or when the maximum
number of shares have been repurchased. As of December 31,
2007, the Company has not repurchased any shares under this
repurchase plan. This repurchase plan follows a prior repurchase
plan for up to five million shares which concluded on
November 8, 2006. We repurchased 5,000,000 shares at a
weighted average price of $35.23 per share under this earlier
program. We did not repurchase any shares of common stock during
the year ended December 31, 2007.
On November 14, 2005, we elected to call for the redemption
of $150 million in principal amount of our
4.25% Convertible Subordinated Notes due 2008 (the
2008 Notes) on December 14, 2005. At the
conclusion of this call for redemption, $0.3 million in
principal amount of the 2008 Notes were redeemed. Prior to the
redemption date, $149.7 million of the 2008 Notes called
for redemption, plus an additional $0.9 million of
37
the 2008 Notes not called for redemption, were converted by the
holders into an aggregate of 4,495,083 shares of our common
stock.
On December 15, 2005, we elected to call for redemption all
of the remaining outstanding 2008 Notes. As of December 15,
2005, there was $136.6 million in aggregate principal
amount outstanding. On January 17, 2006, at the conclusion
of the second call for redemption of 2008 Notes,
$0.1 million in principal amount of the 2008 Notes were
redeemed and $136.5 million of the 2008 Notes were
converted by the holders into 4,074,510 shares of our
common stock prior to the redemption date.
|
|
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.
Community
Health Systems, Inc.
Five Year Summary of Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
7,127,494
|
|
|
$
|
4,180,136
|
|
|
$
|
3,576,117
|
|
|
$
|
3,042,880
|
|
|
$
|
2,514,817
|
|
Income from operations
|
|
|
485,685
|
|
|
|
385,057
|
|
|
|
398,463
|
|
|
|
332,767
|
|
|
|
282,475
|
|
Income from continuing operations
|
|
|
59,897
|
|
|
|
177,695
|
|
|
|
188,370
|
|
|
|
158,009
|
|
|
|
129,497
|
|
Net income
|
|
|
30,289
|
|
|
|
168,263
|
|
|
|
167,544
|
|
|
|
151,433
|
|
|
|
131,472
|
|
Earnings per common share Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.64
|
|
|
$
|
1.87
|
|
|
$
|
2.13
|
|
|
$
|
1.65
|
|
|
$
|
1.32
|
|
(Loss) Income on discontinued operations
|
|
|
(0.32
|
)
|
|
|
(0.10
|
)
|
|
|
(0.24
|
)
|
|
|
(0.07
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
0.32
|
|
|
$
|
1.77
|
|
|
$
|
1.89
|
|
|
$
|
1.58
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.63
|
|
|
$
|
1.85
|
|
|
$
|
2.00
|
|
|
$
|
1.58
|
|
|
$
|
1.28
|
|
(Loss) Income on discontinued operations
|
|
|
(0.31
|
)
|
|
|
(0.10
|
)
|
|
|
(0.21
|
)
|
|
|
(0.07
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
0.32
|
|
|
$
|
1.75
|
|
|
$
|
1.79
|
|
|
$
|
1.51
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
93,517,337
|
|
|
|
94,983,646
|
|
|
|
88,601,168
|
|
|
|
95,643,733
|
|
|
|
98,391,849
|
|
Diluted(2)
|
|
|
94,642,294
|
|
|
|
96,232,910
|
|
|
|
98,579,977
|
(4)
|
|
|
105,863,790
|
(3)
|
|
|
108,094,956
|
(3)
|
Cash and cash equivalents
|
|
$
|
132,874
|
|
|
$
|
40,566
|
|
|
$
|
104,108
|
|
|
$
|
82,498
|
|
|
$
|
16,331
|
|
Total assets
|
|
|
13,493,643
|
|
|
|
4,506,579
|
|
|
|
3,934,218
|
|
|
|
3,632,608
|
|
|
|
3,350,211
|
|
Long-term obligations
|
|
|
10,334,904
|
|
|
|
2,207,623
|
|
|
|
1,932,238
|
|
|
|
2,030,258
|
|
|
|
1,601,558
|
|
Stockholders equity
|
|
|
1,710,804
|
|
|
|
1,723,673
|
|
|
|
1,564,577
|
|
|
|
1,239,991
|
|
|
|
1,350,589
|
|
38
|
|
|
(1) |
|
Includes the results of operations of the former Triad hospitals
from July 25, 2007, the date of acquisition. |
|
(2) |
|
See Note 11 to the Consolidated Financial Statements,
included in item 8 of this
Form 10-K. |
|
(3) |
|
Included 8,582,076 shares related to the convertible notes
under the if-converted method of determining weighted average
shares outstanding. |
|
(4) |
|
Included 8,385,031 shares related to the convertible notes
under the if-converted method of determining weighted average
shares outstanding. |
|
|
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 and 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. Our hospital
facilities included in continuing operations consist of
115 general acute care hospitals. In addition, we own four
home health agencies, located in markets where we do not operate
a hospital and through our wholly-owned subsidiary, 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.
Effective July 25, 2007, we completed our acquisition of
Triad Hospitals Inc., or Triad, for an aggregate
consideration of $6.836 billion, including
$1.686 billion of assumed indebtedness. In connection with
this acquisition, one of our subsidiaries issued
$3.021 billion principal amount of 8.875% senior notes
due 2015 (the Notes) and we entered into a new
$7.215 billion credit facility (the New Credit
Facility) consisting of a $6.065 billion term loan, a
$750 million revolving credit facility and a
$400 million delayed draw term loan facility. The proceeds
of these financings were used to pay the cash consideration
under the merger agreement and to refinance substantially all of
both the assumed indebtedness and our existing indebtedness and
to pay related fees and expenses. The revolving credit facility
and the delayed draw term loan facility remain available to us
for future acquisitions, working capital, and general corporate
purposes. The delayed draw term loan facility was subsequently
reduced per our request to $300 million in the fourth
quarter of 2007. We believe the acquisition of Triad will
benefit us since it expanded the number of markets we serve,
expanded our operations into five states where we previously did
not operate, and reduced our concentration of credit risk in any
one state. We also believe that synergies obtained from
eliminating duplicate corporate functions and centralizing many
support functions will allow us to improve Triads margins.
Subsequent to the acquisition of Triad, two of the former Triad
hospitals were sold and 12 other hospitals, six of which were
formerly owned by Triad, have been identified as available for
sale. Accordingly, these hospitals have been classified in
discontinued operations in the 2007 statement of income.
Since the Triad acquisition, we have not pursued additional
acquisition targets, in order to focus on the integration of the
Triad acquisition. We anticipate this focus on integration will
continue throughout 2008. Through December 31, 2007, we
have realized approximately $25 million of our estimated
synergies related to this acquisition. We continue to believe
our integration is on track and we anticipate fully recognizing
all of the anticipated synergies.
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. The
acquisition of Triad also provided additional data and a
comparative and larger population of data on which to base our
estimates. The results of these analyses indicated a lower rate
of collectability than had previously been indicated. Therefore,
we have recorded an increase to both our contractual allowances
and bad debt allowances. We
39
believe this lower collectability is 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. The
impact of this change in estimate reduced accounts receivable in
the fourth quarter of 2007 by $166.4 million, reduced net
operating revenues for 2007 by $96.3 million and increased
the provision for bad debts as of December 31, 2007 by
$70.1 million. The resulting impact, net of taxes is a
decrease to income from continuing operations for 2007 of
$105.4 million. Upon giving effect to this change in
estimate, the aggregate of our allowance for doubtful accounts
and other related allowances represents approximately 76% of
self-pay accounts receivables at December 31, 2007,
compared to 65% at December 31, 2006.
Self-pay revenues represented approximately 10.0% of our net
operating revenues in 2007 compared 11.8% in 2006. The value of
charity care services relative to total net operating revenues
decreased to 5.0% in 2007 from 5.1% in 2006. Uninsured and
underinsured patients continue to be an industry-wide issue, and
we anticipate this trend will continue into the foreseeable
future. However, we do not anticipate a significant amount of
continuing deterioration in our self-pay business as evidenced
by the lack of relative growth in business from self-pay
patients over the prior year.
Operating results and statistical data for the year ended
December 31, 2007, include comparative information for the
operations of the acquired Triad hospitals from July 25,
2007, the date of its acquisition. Same-store operating results
and statistical data include the hospitals acquired in the Triad
acquisition as if they were owned August 1 through December 31
of both 2007 and 2006 and all other hospitals owned throughout
both periods. For the year ended December 31, 2007, we
generated $7.127 billion in net operating revenues, a
growth of 70.5% over the year ended December 31, 2006, and
$30.3 million of net income, a decrease of 82.0% over the
year ended December 31, 2006. For the year ended
December 31, 2007, admissions at hospitals owned throughout
both periods decreased 1.1% and adjusted admissions increased
0.4%.
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 health care
services. Furthermore, we continue to strive to improve
operating efficiencies and procedures in order to improve our
profitability at all of our hospitals.
Acquisitions
and Dispositions
On July 25, 2007, we completed our acquisition of Triad.
Triad owned and operated 50 hospitals in 17 states as well
as the Republic of Ireland in non-urban and middle market
communities with a total of 9,585 licensed beds.
Triads subsidiary, QHR, acquired as part of the Triad
acquisition, provides management and consulting services to
independent hospitals. We acquired Triad for approximately
$6.836 billion, including the assumption of
$1.686 billion of existing indebtedness.
In addition to the Triad acquisition, effective April 1,
2007, we completed our acquisition of Lincoln General Hospital
(157 licensed beds), located in Ruston, Louisiana. The total
consideration for this hospital was approximately
$48.7 million, of which $44.8 million was paid in cash
and $3.9 million was assumed in liabilities.
Effective May 1, 2007, we completed our acquisition of
Porter Memorial Hospital (301 licensed beds), located in
Valparaiso, Indiana, with a satellite campus in Portage, Indiana
and outpatient medical campuses located in Chesterton, Demotte,
and Hebron, Indiana. As part of this acquisition, we agreed to
construct a
225-bed
replacement facility for the Valparaiso hospital by April 2011.
The total consideration for Porter Memorial Hospital was
approximately $110.1 million, of which $88.9 million
was paid in cash and $21.2 million was assumed in
liabilities.
Effective September 1, 2007, we sold our partnership
interest in River West L.P., which owned and operated River West
Medical Center (an 80 bed facility located in Plaquemine,
Louisiana) to an affiliate of Shiloh Health Services, Inc. of
Lubbock, Texas. The proceeds received from this sale were
$0.3 million in cash.
40
Effective October 31, 2007, we sold our 60% membership
interest in Northeast Arkansas Medical Center, or NEA, a 104 bed
facility in Jonesboro, Arkansas to Baptist Memorial Health Care
(Baptist), headquartered in Memphis, Tennessee for
$16.8 million in cash. In connection with this transaction,
we also sold real estate and other assets previously leased by
us to NEA to a subsidiary of Baptist. Proceeds received from
this sale were $26.2 million in cash.
Effective November 30, 2007, we sold Barberton Citizens
Hospital (312 licensed beds) located in Barberton, Ohio to Summa
Health System of Akron, Ohio. The proceeds received from this
sale were $53.8 million in cash.
Held
for Sale
As of December 31, 2007, we have classified as held for
sale 12 hospitals with an aggregate bed count of 1,690 licensed
beds. Included in the 12 hospitals is Russell County Medical
Center (78 licensed beds) located in Lebanon, Virginia, which
was sold effective February 1, 2008, to Mountain States
Health Alliance, headquartered in Johnson City, Tennessee, for
$48.6 million in cash.
Sources
of Revenue
The following table presents the approximate percentages of net
operating revenue 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Medicare
|
|
|
29.0
|
%
|
|
|
30.4
|
%
|
|
|
31.8
|
%
|
Medicaid
|
|
|
10.3
|
%
|
|
|
11.1
|
%
|
|
|
11.2
|
%
|
Managed care and other third party payors
|
|
|
50.7
|
%
|
|
|
46.7
|
%
|
|
|
45.6
|
%
|
Self pay
|
|
|
10.0
|
%
|
|
|
11.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 adjustments and report them in the periods that such
adjustments become known. Adjustments related to final
settlements or appeals that increased revenue were insignificant
in the years ended December 31, 2007, 2006 and 2005. 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. While these
rates are indexed for inflation annually, 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. The Medicare Prescription
Drug, Improvement and Modernization Act of 2003 provides a broad
range of provider payment benefits; however, federal government
spending in excess of federal budgetary provisions considered in
passage of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 could result in future deficit
spending for the Medicare system, which could cause future
payments under the Medicare system to decline.
41
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, 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.
The following tables summarize, for the periods indicated,
selected operating data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Expressed as a percentage of net operating revenues)
|
|
|
Consolidated(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Operating expenses(b)
|
|
|
(88.8
|
)
|
|
|
(86.5
|
)
|
|
|
(84.5
|
)
|
Depreciation and amortization
|
|
|
(4.4
|
)
|
|
|
(4.3
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6.8
|
|
|
|
9.2
|
|
|
|
11.1
|
|
Interest expense, net
|
|
|
(5.1
|
)
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
Loss from early extinguishment of debt
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Minority interest in earnings
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1.4
|
|
|
|
6.9
|
|
|
|
8.6
|
|
Provision for income taxes
|
|
|
(0.6
|
)
|
|
|
(2.6
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
0.8
|
|
|
|
4.3
|
|
|
|
5.3
|
|
Loss on discontinued operations
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.4
|
|
|
|
4.0
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Expressed in percentages)
|
|
|
Percentage increase from prior year(a):
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
70.5
|
%
|
|
|
16.9
|
%
|
Admissions
|
|
|
50.4
|
|
|
|
12.0
|
|
Adjusted admissions(c)
|
|
|
48.6
|
|
|
|
12.4
|
|
Average length of stay
|
|
|
2.4
|
|
|
|
|
|
Net Income(d)
|
|
|
(82.0
|
)
|
|
|
0.4
|
|
Same-store percentage increase from prior year(a)(e):
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
4.2
|
%
|
|
|
7.5
|
%
|
Admissions
|
|
|
(1.1
|
)
|
|
|
1.2
|
|
Adjusted admissions(c)
|
|
|
0.4
|
|
|
|
1.0
|
|
42
|
|
|
(a) |
|
Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, we have restated our
2006 and 2005 financial statements and statistical results to
reflect the reclassification as discontinued operations of one
hospital which was sold and five hospitals held for sale which
were owned by us during these periods. |
|
(b) |
|
Operating expenses include salaries and benefits, provision for
bad debts, supplies, rent, and other operating expenses. |
|
(c) |
|
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. |
|
(d) |
|
Includes loss on discontinued operations. |
|
(e) |
|
Includes former Triad hospitals during August through December
of the comparable periods and other acquired hospitals to the
extent we operated them during comparable periods in both years. |
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net operating revenues increased by 70.5% to $7.127 billion
in 2007, from $4.180 billion in 2006. This increase was net
of a $96.3 million reduction to net operating revenues as a
result of the change in estimate to increase contractual
allowances recorded in the fourth quarter of 2007.
$2.404 billion of this increase was contributed by
hospitals acquired in the Triad acquisition that remain in
continuing operations, $426.1 million was contributed by
other recently acquired hospitals and $117.2 million, an
increase of 2.8%, was contributed by hospitals that we owned
throughout both periods. The increase from those hospitals that
we owned throughout both periods was attributable to rate
increases, payor mix, and acuity level of services provided.
On a consolidated basis inpatient admissions increased by 50.4%
and adjusted admissions increased by 48.6%. With respect to
consolidated admissions, approximately 35% were contributed from
newly acquired hospitals, including those hospitals acquired
from Triad, and 65% were contributed by hospitals we owned
throughout both periods. On a same-store basis, which includes
the hospitals acquired from Triad, as if we owned them from
August 1 through December 31 of both periods, admissions
decreased by 1.1% during the year ended December 31, 2007.
Operating expenses, excluding depreciation and amortization, as
a percentage of net operating revenues, increased from 86.5% in
2006 to 88.8% in 2007. Salaries and benefits, as a percentage of
net operating revenues, increased from 39.8% in 2006 to 40.6% in
2007, primarily as a result of an increase in stock compensation
expense, incurring duplicate salary costs related to the
acquisition of Triad for certain corporate overhead positions
not yet eliminated and an increase in the number of employed
physicians. These increases have offset improvements realized at
hospitals owned throughout both periods. Provision for bad
debts, as a percentage of net revenues, increased from 12.4% in
2006 to 12.6% in 2007, due primarily to $70.1 million of
additional bad debt expense recorded as a change in estimate to
increase the allowance for doubtful accounts. Supplies, as a
percentage of net operating revenues, increased from 11.7% in
2006 to 13.3% in 2007, primarily from the acquisition of
hospitals from Triad whose higher acuity of services and lower
purchasing program utilization resulted in higher supply costs
than our other hospitals taken collectively and from other
recent acquisitions for whom we have yet to fully integrate into
our purchasing program, offsetting improvements at hospitals
owned throughout both periods 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 22.6% in 2006 to 22.3% in 2007, 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 minority investments in
certain joint ventures. These investments provided earnings of
0.4% of net operating revenues. Prior to the Triad acquisition,
we did not have any material minority investments in joint
ventures.
Income from continuing operations margin decreased from 4.3% in
2006 to 0.8% in 2007. Net income margins decreased from 4.0% in
2006 to 0.4% in 2007. The decrease in these margins is
reflective of the impact of the net increase in expenses, as a
percentage of net revenue, discussed above and the increase in
interest expense and loss on early extinguishment of debt
associated with the acquisition of Triad.
43
Depreciation and amortization increased from 4.3% of net
operating revenues in 2006 to 4.4% of net operating revenues in
2007.
Interest expense, net, increased by $270.1 million from
$94.4 million in 2006, to $364.5 million in 2007. An
increase in the average debt balance in 2007 as compared to 2006
of $3.583 billion, due primarily to the additional
borrowings to fund the Triad acquisition and repay our previous
outstanding debt, accounted for a $247.7 million increase
in interest expense. An increase in interest rates due to an
increase in LIBOR during 2007, as compared to 2006, accounted
for $22.4 million of the increase.
The net results of the above mentioned changes plus a
$27.3 million loss from early extinguishment of debt
incurred in connection with the financing of the Triad
acquisition, resulted in income from continuing operations
before income taxes decreasing $184.9 million from
$287.8 million in 2006 to $102.9 million for 2007.
Provision for income taxes from continuing operations decreased
from $110.2 million in 2006 to $43.0 million in 2007
due to the decrease in income from continuing operations before
income taxes. Our effective tax rates were 41.8% and 38.3% for
the years ended December 31, 2007 and 2006, respectively.
The increase in our effective tax rate is primarily a result of
an increase in valuation allowances. As a result of the
additional interest expense expected to be incurred, we
determined that certain of our state net operating losses will
expire before being utilized and accordingly established
appropriate valuation allowances.
Net income was $30.3 million in 2007 compared to
$168.3 million for 2006, a decrease of 82%.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Net operating revenues increased by 16.9% to $4.180 billion
in 2006, from $3.576 billion in 2005. Of the
$604.0 million increase in net operating revenues, the
hospitals we acquired in 2005 and 2006, which we did not own
throughout both periods, contributed approximately
$336.3 million, and hospitals we owned throughout both
periods contributed approximately $267.7 million, an
increase of 7.5%. The increase from hospitals that we owned
throughout both periods was attributable to rate increase, payor
mix and the acuity level of services provided, offset by a
decrease in volume.
Inpatient admissions increased by 12.0%. Adjusted admissions
increased by 12.4%. On a same-store basis, inpatient admissions
increased by 1.2% and same-store adjusted admissions increased
by 1.0%. Increases in admissions in 2006 were offset by 2006
having fewer flu and respiratory admissions than 2005 and a
reduction in admissions from service closures and a change in
the classification of one day stays from an inpatient admission
to an outpatient procedure. With respect to consolidated
admissions, approximately 10.8 percentage points of the
increase in admissions were from newly acquired hospitals. On a
same-store basis, net inpatient revenues increased by 6.0% and
net outpatient revenues increased by 9.2%. Consolidated and
same-store average length of stay remained unchanged at
4.1 days.
Operating expenses, excluding depreciation and amortization, as
a percentage of net operating revenues, increased from 84.5% in
2005 to 86.5% in 2006. Salaries and benefits, as a percentage of
net operating revenues, increased from 39.7% in 2005 to 39.8% in
2006 as the impact of recent acquisitions, an increase in the
number of employed physicians and the recognition of additional
stock-based compensation from the adoption of
SFAS No. 123(R) offset efficiencies gained since the
prior year period. Provision for bad debts, as a percentage of
net revenues, increased from 10.0% in 2005 to 12.4% in 2006 due
to an increase in self-pay revenue and the $65.0 million
change in estimate, recorded in the third quarter, which
increased the provision for bad debt. Supplies, as a percentage
of net operating revenues, decreased from 12.0% in 2005 to 11.7%
in 2006. Rent and other operating expenses, as a percentage of
net operating revenues, decreased from 22.7% in 2005 to 22.6% in
2006. Income from continuing operations margin decreased from
5.3% in 2005 to 4.3% in 2006. For hospitals that we owned
throughout both periods, income from operations as a percentage
of net operating revenues decreased from 10.9% in 2005 to 9.1%
in 2006. The decrease in income from continuing operations, and
income from operations on a same-store basis is primarily due to
the increase in the provision for bad debts, offset by the
improvements realized and efficiencies gained since the prior
year at hospitals owned throughout both periods in the areas of
salaries and benefits and supplies. Net income margins
44
decreased from 4.7% in 2005 to 4.0% in 2006, as the decrease in
income from continuing operations was offset by a decrease in
both the loss on discontinued operations and the loss on sale
and impairment of assets associated with those discontinued
operations.
Depreciation and amortization decreased from 4.4% of net
operating revenues for the year ended December 31, 2005 to
4.3% of net operating revenues for the year ended
December 31, 2006.
Interest expense, net, increased by $7.2 million from
$87.2 million in 2005, to $94.4 million in 2006. An
increase in interest rates due to an increase in LIBOR during
2006, as compared to 2005 accounted for $14.8 million of
the increase. This increase was offset by a decrease of
$7.1 million as a result of a decrease in our average
outstanding debt during 2006 as compared to 2005 and a decrease
of $0.5 million related to the hospitals in discontinued
operations.
Income from continuing operations before income taxes decreased
$20.4 million from $308.2 million in 2005 to
$287.8 million for 2006, primarily as a result of the
change in estimate of the allowance for doubtful accounts which
increased the provision for bad debt expense offset by other
operating improvements.
Provision for income taxes from continuing operations decreased
from $119.8 million in 2005 to $110.2 million in 2006
due to the decrease in income from continuing operations, before
income taxes. Our effective tax rates were 38.3% and 38.8% for
the years ended December 31, 2006 and 2005, respectively.
The decrease in our effective tax rate is primarily a result of
our current year growth in lower tax rate jurisdictions.
Net income was $168.3 million in 2006 compared to
$167.5 million for 2005, an increase of 0.4%. The increase
is due to the decrease in loss on discontinued operations in
2006 offset by the decrease in income from continuing operations.
Liquidity
and Capital Resources
2007
Compared to 2006
Net cash provided by operating activities increased
$337.4 million from $350.3 million for the year ended
December 31, 2006 compared to $687.7 million for the
year ended December 31, 2007. This increase is due to an
increase in cash flow from changes in accounts receivable of
$202.4 million, increases in cash flows from accounts
payable, accrued liabilities and income taxes of
$73.8 million, and an increase in non-cash expenses of
$231.6 million, of which $143.8 million was related to
depreciation. These cash flow increases were offset by decreases
in cash flows from supplies, prepaid expenses and other current
assets of $27.4 million, decreases in cash flows from other
assets and liabilities of $5.0 million and a decrease in
net income of $138.0 million.
The use of cash in investing activities increased
$6.859 billion from $640.3 million in 2006 to
$7.499 billion in 2007, as a result of the acquisition of
Triad for $6.836 billion.
In 2007, our net cash provided by financing activities increased
$6.677 billion from $226.5 million in 2006 to
$6.903 billion in 2007 from our New Credit Facility and
issuance of Notes in connection with the acquisition of Triad.
45
As described previously in our discussion of Liquidity and
Capital Resources further and in Notes 6, 8 and 14 of the
Notes to Consolidated Financial Statements, at December 31,
2007, we had certain cash obligations, which are due as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-2011
|
|
|
2012-2013
|
|
|
and thereafter
|
|
|
Long Term Debt
|
|
$
|
6,041,610
|
|
|
$
|
14,743
|
|
|
$
|
192,667
|
|
|
$
|
127,214
|
|
|
$
|
5,706,986
|
|
Senior Subordinated Notes
|
|
|
3,021,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,021,331
|
|
Interest on Bank Facility and Notes(1)
|
|
|
4,729,179
|
|
|
|
689,772
|
|
|
|
2,052,729
|
|
|
|
1,347,496
|
|
|
|
639,182
|
|
Capital Leases, including interest
|
|
|
47,009
|
|
|
|
9,290
|
|
|
|
13,915
|
|
|
|
5,503
|
|
|
|
18,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
13,839,129
|
|
|
|
713,805
|
|
|
|
2,259,311
|
|
|
|
1,480,213
|
|
|
|
9,385,800
|
|
Operating Leases
|
|
|
768,703
|
|
|
|
146,084
|
|
|
|
307,484
|
|
|
|
120,638
|
|
|
|
194,497
|
|
Replacement Facilities and Other Capital Committments(2)
|
|
|
676,264
|
|
|
|
267,658
|
|
|
|
408,606
|
|
|
|
|
|
|
|
|
|
Open Purchase Orders(3)
|
|
|
211,119
|
|
|
|
211,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interpretation 48 obligations, including interest and penalties
|
|
|
17,530
|
|
|
|
1,754
|
|
|
|
15,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,512,745
|
|
|
$
|
1,340,420
|
|
|
$
|
2,991,177
|
|
|
$
|
1,600,851
|
|
|
$
|
9,580,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimate of interest payments assumes the interest rates at
December 31, 2007 remain constant during the period
presented for the New Credit Facility, which is variable rate
debt. The interest rate used to calculate interest payments for
the New Credit Facility was LIBOR as of December 31, 2007
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, 2007 and where certificate of need approval
has been obtained, we have commitments to build the following
replacement facilities and the following capital commitments. As
part of an acquisition in 2003, we agreed to build a replacement
hospital in Petersburg, Virginia by August 2008. As part of an
acquisition in 2005, we agreed to build a replacement hospital
in Shelbyville, Tennessee by June 30, 2009. 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. As part of an acquisition in 2007, we
agreed to build a replacement hospital in Valparaiso, Indiana by
April 2011. In conjunction with the acquisition of Triad, we
assumed the commitment to build a replacement hospital in
Clarksville, Tennessee by June 2009 and a de novo hospital in
Cedar Park, TX, which opened in December 2007. Construction
costs, including equipment costs, for these five replacement
facilities and one de novo hospital are currently estimated to
be approximately $761.4 million of which approximately
$362.1 million has been incurred to date including costs
incurred by Triad prior to our acquisition. In addition as a
part of an acquisition in 2004, we committed to spend
$90 million in capital expenditures within eight years in
Phoenixville, Pennsylvania, and as part of an acquisition in
2005 we committed to spend approximately $41 million within
seven years related to capital expenditures at Chestnut Hill
Hospital in Philadelphia, Pennsylvania. |
|
(3) |
|
Open purchase orders represent our commitment for items ordered
but not yet received. |
As more fully described in Note 6 of the Notes to
Consolidated Financial Statements at December 31, 2007, we
had issued letters of credit primarily in support of potential
insurance related claims and specified outstanding bonds of
approximately $36 million.
46
Additional borrowings in 2007, offset by our redemption of
$136.6 million of principal amount of convertible notes in
2006 along with net income for 2006, resulted in our debt as a
percentage of total capitalization increasing from 53% at
December 31, 2006 to 84% at December 31, 2007.
2006
Compared to 2005
Net cash provided by operating activities decreased by
$60.7 million, from $411.0 million for the year ended
December 31, 2005 to $350.3 million for the year ended
December 31, 2006. This decrease in comparison to the prior
year is primarily the result of an incremental
build-up in
accounts receivable from recently acquired hospitals of
$23.7 million, cash paid for income taxes of
$60.1 million in excess of amounts paid in the prior year
period, and the change in cash flow presentation of the tax
benefits from stock option exercises, associated with the
adoption of SFAS No. 123(R), of $24.5 million.
The increase in cash paid for income taxes in 2006 as compared
to 2005 is primarily the result of the deferred nature of the
deductibility for tax purposes, of the increase in bad debt
expense from our change in estimate of our allowance for
doubtful accounts and increase in stock-based compensation
expense. Also, fewer stock options exercised in 2006 compared to
2005, reduced our deductions from taxable income. These
decreases in cash flow were offset by an increase in
depreciation expense of $22.6 million and an increase in
stock-based compensation expense of $15.1 million, both of
which are non-cash expenses, along with an increase of
$3.5 million in other non-cash expenses. In addition,
changes from all other operating assets and liabilities,
primarily due to our management of our working capital,
increased net cash flows by $6.4 million in 2006 as
compared to 2005.
The use of cash in investing activities increased
$313.0 million from $327.3 million in 2005 to
$640.3 million in 2006. This increase is primarily the
result of our increased acquisition activity which accounted for
$226.2 million of the increase and the prior year cash used
in investing activities being offset by $52.0 million
proceeds from the sale of four hospitals, as opposed to in 2006
when we received proceeds of $0.8 million from the sale of
one hospital and a nursing home.
In 2006, our net cash provided by financing activities increased
$288.7 million to $226.5 million from a use of cash in
2005 of $62.2 million. This increase is primarily the
result of our use of borrowings available under our Credit
Agreement to fund hospital acquisitions, the repurchase of
company stock, and the repayment of amounts previously borrowed
under the revolving credit facility portions of our Credit
Agreement.
During 2006, we repurchased 5,000,000 shares of our
outstanding common stock at an aggregate cost of
$176.3 million. Cash flow to fund these repurchases was
derived from borrowings under our credit agreement. Considering
the relatively low cost of funds available to us, we believe the
use of these funds to repurchase outstanding shares provides an
attractive return on investment.
Capital
Expenditures
Cash expenditures for purchases of facilities were
$7.018 billion in 2007, $384.6 million in 2006 and
$158.4 million in 2005. Our expenditures in 2007 included
$6.865 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. Our expenditures in 2006 included
$334.5 million for the purchase of the eight hospitals
acquired in 2006, $21.8 million for the purchase of three
home health agencies and physician practices, $21.5 million
for information systems and other equipment to integrate the
hospitals acquired in 2006 and $6.8 million for the
settlement of acquired working capital. Our capital expenditures
in 2005 included $138.1 million for the purchase of five
hospitals $10.7 million for the purchase of an ambulatory
surgery center and physician practices and $9.6 million for
information systems and other equipment to integrate the
hospitals acquired in 2005.
Excluding the cost to construct replacement hospitals and a de
novo hospital, our cash expenditures for routine capital for
2007 totaled $344.1 million compared to $207.7 million
in 2006, and $185.6 million in 2005. Costs to construct
replacement hospitals and a de novo hospital totaled
$178.7 million in 2007, $16.8 million in 2006 and
$2.8 million in 2005.
47
Pursuant to hospital purchase agreements in effect as of
December 31, 2007, as part of the acquisition in August
2003 of the Southside Regional Medical Center in Petersburg,
Virginia, we are required to build a replacement facility by
August 2008. As part of an acquisition in 2005 of Bedford County
Medical Center in Shelbyville, Tennessee, we are required to
build a replacement facility by June 30, 2009. Also as
required by an amendment to a lease agreement entered into in
2005, we agreed to build a replacement facility at its Barstow
Community Hospital in Barstow, California. As part of an
acquisition in 2007, we agreed to build a replacement hospital
in Valparaiso, Indiana by April 2011. In conjunction with the
acquisition of Triad, we assumed the commitment to build a
replacement hospital in Clarksville, Tennessee by June 2009 and
a de novo hospital in Cedar Park, TX, which opened in December
2007. Estimated construction costs, including equipment costs,
are approximately $761.4 million for these five replacement
facilities and a de novo hospital. We expect total capital
expenditures of approximately $775 to $800 million in 2008,
including approximately $635 to $650 million for
renovation, equipment purchases and IT conversion costs
associated with the former Triad hospitals, (which includes
amounts which are required to be expended pursuant to the terms
of the hospital purchase agreements) and approximately $140 to
$150 million for construction and equipment cost of the
replacement hospitals.
Capital
Resources
Net working capital was $1.105 billion at December 31,
2007 compared to $446.1 million at December 31, 2006,
an increase of $658.9 million. The acquisition of Triad
provided additional initial working capital of
$721.3 million. An increase of cash of approximately
$110.3 million and an increase of deferred taxes of
$60.6 million also contributed to the increase in working
capital. These increases were offset by increases in accrued
liabilities for employee compensation of approximately
$83.7 million and accrued interest of $146.7 million
and the net reduction in working capital of all other assets and
liabilities of $2.9 million.
On November 14, 2005, we elected to call for the redemption
of $150 million in principal amount of our
4.25% Convertible Subordinated Notes due 2008 (the
2008 Notes). At the conclusion of this call for
redemption, $0.3 million in principal amount of the 2008
Notes were redeemed for cash and $149.7 million of the 2008
Notes called for redemption, plus an additional
$0.9 million of the 2008 Notes, were converted by the
holders into 4,495,083 shares of our common stock.
On December 15, 2005, we elected to call for redemption all
of the remaining outstanding 2008 Notes. As of December 15,
2005, there was $136.6 million in aggregate principal
amount outstanding. On January 17, 2006, at the conclusion
of the second call for redemption of 2008 Notes,
$0.1 million in principal amount of the 2008 Notes were
redeemed for cash and $136.5 million of the 2008 Notes were
converted by the holders into 4,074,510 shares of our
common stock prior to the second redemption date.
In connection with the consummation of the Triad acquisition in
July 2007, we obtained $7.215 billion of senior secured
financing under a New Credit Facility with a syndicate of
financial institutions led by Credit Suisse, as administrative
agent and collateral agent. The New Credit Facility consists of
a $6.065 billion funded term loan facility with a maturity
of seven years, a $300 million delayed draw term loan
facility, reduced from $400 million with a maturity of
seven years and a $750 million revolving credit facility
with a maturity of six years. The revolving credit facility also
includes a subfacility for letters of credit and a swingline
subfacility. The New Credit Facility requires us to make
quarterly amortization payments of each term loan facility equal
to 0.25% of the initial outstanding amount of the term loans, if
any, with the outstanding principal balance of each term loan
facility 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 New 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.
48
Voluntary prepayments and commitment reductions are permitted in
whole or in part, without premium or penalty, subject to minimum
prepayment or reduction requirements.
The obligor under the New 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
New Credit Facility are unconditionally guaranteed by Community
Health Systems, Inc. and certain existing and subsequently
acquired or organized domestic subsidiaries. All obligations
under the New 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 New Credit Facility will 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 will initially be
1.25% for Alternative 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 Alternative
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 are 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. We are also obligated to pay
commitment fees of 0.50% per annum for the first six months
after the close of the New Credit Facility, 0.75% per annum for
the next three months thereafter and 1.0% per annum thereafter,
in each case on the unused amount of the delayed draw term loan
facility. We also paid arrangement fees on the closing of the
New Credit Facility and will pay an annual administrative agent
fee.
The New 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 agreement 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 New Credit
Facility.
As of December 31, 2007, there was approximately
$1.050 billion of available borrowing capacity under our
New Credit Facility, of which $36 million was set aside for
outstanding letters of credit. We believe that
49
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.
As of December 31, 2007, we are currently a party to the
following interest rate swap agreements to limit the effect of
changes in interest rates on a portion of our long-term
borrowings. 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 New Credit Facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Fixed
|
|
|
|
|
|
|
Amount
|
|
|
Interest
|
|
|
Termination
|
|
Swap #
|
|
(In 000s)
|
|
|
Rate
|
|
|
Date
|
|
|
1
|
|
|
100,000
|
|
|
|
4.0610
|
%
|
|
|
May 30, 2008
|
|
2
|
|
|
100,000
|
|
|
|
2.4000
|
%
|
|
|
June 13, 2008
|
|
3
|
|
|
100,000
|
|
|
|
3.5860
|
%
|
|
|
August 29, 2008
|
|
4
|
|
|
100,000
|
|
|
|
3.9350
|
%
|
|
|
June 6, 2009
|
|
5
|
|
|
100,000
|
|
|
|
4.3375
|
%
|
|
|
November 30, 2009
|
|
6
|
|
|
100,000
|
|
|
|
4.9360
|
%
|
|
|
October 4, 2010
|
|
7
|
|
|
100,000
|
|
|
|
4.7090
|
%
|
|
|
January 24, 2011
|
|
8
|
|
|
300,000
|
|
|
|
5.1140
|
%
|
|
|
August 8, 2011
|
|
9
|
|
|
100,000
|
|
|
|
4.7185
|
%
|
|
|
August 19, 2011
|
|
10
|
|
|
100,000
|
|
|
|
4.7040
|
%
|
|
|
August 19, 2011
|
|
11
|
|
|
100,000
|
|
|
|
4.6250
|
%
|
|
|
August 19, 2011
|
|
12
|
|
|
200,000
|
|
|
|
4.9300
|
%
|
|
|
August 30, 2011
|
|
13
|
|
|
200,000
|
|
|
|
4.4815
|
%
|
|
|
October 26, 2011
|
|
14
|
|
|
200,000
|
|
|
|
4.0840
|
%
|
|
|
December 3, 2011
|
|
15
|
|
|
250,000
|
|
|
|
5.0185
|
%
|
|
|
May 30, 2012
|
|
16
|
|
|
150,000
|
|
|
|
5.0250
|
%
|
|
|
May 30, 2012
|
|
17
|
|
|
200,000
|
|
|
|
4.6845
|
%
|
|
|
September 11, 2012
|
|
18
|
|
|
125,000
|
|
|
|
4.3745
|
%
|
|
|
November 23, 2012
|
|
19
|
|
|
75,000
|
|
|
|
4.3800
|
%
|
|
|
November 23, 2012
|
|
20
|
|
|
150,000
|
|
|
|
5.0200
|
%
|
|
|
November 30, 2012
|
|
21
|
|
|
100,000
|
|
|
|
5.0230
|
%
|
|
|
May 30, 2013
|
(1)
|
22
|
|
|
300,000
|
|
|
|
5.2420
|
%
|
|
|
August 6, 2013
|
|
23
|
|
|
100,000
|
|
|
|
5.0380
|
%
|
|
|
August 30, 2013
|
(2)
|
24
|
|
|
100,000
|
|
|
|
5.0500
|
%
|
|
|
November 30, 2013
|
(3)
|
25
|
|
|
100,000
|
|
|
|
5.2310
|
%
|
|
|
July 25, 2014
|
|
26
|
|
|
100,000
|
|
|
|
5.2310
|
%
|
|
|
July 25, 2014
|
|
27
|
|
|
200,000
|
|
|
|
5.1600
|
%
|
|
|
July 25, 2014
|
|
28
|
|
|
75,000
|
|
|
|
5.0405
|
%
|
|
|
July 25, 2014
|
|
29
|
|
|
125,000
|
|
|
|
5.0215
|
%
|
|
|
July 25, 2014
|
|
|
|
|
(1) |
|
This swap agreement becomes effective May 30, 2008,
concurrent with the termination of agreement #1 listed above. |
|
(2) |
|
This swap agreement becomes effective June 13, 2008,
concurrent with the termination of agreement #2 listed above. |
|
(3) |
|
This swap agreement becomes effective September 2, 2008,
after the termination of agreement #3 listed above. |
50
The swaps that were in effect prior to the Triad acquisition
remain in effect after the refinancing for the Triad acquisition
and will continue to be used to limit the effects of changes in
interest rates on portions of our New Credit Facility.
The New 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 New 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 New Credit
Facility
and/or the
Notes. Upon the occurrence of an event of default under our New
Credit Facility or the Notes, all amounts outstanding under our
New Credit Facility and the Notes may become due and payable and
all commitments under the New Credit Facility to extend further
credit may be terminated.
We believe that internally generated cash flows, availability
for additional borrowings under our New Credit Facility of
$1.050 billion (consisting of a $750 million revolving
credit facility and a $300 million delayed draw term loan
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 agreement 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.
Off-balance
sheet arrangements
Excluding the hospital whose lease terminated in conjunction
with our sale of interests in the partnership holding the lease
and whose operating results are included in discontinued
operations, our consolidated operating results for the years
ended December 31, 2007 and 2006, included
$288.4 million and $255.7 million, respectively, of
net operating revenue and $14.4 million and
$13.3 million, respectively, of income from 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, 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 $15.6 million and
$14.4 million for the years ended December 31, 2007
and 2006, respectively. The current terms of these operating
leases expire between June 2010 and December 2019, not including
lease extension options. If we allow these leases to expire, we
would no longer generate revenue nor incur expenses from these
hospitals.
51
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 14 of the Notes to
Consolidated Financial Statements, at December 31, 2007, we
have certain cash obligations for replacement facilities and
other construction commitments of $676.3 million and open
purchase orders for $211.1 million.
Joint
Ventures
We have sold minority interests in certain of our subsidiaries
or acquired subsidiaries with existing minority interest
ownership positions. The amount of minority interest in equity
is included in other long-term liabilities and the minority
interest in income or loss is recorded separately in the
consolidated statements of income. Triad also implemented this
strategy to a greater extent than we did. In conjunction with
the acquisition of Triad, we acquired 19 hospitals containing
minority ownership interests ranging from less than 1% to 35%.
As of and for the years ended December 31, 2007 and 2006,
the balance of minority interests included in long-term
liabilities was $366.1 million and $23.6 million,
respectively, and the amount of minority interest in earnings
was $16.0 million and $2.8 million, respectively.
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
accounting principles generally accepted in the United States of
America. 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.
52
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. Excluding the former Triad hospitals, contractual
allowances are automatically calculated and recorded through our
internally developed automated contractual allowance
system. Within the automated system, actual Medicare DRG
data, coupled with all payors historical paid claims data,
is utilized to calculate the contractual allowances. This data
is automatically updated on a monthly basis. For the former
Triad hospitals, contractual allowances are determined through a
manual process wherein contractual allowance adjustments,
regardless of payor or method of calculation, are reviewed and
compared to actual payment experience. The methodology used is
similar to the methodology used within our automated
contractual allowance system. The former Triad hospitals
will be phased in to the automated contractual allowance
system. 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. Final settlements under some of these programs are
subject to adjustment based on administrative review and audit
by third parties. We record adjustments to the estimated
billings in the periods that such adjustments become known. We
account for adjustments to previous program reimbursement
estimates as contractual allowance adjustments and report them
in future periods as final settlements are determined. However,
due to the complexities involved in these estimates, actual
payments we receive could be different from the amounts we
estimate and record. Contractual allowance adjustments related
to final settlements or appeals increased net operating revenue
by an insignificant amount in each of the years ended
December 31, 2007, 2006 and 2005.
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.
Effective September 30, 2006, we began estimating 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
payor categories we began reserving 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 ending
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
acquisition of Triad also provided additional data and a
comparative and larger population on which to base our
estimates. As a result of the lower estimated collectability
indicated by the updated analyses, we recorded an increase to
our contractual reserves of $96.3 million and an increase
to our allowance for doubtful accounts of approximately
$70.1 million as of December 31, 2007. The resulting
impact, net of taxes, is a decrease to income from continuing
operations of $105.4 million. We believe this lower
collectability is 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
53
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. We also 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 the ongoing collection efforts within the Company and
is consistent with industry practices. We had approximately
$1.5 billion and $0.8 billion at December 31,
2007 and December 31, 2006, respectively, 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 in income 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.
Days revenue outstanding was 54 days at December 31,
2007 and 62 days at December 31, 2006. The change in
estimate of our allowance for doubtful accounts reduced our days
revenue outstanding by approximately 5 days. After giving
effect to the change in estimate of our allowance for doubtful
accounts, our target range for days revenue outstanding is
52 58 days.
Total gross accounts receivable (prior to allowance for
contractual adjustments and doubtful accounts) was approximately
$5.111 billion as of December 31, 2007 and
approximately $2.274 billion as of December 31, 2006.
The approximate percentage of total gross accounts receivable
(prior to allowance for contractual adjustments and doubtful
accounts) summarized by aging categories is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
0 60 days
|
|
|
61.2
|
%
|
|
|
63.3
|
%
|
|
|
63.7
|
%
|
60 150 days
|
|
|
18.8
|
%
|
|
|
17.7
|
%
|
|
|
17.1
|
%
|
151 360 days
|
|
|
15.8
|
%
|
|
|
13.2
|
%
|
|
|
6.5
|
%
|
Over 360 days
|
|
|
4.2
|
%
|
|
|
5.8
|
%
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Insured receivables
|
|
|
65.8
|
%
|
|
|
66.0
|
%
|
|
|
65.3
|
%
|
Self-pay receivables
|
|
|
34.2
|
%
|
|
|
34.0
|
%
|
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
On a combined basis, as a percentage of self-pay receivables,
the combined total allowance for doubtful accounts, as reported
in the consolidated financial statements, and related allowances
for other self-pay discounts and contractuals, was approximately
76% at December 31, 2007, and 65% at December 31,
2006. The increase in the percentage of allowances as a
percentage of self-pay receivables from December 31, 2006
to December 31, 2007, is due to the self-pay discounts
assumed in the Triad acquisition as well as the change in
estimate of the allowance for doubtful accounts and contractual
allowances recorded in 2007.
54
Goodwill
and Other Intangibles
Goodwill represents the excess of cost over the fair value of
net assets acquired. Goodwill arising from business combinations
is accounted for under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 141
Business Combinations and SFAS No. 142
Goodwill and Other Intangible Assets and is not
amortized. SFAS No. 142 requires goodwill 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. We selected
September 30th as our annual testing date.
The SFAS No. 142 goodwill impairment model requires a
comparison of the book value of net assets to the fair value of
the related operations that have goodwill assigned to them. If
the fair value is determined to be less than book value, a
second step is performed to compute the amount of the
impairment. We estimated the fair values of the related
operations using both a debt free discounted cash flow model as
well as an adjusted EBITDA multiple model. These models are both
based on our best estimate of future revenues and operating
costs, and are reconciled to our consolidated market
capitalization. The cash flow forecasts are adjusted by an
appropriate discount rate based on our weighted average cost of
capital. We performed our initial evaluation, as required by
SFAS No. 142, during the first quarter of 2002 and the
annual evaluation as of each succeeding September 30. No
impairment has been indicated by these evaluations. In future
periods, estimates used to conduct the impairment review,
including revenue and profitability projections or fair values,
could cause our analysis to indicate that our goodwill is
impaired and result in a write-off of a portion or all of our
goodwill.
Impairment
or Disposal of Long-Lived Assets
In accordance with SFAS No. 144, 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, 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 Insurance Claims
Professional
Liability Insurance for Former Triad Hospitals
Substantially all of the professional and general liability
risks of the acquired Triad hospitals are subject to a per
occurrence deductible. Substantially all losses in periods prior
to May 1999 are insured through a wholly-owned insurance
subsidiary of HCA, Inc., or HCA, 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, 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 reported on or after January 2007 are self-insured up
to $10 million per claim. Excess insurance for all
hospitals is purchased through commercial insurance companies
generally after the self-insured amount covers up to
$100 million per occurrence. The excess insurance for the
former Triad hospitals is underwritten on a claims-made
basis. We accrue an estimated liability for its uninsured
exposure and self-insured retention based on historical loss
patterns and actuarial projections.
Professional
Liability Insurance Claims for All Other Community Health
Systems Hospitals
We accrue for estimated losses resulting from professional
liability claims. 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 using a weighted average
risk-free discount rate of 4.1% and 4.6% in 2007 and 2006,
respectively. To the extent that subsequent claims information
varies from
55
managements estimates, the liability is adjusted
currently. Our insurance is underwritten on a
claims-made basis. Prior to June 1, 2002 ,
substantially all of our professional and general liability
risks were subject to a $0.5 million per occurrence
deductible; for claims reported from June 1, 2002 through
June 1, 2003, these deductibles were $2.0 million per
occurrence. Additional coverage above these deductibles was
purchased through captive insurance companies in which we had a
7.5% minority ownership interest in each and to which the
premiums paid by us represented less than 8% of the total
premium revenues of each captive insurance company. With the
formation of our own wholly-owned captive insurance company in
June 2003, we terminated our minority interest relationships in
those entities. 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
was purchased through commercial insurance companies and
generally covers us for liabilities in excess of the
self-insured amount and up to $100 million per occurrence
for claims reported on or after June 1, 2003.
The following table represents the balance of our liability for
the self-insured component of professional liability insurance
claims and activity for each of the respective years listed
(excludes premiums for insured coverage) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Acquired
|
|
|
Expenses
|
|
|
|
|
|
End
|
|
|
|
of Year
|
|
|
Balance
|
|
|
Paid
|
|
|
Expense(1)
|
|
|
of Year
|
|
|
2005
|
|
$
|
63,849
|
|
|
$
|
|
|
|
$
|
15,544
|
|
|
$
|
40,066
|
|
|
$
|
88,371
|
|
2006
|
|
|
88,371
|
|
|
|
|
|
|
|
34,464
|
|
|
|
50,254
|
|
|
|
104,161
|
|
2007
|
|
|
104,161
|
|
|
|
171,144
|
|
|
|
54,278
|
|
|
|
79,157
|
|
|
|
300,184
|
|
|
|
|
(1) |
|
Total expense, including premiums for insured coverage, was
$53.6 million in 2005, $65.7 million in 2006 and
$99.7 million in 2007. |
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.
On January 1, 2007, we adopted the provisions of the FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. The total amount of unrecognized benefit
that would affect the effective tax rate, if recognized, is
approximately $5.7 million as of December 31, 2007. It
is our policy to recognize interest and penalties accrued
related to unrecognized benefits in our consolidated statement
of operations as income tax expense. During the year ended
December 31, 2007, we recorded approximately
$2.4 million in liabilities and $0.6 million in
interest and penalties related to prior state income tax returns
through our income tax provision from continuing operations and
which are included in our FASB Interpretation No. 48
liability at December 31, 2007. A total of approximately
$1.8 million of interest and penalties is included in the
amount of FASB Interpretation No. 48 liability at
December 31, 2007. During the year ended December 31,
2007, we released $5.2 million plus accrued interest of
$0.8 million of our FASB Interpretation No. 48
liability, as a result of the expiration of the statute of
limitations pertaining to tax positions taken in prior years
relative to legal settlements and $1.5 million relative to
state tax positions. During the year ended December 31,
2007, our FASB Interpretation No. 48 liability decreased
approximately $3.5 million due to an income tax examination
settlement of the federal tax returns of the former Triad
hospitals for the short taxable years ended April 27, 2001,
June 30, 2001 and December 31, 2001, and the taxable
years ended December 31, 2002 and 2003. The financial
statement impact of this settlement impacted goodwill.
56
Our unrecognized tax benefits consist primarily of state
exposure items. We believe it is reasonably possible that
approximately $1.1 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.
With few exceptions, we are no longer subject to
U.S. federal or state income tax examinations for years
prior to 2003. During 2006, we agreed to a settlement at the
Internal Revenue Service (the IRS) Appeals Office
with respect to the 2003 tax year. We have since received a
closing letter with respect to the examination for that tax
year. The settlement was not material to our results of
operations or consolidated financial position.
The IRS has concluded an examination of the federal income tax
returns of Triad for the short taxable years ended
April 27, 2001, June 30, 2001 and December 31,
2001, and the taxable years ended December 31, 2002 and
2003. On May 10, 2006, the IRS issued an examination report
with proposed adjustments. Triad filed a protest on June 9,
2006 and the matter was referred to the IRS Appeals Office.
Representatives of the former Triad hospitals met with the IRS
Appeals Office in April 2007 and reached a tentative settlement.
Triad has since received a closing letter with respect to the
examination for those tax years. The settlement was not material
to our results of operations or consolidated financial position.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value,
provides a framework for measuring fair value, and expands the
disclosures required for fair value measurements.
SFAS No. 157 applies to other accounting
pronouncements that require fair value measurement; it does not
require any new fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007, and is required to be adopted by us beginning in the first
quarter of 2008. Although we will continue to evaluate the
application of SFAS No. 157, management does not
currently believe adoption will have a material impact on our
consolidated results of operations or consolidated financial
position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 expands the use of fair value accounting
but does not affect existing standards that require assets or
liabilities to be carried at fair value. SFAS No. 159
permits an entity, on a
contract-by-contract
basis, to make an irrevocable election to account for certain
types of financial instruments and warranty and insurance
contracts at fair value, rather than historical cost, with
changes in the fair value, whether realized or unrealized,
recognized in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We adopted
SFAS No. 159 as of January 1, 2008. The adoption
of this statement is not expected to have a material effect on
our consolidated results of operations or consolidated financial
position.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) replaces SFAS No. 141 and
addresses the recognition and accounting for identifiable assets
acquired, liabilities assumed, and noncontrolling interests in
business combinations. This standard will require more assets
and liabilities be recorded at fair value and will require
expense recognition (rather than capitalization) of certain
pre-acquisition costs. This standard will also require any
adjustments to acquired deferred tax assets and liabilities
occurring after the related allocation period to be made through
earnings. Furthermore, this standard requires this treatment of
acquired deferred tax assets and liabilities also be applied to
acquisitions occurring prior to the effective date of this
standard. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008 and is required to
be adopted prospectively with no early adoption permitted. We
will begin applying SFAS No. 141(R) in the first
quarter of 2009. We are currently assessing the potential impact
that SFAS No. 141(R) will have on our consolidated
results of operations and financial position.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements (SFAS No. 160).
SFAS No. 160 addresses the accounting and reporting
framework for noncontrolling ownership interests in consolidated
subsidiaries of the parent. SFAS No. 160 also
establishes
57
disclosure requirements that clearly identify and distinguish
between the interests of the parent company and the interests of
the noncontrolling owners and that require minority ownership
interests to be presented separately within equity in the
consolidated financial statements. SFAS No. 160 is
effective for fiscal years beginning after December 15,
2008, and will be adopted by us in the first quarter of 2009. We
are currently assessing the potential impact that
SFAS No. 160 will have on our consolidated results of
operations and consolidated financial position.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are exposed to interest rate changes, primarily as a result
of our New 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 2008. 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 $14 million
in 2007, $4 million for 2006 and $7 million for 2005.
58
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
Community Health Systems, Inc. Consolidated Financial Statements:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
60
|
|
Consolidated Statements of Income for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
61
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
62
|
|
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
63
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
64
|
|
Notes to Consolidated Financial Statements
|
|
|
65
|
|
59
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, 2007 and 2006, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share Based Payment
effective January 1, 2006, which resulted in the
Company changing the method in which it accounts for share-based
compensation.
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, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 28, 2008
60
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net operating revenues
|
|
$
|
7,127,494
|
|
|
$
|
4,180,136
|
|
|
$
|
3,576,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
2,894,977
|
|
|
|
1,661,619
|
|
|
|
1,421,145
|
|
Provision for bad debts
|
|
|
897,285
|
|
|
|
518,861
|
|
|
|
356,120
|
|
Supplies
|
|
|
944,768
|
|
|
|
487,778
|
|
|
|
429,846
|
|
Rent
|
|
|
155,566
|
|
|
|
91,943
|
|
|
|
82,257
|
|
Other operating expenses
|
|
|
1,432,998
|
|
|
|
855,596
|
|
|
|
731,024
|
|
Depreciation and amortization
|
|
|
316,215
|
|
|
|
179,282
|
|
|
|
157,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
6,641,809
|
|
|
|
3,795,079
|
|
|
|
3,177,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
485,685
|
|
|
|
385,057
|
|
|
|
398,463
|
|
Interest expense, net of interest income of $8,181, $1,779, and
$5,742 in 2007, 2006 and 2005, respectively
|
|
|
364,533
|
|
|
|
94,411
|
|
|
|
87,185
|
|
Loss from early extinguishment of debt
|
|
|
27,388
|
|
|
|
4
|
|
|
|
|
|
Minority interest in earnings
|
|
|
15,996
|
|
|
|
2,795
|
|
|
|
3,104
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(25,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
102,900
|
|
|
|
287,847
|
|
|
|
308,174
|
|
Provision for income taxes
|
|
|
43,003
|
|
|
|
110,152
|
|
|
|
119,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
59,897
|
|
|
|
177,695
|
|
|
|
188,370
|
|
Discontinued operations, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of hospitals sold or held for sale
|
|
|
(11,067
|
)
|
|
|
(6,873
|
)
|
|
|
(8,737
|
)
|
Net loss on sale of hospitals and partnership interests
|
|
|
(2,594
|
)
|
|
|
(2,559
|
)
|
|
|
(7,618
|
)
|
Impairment of long-lived assets of hospitals held for sale
|
|
|
(15,947
|
)
|
|
|
|
|
|
|
(4,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations
|
|
|
(29,608
|
)
|
|
|
(9,432
|
)
|
|
|
(20,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
|
$
|
167,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.64
|
|
|
$
|
1.87
|
|
|
$
|
2.13
|
|
Loss on discontinued operations
|
|
$
|
(0.32
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.32
|
|
|
$
|
1.77
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.63
|
|
|
$
|
1.85
|
|
|
$
|
2.00
|
|
Loss on discontinued operations
|
|
$
|
(0.31
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.32
|
|
|
$
|
1.75
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
93,517,337
|
|
|
|
94,983,646
|
|
|
|
88,601,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
94,642,294
|
|
|
|
96,232,910
|
|
|
|
98,579,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,874
|
|
|
$
|
40,566
|
|
Patient accounts receivable, net of allowance for doubtful
accounts of $1,033,516 and $478,565 in 2007 and 2006,
respectively
|
|
|
1,533,798
|
|
|
|
773,984
|
|
Supplies
|
|
|
262,903
|
|
|
|
113,320
|
|
Prepaid income taxes
|
|
|
99,417
|
|
|
|
|
|
Deferred income taxes
|
|
|
113,741
|
|
|
|
13,249
|
|
Prepaid expenses and taxes
|
|
|
70,339
|
|
|
|
32,385
|
|
Other current assets (including assets of hospitals held for
sale of $118,893 at December 31, 2007)
|
|
|
339,826
|
|
|
|
47,880
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,552,898
|
|
|
|
1,021,384
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
460,501
|
|
|
|
163,988
|
|
Buildings and improvements
|
|
|
4,134,654
|
|
|
|
1,634,893
|
|
Equipment and fixtures
|
|
|
1,606,756
|
|
|
|
831,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,201,911
|
|
|
|
2,630,366
|
|
Less accumulated depreciation and amortization
|
|
|
(689,337
|
)
|
|
|
(643,789
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
5,512,574
|
|
|
|
1,986,577
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,247,714
|
|
|
|
1,336,525
|
|
|
|
|
|
|
|
|
|
|
Other assets, net of accumulated amortization of $100,556 and
$92,921 in 2007 and 2006, respectively (including assets of
hospitals held for sale of $417,120 at December 31, 2007)
|
|
|
1,180,457
|
|
|
|
162,093
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,493,643
|
|
|
$
|
4,506,579
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
20,710
|
|
|
$
|
35,396
|
|
Accounts payable
|
|
|
492,693
|
|
|
|
247,747
|
|
Current income taxes payable
|
|
|
|
|
|
|
7,626
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Employee compensation
|
|
|
403,598
|
|
|
|
162,188
|
|
Interest
|
|
|
153,832
|
|
|
|
7,122
|
|
Other (including liabilities of hospitals held for sale of
$67,606 at December 31, 2007)
|
|
|
377,102
|
|
|
|
115,204
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,447,935
|
|
|
|
575,283
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
9,077,367
|
|
|
|
1,905,781
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
407,947
|
|
|
|
141,472
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
483,459
|
|
|
|
136,811
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of consolidated subsidiaries
|
|
|
366,131
|
|
|
|
23,559
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
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; 96,611,085 shares
issued and 95,635,536 shares outstanding at
December 31, 2007 and 95,026,494 shares issued and
94,050,945 shares outstanding at December 31, 2006
|
|
|
966
|
|
|
|
950
|
|
Additional paid-in capital
|
|
|
1,240,308
|
|
|
|
1,195,947
|
|
Treasury stock, at cost, 975,549 shares at
December 31, 2007 and 2006
|
|
|
(6,678
|
)
|
|
|
(6,678
|
)
|
Unearned stock compensation
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
(81,737
|
)
|
|
|
5,798
|
|
Retained earnings
|
|
|
557,945
|
|
|
|
527,656
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,710,804
|
|
|
|
1,723,673
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
13,493,643
|
|
|
$
|
4,506,579
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Other
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Total
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
BALANCE, December 31, 2004
|
|
|
88,591,733
|
|
|
$
|
886
|
|
|
$
|
1,047,888
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
|
|
|
$
|
6,046
|
|
|
$
|
191,849
|
|
|
$
|
1,239,991
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,544
|
|
|
|
167,544
|
|
|
|
|
|
Net change in fair value of interest rate swaps, net of tax
expense of $5,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,923
|
|
|
|
|
|
|
|
8,923
|
|
|
|
|
|
Net change in fair value of available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,145
|
|
|
|
167,544
|
|
|
|
176,689
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(2,239,700
|
)
|
|
|
(22
|
)
|
|
|
(79,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,852
|
)
|
|
|
|
|
Issuance of common stock in connection with the exercise of
options
|
|
|
3,134,721
|
|
|
|
31
|
|
|
|
49,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,574
|
|
|
|
|
|
Issuance of common stock in connection with the conversion of
convertible debt
|
|
|
4,495,083
|
|
|
|
44
|
|
|
|
148,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,620
|
|
|
|
|
|
Restricted stock grant
|
|
|
558,000
|
|
|
|
6
|
|
|
|
18,160
|
|
|
|
|
|
|
|
|
|
|
|
(18,160
|
)
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Tax benefit from exercise of options
|
|
|
|
|
|
|
|
|
|
|
24,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,453
|
|
|
|
|
|
Earned stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,956
|
|
|
|
|
|
|
|
|
|
|
|
4,956
|
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2005
|
|
|
94,539,837
|
|
|
$
|
945
|
|
|
$
|
1,208,930
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
(13,204
|
)
|
|
$
|
15,191
|
|
|
$
|
359,393
|
|
|
$
|
1,564,577
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,263
|
|
|
|
168,263
|
|
|
|
|
|
Net change in fair value of interest rate swaps, net of tax
benefit of $931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
(1,654
|
)
|
|
|
|
|
Net change in fair value of available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
|
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,092
|
)
|
|
|
168,263
|
|
|
|
167,171
|
|
|
|
|
|
Adjustment to adopt FASB statement No. 158, net of tax
benefit of $5,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,301
|
)
|
|
|
|
|
|
|
(8,301
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(5,000,000
|
)
|
|
|
(50
|
)
|
|
|
(176,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,315
|
)
|
|
|
|
|
Issuance of common stock in connection with the exercise of
options
|
|
|
867,833
|
|
|
|
9
|
|
|
|
14,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,573
|
|
|
|
|
|
Issuance of common stock in connection with the conversion of
convertible debt
|
|
|
4,074,510
|
|
|
|
41
|
|
|
|
137,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,198
|
|
|
|
|
|
Tax benefit from exercise of options
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
|
|
|
|
Share-based compensation
|
|
|
544,314
|
|
|
|
5
|
|
|
|
20,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,073
|
|
|
|
|
|
Reclassification of unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
(13,257
|
)
|
|
|
|
|
|
|
|
|
|
|
13,204
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006
|
|
|
95,026,494
|
|
|
$
|
950
|
|
|
$
|
1,195,947
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
|
|
|
$
|
5,798
|
|
|
$
|
527,656
|
|
|
$
|
1,723,673
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,289
|
|
|
|
30,289
|
|
|
|
|
|
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 benefit of $496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,291
|
|
|
|
|
|
|
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,535
|
)
|
|
|
30,289
|
|
|
|
(57,246
|
)
|
|
|
|
|
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
|
|
|
96,611,085
|
|
|
$
|
966
|
|
|
$
|
1,240,308
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
|
|
|
$
|
(81,737
|
)
|
|
$
|
557,945
|
|
|
$
|
1,710,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
|
$
|
167,544
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
332,580
|
|
|
|
188,771
|
|
|
|
166,162
|
|
Deferred income taxes
|
|
|
(39,894
|
)
|
|
|
(25,228
|
)
|
|
|
9,889
|
|
Stock compensation expense
|
|
|
38,771
|
|
|
|
20,073
|
|
|
|
4,957
|
|
Excess tax benefits relating to stock-based compensation
|
|
|
(1,216
|
)
|
|
|
(6,819
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
27,388
|
|
|
|
|
|
|
|
|
|
Minority interest in earnings
|
|
|
15,996
|
|
|
|
2,795
|
|
|
|
3,104
|
|
Impairment on hospital held for sale
|
|
|
19,044
|
|
|
|
|
|
|
|
6,718
|
|
Loss on sale of hospitals
|
|
|
3,954
|
|
|
|
3,937
|
|
|
|
6,295
|
|
Other non-cash expenses, net
|
|
|
19,017
|
|
|
|
500
|
|
|
|
740
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
131,300
|
|
|
|
(71,141
|
)
|
|
|
(47,455
|
)
|
Supplies, prepaid expenses and other current assets
|
|
|
(31,977
|
)
|
|
|
(4,544
|
)
|
|
|
(16,838
|
)
|
Accounts payable, accrued liabilities and income taxes
|
|
|
125,959
|
|
|
|
52,151
|
|
|
|
84,956
|
|
Other
|
|
|
16,527
|
|
|
|
21,497
|
|
|
|
24,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
687,738
|
|
|
|
350,255
|
|
|
|
411,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of facilities and other related equipment
|
|
|
(7,018,048
|
)
|
|
|
(384,618
|
)
|
|
|
(158,379
|
)
|
Purchases of property and equipment
|
|
|
(522,785
|
)
|
|
|
(224,519
|
)
|
|
|
(188,365
|
)
|
Disposition of hospitals and other ancillary operations
|
|
|
109,996
|
|
|
|
750
|
|
|
|
51,998
|
|
Proceeds from sale of equipment
|
|
|
4,650
|
|
|
|
4,480
|
|
|
|
2,325
|
|
Increase in other non-operating assets
|
|
|
(72,671
|
)
|
|
|
(36,350
|
)
|
|
|
(34,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,498,858
|
)
|
|
|
(640,257
|
)
|
|
|
(327,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
8,214
|
|
|
|
14,573
|
|
|
|
49,580
|
|
Stock buy-back
|
|
|
|
|
|
|
(176,316
|
)
|
|
|
(79,853
|
)
|
Deferred financing costs
|
|
|
(182,954
|
)
|
|
|
(2,153
|
)
|
|
|
(1,259
|
)
|
Excess tax benefits relating to stock-based compensation
|
|
|
1,216
|
|
|
|
6,819
|
|
|
|
|
|
Redemption of convertible notes
|
|
|
|
|
|
|
(128
|
)
|
|
|
(298
|
)
|
Proceeds from minority investors in joint ventures
|
|
|
2,351
|
|
|
|
6,890
|
|
|
|
1,383
|
|
Redemption of minority investments in joint ventures
|
|
|
(1,356
|
)
|
|
|
(915
|
)
|
|
|
(3,242
|
)
|
Distribution to minority investors in joint ventures
|
|
|
(6,645
|
)
|
|
|
(3,220
|
)
|
|
|
(1,939
|
)
|
Borrowings under Credit Agreement
|
|
|
9,221,627
|
|
|
|
1,031,000
|
|
|
|
|
|
Repayments of long-term indebtedness
|
|
|
(2,139,025
|
)
|
|
|
(650,090
|
)
|
|
|
(26,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
6,903,428
|
|
|
|
226,460
|
|
|
|
(62,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
92,308
|
|
|
|
(63,542
|
)
|
|
|
21,610
|
|
Cash and cash equivalents at beginning of period
|
|
|
40,566
|
|
|
|
104,108
|
|
|
|
82,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
132,874
|
|
|
$
|
40,566
|
|
|
$
|
104,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
64
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
1.
|
Business
and Summary of Significant Accounting Policies
|
Business. Community Health Systems, Inc.,
through its subsidiaries (collectively the Company),
owns, leases and operates acute care hospitals in non-urban and
select urban markets. As of December 31, 2007, included in
our continuing operations, the Company owned, leased or operated
115 hospitals, licensed for 16,971 beds in 27 states.
Pennsylvania and Texas represent the only areas of geographic
concentration. Net operating revenues generated by the
Companys hospitals in Pennsylvania, as a percentage of
consolidated net operating revenues, were 13.1% in 2007, 22.0%
in 2006 and 23.1% in 2005. Net operating revenues generated by
the Companys hospitals in Texas, as a percentage of
consolidated net operating revenues, were 13.0% in 2007, 10.4%
in 2006 and 11.6% in 2005.
Use of Estimates. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America 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 Company, its
subsidiaries, all of which are controlled by the Company 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.
Certain of the subsidiaries have minority stockholders. The
amount of minority interest in equity is disclosed separately on
the consolidated balance sheets and minority interest in
earnings is disclosed separately on the consolidated statements
of income.
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 the Companys
Franklin, Tennessee and Plano, Texas offices, which were
$133.4 million, $88.9 million and $67.5 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. Included in these amounts is stock-based
compensation of $38.8 million, $20.1 million and
$5.0 million for the years ended December 31, 2007,
2006 and 2005, 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.
Marketable Securites. The Company accounts for
marketable securities in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity 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 revenue and were not material in all
periods presented. Accumulated other comprehensive income
included an unrealized gain of $0.2 million and
$0.6 million at December 31, 2007 and
December 31, 2006, respectively, 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 $457.5 million and $61.2 million at
December 31, 2007 and 2006,
65
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 in accordance with SFAS No. 34,
Capitalization of Interest Cost, was
$19.0 million, $3.0 million and $2.1 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. Net property and equipment additions included in
accounts payable were $21.4 million, $16.9 million and
$0.1 million for the years ended December 31, 2007,
2006 and 2005, respectively.
The Company also leases certain facilities and equipment under
capital leases (see Notes 3 and 8). 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 accounted for under the provisions
of SFAS No. 141, Business Combinations
(SFAS No. 141), and SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), and is not amortized.
SFAS No. 142 requires goodwill 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 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, 2007 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 39.3% of net operating revenues
for the year ended December 31, 2007, 41.5% of net
operating revenues for the year ended December 31, 2006 and
43.0% of net operating revenues for the year ended
December 31, 2005, 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 are approximately 0.42% of net
operating revenues for 2007, 0.44% of net operating revenues for
2006, and 0.47% for 2005. 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
value due from these payors. 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 periods in which final settlements are
determined. Adjustments related to final settlements or appeals
increased revenue by an insignificant amount in each of the
years ended December 31, 2007, 2006 and 2005. Amounts due
to third-party payors were $73 million as of
December 31, 2007 and $55 million as of
December 31, 2006 and are included in accrued
liabilities-other in the accompanying consolidated balance
sheets. Substantially all Medicare and Medicaid cost reports are
final settled through 2005.
Net Operating Revenues. Net operating revenues
are recorded net of provisions for contractual allowance of
approximately $16.839 billion, $10.024 billion and
$8.401 billion in 2007, 2006 and 2005, 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
66
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $282.5 million, $100.3 million and
$77.9 million for the years ended December 31, 2007,
2006 and 2005, 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 $354.8 million, $214.2 million and
$174.2 million for the years ended December 31, 2007,
2006 and 2005, 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 former Triad
hospitals, the Company revised its methodology whereby the
Company has revised 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 revenue 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.
The Company experienced a significant increase in self-pay
volume and related revenue, combined with lower cash collections
during the quarter ended September 30, 2006. The Company
believes this trend reflected an increased collection risk from
self-pay accounts, and as a result the Company performed a
review and an alternative analysis of the adequacy of its
allowance for doubtful accounts. Based on this review, the
Company recorded a $65.0 million increase to its allowance
for doubtful accounts to maintain an adequate allowance for
doubtful accounts as of September 30, 2006. The Company
believed that the increase in self-pay accounts is a result of
current economic trends, including an increase in the number of
uninsured patients, reduced enrollment under Medicaid programs
such as Tenncare, and higher deductibles and co-payments for
patients with insurance.
In conjunction with recording the $65.0 million increase to
the allowance for doubtful accounts, the Company changed its
methodology for estimating its allowance for doubtful accounts
effective September 30, 2006, as follows: The Company
reserved a percentage of all self-pay accounts receivable
without regard to aging category, based on collection history
adjusted for expected recoveries and, if present, other changes
in trends. For all other payor categories the Company reserved
100% of all accounts aging over 365 days from the date of
discharge. Previously, the Company estimated its allowance for
doubtful accounts by reserving all accounts aging over
150 days from the date of discharge without regard to payor
class. The Company believes its revised methodology provided a
better approach to reflect changes in payor mix and historical
collection patterns and to respond to changes in trends.
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. As a
result of these analyses, the Company noted a deterioration in
certain key cash collection indicators. The acquisition of Triad
also provided additional data and a comparative and larger
population on which to base the Companys estimates. As a
result of the lower estimated collectability indicated by the
updated analyses, the Company has recorded an increase to its
contractual reserves of $96.3 million (as described above)
and an increase to its allowance for doubtful accounts as of
December 31, 2007 of approximately $70.1 million. The
Company believes this lower
67
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collectability is 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.
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.
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 $302.1 million and $116.8 million as of
December 31, 2007 and 2006, respectively, representing
11.8% and 9.3% of consolidated net accounts receivable, before
allowance for doubtful accounts, as of December 31, 2007
and 2006, respectively.
Professional Liability Insurance 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 currently.
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
(SFAS No. 144), 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. Comprehensive income is
the change in equity of a business enterprise during a period
from transactions and other events and circumstances from
non-owner sources.
68
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated Other Comprehensive Income 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
|
|
|
Balance as of December 31, 2005
|
|
$
|
14,969
|
|
|
$
|
222
|
|
|
$
|
|
|
|
$
|
15,191
|
|
2006 Activity, net of tax
|
|
|
(1,654
|
)
|
|
|
562
|
|
|
|
(8,301
|
)
|
|
|
(9,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
13,315
|
|
|
$
|
784
|
|
|
$
|
(8,301
|
)
|
|
$
|
5,798
|
|
2007 Activity, net of tax
|
|
|
(91,063
|
)
|
|
|
237
|
|
|
|
3,291
|
|
|
|
(87,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
(77,748
|
)
|
|
$
|
1,021
|
|
|
$
|
(5,010
|
)
|
|
$
|
(81,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Reporting. SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information (SFAS No. 131), requires
that a public company 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.
SFAS No. 131 allows aggregation of similar operating
segments into a single reportable operating segment if the
businesses have similar economic characteristics and are
considered similar under the criteria established by
SFAS No. 131.
Prior to the acquisition of Triad Hospitals, Inc.
(Triad), the Company aggregated its operating
segments into one reportable segment as all of its operating
segments had similar services, had similar types of patients,
operated in a consistent manner and had similar economic and
regulatory characteristics. In connection with the Triad
acquisition, certain aspects of the Companys
organizational structure and the information that is reviewed by
the chief operating decision maker have changed. As a result,
management has determined that the Company now operates in three
distinct operating segments, represented by the hospital
operations (which includes our acute care hospitals and related
healthcare entities that provide inpatient and outpatient health
care services), the home health 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). SFAS No. 131 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 health agencies and
management services segments do not meet the quantitative
thresholds defined in SFAS No. 131 and are therefore
combined with corporate into the all other reportable segment.
The financial information from prior years has been presented in
Note 13 to reflect this change in the composition of our
reportable operating segments.
Derivative Instruments and Hedging
Activities. In accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No.
133), as amended, 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.
69
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has entered into several interest rate swap
agreements subject to the scope of this pronouncement. See
Note 6 for further discussion about the swap transactions.
New Accounting Pronouncements. In June 2006,
the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48),
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of
January 1, 2007. The adoption of this interpretation has
not had a material effect on the Companys consolidated
results of operations or consolidated financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value,
provides a framework for measuring fair value, and expands the
disclosures required for fair value measurements.
SFAS No. 157 applies to other accounting
pronouncements that require fair value measurement; it does not
require any new fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007, and is required to be adopted by the Company beginning in
the first quarter of 2008. Although we will continue to evaluate
the application of SFAS No. 157, management does not
currently believe adoption will have a material impact on the
Companys consolidated results of operations or
consolidated financial position.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 expands the use of fair value accounting
but does not affect existing standards that require assets or
liabilities to be carried at fair value. SFAS No. 159
permits an entity, on a
contract-by-contract
basis, to make an irrevocable election to account for certain
types of financial instruments and warranty and insurance
contracts at fair value, rather than historical cost, with
changes in the fair value, whether realized or unrealized,
recognized in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company
adopted SFAS No. 159 as of January 1, 2008. The
adoption of this statement is not expected to have a material
effect on the Companys consolidated results of operations
or consolidated financial position.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) replaces SFAS No. 141 and
addresses the recognition and accounting for identifiable assets
acquired, liabilities assumed, and noncontrolling interests in
business combinations. This standard will require more assets
and liabilities be recorded at fair value and will require
expense recognition (rather than capitalization) of certain
pre-acquisition costs. This standard also will require any
adjustments to acquired deferred tax assets and liabilities
occurring after the related allocation period to be made through
earnings. Furthermore, this standard requires this treatment of
acquired deferred tax assets and liabilities also be applied to
acquisitions occurring prior to the effective date of this
standard. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008 and is required to
be adopted prospectively with no early adoption permitted.
SFAS No. 141(R) will be adopted by the Company in the
first quarter of 2009. The Company is currently assessing the
potential impact that SFAS No. 141(R) will have on its
consolidated results of operations or financial position.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements (SFAS No. 160).
SFAS No. 160 addresses the accounting and reporting
framework for noncontrolling ownership interests in consolidated
subsidiaries of the parent. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent company and the
interests of the noncontrolling owners and that require minority
ownership interests be presented separately within equity in the
consolidated financial statements. SFAS No. 160 is
effective for fiscal years beginning after December 15,
2008, and will be adopted by the Company in the first quarter of
2009. The Company is
70
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
currently assessing the potential impact that
SFAS No. 160 will have on its consolidated results of
operations or financial position.
Reclassifications. The Company disposed of one
hospital in August 2007, disposed of one hospital in October
2007, disposed of one hospital in November 2007, and designated
twelve hospitals as being held for sale in the fourth quarter of
2007. The operating results of those hospitals have been
classified as discontinued operations on the consolidated
statements of income for all periods presented. There is no
effect on net income for all periods presented related to the
reclassifications made for the discontinued operations. The
presentation of certain other prior year amounts have been
changed. These changes in presentation are immaterial to the
Companys consolidated financial statements.
|
|
2.
|
Accounting
for Stock-Based Compensation
|
The Company adopted the provisions of SFAS No. 123(R),
Share-Based Payments
(SFAS No. 123(R)) on January 1, 2006,
electing to use the modified prospective method for transition
purposes. The modified prospective method requires that
compensation expense be recorded for all unvested stock options
and share awards that subsequently vest or are modified, without
restatement of prior periods. Prior to January 1, 2006, the
Company accounted for stock-based compensation using the
recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations (APB
No. 25), and provided the pro-forma disclosure
requirements of SFAS No. 123 Accounting for
Stock-Based Compensation and SFAS No. 148
Accounting for Stock-Based Compensation Transition and
Disclosures an Amendment of FASB Statement
No. 123 (SFAS No. 148). Under
APB No. 25, when the exercise price of the Companys
stock was equal to the market price of the underlying stock on
the date of grant, no compensation expense was recognized.
The pro-forma table below reflects net income and earnings per
share had the Company applied the fair value recognition
provisions of SFAS No. 123 for the year ended
December 31, 2005, prior to the adoption of
SFAS No. 123(R) (in thousands, except per share data):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net Income:
|
|
$
|
167,544
|
|
Add: Stock-Based compensation expense recognized under APB No.
25, net of tax
|
|
|
3,493
|
|
Deduct: Total stock-based compensation under fair value based
method for all awards, net of tax
|
|
$
|
14,232
|
|
|
|
|
|
|
Pro-forma net income
|
|
$
|
156,805
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
Basic as reported
|
|
$
|
1.89
|
|
|
|
|
|
|
Basic proforma
|
|
$
|
1.77
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
1.79
|
|
|
|
|
|
|
Diluted proforma
|
|
$
|
1.68
|
|
|
|
|
|
|
On September 22, 2005, the Compensation Committee of the
Board of Directors of the Company approved an immediate
acceleration of the vesting of unvested stock options awarded to
employees and officers, including executive officers, on each of
three grant dates, December 10, 2002, February 25,
2003, and May 22, 2003. Each of the grants accelerated had
a three-year vesting period and would have otherwise become
fully vested on their respective anniversary dates no later than
May 22, 2006. All other terms and
71
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conditions applicable to the outstanding stock option grants
remain in effect. A total of 1,235,885 stock options, with a
weighted exercise price of $20.26 per share, were accelerated.
The accelerated options were issued under the Community Health
Systems, Inc. Amended and Restated 2000 Stock Option and Award
Plan (the 2000 Plan). No performance shares or units
or incentive stock options have been granted under the 2000
Plan. Options granted to non-employee directors of the Company
and restricted shares were not affected by this action. The
Compensation Committees decision to accelerate the vesting
of the affected options was based primarily on the relatively
short period of time until such stock options otherwise become
fully vested making them no longer a significant motivator for
retention and the fact the Company anticipated that up to
approximately $3.8 million of compensation expense
($2.3 million, net of tax) associated with certain of these
stock options would have otherwise been recognized in the first
two quarters of 2006 pursuant to SFAS No. 123(R) would
be avoided.
Since the Company accounted for its stock options prior to
January 1, 2006 using the intrinsic value method of
accounting prescribed in APB No. 25, the accelerated
vesting did not result in the recognition of compensation
expense in net income for the year ended December 31, 2005.
However, in accordance with the disclosure requirements of
SFAS No. 148, the pro-forma results presented in the
table above include approximately $5.9 million
($3.6 million, net of tax) of compensation expense for the
year ended December 31, 2005, resulting from the vesting
acceleration.
Stock-based compensation awards are granted under the 2000 Plan.
The 2000 Plan allows for the grant of incentive stock options
intended to qualify under Section 422 of the Internal
Revenue Code as well as stock options which do not so qualify,
stock appreciation rights, restricted stock, performance units
and performance shares, phantom stock awards and share awards.
Persons eligible to receive grants under the 2000 Plan include
the Companys directors, officers, employees and
consultants. To date, the options granted under the 2000 Plan
are 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, except for options granted on July 25, 2007, which
vests equally on the first two anniversaries of the award date.
Options granted prior to 2005 have a 10 year contractual
term and options granted in 2005, 2006 and 2007 have an
8 year contractual term. The exercise price of options
granted to employees under the 2000 Plan were equal to the fair
value of the Companys common stock on the option grant
date. As of December 31, 2007, 5,849,771 shares of
unissued common stock remain reserved for future grants under
the 2000 Plan. The Company also has options outstanding under
its Employee Stock Option Plan (the 1996 Plan).
These options are fully vested and exercisable and no additional
grants of options will be made under the 1996 Plan.
The following table reflects the impact of total compensation
expense related to stock-based equity plans under
SFAS No. 123(R) for periods beginning January 1,
2006, and under APB No. 25 for the year ended
December 31, 2005, on the reported operating results for
the respective periods (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Effect on income from continuing operations before income taxes
|
|
$
|
(38,771
|
)
|
|
$
|
(20,073
|
)
|
|
$
|
(4,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net income
|
|
$
|
(23,541
|
)
|
|
$
|
(12,762
|
)
|
|
$
|
(3,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net income per share-diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of the recognized tax benefit on
compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as required under APB
No. 25 and related interpretations. This requirement
reduced the Companys net operating cash flows and
increased the Companys financing cash flows by
$1.2 million and $6.8 million for the years
72
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended December 31, 2007 and 2006. In addition, the
Companys deferred compensation cost at December 31,
2005, of $13.2 million, arising from the issuance of
restricted stock in 2005 and recorded as a component of
stockholders equity as required under APB No. 25, was
reclassified into additional paid-in capital upon the adoption
of SFAS No. 123(R).
At December 31, 2007, $80.4 million of unrecognized
stock-based compensation expense from all outstanding unvested
stock options and restricted stock is expected to be recognized
over a weighted-average period of 18.4 months. There were
no modifications to awards during 2007 or 2006.
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, 2007 and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
24.4
|
%
|
|
|
24.2
|
%
|
Expected dividends
|
|
|
0
|
|
|
|
0
|
|
Expected term
|
|
|
4 years
|
|
|
|
4 years
|
|
Risk-free interest rate
|
|
|
4.48
|
%
|
|
|
4.67
|
%
|
In determining expected term, the Company examined
concentrations of holdings, its 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 life 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.
73
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options outstanding and exercisable under the 1996 Plan and 2000
Plan as of December 31, 2007, and changes during each of
the years in the three-year period ended December 31, 2007
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)
|
|
|
2007
|
|
|
Outstanding at December 31, 2004
|
|
|
7,456,279
|
|
|
$
|
18.03
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,325,700
|
|
|
|
33.02
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,134,721
|
)
|
|
|
15.81
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(276,984
|
)
|
|
|
26.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
5,370,274
|
|
|
|
22.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,151,000
|
|
|
|
38.07
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(865,833
|
)
|
|
|
16.47
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(172,913
|
)
|
|
|
34.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
6.5 years
|
|
|
$
|
57,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
4,024,138
|
|
|
$
|
23.63
|
|
|
|
5.5 years
|
|
|
$
|
53,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options
granted during the year ended December 31, 2007 and 2006,
was $10.24 and $10.38, respectively. The aggregate intrinsic
value (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) in the table above
represents the amount that would have been received by the
option holders had all option holders exercised their options on
December 31, 2007. This amount changes based on the market
value of the Companys common stock. The aggregate
intrinsic value of options exercised during the year ended
December 31, 2007 and 2006 was $3.5 million and
$18.2 million, respectively. The aggregate intrinsic value
of options vested and expected to vest approximates that of the
outstanding options.