FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-15925
COMMUNITY HEALTH SYSTEMS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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13-3893191
(IRS Employer
Identification No.)
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4000 Meridian Boulevard
Franklin, Tennessee
(Address of principal
executive offices)
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37067
(Zip Code)
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Registrants telephone number, including area code:
(615) 465-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange
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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):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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 $3,198,044,909. Market
value is determined by reference to the closing price on
June 30, 2008 of the Registrants Common Stock as
reported by the New York Stock Exchange. The Registrant does not
(and did not at June 30, 2008) have any non-voting
common stock outstanding. As of February 1, 2009, there
were 91,507,617 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 2009 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, 2008.
TABLE OF
CONTENTS
FORM 10-K
ANNUAL REPORT
COMMUNITY
HEALTH SYSTEMS, INC.
Year
ended December 31, 2008
PART I
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Item 1.
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Business
of Community Health Systems, Inc.
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Overview
of Our Company
We are the largest publicly traded operator of hospitals in the
United States in terms of number of facilities and net operating
revenues. We were incorporated in 1996 as a Delaware
corporation. We provide healthcare services through these
hospitals that we own and operate in non-urban and selected
urban markets throughout the United States. As of
December 31, 2008, included in our continuing operations,
are 118 hospitals that we owned or leased. These hospitals are
geographically diversified across 28 states, with an
aggregate of 17,245 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. 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. In addition to our
hospitals and related businesses, we also own and operate home
care agencies, including two home care agencies located in
markets where we do not operate a hospital. Through our
wholly-owned subsidiary, Quorum Health Resources, LLC, or QHR,
we also provide management and consulting services to
non-affiliated general acute care hospitals located throughout
the United States. The home care agencies and the hospital
management services businesses constitute operating segments
that are not considered reportable segments since they do not
meet the quantitative thresholds defined in Statement of
Financial Accounting Standards, or SFAS, No. 131,
Disclosures about Segments of an Enterprise and Related
Information. The financial information for our reportable
operating segments is presented in Note 14 of the Notes to
our Consolidated Financial Statements included under Item 8
of this Report.
Our strategy has also included growth by acquisition. We target
hospitals in growing, non-urban and select urban healthcare
markets for acquisition because of their favorable demographic
and economic trends and competitive conditions. Because these
service areas have smaller populations, there are generally
fewer hospitals and other healthcare service providers in these
communities and generally a lower level of managed care presence
in these markets. We believe that smaller populations support
less direct competition for hospital-based services. Also, we
believe that these communities generally view the local hospital
as an integral part of the community.
Effective July 25, 2007, we completed our acquisition of
Triad Hospitals, Inc., or Triad. Triad owned and operated 50
hospitals with 49 hospitals located in 17 states in
non-urban and middle market communities and one hospital located
in the Republic of Ireland. At December 31, 2008, 41 of the
50 hospitals acquired from Triad remain in our continuing
operations. The acquisition of Triad also expanded our
operations into five states where we previously did not own any
facilities.
Throughout this
Form 10-K,
we refer to Community Health Systems, Inc., or Parent Company,
and its consolidated subsidiaries in a simplified manner and on
a collective basis, using words like we and
our. This drafting style is suggested by the
Securities and Exchange Commission, or SEC, and is not meant to
indicate that the publicly traded Parent Company or any other
subsidiary of the Parent Company owns or operates any asset,
business, or property. The hospitals, operations, and businesses
described in this filing are owned and operated, and management
services provided, by distinct and indirect subsidiaries of
Community Health Systems, Inc.
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Available
Information
Our Internet address is www.chs.net and the investor relations
section of our website is located at
www.chs.net/investor/index.html. We make available free of
charge, through the investor relations section of our website,
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
as well as amendments to those reports, as soon as reasonably
practical after they are filed with the SEC. Our filings are
also available to the public at the website maintained by the
SEC, www.sec.gov.
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,
or NYSE, the 2008 Annual 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:
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increase revenue at our facilities;
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improve profitability;
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improve quality; and
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grow through selective acquisitions.
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Increase
Revenue at Our Facilities
Overview. We seek to increase revenue at our
facilities by providing a broader range of services in a more
attractive care setting, as well as by supporting and recruiting
physicians. We identify the healthcare needs of the community by
analyzing demographic data and patient referral trends. We also
work with local hospital boards, management teams, and medical
staffs to determine the number and type of additional physician
specialties needed. Our initiatives to increase revenue include:
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recruiting additional primary care physicians and specialists;
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expanding the breadth of services offered at our hospitals
through targeted capital expenditures to support the addition of
more complex services, including orthopedics, cardiovascular
services, and urology; and
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providing the capital to invest in technology and the physical
plant at the facilities, particularly in our emergency rooms,
surgery departments, critical care departments, and diagnostic
services.
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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 686 in 2008, 440 in 2007 and
300 in 2006. The percentage of recruited or other physicians
commencing practice with us that were specialists was over 50%
in 2008. Although in recent years we have begun employing more
physicians, most of our
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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. Approximately
55% of our hospital admissions originate in the emergency room.
Therefore, we systematically take steps to increase patient flow
in our emergency rooms as a means of optimizing utilization
rates for our hospitals. Furthermore, the impression of our
overall operations by our customers is substantially influenced
by our emergency rooms since generally that is their first
experience with our hospitals. The steps we take to increase
patient flow in our emergency rooms include renovating and
expanding our emergency room facilities, improving service and
reducing waiting times, as well as publicizing our emergency
room capabilities in the local community. We have expanded or
renovated 13 of our emergency rooms during the past three years,
including four in 2008. We have also implemented marketing
campaigns that emphasize the speed, convenience, and quality of
our emergency rooms to enhance each communitys awareness
of our emergency room services.
One component of upgrading our emergency rooms is the
implementation of specialized computer software programs
designed to assist physicians in making diagnoses and
determining treatments. The software also benefits patients and
hospital personnel by assisting in proper documentation of
patient records and tracking patient flow. It enables our nurses
to provide more consistent patient care and provides clear
instructions to patients at time of discharge to help them
better understand their treatments.
Expansion of Services. In an effort to better
meet the healthcare needs of the communities we serve and to
capture a greater portion of the healthcare spending in our
markets, we have added a broad range of services to our
facilities. These services range from various types of
diagnostic equipment capabilities to additional and renovated
emergency rooms, surgical and critical care suites and specialty
services. For example, in 2008, we spent $108.7 million as
a part of 27 major construction projects. The 2008 projects
included new emergency rooms, cardiac cathertization labs,
intensive care units, hospital additions, and ambulatory surgery
centers. 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 addition to spending capital on expanding services
at our existing hospitals, we also build replacement facilities
to better meet the healthcare needs of our communities. In 2008,
three replacement hospitals were completed and opened: one in
Clarksville, Tennessee (June 2008), one in Shelbyville,
Tennessee (July 2008) and one in Petersburg, Virginia
(August 2008). We spent approximately $374 million on these
three replacement hospitals which includes expenditures by Triad
prior to our acquisition of Triad.
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.
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Improve
Profitability
Overview. To improve efficiencies and increase
operating margins, we implement cost containment programs and
adhere to operating philosophies that include:
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standardizing and centralizing our operations;
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optimizing resource allocation by utilizing our company-devised
case and resource management program, which assists in improving
clinical care and containing expenses;
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capitalizing on purchasing efficiencies through the use of
company-wide standardized purchasing contracts and terminating
or renegotiating specified vendor contracts;
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installing a standardized management information system,
resulting in more efficient billing and collection
procedures; and
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monitoring and enhancing productivity of our human resources.
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In addition, each of our hospital management teams is supported
by our centralized operational, reimbursement, regulatory and
compliance expertise, as well as by our senior management team,
which has an average of over 25 years of experience in the
healthcare industry.
Standardization and Centralization. Our
standardization and centralization initiatives encompass nearly
every aspect of our business, from developing standard policies
and procedures with respect to patient accounting and physician
practice management to implementing standard processes to
initiate, evaluate and complete construction projects. Our
standardization and centralization initiatives are a key element
in improving our operating results.
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Billing and Collections. We have adopted
standard policies and procedures with respect to billing and
collections. We have also automated and standardized various
components of the collection cycle, including statement and
collection letters and the movement of accounts through the
collection cycle. Upon completion of an acquisition, our
management information system team converts the hospitals
existing information system to our standardized system. This
enables us to quickly implement our business controls and cost
containment initiatives.
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Physician Support. We support our newly
recruited physicians to enhance their transition into our
communities. We have implemented physician practice management
seminars and training. We host these seminars bi-monthly. All
newly recruited physicians are required to attend a
three-day
introductory seminar that covers issues involved in starting up
a practice.
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Procurement and Materials Management. We have
standardized and centralized our operations with respect to
medical supplies, equipment and pharmaceuticals used in our
hospitals. We have a participation agreement with HealthTrust
Purchasing Group, L.P., HealthTrust, a group purchasing
organization, or 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.
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Facilities Management. We have standardized
interiors, lighting and furniture programs. We have also
implemented a standard process to initiate, evaluate and
complete construction projects. Our corporate staff monitors all
construction projects, and reviews and pays all construction
project invoices. Our initiatives in this area have reduced our
construction costs while maintaining the same level of quality
and have shortened the time it takes us to complete these
projects.
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Other Initiatives. We have also improved
margins by implementing standard programs with respect to
ancillary services in areas including emergency rooms, pharmacy,
laboratory, imaging, home care, skilled nursing, centralized
outpatient scheduling and health information management. We have
reduced costs associated with these services by improving
contract terms and standardizing information systems. We work to
identify and communicate best practices and monitor these
improvements throughout the Company.
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Internal Controls Over Financial Reporting. We
have centralized many of our significant internal controls over
financial reporting and standardized those other controls that
are performed at our hospital locations. We continuously monitor
compliance with and evaluate the effectiveness of our internal
controls over financial reporting.
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Case and Resource Management. Our case and
resource management program is a company-devised program
developed with the goal of improving clinical care and cost
containment. The program focuses on:
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appropriately treating patients along the care continuum;
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reducing inefficiently applied processes, procedures and
resources;
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developing and implementing standards for operational best
practices; and
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using
on-site
clinical facilitators to train and educate care practitioners on
identified best practices.
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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:
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have a service area population between 20,000 and 400,000 with a
stable or growing population base;
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are the sole or primary provider of acute care services in the
community;
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are located in an area with the potential for service expansion;
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are not located in an area that is dependent upon a single
employer or industry; and
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have financial performance that we believe will benefit from our
managements operating skills.
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In each year since 1997, we have met or exceeded our acquisition
goals. Occasionally, we have pursued acquisition opportunities
outside of our specified criteria when such opportunities have
had uniquely favorable characteristics. In addition to two
hospitals acquired from local governmental entities in 2007, we
also acquired Triad, which, at the time of our acquisition,
owned and operated 50 hospitals with 49 hospitals located in
17 states across the U.S. and one hospital located in
the Republic of Ireland. Since our acquisition of Triads
50 hospital portfolio in July, 2007, we have primarily focused
our efforts on integrating those hospitals, as opposed to
pursuing further acquisition opportunities. In the fourth
quarter of 2008, we completed an acquisition of a two hospital
system located in Spokane, Washington, an acquisition we had
been pursuing, and for which we were awaiting government
approval, for almost a year. In 2009, in light of the current
economic conditions, we intend to proceed cautiously with our
acquisition strategy, anticipating closing on only two
acquisitions during the year. One of these two anticipated
acquisitions closed on February 1, 2009.
Disciplined Acquisition Approach. We have been
disciplined in our approach to acquisitions. We have a dedicated
team of internal and external professionals who complete a
thorough review of the hospitals financial and operating
performance, the demographics and service needs of the market
and the physical condition of the facilities. Based on our
historical experience, we then build a pro forma financial model
that reflects what we believe can be accomplished under our
ownership. Whether we buy or lease the existing facility or
agree to construct a replacement hospital, we believe we have
been disciplined in our approach to pricing. We typically begin
the acquisition process by entering into a non-binding letter of
intent with an acquisition candidate. After we complete business
and financial due diligence and financial modeling, we decide
whether or not to enter into a definitive agreement. Once an
acquisition is completed, we have an organized and systematic
approach to transitioning and integrating the new hospital into
our system of hospitals.
Acquisition Efforts. Most of our acquisition
targets are municipal or other not-for-profit hospitals. We
believe that our access to capital, ability to recruit
physicians and reputation for providing quality care make us an
attractive partner for these communities. In addition, we have
found that communities located in states where we already
operate a hospital are more receptive to us, when they consider
selling their hospital, because they are aware of our operating
track record with respect to our hospitals within the state.
At the time we acquire a hospital, we may commit to an amount of
capital expenditures, such as a replacement facility,
renovations, or equipment over a specified period of time. As an
obligation under a hospital purchase agreement in effect as of
December 31, 2008, we are required to build a replacement
facility in 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. Estimated construction costs, including
equipment costs, are approximately $269.0 million for these
two replacement hospitals, of which approximately
$8.5 million has been incurred to date. In addition, other
commitments under purchase agreements in effect as of
December 31, 2008, obligate us to spend approximately
$266.8 million through 2013, for costs such as capital
improvements, equipment, selected leases and physician
recruiting.
Industry
Overview
The Centers for Medicare and Medicaid Services, or CMS, reported
that in 2007 total U.S. healthcare expenditures grew by
6.1% to $2.2 trillion. CMS also projected total
U.S. healthcare spending to grow by 6.6% in 2008 and by an
average of 6.7% annually from 2009 through 2017. By these
estimates, healthcare expenditures will account for
approximately $4.3 trillion, or 19.5% of the total
U.S. gross domestic product, by 2017.
Hospital services, the market in which we operate, is the
largest single category of healthcare at 30% of total healthcare
spending in 2007, or $696.5 billion, as reported by CMS.
CMS projects the hospital services category to grow by at least
6.4% per year through 2017. It expects growth in hospital
healthcare spending to continue due to the aging of the
U.S. population and consumer demand for expanded medical
services. As hospitals remain the primary setting for healthcare
delivery, CMS expects hospital services to remain the largest
category of healthcare spending.
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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 care, and outpatient surgery
services.
Urban vs.
Non-Urban Hospitals
According to the U.S. Census Bureau, 21% of the
U.S. population lives in communities designated as
non-urban. In these non-urban communities, hospitals are
typically the primary source of healthcare. In many cases a
single hospital is the only provider of general healthcare
services in these communities.
Factors Affecting Performance. Among the many
factors that can influence a hospitals financial and
operating performance are:
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facility size and location;
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facility ownership structure (i.e., tax-exempt or investor
owned);
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a facilitys ability to participate in group purchasing
organizations; and
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facility payor mix.
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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, 2008, 25 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
37.9 million Americans aged 65 or older in the
U.S. who comprise approximately 12.6% of the total
U.S. population. By the year 2030, the number of elderly is
expected to climb to 72.1 million, or 19.3% of the total
population. Due to the increasing life expectancy of Americans,
the number of people aged 85 years and older is also
expected to
7
increase from 5.5 million to 8.7 million by the year
2030. This increase in life expectancy will increase demand for
healthcare services and, as importantly, the demand for
innovative, more sophisticated means of delivering those
services. Hospitals, as the largest category of care in the
healthcare market, will be among the main beneficiaries of this
increase in demand. Based on data compiled for us, the
populations of the service areas where our hospitals are located
grew by 24.9% from 1990 to 2007 and are expected to grow by 6.2%
from 2007 to 2012. The number of people aged 65 or older in
these service areas grew by 24.4% from 1990 to 2007 and is
expected to grow by 10.5% from 2007 to 2012.
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.
|
As a result of recent changes in the global economic conditions,
we anticipate seeing a decline in the trend of consolidation
activity, including mergers and acquisitions.
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 2008 include a full
year of operations for 116 hospitals and partial periods for two
hospitals acquired during the year. Statistics for 2007 include
a full year of operations for 70 hospitals and partial periods
for 45 hospitals acquired during the year. Statistics for 2006
include a full year of operations for 63 hospitals and partial
periods for seven hospitals acquired during the year. Hospitals
which have been sold and hospitals which are classified as held
for sale are excluded from all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals (at end of period)
|
|
|
118
|
|
|
|
115
|
|
|
|
70
|
|
Licensed beds (at end of period)(1)
|
|
|
17,245
|
|
|
|
16,716
|
|
|
|
8,406
|
|
Beds in service (at end of period)(2)
|
|
|
15,063
|
|
|
|
14,446
|
|
|
|
6,753
|
|
Admissions(3)
|
|
|
663,328
|
|
|
|
459,046
|
|
|
|
307,964
|
|
Adjusted admissions(4)
|
|
|
1,196,602
|
|
|
|
842,368
|
|
|
|
570,969
|
|
Patient days(5)
|
|
|
2,808,247
|
|
|
|
1,923,547
|
|
|
|
1,264,256
|
|
Average length of stay (days)(6)
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
4.1
|
|
Occupancy rate (beds in service)(7)
|
|
|
52.0
|
%
|
|
|
52.2
|
%
|
|
|
54.3
|
%
|
Net operating revenues
|
|
$
|
10,840,098
|
|
|
$
|
7,063,775
|
|
|
$
|
4,180,136
|
|
Net inpatient revenues as a % of total net operating revenues
|
|
|
50.3
|
%
|
|
|
49.2
|
%
|
|
|
50.0
|
%
|
Net outpatient revenues as a % of total net operating revenues
|
|
|
47.5
|
%
|
|
|
48.8
|
%
|
|
|
48.8
|
%
|
Net Income
|
|
$
|
218,304
|
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
Net Income as a % of total net operating revenues
|
|
|
2.0
|
%
|
|
|
0.4
|
%
|
|
|
4.0
|
%
|
Liquidity Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(8)
|
|
$
|
1,524,723
|
|
|
$
|
814,980
|
|
|
$
|
564,339
|
|
Adjusted EBITDA as a % of total net operating revenues(8)
|
|
|
14.1
|
%
|
|
|
11.7
|
%
|
|
|
13.5
|
%
|
Net cash flows provided by operating activities
|
|
$
|
1,057,281
|
|
|
$
|
687,738
|
|
|
$
|
350,255
|
|
Net cash flows provided by operating activities as a % of total
net operating revenues
|
|
|
9.8
|
%
|
|
|
9.7
|
%
|
|
|
8.4
|
%
|
Net cash flows used in investing activities
|
|
$
|
(665,471
|
)
|
|
$
|
(7,498,858
|
)
|
|
$
|
(640,257
|
)
|
Net cash flows provided by (used in) financing activities
|
|
$
|
(304,029
|
)
|
|
$
|
6,903,428
|
|
|
$
|
226,460
|
|
See pages 10 and 11 for footnotes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Same-Store Data(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions(3)
|
|
|
651,211
|
|
|
|
638,635
|
|
|
|
2.0
|
%
|
Adjusted admissions(4)
|
|
|
1,174,600
|
|
|
|
1,149,284
|
|
|
|
2.2
|
%
|
Patient days(5)
|
|
|
2,754,336
|
|
|
|
2,763,735
|
|
|
|
|
|
Average length of stay (days)(6)
|
|
|
4.2
|
|
|
|
4.3
|
|
|
|
|
|
Occupancy rate (beds in service)(7)
|
|
|
52.1
|
%
|
|
|
52.8
|
%
|
|
|
|
|
Net operating revenues
|
|
$
|
10,620,627
|
|
|
$
|
9,962,447
|
|
|
|
6.6
|
%
|
Income from operations
|
|
$
|
981,365
|
|
|
$
|
621,983
|
|
|
|
57.8
|
%
|
Income from operations as a % of net operating revenues
|
|
|
9.2
|
%
|
|
|
6.2
|
%
|
|
|
|
|
Depreciation and amortization
|
|
$
|
487,637
|
|
|
$
|
446,254
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
$
|
42,064
|
|
|
$
|
48,796
|
|
|
|
|
|
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 occupancy rate percentages by dividing the average
daily number of inpatients by the weighted average of beds in
service. |
|
(8) |
|
EBITDA consists of net income (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, 2008, 2007, and 2006 (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Adjusted EBITDA
|
|
$
|
1,524,723
|
|
|
$
|
814,980
|
|
|
$
|
564,339
|
|
Interest expense, net
|
|
|
(651,925
|
)
|
|
|
(361,773
|
)
|
|
|
(94,411
|
)
|
Provision for income taxes
|
|
|
(129,479
|
)
|
|
|
(41,828
|
)
|
|
|
(110,152
|
)
|
Deferred income taxes
|
|
|
159,870
|
|
|
|
(39,894
|
)
|
|
|
(25,228
|
)
|
Income (loss) from operations of hospitals sold or held for sale
|
|
|
5,316
|
|
|
|
(8,884
|
)
|
|
|
(6,873
|
)
|
Income tax (expense) benefit on the non-cash impairment and
(gain) loss on sale of hospitals
|
|
|
(6,357
|
)
|
|
|
5,298
|
|
|
|
1,378
|
|
Depreciation and amortization of discontinued operations
|
|
|
7,609
|
|
|
|
21,458
|
|
|
|
9,485
|
|
Stock compensation expense
|
|
|
52,105
|
|
|
|
38,771
|
|
|
|
20,073
|
|
Excess tax benefits relating to stock based compensation
|
|
|
(1,278
|
)
|
|
|
(1,216
|
)
|
|
|
(6,819
|
)
|
Other non-cash (income) expenses, net
|
|
|
3,577
|
|
|
|
19,017
|
|
|
|
500
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
(57,437
|
)
|
|
|
131,300
|
|
|
|
(71,141
|
)
|
Supplies, prepaid expenses and other current assets
|
|
|
(34,711
|
)
|
|
|
(31,977
|
)
|
|
|
(4,544
|
)
|
Accounts payable, accrued liabilities and income taxes
|
|
|
119,596
|
|
|
|
125,959
|
|
|
|
52,151
|
|
Other
|
|
|
65,672
|
|
|
|
16,527
|
|
|
|
21,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,057,281
|
|
|
$
|
687,738
|
|
|
$
|
350,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
|
Includes former Triad hospitals data, as if we owned them
as of January 1, 2007 (acquisition date was July 25,
2007) and other acquired hospitals to the extent we
operated them during comparable periods in both years. We have
restated our 2008 and 2007 financial statements and statistical
results to reflect the reclassification in 2008 of one hospital
owned by us during these periods, which is held for sale, to
discontinued operations. |
Sources
of Revenue
We receive payment for healthcare services provided by our
hospitals from:
|
|
|
|
|
the federal Medicare program;
|
|
|
|
state Medicaid or similar programs;
|
|
|
|
healthcare insurance carriers, health maintenance organizations
or HMOs, preferred provider organizations or
PPOs, and other managed care programs; and
|
|
|
|
patient directly.
|
11
The following table presents the approximate percentages of net
operating revenue received from Medicare, Medicaid, managed
care, self-pay and other sources for the periods indicated. The
data for the years presented are not strictly comparable due to
the significant effect that hospital acquisitions have had on
these statistics.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Revenues by Payor Source
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Medicare
|
|
|
27.5
|
%
|
|
|
29.0
|
%
|
|
|
30.4
|
%
|
Medicaid
|
|
|
9.1
|
%
|
|
|
10.3
|
%
|
|
|
11.1
|
%
|
Managed Care and other third party payors
|
|
|
52.7
|
%
|
|
|
50.7
|
%
|
|
|
46.7
|
%
|
Self-pay
|
|
|
10.7
|
%
|
|
|
10.0
|
%
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown above, we receive a substantial portion of our revenue
from the Medicare and Medicaid programs. Included in Managed
Care and other third party payors is net operating revenue from
insurance companies from which we have insurance provider
contracts, Managed Care Medicare, insurance companies for which
we do not have insurance provider contracts, workers
compensation carriers, and non-patient service revenue, such as
rental income and cafeteria sales.
Medicare is a federal program that provides medical insurance
benefits to persons age 65 and over, some disabled persons,
and persons with end-stage renal disease. Medicaid is a
federal-state funded program, administered by the states, which
provides medical benefits to individuals who are unable to
afford healthcare. All of our hospitals are certified as
providers of Medicare and Medicaid services. Amounts received
under the Medicare and Medicaid programs are generally
significantly less than a hospitals customary charges for
the services provided. Since a substantial portion of our
revenue comes from patients under Medicare and Medicaid
programs, our ability to operate our business successfully in
the future will depend in large measure on our ability to adapt
to changes in these programs.
In addition to government programs, we are paid by private
payors, which include insurance companies, HMOs, PPOs, other
managed care companies, employers, and by patients directly.
Blue Cross payors are included in Managed Care and other
third party payors line in the above table. Patients are
generally not responsible for any difference between customary
hospital charges and amounts paid for hospital services by
Medicare and Medicaid programs, insurance companies, HMOs, PPOs,
and other managed care companies, but are responsible for
services not covered by these programs or plans, as well as for
deductibles and co-insurance obligations of their coverage. The
amount of these deductibles and co-insurance obligations has
increased in recent years. Collection of amounts due from
individuals is typically more difficult than collection of
amounts due from government or business payors. To further
reduce their healthcare costs, an increasing number of insurance
companies, HMOs, PPOs, and other managed care companies are
negotiating discounted fee structures or fixed amounts for
hospital services performed, rather than paying healthcare
providers the amounts billed. We negotiate discounts with
managed care companies, which are typically smaller than
discounts under governmental programs. If an increased number of
insurance companies, HMOs, PPOs, and other managed care
companies succeed in negotiating discounted fee structures or
fixed amounts, our results of operations may be negatively
affected. For more information on the payment programs on which
our revenues depend, see Payment on page 17.
As of December 31, 2008, Indiana and Texas represented the
only areas of geographic concentration. Net operating revenues
as a percentage of consolidated net operating revenues generated
in Indiana were 11.0% in 2008 and 7.7% in 2007. Net operating
revenues as a percentage of consolidated net operating revenues
generated in Texas were 13.4% in 2008, 13.0% in 2007 and 10.4%
in 2006. As a result of our growth and expansion of services in
other states, Pennsylvania no longer represents an area of
geographic concentration, which it did as of December 31,
2007.
Hospital revenues depend upon inpatient occupancy levels, the
volume of outpatient procedures, and the charges or negotiated
payment rates for hospital services provided. Charges and
payment rates for routine inpatient services vary significantly
depending on the type of service performed and the geographic
location of
12
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 environmental
protection laws. There are also extensive regulations governing
a hospitals participation in these government programs. If
we fail to comply with applicable laws and regulations, we can
be subject to criminal penalties and civil sanctions, our
hospitals can lose their licenses and we could lose our ability
to participate in these government programs. In addition,
government regulations may change. If that happens, we may have
to make changes in our facilities, equipment, personnel, and
services so that our hospitals remain certified as hospitals and
qualified to participate in these programs. We believe that our
hospitals are in substantial compliance with current federal,
state, and local regulations and standards.
Hospitals are subject to periodic inspection by federal, state,
and local authorities to determine their compliance with
applicable regulations and requirements necessary for licensing
and certification. All of our hospitals are licensed under
appropriate state laws and are qualified to participate in
Medicare and Medicaid programs. In addition, most of our
hospitals are accredited by the Joint Commission on
Accreditation of Healthcare Organizations. This accreditation
indicates that a hospital satisfies the applicable health and
administrative standards to participate in Medicare and Medicaid
programs.
Healthcare Reform. 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. The Obama administration has stated as a top
priority its desire to reform the U.S. health care system
with the goal of providing affordable, accessible health care
for all Americans. 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
American Recovery and Reinvestment Act of 2009 has
been signed into law providing for a temporary increase in the
federal matching assistance percentage (FMAP), a temporary
increase in federal Medicaid DSH allotments, subsidization of
health insurance premiums (COBRA) for up to nine months, and
grants and loans for infrastructure and incentive payments for
providers who adopt and use health information technology. The
costs of implementing this law and other 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, other changes the administration may seek to
implement regarding healthcare or interpretations by the
administration of existing governmental healthcare programs and
the effect that any legislation change or interpretation may
have on us.
Fraud and Abuse Laws. Participation in the
Medicare program is heavily regulated by federal statute and
regulation. If a hospital fails substantially to comply with the
requirements for participating in the Medicare program, the
hospitals participation in the Medicare program may be
terminated
and/or civil
or criminal penalties 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;
|
13
|
|
|
|
|
paying money to induce the referral of patients where services
are reimbursable under a federal health program; or
|
|
|
|
paying money to limit or reduce the services provided to
Medicare beneficiaries.
|
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, broadened the scope of the fraud and abuse laws. Under
HIPAA, any person or entity that knowingly and willfully
defrauds or attempts to defraud a healthcare benefit program,
including private healthcare plans, may be subject to fines,
imprisonment or both. Additionally, any person or entity that
knowingly and willfully falsifies or conceals a material fact or
makes any material false or fraudulent statements in connection
with the delivery or payment of healthcare services by a
healthcare benefit plan is subject to a fine, imprisonment or
both.
Another law regulating the healthcare industry is a section of
the Social Security Act, known as the anti-kickback
statute. This law prohibits some business practices and
relationships under Medicare, Medicaid, and other federal
healthcare programs. These practices include the payment,
receipt, offer, or solicitation of remuneration of any kind in
exchange for items or services that are reimbursed under most
federal or state healthcare program. Violations of the
anti-kickback statute may be punished by criminal and civil
fines, exclusion from federal healthcare programs, and damages
up to three times the total dollar amount involved.
The Office of Inspector General of the Department of Health and
Human Services, or OIG, is responsible for identifying and
investigating fraud and abuse activities in federal healthcare
programs. As part of its duties, the OIG provides guidance to
healthcare providers by identifying types of activities that
could violate the anti-kickback statute. The OIG also publishes
regulations outlining activities and business relationships that
would be deemed not to violate the anti-kickback statute. These
regulations are known as safe harbor regulations.
However, the failure of a particular activity to comply with the
safe harbor regulations does not necessarily mean that the
activity violates the anti-kickback statute.
The OIG has identified the following incentive arrangements as
potential violations of the anti-kickback statute:
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payment of any incentive by the hospital when a physician refers
a patient to the hospital;
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use of free or significantly discounted office space or
equipment for physicians in facilities usually located close to
the hospital;
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provision of free or significantly discounted billing, nursing,
or other staff services;
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free training for a physicians office staff including
management and laboratory techniques (but excluding compliance
training);
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guarantees which provide that if the physicians income
fails to reach a predetermined level, the hospital will pay any
portion of the remainder;
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low-interest or interest-free loans, or loans which may be
forgiven if a physician refers patients to the hospital;
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payment of the costs of a physicians travel and expenses
for conferences;
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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
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purchasing goods or services from physicians at prices in excess
of their fair market value.
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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
14
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.
Many states in which we operate also have adopted similar laws
relating to financial relationships with physicians. Some of
these state laws apply even if the payment for care does not
come from the government. These statutes typically provide
criminal and civil penalties as well as loss of licensure. While
there is little precedent for the interpretation or enforcement
of these state laws, we have attempted to structure our
financial relationships with physicians and others in light of
these laws. However, if we are found to have violated these
state laws, it could result in the imposition of criminal and
civil penalties as well as possible licensure revocation.
False Claims Act. Another trend in healthcare
litigation is the increased use of the False Claims Act, or FCA.
This law makes providers liable for, among other things, the
knowing submission of a false claim for reimbursement by the
federal government. The FCA has been used not only by the
U.S. government, but also by individuals who bring an
action on behalf of the government under the laws
qui tam or whistleblower provisions and
share in any recovery. When a private party brings a qui tam
action under the FCA, it files the complaint with the court
under seal, and the defendant will generally not be aware of the
lawsuit until the government makes a determination whether it
will intervene and take a lead in the litigation.
Civil liability under the FCA can be up to three times the
actual damages sustained by the government plus civil penalties
of up to $11,000 for each separate false claim submitted to the
government. There are many potential bases for liability under
the FCA. Although liability under the FCA arises when an entity
knowingly submits a false claim for reimbursement, the FCA
defines the term knowingly to include reckless
disregard of the truth or falsity of the claim being submitted.
A number of states in which we operate have enacted state false
claims legislation. These state false claims laws are generally
modeled on the federal FCA, with similar damages, penalties, and
qui tam enforcement provisions. An increasing number of
healthcare false claims cases seek recoveries under both federal
and state law.
Provisions in the Deficit Reduction Act of 2005, or DRA, that
went into effect on January 1, 2007 give states significant
financial incentives to enact false claims laws modeled on the
federal FCA. Additionally, the DRA requires every entity that
receives annual payments of at least $5 million from a
state Medicaid plan to establish written policies for its
employees that provide detailed information about federal and
state false claims statutes and the whistleblower protections
that exist under those laws. Both provisions of the DRA are
expected to result in increased false claims litigation against
health care providers. We have substantially complied with the
written policy requirements.
15
Corporate Practice of Medicine;
Fee-Splitting. Some states have laws that
prohibit unlicensed persons or business entities, including
corporations, from employing physicians. Some states also have
adopted laws that prohibit direct or indirect payments or
fee-splitting arrangements between physicians and unlicensed
persons or business entities. Possible sanctions for violations
of these restrictions include loss of a physicians
license, civil and criminal penalties and rescission of business
arrangements. These laws vary from state to state, are often
vague and have seldom been interpreted by the courts or
regulatory agencies. We structure our arrangements with
healthcare providers to comply with the relevant state law.
However, we cannot assure you that governmental officials
responsible for enforcing these laws will not assert that we, or
transactions in which we are involved, are in violation of these
laws. These laws may also be interpreted by the courts in a
manner inconsistent with our interpretations.
Emergency Medical Treatment and Active Labor
Act. The Emergency Medical Treatment and Active
Labor Act imposes requirements as to the care that must be
provided to anyone who comes to facilities providing emergency
medical services seeking care before they may be transferred to
another facility or otherwise denied care. Sanctions for failing
to fulfill these requirements include exclusion from
participation in Medicare and Medicaid programs and civil money
penalties. In addition, the law creates private civil remedies
which enable an individual who suffers personal harm as a direct
result of a violation of the law to sue the offending hospital
for damages and equitable relief. A medical facility that
suffers a financial loss as a direct result of another
participating hospitals violation of the law also has a
similar right. Although we believe that our practices are in
compliance with the law, we can give no assurance that
governmental officials responsible for enforcing the law or
others will not assert we are in violation of these laws.
Conversion Legislation. Many states, including
some where we have hospitals and others where we may in the
future acquire hospitals, have adopted legislation regarding the
sale or other disposition of hospitals operated by
not-for-profit entities. In other states that do not have
specific legislation, the attorneys general have demonstrated an
interest in these transactions under their general obligations
to protect charitable assets from waste. These legislative and
administrative efforts primarily focus on the appropriate
valuation of the assets divested and the use of the proceeds of
the sale by the not-for-profit seller. While these reviews and,
in some instances, approval processes can add additional time to
the closing of a hospital acquisition, we have not had any
significant difficulties or delays in completing the process.
There can be no assurance, however, that future actions on the
state level will not seriously delay or even prevent our ability
to acquire hospitals. If these activities are widespread, they
could limit our ability to acquire additional hospitals.
Certificates of Need. The construction of new
facilities, the acquisition of existing facilities and the
addition of new services at our facilities may be subject to
state laws that require prior approval by state regulatory
agencies. These 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. As of December 31, 2008, we operated 54
hospitals in 16 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
16
being transmitted to others. We believe we have established
proper controls to safeguard access to protected health
information.
Payment
Medicare. Under the Medicare program, we are
paid for inpatient and outpatient services performed by our
hospitals.
Payments for inpatient acute services are generally made
pursuant to a prospective payment system, commonly known as
PPS. Under PPS, our hospitals are paid a
predetermined amount for each hospital discharge based on the
patients diagnosis. Specifically, each discharge is
assigned to a diagnosis-related group, commonly known as a
DRG, based upon the patients condition and
treatment during the relevant inpatient stay. For the federal
fiscal year 2008 (i.e., the federal fiscal year beginning
October 1, 2007), each DRG was assigned a payment rate
using 67% of the national average cost per case and 33% of the
national average charge per case and 50% of the change to
severity adjusted DRG weights. Severity adjusted DRGs more
accurately reflect the costs a hospital incurs for caring for a
patient and accounts more fully for the severity of each
patients condition. 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. DRG payment rates
were increased by the full market basket index, for
the federal fiscal years 2006, 2007, 2008 and 2009 or 3.7%,
3.4%, 3.3% and 3.6%, respectively. The Deficit Reduction Act of
2005 imposes a two percentage point reduction to the market
basket index beginning October 1, 2007, and each year
thereafter, if patient quality data is not submitted. We are
complying with this data submission requirement. Future
legislation may decrease the rate of increase for DRG payments,
but we are not able to predict the amount of any reduction or
the effect that any reduction will have on us.
In addition, hospitals may qualify for Medicare disproportionate
share payments when their percentage of low income patients
exceeds specified regulatory thresholds. A majority of our
hospitals qualify to receive Medicare disproportionate share
payments. For the majority of our hospitals that qualify to
receive Medicare disproportionate share payments, these payments
were increased by the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 effective April 1, 2004.
These Medicare disproportionate share payments as a percentage
of net operating revenues were 1.8%, 1.8% and 2.1% for the years
ended December 31, 2008, 2007 and 2006, respectively.
Beginning August 1, 2000, we began receiving Medicare
reimbursement for outpatient services through a PPS. Under the
Balanced Budget Refinement Act of 1999, non-urban hospitals with
100 beds or less were held harmless through December 31,
2004 under this Medicare outpatient PPS. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003
extended the hold harmless provision for non-urban hospitals
with 100 beds or less and for non-urban sole community hospitals
with more than 100 beds through December 31, 2005. The
Deficit Reduction Act of 2005 extended the hold harmless
provision for non-urban hospitals with 100 beds or less that are
not sole community hospitals through December 31, 2008;
however, that Act reduced the amount these hospitals would
receive in hold harmless payment by 5% in 2006, 10% in 2007 and
15% in 2008. Of our 118 hospitals in continuing operations at
December 31, 2008, 31 qualified for this relief. The
Medicare Improvements for Patients and Providers Act extends the
hold harmless provision for non-urban hospitals with 100 beds or
less, including non-urban sole community hospitals, through
December 31, 2009, at 85% of the hold harmless amount. Of
our 118 hospitals in continuing operations at December 31,
2008, 44 will qualify for this relief. The outpatient conversion
factor was increased 3.7%
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effective January 1, 2006; however, coupled with
adjustments to other variables within the outpatient PPS
resulted in an approximate 2.2% to 2.6% net increase in
outpatient PPS payments. The outpatient conversion factor was
increased 3.4% effective January 1, 2007; however, coupled
with adjustments to other variables with the outpatient PPS, an
approximate 2.5% to 2.9% net increase in outpatient payments
occurred. The outpatient conversion factor was increased 3.3%
effective January 1, 2008; however, coupled with
adjustments to other variables with the outpatient PPS, an
approximate 3.0% to 3.4% net increase in outpatient payments
occurred. The outpatient conversion factor was increased 3.6%
effective January 1, 2009; however, coupled with
adjustments to other variables with outpatient PPS, an
approximate 3.5% to 3.9% net increase in outpatient payments is
expected to occur. The Medicare Improvements and Extension Act
of the Tax Relief and Health Care Act of 2006 imposes a two
percentage point reduction to the market basket index beginning
January 1, 2009, and each year thereafter, if patient
quality data is not submitted. We intend to comply with this
data submission requirement.
Skilled nursing facilities and swing bed facilities were
historically paid by Medicare on the basis of actual costs,
subject to limitations. The Balanced Budget Act of 1997
established a PPS for Medicare skilled nursing facilities and
mandated that swing bed facilities must be incorporated into the
skilled nursing facility PPS. For federal fiscal year 2006,
skilled nursing facility PPS payment rates were increased by the
full market basket of 3.1%; however coupled with adjustments to
other variables within the skilled nursing facility PPS, an
approximate 3.9% to 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%, 3.3% and 3.4% for the federal fiscal years 2007, 2008 and
2009, respectively.
The Department of Health and Human Services established a PPS
for home health services (i.e. home care) effective
October 1, 2000. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 implemented a 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 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 occurred.
The home health agency PPS per episodic payment rate increased
by 2.9% on January 1, 2009; however, coupled with
adjustments to other variables with home health agency PPS, an
approximate 0.2% net increase in home health agency payments is
expected to occur. The Deficit Reduction Act of 2005 imposes a
two percentage point reduction to the market basket index
beginning January 1, 2007, and each year thereafter, if
patient quality data is not submitted. We are complying with
this data submission requirement.
Medicaid. Most state Medicaid payments are
made under a PPS or under programs which negotiate payment
levels with individual hospitals. Medicaid is currently funded
jointly by state and federal government. The federal government
and many states are currently considering significantly reducing
Medicaid funding, while at the same time expanding Medicaid
benefits. We can provide no assurance that reductions to
Medicaid fundings will not have a material adverse effect on our
consolidated results of operations.
Annual Cost Reports. Hospitals participating
in the Medicare and some Medicaid programs, whether paid on a
reasonable cost basis or under a PPS, are required to meet
specified financial reporting requirements. Federal and, where
applicable, state regulations require submission of annual cost
reports identifying medical costs and expenses associated with
the services provided by each hospital to Medicare beneficiaries
and Medicaid recipients.
Annual cost reports required under the Medicare and some
Medicaid programs are subject to routine governmental audits.
These audits may result in adjustments to the amounts ultimately
determined to be due to us under these reimbursement programs.
Finalization of these audits often takes several years.
Providers can appeal any final determination made in connection
with an audit. DRG outlier payments have been and
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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, 2008, we have a 17.0%
ownership interest in HealthTrust. By participating in this
organization we are able to procure items at competitively
priced rates for our hospitals. There can be no assurance that
our arrangement with HealthTrust will continue to provide the
discounts we expect to achieve.
Competition
The hospital industry is highly competitive. An important part
of our business strategy is to continue to acquire hospitals in
non-urban markets and select urban markets. However, other
for-profit hospital companies and not-for-profit hospital
systems generally attempt to acquire the same type of hospitals
as we do. In addition, some hospitals are sold through an
auction process, which may result in higher purchase prices than
we believe are reasonable.
In addition to the competition we face for acquisitions, we must
also compete with other hospitals and healthcare providers for
patients. The competition among hospitals and other healthcare
providers for patients has intensified in recent years. Our
hospitals are located in non-urban and selected urban service
areas. Those hospitals in non-urban service areas face no direct
competition because there are no other hospitals in their
primary service areas. However, these hospitals do face
competition from hospitals outside of their primary service
area, including hospitals in urban areas that provide more
complex services. Patients in those service areas may travel to
these other hospitals for a variety of reasons, including the
need for services we do not offer or physician referrals.
Patients who are required to seek services from these other
hospitals may subsequently shift their preferences to those
hospitals for services we do provide. Those hospitals in
selected urban service areas may face competition from hospitals
that are more established than our hospitals. Certain of these
competing facilities offer services, including extensive medical
research and medical education programs, which are not offered
by our facilities. In addition, in certain markets where we
operate, there are large teaching hospitals that provide highly
specialized facilities, equipment and services that may not be
available at our hospitals.
Some of our hospitals operate in primary service areas where
they compete with another hospital. Some of these competing
hospitals use equipment and services more specialized than those
available at our hospitals and some of the hospitals that
compete with us are owned by tax-supported governmental agencies
or not-for-profit entities supported by endowments and
charitable contributions. These hospitals can make capital
expenditures without paying sales, property and income taxes. We
also face competition from other specialized care providers,
including outpatient surgery, orthopedic, oncology, and
diagnostic centers.
The number and quality of the physicians on a hospitals
staff is an important factor in a hospitals competitive
advantage. Physicians decide whether a patient is admitted to
the hospital and the procedures to be performed. Admitting
physicians may be on the medical staffs of other hospitals in
addition to those of our hospitals. We attempt to attract our
physicians patients to our hospitals by offering quality
services and facilities, convenient locations, and
state-of-the-art equipment.
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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 care, skilled nursing, and clinics. Specific
areas identified through regulatory interpretation and
enforcement activities have also been addressed in our program.
Claims preparation and submission, including coding, billing,
and cost reports, comprise the bulk of these areas. Financial
arrangements with physicians and other referral sources,
including compliance with anti-kickback and Stark laws,
emergency department treatment and transfer requirements, and
other patient disposition issues are also the focus of policy
and training, standardized documentation requirements, and
review and audit. Another focus of the program is the
interpretation and implementation of the HIPAA standards for
privacy and security.
We have a Code of Conduct which applies to all directors,
officers, employees and consultants, and a confidential
disclosure program to enhance the statement of ethical
responsibility expected of our employees and business associates
who work in the accounting, financial reporting, and asset
management areas of our Company. Our Code of Conduct is posted
on our website at www.chs.net/company_overview/code_conduct.html.
Employees
At December 31, 2008, we employed approximately
55,579 full-time employees and 22,755 part-time
employees. Of these employees, approximately 2,010 are union
members. We currently believe that our labor relations are good.
Professional
Liability Claims
As part of our business of owning and operating hospitals, we
are subject to legal actions alleging liability on our part. To
cover claims arising out of the operations of hospitals, we
maintain professional malpractice liability insurance and
general liability insurance on a claims made basis in excess of
those amounts for which we are self-insured, in amounts we
believe to be sufficient for our operations. We also maintain
umbrella liability coverage for claims which, due to their
nature or amount, are not covered by our other insurance
policies. However, our insurance coverage does not cover all
claims against us or may not continue to be available at a
reasonable cost for us to maintain adequate levels of insurance.
For a further discussion of our insurance coverage, see our
discussion of professional liability claims in
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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
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is not expected to have a material adverse effect on us. It is
possible, however, that environmental issues may arise in the
future which we cannot now predict.
We are insured for damages of personal property or environmental
injury arising out of environmental impairment for both above
ground and underground storage tank issues under one insurance
policy for all of our hospitals. Our policy coverage is
$2 million per occurrence with a $25,000 deductible and a
$10 million annual aggregate. This policy also provides
pollution legal liability coverage for the former Triad
hospitals.
Under a separate insurance policy, we are insured for onsite and
offsite third party bodily injury, property damage and clean up
costs including business interruption insurance coverage for
actual losses or rental value resulting from pollution issues
for all of our hospitals other than the former Triad hospitals.
This policy coverage for pollution legal liability is
$3 million per occurrence with a $100,000 deductible and a
$6 million annual aggregate.
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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,
2008. In connection with the consummation of our acquisition of
Triad in July 2007, $7.215 billion 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 8.875% senior
notes, or 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, 2008, a $750 million revolving credit
facility and $200 million of our delayed draw term loan
facility are available to us for working capital and general
corporate purposes under the New Credit Facility, with
$93.6 million of the revolving credit facility being set
aside for outstanding letters of credit. During the fourth
quarter of 2008, $100 million of the delayed draw term loan
had been drawn down by us, reducing the delayed draw term loan
availability from $300 million to $200 million at
December 31, 2008. In January 2009, we drew down the
remaining $200 million of the delayed draw term loan.
Also, in connection with the consummation of the acquisition of
Triad, we completed an early repayment of the $300 million
aggregate principal amount of 6.5% Senior Subordinated
Notes due 2012 through a cash tender offer and consent
solicitation.
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As of
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December 31, 2008
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($ in millions)
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Senior secured credit facility
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Term loans
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$
|
5,965.9
|
|
Notes
|
|
|
2,910.8
|
|
Other
|
|
|
90.7
|
|
|
|
|
|
|
Total debt
|
|
|
8,967.4
|
|
|
|
|
|
|
Stockholder equity
|
|
|
1,672.9
|
|
|
|
|
|
|
The following table shows the ratio of earnings to fixed charges
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Ratio of earnings to fixed charges(1)
|
|
|
3.87 x
|
|
|
|
3.79 x
|
|
|
|
3.37 x
|
|
|
|
1.22 x
|
|
|
|
1.47 x
|
|
|
|
|
(1) |
|
There are no shares of preferred stock outstanding. |
As of December 31, 2008, our $5.350 billion notional
amount of interest rate swap agreements represented
approximately 89.7% 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, 2008, would
result in interest expense fluctuating approximately
$6.2 million per year.
22
The New Credit Facility
and/or the
Notes contain various covenants that limit our ability to take
certain actions, including our ability to:
|
|
|
|
|
incur, assume or guarantee additional indebtedness;
|
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|
|
issue redeemable stock and preferred stock;
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|
|
|
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;
|
|
|
|
sell or otherwise dispose of assets, including capital stock of
subsidiaries;
|
|
|
|
enter into agreements that restrict dividends from subsidiaries;
|
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|
merge, consolidate, sell or otherwise dispose of substantial
portions of our assets;
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|
enter into transactions with affiliates; and
|
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|
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.
The counterparty to the interest rate swap agreements exposes us
to credit risk in the event of non-performance. However, at
December 31, 2008, we do not anticipate non-performance by
the counterparty due to the net settlement feature of the
agreements and our liability position with respect to all of our
counterparties.
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:
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|
|
|
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;
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|
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;
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|
|
the debt service requirements of our indebtedness could make it
more difficult for us to satisfy our financial obligations;
|
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|
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;
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|
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
|
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|
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.
|
23
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 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 still experience delays or
difficulties in improving the operating margins or the
operations of these acquired hospitals.
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.
24
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, operations and liquidity.
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
25
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. GPOs attempt to obtain favorable pricing on medical
supplies with manufacturers and vendors who sometimes negotiate
exclusive supply arrangements in exchange for the discounts they
give. To the extent these exclusive supply arrangements are
challenged or deemed unenforceable, we could incur higher costs
for our medical supplies obtained through HealthTrust. These
higher costs could cause our operating results to decline.
There can be no assurance that our arrangement with HealthTrust
will provide the discounts we expect to achieve.
If the
fair value of our reporting units declines, a material non-cash
charge to earnings from impairment of our goodwill could
result.
At December 31, 2008, we had approximately
$4.166 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.
The current turmoil in the financial markets and weakness in
macroeconomic conditions globally continue to be challenging and
we cannot be certain of the duration of these conditions and
their potential impact on our stock price performance. If a
further decline in our market capitalization and other factors
resulted in the decline in our fair value, it is reasonably
likely that a goodwill impairment assessment prior to the next
annual review, in the fourth quarter of 2009, would be
necessary. If such an assessment is required, an impairment of
goodwill may be recognized. A non-cash goodwill impairment
charge would have the effect of decreasing our earnings or
increasing our losses in the period the impairment is
recognized. The amount of such effect on earnings and losses is
dependent on the size of the impairment charge.
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 2008, 36.6% 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. The
Obama administration has stated as a top priority its desire to
reform the U.S. healthcare system with the goal of
providing affordable, accessible health care for all Americans.
Proposals that have been considered include
26
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
American Recovery and Reinvestment Act of 2009 has
been signed into law providing for a temporary increase in the
federal matching assistance percentage (FMAP), a temporary
increase in federal Medicaid DSH allotments, subsidization of
health insurance premiums (COBRA) for up to nine months, and
grants and loans for infrastructure and incentive payments for
providers who adopt and use health information technology. The
costs of implementing this law and other 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, other changes the administration may seek to
implement regarding healthcare or interpretations by the
administration of existing governmental healthcare programs and
the effect that any legislation change or interpretation may
have on us.
In addition, insurance and managed care companies and other
third parties from whom we receive payment for our services
increasingly are attempting to control healthcare costs by
requiring that hospitals discount payments for their services in
exchange for exclusive or preferred participation in their
benefit plans. We believe that this trend may continue and our
inability to negotiate increased reimbursement rates or maintain
existing rates may reduce the payments we receive for our
services.
If we
fail to comply with extensive laws and government regulations,
including fraud and abuse laws, we could suffer penalties or be
required to make significant changes to our
operations.
The healthcare industry is required to comply with many laws and
regulations at the federal, state, and local government levels.
These laws and regulations require that hospitals meet various
requirements, including those relating to the adequacy of
medical care, equipment, personnel, operating policies and
procedures, maintenance of adequate records, compliance with
building codes, environmental protection and privacy. These laws
include the Health Insurance Portability and Accountability Act
of 1996 and a section of the Social Security Act, known as the
anti-kickback statute. If we fail to comply with
applicable laws and regulations, including fraud and abuse laws,
we could suffer civil or criminal penalties, including the loss
of our licenses to operate and our ability to participate in the
Medicare, Medicaid, and other federal and state healthcare
programs.
In addition, there are heightened coordinated civil and criminal
enforcement efforts by both federal and state government
agencies relating to the healthcare industry, including the
hospital segment. The ongoing investigations relate to various
referral, cost reporting, and billing practices, laboratory and
home care services, and physician ownership and joint ventures
involving hospitals. For example, the Department of Justice has
alleged that we and three of our New Mexico hospitals have
caused the state of New Mexico to submit improper claims for
federal funds in violation of the Civil False Claims Act. For a
further discussion of this matter, see Legal
Proceedings.
In 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.
27
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 increased in 2006 by 0.1%,
decreased in 2007 by 0.1% and decreased in 2008 by 0.2% 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.
Currently, the global economies, and in particular the United
States, are experiencing a period of economic uncertainty and
the related financial markets are experiencing a high degree of
volatility. This current financial turmoil is adversely
affecting the banking system and financial markets and resulting
in a tightening in the credit markets, a low level of liquidity
in many financial markets and extreme volatility in fixed
income, credit, currency and equity markets. This uncertainty
poses a risk as it could potentially lead to higher levels of
uninsured patients, result in higher levels of patients covered
by lower paying government programs
and/or
result in fiscal uncertainties at both government payors and
private insurers.
This
Report includes forward-looking statements which could differ
from actual future results.
Some of the matters discussed in this Report include
forward-looking statements. Statements that are predictive in
nature, that depend upon or refer to future events or conditions
or that include words such as expects,
anticipates, intends, plans,
believes, estimates, thinks,
and similar expressions are forward-looking statements. These
statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results and performance
to be materially different from any future results or
performance expressed or implied by these forward-looking
statements. These factors include the following:
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general economic and business conditions, both nationally and in
the regions in which we operate;
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our ability to successfully integrate any acquisitions or to
recognize expected synergies from such acquisitions, including
facilities acquired from Triad;
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risks associated with our substantial indebtedness, leverage and
debt service obligations;
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demographic changes;
|
|
|
|
changes in, or the failure to comply with, governmental
regulations;
|
|
|
|
legislative proposals for healthcare reform;
|
28
|
|
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|
|
potential adverse impact of known and unknown government
investigations and Civil False Claims Act litigation;
|
|
|
|
our ability, where appropriate, to enter into or maintain
managed care provider arrangements and the terms of these
arrangements;
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|
changes in inpatient or outpatient Medicare and Medicaid payment
levels;
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|
|
increases in the amount and risk of collectability of patient
accounts receivable;
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|
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;
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|
liabilities and other claims asserted against us, including
self-insured malpractice claims;
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competition;
|
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|
our ability to attract and retain, without significant
employment costs, qualified personnel, key management,
physicians, nurses and other healthcare workers;
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|
trends toward treatment of patients in less acute or specialty
healthcare settings, including ambulatory surgery centers or
specialty hospitals;
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changes in medical or other technology;
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changes in GAAP;
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the availability and terms of capital to fund additional
acquisitions or replacement facilities;
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our ability to successfully acquire additional hospitals and
complete the sale of hospitals held for sale;
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our ability to obtain adequate levels of general and
professional liability insurance; and
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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
Corporate
Headquarters
We own our corporate headquarters building located in Franklin,
Tennessee.
Hospitals
Our hospitals are general care hospitals offering a wide range
of inpatient and outpatient medical services. These services
generally include internal medicine, surgery, cardiology,
oncology, orthopedics, OB/GYN, diagnostic and emergency room
services, laboratory, radiology, respiratory therapy, physical
therapy, and rehabilitation services. In addition, some of our
hospitals provide skilled nursing and home care services based
on individual community needs.
29
For each of our hospitals owned or leased as of
December 31, 2008, including the two 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:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
Alabama
|
|
|
|
|
|
|
|
|
|
|
LV Stabler Memorial Hospital
|
|
Greenville
|
|
|
72
|
|
|
October, 1994
|
|
Owned
|
South Baldwin Regional Medical Center
|
|
Foley
|
|
|
112
|
|
|
June, 2000
|
|
Leased
|
Cherokee Medical Center
|
|
Centre
|
|
|
60
|
|
|
April, 2006
|
|
Owned
|
Dekalb Regional Medical Center
|
|
Fort Payne
|
|
|
134
|
|
|
April, 2006
|
|
Owned
|
Trinity Medical Center
|
|
Birmingham
|
|
|
560
|
|
|
July, 2007
|
|
Owned
|
Flowers Hospital
|
|
Dothan
|
|
|
235
|
|
|
July, 2007
|
|
Owned
|
Medical Center Enterprise
|
|
Enterprise
|
|
|
131
|
|
|
July, 2007
|
|
Owned
|
Gadsden Regional Medical Center
|
|
Gadsden
|
|
|
346
|
|
|
July, 2007
|
|
Owned
|
Crestwood Medical Center
|
|
Huntsville
|
|
|
150
|
|
|
July, 2007
|
|
Owned
|
Alaska
|
|
|
|
|
|
|
|
|
|
|
Mat-Su Regional Medical Center
|
|
Palmer
|
|
|
74
|
|
|
July, 2007
|
|
Owned
|
Arizona
|
|
|
|
|
|
|
|
|
|
|
Payson Regional Medical Center
|
|
Payson
|
|
|
44
|
|
|
August, 1997
|
|
Leased
|
Western Arizona Regional Medical Center
|
|
Bullhead City
|
|
|
139
|
|
|
July, 2000
|
|
Owned
|
Northwest Medical Center
|
|
Tucson
|
|
|
300
|
|
|
July, 2007
|
|
Owned
|
Northwest Medical Center Oro Valley
|
|
Oro Valley
|
|
|
144
|
|
|
July, 2007
|
|
Owned
|
Arkansas
|
|
|
|
|
|
|
|
|
|
|
Harris Hospital
|
|
Newport
|
|
|
133
|
|
|
October, 1994
|
|
Owned
|
Helena Regional Medical Center
|
|
Helena
|
|
|
155
|
|
|
March, 2002
|
|
Leased
|
Forrest City Medical Center
|
|
Forrest City
|
|
|
118
|
|
|
March, 2006
|
|
Leased
|
Northwest Medical Center Bentonville
|
|
Bentonville
|
|
|
128
|
|
|
July, 2007
|
|
Owned
|
Northwest Medical Center Springdale
|
|
Springdale
|
|
|
222
|
|
|
July, 2007
|
|
Owned
|
Willow Creek Womens Hospital(2)
|
|
Johnson
|
|
|
64
|
|
|
July, 2007
|
|
Owned
|
California
|
|
|
|
|
|
|
|
|
|
|
Barstow Community Hospital
|
|
Barstow
|
|
|
56
|
|
|
January, 1993
|
|
Leased
|
Fallbrook Hospital
|
|
Fallbrook
|
|
|
47
|
|
|
November, 1998
|
|
Operated(3)
|
Watsonville Community Hospital
|
|
Watsonville
|
|
|
106
|
|
|
September, 1998
|
|
Owned
|
Florida
|
|
|
|
|
|
|
|
|
|
|
Lake Wales Medical Center
|
|
Lake Wales
|
|
|
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
|
|
|
416
|
|
|
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
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
Vista Medical Center East/West
|
|
Waukegan
|
|
|
407
|
|
|
July, 2006
|
|
Owned
|
Union County Hospital
|
|
Anna
|
|
|
25
|
|
|
November, 2006
|
|
Leased
|
Indiana
|
|
|
|
|
|
|
|
|
|
|
Porter Hospital
|
|
Valparaiso
|
|
|
301
|
|
|
May, 2007
|
|
Owned
|
Bluffton Regional Medical Center
|
|
Bluffton
|
|
|
79
|
|
|
July, 2007
|
|
Owned
|
Dupont Hospital
|
|
Fort Wayne
|
|
|
131
|
|
|
July, 2007
|
|
Owned
|
Lutheran Hospital
|
|
Fort Wayne
|
|
|
432
|
|
|
July, 2007
|
|
Owned
|
St. Josephs Hospital
|
|
Fort Wayne
|
|
|
191
|
|
|
July, 2007
|
|
Owned
|
Dukes Memorial Hospital
|
|
Peru
|
|
|
25
|
|
|
July, 2007
|
|
Owned
|
Kosciusko Community Hospital
|
|
Warsaw
|
|
|
72
|
|
|
July, 2007
|
|
Owned
|
Lutheran Musculoskeletal Center(4)
|
|
Fort Wayne
|
|
|
39
|
|
|
July, 2007
|
|
Owned
|
Kentucky
|
|
|
|
|
|
|
|
|
|
|
Parkway Regional Hospital
|
|
Fulton
|
|
|
70
|
|
|
May, 1992
|
|
Owned
|
Three Rivers Medical Center
|
|
Louisa
|
|
|
90
|
|
|
May, 1993
|
|
Owned
|
Kentucky River Medical Center
|
|
Jackson
|
|
|
55
|
|
|
August, 1995
|
|
Leased
|
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
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
Mesa View Regional Hospital
|
|
Mesquite
|
|
|
25
|
|
|
July, 2007
|
|
Owned
|
New Jersey
|
|
|
|
|
|
|
|
|
|
|
Memorial Hospital of Salem County
|
|
Salem
|
|
|
140
|
|
|
September, 2002
|
|
Owned
|
New Mexico
|
|
|
|
|
|
|
|
|
|
|
Mimbres Memorial Hospital
|
|
Deming
|
|
|
49
|
|
|
March, 1996
|
|
Owned
|
Eastern New Mexico Medical Center
|
|
Roswell
|
|
|
162
|
|
|
April, 1998
|
|
Owned
|
Alta Vista Regional Hospital
|
|
Las Vegas
|
|
|
54
|
|
|
April, 2000
|
|
Owned
|
Carlsbad Medical Center
|
|
Carlsbad
|
|
|
112
|
|
|
July, 2007
|
|
Owned
|
Lea Regional Medical Center
|
|
Hobbs
|
|
|
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
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
Deaconess Hospital
|
|
Oklahoma City
|
|
|
313
|
|
|
July, 2007
|
|
Owned
|
SouthCrest Hospital
|
|
Tulsa
|
|
|
180
|
|
|
July, 2007
|
|
Owned
|
Woodward Regional Hospital
|
|
Woodward
|
|
|
87
|
|
|
July, 2007
|
|
Owned
|
Oregon
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
138
|
|
|
August, 2004
|
|
Owned
|
Chestnut Hill Hospital
|
|
Philadelphia
|
|
|
164
|
|
|
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
|
|
|
231
|
|
|
November, 1994
|
|
Owned
|
Carolinas Hospital System Florence
|
|
Florence
|
|
|
420
|
|
|
July, 2007
|
|
Owned
|
Mary Black Memorial Hospital
|
|
Spartanburg
|
|
|
209
|
|
|
July, 2007
|
|
Owned
|
Tennessee
|
|
|
|
|
|
|
|
|
|
|
Lakeway Regional Hospital
|
|
Morristown
|
|
|
135
|
|
|
May, 1993
|
|
Owned
|
Regional Hospital Of Jackson
|
|
Jackson
|
|
|
154
|
|
|
January, 2003
|
|
Owned
|
Dyersburg Regional Medical Center
|
|
Dyersburg
|
|
|
225
|
|
|
January, 2003
|
|
Owned
|
Haywood Park Community Hospital
|
|
Brownsville
|
|
|
62
|
|
|
January, 2003
|
|
Owned
|
Henderson County Community Hospital
|
|
Lexington
|
|
|
45
|
|
|
January, 2003
|
|
Owned
|
McKenzie Regional Hospital
|
|
McKenzie
|
|
|
45
|
|
|
January, 2003
|
|
Owned
|
McNairy Regional Hospital
|
|
Selmer
|
|
|
45
|
|
|
January, 2003
|
|
Owned
|
Volunteer Community Hospital
|
|
Martin
|
|
|
100
|
|
|
January, 2003
|
|
Owned
|
Heritage Medical Center
|
|
Shelbyville
|
|
|
60
|
|
|
July, 2005
|
|
Owned
|
Sky Ridge Medical Center
|
|
Cleveland
|
|
|
351
|
|
|
October, 2005
|
|
Owned
|
Gateway Medical Center
|
|
Clarksville
|
|
|
270
|
|
|
July, 2007
|
|
Owned
|
Texas
|
|
|
|
|
|
|
|
|
|
|
Big Bend Regional Medical Center
|
|
Alpine
|
|
|
25
|
|
|
October, 1999
|
|
Owned
|
Cleveland Regional Medical Center
|
|
Cleveland
|
|
|
107
|
|
|
August, 1996
|
|
Leased
|
Scenic Mountain Medical Center
|
|
Big Spring
|
|
|
150
|
|
|
October, 1994
|
|
Owned
|
Hill Regional Hospital
|
|
Hillsboro
|
|
|
92
|
|
|
October, 1994
|
|
Owned
|
Lake Granbury Medical Center
|
|
Granbury
|
|
|
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
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
|
|
|
|
|
Licensed
|
|
|
Acquisition/Lease
|
|
Ownership
|
Hospital
|
|
City
|
|
Beds(1)
|
|
|
Inception
|
|
Type
|
|
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
|
Southampton Memorial Hospital
|
|
Franklin
|
|
|
105
|
|
|
March, 2000
|
|
Owned
|
Southside Regional Medical Center
|
|
Petersburg
|
|
|
300
|
|
|
August, 2003
|
|
Owned
|
Washington
|
|
|
|
|
|
|
|
|
|
|
Deaconess Medical Center
|
|
Spokane
|
|
|
388
|
|
|
October, 2008
|
|
Owned
|
Valley Hospital and Medical Center
|
|
Spokane Valley
|
|
|
123
|
|
|
October, 2008
|
|
Owned
|
West Virginia
|
|
|
|
|
|
|
|
|
|
|
Plateau Medical Center
|
|
Oak Hill
|
|
|
25
|
|
|
July, 2002
|
|
Owned
|
Greenbrier Valley Medical Center
|
|
Ronceverte
|
|
|
122
|
|
|
July, 2007
|
|
Owned
|
Wyoming
|
|
|
|
|
|
|
|
|
|
|
Evanston Regional Hospital
|
|
Evanston
|
|
|
42
|
|
|
November, 1999
|
|
Owned
|
|
|
|
|
|
|
|
|
|
|
|
Total Licensed Beds at December 31, 2008
|
|
|
|
|
17,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Licensed beds are the number of beds for which the appropriate
state agency licenses a facility regardless of whether the beds
are actually available for patient use. |
|
(2) |
|
In 2008, we segregated this entity from Northwest Medical
Center Bentonville for reporting purposes. |
|
(3) |
|
We operate this hospital under a lease-leaseback and operating
agreement. We recognize all operating statistics, revenue and
expenses associated with this hospital in our consolidated
financial statements. |
|
(4) |
|
In 2008, we segregated this entity from Lutheran Hospital for
reporting purposes. |
The real property of substantially all of our wholly-owned
hospitals are encumbered by mortgages under the New Credit
Facility.
33
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, 2008. 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
|
|
Coliseum 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 System 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 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
34
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 charges from 1997 and 1998 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 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 filed a motion for
rehearing. That motion for rehearing was denied. The relator
amended his complaint to conform to the decision of the Court of
Appeals and we filed an answer. A case management conference was
held August 18, 2008. The parties have exchanged initial
written discovery. Relator has recently filed a pleading stating
Relator Sean Bledsoe has a potentially fatal brain tumor
that has severely affected Relators long-term and
short-term memory... The court has now ordered that a
mandatory settlement conference be stayed until Relator and wife
can be deposed. We will continue to vigorously defend 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. On
summary judgment, the Circuit Court dismissed the case against
Community Health Systems, Inc. only. All other parties remain.
We disagree with the certification ruling and pursued our
automatic right of appeal to the Alabama Supreme Court. Briefs
have now been filed and oral argument requested. 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 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. On June 16, 2008, the Appellate Court
upheld the dismissal of the consumer fraud claim but reversed
dismissal of the contract claim. We filed a Petition for Leave
of Appeal to the Illinois Supreme Court which was denied. The
case has now been remanded and we are evaluating our position
concerning discovery and possible dispositive motions. We are
vigorously defending this case.
35
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 have refiled our motion to dismiss in light of
subsequent favorable Illinois Appellate court decisions on the
consumer fraud issues. 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 may 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. On May 28,
2008, we received a letter from the Office of the
U.S. Attorney for the state of New Mexico requesting
additional information. The Company responded to and
subsequently met with the government on October 30, 2008
and in January 2009 we provided additional information. We
continue to believe that we have not violated the Federal False
Claims Act in the manner described in the governments
letter of January 22, 2008. However, in February 2009 we
were informed by the Department of Justice that it intends to
pursue litigation in this matter.
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. A motion
to dismiss the case has been granted and the relators
appeal of the ruling to the U.S. Court of Appeals for the
Fourth Circuit was denied. We will no longer refer to this case
in future filings unless there is further litigation.
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
36
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. Pursuant to the limited partnership
agreement, the closing was to occur on or before
November 26, 2007. The closing did not occur on
November 26, 2007, as THR failed to properly tender
adequate closing consideration. The case proceeded with
discovery and motions. On February 12, 2009, the parties
announced the execution of a settlement agreement, pursuant to
which we will transfer our partnership interests on or before
March 31, 2009 to THR or an affiliate. We will no longer
refer to this case in future filings.
On June 12, 2008, two of our hospitals received letters
from the U.S. Attorneys Office for the Western
District of New York requesting documents in an investigation
they are conducting into billing practices with respect to
kyphoplasty procedures performed during the period
January 1, 2002, through June 9, 2008. On
September 16, 2008, one of our hospitals in South Carolina
also received an inquiry. Kyphoplasty is a surgical spine
procedure that returns a compromised vertebrae (either from
trauma or osteoporotic disease process) to its previous height,
reducing or eliminating severe pain. We have been informed that
similar investigations have been initiated at unaffiliated
facilities in Alabama, South Carolina, Indiana and other states.
We believe that this investigation is related to a recent qui
tam settlement between the same U.S. Attorneys office
and the manufacturer and distributor of the Kyphon product,
which is used in performing the kyphoplasty procedure. We are
cooperating with the investigation by collecting and producing
material responsive to the requests. At this early stage, we do
not have sufficient information to determine whether our
hospitals have engaged in inappropriate billing for kyphoplasty
procedures. We are continuing to evaluate and discuss this
matter with the government.
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. On August 5, 2008, our motion to dismiss
was denied. Discovery is continuing and a motion for summary
judgment will be filed. The pre-trial order is due
March 13, 2009 and any trial would be anticipated for May
2009. 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), that Quorum conspired
with an unaffiliated
37
hospital to pay an illegal remuneration in violation of the
anti-kickback statute and the Stark laws, thus causing false
claims to be filed. A renewed motion to dismiss that was filed
in March 2006 asserting that the second amended complaint did
not cure the defects contained in the first amended complaint.
In September 2006, the hospital and one of the other defendants
affiliated with the hospital filed for protection under
Chapter 11 of the federal bankruptcy code, which imposed an
automatic stay on proceedings in the case. Relators entered into
a settlement agreement with the hospital, subject to
confirmation of the hospitals reorganization plan. The
District Court conducted a status conference on January 30,
2009 and has indicated it will convene another conference with
the Bankruptcy Court in the near future. We believe that this
case is without merit and should the stay be lifted, will
continue to vigorously defend it.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 2008.
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 2, 2009, there were
approximately 46 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, 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
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
36.85
|
|
|
$
|
29.79
|
|
Second Quarter
|
|
|
40.05
|
|
|
|
32.40
|
|
Third Quarter
|
|
|
36.81
|
|
|
|
28.24
|
|
Fourth Quarter
|
|
|
28.38
|
|
|
|
10.47
|
|
38
Corporate
Performance Graph
The following graph sets forth the cumulative return of the
Companys common stock during the five year period ended
December 31, 2008, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
Community Health Systems
|
|
|
$
|
100.00
|
|
|
|
$
|
104.89
|
|
|
|
$
|
144.24
|
|
|
|
$
|
137.40
|
|
|
|
$
|
138.68
|
|
|
|
$
|
54.85
|
|
Dow Jones Health Care Index
|
|
|
$
|
100.00
|
|
|
|
$
|
103.21
|
|
|
|
$
|
110.30
|
|
|
|
$
|
116.20
|
|
|
|
$
|
124.07
|
|
|
|
$
|
93.95
|
|
S&P 500
|
|
|
$
|
100.00
|
|
|
|
$
|
108.99
|
|
|
|
$
|
112.26
|
|
|
|
$
|
127.55
|
|
|
|
$
|
132.06
|
|
|
|
$
|
81.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, the amount of
permitted dividends
and/or stock
repurchases permitted under the indenture was $399 million.
The following table contains information about our purchases of
common stock during the three months ended December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Number of
|
|
|
|
Total
|
|
|
Average
|
|
|
Part of
|
|
|
Shares that May
|
|
|
|
Number of
|
|
|
Price
|
|
|
Publicly
|
|
|
Yet be Purchased
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Under the Plans
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Plans(a)
|
|
|
or Programs(a)
|
|
|
October 1, 2008 October 31, 2008
|
|
|
2,500,000
|
|
|
$
|
20.73
|
|
|
|
2,500,000
|
|
|
|
1,983,000
|
|
November 1, 2008 November 30, 2008
|
|
|
1,319,609
|
|
|
|
11.75
|
|
|
|
1,319,609
|
|
|
|
663,391
|
|
December 1, 2008 December 31, 2008
|
|
|
450,000
|
|
|
|
12.43
|
|
|
|
450,000
|
|
|
|
213,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,269,609
|
|
|
|
17.08
|
|
|
|
4,269,609
|
|
|
|
213,391
|
|
39
|
|
|
(a) |
|
On December 13, 2006, we commenced an open market
repurchase program for up to 5,000,000 shares of our common
stock not to exceed $200 million in purchases. This
purchase program will conclude at the earlier of three years or
when the maximum number of shares have been repurchased. During
the year ended December 31, 2008, we repurchased
4,786,609 shares, which is the cumulative number of shares
repurchased under this program, at a weighted-average price of
$18.80 per share. 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. |
|
|
Item 6.
|
Selected
Financial Data
|
The following table summarizes specified selected financial data
and should be read in conjunction with our related Consolidated
Financial Statements and accompanying Notes to Consolidated
Financial Statements. The amounts shown below have been adjusted
for discontinued operations. We have restated our 2008 and 2007
financial statements to reflect the reclassification in 2008 of
one hospital owned by us during these periods, which is held for
sale, to discontinued operations.
Community
Health Systems, Inc.
Five Year Summary of Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
10,840,098
|
|
|
$
|
7,063,775
|
|
|
$
|
4,180,136
|
|
|
$
|
3,576,117
|
|
|
$
|
3,042,880
|
|
Income from operations
|
|
|
983,574
|
|
|
|
478,726
|
|
|
|
385,057
|
|
|
|
398,463
|
|
|
|
332,767
|
|
Income from continuing operations
|
|
|
206,658
|
|
|
|
57,714
|
|
|
|
177,695
|
|
|
|
188,370
|
|
|
|
158,009
|
|
Net income
|
|
|
218,304
|
|
|
|
30,289
|
|
|
|
168,263
|
|
|
|
167,544
|
|
|
|
151,433
|
|
Earnings per common
share Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.21
|
|
|
$
|
0.62
|
|
|
$
|
1.87
|
|
|
$
|
2.13
|
|
|
$
|
1.65
|
|
Income (Loss) on discontinued operations
|
|
|
0.13
|
|
|
|
(0.30
|
)
|
|
|
(0.10
|
)
|
|
|
(0.24
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2.34
|
|
|
$
|
0.32
|
|
|
$
|
1.77
|
|
|
$
|
1.89
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common
share Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.19
|
|
|
$
|
0.61
|
|
|
$
|
1.85
|
|
|
$
|
2.00
|
|
|
$
|
1.58
|
|
Income (Loss) on discontinued operations
|
|
|
0.13
|
|
|
|
(0.29
|
)
|
|
|
(0.10
|
)
|
|
|
(0.21
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2.32
|
|
|
$
|
0.32
|
|
|
$
|
1.75
|
|
|
$
|
1.79
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
93,371,782
|
|
|
|
93,517,337
|
|
|
|
94,983,646
|
|
|
|
88,601,168
|
|
|
|
95,643,733
|
|
Diluted(2)
|
|
|
94,288,829
|
|
|
|
94,642,294
|
|
|
|
96,232,910
|
|
|
|
98,579,977
|
(4)
|
|
|
105,863,790
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
220,655
|
|
|
$
|
132,874
|
|
|
$
|
40,566
|
|
|
$
|
104,108
|
|
|
$
|
82,498
|
|
Total assets
|
|
|
13,818,254
|
|
|
|
13,493,643
|
|
|
|
4,506,579
|
|
|
|
3,934,218
|
|
|
|
3,632,608
|
|
Long-term obligations
|
|
|
10,611,419
|
|
|
|
10,334,904
|
|
|
|
2,207,623
|
|
|
|
1,932,238
|
|
|
|
2,030,258
|
|
Stockholders equity
|
|
|
1,672,865
|
|
|
|
1,710,804
|
|
|
|
1,723,673
|
|
|
|
1,564,577
|
|
|
|
1,239,991
|
|
40
|
|
|
(1) |
|
Includes the results of operations of the former Triad hospitals
from July 25, 2007, the date of acquisition. |
|
(2) |
|
See Note 12 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 in terms of number of facilities and net operating
revenues. We provide healthcare services through these hospitals
that we own and operate in non-urban and selected urban markets.
We generate revenue primarily by providing a broad range of
general hospital healthcare services to patients in the
communities in which we are located. We currently have 118
general acute care hospitals included in continuing operations.
In addition, we own four home care agencies, located in markets
where we do not operate a hospital and through our wholly-owned
subsidiary, Quorum Health Resources, LLC (QHR), we
provide management and consulting services to non-affiliated
general acute care hospitals located throughout the United
States. We are paid for our services by governmental agencies,
private insurers and directly by the patients we serve.
Since our acquisition of Triad on July 25, 2007 and
throughout most of 2008, we have focused our efforts toward
integrating the former Triad hospitals and realigning our
hospital portfolio. As such we have put less effort toward the
pursuit of additional acquisitions. During this time we have
sold seven of the hospitals acquired from Triad and seven
hospitals owned by us prior to our acquisition of Triad. These
hospitals have been classified in discontinued operations for
the years ended December 31, 2008, 2007 and 2006 to the
extent the hospitals were owned by us during the respective
periods. Two additional hospitals acquired from Triad have been
classified as held for sale and are also included in
discontinued operations during the respective periods of our
ownership.
During 2008, with the exception of acquiring the outstanding
minority interests in two of our hospitals, our only hospital
acquisition was a two hospital system located in Spokane,
Washington, an acquisition we had been pursuing and for which we
were awaiting government approval since 2007.
Currently, the global economies, and in particular the United
States, are experiencing a period of economic uncertainty and
the related financial markets are experiencing a high degree of
volatility. This current financial turmoil is adversely
affecting the banking system and financial markets and resulting
in a tightening in the credit markets, a low level of liquidity
in many financial markets and extreme volatility in fixed
income, credit, currency and equity markets. A risk associated
with this uncertainty is that it could potentially lead to
higher levels of uninsured patients, result in higher levels of
patients covered by lower paying government programs
and/or
result in fiscal uncertainties at both government payors and
private insurers.
As a result of our current levels of cash, available borrowing
capacity, long term outlook on our debt repayments and our
continued projection of our ability to generate cash flows, we
do not anticipate a significant impact on our ability to invest
the necessary capital in our business over the next twelve
months. However, we do believe it to be prudent that we pursue
our strategy of acquiring hospitals very cautiously and
therefore we anticipate only completing two acquisitions in
2009. On February 1, 2009, we completed one of
41
our anticipated acquisitions for 2009 with the acquisition of
Siloam Springs Memorial Hospital (74 licensed beds), located in
Siloam Springs, Arkansas, from the City of Siloam Springs.
In the quarter ended June 30, 2008, we were informed that
we would not receive the full amount of previously estimated
reimbursements under certain Indiana Medicaid programs. The
reductions are due partly to the state not receiving a federal
waiver for one of its programs and partly as a result of changes
to its disproportionate share program which were different from
what had previously been communicated to us. This represents an
approximately $8.0 million reduction in expected payments
from these programs on an annual basis.
Self-pay revenues represented approximately 10.7% of our net
operating revenues in 2008 compared to 10.0% in 2007. The value
of charity care services relative to total net operating
revenues decreased to 3.5% in 2008 from 4.6% in 2007. 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 resulting from 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, 2008, include comparative information for the
operations of the acquired Triad hospitals from July 25,
2007, the date of acquisition. Same-store operating results and
statistical data include the hospitals acquired in the Triad
acquisition as if they were owned by us from January 1 through
July 24, 2007 and all other hospitals as owned throughout
both periods. For the year ended December 31, 2008, we
generated $10.840 billion in net operating revenues, a
growth of 53.5% over the year ended December 31, 2007, and
$218.3 million of net income, an increase of 620.7% over
the year ended December 31, 2007. For the year ended
December 31, 2008, admissions at hospitals owned throughout
both periods increased 2.0% and adjusted admissions increased
2.2%.
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
Effective November 14, 2008, we acquired from Willamette
Community Health Solutions all of its joint venture interest in
MWMC Holdings, LLC, which indirectly owns and operates
McKenzie-Willamette Medical Center of Springfield, Oregon. This
acquisition resulted from a put right held by Willamette
Community Health Solutions in connection with the 2003
transaction establishing the joint venture. The purchase price
for this minority interest was $22.7 million in cash.
Physicians affiliated with Oregon Healthcare Resources, Inc.
continue to own a minority interest in the hospital.
Effective October 1, 2008, we completed the acquisition of
Deaconess Medical Center (388 licensed beds) and Valley Hospital
and Medical Center (123 licensed beds) located in Spokane,
Washington, from Empire Health Services. The total consideration
for these two hospitals was approximately $182.6 million,
of which $149.2 million was paid in cash and
$33.4 million was assumed in liabilities.
Effective June 30, 2008, we acquired the remaining 35%
equity interest in Affinity Health Systems, LLC, which
indirectly owns and operates Trinity Medical Center (560
licensed beds) in Birmingham, Alabama, from Baptist Health
Systems, Inc. of Birmingham, Alabama (Baptist),
giving us 100% ownership of that facility. The purchase price
for this minority interest was $51.5 million in cash and
the cancellation of a promissory note issued by Baptist to
Affinity Health Systems, LLC in the original principal amount of
$32.8 million.
Effective March 1, 2008, we sold Woodland Medical Center
(100 licensed beds) located in Cullman, Alabama; Parkway Medical
Center (108 licensed beds) located in Decatur, Alabama;
Hartselle Medical Center (150 licensed beds) located in
Hartselle, Alabama; Jacksonville Medical Center (89 licensed
beds) located in Jacksonville, Alabama; National Park Medical
Center (166 licensed beds) located in Hot Springs, Arkansas;
St. Marys Regional Medical Center (170 licensed beds)
located in Russellville, Arkansas; Mineral Area Regional Medical
Center (135 licensed beds) located in Farmington, Missouri;
Willamette Valley Medical
42
Center (80 licensed beds) located in McMinnville, Oregon; and
White County Community Hospital (60 licensed beds) located in
Sparta, Tennessee, to Capella Healthcare, Inc., headquartered in
Franklin, Tennessee. The proceeds from this sale were
$315 million in cash.
Effective February 21, 2008, we sold THI Ireland Holdings
Limited, a private limited company incorporated in the Republic
of Ireland, which leased and managed the operations of Beacon
Medical Center (122 licensed beds) located in Dublin, Ireland,
to Beacon Medical Group Limited, headquartered in Dublin,
Ireland. The proceeds from this sale were $1.5 million in
cash.
Effective February 1, 2008, we sold Russell County Medical
Center (78 licensed beds) located in Lebanon, Virginia to
Mountain States Health Alliance, headquartered in Johnson City,
Tennessee. The proceeds from this sale were $48.6 million
in cash.
As of December 31, 2008, we had two hospitals classified as
held for sale and included in discontinued operations.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Medicare
|
|
|
27.5
|
%
|
|
|
29.0
|
%
|
|
|
30.4
|
%
|
Medicaid
|
|
|
9.1
|
%
|
|
|
10.3
|
%
|
|
|
11.1
|
%
|
Managed care and other third party payors
|
|
|
52.7
|
%
|
|
|
50.7
|
%
|
|
|
46.7
|
%
|
Self pay
|
|
|
10.7
|
%
|
|
|
10.0
|
%
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 were insignificant to both net operating revenue and
net income in the years ended December 31, 2008, 2007 and
2006. In the future, we expect the percentage of revenues
received from the Medicare program to increase due to the
general aging of the population.
The payment rates under the Medicare program for inpatient acute
services are based on a prospective payment system, depending
upon the diagnosis of a patients condition. These rates
are indexed for inflation annually, although the increases have
historically been less than actual inflation. Reductions in the
rate of increase in Medicare reimbursement may cause our net
operating revenue growth to decline.
In addition, specified managed care programs, insurance
companies, and employers are actively negotiating the amounts
paid to hospitals. The trend toward increased enrollment in
managed care may adversely effect our net operating revenue
growth.
43
Results
of Operations
Our hospitals offer a variety of services involving a broad
range of inpatient and outpatient medical and surgical services.
These include orthopedics, cardiology, occupational medicine,
diagnostic services, emergency services, rehabilitation
treatment, home care and skilled nursing. The strongest demand
for hospital services generally occurs during January through
April and the weakest demand for these services occurs during
the summer months. Accordingly, eliminating the effect of new
acquisitions, our net operating revenues and earnings are
historically highest during the first quarter and lowest during
the third quarter.
The following tables summarize, for the periods indicated,
selected operating data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Expressed as a percentage
|
|
|
|
of net operating revenues)
|
|
|
Consolidated(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Operating expenses(b)
|
|
|
(86.3
|
)
|
|
|
(88.9
|
)
|
|
|
(86.5
|
)
|
Depreciation and amortization
|
|
|
(4.6
|
)
|
|
|
(4.4
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9.1
|
|
|
|
6.7
|
|
|
|
9.2
|
|
Interest expense, net
|
|
|
(6.0
|
)
|
|
|
(5.1
|
)
|
|
|
(2.2
|
)
|
Loss from early extinguishment of debt
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
Minority interest in earnings
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
3.1
|
|
|
|
1.4
|
|
|
|
6.9
|
|
Provision for income taxes
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1.9
|
|
|
|
0.8
|
|
|
|
4.3
|
|
Income (loss) on discontinued operations, net of tax
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.0
|
|
|
|
0.4
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Expressed in percentages)
|
|
|
Percentage increase from prior year(a):
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
53.5
|
%
|
|
|
69.0
|
%
|
Admissions
|
|
|
44.5
|
|
|
|
49.1
|
|
Adjusted admissions(c)
|
|
|
42.1
|
|
|
|
47.5
|
|
Average length of stay
|
|
|
|
|
|
|
2.4
|
|
Net Income(d)
|
|
|
620.7
|
|
|
|
(82.0
|
)
|
Same-store percentage increase from prior year(a)(e):
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
6.6
|
%
|
|
|
4.2
|
%
|
Admissions
|
|
|
2.0
|
|
|
|
(1.1
|
)
|
Adjusted admissions(c)
|
|
|
2.2
|
|
|
|
0.3
|
|
|
|
|
(a) |
|
Pursuant to SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we have
restated our 2008 and 2007 financial statements to reflect the
reclassification in 2008 of one hospital owned by us during
these periods, which is held for sale, to discontinued
operations. Our statistical results have also been restated to
reflect the aforementioned reclassification. |
44
|
|
|
(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 income (loss) on discontinued operations. |
|
(e) |
|
Includes former Triad hospitals during the comparable periods
and other acquired hospitals to the extent we operated them
during comparable periods in both years. |
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net operating revenues increased by 53.5% to
$10.840 billion in 2008, from $7.064 billion in 2007.
On a combined basis, the hospitals acquired in the Triad
acquisition and growth from those hospitals owned throughout
both periods contributed $3.557 billion of the increase and
$219 million was contributed by other hospitals acquired in
2008. On a same-store basis, including the former Triad
hospitals as if they were owned by us as of January 1,
2007, this represents an increase in same-store net revenue of
6.6%. The increase from hospitals that we owned throughout both
periods was attributable to volume increases, rate increases,
payor mix and the acuity level of services provided.
On a consolidated basis inpatient admissions increased by 44.5%
and adjusted admissions increased by 42.1%. With respect to
consolidated admissions, approximately 50.5% were contributed
from newly acquired hospitals, including those hospitals
acquired from Triad, and 49.5% 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
both years, admissions increased by 2.0% during the year ended
December 31, 2008.
Operating expenses, excluding depreciation and amortization, as
a percentage of net operating revenues, decreased from 88.9% in
2007 to 86.3% in 2008. Salaries and benefits, as a percentage of
net operating revenues, decreased from 40.7% in 2007 to 39.9% in
2008, primarily as a result of efficiency improvements realized
at hospitals owned throughout both periods. These improvements
were partially offset by an increase in the number of employed
physicians as well as an increase in salaries for certain IT
employees who were previously treated as leased employees with
related expense previously being included in other operating
expense. Provision for bad debts, as a percentage of net
revenues, decreased from 12.5% in 2007 to 11.2% in 2008, due
primarily to $70.1 million of additional bad debt expense
recorded as a change in estimate to increase the allowance for
doubtful accounts in 2007. Supplies, as a percentage of net
operating revenues, increased from 13.2% in 2007 to 14.0% in
2008, primarily the result of the acquisition of the former
Triad hospitals whose higher acuity of services resulted in
higher supply costs than our other hospitals taken collectively,
offsetting improvements from greater utilization of and improved
pricing under our purchasing program. Rent and other operating
expenses, as a percentage of net operating revenues, decreased
from 22.5% in 2007 to 21.2% in 2008, primarily as a result of
the hospitals acquired from Triad having lower rent expense as a
percentage of net operating revenues. As part of our acquisition
of Triad, we acquired minority ownership interests in several
hospitals. Our percentage of ownership interests in these joint
ventures provided earnings of 0.4% of net operating revenues
during both of the years ended December 31, 2008 and 2007.
Prior to the Triad acquisition, we did not have any material
minority investments in joint ventures.
Income from continuing operations margin increased from 0.8% in
2007 to 1.9% in 2008. Net income margins increased from 0.4% in
2007 to 2.0% in 2008. The increase in these margins is
reflective of the impact of the net decrease in expenses, as a
percentage of net revenue, discussed above.
Depreciation and amortization increased from 4.4% of net
operating revenues in 2007 to 4.6% of net operating revenues in
2008.
Interest expense, net, increased by $290.1 million from
$361.8 million in 2007, to $651.9 million in 2008. The
primary reason for the increase in interest expense is the
increase in our average outstanding debt during the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, resulting in an additional
$299.2 million of interest expense. Interest expense for
the year ended December 31, 2008 includes
45
a full year of interest expense from borrowings under our New
Credit Facility and the issuance of Notes in connection with the
acquisition of Triad in 2007. Since 2008 was a leap year, one
additional day in the year resulted in $1.8 million of the
increase in interest expense. A decrease in our effective
interest rate during the year ended December 31, 2008, as
compared to the year ended December 31, 2007, resulted in a
decrease in interest expense of $10.9 million.
The net results of the above mentioned changes resulted in
income from continuing operations before income taxes increasing
$236.6 million from $99.5 million in 2007 to
$336.1 million for 2008.
Provision for income taxes from continuing operations increased
from $41.8 million in 2007 to $129.5 million in 2008
due to the increase in income from continuing operations before
income taxes. Our effective tax rates were 38.5% and 41.8% for
the years ended December 31, 2008 and 2007, respectively.
The decrease in our effective tax rate is primarily a result of
a decrease in our effective state tax rate.
Net income was $218.3 million in 2008 compared to
$30.3 million for 2007, an increase of 620.7%. The increase
in net income is reflective of the impact of the net decrease in
expenses discussed above, including the effect of the change in
estimate that increased bad debt expense in 2007.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net operating revenues increased by 69.0% to $7.064 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. On a combined
basis, the hospitals acquired in the Triad acquisition and
growth from those hospitals owned throughout both periods
contributed $2.458 billion of that increase and
$426 million was contributed by other hospitals acquired in
2007. On a same-store basis, including the former Triad
hospitals during the comparable periods, this represents an
increase in same-store net revenue of 4.2%. The increase from
hospitals that we owned throughout both periods was attributable
to volume increases, rate increases, payor mix and the acuity
level of services provided.
On a consolidated basis inpatient admissions increased by 49.1%
and adjusted admissions increased by 47.5%. With respect to
consolidated admissions, approximately 34% were contributed from
newly acquired hospitals, including those hospitals acquired
from Triad, and 66% 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 88.9% in 2007. Salaries and benefits, as a percentage of
net operating revenues, increased from 39.8% in 2006 to 40.7% 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 12.5% 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 13.2% 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 which 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 22.5% 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 ownership interests in several hospitals. These
investments provided earnings of 0.4% of net operating revenues
during the year ended December 31, 2007. Prior to the Triad
acquisition, we did not have any material minority investments
in joint ventures.
46
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.
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 $267.4 million from
$94.4 million in 2006, to $361.8 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 $245.9 million increase
in interest expense. An increase in interest rates due to an
increase in LIBOR during 2007, as compared to 2006, accounted
for $21.5 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 $188.3 million from
$287.8 million in 2006 to $99.5 million for 2007.
Provision for income taxes from continuing operations decreased
from $110.2 million in 2006 to $41.8 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%. The decrease in
net income is reflective of the impact of the net increase in
expenses discussed above, including the effect of the change in
estimate that increased bad debt expense in 2007.
Liquidity
and Capital Resources
2008
Compared to 2007
Net cash provided by operating activities increased
$369.5 million from $687.7 million for the year ended
December 31, 2007 to $1.057 billion for the year ended
December 31, 2008. This increase is due to an increase in
cash flow from net income of $188.0 million, increases in
cash flows from other assets of $29.1 million and a net
increase in non-cash expenses of $350.2 million, of which
$174.1 million was related to depreciation and
$199.8 million related to deferred income taxes. These cash
flow increases were offset by decreases in cash flows from
supplies, prepaid expenses and other current assets of
$2.7 million, accounts receivable of $188.7 million
and accounts payable, accrued liabilities and income taxes of
$6.4 million. The decrease in income taxes was primarily a
result of a prior year prepaid tax position which was used to
offset taxes owed during the current year.
The use of cash in investing activities decreased
$6.833 billion from $7.499 billion in 2007 to
$665.5 million in 2008, as a result of the acquisition
occurring in 2007. The purchase of property and equipment in
2008 increased $169.4 million from $522.8 million in
2007 to $692.2 million in 2008. This increase reflects the
increased number of hospitals owned by us after the acquisition
of Triad. We anticipate being able to fund future routine
capital expenditures with cash flows generated from operations.
In 2008, our net cash provided by financing activities decreased
$7.207 billion from $6.903 billion in 2007 to a net
cash used in financing activities of $304.0 million in
2008, primarily due to borrowings under our New Credit Facility
and issuance of Notes in connection with the acquisition of
Triad in 2007. During the fourth quarter of 2008,
$100 million of delayed draw term loans had been drawn by
us.
In 2008, we used $90.0 million for the repurchase of
4,786,609 shares of our outstanding common stock on the
open market. We believed this to be a prudent use of cash as a
result of the severely depressed stock price under the current
economic conditions. Our New Credit Facility limits our ability
to pay dividends and/
47
or repurchase stock to an amount not to exceed $400 million
in the aggregate (but not in excess $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, 2008, the amount of permitted dividends and/or
stock repurchases permitted under the indenture was
$399 million.
With the exception of some small principal payments of our term
loans under our New Credit Facility, representing less than 1%
of the outstanding balance each year through 2013, the term
loans under our New Credit Facility mature in 2014 and our Notes
are not due until 2015. We believe this five to six year period
before final maturity allows sufficient time for the current
financial environment to improve and permits us to make
favorable changes, including refinancing, to our debt structure.
Furthermore, we do not anticipate the need to use funds
currently available under our New Credit Facility for purposes
of funding our operations, although these funds could be used
for the purpose of making further acquisitions or for
restructuring our existing debt. Furthermore, we anticipate we
will remain in compliance with our debt covenants and thus it
would not be necessary to exercise the cures available to us in
our existing debt agreements.
As described in Notes 6, 9 and 15 of the Notes to
Consolidated Financial Statements, at December 31, 2008, we
had certain cash obligations, which are due as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Total
|
|
|
2009
|
|
|
2010-2012
|
|
|
2013-2014
|
|
|
and thereafter
|
|
|
Long Term Debt
|
|
$
|
6,015,529
|
|
|
$
|
22,730
|
|
|
$
|
148,787
|
|
|
$
|
5,821,263
|
|
|
$
|
22,749
|
|
Senior Notes
|
|
|
2,910,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,910,831
|
|
Interest on Bank Facility and Notes(1)
|
|
|
2,947,815
|
|
|
|
487,993
|
|
|
|
1,454,945
|
|
|
|
864,943
|
|
|
|
139,934
|
|
Capital Leases, including interest
|
|
|
58,972
|
|
|
|
10,589
|
|
|
|
16,553
|
|
|
|
5,865
|
|
|
|
25,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
11,933,147
|
|
|
|
521,312
|
|
|
|
1,620,285
|
|
|
|
6,692,071
|
|
|
|
3,099,479
|
|
Operating Leases
|
|
|
842,523
|
|
|
|
159,954
|
|
|
|
339,486
|
|
|
|
137,514
|
|
|
|
205,569
|
|
Replacement Facilities and Other Capital Committments(2)
|
|
|
527,320
|
|
|
|
110,683
|
|
|
|
383,615
|
|
|
|
18,022
|
|
|
|
15,000
|
|
Open Purchase Orders(3)
|
|
|
93,257
|
|
|
|
93,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Interpretation No. 48 obligations, including
interest and penalties
|
|
|
18,211
|
|
|
|
6,454
|
|
|
|
11,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,414,458
|
|
|
$
|
891,660
|
|
|
$
|
2,355,143
|
|
|
$
|
6,847,607
|
|
|
$
|
3,320,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimate of interest payments assumes the interest rates at
December 31, 2008 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, 2008
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, 2008 and where certificate of need approval
has been obtained, we have commitments to build the following
replacement facilities and the following capital commitments. As
required by an amendment to our lease agreement entered into in
2005, we agreed to build a replacement hospital at our Barstow,
California location by November 2012. As part of an acquisition
in 2007, we agreed to build a replacement hospital in
Valparaiso, Indiana by April 2011. Construction costs, including
equipment costs, for these two replacement facilities are
currently estimated to be approximately $269.0 million of
which approximately $8.5 million has been incurred to date.
In addition as a part of an acquisition in 2004, we committed to
spend $90.0 million in capital expenditures within eight
years in Phoenixville, Pennsylvania, and as part of an
acquisition in 2005, we committed to spend approximately
$64 million within seven years and an additional
$15 million with no set completion |
48
|
|
|
|
|
date related to capital expenditures at Chestnut Hill Hospital
in Philadelphia, Pennsylvania. As of December 31, 2008, we
have incurred to date approximately $53.6 million and
$17.0 million for the capital expenditures at Phoenixville,
Pennsylvania and Chestnut Hill, Pennsylvania, respectively. As
part of an acquisition in 2008, we committed to spend
$100.0 million within five years related to capital
expenditures at Deaconess Hospital and Valley Hospital and
Medical Center, both in Spokane, Washington. As of
December 31, 2008, we have incurred to date approximately
$11.3 million related to this commitment. |
|
(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, 2008, we
had issued letters of credit primarily in support of potential
insurance related claims and specified outstanding bonds of
approximately $93.6 million.
Our debt as a percentage of total capitalization remained
consistent at 84% for both December 31, 2008 and 2007.
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.
Capital
Expenditures
Cash expenditures for purchases of facilities were
$161.9 million in 2008, $7.018 billion in 2007 and
$384.6 million in 2006. Our expenditures in 2008 included
$149.1 million for the purchase of two hospitals and
$12.8 million for the purchase of physician practices and a
home care agency. Our expenditures in 2007 included
$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 care 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.
Excluding the cost to construct replacement hospitals and a de
novo hospital, our cash expenditures for routine capital for
2008 totaled $569.4 million compared to $344.1 million
in 2007, and $207.7 million in 2006. Costs to construct
replacement hospitals and a de novo hospital totaled
$122.8 million in 2008, $178.7 million in 2007 and
$16.8 million in 2006.
Pursuant to hospital purchase agreements in effect as of
December 31, 2008, as part of an acquisition in 2007, we
agreed to build a replacement hospital in 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
facility at Barstow Community Hospital in Barstow, California.
Estimated construction costs, including equipment costs, are
approximately $269 million for these two replacement
facilities. We expect total capital expenditures of
approximately $600 to $650 million in 2009 (which includes
amounts which are required to be expended pursuant to the terms
of hospital purchase agreements), including approximately $593
to $640 million for
49
renovation and equipment cost and approximately $7 to
$10 million for construction and equipment cost of the
replacement hospitals.
Capital
Resources
Net working capital was $1.071 billion at December 31,
2008 compared to $1.105 billion at December 31, 2007,
a decrease of $34 million. This decrease in working capital
is due to increases in accounts payable of $16.4 million
and accrued liabilities of $21.6 million, decreases in
other current assets of approximately $100.1 million and
deferred income taxes of $21.9 million and the net
reduction in all other working capital assets and liabilities of
$15.1 million. This decrease in working capital was offset
by an increase in working capital attributable to the
acquisition of Deaconess Medical Center and Valley Hospital and
Medical Center, which provided additional working capital of
$17.7 million at December 31, 2008. In addition, an
increase in cash of $85.3 million and accounts receivable
of $38.1 million also offset the decrease in working
capital.
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 nine years. During the fourth quarter of
2008, $100 million of the delayed draw term loan had been
drawn down by us reducing the delayed draw term loan
availability to $200 million at December 31, 2008. In
January 2009, we drew down the remaining $200 million of the
delayed draw term loan. The revolving credit facility also
includes a subfacility for letters of credit and a swingline
subfacility. The 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. 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 bear interest on the
outstanding unpaid principal amount at a rate equal to an
applicable percentage plus, at our option, either (a) an
Alternate Base Rate (as defined) determined by reference to the
greater of (1) the Prime Rate (as defined) announced by
Credit Suisse or (2) the Federal Funds Effective Rate (as
defined) plus one-half of 1.0%, or (b) a reserve adjusted
London interbank offered rate for dollars (Eurodollar rate) (as
defined). The applicable percentage for term loans is 1.25% for
Alternate Base Rate loans and 2.25% for Eurodollar rate loans.
The applicable percentage for revolving loans was initially
1.25% for Alternate Base Rate revolving loans and 2.25% for
Eurodollar revolving loans, in each case subject to reduction
based on our leverage ratio. Loans under the swingline
subfacility bear interest at the rate applicable to Alternate
Base Rate loans under the revolving credit facility.
50
We have agreed to pay letter of credit fees equal to the
applicable percentage then in effect with respect to Eurodollar
rate loans under the revolving credit facility times the maximum
aggregate amount available to be drawn under all letters of
credit outstanding under the subfacility for letters of credit.
The issuer of any letter of credit issued under the subfacility
for letters of credit will also receive a customary fronting fee
and other customary processing charges. We were initially
obligated to pay commitment fees of 0.50% per annum (subject to
reduction based upon on our leverage ratio), on the unused
portion of the revolving credit facility. For purposes of this
calculation, swingline loans are not treated as usage of the
revolving credit facility. With respect to the delayed draw term
loan facility, we were also obligated to pay commitment fees of
0.50% per annum for the first nine months after the close of the
New Credit Facility and 0.75% per annum for the next three
months thereafter. Thereafter, we are obligated to pay a
commitment fee of 1.0% per annum. In each case, the commitment
fee is based 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 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 New Credit Facility include, but are
not limited to, (1) our failure to pay principal, interest,
fees or other amounts under the credit agreement when due
(taking into account any applicable grace period), (2) any
representation or warranty proving to have been materially
incorrect when made, (3) covenant defaults subject, with
respect to certain covenants, to a grace period,
(4) bankruptcy events, (5) a cross default to certain
other debt, (6) certain undischarged judgments (not paid
within an applicable grace period), (7) a change of
control, (8) certain ERISA-related defaults and
(9) the invalidity or impairment of specified security
interests, guarantees or subordination provisions in favor of
the administrative agent or lenders under the New Credit
Facility.
As of December 31, 2008, there was approximately
$950 million of available borrowing capacity under our New
Credit Facility, of which $93.6 million was set aside for
outstanding letters of credit and $200 million was
available under the delayed draw term loan facility (which was
borrowed in January 2009). We believe that these funds, along
with internally generated cash and continued access to the bank
credit and capital markets, will be sufficient to finance future
acquisitions, capital expenditures and working capital
requirements through the next 12 months and into the
foreseeable future.
During the year ended December 31, 2008, we repurchased on
the open market and cancelled $110.5 million of principal
amount of the Notes. This resulted in a net gain from early
extinguishment of debt of $2.5 million with an after-tax
impact of $1.6 million.
51
As of December 31, 2008, 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
|
|
|
Fair Value
|
|
Swap #
|
|
(In 000s)
|
|
|
Rate
|
|
|
Date
|
|
|
(In 000s)
|
|
|
1
|
|
$
|
100,000
|
|
|
|
3.9350
|
%
|
|
|
June 6, 2009
|
|
|
$
|
(975
|
)
|
2
|
|
|
100,000
|
|
|
|
4.3375
|
%
|
|
|
November 30, 2009
|
|
|
|
(2,147
|
)
|
3
|
|
|
200,000
|
|
|
|
2.8800
|
%
|
|
|
September 17, 2010
|
|
|
|
(3,846
|
)
|
4
|
|
|
100,000
|
|
|
|
4.9360
|
%
|
|
|
October 4, 2010
|
|
|
|
(5,632
|
)
|
5
|
|
|
100,000
|
|
|
|
4.7090
|
%
|
|
|
January 24, 2011
|
|
|
|
(6,327
|
)
|
6
|
|
|
300,000
|
|
|
|
5.1140
|
%
|
|
|
August 8, 2011
|
|
|
|
(25,737
|
)
|
7
|
|
|
100,000
|
|
|
|
4.7185
|
%
|
|
|
August 19, 2011
|
|
|
|
(7,645
|
)
|
8
|
|
|
100,000
|
|
|
|
4.7040
|
%
|
|
|
August 19, 2011
|
|
|
|
(7,609
|
)
|
9
|
|
|
100,000
|
|
|
|
4.6250
|
%
|
|
|
August 19, 2011
|
|
|
|
(7,408
|
)
|
10
|
|
|
200,000
|
|
|
|
4.9300
|
%
|
|
|
August 30, 2011
|
|
|
|
(16,510
|
)
|
11
|
|
|
200,000
|
|
|
|
3.0920
|
%
|
|
|
September 18, 2011
|
|
|
|
(7,118
|
)
|
12
|
|
|
100,000
|
|
|
|
3.0230
|
%
|
|
|
October 23, 2011
|
|
|
|
(3,432
|
)
|
13
|
|
|
200,000
|
|
|
|
4.4815
|
%
|
|
|
October 26, 2011
|
|
|
|
(14,788
|
)
|
14
|
|
|
200,000
|
|
|
|
4.0840
|
%
|
|
|
December 3, 2011
|
|
|
|
(12,949
|
)
|
15
|
|
|
100,000
|
|
|
|
3.8470
|
%
|
|
|
January 4, 2012
|
|
|
|
(5,908
|
)
|
16
|
|
|
100,000
|
|
|
|
3.8510
|
%
|
|
|
January 4, 2012
|
|
|
|
(5,919
|
)
|
17
|
|
|
100,000
|
|
|
|
3.8560
|
%
|
|
|
January 4, 2012
|
|
|
|
(5,934
|
)
|
18
|
|
|
200,000
|
|
|
|
3.7260
|
%
|
|
|
January 8, 2012
|
|
|
|
(11,150
|
)
|
19
|
|
|
200,000
|
|
|
|
3.5065
|
%
|
|
|
January 16, 2012
|
|
|
|
(9,924
|
)
|
20
|
|
|
250,000
|
|
|
|
5.0185
|
%
|
|
|
May 30, 2012
|
|
|
|
(25,375
|
)
|
21
|
|
|
150,000
|
|
|
|
5.0250
|
%
|
|
|
May 30, 2012
|
|
|
|
(15,337
|
)
|
22
|
|
|
200,000
|
|
|
|
4.6845
|
%
|
|
|
September 11, 2012
|
|
|
|
(19,262
|
)
|
23
|
|
|
100,000
|
|
|
|
3.3520
|
%
|
|
|
October 23, 2012
|
|
|
|
(5,080
|
)
|
24
|
|
|
125,000
|
|
|
|
4.3745
|
%
|
|
|
November 23, 2012
|
|
|
|
(10,932
|
)
|
25
|
|
|
75,000
|
|
|
|
4.3800
|
%
|
|
|
November 23, 2012
|
|
|
|
(6,668
|
)
|
26
|
|
|
150,000
|
|
|
|
5.0200
|
%
|
|
|
November 30, 2012
|
|
|
|
(16,905
|
)
|
27
|
|
|
100,000
|
|
|
|
5.0230
|
%
|
|
|
May 30, 2013
|
|
|
|
(12,247
|
)
|
28
|
|
|
300,000
|
|
|
|
5.2420
|
%
|
|
|
August 6, 2013
|
|
|
|
(40,561
|
)
|
29
|
|
|
100,000
|
|
|
|
5.0380
|
%
|
|
|
August 30, 2013
|
|
|
|
(12,762
|
)
|
30
|
|
|
50,000
|
|
|
|
3.5860
|
%
|
|
|
October 23, 2013
|
|
|
|
(3,297
|
)
|
31
|
|
|
50,000
|
|
|
|
3.5240
|
%
|
|
|
October 23, 2013
|
|
|
|
(3,160
|
)
|
32
|
|
|
100,000
|
|
|
|
5.0500
|
%
|
|
|
November 30, 2013
|
|
|
|
(13,262
|
)
|
33
|
|
|
200,000
|
|
|
|
2.0700
|
%
|
|
|
December 19, 2013
|
|
|
|
161
|
|
34
|
|
|
100,000
|
|
|
|
5.2310
|
%
|
|
|
July 25, 2014
|
|
|
|
(15,376
|
)
|
35
|
|
|
100,000
|
|
|
|
5.2310
|
%
|
|
|
July 25, 2014
|
|
|
|
(15,376
|
)
|
36
|
|
|
200,000
|
|
|
|
5.1600
|
%
|
|
|
July 25, 2014
|
|
|
|
(30,033
|
)
|
37
|
|
|
75,000
|
|
|
|
5.0405
|
%
|
|
|
July 25, 2014
|
|
|
|
(10,809
|
)
|
38
|
|
|
125,000
|
|
|
|
5.0215
|
%
|
|
|
July 25, 2014
|
|
|
|
(17,895
|
)
|
52
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
$950 million (consisting of a $750 million revolving
credit facility and $200 million of our 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.
On December 22, 2008, we filed a universal automatic shelf
registration statement on
Form S-3ASR
that will permit us, from time to time, in one or more public
offerings, to offer debt securities, common stock, preferred
stock, warrants, depositary shares, or any combination of such
securities. The shelf registration statement will also permit
our subsidiary, CHS, to offer debt securities that would be
guaranteed by us, from time to time in one or more public
offerings. The terms of any such future offerings would be
established at the time of the offering.
Off-balance
sheet arrangements
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, 2008 and 2007, included
$282.0 million and $275.6 million, respectively, of
net operating revenue and $18.4 million and
$22.7 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 $16.7 million and
$15.2 million for the years ended December 31, 2008
and 2007, 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.
53
In the past, we have utilized operating leases as a financing
tool for obtaining the operations of specified hospitals without
acquiring, through ownership, the related assets of the hospital
and without a significant outlay of cash at the front end of the
lease. We utilize the same operating strategies to improve
operations at those hospitals held under operating leases as we
do at those hospitals that we own. We have not entered into any
operating leases for hospital operations since December 2000.
As described more fully in Note 15 of the Notes to
Consolidated Financial Statements, at December 31, 2008, we
have certain cash obligations for replacement facilities and
other construction commitments of $527.3 million and open
purchase orders for $93.3 million.
Joint
Ventures
We have sold minority interests in certain of our subsidiaries
or acquired subsidiaries with existing minority interest
ownership positions. Triad implemented this strategy to a
greater extent than we did, and in conjunction with the
acquisition of Triad, we acquired 19 hospitals containing
minority ownership interests ranging from less than 1% to 35%.
As of December 31, 2008, 22 of our hospitals were owned by
physician joint ventures, of which one also had a non-profit
entity as a partner. In addition, five other hospitals had
non-profit entities as partners. During 2008, we sold minority
interests in six of our hospitals for total consideration of
$80.0 million. These minority interest positions represent
ownership positions in the hospitals ranging from less than 1%
to 40%. Effective June 30, 2008, we acquired the remaining
35% equity interest in Affinity Health Systems, LLC which
indirectly owns and operates Trinity Medical Center (560
licensed beds) in Birmingham, Alabama, from Baptist, giving us
100% ownership of that facility. The purchase price to acquire
this interest was $51.5 million in cash and the cancellation of
a promissory note issued by Baptist to Affinity Health Systems,
LLC in the original principal amount of $32.8 million. Effective
November 14, 2008, we acquired from Willamette Community
Health Solutions all of its joint venture interest in MWMC
Holdings, LLC, which indirectly owns and operates
McKenzie-Willamette Medical Center of Springfield, Oregon. This
acquisition resulted from a put right held by Willamette
Community Health Solutions in connection with the 2003
transaction establishing the joint venture. The purchase price
to acquire this interest was $22.7 million in cash.
Physicians affiliated with Oregon Health Resources, Inc.
continue to own a minority interest in the hospital. Minority
interests in equity of consolidated subsidiaries was
$325.2 million and $366.1 million as of
December 31, 2008 and December 31, 2007, respectively,
and the amount of minority interest in earnings was
$40.1 million and $15.2 million for the years ended
December 31, 2008 and 2007, 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.
54
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.
Third
Party Reimbursement
Net operating revenues include amounts estimated by management
to be reimbursable by Medicare and Medicaid under prospective
payment systems and provisions of cost-reimbursement and other
payment methods. In addition, we are reimbursed by
non-governmental payors using a variety of payment
methodologies. Amounts we receive for treatment of patients
covered by these programs are generally less than the standard
billing rates. Contractual allowances are automatically
calculated and recorded through our internally developed
automated contractual allowance system. Within the
automated system, excluding the former Triad hospitals, 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, regardless of payor or
method of calculation, contractual allowances are determined
through a process wherein contractual allowance adjustments are
reviewed and compared to actual payment experience. All hospital
contractual allowance calculations are subjected to monthly
review by management to ensure reasonableness and accuracy. We
account for the differences between the estimated program
reimbursement rates and the standard billing rates as
contractual allowance adjustments, which we deduct from gross
revenues to arrive at net operating revenues. The process of
estimating contractual allowances requires us to estimate the
amount expected to be received based on payor contract
provisions. The key assumption in this process is the estimated
contractual reimbursement percentage, which is based on payor
classification and historical paid claims data. Due to the
complexities involved in these estimates, actual payments we
receive could be different from the amounts we estimate and
record. If the actual contractual reimbursement percentage under
government programs and managed care contracts differed by 1%
from our estimated reimbursement percentage, net income for the
year ended December 31, 2008 would have changed by
approximately $24.1 million, and net accounts receivable
would have changed by $39.1 million. Final settlements
under some of these programs are subject to adjustment based on
administrative review and audit by third parties. We account for
adjustments to previous program reimbursement estimates as
contractual allowance adjustments and report them in the periods
that such adjustments become known. Contractual allowance
adjustments related to final settlements were insignificant to
both net operating revenue and net income in each of the years
ended December 31, 2008, 2007 and 2006.
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.
55
We estimate the allowance for doubtful accounts by reserving a
percentage of all self-pay accounts receivable without regard to
aging category, based on collection history, adjusted for
expected recoveries and, if present, anticipated changes in
trends. For all other payor categories we reserve 100% of all
accounts aging over 365 days from the date of discharge.
The percentage used to reserve for all self-pay accounts is
based on our collection history. We believe that we collect
substantially all of our third-party insured receivables which
include receivables from governmental agencies. During the
quarter ended December 31, 2007, in conjunction with our
ongoing process of monitoring the net realizable value of our
accounts receivable, as well as integrating the methodologies,
data and assumptions used by the former Triad management, we
performed various analyses including updating a review of
historical cash collections. As a result of these analyses, we
noted deterioration in certain key cash collection indicators.
The primary key cash collection indicator that experienced
deterioration during the fourth quarter of 2007 was cash
receipts as a percentage of net revenue less bad debts.
This indicator decreased to the lowest percentage experienced by
us since the quarter ended September 30, 2006. Further
analysis indicated the primary causes of this deterioration were
a continuing increase in the volume of indigent non-resident
aliens, an increase in the number of patients qualifying for
charity care and a greater than expected impact of the removal
of participants from TennCare (Tennessees state provided
Medicaid program) which increased the number of uninsured
patients with limited financial means receiving care at our
eight Tennessee hospitals. During the fourth quarter of 2007,
due to the deteriorating cash collections and the desire to
standardize processes with those of the former Triad hospitals,
we undertook a detailed programming effort to develop data
around the deteriorating classes of accounts receivable needed
to update its historical cash collections percentages as well as
enable it to estimate how much of certain self-pay categories
ultimately convert to Medicaid, charity and indigent programs.
Triads processes for establishing contractual allowances
and allowances for bad debts related to accounts classified as
Medicaid pending, charity pending and
indigent non-resident alien included inputs and assumptions
based on the historical percentage of these accounts which
ultimately qualified for specific government programs or for
write-off as charity care.
We used these new inputs and assumptions regarding
Medicaid pending, charity pending, and
indigent non-resident alien in conjunction with the new data
developed in the fourth quarter of 2007 as described above to
evaluate the reliability of accounts receivable and to revise
our estimate of contractual allowances for estimated amounts of
self-pay accounts receivable that will ultimately qualify as
charity care, or that will ultimately qualify for Medicaid,
indigent care or other specific governmental reimbursement,
resulting in an increase to our contractual reserves of
$96.3 million as of December 31, 2007. Previous
estimates of uncollectible amounts for such receivables were
included in our bad debt reserves for each period.
Furthermore, in updating the historical collection statistics of
all our hospitals, we also took into account a detailed study of
the historical collection information for the hospitals acquired
from Triad. The updated collection statistics of the hospitals
acquired from Triad also showed subsequent deterioration in cash
collections similar to those experienced by the other hospitals
that we own. Therefore, we also standardized the processes for
calculating the allowance for doubtful accounts of the hospitals
acquired from Triad to that of our other hospitals which, along
with the allowance percentages determined from the new
collection data, resulted in the recording of an additional
$70.1 million of allowance for bad debts as of
December 31, 2007.
The resulting impact of the above, net of taxes, for the year
ended December 31, 2007 was a decrease to income from
continuing operations of $105.4 million. We believe this
lower collectability was primarily the result of an increase in
the number of patients qualifying for charity care, reduced
enrollment in certain state Medicaid programs and an increase in
the number of indigent non-resident aliens. Collections are
impacted by the economic ability of patients to pay and the
effectiveness of our collection efforts. Significant changes in
payor mix, business office operations, economic conditions or
trends in federal and state governmental healthcare coverage
could affect our collection of accounts receivable. The process
of estimating the allowance for doubtful accounts requires us to
estimate the collectability of self-pay accounts receivable,
which is primarily based on our collection history, adjusted for
expected recoveries and, if available, anticipated changes in
collection trends. Significant change in payor mix, business
office operations, economic conditions, trends in federal and
state governmental healthcare coverage or other third party
payors could affect our estimates of accounts receivable
collectability. If the actual collection percentage differed by
1% from our
56
estimated collection percentage as a result of a change in
expected recoveries, net income for the year ended
December 31, 2008 would have changed by $11.5 million,
and net accounts receivable would have changed by
$18.7 million. We also continually review our overall
reserve adequacy by monitoring historical cash collections as a
percentage of trailing net revenue less provision for bad debts,
as well as by analyzing current period net revenue and
admissions by payor classification, aged accounts receivable by
payor, days revenue outstanding, and the impact of recent
acquisitions and dispositions.
Our policy is to write-off gross accounts receivable if the
balance is under $10.00 or when such amounts are placed with
outside collection agencies. We believe this policy accurately
reflects our ongoing collection efforts and is consistent with
industry practices. We had approximately $1.5 billion at
December 31, 2008 and 2007, being pursued by various
outside collection agencies. We expect to collect less than 3%,
net of estimated collection fees, of the amounts being pursued
by outside collection agencies. As these amounts have been
written-off, they are not included in our gross accounts
receivable or our allowance for doubtful accounts. Collections
on amounts previously written-off are recognized as a reduction
to bad debt expense when received. However, we take into
consideration estimated collections of these future amounts
written-off in evaluating the reasonableness of our allowance
for doubtful accounts.
All of the following information is derived from our hospitals,
excluding clinics, unless otherwise noted.
Patient accounts receivable from our hospitals represent
approximately 95% of our total consolidated accounts receivable.
Days revenue outstanding was 53 days at December 31,
2008 and 54 days at December 31, 2007. Our target
range for days revenue outstanding is from 52 to 58 days.
Total gross accounts receivable (prior to allowance for
contractual adjustments and doubtful accounts) was approximately
$5.458 billion as of December 31, 2008 and
approximately $4.692 billion as of December 31, 2007.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
0 60 days
|
|
|
59.8
|
%
|
|
|
61.2
|
%
|
60 150 days
|
|
|
19.0
|
%
|
|
|
18.8
|
%
|
151 360 days
|
|
|
16.2
|
%
|
|
|
15.3
|
%
|
Over 360 days
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
Insured receivables
|
|
|
67.0
|
%
|
|
|
66.7
|
%
|
Self-pay receivables
|
|
|
33.0
|
%
|
|
|
33.3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
For the hospital segment, the combined total of the allowance
for doubtful accounts and related allowances for other self-pay
discounts and contractuals, as a percentage of gross self-pay
receivables, was approximately 80% at December 31, 2008 and
79% at December 31, 2007. If the receivables that have been
written-off, but where collections are still being pursued by
outside collection agencies, were included in both the
allowances and gross self-pay receivables specified above, the
percentage of combined allowances to total self-pay receivables
would have been approximately 88% at December 31, 2008 and
89% at December 31, 2007.
57
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 142 requires goodwill to be evaluated for impairment
at the same time every year and when an event occurs or
circumstances change that, more likely than not, reduce the fair
value of the reporting unit below its carrying value.
SFAS No. 142 requires a two-step method for
determining goodwill impairment. Step one is to compare the fair
value of the reporting unit with the units carrying
amount, including goodwill. If this test indicates the fair
value is less than the carrying value, then step two is required
to compare the implied fair value of the reporting units
goodwill with the carrying value of the reporting units
goodwill. We have selected September 30th as our
annual testing date.
We estimate the fair value of the related reporting units using
both a discounted cash flow model as well as an 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. Historically our valuation models did
not fully capture the fair value of our business as a whole, as
they did not consider the increased consideration a potential
acquirer would be required to pay, in the form of a control
premium, in order to gain sufficient ownership to set policies,
direct operations and control management decisions. However,
because our models have indicated value significantly in excess
of the carrying amount of assets in our reporting units, the
additional value from a control premium was not a determining
factor in the outcome of step one of our impairment assessment.
As indicated above, in addition to the annual impairment
analysis, we are required to evaluate goodwill for impairment
whenever an event occurs or circumstances change such that it is
more likely than not that an impairment may exist. In light of
this requirement, we have considered whether the decline in our
market capitalization between September 30, 2008 and
December 31, 2008 has, more likely than not, resulted in
the existence of an impairment and have concluded that the
decline in our market capitalization did not, more likely than
not, result in the existence of an impairment. In making this
conclusion, we gave consideration to the valuation of hospitals
in which we sold equity interests during periods subsequent to
September 30, 2008, currently proposed hospital equity sale
transactions, our proposed purchase price for a hospital which
we anticipate closing on the acquisition in the first half of
2009, the increase in our stock price since December 31,
2008 and our average stock price over the trailing 3 month,
6 month and 1 year periods. We also considered the
fact that the decline in our stock price has not been related to
a decline in our operating performance and that any near term
credit tightening within the financial markets could be overcome
by us through the substantial amount of cash flows being
generated by us, as well as, the borrowing capacity available to
us through our existing credit facilities. The current turmoil
in the financial markets and weakness in macroeconomic
conditions globally continue to be challenging and we cannot be
certain of the duration of these conditions and their potential
impact on our stock price performance. If a further decline in
our market capitalization and other factors resulted in the
decline in our fair value, it is reasonably likely that a
goodwill impairment assessment prior to the next annual review,
in the fourth quarter of 2009, would be necessary. If such an
assessment is required, an impairment of goodwill may be
recognized. A non-cash goodwill impairment charge would have the
effect of decreasing our earnings or increasing our losses in
the period the impairment is recognized. The amount of such
effect on earnings and losses is dependent on the size of the
impairment charge. Such a change, however, would be a non-cash
charge and therefore would not impact our compliance with
covenants contained in our New Credit Facility.
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
58
their estimated fair value based on a quoted market price, if
available, or an estimate based on valuation techniques
available in the circumstances.
Professional
Liability Claims
As part of our business of owning and operating hospitals, we
are subject to legal actions alleging liability on our part. We
accrue for losses resulting from such liability claims, as well
as loss adjustment expenses that are out-of-pocket and directly
related to such liability claims. These direct out-of-pocket
expenses include fees of outside counsel and experts. We do not
accrue for costs that are part of our corporate overhead, such
as the costs of our in-house legal and risk management
departments. The losses resulting from professional liability
claims primarily consist of estimates for known claims, as well
as estimates for incurred but not reported claims. The estimates
are based on specific claim facts, our historical claim
reporting and payment patterns, the nature and level of our
hospital operations, and actuarially determined projections. The
actuarially determined projections are based on our actual claim
data, including historic reporting and payment patterns which
have been gathered over an approximate
20-year
period. As discussed below, since we purchase excess insurance
on a claims-made basis that transfers risk to third party
insurers, the liability we accrue does not include an amount for
the losses covered by our excess insurance. Since we believe
that the amount and timing of our future claims payments are
reliably determinable, we discount the amount we accrue for
losses resulting from professional liability claims using the
risk-free interest rate corresponding to the timing of our
expected payments.
The net present value of the projected payments was discounted
using a weighted-average risk-free rate of 2.6%, 4.1% and 4.6%
in 2008, 2007 and 2006, respectively. This liability is adjusted
for new claims information in the period such information
becomes known to us. Professional malpractice expense includes
the losses resulting from professional liability claims and loss
adjustment expense, as well as paid excess insurance premiums,
and is presented within other operating expenses in the
accompanying consolidated statements of income.
Our processes for obtaining and analyzing claims and incident
data are standardized across all of our hospitals and have been
consistent for many years. We monitor the outcomes of the
medical care services that we provide and for each reported
claim, we obtain various information concerning the facts and
circumstances related to that claim. In addition, we routinely
monitor current key statistics and volume indicators in our
assessment of utilizing historical trends. The average lag
period between claim occurrence and payment of a final
settlement is between 4 and 5 years, although the facts and
circumstances of individual claims could result in the timing of
such payments being different from this average. Since claims
are paid promptly after settlement with the claimant is reached,
settled claims represent less than 1.0% of the total liability
at the end of any period.
For purposes of estimating our individual claim accruals, we
utilize specific claim information, including the nature of the
claim, the expected claim amount, the year in which the claim
occurred and the laws of the jurisdiction in which the claim
occurred. Once the case accruals for known claims are
determined, information is stratified by loss layers and
retentions, accident years, reported years, geography, and
claims relating to the acquired Triad hospitals versus claims
relating to our other hospitals. Several actuarial methods are
used against this data to produce estimates of ultimate paid
losses and reserves for incurred but not reported claims. Each
of these methods uses our company-specific historical claims
data and other information. This company-specific data includes
information regarding our business, including historical paid
losses and loss adjustment expenses, historical and current case
loss reserves, actual and projected hospital statistical data, a
variety of hospital census information, employed physician
information, professional liability retentions for each policy
year, geographic information and other data.
Based on these analyses we determine our estimate of the
professional liability claims. The determination of
managements estimate, including the preparation of the
reserve analysis that supports such estimate, involves
subjective judgment of the management. Changes in reserving data
or the trends and factors that influence reserving data may
signal fundamental shifts in our future claim development
patterns or may simply reflect single-period anomalies. Even if
a change reflects a fundamental shift, the full extent of the
change
59
may not become evident until years later. Moreover, since our
methods and models use different types of data and we select our
liability from the results of all of these methods, we typically
cannot quantify the precise impact of such factors on our
estimates of the liability. Due to our standardized and
consistent processes for handling claims and the long history
and depth of our company-specific data, our methodologies have
produced reliably determinable estimates of ultimate paid losses.
Although we have not historically maintained and presented our
claims data in this manner, we are providing the following table
to present the amounts of our accrual for professional liability
claims and approximate amounts of our activity for each of the
respective years listed (excludes premiums for excess insurance
coverage) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Accrual for professional liability claims, January 1
|
|
$
|
300,184
|
|
|
$
|
104,161
|
|
|
$
|
88,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability acquired through acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability acquired
|
|
|
|
|
|
|
197,453
|
|
|
|
|
|
Discount of liability acquired
|
|
|
|
|
|
|
(26,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted liability acquired
|
|
|
|
|
|
|
171,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense (income) related to(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
110,010
|
|
|
|
73,039
|
|
|
|
43,441
|
|
Prior accident years
|
|
|
(15,826
|
)
|
|
|
7,158
|
|
|
|
3,146
|
|
Expense (income) from discounting
|
|
|
11,499
|
|
|
|
(1,040
|
)
|
|
|
3,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred loss and loss expense
|
|
|
105,683
|
|
|
|
79,157
|
|
|
|
50,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid claims and expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
(688
|
)
|
|
|
(701
|
)
|
|
|
(574
|
)
|
Prior accident years
|
|
|
(54,600
|
)
|
|
|
(53,577
|
)
|
|
|
(33,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid claims and expenses
|
|
|
(55,288
|
)
|
|
|
(54,278
|
)
|
|
|
(34,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual for professional liability claims, December 31
|
|
$
|
350,579
|
|
|
$
|
300,184
|
|
|
$
|
104,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total expense, including premiums for insured coverage, was
$65.7 million in 2006, $99.7 million in 2007 and
$130.4 million in 2008. |
The increase in current accident year claims expense in each
respective year from 2006 to 2008 is consistent with the
increase in net operating revenues during the respective
periods. Income/expense related to prior accident years reflects
changes in estimates resulting from the filing of claims for
prior year incidents, claim settlements, updates from
litigation, and our ongoing investigation of open claims.
Expense/income from discounting reflects the changes in the
weighted-average risk-free interest rate used and timing of
estimated payments for discounting in each respective year.
We are primarily self-insured for these claims; however, we
obtain excess insurance that transfers the risk of loss to a
third-party insurer for claims in excess of our self-insured
retentions. Our excess insurance is underwritten on a
claims-made basis. For claims reported prior to June 1,
2002, substantially all of our professional and general
liability risks were subject to a $0.5 million per
occurrence self-insured retention and for claims reported from
June 1, 2002 through June 1, 2003, these self-insured
retentions were $2.0 million per occurrence. Substantially
all claims reported after June 1, 2003 and before
June 1, 2005 are self-insured up to $4 million per
claim. Substantially all claims reported on or after
June 1, 2005 are self-insured up to $5 million per
claim. Management on occasion has selectively increased the
insured risk at certain hospitals based upon insurance pricing
and other factors and may continue that practice in the future.
Excess insurance for all hospitals has been purchased through
commercial insurance companies and generally covers us for
liabilities in excess of the self-insured retentions and up to
$100 million per occurrence for claims reported on
60
or after June 1, 2003 and up to $150 million per
occurrence for claims occurred and reported after
January 1, 2008.
Effective January 1, 2008, the former Triad Hospitals are
insured on a claims-made basis as described above and through
commercial insurance companies as described above for
substantially all claims occurring on or after January 1,
2002 and reported on or after January 1, 2008.
Substantially all losses for the former Triad hospitals in
periods prior to May 1999 were insured through a wholly-owned
insurance subsidiary of HCA, 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 through December 31,
2006, the former Triad hospitals obtained insurance coverage on
a claims incurred basis from HCAs wholly-owned insurance
subsidiary with excess coverage obtained from other carriers
that is subject to certain deductibles. Effective for claims
incurred after December 31, 2006, Triad began insuring its
claims from $1 million to $5 million through its
wholly-owned captive insurance company, replacing the coverage
provided by HCA. Substantially all claims occurring during 2007
were self-insured up to $10 million per claim.
Income
Taxes
We must make estimates in recording provision for income taxes,
including determination of deferred tax assets and deferred tax
liabilities and any valuation allowances that might be required
against the deferred tax assets. We believe that future income
will enable us to realize these deferred tax assets, subject to
the valuation allowance we have established.
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 $10.5 million as of December 31, 2008.
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, 2008, we decreased liabilities by
approximately $0.8 million and recorded $0.2 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, 2008. A total of
approximately $1.2 million of interest and penalties is
included in the amount of FASB Interpretation No. 48
liability at December 31, 2008. During the year ended
December 31, 2008, we released $7.5 million for income
taxes and $1.8 million for accrued interest 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 state tax positions.
We believe it is reasonably possible that approximately
$5.3 million of our current unrecognized tax benefit may be
recognized within the next twelve months as a result of a lapse
of the statute of limitations and settlements with taxing
authorities.
We or one of our subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state jurisdictions.
We have extended the federal statute of limitations for Triad
for the tax periods ended December 31, 1999,
December 31, 2000, April 30, 2001, June 30, 2001,
December 31, 2001, December 31, 2002 and
December 31, 2003. With few exceptions, we are no longer
subject to state income tax examinations for years prior to
2003. During 2007, we agreed to a settlement with the Internal
Revenue Service, or 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.
In December 2008, we were notified by
61
the IRS of its intent to examine the federal tax return of Triad
for the tax periods ended December 31, 2005 and ended
July 25, 2007. We believe the results of this examination
will not be 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
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 was adopted by us as of January 1, 2008. The
adoption of this statement has not had a material effect 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 and did not
elect to re-measure any assets or liabilities. The adoption of
this statement has not had 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 to 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 to 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 do not currently have on our consolidated
balance sheet any material deferred costs related to prospective
acquisitions that would be required to be expensed upon the
adoption of SFAS No. 141(R). Any outstanding deferred
costs will be expensed in 2009 for any acquisitions that are not
closed by December 31, 2008. Furthermore, the impact of
SFAS No. 141(R) on our consolidated results of
operations and consolidated financial position in future periods
will be largely dependent on the number of acquisitions we
pursue; however, it is not anticipated at this time that such
impact will be material.
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 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.
In February 2008, the FASB issued FASB Statement of Position
No. 157-2, Effective Date of FASB Statement
No. 157 (FSP 157-2). FSP 157-2 deferred
the effective date of the provisions of SFAS No. 157 for
all non-financial assets and non-financial liabilities to fiscal
years beginning after November 15, 2008, and
62
will be adopted by us in the first quarter of 2009. We are
currently assessing the potential impact of SFAS No. 157
for non-financial assets and non-financial liabilities on our
consolidated results of operations and consolidated financial
position.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161).
SFAS No. 161 expands the disclosure requirements for
derivative instruments and for hedging activities in order to
provide additional understanding of how an entity uses
derivative instruments and how they are accounted for and
reported in an entitys financial statements. The new
disclosure requirements for SFAS No. 161 are effective
for fiscal years beginning after November 15, 2008, and
will be adopted by us in the first quarter of 2009.
|
|
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 2009. 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 $13 million
in 2008, $14 million in 2007 and $4 million in 2006.
63
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
Index to
Financial Statements
|
|
|
|
|
|
|
Page
|
|
Community Health Systems, Inc. Consolidated Financial Statements:
|
|
|
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
69
|
|
|
|
|
70
|
|
64
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, 2008 and 2007, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 8 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157) effective
January 1, 2008, which changed the Companys
definitions of fair value, framework for measuring fair value,
and disclosures for fair value measurements.
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, 2008, 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 26, 2009 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 26, 2009
65
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net operating revenues
|
|
$
|
10,840,098
|
|
|
$
|
7,063,775
|
|
|
$
|
4,180,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
4,326,526
|
|
|
|
2,875,795
|
|
|
|
1,661,619
|
|
Provision for bad debts
|
|
|
1,208,687
|
|
|
|
885,653
|
|
|
|
518,861
|
|
Supplies
|
|
|
1,518,987
|
|
|
|
935,812
|
|
|
|
487,778
|
|
Other operating expenses
|
|
|
2,073,713
|
|
|
|
1,422,972
|
|
|
|
855,596
|
|
Rent
|
|
|
229,526
|
|
|
|
153,695
|
|
|
|
91,943
|
|
Depreciation and amortization
|
|
|
499,085
|
|
|
|
311,122
|
|
|
|
179,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
9,856,524
|
|
|
|
6,585,049
|
|
|
|
3,795,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
983,574
|
|
|
|
478,726
|
|
|
|
385,057
|
|
Interest expense, net of interest income of $7,057, $8,181, and
$1,779 in 2008, 2007 and 2006, respectively
|
|
|
651,925
|
|
|
|
361,773
|
|
|
|
94,411
|
|
(Gain) loss from early extinguishment of debt
|
|
|
(2,525
|
)
|
|
|
27,388
|
|
|
|
4
|
|
Minority interest in earnings
|
|
|
40,101
|
|
|
|
15,155
|
|
|
|
2,795
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(42,064
|
)
|
|
|
(25,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
336,137
|
|
|
|
99,542
|
|
|
|
287,847
|
|
Provision for income taxes
|
|
|
129,479
|
|
|
|
41,828
|
|
|
|
110,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
206,658
|
|
|
|
57,714
|
|
|
|
177,695
|
|
Discontinued operations, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of hospitals sold and held for sale
|
|
|
5,316
|
|
|
|
(8,884
|
)
|
|
|
(6,873
|
)
|
Gain (loss) on sale of hospitals and partnership interests
|
|
|
9,580
|
|
|
|
(2,594
|
)
|
|
|
(2,559
|
)
|
Impairment of long-lived assets of hospitals held for sale
|
|
|
(3,250
|
)
|
|
|
(15,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on discontinued operations
|
|
|
11,646
|
|
|
|
(27,425
|
)
|
|
|
(9,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,304
|
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.21
|
|
|
$
|
0.62
|
|
|
$
|
1.87
|
|
Income (loss) on discontinued operations
|
|
$
|
0.13
|
|
|
$
|
(0.30
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.34
|
|
|
$
|
0.32
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.19
|
|
|
$
|
0.61
|
|
|
$
|
1.85
|
|
Income (loss) on discontinued operations
|
|
$
|
0.13
|
|
|
$
|
(0.29
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.32
|
|
|
$
|
0.32
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
93,371,782
|
|
|
|
93,517,337
|
|
|
|
94,983,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
94,288,829
|
|
|
|
94,642,294
|
|
|
|
96,232,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
66
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
220,655
|
|
|
$
|
132,874
|
|
Patient accounts receivable, net of allowance for doubtful
accounts of $1,102,900 and $1,033,516 in 2008 and 2007,
respectively
|
|
|
1,613,959
|
|
|
|
1,533,798
|
|
Supplies
|
|
|
272,937
|
|
|
|
262,903
|
|
Prepaid income taxes
|
|
|
92,710
|
|
|
|
99,417
|
|
Deferred income taxes
|
|
|
91,875
|
|
|
|
113,741
|
|
Prepaid expenses and taxes
|
|
|
72,900
|
|
|
|
70,339
|
|
Other current assets (including assets of hospitals held for
sale of $40,853 and $118,893 at December 31, 2008 and 2007,
respectively)
|
|
|
240,014
|
|
|
|
339,826
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,605,050
|
|
|
|
2,552,898
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
508,690
|
|
|
|
463,373
|
|
Buildings and improvements
|
|
|
4,480,999
|
|
|
|
4,166,888
|
|
Equipment and fixtures
|
|
|
2,093,241
|
|
|
|
1,679,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,082,930
|
|
|
|
6,310,240
|
|
Less accumulated depreciation and amortization
|
|
|
(1,213,871
|
)
|
|
|
(797,666
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
5,869,059
|
|
|
|
5,512,574
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,166,091
|
|
|
|
4,247,714
|
|
|
|
|
|
|
|
|
|
|
Other assets, net of accumulated amortization of $158,532 and
$100,556 in 2008 and 2007, respectively (including assets of
hospitals held for sale of $172,870 and $362,546 at
December 31, 2008 and 2007, respectively)
|
|
|
1,178,054
|
|
|
|
1,180,457
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,818,254
|
|
|
$
|
13,493,643
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
29,462
|
|
|
$
|
20,710
|
|
Accounts payable
|
|
|
529,429
|
|
|
|
492,693
|
|
Deferred income taxes
|
|
|
6,740
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Employee compensation
|
|
|
427,688
|
|
|
|
403,598
|
|
Interest
|
|
|
152,228
|
|
|
|
153,832
|
|
Other (including liabilities of hospitals held for sale of
$106,856 and $67,606 at December 31, 2008 and 2007,
respectively)
|
|
|
388,423
|
|
|
|
377,102
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,533,970
|
|
|
|
1,447,935
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
8,937,984
|
|
|
|
9,077,367
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
460,793
|
|
|
|
407,947
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
887,445
|
|
|
|
483,459
|
|
|
|
|
|
|
|
|
|
|
Minority interests in equity of consolidated subsidiaries
|
|
|
325,197
|
|
|
|
366,131
|
|
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; 92,483,166 shares
issued and 91,507,617 shares outstanding at
December 31, 2008 and 96,611,085 shares issued and
95,635,536 shares outstanding at December 31, 2007
|
|
|
925
|
|
|
|
966
|
|
Additional paid-in capital
|
|
|
1,197,944
|
|
|
|
1,240,308
|
|
Treasury stock, at cost, 975,549 shares at
December 31, 2008 and 2007
|
|
|
(6,678
|
)
|
|
|
(6,678
|
)
|
Unearned stock compensation
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(295,575
|
)
|
|
|
(81,737
|
)
|
Retained earnings
|
|
|
776,249
|
|
|
|
557,945
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,672,865
|
|
|
|
1,710,804
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
13,818,254
|
|
|
$
|
13,493,643
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
67
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005
|
|
|
94,539,837
|
|
|
$
|
945
|
|
|
$
|
1,208,930
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
(13,204
|
)
|
|
$
|
15,191
|
|
|
$
|
359,393
|
|
|
$
|
1,564,577
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of $496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,291
|
|
|
|
|
|
|
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,304
|
|
|
|
218,304
|
|
|
|
|
|
Net change in fair value of interest rate swaps, net of tax
benefit of $112,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,737
|
)
|
|
|
|
|
|
|
(200,737
|
)
|
|
|
|
|
Net change in fair value of available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,613
|
)
|
|
|
|
|
|
|
(2,613
|
)
|
|
|
|
|
Adjustment to pension liability, net of tax of $7,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,488
|
)
|
|
|
|
|
|
|
(10,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,838
|
)
|
|
|
218,304
|
|
|
|
4,466
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(4,786,609
|
)
|
|
|
(48
|
)
|
|
|
(90,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,189
|
)
|
|
|
|
|
Issuance of common stock in connection with the exercise of
options
|
|
|
281,831
|
|
|
|
3
|
|
|
|
1,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
|
|
|
|
Cancellation of restricted stock for tax withholdings on vested
shares
|
|
|
(310,806
|
)
|
|
|
(3
|
)
|
|
|
(5,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,455
|
)
|
|
|
|
|
Tax benefit from exercise of options
|
|
|
|
|
|
|
|
|
|
|
(672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672
|
)
|
|
|
|
|
Share-based compensation
|
|
|
687,665
|
|
|
|
7
|
|
|
|
52,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008
|
|
|
92,483,166
|
|
|
$
|
925
|
|
|
$
|
1,197,944
|
|
|
|
(975,549
|
)
|
|
$
|
(6,678
|
)
|
|
$
|
|
|
|
$
|
(295,575
|
)
|
|
$
|
776,249
|
|
|
$
|
1,672,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
68
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,304
|
|
|
$
|
30,289
|
|
|
$
|
168,263
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
506,694
|
|
|
|
332,580
|
|
|
|
188,771
|
|
Deferred income taxes
|
|
|
159,870
|
|
|
|
(39,894
|
)
|
|
|
(25,228
|
)
|
Stock-based compensation expense
|
|
|
52,105
|
|
|
|
38,771
|
|
|
|
20,073
|
|
Excess tax benefits relating to stock-based compensation
|
|
|
(1,278
|
)
|
|
|
(1,216
|
)
|
|
|
(6,819
|
)
|
(Gain) loss on early extinguishment of debt
|
|
|
(2,525
|
)
|
|
|
27,388
|
|
|
|
|
|
Minority interest in earnings
|
|
|
40,101
|
|
|
|
15,996
|
|
|
|
2,795
|
|
Impairment on hospitals held for sale
|
|
|
5,000
|
|
|
|
19,044
|
|
|
|
|
|
(Gain) loss on sale of hospitals and partnership interest, net
|
|
|
(17,687
|
)
|
|
|
3,954
|
|
|
|
3,937
|
|
Other non-cash expenses, net
|
|
|
3,577
|
|
|
|
19,017
|
|
|
|
500
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
(57,437
|
)
|
|
|
131,300
|
|
|
|
(71,141
|
)
|
Supplies, prepaid expenses and other current assets
|
|
|
(34,711
|
)
|
|
|
(31,977
|
)
|
|
|
(4,544
|
)
|
Accounts payable, accrued liabilities and income taxes
|
|
|
119,596
|
|
|
|
125,959
|
|
|
|
52,151
|
|
Other
|
|
|
65,672
|
|
|
|
16,527
|
|
|
|
21,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,057,281
|
|
|
|
687,738
|
|
|
|
350,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of facilities and other related equipment
|
|
|
(161,907
|
)
|
|
|
(7,018,048
|
)
|
|
|
(384,618
|
)
|
Purchases of property and equipment
|
|
|
(692,233
|
)
|
|
|
(522,785
|
)
|
|
|
(224,519
|
)
|
Proceeds from disposition of hospitals and other ancillary
operations
|
|
|
365,636
|
|
|
|
109,996
|
|
|
|
750
|
|
Proceeds from sale of property and equipment
|
|
|
13,483
|
|
|
|
4,650
|
|
|
|
4,480
|
|
Increase in other assets
|
|
|
(190,450
|
)
|
|
|
(72,671
|
)
|
|
|
(36,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(665,471
|
)
|
|
|
(7,498,858
|
)
|
|
|
(640,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,806
|
|
|
|
8,214
|
|
|
|
14,573
|
|
Stock buy-back
|
|
|
(90,188
|
)
|
|
|
|
|
|
|
(176,316
|
)
|
Deferred financing costs
|
|
|
(3,136
|
)
|
|
|
(182,954
|
)
|
|
|
(2,153
|
)
|
Excess tax benefits relating to stock-based compensation
|
|
|
1,278
|
|
|
|
1,216
|
|
|
|
6,819
|
|
Redemption of convertible notes
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
Proceeds from minority investors in joint ventures
|
|
|
14,329
|
|
|
|
2,351
|
|
|
|
6,890
|
|
Redemption of minority investments in joint ventures
|
|
|
(77,587
|
)
|
|
|
(1,356
|
)
|
|
|
(915
|
)
|
Distribution to minority investors in joint ventures
|
|
|
(46,890
|
)
|
|
|
(6,645
|
)
|
|
|
(3,220
|
)
|
Borrowings under Credit Agreement
|
|
|
131,277
|
|
|
|
9,221,627
|
|
|
|
1,031,000
|
|
Repayments of long-term indebtedness
|
|
|
(234,918
|
)
|
|
|
(2,139,025
|
)
|
|
|
(650,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(304,029
|
)
|
|
|
6,903,428
|
|
|
|
226,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
87,781
|
|
|
|
92,308
|
|
|
|
(63,542
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
132,874
|
|
|
|
40,566
|
|
|
|
104,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
220,655
|
|
|
$
|
132,874
|
|
|
$
|
40,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
69
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
|
|
1.
|
Business
and Summary of Significant Accounting Policies
|
Business. Community Health Systems, Inc. is a
holding company and operates no business in its own name. On a
consolidated basis, Community Health Systems, Inc. and its
subsidiaries (collectively the Company), own, lease
and operate acute care hospitals in non-urban and select urban
markets. As of December 31, 2008, included in its
continuing operations, the Company owned or leased 118
hospitals, licensed for 17,245 beds in 28 states. As of
December 31, 2008, Indiana and Texas represent the only
areas of geographic concentration. Net operating revenues
generated by the Companys hospitals in Indiana, as a
percentage of consolidated net operating revenues, were 11.0% in
2008 and 7.7% in 2007. Net operating revenues generated by the
Companys hospitals in Texas, as a percentage of
consolidated net operating revenues, were 13.4% in 2008, 13.0%
in 2007 and 10.4% in 2006. As a result of the Companys
growth and expansion of services in other states, Pennsylvania
no longer represents an area of geographic concentration, which
it did as of December 31, 2007.
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 offices and former offices in Brentwood,
Tennessee and Plano, Texas, which were $149.9 million,
$133.4 million and $88.9 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Included in
these amounts is stock-based compensation of $52.1 million,
$38.8 million and $20.1 million for the years ended
December 31, 2008, 2007 and 2006, 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 Securities. 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 operating revenue and were not
material in all periods presented. Accumulated other
comprehensive income (loss) included an unrealized loss of
$2.6 million at December 31, 2008 and an unrealized
gain of $0.2 million at December 31, 2007, related to
these available-for-sale securities.
70
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $196.4 million and $457.5 million at
December 31, 2008 and 2007, 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 $22.1 million, $19.0 million and
$3.0 million for the years ended December 31, 2008,
2007 and 2006, respectively. Net property and equipment
additions included in accounts payable decreased
$7.9 million for the year ended December 31, 2008, and
increased $21.4 million and $16.9 million for the
years ended December 31, 2007 and 2006, respectively.
The Company also leases certain facilities and equipment under
capital leases (see Note 9). Such assets are amortized on a
straight-line basis over the lesser of the term of the lease or
the remaining useful lives of the applicable assets.
Goodwill. Goodwill represents the excess cost
over the fair value of net assets acquired. Goodwill arising
from business combinations is 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, 2008 and 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 36.6% of net operating revenues
for the year ended December 31, 2008, 39.3% of net
operating revenues for the year ended December 31, 2007 and
41.5% of net operating revenues for the year ended
December 31, 2006, are related to services rendered to
patients covered by the Medicare and Medicaid programs. Revenues
from Medicare outlier payments are included in the amounts
received from Medicare and were approximately 0.55% of net
operating revenues for 2008, 0.42% of net operating revenues for
2007, and 0.44% for 2006. In addition, the Company is reimbursed
by non-governmental payors using a variety of payment
methodologies. Amounts received by the Company for treatment of
patients covered by such programs are generally less than the
standard billing rates. The differences between the estimated
program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted
from gross revenues to arrive at net operating revenues. These
net operating revenues are an estimate of the net realizable
amount due from these payors. The process of estimating
contractual allowances requires the Company to estimate the
amount expected to be received based on payor contract
provisions. The key assumption in this process is the estimated
contractual reimbursement percentage, which is based on payor
classification and historical paid claims data. Due to the
complexities involved in these estimates, actual payments the
Company receives could be different from the amounts it
estimates and records. Final settlements under certain of these
programs are subject to adjustment based on administrative
review and audit by third parties. Adjustments to the estimated
billings are recorded in the periods that such adjustments
become known. Adjustments to previous program
71
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reimbursement estimates are accounted for as contractual
allowance adjustments and reported in the periods that such
adjustments become known. Adjustments related to final
settlements were insignificant to both net operating revenue and
net income in each of the years ended December 31, 2008,
2007 and 2006.
Amounts due to third-party payors were $87.9 million and
$91.4 million as of December 31, 2008 and 2007,
respectively, and are included in accrued liabilities-other in
the accompanying consolidated balance sheets. Amounts due from
third party payors were $73.6 million and
$90.8 million as of December 31, 2008 and 2007,
respectively, and are included in other current assets in the
accompanying consolidated balance sheets. Substantially all
Medicare and Medicaid cost reports are final settled through
2006.
Net Operating Revenues. Net operating revenues
are recorded net of provisions for contractual allowance of
approximately $26.433 billion, $16.718 billion and
$10.024 billion in 2008, 2007 and 2006, respectively. Net
operating revenues are recognized when services are provided and
are reported at the estimated net realizable amount from
patients, third party payors and others for services rendered.
Also included in the provision for contractual allowance shown
above is the value of administrative and other discounts
provided to self-pay patients eliminated from net operating
revenues which was $458.6 million, $266.0 million and
$100.3 million for the years ended December 31, 2008,
2007 and 2006, 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 $380.2 million, $322.2 million and
$214.2 million for the years ended December 31, 2008,
2007 and 2006, respectively. In the fourth quarter of 2007, in
conjunction with an analysis of the net realizable value of
accounts receivable, which included updating the Companys
analysis of historical cash collections, as well as conforming
estimation methodologies with those of the hospitals acquired
from Triad Hospitals, Inc. (Triad), the Company
revised its methodology 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 was a result of
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
72
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The primary key cash collection indicator that experienced
deterioration during the fourth quarter of 2007 was cash
receipts as a percentage of net revenue less bad debts.
This percentage decreased to the lowest percentage experienced
by the Company since the quarter ended September 30, 2006.
Further analysis indicated the primary causes of this
deterioration were a continuing increase in the volume of
indigent non-resident aliens, an increase in the number of
patients qualifying for charity care and a greater than expected
impact of the removal of participants from TennCare
(Tennessees state provided Medicaid program) which
increased the number of uninsured patients with limited
financial means receiving care at the Companys eight
Tennessee hospitals. During the fourth quarter of 2007, due to
the deteriorating cash collections and desire to standardize
processes with those of the former Triad hospitals, the Company
undertook a detailed programming effort to develop data around
the deteriorating classes of accounts receivable needed to
update its historical cash collections percentages as well as
enable it to estimate how much of certain self-pay categories
ultimately convert to Medicaid, charity and indigent programs.
Triads processes for establishing contractual allowances
and allowances for bad debts related to accounts classified as
Medicaid pending, charity pending and
indigent non-resident alien included inputs and assumptions
based on the historical percentage of these accounts which
ultimately qualified for specific government programs or for
write-off as charity care.
The Company used these new inputs and assumptions regarding
Medicaid pending, charity pending, and
indigent non-resident alien in conjunction with the new data
developed in the fourth quarter of 2007 as described above to
evaluate the realizability of accounts receivable and to revise
the Companys estimate of contractual allowances for
estimated amounts of self-pay accounts receivable that will
ultimately qualify as charity care, or that will ultimately
qualify for Medicaid, indigent care or other specific
governmental reimbursement, resulting in an increase to the
Companys contractual reserves of $96.3 million as of
December 31, 2007. Previous estimates of uncollectible
amounts for such receivables were included in the Companys
bad debt reserves for each period.
Furthermore, in updating the historical collection statistics of
all its hospitals, the Company also took into account a detailed
study of the historical collection information for the hospitals
acquired from Triad. The updated collection statistics of the
hospitals acquired from Triad also showed subsequent
deterioration in cash collections similar to those experienced
by the other hospitals that the Company owns. Therefore, the
Company also standardized the processes for calculating the
allowance for doubtful accounts of the hospitals acquired from
Triad to that of its other hospitals which, along with the
allowance percentages determined from the new collection data,
resulted in the recording of an additional $70.1 million of
allowance for bad debts as of December 31, 2007.
The resulting impact of the above, net of taxes, for the year
ended December 31, 2007 was a decrease to income from
continuing operations of $105.4 million. The Company
believes this lower collectability was primarily the result of
an increase in the number of patients qualifying for charity
care, reduced enrollment in certain state Medicaid programs and
an increase in the number of indigent non-resident aliens.
Collections are impacted by the economic ability of patients to
pay and the effectiveness of the Companys collection
efforts. Significant changes in payor mix, business office
operations, economic conditions or trends in federal and state
governmental healthcare coverage could affect the Companys
collection of accounts receivable. The process of estimating the
allowance for doubtful accounts requires the Company to estimate
the collectability of self-pay accounts receivable, which is
primarily based on its collection history, adjusted for expected
recoveries
73
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and, if available, anticipated changes in collection trends.
Significant change in payor mix, business office operations,
economic conditions, trends in federal and state governmental
healthcare coverage or other third party payors could affect the
Companys estimates of accounts receivable collectability.
The Company believes the revised methodology provides a better
approach to estimating changes in payor mix, continued increases
in charity and indigent care as well as the monitoring of
historical collection patterns. The revised accounting
methodology and the adequacy of resulting estimates will
continue to be reviewed by monitoring accounts receivable
write-offs, monitoring cash collections as a percentage of
trailing net revenues less provision for bad debts, monitoring
historical cash collection trends, as well as analyzing current
period net revenue and admissions by payor classification, aged
accounts receivable by payor, days revenue outstanding, and the
impact of recent acquisitions and dispositions.
Physician Income Guarantees. The Company
enters into physician recruiting agreements under which it
supplements physician income to a minimum amount over a period
of time, typically one year, while the physician establishes
themselves in the community. As part of the agreements, the
physicians are committed to practice in the community for a
period of time, typically three years, which extends beyond
their income guarantee period. The Company accounts for these
agreements in accordance with FASB Staff Position
No. 45-3,
Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners,
(FIN 45-3).
FIN 45-3
requires that an asset and liability for the estimated fair
value of minimum revenue guarantees be recorded on new
agreements entered into on or after January 1, 2006.
Adjustments to the ultimate value of the guarantee paid to
physicians are recognized in the period that the change in
estimate is identified. The Company amortizes such costs over
the life of the agreement. As of December 31, 2008 and
2007, the unamortized portion of these physician income
guarantees was $49.1 million and $45.7 million,
respectively.
Concentrations of Credit Risk. The Company
grants unsecured credit to its patients, most of whom reside in
the service area of the Companys facilities and are
insured under third-party payor agreements. Because of the
economic diversity of the Companys facilities and
non-governmental third-party payors, Medicare represents the
only significant concentration of credit risk from payors.
Accounts receivable, net of contractual allowances, from
Medicare were $256.6 million and $302.1 million as of
December 31, 2008 and 2007, respectively, representing 9.4%
and 11.8% of consolidated net accounts receivable, before
allowance for doubtful accounts, as of December 31, 2008
and 2007, respectively.
Professional Liability Claims. The Company
accrues for estimated losses resulting from professional
liability. The accrual, which includes an estimate for incurred
but not reported claims, is based on historical loss patterns
and actuarially-determined projections and is discounted to its
net present value. To the extent that subsequent claims
information varies from managements estimates, the
liability is adjusted when such information becomes available.
Accounting for the Impairment or Disposal of Long-Lived
Assets. 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
74
COMMUNITY
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in tax rates is recognized in the consolidated statement of
income during the period in which the tax rate change becomes
law.
Comprehensive Income (Loss). Comprehensive
income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and
circumstances from non-owner sources.
Accumulated Other Comprehensive Income (Loss) consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Change in Fair
|
|
|
Change in Fair
|
|
|
Adjustment
|
|
|
Other
|
|
|
|
Value of Interest
|
|
|
Value of Available
|
|
|
to Pension
|
|
|
Comprehensive
|
|
|
|
Rate Swaps
|
|
|
for Sale Securities
|
|
|
Liability
|
|
|
Income (Loss)
|
|
|
Balance as of December 31, 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Activity, net of tax
|
|
|
(200,737
|
)
|
|
|
(2,613
|
)
|
|
|
(10,488
|
)
|
|
|
(213,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
(278,485
|
)
|
|
$
|
(1,592
|
)
|
|
$
|
(15,498
|
)
|
|
$
|
(295,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 the Companys acute care
hospitals and related healthcare entities that provide inpatient
and outpatient health care services), the home care agencies
operations (which provide outpatient care generally in the
patients home), and the hospital management services
business (which provides executive management and consulting
services to independent acute care hospitals).
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 care
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 2006 has been presented in
Note 14 to reflect this change in the composition of the
Companys 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
75