FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This quarterly report on Form 10-Q includes certain disclosures which contain
"forward-looking statements." Forward-looking statements include statements
regarding estimated EHR incentive income and related EHR operating expenses,
expected capital expenditures and expected net claim payments and all other
statements that do not relate solely to historical or current facts, and can be
identified by the use of words like "may," "believe," "will," "expect,"
"project," "estimate," "anticipate," "plan," "initiative" or "continue." These
forward-looking statements are based on our current plans and expectations and
are subject to a number of known and unknown uncertainties and risks, many of
which are beyond our control, which could significantly affect current plans and
expectations and our future financial position and results of operations. These
factors include, but are not limited to, (1) the impact of our substantial
indebtedness and the ability to refinance such indebtedness on acceptable terms,
(2) the effects related to the enactment and implementation of the Budget
Control Act of 2011 ("BCA") and the Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Reconciliation Act (collectively,
the "Health Reform Law"), the possible enactment of additional federal or state
health care reforms and possible changes to the Health Reform Law and other
federal, state or local laws or regulations affecting the health care industry,
(3) increases in the amount and risk of collectibility of uninsured accounts and
deductibles and copayment amounts for insured accounts, (4) the ability to
achieve operating and financial targets, and attain expected levels of patient
volumes and control the costs of providing services, (5) possible changes in the
Medicare, Medicaid and other state programs, including Medicaid upper payment
limit ("UPL") programs or waiver programs, that may impact reimbursements to
health care providers and insurers, (6) the highly competitive nature of the
health care business, (7) changes in service mix, revenue mix and surgical
volumes, including potential declines in the population covered under managed
care agreements and the ability to enter into and renew managed care provider
agreements on acceptable terms and the impact of consumer driven health plans
and physician utilization trends and practices, (8) the efforts of insurers,
health care providers and others to contain health care costs, (9) the outcome
of our continuing efforts to monitor, maintain and comply with appropriate laws,
regulations, policies and procedures, (10) increases in wages and the ability to
attract and retain qualified management and personnel, including affiliated
physicians, nurses and medical and technical support personnel, (11) the
availability and terms of capital to fund the expansion of our business and
improvements to our existing facilities, (12) changes in accounting practices,
(13) changes in general economic conditions nationally and regionally in our
markets, (14) future divestitures which may result in charges and possible
impairments of long-lived assets, (15) changes in business strategy or
development plans, (16) delays in receiving payments for services provided,
(17) the outcome of pending and any future tax audits, appeals and litigation
associated with our tax positions, (18) potential adverse impact of known and
unknown government investigations, litigation and other claims that may be made
against us, (19) our ongoing ability to demonstrate meaningful use of certified
electronic health record technology and recognize income for the related
Medicare or Medicaid incentive payments, and (20) other risk factors described
in our annual report on Form 10-K for the year ended December 31, 2011 and our
other filings with the Securities and Exchange Commission. As a consequence,
current plans, anticipated actions and future financial position and results of
operations may differ from those expressed in any forward-looking statements
made by or on behalf of HCA. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
report, which forward-looking statements reflect management's views only as of
the date of this report. We undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Health Care Reform
As enacted, the Health Reform Law will change how health care services are
covered, delivered and reimbursed through expanded coverage of uninsured
individuals, reduced growth in Medicare program spending, reductions in Medicare
and Medicaid Disproportionate Share Hospital ("DSH") payments, and the
establishment of programs in which reimbursement is tied to quality and
integration. In addition, the Health Reform Law
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Health Care Reform (continued)
reforms certain aspects of health insurance, expands existing efforts to tie
Medicare and Medicaid payments to performance and quality, and contains
provisions intended to strengthen fraud and abuse enforcement. Numerous lawsuits
have challenged the constitutionality of the Health Reform Law. On June 28,
2012, the United States Supreme Court upheld the constitutionality of the
individual mandate provisions of the Health Reform Law but struck down the
provisions that would have allowed the Department of Health and Human Services
("HHS") to penalize states that do not implement the Medicaid expansion
provisions with the loss of existing federal Medicaid funding. States that
choose not to implement the Medicaid expansion will forego funding established
by the Health Reform Law to cover most of the expansion costs. It is unclear how
many states will decline to implement the Medicaid expansion. Further, repeal or
modification of the Health Reform Law has become a theme in political campaigns
during the 2012 election year. Due to these factors, we are unable to predict
with any reasonable certainty or otherwise quantify the likely impact of the
Health Reform Law on our business model, financial condition or result of
operations.
Second Quarter 2012 Operations Summary
Net income attributable to HCA Holdings, Inc. totaled $391 million, or $0.85 per
diluted share, for the quarter ended June 30, 2012, compared to $229 million, or
$0.43 per diluted share, for the quarter ended June 30, 2011. Revenues increased
to $8.112 billion in the second quarter of 2012 from $7.249 billion in the
second quarter of 2011. Second quarter 2011 results include losses on retirement
of debt of $75 million, or $0.08 per diluted share. All "per diluted share"
disclosures are based upon amounts net of the applicable income taxes. Shares
used for diluted earnings per share were 458.6 million shares for the quarter
ended June 30, 2012 and 538.6 million shares for the quarter ended June 30,
2011.
Revenues increased 11.9% on a consolidated basis and increased 3.8% on a same
facility basis for the quarter ended June 30, 2012, compared to the quarter
ended June 30, 2011. The increase in consolidated revenues can be attributed
primarily to the combined impact of a 2.0% increase in revenue per equivalent
admission and a 9.7% increase in equivalent admissions. The same facility
revenues increase resulted primarily from the combined net impact of a 0.1%
decline in same facility revenue per equivalent admission and a 3.9% increase in
same facility equivalent admissions. The increase in consolidated revenues (and
consolidated volume metrics) for the second quarter of 2012 compared to the
second quarter of 2011 is related primarily to the impact of the financial
consolidation of the HCA-HealthONE LLC venture for periods subsequent to our
acquisition of controlling interests during October 2011. The HealthONE
venture's operating results and volume metrics are not included in our same
facility amounts.
During the quarter ended June 30, 2012, consolidated admissions and same
facility admissions increased 7.7% and 2.5%, respectively, compared to the
quarter ended June 30, 2011. Inpatient surgeries increased 5.5% on a
consolidated basis and declined 0.6% on a same facility basis during the quarter
ended June 30, 2012, compared to the quarter ended June 30, 2011. Outpatient
surgeries increased 10.4% on a consolidated basis and 0.3% on a same facility
basis during the quarter ended June 30, 2012, compared to the quarter ended
June 30, 2011. Emergency department visits increased 13.4% on a consolidated
basis and 8.8% on a same facility basis during the quarter ended June 30, 2012,
compared to the quarter ended June 30, 2011.
For the quarter ended June 30, 2012, the provision for doubtful accounts
increased $266 million, compared to the quarter ended June 30, 2011. The
self-pay revenue deductions for charity care and uninsured discounts increased
$76 million and $278 million, respectively, during the second quarter of 2012,
compared to the second quarter of 2011. The sum of the provision for doubtful
accounts, uninsured discounts and charity care, as a percentage of the sum of
revenues, provision for doubtful accounts, uninsured discounts and charity care,
was
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Second Quarter 2012 Operations Summary (continued)
29.5% for the second quarter of 2012, compared to 27.7% for the second quarter
of 2011. Same facility uninsured admissions increased 8.9% and same facility
uninsured emergency room visits increased 9.8% for the quarter ended June 30,
2012, compared to the quarter ended June 30, 2011.
Interest expense declined $72 million to $448 million for the quarter ended
June 30, 2012 from $520 million for the quarter ended June 30, 2011. The decline
in interest expense was due to a decline in the average effective interest rate.
Cash flows from operating activities increased $712 million from $748 million
for the second quarter of 2011 to $1.460 billion for the second quarter of 2012.
The increase is primarily related to the combined impact of the increase from
changes in working capital items of $525 million and the increase in net income
of $165 million.
Results of Operations
Revenue/Volume Trends
Our revenues depend upon inpatient occupancy levels, the ancillary services and
therapy programs ordered by physicians and provided to patients, the volume of
outpatient procedures and the charge and negotiated payment rates for such
services. Gross charges typically do not reflect what our facilities are
actually paid. Our facilities have entered into agreements with third-party
payers, including government programs and managed care health plans, under which
the facilities are paid based upon the cost of providing services, predetermined
rates per diagnosis, fixed per diem rates or discounts from gross charges. We do
not pursue collection of amounts related to patients who meet our guidelines to
qualify for charity care; therefore, they are not reported in revenues. We
provide discounts to uninsured patients who do not qualify for Medicaid or
charity care. These discounts are similar to those provided to many local
managed care plans. After the discounts are applied, we are still unable to
collect a significant portion of uninsured patients' accounts, and we record
significant provisions for doubtful accounts (based upon our historical
collection experience) related to uninsured patients in the period the services
are provided.
We adopted the provisions of Accounting Standards Update ("ASU") No. 2011-07,
Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts,
and the Allowance for Doubtful Accounts for Certain Health Care Entities ("ASU
2011-07"), during 2011. ASU 2011-07 requires health care entities to change the
presentation of the statement of operations by reclassifying the provision for
doubtful accounts from an operating expense to a deduction from patient service
revenues. Operating results for the quarter and six months ended June 30, 2011
have been reclassified in accordance with ASU 2011-07.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
Revenues increased 11.9% from $7.249 billion in the second quarter of 2011 to
$8.112 billion in the second quarter of 2012. Revenues are recorded during the
period the health care services are provided, based upon the estimated amounts
due from the patients and third-party payers. Third-party payers include federal
and state agencies (under the Medicare, Medicaid and other programs), managed
care health plans, commercial insurance companies and employers. Estimates of
contractual allowances under managed care health plans are based upon the
payment terms specified in the related contractual agreements. Revenues related
to uninsured patients and copayment and deductible amounts for patients who have
health care coverage may have discounts applied (uninsured discounts and
contractual discounts). We also record a provision for doubtful accounts related
to uninsured accounts to record the net self pay accounts receivable at the
estimated amounts we expect to collect. Our revenues from our third-party
payers, the uninsured and other revenues for the quarters and six months ended
June 30, 2012 and 2011 are summarized in the following tables (dollars in
millions):
Quarter
2012 Ratio 2011 Ratio
Medicare $ 1,989 24.5 % $ 1,871 25.8 %
Managed Medicare 729 9.0 584 8.1
Medicaid 380 4.7 479 6.6
Managed Medicaid 358 4.4 316 4.4
Managed care and other insurers 4,473 55.1 3,853 53.1
International (managed care and other
insurers) 266 3.3 233 3.2
8,195 101.0 7,336 101.2
Uninsured 739 9.1 492 6.8
Other 219 2.7 196 2.7
Revenues before provision for doubtful
accounts 9,153 112.8 8,024 110.7
Provision for doubtful accounts (1,041 ) (12.8 ) (775 ) (10.7 )
Revenues $ 8,112 100.0 % $ 7,249 100.0 %
Six Months
2012 Ratio 2011 Ratio
Medicare $ 4,302 26.0 % $ 3,871 26.4 %
Managed Medicare 1,479 9.0 1,196 8.2
Medicaid 810 4.9 987 6.7
Managed Medicaid 700 4.2 635 4.3
Managed care and other insurers 8,918 54.0 7,631 52.1
International (managed care and other
insurers) 526 3.2 466 3.2
16,735 101.3 14,786 100.9
Uninsured 1,181 7.2 882 6.0
Other 436 2.6 411 2.8
Revenues before provision for doubtful
accounts 18,352 111.1 16,079 109.7
Provision for doubtful accounts (1,835 ) (11.1 ) (1,424 ) (9.7 )
Revenues $ 16,517 100.0 % $ 14,655 100.0 %
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
The increase in revenues for the first six months of 2012 compared to the first
six months of 2011 includes two adjustments (Rural Floor Provision Settlement
and SSI ratios) related to Medicare revenues for prior periods. The net effect
of the Medicare adjustments was an increase of $188 million to revenues. The
Rural Floor Provision Settlement was signed on April 5, 2012. As a result of the
agreement, we received additional Medicare payments of approximately $271
million during June 2012. This amount was recorded as an increase to Medicare
revenues during the first quarter of 2012. During March 2012, the Centers for
Medicare & Medicaid Services ("CMS") issued new SSI ratios used for calculating
Medicare DSH reimbursement for federal fiscal years ending September 30, 2006
through September 30, 2009. As a result, we recalculated our DSH reimbursement
for all applicable periods. The cumulative impact of this retroactive adjustment
was a reduction in Medicare revenues of approximately $83 million. This
adjustment was recorded as a reduction to Medicare revenues during the first
quarter of 2012.
We previously reported $39 million of Medicaid EHR incentives for the quarter
and six months ended June 30, 2011 in the line item "Revenues" in our condensed
consolidated income statements. This amount has been reclassified and is now
included in the line item "Electronic health record incentive income" in our
condensed consolidated comprehensive income statements for the quarter and six
months ended June 30, 2011.
Consolidated and same facility revenue per equivalent admission increased 2.0%
and declined 0.1%, respectively, in the second quarter of 2012, compared to the
second quarter of 2011. Consolidated and same facility equivalent admissions
increased 9.7% and 3.9%, respectively, in the second quarter of 2012, compared
to the second quarter of 2011. Consolidated and same facility admissions
increased 7.7% and 2.5%, respectively, in the second quarter of 2012, compared
to the second quarter of 2011. Consolidated and same facility outpatient
surgeries increased 10.4% and 0.3%, respectively, in the second quarter of 2012,
compared to the second quarter of 2011. Consolidated and same facility inpatient
surgeries increased 5.5% and declined 0.6%, respectively, in the second quarter
of 2012, compared to the second quarter of 2011. Consolidated and same facility
emergency department visits increased 13.4% and 8.8%, respectively, in the
second quarter of 2012, compared to the second quarter of 2011.
To quantify the total impact of and trends related to uninsured accounts, we
believe it is beneficial to view the direct uninsured revenue deductions and
provision for doubtful accounts in combination, rather than each separately. At
June 30, 2012, our allowance for doubtful accounts represented approximately 92%
of the $4.805 billion total patient due accounts receivable balance. The patient
due accounts receivable balance represents the estimated uninsured portion of
our accounts receivable. A summary of these adjustments to revenues amounts,
related to uninsured accounts, for the quarters and six months ended June 30,
2012 and 2011 follows (dollars in millions):
Quarter Six Months
2012 Ratio 2011 Ratio 2012 Ratio 2011 Ratio
Charity care $ 733 21 % $ 657 24 % $ 1,531 23 % $ 1,292 24 %
Uninsured discounts 1,620 48 1,342 48 3,259 49 2,615 49
Provision for doubtful accounts 1,041 31 775 28 1,835 28 1,424 27
Totals $ 3,394 100 % $ 2,774 100 % $ 6,625 100 % $ 5,331 100 %
Same facility uninsured admissions increased by 2,589 admissions, or 8.9%, in
the second quarter of 2012, compared to the second quarter of 2011. Same
facility uninsured admissions increased 11.6% in the first quarter of 2012,
compared to the first quarter of 2011. Same facility uninsured admissions in
2011, compared to 2010, increased by 5.2% in the fourth quarter of 2011, 8.8% in
the third quarter of 2011, 10.6% in the second quarter of 2011 and 4.7% in the
first quarter of 2011.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
The approximate percentages of our admissions related to Medicare, managed
Medicare, Medicaid, managed Medicaid, managed care and other insurers and the
uninsured for the quarters and six months ended June 30, 2012 and 2011 are set
forth in the following table.
Quarter Six Months
2012 2011 2012 2011
Medicare 33 % 35 % 34 % 35 %
Managed Medicare 12 11 12 11
Medicaid 8 9 8 9
Managed Medicaid 8 7 8 7
Managed care and other insurers 31 31 31 31
Uninsured 8 7 7 7
100 % 100 % 100 % 100 %
The approximate percentages of our inpatient revenues, before provision for
doubtful accounts, related to Medicare, managed Medicare, Medicaid, managed
Medicaid, managed care and other insurers and the uninsured for the quarters and
six months ended June 30, 2012 and 2011 are set forth in the following table.
Quarter Six Months
2012 2011 2012 2011
Medicare 29 % 31 % 31 % 32 %
Managed Medicare 10 9 10 9
Medicaid 6 9 6 9
Managed Medicaid 4 4 4 4
Managed care and other insurers 45 44 45 44
Uninsured 6 3 4 2
100 % 100 % 100 % 100 %
At June 30, 2012, we had 75 hospitals in the states of Texas and Florida. During
the second quarter of 2012, 53% of our admissions and 46% of our revenues were
generated by these hospitals. Uninsured admissions in Texas and Florida
represented 57% of our uninsured admissions during the second quarter of 2012.
We receive a significant portion of our revenues from government health
programs, principally Medicare and Medicaid, which are highly regulated and
subject to frequent and substantial changes. We provide indigent care services
in several communities in the state of Texas, in affiliation with other
hospitals. The state of Texas has been involved in efforts to increase the
indigent care provided by private hospitals. As a result of additional indigent
care being provided by private hospitals, public hospital districts or counties
in Texas have available funds that were previously devoted to indigent care. The
public hospital districts or counties are under no contractual or legal
obligation to provide such indigent care. The public hospital districts or
counties have elected to transfer some portion of these available funds to the
state's Medicaid program. Such action is at the sole discretion of the public
hospital districts or counties. It is anticipated that these contributions to
the state will be matched with federal Medicaid funds. The state then may make
supplemental payments to hospitals in the state for Medicaid services rendered.
Hospitals receiving Medicaid supplemental payments may include those that are
providing additional indigent care services. Our Texas Medicaid revenues
included $112 million and $134 million during the second quarters of 2012 and
2011, respectively,
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
and $240 million and $301 million during the first six months of 2012 and 2011,
respectively, of Medicaid supplemental payments. In addition, we receive
supplemental payments in several other states. We are aware these supplemental
payment programs are currently being reviewed by certain state agencies and some
states have made waiver requests to CMS to replace their existing supplemental
payment programs. It is possible these reviews and waiver requests will result
in the restructuring of such supplemental payment programs and could result in
the payment programs being reduced or eliminated. In 2011, CMS approved a
Medicaid waiver that allows Texas to continue receiving supplemental Medicaid
reimbursement while expanding its Medicaid managed care program, thus Texas is
operating pursuant to a waiver program. However, we cannot predict whether the
Texas private supplemental Medicaid reimbursement program will continue or
guarantee that revenues recognized for the program will not decline. Because
deliberations about these programs are ongoing, we are unable to estimate the
financial impact the program structure modifications, if any, may have on our
results of operations.
Electronic Health Record Incentive Payments
The American Recovery and Reinvestment Act of 2009 provides for Medicare and
Medicaid incentive payments beginning in 2011 for eligible hospitals and
professionals that adopt and meaningfully use certified electronic health record
("EHR") technology. We recognize income related to Medicare and Medicaid
incentive payments using a gain contingency model that is based upon when our
eligible hospitals have demonstrated meaningful use of certified EHR technology
for the applicable period and the cost report information for the full cost
report year that will determine the final calculation of the incentive payment
is available.
Medicaid EHR incentive calculations and related payment amounts are based upon
prior period cost report information available at the time our eligible
hospitals adopt, implement or demonstrate meaningful use of certified EHR
technology for the applicable period, and are not subject to revision for cost
report data filed for a subsequent period. Thus, incentive income recognition
occurs at the point our eligible hospitals adopt, implement or demonstrate
meaningful use of certified EHR technology for the applicable period, as the
cost report information for the full cost report year that will determine the
final calculation of the incentive payment is known at that time.
Medicare EHR incentive calculations and related initial payment amounts are
based upon the most current filed cost report information available at the time
our eligible hospitals demonstrate meaningful use of certified EHR technology
for the applicable period. However, unlike Medicaid, this initial payment amount
will be adjusted based upon an updated calculation using the annual cost report
information for the cost report period that began during the applicable payment
year. Thus, incentive income recognition occurs at the point our eligible
hospitals demonstrate meaningful use of certified EHR technology for the
applicable period and the cost report information for the full cost report year
that will determine the final calculation of the incentive payment is available.
We recognized $70 million of electronic health record incentive income related
to Medicare incentive programs during the second quarter of 2012, and we
recognized $39 million of electronic health record incentive income related to
Medicaid incentive programs during the second quarter of 2011. We recognized
$125 million ($122 millionMedicare and $3 millionMedicaid) and $39 million
(all Medicaid) of electronic health record incentive income during the first six
months of 2012 and 2011, respectively. We previously reported $39 million of
Medicaid EHR incentives for the quarter and six months ended June 30, 2011 in
the line item "Revenues" in our condensed consolidated income statements. This
amount has been reclassified and is now included in the line item "Electronic
health record incentive income" in our condensed consolidated comprehensive
income statements for the quarter and six months ended June 30, 2011. At
June 30, 2012, we have $33 million of deferred EHR incentive income, which
represents initial incentive payments received for which EHR incentive income
has not been recognized.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Electronic Health Record Incentive Payments (continued)
We have incurred and will continue to incur both capital costs and operating
expenses in order to implement our certified EHR technology and meet meaningful
use requirements. These expenses are ongoing and are projected to continue over
all stages of implementation of meaningful use. The timing of recognition of the
expenses may not correlate with the receipt of the incentive payments and the
recognition of income. We incurred $20 million and $24 million during the second
quarters of 2012 and 2011, respectively, and $37 million and $44 million during
the first six months of 2012 and 2011, respectively, of operating expenses to
implement our certified EHR technology and meet meaningful use.
For 2012, we estimate EHR incentive income will be recognized in the range of
$325 million to $350 million and that related EHR operating expenses will be in
the range of $90 million to $115 million. Actual EHR incentive income and EHR
operating expenses could vary from these estimates due to certain factors,
including the availability of federal funding for both Medicare and Medicaid
incentive payments, timing of the approval of state Medicaid incentive payment
plans by CMS and our ability to continue to demonstrate meaningful use of
certified EHR technology. The failure of any of these factors to occur could
have a material, adverse effect on our results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Operating Results Summary
The following is a comparative summary of results from operations for the
quarters and six months ended June 30, 2012 and 2011 (dollars in millions):
Quarter
2012 2011
Amount Ratio Amount Ratio
Revenues before provision for doubtful
accounts $ 9,153 $ 8,024
Provision for doubtful accounts 1,041 775
Revenues 8,112 100.0 7,249 100.0
Salaries and benefits 3,707 45.7 3,320 45.8
Supplies 1,422 17.5 1,295 17.9
Other operating expenses 1,493 18.5 1,326 18.2
Electronic health record incentive income (70 ) (0.9 ) (39 ) (0.5 )
Equity in earnings of affiliates (9 ) (0.1 ) (73 ) (1.0 )
Depreciation and amortization 420 5.2 358 5.0
Interest expense 448 5.5 520 7.2
Losses on sales of facilities 2 - - -
Losses on retirement of debt - - 75 1.0
7,413 91.4 6,782 93.6
Income before income taxes 699 8.6 467 6.4
Provision for income taxes 214 2.6 147 2.0
Net income 485 6.0 320 4.4
Net income attributable to noncontrolling
interests 94 1.2 91 1.2
Net income attributable to HCA Holdings,
Inc. $ 391 4.8 $ 229 3.2
% changes from prior year:
Revenues 11.9 % 4.0 %
Income before income taxes 49.6 (9.2 )
Net income attributable to HCA Holdings,
Inc. 70.3 (21.5 )
Admissions(a) 7.7 3.2
Equivalent admissions(b) 9.7 3.4
Revenue per equivalent admission 2.0
0.6
Same facility % changes from prior
year(c):
Revenues 3.8 2.5
Admissions(a) 2.5 1.8
Equivalent admissions(b) 3.9 1.9
Revenue per equivalent admission (0.1 ) 0.6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Operating Results Summary (continued)
Six Months
2012 2011
Amount Ratio Amount Ratio
Revenues before provision for doubtful
accounts $ 18,352 $ 16,079
Provision for doubtful accounts 1,835 1,424
Revenues 16,517 100.0 14,655 100.0
Salaries and benefits 7,443 45.1 6,615 45.1
Supplies 2,841 17.2 2,570 17.5
Other operating expenses 2,986 18.1 2,648 18.2
Electronic health record incentive
income (125 ) (0.8 ) (39 ) (0.3 )
Equity in earnings of affiliates (20 ) (0.1 ) (149 ) (1.0 )
Depreciation and amortization 837 5.0 716 4.9
Interest expense 890 5.4 1,053 7.2
Losses on sales of facilities 3 - 1 -
Losses on retirement of debt - - 75 0.5
Termination of management agreement - - 181 1.2
14,855 89.9 13,671 93.3
Income before income taxes 1,662 10.1 984 6.7
Provision for income taxes 538 3.3 330 2.2
Net income 1,124 6.8 654 4.5
Net income attributable to
noncontrolling interests 193 1.2 185 1.3
Net income attributable to HCA Holdings,
Inc. $ 931 5.6 $ 469 3.2
% changes from prior year:
Revenues 12.7 % 5.1 %
Income before income taxes 68.9 (18.0 )
Net income attributable to HCA Holdings,
Inc. 98.4 (31.1 )
Admissions(a) 8.3 2.6
Equivalent admissions(b) 10.5 3.6
Revenue per equivalent admission 2.0 1.5
Same facility % changes from prior
year(c):
Revenues 4.5 3.9
Admissions(a) 2.9 1.7
Equivalent admissions(b) 4.4 2.6
Revenue per equivalent admission 0.1 1.3
(a) Represents the total number of patients admitted to our hospitals and is used
by management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenues and gross outpatient revenues and then
dividing the resulting amount by gross inpatient revenues. The equivalent
admissions computation "equates" outpatient revenues to the volume measure
(admissions) used to measure inpatient volume, resulting in a general measure
of combined inpatient and outpatient volume.
(c) Same facility information excludes the operations of hospitals and their
related facilities which were either acquired or divested during the current
and prior period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Quarters Ended June 30, 2012 and 2011
Net income attributable to HCA Holdings, Inc. totaled $391 million, or $0.85 per
diluted share, for the second quarter of 2012 compared to $229 million, or $0.43
per diluted share, for the second quarter of 2011. Second quarter 2011 results
include losses on retirement of debt of $75 million, or $0.08 per diluted share.
All "per diluted share" disclosures are based upon amounts net of the applicable
income taxes. Shares used for diluted earnings per share were 458.6 million
shares and 538.6 million shares for the quarters ended June 30, 2012 and 2011,
respectively.
For the second quarter of 2012, consolidated and same facility admissions
increased 7.7% and 2.5%, respectively, compared to the second quarter of 2011.
Consolidated and same facility outpatient surgical volumes increased 10.4% and
0.3%, respectively, during the second quarter of 2012, compared to the second
quarter of 2011. Consolidated and same facility inpatient surgeries increased
5.5% and declined 0.6%, respectively, in the second quarter of 2012, compared to
the second quarter of 2011. Consolidated and same facility emergency department
visits increased 13.4% and 8.8%, respectively, during the quarter ended June 30,
2012, compared to the quarter ended June 30, 2011.
Revenues before provision for doubtful accounts increased 14.1% for the second
quarter of 2012 compared to the second quarter of 2011. Provision for doubtful
accounts increased $266 million from $775 million in the second quarter of 2011
to $1.041 billion in the second quarter of 2012. The provision for doubtful
accounts relates primarily to uninsured amounts due directly from patients,
including copayment and deductible amounts for patients who have health care
coverage. The self-pay revenue deductions for charity care and uninsured
discounts increased $76 million and $278 million, respectively, during the
second quarter of 2012, compared to the second quarter of 2011. The sum of the
provision for doubtful accounts, uninsured discounts and charity care, as a
percentage of the sum of revenues, the provision for doubtful accounts,
uninsured discounts and charity care, was 29.5% for the second quarter of 2012,
compared to 27.7% for the second quarter of 2011. At June 30, 2012, our
allowance for doubtful accounts represented approximately 92% of the
$4.805 billion total patient due accounts receivable balance, including
accounts, net of estimated contractual discounts, related to patients for which
eligibility for Medicaid coverage or uninsured discounts was being evaluated.
Revenues increased 11.9% primarily due to the combined impact of revenue per
equivalent admission growth of 2.0% and an increase of 9.7% in equivalent
admissions for the second quarter of 2012 compared to the second quarter of
2011. Same facility revenues increased 3.8% due to the combined net impact of a
0.1% decline in same facility revenue per equivalent admission and a 3.9%
increase in same facility equivalent admissions for the second quarter of 2012
compared to the second quarter of 2011. The increase in revenues for the second
quarter of 2012 compared to the second quarter of 2011 is related primarily to
the financial consolidation of our 2011 acquisition of our partner's interest in
the HCA-HealthONE LLC venture for periods subsequent to our acquisition of
controlling interests during October 2011 (HealthONE revenues are not included
in same facility amounts).
Salaries and benefits, as a percentage of revenues, were 45.7% in the second
quarter of 2012 and 45.8% in the second quarter of 2011. Salaries and benefits
per equivalent admission increased 1.8% in the second quarter of 2012 compared
to the second quarter of 2011. Same facility labor rate increases averaged 1.3%
for the second quarter of 2012 compared to the second quarter of 2011.
Supplies, as a percentage of revenues, were 17.5% in the second quarter of 2012
and 17.9% in the second quarter of 2011. Supply cost per equivalent admission
increased 0.1% in the second quarter of 2012 compared to the second quarter of
2011. Supply costs per equivalent admission increased 1.5% for medical devices
and 1.2% for general medical and surgical items and declined 1.8% for pharmacy
supplies and 5.7% for blood products in the second quarter of 2012 compared to
the second quarter of 2011.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Quarters Ended June 30, 2012 and 2011 (continued)
Other operating expenses, as a percentage of revenues, increased to 18.5% in the
second quarter of 2012 from 18.2% in the second quarter of 2011. Other operating
expenses is primarily comprised of contract services, professional fees, repairs
and maintenance, rents and leases, utilities, insurance (including professional
liability insurance) and nonincome taxes. Other operating expenses include
$71 million and $79 million of indigent care costs in certain Texas markets
during the second quarters of 2012 and 2011, respectively. Provisions for losses
related to professional liability risks were $77 million and $60 million for the
second quarters of 2012 and 2011, respectively.
We recognized $70 million of electronic health record incentive income related
to Medicare incentive programs during the second quarter of 2012, and we
recognized $39 million of electronic health record incentive income related to
Medicaid incentive programs during the second quarter of 2011. We recognize
income related to Medicare and Medicaid incentive payments using a gain
contingency model that is based upon when our eligible hospitals have
demonstrated meaningful use of certified EHR technology for the applicable
period and the cost report information for the full cost report year that will
determine the final calculation of the incentive payment is available.
Equity in earnings of affiliates was $9 million and $73 million in the second
quarters of 2012 and 2011, respectively. Equity in earnings of affiliates for
the second quarter of 2011 relates primarily to our Denver, Colorado market
(HealthONE) joint venture, which effective November 1, 2011, we began
consolidating due to our acquisition of our partner's ownership interest.
Depreciation and amortization increased $62 million, from $358 million in the
second quarter of 2011 to $420 million in the second quarter of 2012. The
increase was primarily related to the consolidation of HealthONE.
Interest expense declined from $520 million in the second quarter of 2011 to
$448 million in the second quarter of 2012 due to a decline in the average
effective interest rate. Our average debt balance was $27.541 billion for the
second quarter of 2012 compared to $25.437 billion for the second quarter of
2011. The average effective interest rate for our long term debt declined from
8.2% for the quarter ended June 30, 2011 to 6.5% for the quarter ended June 30,
2012 due primarily to debt refinancing transactions completed during 2011.
During the second quarter of 2012, we recorded net losses on sales of facilities
of $2 million.
During the second quarter of 2011, we recorded losses on retirement of debt of
$75 million related to the redemptions of all $1.000 billion aggregate principal
amount of our 9 1/8% senior secured notes due 2014, at a redemption price of
104.563% of the principal amount, and $108 million aggregate principal amount of
our 9 7/8% senior secured notes due 2017, at a redemption price of 109.875% of
the principal amount.
The effective tax rates were 35.5% and 39.1% for the second quarters of 2012 and
2011, respectively. The effective tax rate computations exclude net income
attributable to noncontrolling interests as it relates to consolidated
partnerships. Our provision for income taxes for the second quarter of 2012 was
reduced by $11 million related to a reduction in interest expense related to
taxing authority examinations. Excluding the effect of this adjustment, the
effective tax rate for the second quarter of 2012 would have been 37.4%.
Net income attributable to noncontrolling interests increased from $91 million
for the second quarter of 2011 to $94 million for the second quarter of 2012.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Six Months Ended June 30, 2012 and 2011
Net income attributable to HCA Holdings, Inc. totaled $931 million, or $2.03 per
diluted share, in the six months ended June 30, 2012 compared to $469 million,
or $0.94 per diluted share, in the six months ended June 30, 2011. The first six
months of 2012 results include two Medicare adjustments (and related expenses)
that added $170 million to income before income taxes, or $0.22 per diluted
share. The first six months of 2011 results include a charge of $181 million, or
$0.30 per diluted share, related to the termination of the management agreement
between HCA and the Investors upon the completion of our initial public offering
and $75 million, or $0.09 per diluted share, of losses on retirement of debt.
All "per diluted share" disclosures are based upon amounts net of the applicable
income taxes. Shares used for diluted earnings per share were 458.5 million
shares and 500.5 million shares for the six months ended June 30, 2012 and 2011,
respectively.
For the first six months of 2012, consolidated and same facility admissions
increased 8.3% and 2.9%, respectively, compared to the first six months of 2011.
Consolidated and same facility outpatient surgical volumes increased 11.5% and
1.4%, respectively, during the first six months of 2012, compared to the first
six months of 2011. Consolidated and same facility inpatient surgeries increased
6.3% and 0.4%, respectively, in the first six months of 2012, compared to the
first six months of 2011. Consolidated and same facility emergency department
visits increased 11.9% and 7.1%, respectively, during the six months ended
June 30, 2012, compared to the six months ended June 30, 2011.
Revenues before provision for doubtful accounts increased 14.1% for the first
six months of 2012 compared to the first six months of 2011. Provision for
doubtful accounts increased $411 million from $1.424 billion in the first six
months of 2011 to $1.835 billion in the first six months of 2012. The provision
for doubtful accounts relates primarily to uninsured amounts due directly from
patients, including copayment and deductible amounts for patients who have
health care coverage. The self-pay revenue deductions for charity care and
uninsured discounts increased $239 million and $644 million, respectively,
during the first six months of 2012, compared to the first six months of 2011.
The sum of the provision for doubtful accounts, uninsured discounts and charity
care, as a percentage of the sum of revenues, the provision for doubtful
accounts, uninsured discounts and charity care, was 28.6% for the first six
months of 2012, compared to 26.7% for the first six months of 2011. At June 30,
2012, our allowance for doubtful accounts represented approximately 92% of the
$4.805 billion total patient due accounts receivable balance, including
accounts, net of estimated contractual discounts, related to patients for which
eligibility for Medicaid coverage or uninsured discounts was being evaluated.
Revenues increased 12.7% primarily due to the combined impact of revenue per
equivalent admission growth of 2.0% and an increase of 10.5% in equivalent
admissions for the first six months of 2012 compared to the first six months of
2011. Same facility revenues increased 4.5% due to the combined impact of a 0.1%
increase in same facility revenue per equivalent admission and a 4.4% increase
in same facility equivalent admissions for the first six months of 2012 compared
to the first six months of 2011. The increase in revenues for the first six
months of 2012 compared to the first six months of 2011 is related primarily to
the combined impact of the financial consolidation of our 2011 acquisition of
our partner's interest in the HCA-HealthONE LLC venture for periods subsequent
to our acquisition of controlling interests during October 2011 (HealthONE
revenues are not included in same facility amounts) and two adjustments (Rural
Floor Provision Settlement and SSI ratios) related to Medicare revenues for
prior periods. The net effect of the Medicare adjustments was an increase of
$188 million to revenues.
Salaries and benefits, as a percentage of revenues, were 45.1% in the first six
months of both 2012 and 2011. Salaries and benefits per equivalent admission
increased 1.8% in the first six months of 2012 compared to the first six months
of 2011. Same facility labor rate increases averaged 1.5% for the first six
months of 2012 compared to the first six months of 2011.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Six Months Ended June 30, 2012 and 2011 (continued)
Supplies, as a percentage of revenues, were 17.2% in the first six months of
2012 and 17.5% in the first six months of 2011. Supply cost per equivalent
admission was unchanged in the first six months of 2012 compared to the first
six months of 2011. Supply costs per equivalent admission increased 1.0% for
medical devices and declined 1.5% for pharmacy supplies, 0.1% for general
medical and surgical items and 5.8% for blood products in the first six months
of 2012 compared to the first six months of 2011.
Other operating expenses, as a percentage of revenues, declined to 18.1% in the
first six months of 2012 from 18.2% in the first six months of 2011. Other
operating expenses is primarily comprised of contract services, professional
fees, repairs and maintenance, rents and leases, utilities, insurance (including
professional liability insurance) and nonincome taxes. Other operating expenses
include $151 million and $170 million of indigent care costs in certain Texas
markets during the first six months of 2012 and 2011, respectively. Provisions
for losses related to professional liability risks were $171 million and
$121 million for the first six months of 2012 and 2011, respectively.
We recognized $125 million ($122 millionMedicare and $3 millionMedicaid) and
$39 million (all Medicaid) of electronic health record incentive income during
the first six months of 2012 and 2011, respectively. We recognize income related
to Medicare and Medicaid incentive payments using a gain contingency model that
is based upon when our eligible hospitals have demonstrated meaningful use of
certified EHR technology for the applicable period and the cost report
information for the full cost report year that will determine the final
calculation of the incentive payment is available.
Equity in earnings of affiliates was $20 million and $149 million in the first
six months of 2012 and 2011, respectively. Equity in earnings of affiliates for
the first six months of 2011 relates primarily to our Denver, Colorado market
(HealthONE) joint venture, which effective November 1, 2011, we began
consolidating due to our acquisition of our partner's ownership interest.
Depreciation and amortization increased $121 million, from $716 million in the
first six months of 2011 to $837 million in the first six months of 2012. The
increase was primarily related to the consolidation of HealthONE.
Interest expense declined from $1.053 billion in the first six months of 2011 to
$890 million in the first six months of 2012 due to a decline in the average
effective interest rate. Our average debt balance was $27.487 billion for the
first six months of 2012 compared to $26.544 billion for the first six months of
2011. The average effective interest rate for our long term debt declined from
8.0% for the six months ended June 30, 2011 to 6.5% for the six months ended
June 30, 2012 due primarily to debt refinancing transactions completed during
2011.
During the first six months of 2012 and 2011, we recorded net losses on sales of
facilities of $3 million and $1 million, respectively.
During the first six months of 2011, we recorded losses on retirement of debt of
$75 million related to the redemptions of all $1.000 billion aggregate principal
amount of our 9 1/8% senior secured notes due 2014, at a redemption price of
104.563% of the principal amount, and $108 million aggregate principal amount of
our 9 7/8% senior secured notes due 2017, at a redemption price of 109.875% of
the principal amount.
Our Investors provided management and advisory services to the Company, pursuant
to a management agreement among HCA and the Investors executed in connection
with the Investors' acquisition of HCA in November 2006. In March 2011, the
management agreement was terminated pursuant to its terms upon completion of the
initial public offering of our common stock, and the Investors were paid a final
fee of $181 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (continued)
Six Months Ended June 30, 2012 and 2011 (continued)
The effective tax rates were 36.6% and 41.3% for the first six months of 2012
and 2011, respectively. The effective tax rate computations exclude net income
attributable to noncontrolling interests as it relates to consolidated
partnerships. Our provision for income taxes for the first six months of 2012
was reduced by $13 million related to a reduction in interest expense related to
taxing authority examinations. Our provision for income taxes for the first six
months of 2011 increased by $16 million related to adjustments to our liability
for unrecognized tax benefits, including reductions in interest expense related
to taxing authority examinations. Excluding the effect of these adjustments, the
effective tax rates for the first six months of 2012 and 2011 would have been
37.5% and 39.3%, respectively.
Net income attributable to noncontrolling interests increased from $185 million
for the first six months of 2011 to $193 million for the first six months of
2012.
Liquidity and Capital Resources
Cash provided by operating activities totaled $2.257 billion in the first six
months of 2012 compared to $1.666 billion in the first six months of 2011. The
$591 million increase in cash provided by operating activities in the first six
months of 2012 compared to the first six months of 2011 related primarily to the
combined impact of the increase from changes in working capital items of $60
million and the increase in net income of $470 million. The combined interest
payments and net tax payments (refunds) in the first six months of 2012 and 2011
were $995 million and $1.007 billion, respectively. Working capital totaled
$1.690 billion at June 30, 2012 and $1.679 billion at December 31, 2011.
Cash used in investing activities was $886 million in the first six months of
2012 compared to $812 million in the first six months of 2011. Excluding
acquisitions, capital expenditures were $784 million in the first six months of
2012 and $776 million in the first six months of 2011. We expended $58 million
for the acquisition of a hospital facility and $81 million to acquire
nonhospital health care facilities during the first six months of 2012. We
expended $136 million for the acquisition of a hospital facility and $32 million
to acquire nonhospital health care facilities during the first six months of
2011. Capital expenditures are expected to approximate $1.83 billion in 2012. At
June 30, 2012, there were projects under construction which had estimated
additional costs to complete and equip over the next five years of approximately
$1.69 billion. We expect to finance capital expenditures with internally
generated and borrowed funds. We received $6 million and $54 million from sales
of health care entities during the first six months of 2012 and 2011,
respectively. We received net cash flows from our investments of $35 million and
$76 million in the first six months of 2012 and 2011, respectively.
Cash used in financing activities totaled $1.226 billion during the first six
months of 2012 compared to $726 million during the first six months of 2011.
During the first six months of 2012, net cash flows used in financing activities
included net debt repayments of $78 million, distributions to noncontrolling
interests of $191 million, distributions to stockholders of $982 million,
payments of debt issuance costs of $19 million and receipts of $71 million of
income tax benefits for certain items (primarily distributions to holders of our
stock options). During the first six months of 2011, net cash flows used in
financing activities included reductions in net borrowings of $3.032 billion,
net proceeds of $2.506 billion related to the issuance of common stock in
conjunction with our initial public offering, distributions to noncontrolling
interests of $185 million, distributions to stockholders of $30 million,
payments of debt issuance costs of $12 million and receipts of $49 million of
income tax benefits for certain items (primarily distributions to holders of our
stock options).
We are a highly leveraged company with significant debt service requirements.
Our debt totaled $27.041 billion at June 30, 2012. Our interest expense was $890
million for the first six months of 2012 and $1.053 billion for the first six
months of 2011. The decline in interest expense was related to a decline in the
average effective interest rate.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
In addition to cash flows from operations, available sources of capital include
amounts available under our senior secured credit facilities ($3.100 billion and
$3.475 billion available as of June 30, 2012 and July 31, 2012, respectively)
and anticipated access to public and private debt markets.
During April 2012, we extended $75 million of our term loan A-1 facility with a
final maturity of November 2012 and $651 million of our term loan B-1 facility
with a final maturity of November 2013 to term loan A-3 with a final maturity of
February 2016.
During February 2012, our Board of Directors declared a distribution to the
Company's stockholders and holders of vested stock awards. The distribution
declared was $2.00 per share and vested stock award, or approximately $971
million in the aggregate.
During February 2012, we issued $1.350 billion aggregate principal amount of
5.875% senior secured notes due 2022. After the payment of related fees and
expenses, we used the proceeds for general corporate purposes.
Investments of our insurance subsidiaries, to maintain statutory equity and pay
claims, totaled $621 million and $628 million at June 30, 2012 and December 31,
2011, respectively. An insurance subsidiary maintained net reserves for
professional liability risks of $341 million and $410 million at June 30, 2012
and December 31, 2011, respectively. Our facilities are insured by a
wholly-owned insurance subsidiary for losses up to $50 million per occurrence;
however, this coverage is subject to a $5 million per occurrence self-insured
retention. Net reserves for the self-insured professional liability risks
retained were $948 million and $842 million at June 30, 2012 and December 31,
2011, respectively. Claims payments, net of reinsurance recoveries, during the
next 12 months are expected to approximate $289 million. We estimate that
approximately $221 million of the expected net claim payments during the next
12 months will relate to claims subject to the self-insured retention.
Management believes that cash flows from operations, amounts available under our
senior secured credit facilities and our anticipated access to public and
private debt markets will be sufficient to meet expected liquidity needs during
the next 12 months.
Market Risk
We are exposed to market risk related to changes in market values of securities.
The investments in debt and equity securities of our wholly-owned insurance
subsidiaries were $613 million and $8 million, respectively, at June 30, 2012.
These investments are carried at fair value, with changes in unrealized gains
and losses being recorded as adjustments to other comprehensive income. At
June 30, 2012, we had a net unrealized gain of $15 million on the insurance
subsidiaries' investment securities.
We are exposed to market risk related to market illiquidity. Investments in debt
and equity securities of our wholly-owned insurance subsidiaries could be
impaired by the inability to access the capital markets. Should the wholly-owned
insurance subsidiaries require significant amounts of cash in excess of normal
cash requirements to pay claims and other expenses on short notice, we may have
difficulty selling these investments in a timely manner or be forced to sell
them at a price less than what we might otherwise have been able to in a normal
market environment. At June 30, 2012, our wholly-owned insurance subsidiaries
had invested $70 million ($76 million par value) in tax-exempt student loan
auction rate securities that continue to experience market illiquidity. It is
uncertain if auction-related market liquidity will resume for these securities.
We may be required to recognize other-than-temporary impairments on these
long-term investments in future periods should issuers default on interest
payments or should the fair market valuations of the securities deteriorate due
to ratings downgrades or other issue specific factors.
We are also exposed to market risk related to changes in interest rates, and we
periodically enter into interest rate swap agreements to manage our exposure to
these fluctuations. Our interest rate swap agreements
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (continued)
Market Risk (continued)
involve the exchange of fixed and variable rate interest payments between two
parties, based on common notional principal amounts and maturity dates. The
notional amounts of the swap agreements represent balances used to calculate the
exchange of cash flows and are not our assets or liabilities. Our credit risk
related to these agreements is considered low because the swap agreements are
with creditworthy financial institutions. The interest payments under these
agreements are settled on a net basis. These derivatives have been recognized in
the financial statements at their respective fair values. Changes in the fair
value of these derivatives, which are designated as cash flow hedges, are
included in other comprehensive income, and changes in the fair value of
derivatives which have not been designated as hedges are recorded in operations.
With respect to our interest-bearing liabilities, approximately $4.078 billion
of long-term debt at June 30, 2012 was subject to variable rates of interest,
while the remaining balance in long-term debt of $22.963 billion at June 30,
2012 was subject to fixed rates of interest. Both the general level of interest
rates and, for the senior secured credit facilities, our leverage affect our
variable interest rates. Our variable debt is comprised primarily of amounts
outstanding under the senior secured credit facilities. Borrowings under the
senior secured credit facilities bear interest at a rate equal to an applicable
margin plus, at our option, either (a) a base rate determined by reference to
the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of
Bank of America, or (b) a LIBOR rate for the currency of such borrowing for the
relevant interest period. The applicable margin for borrowings under the senior
secured credit facilities may fluctuate according to a leverage ratio. The
average effective interest rate for our long-term debt declined from 8.0% for
the six months ended June 30, 2011 to 6.5% for the six months ended June 30,
2012.
The estimated fair value of our total long-term debt was $28.146 billion at
June 30, 2012. The estimates of fair value are based upon the quoted market
prices for the same or similar issues of long-term debt with the same
maturities. Based on a hypothetical 1% increase in interest rates, the potential
annualized reduction to future pretax earnings would be approximately $41
million. To mitigate the impact of fluctuations in interest rates, we generally
target a portion of our debt portfolio to be maintained at fixed rates.
Our international operations and foreign currency denominated loans expose us to
market risks associated with foreign currencies. In order to mitigate the
currency exposure related to foreign currency denominated debt service
obligations, we have entered into cross currency swap agreements. A cross
currency swap is an agreement between two parties to exchange a stream of
principal and interest payments in one currency for a stream of principal and
interest payments in another currency over a specified period. Our credit risk
related to these agreements is considered low because the swap agreements are
with creditworthy financial institutions.
Pending IRS Disputes
We are contesting certain claimed deficiencies and adjustments proposed by the
IRS Examination Division in connection with its audit of HCA Inc.'s 2005 and
2006 federal income tax returns. The disputed items include the timing of
recognition of certain patient service revenues, the deductibility of certain
debt retirement costs and our method for calculating the tax allowance for
doubtful accounts. The IRS Examination Division began an audit of HCA Inc.'s
2007, 2008 and 2009 federal income tax returns in 2010.
Management believes HCA Holdings, Inc., its predecessors and affiliates properly
reported taxable income and paid taxes in accordance with applicable laws and
agreements established with the IRS and final resolution of these disputes will
not have a material, adverse effect on our results of operations or financial
position. However, if payments due upon final resolution of these issues exceed
our recorded estimates, such resolutions could have a material, adverse effect
on our results of operations or financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Data
2012 2011
Number of hospitals in operation at:
March 31 164 156
June 30 163 157
September 30 157
December 31 163
Number of freestanding outpatient surgical centers in
operation at:
March 31 109 98
June 30 110 98
September 30 98
December 31 108
Licensed hospital beds at(a):
March 31 41,815 39,075
June 30 41,817 39,472
September 30 39,526
December 31 41,594
Weighted average licensed beds(b):
Quarter:
First 41,740 39,061
Second 41,789 39,356
Third 39,509
Fourth 40,994
Year 39,735
Average daily census(c):
Quarter:
First 23,284 22,002
Second 22,113 20,764
Third 20,528
Fourth 21,213
Year 21,123
Admissions(d):
Quarter:
First 443,300 406,900
Second 428,200 397,500
Third 402,300
Fourth 413,700
Year 1,620,400
Equivalent admissions(e):
Quarter:
First 711,100 638,400
Second 700,800 638,900
Third 650,900
Fourth 667,700
Year 2,595,900
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Data - (Continued)
Average length of stay (days)(f):
Quarter:
First 4.8 4.9
Second 4.7 4.8
Third 4.7
Fourth 4.7
Year 4.8
Emergency room visits(g):
Quarter:
First 1,688,400 1,527,600
Second 1,714,200 1,512,000
Third 1,539,500
Fourth 1,564,400
Year 6,143,500
Outpatient surgeries(h):
Quarter:
First 217,500 193,000
Second 219,800 199,100
Third 194,300
Fourth 212,800
Year 799,200
Inpatient surgeries(i):
Quarter:
First 128,300 119,700
Second 126,700 120,200
Third 121,100
Fourth 123,500
Year 484,500 Days revenues in accounts receivable(j):
Quarter:
First 53 49
Second 50 50
Third 50
Fourth 52
Year 53
Gross patient revenues(k) (dollars in millions):
Quarter:
First $ 41,377 $ 34,764
Second 40,327 34,242
Third 34,288
Fourth 38,222
Year 141,516
Outpatient revenues as a % of patient revenues(l):
Quarter:
First 37 % 36 %
Second 39 % 37 %
Third 37 %
Fourth 38 %
Year 37 %
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Data - (Continued)
BALANCE SHEET DATA
% of Accounts Receivable
Under 91 Days 91 - 180 Days Over 180 Days
Accounts receivable aging at
June 30, 2012 (m):
Medicare and Medicaid 12 % 1 % 1 %
Managed care and other
discounted 23 5 4
Uninsured 17 9 28
Total 52 % 15 % 33 %
(a) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds, weighted based on periods
owned.
(c) Represents the average number of patients in our hospital beds each day.
(d) Represents the total number of patients admitted to our hospitals and is used
by management and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenues and gross outpatient revenues and then
dividing the resulting amount by gross inpatient revenues. The equivalent
admissions computation "equates" outpatient revenues to the volume measure
(admissions) used to measure inpatient volume resulting in a general measure
of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in our
hospitals.
(g) Represents the number of patients treated in our emergency rooms.
(h) Represents the number of surgeries performed on patients who were not
admitted to our hospitals. Pain management and endoscopy procedures are not
included in outpatient surgeries.
(i) Represents the number of surgeries performed on patients who have been
admitted to our hospitals. Pain management and endoscopy procedures are not
included in inpatient surgeries.
(j) Revenues per day is calculated by dividing the revenues for the period by the
days in the period. Days revenues in accounts receivable is then calculated
as accounts receivable, net of allowance for doubtful accounts, at the end of
the period divided by the revenues per day. With our adoption of ASU 2011-07
during 2011, "revenues" used in this computation are net of the provision for
doubtful accounts.
(k) Gross patient revenues are based upon our standard charge listing. Gross
charges/revenues typically do not reflect what our hospital facilities are
paid. Gross charges/revenues are reduced by contractual adjustments,
discounts and charity care to determine reported revenues.
(l) Represents the percentage of patient revenues related to patients who are not
admitted to our hospitals.
(m) Accounts receivable aging data is based upon consolidated gross accounts
receivable of $8.901 billion (each 1% is equivalent to approximately
$89 million of gross accounts receivable).
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