INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), is to provide a narrative
explanation of our financial statements that enables investors to better
understand our business, to enhance our overall financial disclosures, to
provide the context within which our financial information may be analyzed, and
to provide information about the quality of, and potential variability of, our
financial condition, results of operations and cash flows. Unless otherwise
indicated, all financial and statistical information included herein relates to
our continuing operations, with dollar amounts expressed in millions (except per
share, per admission, per adjusted admission, per patient day, per adjusted
patient day and per visit amounts). All current and prior period amounts related
to shares, share prices and earnings per share have been restated to give
retrospective presentation for the reverse stock split described in Note 2 to
the accompanying Consolidated Financial Statements. In the three months ended
June 30, 2012, we began reporting Conifer Health Solutions ("Conifer") as a
separate reportable business segment. Our core business is Hospital Operations
and other, which is focused on owning and operating acute care hospitals and
outpatient facilities. We also operate revenue cycle management, patient
communications services and management services businesses under our Conifer
subsidiary. MD&A, which should be read in conjunction with the accompanying
Consolidated Financial Statements, includes the following sections:
† Management Overview
† Sources of Revenue
† Results of Operations
† Liquidity and Capital Resources
† Off-Balance Sheet Arrangements
† Recently Issued Accounting Standards
† Critical Accounting Estimates
MANAGEMENT OVERVIEW
RECENT DEVELOPMENTS
Agreement to Acquire Hospital-In February 2013, we announced the signing of a
definitive agreement to acquire Emanuel Medical Center, a 209-bed hospital in
Turlock, California. The acquisition is subject to customary approvals and other
closing conditions, but is expected to be completed in the second quarter of
2013.
Issuance of New Notes; Repurchase of Outstanding Notes-In February 2013, we sold
$850 million aggregate principal amount of 41†2% senior secured notes, which
will mature on April 1, 2021. We will pay interest on the 41†2% senior secured
notes semi-annually in arrears on April 1 and October 1 of each year, commencing
on October 1, 2013. We used a portion of the proceeds from the sale of the notes
to purchase approximately $645 million aggregate principal amount outstanding of
our 10% senior secured notes due 2018 in a tender offer and to call
approximately $69 million of the remaining aggregate principal amount
outstanding of those notes. The remaining net proceeds will be used for
purchases of our other outstanding senior secured notes through public or
privately negotiated transactions and for general corporate purposes,
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including strategic acquisitions and the repayment of indebtedness and drawings
under our senior secured revolving credit facility.
Joint Venture with John Muir Health-In January 2013, we announced the creation
of a joint venture partnership between our San Ramon Regional Medical Center and
John Muir Health, a not-for-profit integrated system of doctors, hospitals and
other health care services in the San Francisco Bay area. Through this
partnership, John Muir Health will invest approximately $100 million to acquire
a 49% ownership interest in San Ramon Regional Medical Center.
STRATEGY AND TRENDS
We are committed to providing the communities our hospitals, outpatient centers
and other health care facilities serve with high quality, cost-effective health
care while growing our business, increasing our profitability and creating
long-term value for our shareholders. We believe that our success in increasing
our profitability depends in part on our success in executing the strategies and
managing the trends discussed below.
Core Business Strategy-Our business is focused on providing high quality care to
patients through our hospitals and outpatient centers, and providing business
process solutions for health care providers through our Conifer business. With
respect to our hospitals and outpatient facilities, we seek to offer superior
quality and patient services to meet community needs, to make capital and other
investments in our facilities and technology to remain competitive, to recruit
and retain physicians, to expand our outpatient business, and to negotiate
favorable contracts with managed care and other commercial payers. With respect
to business process services, we provide comprehensive operational management
for revenue cycle functions, including patient access, health information
management, revenue integrity and patient financial services. We also offer
patient communications solutions to optimize the relationship between providers
and patients. In addition, our management services offerings have expanded to
support value-based performance through clinical integration, financial risk
management and population health management.
Development Strategies-We remain focused on opportunities to increase our
hospital and outpatient revenues through organic growth and acquisitions, and to
expand our Conifer business.
From time to time, we build new hospitals, make strategic acquisitions of
hospitals and enter into joint venture arrangements or affiliations with health
care businesses - in each case in markets where we believe our operating
strategies can improve performance and create shareholder value. We recently
signed a definitive agreement to acquire the Emanuel Medical Center in Turlock,
California. In addition, we are creating a joint venture partnership with John
Muir Health, a not-for-profit integrated system of doctors, hospitals and other
health care services in the San Francisco Bay area, through which John Muir
Health will invest approximately $100 million to acquire a 49% ownership
interest in San Ramon Regional Medical Center.
Historically, our outpatient services have generated significantly higher
margins for us than inpatient services. During the year ended December 31, 2012,
we derived approximately 34% of our net patient revenues from outpatient
services. By expanding our outpatient business, we expect to increase our
profitability over time. We believe that growth by strategic acquisitions, when
and if opportunities are available, can supplement the growth we believe we can
generate organically in our existing markets. We continually evaluate
collaboration opportunities with outpatient facilities, health care providers,
physician groups and others in our markets to maximize effectiveness, reduce
costs and build clinically integrated networks that provide quality service
across the care continuum.
We intend to continue expanding Conifer's revenue cycle management, patient
communications services and management services businesses by marketing these
services to non-Tenet hospitals and other health care-related entities. Conifer
provides services to more than 600 Tenet and non-Tenet hospital and other
clients nationwide. We believe this business has the potential over time to
generate high margins and improve our results of operations. In May 2012,
Conifer entered into a 10-year agreement with Catholic Health Initiatives
("CHI") to provide revenue cycle services for over 50 of CHI's hospitals. As
part of this agreement, CHI received a minority ownership interest in Conifer.
In addition, in October and November 2012, Conifer acquired an information
management and services company and a hospital revenue cycle management
business, respectively. Our service offerings have also recently expanded to
support value-based performance through clinical integration, financial risk
management and population health management, which are integral parts of the
health care industry's movement toward accountable care organizations ("ACOs")
and similar risk-based or capitated contract models. In addition to hospitals,
other clients for these services include health plans, self-insured employees
and other entities.
Commitment to Quality-We have made significant investments in the last decade in
equipment, technology, education and operational strategies designed to improve
clinical quality at our hospitals and outpatient centers. As a result of our
efforts, our CMS Hospital Compare Core Measures scores have consistently
exceeded the national average since the end of 2005, and the major national
commercial payers have also recognized our achievements relative to quality.
These designations are expected to become increasingly important as the
commercial market moves to narrow networks and other methods designed to
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encourage covered individuals to use certain facilities over others. Through our
Commitment to Quality and Medicare Performance Improvement initiatives, we
continually work with physicians to implement the most current evidence-based
medicine techniques to improve the way we provide care, while using labor
management tools and supply chain initiatives to reduce variable costs. We
believe the use of these practices will promote the most effective and efficient
utilization of resources and result in shorter lengths of stay, as well as
reductions in redundant ancillary services and readmissions for hospitalized
patients. In general, we believe that quality of care improvements may have the
effect of reducing costs, increasing payments from Medicare and certain managed
care payers for our services, and increasing physician and patient satisfaction,
which may improve our volumes.
Realizing HIT Incentive Payments and Other Benefits-Beginning in the year ended
December 31, 2011, we achieved compliance with certain of the health information
technology ("HIT") requirements under the American Recovery and Reinvestment Act
of 2009 ("ARRA"); as a result, we recognized approximately $55 million of
electronic health record ("EHR") incentives related to Medicaid ARRA HIT in 2011
in our consolidated statement of operations. In addition, we recognized
approximately $40 million of Medicare and Medicaid EHR incentives in our
consolidated statement of operations in the year ended December 31, 2012. These
incentives partially offset the operating expenses we have incurred and continue
to incur to invest in HIT systems. Furthermore, we believe that the operational
benefits of HIT, including improved clinical outcomes and increased operating
efficiencies, will contribute to our long-term ability to grow our business.
General Economic Conditions-We believe that high unemployment rates and other
adverse economic conditions are continuing to have a negative impact on our bad
debt expense levels and patient volumes. However, as the economy recovers, we
expect to experience improvements in these metrics relative to current levels.
Improving Operating Leverage-We are experiencing an increase in our adjusted
patient admissions that we believe is primarily attributable to our focus on
physician alignment and satisfaction, targeted capital spending on critical
growth opportunities for our hospitals, emphasis on higher demand clinical
service lines (including outpatient lines), focus on expanding our outpatient
business, the implementation of new payer contracting strategies, and improved
quality metrics at our hospitals. Increases in patient volumes have been
constrained by the slow pace of the current economic recovery, increased
competition, utilization pressure by managed care organizations, the effects of
higher patient co-pays and deductibles, and demographic trends. We continue to
pursue integrated contracting models that maximize our system-wide skills and
capabilities in conjunction with our strong market positions to accommodate new
payment models. We are also committed to a clinical alignment strategy, which
includes an emphasis on physician employment and on innovative arrangements with
payers, physicians and other providers. For example, during 2012, we
successfully completed our first year of operation of an ACO in Northern
California with roughly 7,000 Blue Shield members as part of an integrated
health care delivery system designed to compete with offerings from other
providers in the local market. In several other markets, we have formed clinical
integration organizations, which are collaborations with independent physicians
and hospitals to develop ongoing clinical initiatives designed to control costs
and improve the quality of care delivered to patients. These achievements
provide a foundation for negotiating with plans under an ACO structure or other
risk-sharing model.
Impact of Affordable Care Act-We anticipate that we will benefit over time from
the provisions of the Patient Protection and Affordable Care Act as amended by
the Health Care and Education Reconciliation Act of 2010 ("Affordable Care Act")
that will extend insurance coverage through Medicaid or private insurance to a
broader segment of the U.S. population. Although we are unable to predict the
precise impact of the Affordable Care Act on our future results of operations,
and while there will be some reductions in reimbursement rates, which began in
2010, we anticipate, based on the current timetable for implementing the law,
that we should begin to receive reimbursement for caring for uninsured and
underinsured patients as early as 2014.
Our ability to execute on these strategies and manage these trends is subject to
a number of risks and uncertainties that may cause actual results to be
materially different from expectations. For information about these risks and
uncertainties, see the Forward-Looking Statements and Risk Factors sections in
Part I of this report.
RESULTS OF OPERATIONS-OVERVIEW
Our results of operations have been and continue to be influenced by
industry-wide and company-specific challenges, including constrained volume
growth, lower patient acuity levels for certain patient service lines, and high
levels of bad debt, that have affected our revenue growth and operating
expenses. We believe our results of operations for our most recent fiscal
quarter best reflect recent trends we are experiencing with respect to volumes,
revenues and expenses; therefore, we have provided below information about these
metrics for the three months ended December 31, 2012 and 2011 for all of our
continuing operations hospitals, excluding the results of our Creighton
University Medical Center, which has been reclassified to discontinued
operations.
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Three Months Ended December 31,
IncreaseAdmissions, Patient Days and Surgeries 2012 2011 (Decrease)
Total admissions
125,290 125,347 - %
Adjusted patient admissions(1) 199,304 193,631 2.9 %
Paying admissions (excludes charity and
uninsured) 116,611 116,763 (0.1 ) %
Charity and uninsured admissions 8,679 8,584 1.1 %
Admissions through emergency department 77,465 76,151 1.7 %
Paying admissions as a percentage of
total admissions 93.1% 93.2% (0.1 ) % (2)
Charity and uninsured admissions as a
percentage of total admissions 6.9% 6.8% 0.1 % (2)
Emergency department admissions as a
percentage of total admissions 61.8% 60.8% 1.0 % (2)
Surgeries - inpatient 34,511 35,419 (2.6 ) %
Surgeries - outpatient 63,534 55,781 13.9 %
Total surgeries 98,045 91,200 7.5 %
Patient days - total 580,426 589,848 (1.6 ) %
Adjusted patient days(1) 915,584 902,762 1.4 %
Average length of stay (days) 4.63 4.71 (1.7 ) %
Average licensed beds 13,216 13,119 0.7 %
Utilization of licensed beds(3) 47.7% 48.9% (1.2 ) % (2)
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(1) Adjusted patient days/admissions represents actual patient days/admissions
adjusted to include outpatient services by multiplying actual patient
days/admissions by the sum of gross inpatient revenues and outpatient revenues
and dividing the results by gross inpatient revenues.
(2) The change is the difference between the amounts shown for the three
months ended December 31, 2012 compared to the three months ended
December 31, 2011.
(3) Utilization of licensed beds represents patient days divided by number of
days in the period divided by average licensed beds.
Total admissions were flat in the three months ended December 31, 2012 compared
to the three months ended December 31, 2011. Total surgeries increased by 7.5%
in the three months ended December 31, 2012 compared to the same period in 2011,
comprised of a 13.9% increase in outpatient surgeries partially offset by a 2.6%
decrease in inpatient surgeries. Our emergency department admissions increased
1.7% in the three months ended December 31, 2012 compared to the same period in
the prior year. We believe the current economic conditions continue to have an
adverse impact on the level of elective procedures performed at our hospitals,
which constrained the overall change in our total admissions. Charity and
uninsured admissions increased 1.1% in the three months ended December 31, 2012
compared to the three months ended December 31, 2011.
Three Months Ended December 31,
Increase
Outpatient Visits 2012 2011 (Decrease)
Total visits 1,053,499 982,083 7.3 %
Paying visits (excludes charity and
uninsured) 941,658 884,421 6.5 %
Charity and uninsured visits 111,841 97,662 14.5 %
Emergency department visits 399,711 363,230 10.0 %
Surgery visits 63,534 55,781 13.9 %
Paying visits as a percentage of total
visits 89.4% 90.1% (0.7 ) % (1)
Charity and uninsured visits as a
percentage of total visits 10.6% 9.9% 0.7 % (1)
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(1) The change is the difference between the amounts shown for the three
months ended December 31, 2012 compared to the three months ended
December 31, 2011.
Total outpatient visits increased 71,416 or 7.3%, in the three months ended
December 31, 2012 compared to the three months ended December 31, 2011. All four
of our regions reported increased outpatient visits in the three months ended
December 31, 2012, with the strongest growth occurring in our California region.
Outpatient surgery visits increased by 13.9% in the three months ended
December 31, 2012 compared to the same period in 2011. Charity and uninsured
outpatient visits increased by 14.5% in the three months ended December 31, 2012
compared to the three months ended December 31, 2011.
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Three Months Ended December 31,
Increase
Revenues 2012 2011 (Decrease)
Net operating revenues $ 2,331 $ 2,172 7.3 %
Revenues from the uninsured $ 165 $ 157 5.1 %
Net inpatient revenues(1) $ 1,544 $ 1,499 3.0 %
Net outpatient revenues(1) $ 821 $ 736 11.5 %
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(1) Net inpatient revenues and net outpatient revenues are components of net
operating revenues. Net inpatient revenues include self-pay revenues of
$71 million and $72 million for the three months ended December 31, 2012 and
2011, respectively. Net outpatient revenues include self-pay revenues of
$94 million and $85 million for the three months ended December 31, 2012 and
2011, respectively.
Net operating revenues increased by $159 million, or 7.3%, in the three months
ended December 31, 2012 compared to the same period in 2011. Net operating
revenues in the three months ended December 31, 2012 included $72 million of
Medicaid disproportionate share hospital ("DSH") and other state-funded subsidy
revenues compared to $60 million in the same period in 2011.
In addition to certain of the factors discussed above, net patient revenues
increased by 5.8% in the three months ended December 31, 2012 compared to the
same period in 2011 primarily as a result of managed care pricing improvement
and increased outpatient volumes.
Three Months Ended December 31,
Increase
Revenues on a Per Admission, Per Patient Day and Per Visit Basis 2012
2011 (Decrease)
Net inpatient revenue per admission $ 12,323 $ 11,959 3.0 %
Net inpatient revenue per patient day $ 2,660 $ 2,541 4.7 %
Net outpatient revenue per visit $ 779 $ 749 4.0 %
Net patient revenue per adjusted patient admission(1) $ 11,866 $ 11,543 2.8 %
Net patient revenue per adjusted patient day(1) $ 2,583 $ 2,476 4.3 %
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(1) Adjusted patient days/admissions represents actual patient days/admissions
adjusted to include outpatient services by multiplying actual patient
days/admissions by the sum of gross inpatient revenues and outpatient revenues
and dividing the results by gross inpatient revenues.
Net inpatient revenue per patient day and per admission increased 4.7% and 3.0%,
respectively, in the three months ended December 31, 2012 compared to the same
period in 2011. This pricing increase reflects improved terms in our contracts
with commercial managed care payers, as well as the increase in DSH and other
state-funded subsidy revenues described above, partially offset by an adverse
shift in payer mix. The 4.0% increase in net outpatient revenue per visit was
primarily due to the improved terms of our managed care contracts, partially
offset by the provision of lower acuity services by outpatient centers we
acquired in the past several years, as well as an unfavorable shift in our total
outpatient payer mix.
Three Months Ended December 31,
Increase
Provision for Doubtful Accounts 2012 2011
(Decrease)
Provision for doubtful accounts $ 200 $ 181 10.5 %
Provision for doubtful accounts as a
percentage of net operating revenues
before provision for doubtful accounts 7.9% 7.7% 0.2 % (1)
Collection rate on self-pay accounts(2) 28.9% 27.7% 1.2 % (1)
Collection rate on commercial managed
care accounts 98.0% 98.2% (0.2 ) % (1)
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(1) The change is the difference between the amounts shown for the three
months ended December 31, 2012 compared to the three months ended
December 31, 2011.
(2) Self-pay accounts receivable are comprised of both uninsured and balance
after insurance receivables.
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Provision for doubtful accounts increased by $19 million, or 10.5%, in the three
months ended December 31, 2012 compared to the same period in 2011. The increase
in provision for doubtful accounts primarily related to the increase in
uninsured patient volumes in the three months ended December 31, 2012 compared
to the three months ended December 31, 2011, partially offset by the impact of a
120 basis point improvement in our collection rate on self-pay accounts. Our
self-pay collection rate, which is the blended collection rate for uninsured and
balance after insurance accounts receivable, was approximately 28.9% at
December 31, 2012 and 27.7% at December 31, 2011.
Three Months Ended December 31,
Increase
Selected Operating Expenses 2012 2011
(Decrease)
Hospital Operations and other
Salaries, wages and benefits $ 1,010 $ 955 5.8 %
Supplies 388 381 1.8 %
Other operating expenses 506 480 5.4 %
Total $ 1,904 $ 1,816 4.8 %
Conifer
Salaries, wages and benefits $ 81 $ 59 37.3 %
Other operating expenses 37 14 164.3 %
Total $ 118 $ 73 61.6 %
Total
Salaries, wages and benefits $ 1,091 $ 1,014 7.6 %
Supplies 388 381 1.8 %
Other operating expenses 543 494 9.9 %
Total $ 2,022 $ 1,889 7.0 %
Rent/lease expense(1)
Hospital Operations and other $ 39 $ 34 14.7 %
Conifer 3 3 - %
Total $ 42 $ 37 13.5 %
Hospital Operations and other
Salaries, wages and benefits per adjusted
patient day(2) $ 1,103 $ 1,058 4.3 %
Supplies per adjusted patient day(2) 424 422 0.5 %
Other operating expenses per adjusted
patient day(2) 553 532 3.9 %
Total per adjusted patient day $ 2,080 $ 2,012 3.4 %
Salaries, wages and benefits per adjusted
patient admission(2) $ 5,068 $ 4,932 2.8 %
Supplies per adjusted patient admission(2) 1,947 1,968 (1.1 ) %
Other operating expenses per adjusted
patient admission(2) 2,538 2,479 2.4 %
Total per adjusted patient admission $ 9,553 $ 9,379 1.9 %
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(1) Included in other operating expenses.
(2) Adjusted patient days/admissions represents actual patient days/admissions
adjusted to include outpatient services by multiplying actual patient
days/admissions by the sum of gross inpatient revenues and outpatient revenues
and dividing the results by gross inpatient revenues.
Total selected operating expenses, which is defined as salaries, wages and
benefits, supplies and other operating expenses, increased by 3.4% and 1.9% on a
per adjusted patient day and per adjusted patient admission basis, respectively,
in the three months ended December 31, 2012 compared to the three months ended
December 31, 2011. The increase on a per adjusted patient admission basis was
lower than the increase on a per adjusted patient day basis due in part to the
impact of our focus on reducing average length of stay.
Salaries, wages and benefits per adjusted patient admission increased by 2.8% in
the three months ended December 31, 2012 compared to the same period in 2011.
This increase is primarily due to an increase in the number of physicians we
employ, annual merit and contractual wage increases for our employees, increased
contract labor costs, increased annual incentive compensation expense, increased
health benefits costs and increased employee-related costs associated with our
HIT implementation program, partially offset by a decrease in overtime expense.
Salaries, wages and benefits expense for our Conifer segment increased by 37.3%
in the three months ended December 31, 2012 compared to the three months ended
December 31, 2011 due to an increase in employee headcount as a result of the
growth in Conifer's business primarily attributable to the new CHI partnership
and Conifer's two recent business acquisitions.
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Supplies expense per adjusted patient admission decreased by 1.1% in the three
months ended December 31, 2012 compared to the three months ended
December 31, 2011. Supplies expense was favorably impacted by lower
pharmaceutical costs and a decline in orthopedic costs due to renegotiated
prices, partially offset by increased costs of implants and surgical supplies.
Other operating expenses per adjusted patient admission increased by 2.4% in the
three months ended December 31, 2012 compared to the same period in 2011. This
change is primarily due to increased costs of contracted services, increased
systems implementation costs primarily related to our HIT implementation
program, increased consulting and legal expenses, costs related to agreements to
fund indigent care services by certain of our Texas hospitals beginning in the
three months ended December 31, 2012, and increased rent and lease expenses,
partially offset by decreased malpractice expense and decreased physician
relocation expenses. In the 2012 period, we also recognized a $3 million gain on
the sale of land and buildings. Malpractice expense in the 2012 period includes
a favorable adjustment of approximately $1 million due to a 14 basis point
increase in the interest rate used to estimate the discounted present value of
projected future malpractice liabilities compared to an unfavorable adjustment
of approximately $1 million as a result of an eight basis point decrease in the
interest rate in the 2011 period.
Other operating expenses for our Conifer segment increased by 164.3% in the
three months ended December 31, 2012 compared to the three months ended
December 31, 2011 primarily due to additional operating expenses related to the
new CHI partnership and Conifer's two recent business acquisitions.
The table below shows the pre-tax and after-tax impact on continuing operations
for the three months and years ended December 31, 2012 and 2011 of the following
items:
Three Months Ended Years Ended
December 31 December 31,
2012 2011 2012 2011
(Expense) Income
Impairment of long-lived assets
and goodwill, and restructuring
charges $ (7 ) $ (2 ) $ (19 ) $ (20 )
Litigation and investigation
costs (2 ) (31 ) (5 ) (55 )
Loss from early extinguishment
of debt (4 ) (117 ) (4 ) (117 )
Pre-tax impact $ (13 ) $ (150 ) $ (28 ) $ (192 )
Total after-tax impact $ (8 ) $ (95 ) $ (18 ) $ (121 )
Diluted per-share impact of
above items $ (0.08 ) $ (0.88 ) $ (0.17 ) $ (1.00 )
Diluted earnings per share,
including above items $ 0.52 $ (0.55 ) $ 1.70 $ 0.56
LIQUIDITY AND CAPITAL RESOURCES OVERVIEW
Cash and cash equivalents were $364 million at December 31, 2012, an increase of
$281 million from $83 million at September 30, 2012.
Significant cash flow items in the three months ended December 31, 2012
included:
† Capital expenditures of $148 million;
† Interest payments of $88 million;
† Payments on reserves for restructuring charges and litigation costs
of $7 million;
† $173 million of payments to acquire various outpatient, physician
practice, information management and revenue cycle management businesses;
† $175 million of net repayments of borrowings under our revolving
credit facility;
† $100 million of payments to repurchase common stock;
† $161 million of payments to retire a portion of our 73/8% senior
notes due 2013; and
† $800 million of proceeds from the issuance of our 43/4% senior
secured notes due 2020 ($500 million) and 63/4% senior notes due 2020 ($300
million).
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Net cash provided by operating activities was $593 million in the year ended
December 31, 2012 compared to $497 million in the year ended December 31, 2011.
Key negative and positive factors contributing to the change between the 2012
and 2011 periods include the following:
† $81 million of proceeds in the 2012 period related to our continuing
operations from the Medicare Rural Floor Budget Neutrality Adjustment settlement
described below;
† Income tax payments of $13 million in the year ended
December 31, 2012 compared to $10 million in the year ended December 31, 2011;
† Higher payments on reserves for restructuring charges and litigation
costs of $19 million; and
† $3 million less cash used in operating activities from discontinued
operations.
SOURCES OF REVENUE
We receive revenues for patient services from a variety of sources, primarily
managed care payers and the federal Medicare program, as well as state Medicaid
programs, indemnity-based health insurance companies and self-pay patients (that
is, patients who do not have health insurance and are not covered by some other
form of third-party arrangement).
The table below shows the sources of net patient revenues before provision for
doubtful accounts for our general hospitals, expressed as percentages of net
patient revenues before provision for doubtful accounts from all sources:
Years Ended December 31,
Net Patient Revenues from: 2012 2011 2010
Medicare 23.4 % 23.1 % 23.7 %
Medicaid 8.4 % 9.0 % 8.6 %
Managed care 57.4 % 57.2 % 56.6 %
Indemnity, self-pay and other 10.8 % 10.7 % 11.1 %
Our payer mix on an admissions basis for our general hospitals, expressed as a
percentage of total admissions from all sources, is shown below:
Years Ended December 31,
Admissions from: 2012 2011 2010
Medicare 28.9 % 29.6 % 29.9 %
Medicaid 12.2 % 12.8 % 13.0 %
Managed care 48.8 % 47.9 % 47.8 %Indemnity, self-pay and other 10.1 % 9.7 % 9.3 %
GOVERNMENT PROGRAMS
The Medicare program, the nation's largest health insurance program, is
administered by the Centers for Medicare and Medicaid Services of the U.S.
Department of Health and Human Services ("HHS"). Medicare is a health insurance
program primarily for individuals 65 years of age and older, certain younger
people with disabilities, and people with end-stage renal disease, and is
provided without regard to income or assets. Medicaid is a program that pays for
medical assistance for certain individuals and families with low incomes and
resources, and is jointly funded by the federal government and state
governments. Medicaid is the largest source of funding for medical and
health-related services for the nation's poor and most vulnerable individuals.
The Affordable Care Act was enacted to change how health care services in the
United States are covered, delivered and reimbursed. One key provision of the
Affordable Care Act is the individual mandate, which requires most Americans to
maintain "minimum essential" health insurance coverage. For individuals who are
not exempt from the individual mandate, and who do not receive health insurance
through an employer or government program, the means of satisfying the
requirement is to purchase insurance from a private company. Beginning in 2014,
those who do not comply with the individual mandate must make a "shared
responsibility payment" to the federal government in the form of a tax penalty.
Another key provision of the Affordable Care Act is the expansion of Medicaid
coverage. The current Medicaid program offers federal funding to states to
assist pregnant women, children, needy families, the blind, the elderly and the
disabled in obtaining medical care. The Affordable Care Act, as enacted,
expanded the scope of the Medicaid program, increased the number of individuals
the states must cover and penalized states that refused to comply with Medicaid
expansion with the possibility of losing 100% of their federal Medicaid funding.
However, the U.S. Supreme Court struck down the Medicaid expansion provision in
June 2012 following the appeal of a lawsuit first filed in federal district
court by 26 states, several individuals and the National Federation
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of Independent Business challenging the constitutionality of various provisions
of the Affordable Care Act. The expansion of the Medicaid program in each state
will require state legislative action and the approval by CMS of a state
Medicaid plan amendment. There is no deadline for a state to undertake expansion
and qualify for the enhanced federal funding available under the Affordable Care
Act. We cannot provide any assurances as to whether or when the states in which
we operate might choose to expand their Medicaid programs. We anticipate that
health care providers will benefit over time from provisions of the Affordable
Care Act that will extend insurance coverage through Medicaid, state-sponsored,
federally funded, non-Medicaid plans for low-income residents not eligible for
Medicaid, and private insurance to a broader segment of the U.S. population.
However, the Affordable Care Act also contains a number of provisions designed
to significantly reduce Medicare and Medicaid program spending, including:
(1) negative adjustments to the annual market basket updates for Medicare
inpatient, outpatient, long-term acute and inpatient rehabilitation prospective
payment systems, which began in 2010, as well as additional "productivity
adjustments" that began in 2011; and (2) reductions to Medicare and Medicaid
disproportionate share hospital payments beginning in federal fiscal year
("FFY") 2014 as the number of uninsured individuals declines. We are unable to
predict the full impact of the Affordable Care Act on our future revenues and
operations at this time due to the law's complexity, the limited amount of
implementing regulations and interpretive guidance, uncertainty regarding the
ultimate number of uninsured patients who will obtain insurance coverage,
uncertainty regarding future negotiations with payers, and gradual or
potentially delayed implementation. Furthermore, we are unable to predict what
action, if any, Congress might take with respect to the Affordable Care Act or
the actions individual states might take with respect to expanding Medicaid
coverage as originally contemplated by the Affordable Care Act.
In addition to the changes affected by the Affordable Care Act, the Medicare and
Medicaid programs are subject to statutory and regulatory changes,
administrative and judicial rulings, interpretations and determinations,
requirements for utilization review, and federal and state funding restrictions,
all of which could materially increase or decrease payments from these
government programs in the future, as well as affect the cost of providing
services to our patients and the timing of payments to our facilities. We are
unable to predict the effect of future government health care funding policy
changes on our operations. If the rates paid by governmental payers are reduced,
if the scope of services covered by governmental payers is limited, or if we or
one or more of our subsidiaries' hospitals are excluded from participation in
the Medicare or Medicaid program or any other government health care program,
there could be a material adverse effect on our business, financial condition,
results of operations or cash flows.
MedicareMedicare offers its beneficiaries different ways to obtain their medical
benefits. One option, the Original Medicare Plan, is a fee-for-service payment
system. The other option, called Medicare Advantage (sometimes called "Part C"
or "MA Plans"), includes health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), private fee-for-service Medicare special needs
plans and Medicare medical savings account plans. The major components of our
net patient revenues, including our general hospitals and other operations, for
services provided to patients enrolled in the Original Medicare Plan for the
years ended December 31, 2012, 2011 and 2010 are set forth in the following
table:
Years Ended December 31,
Revenue Descriptions 2012 2011 2010
Medicare severity-adjusted diagnosis-related
group - operating $ 1,109 $ 1,126 $ 1,148
Medicare severity-adjusted diagnosis-related
group - capital 98 100 104
Outliers 51 44 47
Outpatient 522 462 441
Disproportionate share 217 214 211
Direct Graduate and Indirect Medical
Education(1) 96 97
96
Other(2) 66 70
52
Adjustments for prior-year cost reports and
related valuation allowances 109 - (15 )
Total Medicare net patient revenues $ 2,268 $ 2,113 $ 2,084
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(1) Includes Indirect Medical Education revenue earned by our children's
hospital under the Children's Hospitals Graduate Medical Education Payment
Program administered by the Health Resources and Services Administration of HHS.
(2) The other revenue category includes inpatient psychiatric units, inpatient
rehabilitation units, one long-term acute care hospital, other revenue
adjustments, and adjustments related to the estimates for current-year cost
reports and related valuation allowances.
A general description of the types of payments we receive for services provided
to patients enrolled in the Original Medicare Plan is provided below. Recent
regulatory and legislative updates to the terms of these payment systems and
their estimated effect on our revenues can be found below under "Regulatory and
Legislative Changes."
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Acute Care Hospital Inpatient Prospective Payment System
Medicare Severity-Adjusted Diagnosis-Related Group Payments-Sections 1886(d) and
1886(g) of the Social Security Act (the "Act") set forth a system of payments
for the operating and capital costs of inpatient acute care hospital admissions
based on a prospective payment system ("PPS"). Under the inpatient prospective
payment system ("IPPS"), Medicare payments for hospital inpatient operating
services are made at predetermined rates for each hospital discharge. Discharges
are classified according to a system of Medicare severity-adjusted
diagnosis-related groups ("MS-DRGs"), which categorize patients with similar
clinical characteristics that are expected to require similar amounts of
hospital resources. CMS assigns to each MS-DRG a relative weight that represents
the average resources required to treat cases in that particular MS-DRG,
relative to the average resources used to treat cases in all MS-DRGs.
The base payment amount for the operating component of the MS-DRG payment is
comprised of an average standardized amount that is divided into a labor-related
share and a nonlabor-related share. Both the labor-related share of operating
base payments and the base payment amount for capital costs are adjusted for
geographic variations in labor and capital costs, respectively. Using diagnosis
and procedure information submitted by the hospital, CMS assigns to each
discharge an MS-DRG, and the base payments are multiplied by the relative weight
of the MS-DRG assigned. The MS-DRG operating and capital base rates, relative
weights and geographic adjustment factors are updated annually, with
consideration given to: the increased cost of goods and services purchased by
hospitals; the relative costs associated with each MS-DRG; and changes in labor
data by geographic area. Although these payments are adjusted for area labor and
capital cost differentials, the adjustments do not take into consideration an
individual hospital's operating and capital costs.
Outlier Payments- Outlier payments are additional payments made to hospitals on
individual claims for treating Medicare patients whose medical conditions are
costlier to treat than those of the average patient in the same MS-DRG. To
qualify for a cost outlier payment, a hospital's billed charges, adjusted to
cost, must exceed the payment rate for the MS-DRG by a fixed threshold
established annually by CMS. A Medicare administrative contractor ("MAC")
calculates the cost of a claim by multiplying the billed charges by a
cost-to-charge ratio that is typically based on the hospital's most recently
filed cost report. Generally, if the computed cost exceeds the sum of the MS-DRG
payment plus the fixed threshold, the hospital receives 80% of the difference as
an outlier payment.
Under the Act, CMS must project aggregate annual outlier payments to all PPS
hospitals to be not less than 5% or more than 6% of total MS-DRG payments
("Outlier Percentage"). The Outlier Percentage is determined by dividing total
outlier payments by the sum of MS-DRG and outlier payments. CMS annually adjusts
the fixed threshold to bring projected outlier payments within the mandated
limit. A change to the fixed threshold affects total outlier payments by
changing: (1) the number of cases that qualify for outlier payments; and (2) the
dollar amount hospitals receive for those cases that still qualify for outlier
payments.
Medicare Rural Floor Budget Neutrality Adjustment Settlement-In April 2012, we
entered into an industry-wide settlement (the "Medicare Budget Neutrality
Settlement") with HHS, the Secretary of HHS and CMS that corrects Medicare
payments made to providers for inpatient hospital services for a number of prior
periods. The Balanced Budget Act of 1997 created the "rural floor," which is
intended to ensure that the wage-adjusted IPPS rates for providers in urban
areas in a state are not lower than the wage-adjusted IPPS rates for rural
providers in the same state. Congress required that the rural floor adjustment,
which would otherwise increase aggregate IPPS payments, be administered in a
budget neutral manner. CMS included a rural floor budget neutrality adjustment
in annual IPPS updates to the base payment rate; however, it did so in a manner
that went beyond what was required to achieve budget neutrality. Our 2012
settlement with the government, which is included in adjustments for prior-year
cost reports and related valuation allowances in the table above, resulted in a
net favorable adjustment in the three months ended March 31, 2012 of
approximately $84 million, of which $75 million related to continuing operations
(revenues of $81 million less $6 million of legal fees). Substantially all of
the cash proceeds to which the Company is entitled under the settlement were
received during the three months ended June 30, 2012.
Disproportionate Share Hospital Payments-In addition to making payments for
services provided directly to beneficiaries, Medicare makes additional payments
to hospitals that treat a disproportionately high share of low-income patients.
DSH payments are determined annually based on certain statistical information
defined by CMS and are calculated as a percentage add-on to the MS-DRG payments.
During 2012, 43 of our hospitals in continuing operations qualified for DSH
payments. The primary method for a hospital to qualify for DSH payments is based
on a complex statutory formula that results in a DSH percentage that is applied
to payments based on MS-DRGs. The hospital-specific DSH percentage is equal to
the sum of the percentage of Medicare inpatient days attributable to patients
eligible for both the Traditional Medicare Plan ("Part A") and Supplemental
Security Income ("SSI") percentage, and the percentage of total inpatient days
attributable to patients eligible for Medicaid but not Medicare Part A.
Hospitals receive interim DSH payments that are reconciled in the annual cost
report. CMS develops and distributes the hospital-specific SSI percentages,
typically one year after the close of the federal fiscal year; however, the
release of the SSI percentages was delayed several years as CMS examined and
refined the underlying data, in
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particular the data supporting CMS' policy of including Medicare Advantage days
in the calculation of the SSI ratio. During this time, CMS instructed the MACs
to suspend the settlement of cost reports pending the completion of its review
of the SSI data. The FFY 2007 SSI ratios previously issued by CMS generally
included the Medicare Advantage days for teaching hospitals only. CMS initiated
a data collection effort intended to ensure that the SSI ratios include the
Medicare Advantage days for non-teaching hospitals as well. Since 2009, we have
estimated the impact of including the Medicare Advantage days of our
non-teaching hospitals using internal estimates of the SSI ratios. We accrued
approximately $49 million in reserves for potential SSI adjustments in prior
reporting periods, including $6 million in 2011. During the three months ended
March 31, 2012, CMS released revised SSI ratios for FFYs 2006 and 2007, and SSI
ratios for FFYs 2008 and 2009, which, according to CMS, include the Medicare
Advantage days; based on these ratios, we increased the aforementioned reserves
by approximately $2 million related to our hospitals in continuing operations
and approximately $4 million related to our hospitals in discontinued
operations. During the three months ended September 30, 2012, CMS released the
SSI ratios for FFY 2010, which also include the Medicare Advantage days, and
removed the aforementioned suspension on issuing cost report settlements. Based
on these ratios, we increased the aforementioned reserves by approximately $3
million related to our hospitals in continuing operations and decreased the
reserves by approximately $1 million related to our hospitals in discontinued
operations. During the three months ended December 31, 2012, we received cost
report settlements previously held in abeyance due to the aforementioned
moratorium, resulting in a cash outflow of approximately $20 million,
substantially all of which is related to the SSI percentages. We expect to be
required to pay the remainder of the estimated liability related to the SSI
percentages during 2013.
The Medicare DSH statutes and regulations have been the subject of various
administrative appeals and lawsuits, and our hospitals have been participating
in these appeals, including challenges to the inclusion of Medicare Advantage
days in the SSI ratios. These types of appeals generally take several years to
resolve, particularly for multi-hospital organizations, because of CMS'
administrative appeal rules. During the three months ended December 31, 2012,
the federal district court in the District of Columbia ruled that the Secretary
of HHS failed to follow the Administrative Procedures Act when promulgating the
regulation requiring the inclusion of the Medicare Advantage days in the SSI
ratios. The court remanded the matter to the Secretary and vacated the
regulation it found to be improperly promulgated. Subsequently, the Secretary
appealed the district court's order to the court of appeals. The Company's DSH
appeals are still pending; however, the outcome of the aforementioned case could
influence the disposition of our appeals. We cannot predict the timing or
outcome of our DSH appeals; however, a favorable outcome of our appeals could
have a material impact on our future revenues and cash flows. We are also not
able to predict what additional action the Secretary might take with respect to
the regulation vacated by the district court.
Direct Graduate and Indirect Medical Education Payments-The Medicare program
provides additional reimbursement to approved teaching hospitals for additional
expenses incurred by such institutions. This additional reimbursement, which is
subject to certain limits, including intern and resident full-time equivalent
("FTE") limits, is made in the form of Direct Graduate Medical Education
("DGME") and Indirect Medical Education ("IME") payments. During 2012, 12 of our
hospitals in continuing operations were affiliated with academic institutions
and were eligible to receive such payments. Medicare rules permit teaching
hospitals to enter into Medicare Graduate Medical Education Affiliation
Agreements for the purpose of applying the FTE limits on an aggregate basis, and
some of our teaching hospitals have entered into such agreements.
Hospital Outpatient Prospective Payment System
Under the outpatient prospective payment system, hospital outpatient services,
except for certain services that are reimbursed on a separate fee schedule, are
classified into groups called ambulatory payment classifications ("APCs").
Services in each APC are similar clinically and in terms of the resources they
require, and a payment rate is established for each APC. Depending on the
services provided, hospitals may be paid for more than one APC for an encounter.
CMS periodically updates the APCs and annually adjusts the rates paid for each
APC.
Inpatient Psychiatric Facility Prospective Payment System
The inpatient psychiatric facility prospective payment system ("IPF-PPS")
applies to psychiatric hospitals and psychiatric units located within acute care
hospitals that have been designated as exempt from the hospital inpatient
prospective payment system. The IPF-PPS is based on prospectively determined
per-diem rates and includes an outlier policy that authorizes additional
payments for extraordinarily costly cases.
Inpatient Rehabilitation Prospective Payment System
Rehabilitation hospitals and rehabilitation units in acute care hospitals
meeting certain criteria established by CMS are eligible to be paid as an
inpatient rehabilitation facility ("IRF") under the IRF prospective payment
system ("IRF-PPS").
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Payments under the IRF-PPS are made on a per-discharge basis. A patient
classification system is used to assign patients in IRFs into case-mix groups.
The IRF-PPS uses federal prospective payment rates across distinct case-mix
groups.
To be paid under the IRF-PPS, each hospital or unit must demonstrate on an
annual basis that at least 60% of its total population had either a principal or
secondary diagnosis that fell within one or more of the qualifying conditions
designated in the Medicare regulations governing IRFs. As of December 31, 2012,
all of our rehabilitation units were in compliance with the required 60%
threshold.
Physician Services Payment System
Medicare pays for physician and other professional services based on a list of
services and their payment rates, called the Medicare Physician Fee Schedule
("MPFS"). In determining payment rates for each service on the fee schedule, CMS
considers the amount of work required to provide a service, expenses related to
maintaining a practice, and liability insurance costs. The values given to these
three types of resources are adjusted by variations in the input prices in
different markets, and then a total is multiplied by a standard dollar amount,
called the fee schedule's conversion factor, to arrive at the payment amount.
Medicare's payment rates may be adjusted based on provider characteristics,
additional geographic designations and other factors. The conversion factor
updates payments for physician services every year according to a formula called
the sustainable growth rate ("SGR") system. This formula is intended to keep
spending growth (a function of service volume growth) consistent with growth in
the national economy. However, in the last several years, Congress has specified
an update outside of the SGR formula. Because of budget neutrality requirements,
these payment updates have largely been funded by payment reductions to other
providers, including hospitals.
Cost Reports
The final determination of certain Medicare payments to our hospitals, such as
DSH, DGME, IME and bad debt expense, are retrospectively determined based on our
hospitals' cost reports. The final determination of these payments often takes
many years to resolve because of audits by the program representatives,
providers' rights of appeal, and the application of numerous technical
reimbursement provisions.
For filed cost reports, we adjust the accrual for estimated cost report
settlements based on those cost reports and subsequent activity, and record a
valuation allowance against those cost reports based on historical settlement
trends. The accrual for estimated cost report settlements for periods for which
a cost report is yet to be filed is recorded based on estimates of what we
expect to report on the filed cost reports and a corresponding valuation
allowance is recorded as previously described. Cost reports must generally be
filed within five months after the end of the annual cost report reporting
period. After the cost report is filed, the accrual and corresponding valuation
allowance may need to be adjusted.
MedicaidMedicaid programs and the corresponding reimbursement methodologies are
administered by the states and vary from state to state and from year to year.
Estimated revenues under various state Medicaid programs, excluding state-funded
managed care Medicaid programs, constituted approximately 8.4%, 9.0% and 8.6% of
net patient revenues at our continuing general hospitals for the years ended
December 31, 2012, 2011 and 2010, respectively. We also receive DSH payments
under various state Medicaid programs. For the years ended December 31, 2012,
2011 and 2010, our revenues attributable to DSH payments and other state-funded
subsidy payments were approximately $283 million, $255 million and $178 million,
respectively.
Several states in which we operate have recently faced budgetary challenges that
resulted in reduced Medicaid funding levels to hospitals and other providers.
Because most states must operate with balanced budgets, and the Medicaid program
is generally a significant portion of a state's budget, states can be expected
to adopt or consider adopting future legislation designed to reduce their
Medicaid expenditures. The economic downturn has increased budget pressures on
most states, and these budget pressures have resulted, and likely will continue
to result, in decreased spending for Medicaid programs in many states. In
addition, some states are implementing delays in issuing Medicaid payments to
providers. Increased Medicaid enrollment due to the economic downturn, budget
gaps and other factors could result in future reductions to Medicaid payments,
payment delays or additional taxes on hospitals.
As an alternative means of funding provider payments, several states in which we
operate have adopted or are considering adopting broad-based provider taxes to
fund the non-federal share of Medicaid programs. Most states have introduced
provider fee arrangements, which are intended to enhance funding or partially
mitigate reduced Medicaid funding levels to hospitals and other providers.
In September 2011, the Governor of California signed legislation that created a
hospital fee program to provide supplemental Medi-Cal payments to hospitals
retroactive to July 1, 2011 and expiring on December 31, 2013 (the "30-Month
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Program"). During the three months ended June 30, 2012, the Governor of
California signed the state's 2012/2013 budget, which included a change to the
fee program. This legislative change and approval by CMS of the fee-for-service
supplemental payment and assessment portions of the 30-Month Program in
June 2012 enabled us to record $72 million of net revenues related to the
30-Month Program in 2012, of which $42 million had not been received as of
December 31, 2012. We recorded $91 million of net revenues from similar
California hospital fee programs during the year ended December 31, 2011. We
expect the managed care portion of the 30-Month Program to be approved in 2013.
Based on the most recent California Hospital Association estimates, the 30-Month
Program could result in approximately $187 million of net revenues for our
California hospitals. At such time as CMS approves the managed care portion of
the fee program, we expect to: (1) make a one-time adjustment to record the
retroactive impact of the additional revenues net of assessments; and (2) record
the remaining net revenues for the program years ratably over the remaining term
of the program. We cannot provide any assurances regarding the final approval of
the managed care portion of the 30-Month Program by CMS or the timing or amount
of the payments we may ultimately receive or be required to make.
The State of Georgia adopted an amended budget for the state fiscal year ended
June 30, 2012 that included additional funding for payments to private hospitals
from the Indigent Care Trust Fund ("ICTF"), the state's disproportionate share
program. As a result, we recognized ICTF revenues of approximately $14 million
in 2012. During 2011, we recorded $13 million of ICTF revenues. We cannot
provide any assurances regarding the amount, if any, of ICTF payments we might
receive in 2013.
During the three months ended June 30, 2012, we received notification of our net
revenues under a North Carolina hospital fee program retroactive to January 1,
2011 through September 30, 2012. As a result, we recognized $17 million of net
revenues from this program during 2012. This program has no sunset date.
Based on an audit of Missouri's 2005-2007 Medicaid plan years, we had recorded a
liability of approximately $10 million as of September 30, 2012 related to
estimated Medicaid DSH overpayments. We formally challenged the recovery of the
overpayment and, during the three months ended December 31, 2012, we settled the
matter for $1.5 million. As a result, we recognized a favorable adjustment to
net operating revenues of approximately $8 million during the three months ended
December 31, 2012.
During the three months ended December 31, 2012, certain of our Texas hospitals
began to participate in the Texas 1115 demonstration waiver approved by CMS in
December 2011 to replace the state's Upper Payment Limit program. The waiver
term covers state fiscal years September 1, 2012 through August 31, 2016, is
funded by intergovernmental transfer payments from local government entities,
and includes two funding pools - Uncompensated Care and Delivery System Reform
Payment. We recognized $15 million of revenues associated with this 1115 waiver
program during the three months ended December 31, 2012, which we have not yet
received. Separately, during the same period we incurred $13 million of expenses
related to funding indigent care services by certain of our Texas hospitals. The
state is also negotiating with local government entities the amount of
intergovernmental transfer funding that will be provided for the state's
Medicaid DSH program. In 2012, we recognized $32 million in revenues from the
Texas 1115 waiver and DSH programs. We cannot provide any assurances as to the
ultimate amount of revenues that our hospitals may receive from these programs
in 2013.
Because we cannot predict what actions the federal government or the states may
take under existing legislation and future legislation to address budget gaps or
deficits, we are unable to assess the effect that any such legislation might
have on our business, but the impact on our future financial position, results
of operations or cash flows could be material.
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Medicaid-related patient revenues recognized by our continuing general hospitals
from Medicaid-related programs in the states in which they are located, as well
as from Medicaid programs in neighboring states, for the years ended
December 31, 2012, 2011 and 2010 are set forth in the table below:
Years Ended December 31,
2012 2011 2010
Managed Managed Managed
Hospital Location Medicaid Medicaid Medicaid Medicaid Medicaid Medicaid
California $ 198 $ 148 $ 221 $ 127 $ 137 $ 111
Florida 178 61 184 60 194 55
Georgia 85 38 88 40 87 40
Pennsylvania 72 209 91 195 53 161
Missouri 70 5 52 5 81 6
Texas 67 123 64 114 66 109
North Carolina 40 - 23 - 26 -
South Carolina 34 25 40 22 61 20
Alabama 31 - 29 - 26 -
Tennessee 8 29 10 30 9 27
$ 783 $ 638 $ 802 $ 593 $ 740 $ 529
Regulatory and Legislative Changes
Recent regulatory and legislative updates to the Medicare and Medicaid payment
systems are provided below.
Payment and Policy Changes to the Medicare Inpatient Prospective Payment System
Under Medicare law, CMS is required to annually update certain rules governing
the IPPS. The updates generally become effective October 1, the beginning of the
federal fiscal year. On August 1, 2012, CMS issued the Changes to the Hospital
Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year
2013 Rates ("Final Rule"). The Final Rule includes the following payment and
policy changes:
† A market basket increase of 2.6% for MS-DRG operating payments for
hospitals reporting specified quality measure data (hospitals that do not report
specified quality measure data would receive an increase of 0.6%); CMS is also
making certain adjustments to the estimated 2.6% market basket increase that
result in a net market basket update of 2.8%, including the following
adjustments to the market basket index:
† Market basket index and productivity reductions required by the
Affordable Care Act of 0.1% and 0.7%, respectively;
† A reduction of 1.9% to permanently remove the remaining portion of
the estimated 3.9% documentation and coding adjustment resulting from the
conversion to MS-DRGs based on CMS' analysis of FFY 2008 and FFY 2009 claims
data; and
† Restoration of a 2.9% reduction that was required to complete the
recovery in FFY 2012 of the estimated MS-DRG documentation and coding
overpayments for FFYs 2008 and 2009;
† A 0.97% net increase in the capital federal MS-DRG rate; and
† A decrease in the cost outlier threshold from $22,385 to $21,821.
CMS projects that the combined impact of the payment and policy changes in the
Final Rule will yield an average 2.6% increase in payments for hospitals in
large urban areas (populations over 1 million). Using the impact percentages in
the Final Rule as applied to our IPPS payments for the 12 months ended
September 30, 2012, the estimated annual impact for all changes in the Final
Rule on our hospitals is an increase in our Medicare inpatient revenues of
approximately $40 million. Because of the uncertainty regarding other factors
that may influence our future IPPS payments by individual hospital, including
admission volumes, length of stay and case mix, we cannot provide any assurances
regarding our estimate.
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Payment Changes to the Medicare Inpatient Psychiatric Facility Prospective
Payment System
On August 2, 2012, CMS issued a notice updating the prospective payment rates
for the Medicare inpatient psychiatric facility ("IPF") PPS for FFY 2013
("IPF-PPS Notice"). The IPF-PPS Notice includes the following payment and policy
changes:
† A net payment increase for IPFs of 1.9%, which reflects a market
basket index increase of 2.7%, reduced by a productivity adjustment of 0.7% and
an additional 0.1%, both as required by the Affordable Care Act, as well as
other adjustments, including a budget neutrality reduction; and
† An increase in the outlier threshold from $7,340 to $11,600.
At December 31, 2012, 11 of our general hospitals operated inpatient psychiatric
units reimbursed under the IPF-PPS. CMS projects that the combined impact of the
payment and policy changes included in the IPF-PPS Notice will yield an average
0.8% increase in payments for all IPFs (including psychiatric units in acute
care hospitals) and an average 0.2% increase in payments for psychiatric units
of acute care hospitals located in urban areas for FFY 2013. Using the urban
psychiatric unit impact percentage as applied to our IPF-PPS payments for the 12
months ended September 30, 2012, the annual impact of all payment and policy
changes in the IPF-PPS Notice on our IPF-PPS psychiatric units may result in an
estimated increase in our Medicare revenues of approximately $1 million. Because
of the uncertainty associated with various factors that may influence our future
IPF-PPS payments, including legislative action, admission volumes, length of
stay and case mix, we cannot provide any assurances regarding our estimate of
the impact of the aforementioned changes.
Payment Changes to the Medicare Inpatient Rehabilitation Facility Prospective
Payment System
On July 25, 2012, CMS issued a notice that further implements certain provisions
of the Affordable Care Act and updates the prospective payment rates for the
Medicare inpatient rehabilitation facility prospective payment system for
FFY 2013 ("IRF-PPS Notice"). The IRF-PPS Notice includes the following payment
changes:
† A net payment increase for IRFs of 1.9%, which reflects a market
basket index increase of 2.7%, reduced by a productivity adjustment of 0.7% and
an additional 0.1%, both as required by the Affordable Care Act, as well as
other adjustments, including a budget neutrality reduction; and
† A decrease in the outlier threshold for high cost outlier cases from
$10,660 to $10,466.
The IRF-PPS Notice also notes that the Affordable Care Act requires the
Secretary of HHS to establish a quality reporting program for IRFs, and that
IRFs that fail to comply with the quality data submission requirements,
beginning in FFY 2014, will experience a 2% reduction in the annual payment
update.
At December 31, 2012, eight of our general hospitals operated inpatient
rehabilitation units. CMS projects that the payment changes in the IRF-PPS
Notice will result in an estimated total increase in aggregate IRF payments of
2.1%. This estimated increase includes an average 2.2% increase for
rehabilitation units in hospitals located in urban areas for FFY 2013. Using the
urban rehabilitation unit impact percentage as applied to our Medicare IRF
payments for the 12 months ended September 30, 2012, the annual impact of the
payment changes in the IRF-PPS Notice may result in an estimated increase in our
Medicare revenues of less than $1 million. Because of the uncertainty associated
with various factors that may influence our future IRF payments, including
legislative action, admission volumes, length of stay and case mix, and the
impact of compliance with IRF admission criteria, we cannot provide any
assurances regarding our estimate of the impact of these changes.
Payment and Policy Changes to the Medicare Outpatient Prospective Payment System
On November 1, 2012, CMS released the Final Changes to the Hospital Outpatient
Prospective Payment System ("OPPS") and Calendar Year ("CY") 2013 Payment Rates
("Final OPPS Rule"). The Final OPPS Rule includes the following payment and
policy changes:
† A net update to OPPS payments equal to the estimated market basket of
1.8%, which takes into account a projected hospital IPPS market basket
percentage increase of 2.6%, minus an estimated productivity adjustment of 0.7%
and a 0.1% adjustment, both of which are necessary to comply with certain
provisions of the Affordable Care Act; and
† The continuation of a budget neutral reduction in payments for
non-cancer OPPS hospitals to fund an increase in OPPS payments to cancer
hospitals mandated under the Affordable Care Act.
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CMS projects that the combined impact of the payment and policy changes in the
Final OPPS Rule will yield an average 1.9% increase in payments for all
hospitals and an average 2.0% increase in payments for hospitals in large urban
areas (populations over one million). According to CMS' estimates, the projected
annual impact of the payment and policy changes in the Final OPPS Rule on our
hospitals is an $11 million increase in Medicare outpatient revenues. Because of
the uncertainty associated with factors that may influence our future OPPS
payments by individual hospital, including patient volumes and case mix, we
cannot provide any assurances regarding this estimate.
Changes to the Medicare Physician Fee Schedule
On November 1, 2012, CMS issued the CY 2013 Medicare Physician Fee Schedule
final rule detailing Medicare physician payment policies for 2013. The
rule confirmed that, unless Congress intervened, Medicare's physician payments
were scheduled to decrease in January 2013 by 26.5%. The American Taxpayer
Relief Act of 2012, which was enacted on January 2, 2013, includes a provision
to avert the 26.5% reduction for 2013. For additional information, see the
disclosure regarding the American Taxpayer Relief Act of 2012 below.
Medicare Prepayment Reviews
The Improper Payments Information Act of 2002, amended by the Improper Payments
Elimination and Recovery Act of 2010, requires the heads of federal agencies,
including HHS, to annually review programs it administers to:
† Identify programs that may be susceptible to significant improper
payments;
† Estimate the amount of improper payments in those programs;
† Submit those estimates to Congress; and
† Describe the actions the agency is taking to reduce improper payments
in those programs.
CMS has identified the Medicare Fee-For-Service ("FFS") program as a program at
risk for significant erroneous payments. In 2010, the Medicare FFS paid claims
error rate was estimated to be 10.5%, or approximately $34 billion in improper
payments. As a result, in addition to the Recovery Audit Contractor ("RAC")
program, which currently performs post-payment claims reviews, CMS has recently
established initiatives to prevent improper payments before a claim is
processed. These initiatives include:
† A significant increase in the number of prepayment claims reviews
performed by MACs; and
† A three-year demonstration project that expands the scope of the RAC
program to include prepayment reviews in 11 states; these reviews, which
commenced in August 2012, are initially focusing on inpatient claims, in
particular short stays.
Claims selected for prepayment review are not subject to the normal Medicare FFS
payment timeframe. Furthermore, prepayment claims denials are subject to
administrative and judicial review. The degree to which our Medicare FFS claims
are subjected to prepayment reviews, the extent to which payments are denied,
and our success in overturning denials could have a material adverse effect on
our cash flows and results of operations.
Affordable Care Act
The Affordable Care Act was enacted to change how health care services in the
United States are covered, delivered and reimbursed through expanded coverage of
uninsured individuals, reduced growth and other reductions in Medicare program
spending, and the establishment of programs where reimbursement is tied to
quality and integration. In addition, the law 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. The expansion of health insurance coverage under the
Affordable Care Act may result in a material increase in the number of patients
using our facilities who have either private or public program coverage. On the
other hand, the Affordable Care Act provides for significant reductions in
Medicare market basket updates and reductions in Medicare and Medicaid DSH
payments. Given that approximately 31.8% of our net patient revenues in 2012
were from Medicare and Medicaid, reductions to these programs may significantly
impact us and could offset any positive effects of the Affordable Care Act.
We are unable to predict the full impact of the Affordable Care Act on our
future revenues and operations at this time due to the law's complexity, the
limited amount of implementing regulations and interpretive guidance,
uncertainty regarding the ultimate number of uninsured patients who will obtain
insurance coverage and uncertainty regarding future negotiations with payers.
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Furthermore, many of the provisions of the Affordable Care Act that expand
insurance coverage will not become effective until 2014 or later. In addition,
the Affordable Care Act will result in increased state legislative and
regulatory changes in order for states to participate in Medicaid expansion and
the grants and other incentive opportunities under the law. At this time, we are
unable to predict the timing and impact of changes resulting from actions
individual states have taken or might take with respect to expanding Medicaid
coverage.
Because of the many variables involved, we are unable to predict with certainty
the net effect on us of (1) the expected increases in volumes and revenues and
decrease in bad debt expense from providing care to previously uninsured and
underinsured individuals, (2) the reductions in Medicare spending, (3) the
reductions in Medicare and Medicaid DSH funding, and (4) numerous other
provisions in the Affordable Care Act legislation that may affect us.
The American Recovery and Reinvestment Act of 2009
The ARRA was enacted to stimulate the U.S. economy. One provision of ARRA
provides financial incentives to hospitals and physicians to become "meaningful
users" of electronic health records. The Medicare incentive payments to
individual hospitals are made over a four-year, front-weighted transition
period. The Medicaid incentive payments, which are administered by the states,
are subject to more flexible payment and compliance standards than Medicare
incentive payments; hospitals that achieve compliance between 2014 and 2015 will
receive reduced incentive payments during the transition period.
We will be required to make investments in HIT through 2014 in excess of $600
million ($443 million of which had already been invested as of December 31,
2012) compared to approximately $320 million of Medicare and Medicaid EHR
incentive payments, some of which we were able to recognize in 2012 and 2011, as
described below. In addition to the expenditures we incur to qualify for these
incentive payments, our operating expenses have increased and we anticipate will
increase in the future as a result of these information system investments. Much
or all of these expenditures may have been made by us as a part of our clinical
systems enhancements, but would not have been incurred in the timeline to comply
with the incentive payment requirements of ARRA. However, we anticipate there
will be other operational benefits that we can realize as a result of these HIT
enhancements that are not included in the above amounts. Hospitals that fail to
become meaningful users of EHRs or fail to submit quality data by 2015 will be
subject to penalties in the form of a reduction to Medicare payments. This
reduction, which will be based on the market basket update, will be phased in
over three years and will continue until a hospital achieves compliance. Should
all of our hospitals fail to become meaningful users of EHRs and fail to submit
quality data, the penalties would result in reductions to our annual Medicare
traditional inpatient net revenues of approximately $12 million, $24 million and
$36 million in 2015, 2016, and 2017 and subsequent years, respectively.
During the year ended December 31, 2012, 19 of our hospitals and certain of our
employed physicians attested to meaningful use of certified EHR technology. As a
result, we recognized approximately $40 million of EHR incentives related to the
Medicare and Medicaid EHR incentive programs. These incentives partially offset
approximately $98 million of operating expenses we incurred in 2012 related to
our overall HIT implementation program. The final Medicare EHR incentive
payments are determined when the cost report that begins in the federal fiscal
year during which the hospital achieved meaningful use is settled. Medicare and
Medicaid incentive payment amounts to which a provider is entitled are subject
to post-payment audits.
The complexity of the changes required to our hospitals' systems and the time
required to complete the changes will likely result in some or all of our
hospitals not being fully compliant in time to be eligible for the maximum HIT
funding permitted under ARRA. Because of the uncertainties regarding the
implementation of HIT, including CMS' future EHR implementation regulations, the
ability of our hospitals to achieve compliance and the associated costs, we
cannot provide any assurances regarding the aforementioned estimates.
The American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013,
includes the following provisions affecting hospital and physician Medicare
payments:
† An extension of two months until April 1, 2013 of the automatic 2%
reduction (referred to as "sequestration") in Medicare payments required by the
Budget Control Act of 2011;
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† The so-called "doc fix," which continues Medicare payments under the
MPFS at CY 2012 levels through December 31, 2013; this measure averts a
reduction of 26.5% as finalized in the 2013 MPFS final rule and as required by
the SGR formula; and
† A requirement that the Secretary of HHS recover $11 billion in
overpayments to providers related to IPPS documentation and coding improvements
over no more than four years beginning in FFY 2014.
It remains uncertain as to whether the aforementioned sequestration adjustment
will be triggered; however, additional action by Congress will be required to
prevent it from occurring or to terminate it. It is likely that if sequestration
is avoided or terminated, other payment reductions affecting our hospitals and
physicians could be enacted. We cannot predict what other action Congress might
take to address federal spending or the impact those actions could have on our
operations or cash flows; however, it is likely that additional reductions to
Medicare payments to hospitals and modifications to health care entitlement
program eligibility will be among the items considered in spending reduction
discussions. Also, we cannot predict the timing of or how CMS will administer
the aforementioned documentation and coding overpayment recovery. We expect the
details of the recovery to be included in the FFY 2014 IPPS rulemaking.
Medicare and Medicaid Recovery Audit Contractor Initiatives
Section 302 of the Tax Relief and Health Care Act of 2006 authorized a permanent
program involving the use of third-party recovery audit contractors ("RACs") to
identify Medicare overpayments and underpayments made to providers. RACs are
compensated based on the amount of both overpayments and underpayments they
identify by reviewing claims submitted to Medicare for correct coding and
medical necessity. CMS must approve new issues prior to widespread review by the
RACs. Historically, RACs have conducted claims reviews on a post-payment basis.
In February 2012, CMS announced that it is moving forward with a RAC prepayment
demonstration in 11 states. We have been advised by CMS that only our hospitals
located in Texas and Pennsylvania will be included in the RAC prepayment review
demonstration project. At commencement of the demonstration in August 2012,
prepayment review was limited to short stays in a single MS-DRG, and CMS has
stated that it will be reviewing only a small percentage of claims within that
MS-DRG. Once fully implemented, the demonstration project will conduct
prepayment review of eight MS-DRGs. We have established protocols to respond to
RAC requests and payment denials. Payment recoveries resulting from RAC reviews
are appealable through administrative and judicial processes, and we intend to
pursue the reversal of adverse determinations where appropriate. In addition to
overpayments that are not reversed on appeal, we will incur additional costs to
respond to requests for records and pursue the reversal of payment denials. We
expect that the RACs will continue to seek CMS approval to review additional
issues.
In addition to increasing funding for the CMS Medicaid Integrity Program, which
employs Medicaid Integrity Contractors to audit Medicaid claims, the Affordable
Care Act expanded the RAC program's scope to include Medicare Advantage plans
and Medicaid claims beginning in 2012. We cannot predict with certainty the
impact of these program safeguard activities on our future results of operations
or cash flows.
MedPAC Report to Congress
On January 22, 2013, the Medicare Payment Advisory Commission ("MedPAC") issued
its annual Report to Congress. The report included one recommendation affecting
hospitals, which is that Congress should increase payment rates for the
inpatient and outpatient prospective payment systems in 2014 by 1.0%. Although
briefly addressed in its recommendations, MedPAC did not recommend that payments
for evaluation and management services provided in the outpatient setting be
reduced to match payments for such evaluation and management services paid under
the physician fee schedule.
PRIVATE INSURANCE
Managed Care
We currently have thousands of managed care contracts with various HMOs and
PPOs. HMOs generally maintain a full-service health care delivery network
comprised of physician, hospital, pharmacy and ancillary service providers that
HMO members must access through an assigned "primary care" physician. The
member's care is then managed by his or her primary care physician and other
network providers in accordance with the HMO's quality assurance and utilization
review guidelines so that appropriate health care can be efficiently delivered
in the most cost-effective manner. HMOs typically provide reduced benefits or
reimbursement (or none at all) to their members who use non-contracted health
care providers for non-emergency care.
PPOs generally offer limited benefits to members who use non-contracted health
care providers. PPO members who use contracted health care providers receive a
preferred benefit, typically in the form of lower co-payments, co-insurance or
deductibles. As employers and employees have demanded more choice, managed care
plans have developed hybrid products that combine elements of both HMO and PPO
plans, including high-deductible health care plans that may have limited
benefits, but cost the employee less in premiums.
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The amount of our managed care net patient revenues during the years ended
December 31, 2012, 2011 and 2010 was $5.4 billion, $5.1 billion and
$4.9 billion, respectively. Approximately 63% of our managed care net patient
revenues for the year ended December 31, 2012 was derived from our top ten
managed care payers. National payers generate approximately 45% of our total net
managed care revenues. The remainder comes from regional or local payers. At
December 31, 2012 and 2011 approximately 52% and 56%, respectively, of our net
accounts receivable related to continuing operations were due from managed care
payers.
Revenues under managed care plans are based primarily on payment terms involving
predetermined rates per diagnosis, per-diem rates, discounted fee-for-service
rates and other similar contractual arrangements. These revenues are also
subject to review and possible audit by the payers. The payers are billed for
patient services on an individual patient basis. An individual patient's bill is
subject to adjustment on a patient-by-patient basis in the ordinary course of
business by the payers following their review and adjudication of each
particular bill. We estimate the discounts for contractual allowances at the
individual hospital level utilizing billing data on an individual patient basis.
At the end of each month, on an individual hospital basis, we estimate our
expected reimbursement for patients of managed care plans based on the
applicable contract terms. We believe it is reasonably likely for there to be an
approximately 3% increase or decrease in the estimated contractual allowances
related to managed care plans. Based on reserves as of December 31, 2012, a 3%
increase or decrease in the estimated contractual allowance would impact the
estimated reserves by approximately $8 million. Some of the factors that can
contribute to changes in the contractual allowance estimates include:
(1) changes in reimbursement levels for procedures, supplies and drugs when
threshold levels are triggered; (2) changes in reimbursement levels when
stop-loss or outlier limits are reached; (3) changes in the admission status of
a patient due to physician orders subsequent to initial diagnosis or testing;
(4) final coding of in-house and discharged-not-final-billed patients that
change reimbursement levels; (5) secondary benefits determined after primary
insurance payments; and (6) reclassification of patients among insurance plans
with different coverage levels. Contractual allowance estimates are periodically
reviewed for accuracy by taking into consideration known contract terms, as well
as payment history. Although we do not separately accumulate and disclose the
aggregate amount of adjustments to the estimated reimbursement for every patient
bill, we believe our estimation and review process enables us to identify
instances on a timely basis where such estimates need to be revised. We do not
believe there were any adjustments to estimates of individual patient bills that
were material to our revenues. In addition, on a corporate-wide basis, we do not
record any general provision for adjustments to estimated contractual allowances
for managed care plans.
We expect managed care governmental admissions to continue to increase as a
percentage of total managed care admissions over the near term. However, the
managed Medicare and Medicaid insurance plans typically generate lower yields
than commercial managed care plans, which have been experiencing an improved
pricing trend. Although we have had improved year-over-year managed care
pricing, we expect some moderation in the pricing percentage increases in future
years. It is not clear what impact, if any, the increased obligations on managed
care and other payers imposed by the Affordable Care Act will have on our
commercial managed care volumes and payment rates. In the year ended
December 31, 2012 our commercial managed care net inpatient revenue per
admission from our acute care hospitals was approximately 79% higher than our
aggregate yield on a per admission basis from government payers, including
managed Medicare and Medicaid insurance plans.
Indemnity
An indemnity-based agreement generally requires the insurer to reimburse an
insured patient for health care expenses after those expenses have been incurred
by the patient, subject to policy conditions and exclusions. Unlike an HMO
member, a patient with indemnity insurance is free to control his or her
utilization of health care and selection of health care providers.
SELF-PAY PATIENTS
Self-pay patients are patients who do not qualify for government programs
payments, such as Medicare and Medicaid, do not have some form of private
insurance and, therefore, are responsible for their own medical bills. A
significant portion of our self-pay patients is admitted through our hospitals'
emergency departments and often requires high-acuity treatment that is more
costly to provide and, therefore, results in higher billings, which are the
least collectible of all accounts. We believe that our level of self-pay
patients has been higher in the last several years than previous periods due to
a combination of broad economic factors, including increased unemployment rates,
reductions in state Medicaid budgets, increasing numbers of individuals and
employers who choose not to purchase insurance, and an increased burden of
co-payments and deductibles to be made by patients instead of insurers.
Self-pay accounts pose significant collectability problems. At both
December 31, 2012 and 2011, approximately 7% of our net accounts receivable
related to continuing operations were due from self-pay patients. Further, a
significant portion of our provision for doubtful accounts relates to self-pay
patients, as well as co-payments and deductibles owed to us by patients with
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insurance. We provide revenue cycle management services through our Conifer
subsidiary, which has performed systematic analyses to focus our attention on
the drivers of bad debt for each hospital. While emergency department use is the
primary contributor to our provision for doubtful accounts in the aggregate,
this is not the case at all hospitals. As a result, we have been increasing our
focus on targeted initiatives that concentrate on non-emergency department
patients as well. These initiatives are intended to promote process efficiencies
in working self-pay accounts, as well as co-payment and deductible amounts owed
to us by patients with insurance, that we deem highly collectible. We are
dedicated to modifying and refining our processes as needed, enhancing our
technology and improving staff training throughout the revenue cycle in an
effort to increase collections and reduce accounts receivable.
Over the longer term, several other initiatives we have previously announced
should also help address this challenge. For example, our Compact with Uninsured
Patients ("Compact") is designed to offer managed care-style discounts to
certain uninsured patients, which enables us to offer lower rates to those
patients who historically have been charged standard gross charges. A
significant portion of those charges had previously been written down in our
provision for doubtful accounts. Under the Compact, the discount offered to
uninsured patients is recognized as a contractual allowance, which reduces net
operating revenues at the time the self-pay accounts are recorded. The uninsured
patient accounts, net of contractual allowances recorded, are further reduced to
their net realizable value through provision for doubtful accounts based on
historical collection trends for self-pay accounts and other factors that affect
the estimation process.
In July 2010, the President signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Dodd-Frank Act") into law. Under the Dodd-Frank
Act, a new Consumer Financial Protection Bureau ("CFPB") was formed within the
U.S. Federal Reserve to promulgate regulations to promote transparency,
simplicity, fairness, accountability and equal access in the market for consumer
financial products or services, including debt collection services. The
legislation gives significant discretion to the CFPB in establishing regulatory
requirements and enforcement priorities. At this time, we cannot predict the
extent to which Conifer's operations could be affected by these developments.
Our estimated costs (based on selected operating expenses, which include
salaries, wages and benefits, supplies and other operating expenses) of caring
for our self-pay patients for the years ended December 31, 2012, 2011 and 2010
were approximately $437 million, $395 million and $368 million, respectively. We
also provide charity care to patients who are financially unable to pay for the
health care services they receive. Most patients who qualify for charity care
are charged a per-diem amount for services received, subject to a cap. Except
for the per-diem amounts, our policy is not to pursue collection of amounts
determined to qualify as charity care; therefore, we do not report these amounts
in net operating revenues. Most states include an estimate of the cost of
charity care in the determination of a hospital's eligibility for Medicaid DSH
payments. Revenues attributable to DSH payments and other state-funded subsidy
payments for the years ended December 31, 2012, 2011 and 2010 were approximately
$283 million, $255 million and $178 million, respectively. These payments are
intended to mitigate our cost of uncompensated care, as well as reduced Medicaid
funding levels. Our estimated costs (based on the selected operating expenses
described above) of caring for charity care patients for the years ended
December 31, 2012, 2011 and 2010 were $133 million, $117 million and
$113 million, respectively. Our method of measuring the estimated costs uses
adjusted self-pay/charity patient days multiplied by selected operating expenses
per adjusted patient day. The adjusted self-pay/charity patient days represents
actual self-pay/charity patient days adjusted to include self-pay/charity
outpatient services by multiplying actual self-pay/charity patient days by the
sum of gross self-pay/charity inpatient revenues and gross self-pay/charity
outpatient revenues and dividing the results by gross self-pay/charity inpatient
revenues.
The expansion of health insurance coverage under the Affordable Care Act may
result in a material increase in the number of patients using our facilities who
have either private or public program coverage. However, because of the many
variables involved, we are unable to predict with certainty the net effect on us
of the expected increase in revenues and expected decrease in bad debt expense
from providing care to previously uninsured and underinsured individuals, and
numerous other provisions in the law that may affect us. In addition, even after
implementation of the Affordable Care Act, we may continue to experience a high
level of bad debt expense and have to provide uninsured discounts and charity
care due to the failure of states to expand Medicaid coverage as originally
contemplated by the Affordable Care Act and for undocumented aliens who will not
be permitted to enroll in a health insurance exchange or government health care
program.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2012 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2011
The following two tables summarize our net operating revenues, operating
expenses and operating income from continuing operations, both in dollar amounts
and as percentages of net operating revenues, for the years ended
December 31, 2012 and 2011:
Years Ended December 31,
Increase
2012 2011 (Decrease)
Net operating revenues:
General hospitals $ 9,436 $ 9,061 $ 375
Other operations 468 310 158
Net operating revenues before provision for
doubtful accounts 9,904 9,371 533
Less provision for doubtful accounts 785 717 68
Net operating revenues 9,119 8,654 465
Operating expenses:
Salaries, wages and benefits 4,257 4,015 242
Supplies 1,552 1,548 4
Other operating expenses, net 2,147 2,020 127
Electronic health record incentives (40 ) (55 ) 15
Depreciation and amortization 430 398 32
Impairment of long-lived assets and
goodwill, and restructuring charges 19 20 (1 )
Litigation and investigation costs 5 55 (50 )
Operating income $ 749 $ 653 $ 96
Years Ended December 31,
Increase
2012 2011 (Decrease)
Net operating revenues 100.0 % 100.0 % - %
Operating expenses:
Salaries, wages and benefits 46.7 % 46.4 % 0.3 %
Supplies 17.0 % 17.9 % (0.9 )%
Other operating expenses, net 23.5 % 23.4 % 0.1 %
Electronic health record incentives (0.4 )% (0.6 )% 0.2 %
Depreciation and amortization 4.7 % 4.6 % 0.1 %
Impairment of long-lived assets and
goodwill, and restructuring charges 0.2 % 0.2 % - %
Litigation and investigation costs 0.1 % 0.6 % (0.5 )%
Operating income 8.2 % 7.5 % 0.7 %
Net operating revenues of our general hospitals include inpatient and outpatient
revenues, as well as nonpatient revenues (rental income, management fee revenue,
and income from services such as cafeterias, gift shops and parking) and other
miscellaneous revenue. Net operating revenues of other operations primarily
consist of revenues from (1) physician practices, (2) a long-term acute care
hospital and (3) services provided by our Conifer subsidiary. Revenues from our
general hospitals represented approximately 95% and 97% of our total net
operating revenues before provision for doubtful accounts for the years ended
December 31, 2012 and 2011, respectively.
Net operating revenues from our other operations were $468 million and
$310 million in the years ended December 31, 2012 and 2011, respectively. The
increase in net operating revenues from other operations during 2012 primarily
relates to our additional owned physician practices and revenue cycle services
provided by our Conifer subsidiary. Equity earnings for unconsolidated
affiliates included in our net operating revenues from other operations were
$8 million for each of the years ended December 31, 2012 and 2011.
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The tables below show certain selected historical operating statistics of our
continuing hospitals:
Years Ended December 31,
IncreaseAdmissions, Patient Days and Surgeries 2012 2011 (Decrease)
Total admissions
506,485 507,834 (0.3 ) %
Adjusted patient admissions(1) 796,874 780,026 2.2 %
Paying admissions (excludes charity and
uninsured) 470,756 473,943 (0.7 ) %
Charity and uninsured admissions 35,729 33,891 5.4 %
Admissions through emergency department 312,902 306,424 2.1 %
Paying admissions as a percentage of total
admissions 92.9% 93.3% (0.4 ) % (2)
Charity and uninsured admissions as a
percentage of total admissions 7.1% 6.7% 0.4 % (2)
Emergency department admissions as a
percentage of total admissions 61.8% 60.3% 1.5 % (2)
Surgeries - inpatient 141,288 144,665 (2.3 ) %
Surgeries - outpatient 239,667 217,621 10.1 %
Total surgeries 380,955 362,286 5.2 %
Patient days - total 2,368,916 2,413,245 (1.8 ) %
Adjusted patient days(1) 3,693,828 3,673,447 0.6 %
Average length of stay (days) 4.68 4.75 (1.5 ) %
Number of hospitals (at end of period) 49 49 - (2)
Licensed beds (at end of period) 13,216 13,119 0.7 %
Average licensed beds 13,187 13,115 0.5 %
Utilization of licensed beds(3) 49.1% 50.4% (1.3 ) % (2)
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(1) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
(2) The change is the difference between the 2012 and 2011 amounts shown.
(3) Utilization of licensed beds represents patient days divided by number
of days in the period divided by average licensed beds.
Years Ended December 31,
Increase
Outpatient Visits 2012 2011 (Decrease)
Total visits 4,167,114 3,954,016 5.4 %
Paying visits (excludes charity and
uninsured) 3,728,402 3,554,231 4.9 %
Charity and uninsured visits 438,712 399,785 9.7 %
Emergency department visits 1,555,102 1,457,250 6.7 %
Surgery visits 239,667 217,621 10.1 %
Paying visits as a percentage of total
visits 89.5% 89.9% (0.4 ) % (1)
Charity and uninsured visits as a
percentage of total visits 10.5% 10.1% 0.4 % (1)
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(1) The change is the difference between the 2012 and 2011 amounts shown.
Years Ended December 31,
Increase
Revenues 2012 2011 (Decrease)
Net operating revenues $ 9,119 $ 8,654 5.4 %
Revenues from the uninsured $ 636 $ 607 4.8 %
Net inpatient revenues(1) $ 6,200 $ 6,028 2.9 %
Net outpatient revenues(1) $ 3,167 $ 2,928 8.2 %
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(1) Net inpatient revenues and net outpatient revenues are components of net
operating revenues. Net inpatient revenues include self-pay revenues of
$269 million and $271 million for the years ended December 31, 2012 and 2011,
respectively. Net outpatient revenues include self-pay revenues of $367 million
and $336 million for the years ended December 31, 2012 and 2011, respectively.
Years Ended December 31,
Increase
Revenues on a Per Admission, Per Patient Day and Per Visit Basis 2012
2011 (Decrease)
Net inpatient revenue per admission $ 12,241 $ 11,870 3.1 %
Net inpatient revenue per patient day $ 2,617 $ 2,498 4.8 %
Net outpatient revenue per visit $ 760 $ 741 2.6 %
Net patient revenue per adjusted patient admission(1) $ 11,755 $ 11,482 2.4 %
Net patient revenue per adjusted patient day(1) $ 2,536 $ 2,438 4.0 %
--------------------------------------------------------------------------------
(1) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
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Years Ended December 31,
Increase
Provision for Doubtful Accounts 2012 2011 (Decrease)
Provision for doubtful accounts $ 785 $ 717 9.5 %
Provision for doubtful accounts as a
percentage of net operating revenues before
provision for doubtful accounts 7.9% 7.7% 0.2 % (1)
Collection rate on self-pay accounts(2) 28.9% 27.7% 1.2 % (1)
Collection rate on commercial managed care
accounts 98.0% 98.2% (0.2 ) % (1)
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(1) The change is the difference between the 2012 and 2011 amounts shown.
(2) Self-pay accounts receivable are comprised of both uninsured and balance
after insurance receivables.
Years Ended December 31,
Increase
Selected Operating Expenses 2012 2011 (Decrease)
Hospital Operations and other
Salaries, wages and benefits $ 3,983 $ 3,792 5.0 %
Supplies 1,552 1,548 0.3 %
Other operating expenses 2,040 1,946 4.8 %
Total $ 7,575 $ 7,286 4.0 %
Conifer
Salaries, wages and benefits $ 274 $ 223 22.9 %
Other operating expenses 107 74 44.6 %
Total $ 381 $ 297 28.3 %
Total
Salaries, wages and benefits $ 4,257 $ 4,015 6.0 %
Supplies 1,552 1,548 0.3 %
Other operating expenses 2,147 2,020 6.3 %
Total $ 7,956 $ 7,583 4.9 %
Rent/lease expense(1)
Hospital Operations and other $ 144 $ 132 9.1 %
Conifer 12 11 9.1 %
Total $ 156 $ 143 9.1 %
Hospital Operations and other
Salaries, wages and benefits per adjusted
patient day(2) $ 1,078 $ 1,032 4.5 %
Supplies per adjusted patient day(2) 420 421 (0.2 ) %
Other operating expenses per adjusted
patient day(2) 553 530 4.3 %
Total per adjusted patient day $ 2,051 $ 1,983 3.4 %
Salaries, wages and benefits per adjusted
patient admission(2) $ 4,998 $ 4,861 2.8 %
Supplies per adjusted patient
admission(2) 1,948 1,985 (1.9 ) %
Other operating expenses per adjusted
patient admission(2) 2,560 2,495 2.6 %
Total per adjusted patient admission $ 9,506 $ 9,341 1.8 %
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(1) Included in other operating expenses.
(2) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
REVENUES
During the year ended December 31, 2012, net operating revenues before provision
for doubtful accounts increased 5.7%, which included a 4.6% increase in net
patient revenues, compared to the year ended December 31, 2011. Increases in
pricing were the largest contributing factors, resulting in a 4.0% increase in
net patient revenues, while increases in our overall volumes resulted in a 0.6%
increase in net patient revenues.
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Our net inpatient revenues for the year ended December 31, 2012 increased by
2.9% compared to the year ended December, 31, 2011. Several factors impacted our
net inpatient revenues in the 2012 period compared to the 2011 period,
including:
† Improved managed care pricing as a result of renegotiated contracts;
† Medicaid DSH and other state-funded subsidy revenues of $283 million
in the year ended December 31, 2012 compared to $255 million in the year ended
December 31, 2011;
† Favorable adjustments of approximately $81 million in the year ended
December 31, 2012 related to the aforementioned Medicare Budget Neutrality
Settlement; and
† An unfavorable shift in our total payer mix.
Patient days decreased by 1.8% and total admissions decreased by 0.3% during the
year ended December 31, 2012 compared to the year ended December 31, 2011. We
believe the following factors contributed to the changes in our inpatient volume
levels: (1) the current weak economic conditions, which we believe have
adversely impacted the level of elective procedures performed at our hospitals;
(2) loss of patients to competing health care providers; and (3) industry trends
reflecting the shift of certain clinical procedures being performed in an
outpatient setting rather than in an inpatient setting.
Net outpatient revenues and total outpatient visits increased 8.2% and 5.4%,
respectively, during the year ended December 31, 2012 compared to the year ended
December 31, 2011. The growth in our outpatient revenues and volumes was related
to both organic growth and growth from acquisitions. Net outpatient revenue per
visit increased 2.6% primarily due to the improved terms of our managed care
contracts, partially offset by the provision of lower acuity services by
outpatient centers we acquired in the past several years, as well as an
unfavorable shift in our total outpatient payer mix.
Our Conifer subsidiary generated net operating revenues of $488 million and $340
million for the years ended December 31, 2012 and 2011, respectively, a portion
of which was eliminated in consolidation as described in Note 20 to the
Consolidated Financial Statements. The increase in the portion that was not
eliminated in consolidation is primarily due to new clients, expanded service
offerings and acquisitions.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts as a percentage of net operating revenues
before provision for doubtful accounts was 7.9% for the year ended
December 31, 2012 compared to 7.7% for the year ended December 31, 2011. The
increase in provision for doubtful accounts primarily related to increased
uninsured patient volumes, partially offset by the impact of a 120 basis point
improvement in our collection rate on self-pay accounts.
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The table below shows the net accounts receivable and allowance for doubtful
accounts by payer at December 31, 2012 and 2011:
December 31, 2012 December 31, 2011
Accounts Accounts
Receivable Receivable
Before Before
Allowance Allowance Allowance Allowance
for Doubtful for Doubtful for Doubtful for Doubtful
Accounts Accounts Net Accounts Accounts Net
Medicare $ 172 $ - $ 172 $ 166 $ - $ 166
Medicaid 116 - 116 118 - 118
Net cost report
settlements payable
and valuation
allowances (24 ) - (24 ) (39 ) - (39 )
Managed care 769 72 697 760 67 693
Self-pay uninsured 204 178 26 215 190 25
Self-pay balance
after insurance 143 78 65 134 77 57
Estimated future
recoveries from
accounts assigned to
our Conifer
subsidiary 88 - 88 62 - 62
Other payers 264 68 196 212 48 164
Total continuing
operations 1,732 396 1,336 1,628 382 1,246
Total discontinued
operations 14 5 9 47 15 32
$ 1,746 $ 401 $ 1,345 $ 1,675 $ 397 $ 1,278
We provide revenue cycle management and patient communications services, among
others, through our Conifer subsidiary, which has performed systematic analyses
to focus our attention on the drivers of bad debt for each hospital. While
emergency department use is the primary contributor to our provision for
doubtful accounts in the aggregate, this is not the case at all hospitals. As a
result, we have increased our focus on targeted initiatives that concentrate on
non-emergency department patients as well. These initiatives are intended to
promote process efficiencies in working self-pay accounts, as well as co-payment
and deductible amounts owed to us by patients with insurance, that we deem
highly collectible. We are dedicated to modifying and refining our processes as
needed, enhancing our technology and improving staff training throughout the
revenue cycle in an effort to increase collections and reduce accounts
receivable.
A significant portion of our provision for doubtful accounts relates to self-pay
patients, as well as co-payments and deductibles owed to us by patients with
insurance. Collection of accounts receivable has been a key area of focus,
particularly over the past several years, as we have experienced adverse changes
in our business mix. At December 31, 2012, our collection rate on self-pay
accounts was approximately 28.9%. We experienced a relatively stable self-pay
collection rate during 2011 and 2012 as follows: 27.8% at March 31, 2011; 27.9%
at June 30, 2011; 27.7% at both September 30, 2011 and December 31, 2011; 27.9%
at March 31, 2012; 28.5% at June 30, 2012; and 28.8% at September 30, 2012.
These self-pay collection rates include payments made by patients, including
co-payments and deductibles paid by patients with insurance. Based on our
accounts receivable from self-pay patients and co-payments and deductibles owed
to us by patients with insurance at December 31, 2012, a 10% decrease or
increase in our self-pay collection rate, or approximately 3%, which we believe
could be a reasonably likely change, would result in an unfavorable or favorable
adjustment to provision for doubtful accounts of approximately $7 million.
Payment pressure from managed care payers also affects our provision for
doubtful accounts. We typically experience ongoing managed care payment delays
and disputes; however, we continue to work with these payers to obtain adequate
and timely reimbursement for our services. Our estimated collection rate from
managed care payers was approximately 98.0% at December 31, 2012 and 98.2% at
December 31, 2011.
Conifer continues to focus on revenue cycle initiatives to improve our cash
flow. These initiatives are focused on standardizing and improving patient
access processes, including pre-registration, registration, verification of
eligibility and benefits, liability identification and collection at
point-of-service, and financial counseling. The goals of the effort are focused
on reducing denials, improving service levels to patients and increasing the
quality of accounts that end up in accounts receivable. Although we continue to
focus on improving our methodology for evaluating the collectability of our
accounts receivable, we may incur future charges if there are unfavorable
changes in the trends affecting the net realizable value of our accounts
receivable.
We manage our provision for doubtful accounts using hospital-specific goals and
benchmarks such as (1) total cash collections, (2) point-of-service cash
collections, (3) accounts receivable days outstanding ("AR Days"), and
(4) accounts receivable by aging category. The following tables present the
approximate aging by payer of our net accounts receivable from
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continuing operations of $1.360 billion and $1.285 billion at December 31, 2012
and 2011, respectively, excluding cost report settlements payable and valuation
allowances of $24 million and $39 million at December 31, 2012 and 2011,
respectively:
December 31, 2012
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 92 % 62 % 78 % 29 % 67 %
61-120 days 2 % 19 % 11 % 17 % 12 %
121-180 days 1 % 8 % 4 % 9 % 5 %
Over 180 days 5 % 11 % 7 % 45 % 16 %
Total 100 % 100 % 100 % 100 % 100 %
December 31, 2011
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 93 % 63 % 75 % 31 % 68 %
61-120 days 3 % 18 % 12 % 17 % 12 %
121-180 days 2 % 9 % 5 % 10 % 6 %
Over 180 days 2 % 10 % 8 % 42 % 14 %
Total 100 % 100 % 100 % 100 % 100 %
Our AR Days from continuing operations were 53 days at both December 31, 2012
and 2011, within our target of less than 55 days. AR Days are calculated as our
accounts receivable from continuing operations on the last date in the quarter
divided by our net operating revenues from continuing operations for the quarter
ended on that date divided by the number of days in the quarter.
As of December 31, 2012, we had a cumulative total of patient account
assignments to our Conifer subsidiary dating back at least three years or older
of approximately $3.2 billion related to our continuing operations. These
accounts have already been written off and are not included in our receivables
or in the allowance for doubtful accounts; however, an estimate of future
recoveries from all the accounts assigned to our Conifer subsidiary is
determined based on our historical experience and recorded in accounts
receivable.
Patient advocates from Conifer's Medical Eligibility Program ("MEP") screen
patients in the hospital to determine whether those patients meet eligibility
requirements for financial assistance programs. They also expedite the process
of applying for these government programs. Receivables from patients who are
potentially eligible for Medicaid are classified as Medicaid pending, under the
MEP, with appropriate contractual allowances recorded. Based on recent trends,
approximately 90% of all accounts in the MEP are ultimately approved for
benefits under a government program, such as Medicaid. The following table shows
the approximate amount of accounts receivable in the MEP still awaiting
determination of eligibility under a government program at December 31, 2012
and 2011 by aging category:
December 31,
2012 2011
0-60 days $ 99 $ 82
61-120 days 22 18
121-180 days 5 7
Over 180 days 16 15
Total $ 142 $ 122
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits expense as a percentage of net operating revenues
increased 0.3% for the year ended December 31, 2012 compared to the year ended
December 31, 2011. Salaries, wages and benefits per adjusted patient admission
increased 2.8% in the year ended December 31, 2012 compared to the same period
in 2011. This increase is primarily due to an increase in the number of
physicians we employ, annual merit and contractual wage increases for our
employees, increased contract labor costs, increased annual incentive
compensation expense, increased workers' compensation expense, increased health
benefits costs and increased employee-related costs associated with our HIT
implementation program, partially offset by decreased overtime expense. Included
in salaries, wages and benefits expense in 2012 is $1 million of expense due to
a 17 basis point decrease in the interest rate used to estimate the discounted
present value of projected future workers'
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compensation liabilities, compared to a $4 million unfavorable adjustment as a
result of a 136 basis point decrease in the interest rate in the year ended
December 31, 2011. Salaries, wages and benefits expense for the years ended
December 31, 2012 and 2011 also included stock-based compensation expense of
$32 million and $24 million, respectively.
Salaries, wages and benefits expense for our Conifer segment increased by 22.9%
in the year ended December 31, 2012 compared to the year ended December 31, 2011
due to an increase in employee headcount as a result of the growth in Conifer's
business primarily attributable to the new CHI partnership and Conifer's two
recent business acquisitions.
As of December 31, 2012, approximately 29% of our employees were represented by
various labor unions. These employees - primarily registered nurses and service
and maintenance workers - were located at 25 of our hospitals, the majority of
which are in California and Florida. We have no expired contracts at this time;
however, we are in the process of negotiating new contracts where employees have
recently chosen union representation. At this time, we are unable to predict the
outcome of the negotiations, but increases in salaries, wages and benefits could
result from these agreements. Furthermore, there is a possibility that strikes
could occur during the negotiation process, which could increase our labor costs
and have an adverse effect on our patient admissions and net operating revenues.
SUPPLIES
Supplies expense as a percentage of net operating revenues decreased 0.9% for
the year ended December 31, 2012 compared to the year ended December 31, 2011.
Supplies expense per adjusted patient admission decreased 1.9% in the year ended
December 31, 2012 compared to the same period in 2011. Supplies expense was
favorably impacted by lower pharmaceutical costs and a decline in orthopedic and
cardiology-related costs due to renegotiated prices, partially offset by
increased costs of implants and surgical supplies. In general, supplies expense
changes are primarily attributable to changes in our patient volume levels and
the mix of procedures performed.
We strive to control supplies expense through product standardization, contract
compliance, improved utilization, bulk purchases and operational improvements.
The items of current cost reduction focus continue to be cardiac stents and
pacemakers, orthopedics and implants, and high-cost pharmaceuticals. We also
utilize the group-purchasing strategies and supplies-management services of
MedAssets, Inc., a company that offers group-purchasing procurement strategy,
outsourcing and e-commerce services to the health care industry.
OTHER OPERATING EXPENSES, NET
Other operating expenses as a percentage of net operating revenues was 23.5% in
the year ended December 31, 2012 compared to 23.4% in the year ended
December 31, 2011. Other operating expenses per adjusted patient admission
increased by 2.6% in the year ended December 31, 2012 compared to the same
period in 2011. The increase in other operating expenses for our Hospital
Operations and other segment is primarily due to:
† increased costs of contracted services ($33 million), primarily due
to additional physician practices we acquired;
† higher consulting and legal costs of $23 million, which
includes
costs related to the aforementioned Medicare Budget Neutrality Settlement and
various managed care payer settlements;
† increased systems implementation costs ($17 million)
primarily
related to our HIT implementation program;
† increased rent and lease expenses ($14 million);
† $13 million of costs associated with funding indigent care
services
by certain of our Texas hospitals beginning in the three months ended
December 31, 2012; and
† gains totaling $4 million from the sale of land and buildings in the
2012 period compared to gains of $8 million from the sale of a building at the
former campus of one of our hospitals and a medical office building in the 2011
period.
These increases were partially offset by decreased physician relocation expenses
($9 million).
Malpractice expense was $92 million in the year ended December 31, 2012, which
included an unfavorable adjustment of approximately $2 million due to a 17 basis
point decrease in the interest rate used to estimate the discounted present
value of projected future malpractice liabilities, compared to malpractice
expense of $108 million in the year ended December 31, 2011, which included an
unfavorable adjustment of approximately $17 million due to a 136 basis point
decrease in the interest rate. The amount of malpractice expense in the year
ended December 31, 2012 may not necessarily be indicative of malpractice expense
amounts in future years due to changes in loss experience and interest rates
used to estimate the discounted present value of projected future malpractice
liabilities.
Other operating expenses for our Conifer segment increased by 44.6% in the year
ended December 31, 2012 compared to the year ended December 31, 2011 primarily
due to additional operating expenses related to the new CHI partnership and
Conifer's two recent business acquisitions.
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IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL, AND RESTRUCTURING CHARGES
During the year ended December 31, 2012, we recorded net impairment and
restructuring charges of $19 million, consisting of $3 million relating to the
impairment of obsolete assets, $2 million relating to other impairment charges,
$8 million of employee severance costs and $6 million of other related costs.
During the year ended December 31, 2011, we recorded net impairment and
restructuring charges of $20 million. This amount included a $6 million
impairment charge for the write-down of buildings and equipment of one of our
previously impaired hospitals to their estimated fair values, primarily due to a
decline in the fair value of real estate in the market in which the hospital
operates and a decline in the estimated fair value of equipment. Material
adverse trends in our estimates of future undiscounted cash flows of the
hospital at that time, consistent with our previous estimates in prior years
when impairment charges were recorded at this hospital, indicated the carrying
value of the hospital's long-lived assets was not recoverable from the estimated
future cash flows. We believed the most significant factors contributing to the
adverse financial trends at that time included reductions in volumes of insured
patients, shifts in payer mix from commercial to governmental payers combined
with reductions in reimbursement rates from governmental payers, and high levels
of uninsured patients. As a result, we updated the estimate of the fair value of
the hospital's long-lived assets and compared the fair value estimate to the
carrying value of the hospital's long-lived assets. Because the fair value
estimate was lower than the carrying value of the hospital's long-lived assets,
an impairment charge was recorded for the difference in the amounts. The
aggregate carrying value of assets held and used of the hospital for which an
impairment charge was recorded was $20 million as of December 31, 2011 after
recording the impairment charge. In addition, we recorded impairment charges of
$1 million in connection with the sale of seven medical office buildings in
Texas, $1 million related to a cost basis investment, $7 million in employee
severance costs, $3 million in lease termination costs, $1 million of
acceleration of stock-based compensation costs and $1 million of other related
costs.
Our impairment tests presume stable, improving or, in some cases, declining
operating results in our hospitals, which are based on programs and initiatives
being implemented that are designed to achieve the hospital's most recent
projections. If these projections are not met, or if in the future negative
trends occur that impact our future outlook, future impairments of long-lived
assets and goodwill may occur, and we may incur additional restructuring
charges.
LITIGATION AND INVESTIGATION COSTS
Litigation and investigation costs for the year ended December 31, 2012 were
$5 million compared to $55 million for the year ended December 31, 2011. The
2012 amount primarily related to costs associated with various legal proceedings
and governmental reviews. The 2011 amount primarily related to costs associated
with our evaluation of an unsolicited acquisition proposal received in
November 2010 (which was subsequently withdrawn), changes in reserve estimates
established in connection with certain governmental reviews described in Note 15
to the accompanying Consolidated Financial Statements, accruals for a physician
privileges case and certain hospital-related tort claims, the settlement of a
union arbitration claim and costs to defend the Company in various matters.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2012 was $412 million compared
to $375 million for the year ended December 31, 2011. The increase primarily
related to a $30 million favorable impact from an interest rate swap agreement
we terminated in August 2011. During the year ended December 31, 2011, the
interest rate swap agreement generated approximately $8 million of cash interest
savings and a $22 million gain on the settlement of the agreement. See Note 6 to
the accompanying Consolidated Financial Statements for additional information
about this agreement.
LOSS FROM EARLY EXTINGUISHMENT OF DEBT
During the year ended December 31, 2012, we recorded a loss from early
extinguishment of debt of approximately $4 million, primarily related to the
difference between the purchase prices and the par values of the $161 million
aggregate principal amount outstanding of our 73†8% senior notes due 2013 that
we purchased during the period. During the year ended December 31, 2011, we
recorded a loss from early extinguishment of debt of approximately $117 million,
primarily related to the difference between the purchase prices and the par
values of the $713 million aggregate principal amount of 9% senior secured notes
due 2015 that we purchased during the period, as well as the write-off of
unamortized note discounts and issuance costs.
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INCOME TAX EXPENSE
During the year ended December 31, 2012, we recorded income tax expense of
$125 million compared to $61 million during the year ended December 31, 2011.
See Note 16 to the accompanying Consolidated Financial Statements for additional
information about income taxes.
DISCONTINUED OPERATIONS: IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL, AND
RESTRUCTURING CHARGES
During the year ended December 31, 2012, we recorded an impairment charge in
discontinued operations of $100 million related to the sale of Creighton
University Medical Center, consisting of $98 million for the write-down of
long-lived assets to their estimated fair values and a $2 million charge for the
write-down of goodwill.
ADDITIONAL SUPPLEMENTAL NON-GAAP DISCLOSURES
The financial information provided throughout this report, including our
Consolidated Financial Statements and the notes thereto, has been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). However, we use certain non-GAAP financial measures defined
below in communications with investors, analysts, rating agencies, banks and
others to assist such parties in understanding the impact of various items on
our financial statements, some of which are recurring or involve cash payments.
In addition, from time to time we use these measures to define certain
performance targets under our compensation programs.
"Adjusted EBITDA" is a non-GAAP measure that we use in our analysis of the
performance of our business, which we define as net income (loss) attributable
to our common shareholders before: (1) the cumulative effect of changes in
accounting principle, net of tax; (2) net loss (income) attributable to
noncontrolling interests; (3) preferred stock dividends; (4) income (loss) from
discontinued operations, net of tax; (5) income tax benefit (expense);
(6) investment earnings (loss); (7) gain (loss) from early extinguishment of
debt; (8) net gain (loss) on sales of investments; (9) interest expense;
(10) litigation and investigation benefit (costs), net of insurance recoveries;
(11) hurricane insurance recoveries, net of costs; (12) impairment of long-lived
assets and goodwill, and restructuring charges; and (13) depreciation and
amortization. As is the case with all non-GAAP measures, investors should
consider the limitations associated with this metric, including the potential
lack of comparability of this measure from one company to another, and should
recognize that Adjusted EBITDA does not provide a complete measure of our
operating performance because it excludes many items that are included in our
financial statements. Accordingly, investors are encouraged to use GAAP measures
when evaluating our financial performance.
The table below shows the reconciliation of Adjusted EBITDA to net income
attributable to our common shareholders (the most comparable GAAP term) for the
years ended December 31, 2012 and 2011:
Years Ended December 31,
2012 2011Net income attributable to Tenet Healthcare Corporation
common shareholders
$ 141
$ 58
Less: Net loss (income) attributable to noncontrolling
interests
19 (12 )
Preferred stock dividends (11 ) (24 )
Loss from discontinued operations, net of tax (76 ) (9 )
Income from continuing operations 209 103
Income tax expense (125 ) (61 )
Investment earnings 1 3
Loss from early extinguishment of debt (4 ) (117 )
Interest expense (412 ) (375 )
Operating income 749 653
Litigation and investigation costs (5 ) (55 )
Impairment of long-lived assets and goodwill, and
restructuring charges (19 ) (20 )
Depreciation and amortization (430 ) (398 )
Adjusted EBITDA $ 1,203 $ 1,126
Net operating revenues $ 9,119 $ 8,654
Adjusted EBITDA as % of net operating revenues (Adjusted
EBITDA margin) 13.2 % 13.0 %
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2010
The following two tables summarize our net operating revenues, operating
expenses and operating income from continuing operations, both in dollar amounts
and as percentages of net operating revenues, for the years ended
December 31, 2011 and 2010:
Years Ended December 31,
Increase
2011 2010 (Decrease)
Net operating revenues:
General hospitals $ 9,061 $ 8,756 $ 305
Other operations 310 236 74
Net operating revenues before provision
for doubtful accounts 9,371 8,992
379
Less provision for doubtful accounts 717 727 (10 )
Net operating revenues 8,654 8,265 389
Operating expenses:
Salaries, wages and benefits 4,015 3,830 185
Supplies 1,548 1,542 6
Other operating expenses, net 2,020 1,857 163
Electronic health record incentives (55 ) - (55 )
Depreciation and amortization 398 380
18
Impairment of long-lived assets and
goodwill, and restructuring charges, net 20 10
10
Litigation and investigation costs 55 12 43
Operating income $ 653 $ 634 $ 19
Years Ended December 31,
Increase
2011 2010 (Decrease)
Net operating revenues 100.0 % 100.0 % - %
Operating expenses:
Salaries, wages and benefits 46.4 % 46.3 % 0.1 %
Supplies 17.9 % 18.7 % (0.8 ) %
Other operating expenses, net 23.4 % 22.5 % 0.9 %
Electronic health record incentives (0.6 ) % - % (0.6 ) %
Depreciation and amortization 4.6 % 4.6 % - %
Impairment of long-lived assets and
goodwill, and restructuring charges, net 0.2 % 0.1 % 0.1 %
Litigation and investigation costs 0.6 % 0.1 % 0.5 %
Operating income 7.5 % 7.7 % (0.2 ) %
Revenues from our general hospitals represented approximately 97% of our total
net operating revenues before provision for doubtful accounts for both of the
years ended December 31, 2011 and 2010.
Net operating revenues from our other operations were $310 million and
$236 million in the years ended December 31, 2011 and 2010, respectively. The
increase in net operating revenues from other operations during 2011 primarily
relates to our additional owned physician practices and revenue cycle services
provided by our Conifer subsidiary. Equity earnings for unconsolidated
affiliates, included in our net operating revenues from other operations, were
$8 million and $5 million for the years ended December 31, 2011 and 2010,
respectively.
The tables below show certain selected historical operating statistics of our
continuing hospitals:
Years Ended December 31,
IncreaseAdmissions, Patient Days and Surgeries 2011 2010 (Decrease)
Total admissions
507,834 504,955 0.6 %
Adjusted patient admissions(1) 780,026 767,047 1.7 %
Paying admissions (excludes charity and
uninsured) 473,943 471,563 0.5 %
Charity and uninsured admissions 33,891 33,392 1.5 %
Admissions through emergency department 306,424 296,763 3.3 %
Paying admissions as a percentage of
total admissions 93.3% 93.4% (0.1 ) % (2)
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Years Ended December 31,
Increase
Admissions, Patient Days and Surgeries 2011 2010 (Decrease)
Charity and uninsured admissions as a
percentage of total admissions 6.7% 6.6% 0.1 % (2)
Emergency department admissions as a
percentage of total admissions 60.3% 58.8% 1.5 % (2)
Surgeries - inpatient 144,665 147,336 (1.8 ) %
Surgeries - outpatient 217,621 207,510 4.9 %
Total surgeries 362,286 354,846 2.1 %
Patient days - total 2,413,245 2,431,400 (0.7 ) %
Adjusted patient days(1) 3,673,447 3,664,220 0.3 %
Average length of stay (days) 4.75 4.82 (1.5 ) %
Number of hospitals (at end of period) 49 49 - (2)
Licensed beds (at end of period) 13,119 13,094 0.2 %
Average licensed beds 13,115 13,096 0.1 %
Utilization of licensed beds(3) 50.4% 50.9% (0.5 ) % (2)
--------------------------------------------------------------------------------
(1) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
(2) The change is the difference between the 2011 and 2010 amounts shown.
(3) Utilization of licensed beds represents patient days divided by number
of days in the period divided by average licensed beds.
Years Ended December 31,
Increase
Outpatient Visits 2011 2010 (Decrease)
Total visits 3,954,016 3,836,777 3.1 %
Paying visits (excludes charity and
uninsured) 3,554,231 3,443,718 3.2 %
Charity and uninsured visits 399,785 393,059 1.7 %
Emergency department visits 1,457,250 1,403,515 3.8 %
Surgery visits 217,621 207,510 4.9 %
Paying visits as a percentage of total
visits 89.9% 89.8% 0.1 % (1)
Charity and uninsured visits as a
percentage of total visits 10.1% 10.2% (0.1 ) % (1)
--------------------------------------------------------------------------------
(1) The change is the difference between the 2011 and 2010 amounts shown.
Years Ended December 31,
Increase
Revenues 2011 2010 (Decrease)
Net operating revenues $ 8,654 $ 8,265 4.7 %
Revenues from the uninsured $ 607 $ 631 (3.8 ) %
Net inpatient revenues(1) $ 6,028 $ 5,790 4.1 %
Net outpatient revenues(1) $ 2,928 $ 2,851 2.7 %
--------------------------------------------------------------------------------
(1) Net inpatient revenues and net outpatient revenues are components of net
operating revenues. Net inpatient revenues include self-pay revenues of
$271 million and $257 million for the years ended December 31, 2011 and 2010,
respectively. Net outpatient revenues include self-pay revenues of $336 million
and $374 million for the years ended December 31, 2011 and 2010, respectively.
Years Ended December 31,
Increase
Revenues on a Per Admission, Per Patient Day and Per Visit Basis 2011
2010 (Decrease)
Net inpatient revenue per admission $ 11,870 $ 11,466 3.5 %
Net inpatient revenue per patient day $ 2,498 $ 2,381 4.9 %
Net outpatient revenue per visit $ 741 $ 743 (0.3 ) %
Net patient revenue per adjusted patient admission(1) $ 11,482 $ 11,265 1.9 %
Net patient revenue per adjusted patient day(1) $ 2,438 $ 2,358 3.4 %
--------------------------------------------------------------------------------
(1) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
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Years Ended December 31,
Increase
Provision for Doubtful Accounts 2011 2010 (Decrease)
Provision for doubtful accounts $ 717 $ 727 (1.4 )%
Provision for doubtful accounts as a
percentage of net operating revenues
before provision for doubtful accounts 7.7% 8.1% (0.4 )%(1)
Collection rate on self-pay accounts(2) 27.7% 28.2% (0.5 )%(1)
Collection rate on commercial managed care
accounts 98.2% 98.4% (0.2 )%(1)
--------------------------------------------------------------------------------
(1) The change is the difference between the 2011 and 2010 amounts shown.
(2) Self-pay accounts receivable are comprised of both uninsured and balance
after insurance receivables.
Years Ended December 31,
Increase
Selected Operating Expenses 2011 2010 (Decrease)
Hospital Operations and other
Salaries, wages and benefits $ 3,792 $ 3,664 3.5 %
Supplies 1,548 1,542 0.4 %
Other operating expenses 1,946 1,783 9.1 %
Total $ 7,286 $ 6,989 4.2 %
Conifer
Salaries, wages and benefits $ 223 $ 166 34.3 %
Other operating expenses 74 74 - %
Total $ 297 $ 240 23.8 %
Total
Salaries, wages and benefits $ 4,015 $ 3,830 4.8 %
Supplies 1,548 1,542 0.4 %
Other operating expenses 2,020 1,857 8.8 %
Total $ 7,583 $ 7,229 4.9 %
Rent/lease expense(1)
Hospital Operations and other $ 132 $ 121 9.1 %
Conifer 11 13 (15.4 ) %
Total $ 143 $ 134 6.7 %
Hospital Operations and other
Salaries, wages and benefits per adjusted
patient day(2) $ 1,032 $ 1,000 3.2 %
Supplies per adjusted patient day(2) 421 421 - %
Other operating expenses per adjusted
patient day(2) 530 486 9.1 %
Total per adjusted patient day $ 1,983 $ 1,907 4.0 %
Salaries, wages and benefits per adjusted
patient admission(2) $ 4,861 $ 4,777 1.8 %
Supplies per adjusted patient admission(2) 1,985 2,010 (1.2 ) %
Other operating expenses per adjusted
patient admission(2) 2,495 2,325 7.3 %
Total per adjusted patient admission $ 9,341 $ 9,112 2.5 %
--------------------------------------------------------------------------------
(1) Included in other operating expenses.
(2) Adjusted patient days/admissions represents actual patient
days/admissions adjusted to include outpatient services by multiplying actual
patient days/admissions by the sum of gross inpatient revenues and outpatient
revenues and dividing the results by gross inpatient revenues.
REVENUES
During the year ended December 31, 2011, net operating revenues before provision
for doubtful accounts from continuing operations increased 4.2%, which included
a 3.6% increase in net patient revenues, compared to the year ended
December 31, 2010. Increases in pricing were the largest contributing factors,
resulting in a 3.4% increase in net patient revenues, while increases in our
inpatient admissions and outpatient visits resulted in a 0.2% increase in net
patient revenues.
Our net inpatient revenues for the year ended December 31, 2011 increased by
4.1% compared to the year ended December 31, 2010. Several factors impacted our
net inpatient revenues in the 2011 period compared to the 2010 period,
including:
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† Medicaid DSH payments and other state-funded subsidy revenues of
$255 million in the year ended December 31, 2011 compared to $178 million in the
year ended December 31, 2010 (significant changes in DSH revenues included:
(i) $91 million of additional revenues, net of provider fees and other expenses,
related to California's provider fee programs, which were recorded in the year
ended December 31, 2011 because CMS issued the final required federal approval
of the programs in 2011; (ii) a $33 million increase in the year ended
December 31, 2011 related to our Pennsylvania hospitals, primarily due to the
Pennsylvania provider fee program that was approved by CMS in 2011; and (iii) a
$22 million reduction in the year ended December 31, 2011 primarily due to a new
regulation issued by the State of Missouri);
† Improved managed care pricing as a result of renegotiated contracts;
† Increased Medicaid-related admissions, the reimbursement for which is
lower than other payers;
† A $3 million unfavorable patient revenue adjustment in the
year
ended December 31, 2011 related to the portion of our bad debts that will not be
reimbursed by Medicare compared to $11 million in unfavorable adjustments for
the year ended December 31, 2010;
† An unfavorable patient revenue adjustment of approximately
$20
million ($14 million related to 2009 and prior years and $6 million related to
the year ended December 31, 2010) recorded in the year ended December 31, 2010
for the estimated impact on our DSH payments as a result of estimated lower SSI
percentages at certain of our hospitals; and
† The recognition by our Philadelphia hospitals of $8 million of
revenues that were approved for distribution to us in the year ended
December 31, 2011 by a Philadelphia HMO in which we hold a minority interest.
Patient days decreased by 0.7%, while total admissions increased by 0.6%, during
the year ended December 31, 2011 compared to the year ended December 31, 2010.
We believe the following factors contributed to the changes in our inpatient
volume levels: (1) weak economic conditions, which we believe adversely impacted
the level of elective procedures performed at our hospitals; (2) loss of
patients to competing health care providers; (3) industry trends reflecting the
shift of certain clinical procedures being performed in an outpatient setting
rather than in an inpatient setting; and (4) strategic reduction of services
related to our Targeted Growth Initiative, which seeks to de-emphasize or
eliminate less profitable service lines.
Net outpatient revenues and total outpatient visits increased 2.7% and 3.1%,
respectively, during the year ended December 31, 2011 compared to the year ended
December 31, 2010. The growth in our outpatient revenues and volumes was
substantially related to the acquisition of various outpatient centers during
2010 and 2011. Outpatient revenue per visit declined 0.3% primarily due to the
provision of lower acuity services by outpatient centers we acquired in 2010 and
2011, as well as an unfavorable shift in our total outpatient payer mix,
including a decline in managed care outpatient visits as a percentage of total
outpatient visits in the year ended December 31, 2011 as compared to the same
period in 2010.
Our Conifer subsidiary generated net operating revenues of $340 million and
$255 million for the years ended December 31, 2011 and 2010, respectively, a
portion of which was eliminated in consolidation as described in Note 20 to the
Consolidated Financial Statements.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts as a percentage of net operating revenues
before provision for doubtful accounts was 7.7% for the year ended
December 31, 2011 compared to 8.1% for the year ended December 31, 2010. Key
factors contributing to the change in the provision for doubtful accounts for
the year ended December 31, 2011 compared to the same period in 2010 include
(i) a $24 million decrease in revenues from the uninsured in the 2011 period
compared to the same period in 2010, (ii) a $12 million favorable adjustment in
the 2011 period for Medicare bad debts to be claimed on our cost reports
compared to $36 million in the 2010 period, and (iii) a lower collection rate on
self-pay accounts in the 2011 period compared to the 2010 period. Our self-pay
collection rate, which is the blended collection rate for uninsured and balance
after insurance accounts receivable, declined to approximately 27.7% as of
December 31, 2011 from 28.2% as of December 31, 2010.
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The table below shows the net accounts receivable and allowance for doubtful
accounts by payer at December 31, 2011 and 2010:
December 31, 2011 December 31, 2010
Accounts Accounts
Receivable Receivable
Before Before
Allowance Allowance Allowance Allowance
for Doubtful for Doubtful for Doubtful for Doubtful
Accounts Accounts Net Accounts Accounts Net
Medicare $ 166 $ - $ 166 $ 155 $ - $ 155
Medicaid 118 - 118 114 - 114
Net cost report
settlements payable and
valuation allowances (39 ) - (39 ) (26 ) - (26 )
Managed care 760 67 693 698 58 640
Self-pay uninsured 215 190 25 190 169 21
Self-pay balance after
insurance 134 77 57 117 65 52
Estimated future
recoveries from accounts
assigned to our Conifer
subsidiary 62 - 62 32 - 32
Other payers 212 48 164 159 37 122
Total continuing
operations 1,628 382 1,246 1,439 329 1,110
Total discontinued
operations 47 15 32 56 23 33
$ 1,675 $ 397 $ 1,278 $ 1,495 $ 352 $ 1,143
At December 31, 2011, our collection rate on self-pay accounts was approximately
27.7%. We experienced a downward trend in our self-pay collection rate from 2010
through 2011, as follows: 29.8% at March 31, 2010; 29.4% at June 30, 2010; 29.0%
at September 30, 2010; 28.2% at December 31, 2010; 27.8% at March 31, 2011;
27.9% at June 30, 2011; and 27.7% at September 30, 2011. These self-pay
collection rates include payments made by patients, including co-payments and
deductibles paid by patients with insurance. Based on our accounts receivable
from self-pay patients and co-payments and deductibles owed to us by patients
with insurance at December 31, 2011, a 10% decrease or increase in our self-pay
collection rate, or approximately 3%, which we believe could be a reasonable
likely change, would result in an unfavorable or favorable adjustment to
provision for doubtful accounts of approximately $6 million.
Our estimated collection rate from managed care payers was approximately 98.2%
and 98.4% at December 31, 2011 and 2010, respectively. We experienced a
temporary slowdown in collections related to commercial and governmental managed
care accounts receivable in the year ended December 31, 2011 as a result of a
revenue cycle operational realignment we initiated that resulted in the closure
of two of our service centers.
The following tables present the approximate aging by payer of our net accounts
receivable from continuing operations of $1.285 billion and $1.136 billion at
December 31, 2011 and December 31, 2010, respectively, excluding cost report
settlements payable and valuation allowances of $39 million and $26 million at
December 31, 2011 and December 31, 2010, respectively:
December 31, 2011
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 93 % 63 % 75 % 31 % 68 %
61-120 days 3 % 18 % 12 % 17 % 12 %
121-180 days 2 % 9 % 5 % 10 % 6 %
Over 180 days 2 % 10 % 8 % 42 % 14 %
Total 100 % 100 % 100 % 100 % 100 %
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December 31, 2010
Indemnity,
Managed Self-Pay
Medicare Medicaid Care and Other Total
0-60 days 96 % 70 % 79 % 38 % 74 %
61-120 days 3 % 22 % 12 % 20 % 13 %
121-180 days 1 % 8 % 4 % 10 % 5 %
Over 180 days - % - % 5 % 32 % 8 %
Total 100 % 100 % 100 % 100 % 100 %
Our AR Days from continuing operations were 53 days at December 31, 2011 and 50
days at December 31, 2010, within our target of less than 55 days. AR Days are
calculated as our accounts receivable from continuing operations on the last
date in the quarter divided by our net operating revenues from continuing
operations for the quarter ended on that date divided by the number of days in
the quarter.
As of December 31, 2011, we had a cumulative total of patient account
assignments to our Conifer subsidiary dating back at least three years or older
of approximately $3.6 billion related to our continuing operations. These
accounts have already been written off and are not included in our receivables
or in the allowance for doubtful accounts; however, an estimate of future
recoveries from all the accounts assigned to our Conifer subsidiary is
determined based on our historical experience and recorded in accounts
receivable.
The following table shows the approximate amount of accounts receivable in
Conifer's Medical Eligibility Program, still awaiting determination of
eligibility under a government program at December 31, 2011 and 2010 by aging
category:
December 31,
2011 2010
0-60 days $ 82 $ 95
61-120 days 18 19
121-180 days 7 7
Over 180 days 15 12
Total $ 122 $ 133
SALARIES, WAGES AND BENEFITS
Salaries, wages and benefits expense as a percentage of net operating revenues
increased by 0.1% for the year ended December 31, 2011 compared to the year
ended December 31, 2010. Salaries, wages and benefits per adjusted patient
admission increased 1.8% in the year ended December 31, 2011 as compared to the
same period in 2010. This increase is primarily due to annual merit increases
for our employees, as well as an increase in the number of physicians we employ,
increased overtime costs, increased health benefits costs, increased 401(k) plan
expense and increased employee-related costs associated with our HIT
implementation program, partially offset by reductions in workers' compensation
expense and annual incentive compensation expense, in the year ended
December 31, 2011 as compared to the year ended December 31, 2010. Included in
salaries, wages and benefits expense in 2011 is $4 million of expense due to a
136 basis point decrease in the interest rate used to estimate the discounted
present value of projected future workers' compensation liabilities. Salaries,
wages and benefits expense for the years ended December 31, 2011 and 2010 also
included stock-based compensation expense of $24 million and $22 million,
respectively.
SUPPLIES
Supplies expense as a percentage of net operating revenues was 17.9% for the
year ended December 31, 2011 compared to 18.7% for the year ended
December 31, 2010. Supplies expense per adjusted patient admission decreased by
1.2% in the year ended December 31, 2011 compared to the same period in 2010.
Supplies expense was unfavorably impacted by the higher cost of pharmaceuticals
and increased costs of surgical supplies, partially offset by decreases in
cardiology-related costs due to renegotiated prices and lower volume levels. In
general, supplies expense changes are primarily attributable to changes in our
patient volume levels and the mix of procedures performed.
OTHER OPERATING EXPENSES, NET
Other operating expenses as a percentage of net operating revenues was 23.4% in
the year ended December 31, 2011 compared to 22.5% in the year ended
December 31, 2010. Other operating expenses per adjusted patient admission
increased by
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7.3% in the year ended December 31, 2011 as compared to the same period in 2010.
This change is due in part to a $51 million increase in malpractice expense in
the year ended December 31, 2011 compared to the year ended December 31, 2010.
The increase in malpractice expense is primarily attributable to several large
unfavorable case reserve adjustments in the 2011 period as compared to the
prior-year period, as well as a $17 million unfavorable adjustment due to a 136
basis point decrease in the interest rate used to estimate the discounted
present value of projected future malpractice liabilities in the year ended
December 31, 2011. There were also increases in other operating expenses due to:
† increased physician and medical fees ($28 million);
† increased costs of contracted services ($25 million);
† increased systems implementation costs and information technology
service contract expenses primarily related to our HIT implementation program
($16 million);
† increased rent and lease expense ($9 million);
† increased physician relocation and income guarantee costs
($9 million);
† a favorable adjustment of $10 million in the 2010 period related to
the estimated recovery of the employer portion of certain payroll taxes paid
prior to April 2005 on behalf of medical residents;
† increased hospital provider fees assessed by certain states
in which
we operate ($4 million, which were substantially offset by additional DSH
payments recognized in net patient revenues);
† increased repairs and maintenance expense ($14 million); and
† a reduction in information systems and business office costs
allocable to discontinued operations ($2 million).
These increases were partially offset by $7 million of lower consulting costs
and gains of $8 million from the sale of a building at the former campus of one
of our hospitals and a medical office building.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL, AND RESTRUCTURING CHARGES, NET
During the year ended December 31, 2011, we recorded net impairment and
restructuring charges of $20 million. This amount included a $6 million
impairment charge for the write-down of buildings and equipment of one of our
previously impaired hospitals to their estimated fair values, primarily due to a
decline in the fair value of real estate in the market in which the hospital
operates and a decline in the estimated fair value of equipment. Material
adverse trends in our estimates of future undiscounted cash flows of the
hospital at that time, consistent with our previous estimates in prior years
when impairment charges were recorded at this hospital, indicated the carrying
value of the hospital's long-lived assets was not recoverable from the estimated
future cash flows. We believed the most significant factors contributing to the
adverse financial trends at that time included reductions in volumes of insured
patients, shifts in payer mix from commercial to governmental payers combined
with reductions in reimbursement rates from governmental payers, and high levels
of uninsured patients. As a result, we updated the estimate of the fair value of
the hospital's long-lived assets and compared the fair value estimate to the
carrying value of the hospital's long-lived assets. Because the fair value
estimate was lower than the carrying value of the hospital's long-lived assets,
an impairment charge was recorded for the difference in the amounts. The
aggregate carrying value of assets held and used of the hospital for which an
impairment charge was recorded was $20 million as of December 31, 2011 after
recording the impairment charge. In addition, we recorded impairment charges of
$1 million in connection with the sale of seven medical office buildings in
Texas, $1 million related to a cost basis investment, $7 million in employee
severance costs, $3 million in lease termination costs, $1 million of
acceleration of stock-based compensation costs and $1 million of other related
costs.
During the year ended December 31, 2010, we recorded net impairment and
restructuring charges of $10 million. This amount included a $5 million net
impairment charge for the write-down of buildings, equipment and other
long-lived assets, primarily capitalized software costs classified in other
intangible assets, of one of our previously impaired hospitals to their
estimated fair values, primarily due to a decline in the fair value of real
estate in the market in which the hospital operates and a decline in the
estimated fair value of equipment. Material adverse trends in our estimates of
future undiscounted cash flows of the hospital at that time, consistent with our
previous estimates in prior years when impairment charges were recorded at this
hospital, indicated the carrying value of the hospital's long-lived assets was
not recoverable from the estimated future cash flows. We believed the most
significant factors contributing to the adverse financial trends at that time
included reductions in volumes of insured patients, shifts in payer mix from
commercial to governmental payers combined with reductions in reimbursement
rates from governmental payers, and high levels of uninsured patients. As a
result, we updated the estimate of the fair value of the hospital's long-lived
assets and compared the fair value estimate to the carrying value of the
hospital's long-lived assets. Because the fair value estimate was lower than the
carrying value of the hospital's long-lived assets, an impairment charge was
recorded for the difference in the amounts. We disclosed in our Form 10-K for
the year ended December 31, 2010 that, unless the anticipated future financial
trends of this hospital improved to the extent that the estimated future
undiscounted cash flows exceeded the carrying value of the long-lived assets,
this hospital was at risk of future impairments, which impairments occurred in
2011 as described above, particularly if we spent significant amounts of capital
at the hospital without generating a corresponding increase in the hospital's
fair value or if the fair value of the hospital's real estate or equipment
continued to decline. The aggregate carrying value of assets held and used of
the hospital for which an impairment charge was
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recorded was $25 million as of December 31, 2010 after recording the impairment
charge. In addition, we recorded a $5 million net impairment charge in
connection with the sale of nine medical office buildings in Florida and $2
million in employee severance and other related costs. These charges were
partially offset by a $2 million credit related to the collection of a note
receivable due from a buyer of one of our previously divested hospitals, which
had been fully reserved in a prior year.
LITIGATION AND INVESTIGATION COSTS
Litigation and investigation costs for the year ended December 31, 2011 were
$55 million compared to $12 million for the year ended December 31, 2010. The
2011 amount is comprised of costs associated with our evaluation of an
unsolicited acquisition proposal received in November 2010 (which was
subsequently withdrawn), changes in reserve estimates established in connection
with certain governmental reviews described in Note 15 to the Consolidated
Financial Statements, accruals for a physician privileges case and certain
hospital-related tort claims, the settlement of a union arbitration claim, and
costs to defend the Company in various matters. The 2010 costs primarily related
to costs to defend the Company in various matters and changes in reserve
estimates established in connection with certain governmental reviews, as well
as costs associated with our evaluation of the unsolicited acquisition proposal
received in November 2010.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2011 was $375 million compared
to $424 million for the year ended December 31, 2010. The decrease in interest
expense primarily relates to our repurchases of outstanding senior notes during
2010 and the $30 million favorable impact from an interest rate swap agreement
we terminated in August 2011. During the year ended December 31, 2011, the
interest rate swap agreement generated approximately $8 million of cash interest
savings and a $22 million gain on the settlement of the agreement. See Note 6 to
the Consolidated Financial Statements for additional information about this
agreement.
LOSS FROM EARLY EXTINGUISHMENT OF DEBT
During the year ended December 31, 2011, we recorded a loss from early
extinguishment of debt of approximately $117 million, primarily related to the
difference between the purchase prices and the par values of the $713 million
aggregate principal amount of 9% senior secured notes due 2015 that we purchased
during the period, as well as the write-off of unamortized note discounts and
issuance costs.
During the year ended December 31, 2010, we recorded a loss from early
extinguishment of debt of approximately $57 million primarily related to the
difference between the purchase prices and the par values of the $782 million
aggregate principal amount of 73/8% senior notes due 2013 that we purchased
during the period, as well as the write-off of unamortized note discounts,
issuance costs and unrecognized interest rate hedge settlements associated with
the notes. In addition, we repurchased $40 million aggregate principal amount of
our 97/8% senior notes due 2014 and $7 million aggregate principal amount of our
91/4% senior notes due 2015 for total cash of $49 million.
INCOME TAX EXPENSE (BENEFIT)
During the year ended December 31, 2011, we recorded income tax expense of
$61 million compared to a $977 million benefit during the year ended
December 31, 2010. The increase in income tax expense in the 2011 period is
primarily due to the elimination of substantially all of our valuation allowance
for deferred tax assets during the three months ended September 30, 2010. We now
recognize income tax expense that includes little or no change in the deferred
tax valuation allowance, whereas in the 2010 period the tax impact associated
with our earnings was substantially offset by the change in the deferred tax
valuation allowance. See Note 16 to the Consolidated Financial Statements for
additional detail about these amounts.
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LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Our obligations to make future cash payments under contracts, such as debt and
lease agreements, and under contingent commitments, such as standby letters of
credit and minimum revenue guarantees, are summarized in the table below, all as
of December 31, 2012:
Years Ending December 31, Later
Total 2013 2014 2015 2016 2017 Years
(In Millions)
Long-term debt(1) $ 8,093 $ 458 $ 462 $ 848 $ 352 $ 352 $ 5,621
Capital lease obligations(1) 119 39 44 23 3 3 7
Long-term non-cancelable
operating leases 439 118 77 58 48 35 103
Standby letters of credit 154 154 - - - - -
Guarantees(2) 126 68 28 18 11 1 -
Asset retirement obligations 145 - - - - - 145
Academic affiliation
agreements(3) 183 34 20 17 17 17 78
Tax liabilities 30 - - - - - 30
Supplemental executive
retirement plan obligations 524 20 20 20 21 20 423
Information technology contract
services 1,427 189 166 156 159 162 595
Purchase orders 219 219 - - - - -
Total(4) $ 11,459 $ 1,299 $ 817 $ 1,140 $ 611 $ 590 $ 7,002
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(1) Includes interest through maturity date/lease termination.
(2) Includes minimum revenue guarantees, primarily related to physicians
under relocation agreements and physician groups that provide services at our
hospitals, and operating lease guarantees.
(3) These agreements contain various rights and termination provisions.
(4) Professional liability and workers' compensation reserves have been
excluded from the table. At December 31, 2012, the current and long-term
professional and general liability reserves included in our Consolidated Balance
Sheet were approximately $64 million and $292 million, respectively, and the
current and long-term workers' compensation reserves included in our
Consolidated Balance Sheet were approximately $31 million and $150 million,
respectively.
Standby letters of credit are required principally by our insurers and various
states to collateralize our workers' compensation programs pursuant to statutory
requirements and as security to collateralize the deductible and self-insured
retentions under certain of our professional and general liability insurance
programs. The amount of collateral required is primarily dependent upon the
level of claims activity and our creditworthiness. The insurers require the
collateral in case we are unable to meet our obligations to claimants within the
deductible or self-insured retention layers. The standby letters of credit are
issued under our revolving credit facility, as amended November 29, 2011.
We consummated the following transactions affecting our long-term commitments in
the year ended December 31, 2012:
† We entered into a $14 million commitment during the three months
ended March 31, 2012 for future professional services to be provided to us and
licensed software fees related to our initiative to achieve full compliance with
the ARRA HIT requirements.
† We sold $500 million aggregate principal amount of 43†4% senior
secured notes due 2020 and $300 million aggregate principal amount of 63†4%
senior notes due 2020 in October 2012. The 43†4% senior secured notes will
mature on June 1, 2020, and the 63†4% senior notes will mature on February 1,
2020. We will pay interest on the 43†4% senior secured notes semi-annually in
arrears on June 1 and December 1 of each year, commencing on June 1, 2013. We
will pay interest on the 63†4% senior notes semi-annually in arrears on
February 1 and August 1 of each year; payments commenced on February 1, 2013. We
used a portion of the proceeds from the sale of the notes to purchase
$161 million aggregate principal amount outstanding of our 73†8% senior notes
due 2013 in a tender offer. The remaining net proceeds were used for purchases
of our other outstanding senior notes through public or privately negotiated
transactions and for general corporate purposes, including strategic
acquisitions and the repayment of indebtedness and drawings under our senior
secured revolving credit facility.
† We entered into non-cancellable capital leases of approximately
$88 million, primarily for equipment.
As part of our long-term objective to manage our capital structure, we may from
time to time seek to retire, purchase, redeem or refinance some of our
outstanding debt or equity securities subject to prevailing market conditions,
our liquidity
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requirements, contractual restrictions and other factors. These actions are part
of our strategy to manage our leverage and capital structure over time, which is
dependent on our total amount of debt, our cash and our operating results. At
December 31, 2012, using the last 12 months of Adjusted EBITDA, our ratio of
total long-term debt, net of cash and cash equivalent balances, to Adjusted
EBITDA was 4.1x. We anticipate this ratio will fluctuate from quarter to quarter
based on earnings performance and other factors. We intend to manage this ratio
by following our business plan, managing our cost structure and through other
changes in our capital structure, including, if appropriate, the issuance
of equity or convertible securities. Our ability to achieve our leverage and
capital structure objectives is subject to numerous risks and uncertainties,
many of which are described in the Forward-Looking Statements and Risk Factors
sections in Part I of this report.
Our capital expenditures primarily relate to the expansion and renovation of
existing facilities (including amounts to comply with applicable laws and
regulations), equipment and information systems additions and replacements
(including those required to achieve compliance with the HIT requirements under
ARRA), introduction of new medical technologies, design and construction of new
buildings, and various other capital improvements. Capital expenditures were
$508 million, $475 million and $476 million in the years ended December 31,
2012, 2011 and 2010, respectively, which included $2 million, $8 million and
$30 million in the years ended December 31, 2012, 2011 and 2010, respectively,
related to discontinued operations. We anticipate that our capital expenditures
for continuing operations for the year ending December 31, 2013 will total
approximately $550 million to $600 million, including $98 million that was
accrued as a liability at December 31, 2012. Our budgeted 2013 capital
expenditures include approximately $32 million to improve disability access at
certain of our facilities pursuant to the terms of a negotiated consent decree.
We expect to spend approximately $38 million more on such improvements over the
next three years.
During the year ended December 31, 2012, we acquired as part of our Hospital
Operations and other segment a diagnostic imaging center, an oncology center, an
urgent care center, a health plan, a cyberknife center in which we previously
held a noncontrolling interest, a majority interest in nine ambulatory surgery
centers (in one of which we had previously held a noncontrolling interest), as
well as 20 physician practice entities and a physician practice management
company in which we previously held a noncontrolling interest. Also during the
year ended December 31, 2012, our Conifer segment acquired an information
management and services company and a hospital revenue cycle management
business. The fair value of the consideration conveyed in the acquisitions was
$211 million.
Interest payments, net of capitalized interest, were $376 million, $347 million
and $402 million in the years ended December 31, 2012, 2011 and 2010,
respectively. Interest payments were lower in the 2011 period due to our
repurchases of outstanding senior notes during 2010 and the favorable impact
from an interest rate swap agreement we terminated in August 2011.
From time to time, we use interest rate swap agreements to manage our exposure
to future changes in interest rates. We were party to an interest rate swap
agreement for an aggregate notional amount of $600 million from February 14,
2011 through August 2, 2011. The interest rate swap agreement was designated as
a fair value hedge. It had the effect of converting our 10% senior secured notes
due 2018 from a fixed interest rate paid semi-annually to a variable interest
rate paid semi-annually based on the six-month London Interbank Offered Rate
("LIBOR") plus a floating rate spread of 6.60%. During the term of the interest
rate swap agreement, changes in the fair value of the interest rate swap
agreement and changes in the fair value of the 10% senior secured notes were
recorded in interest expense. During the year ended December 31, 2011, our
interest rate swap agreement generated $8 million of cash interest savings and a
$22 million gain on the settlement of the agreement.
Income tax payments, net of tax refunds, were approximately $13 million in the
year ended December 31, 2012 compared to approximately $10 million in the year
ended December 31, 2011. At December 31, 2012, our carryforwards available to
offset future taxable income consisted of (1) federal net operating loss ("NOL")
carryforwards of approximately $1.5 billion pretax expiring in 2024 to 2029,
(2) approximately $19 million in alternative minimum tax credits with no
expiration, (3) general business credit carryforwards of approximately
$14 million expiring in 2023 to 2032, and (4) state NOL carryforwards of $3.2
billion expiring in 2012 to 2032 for which the associated deferred tax benefit,
net of valuation allowance and federal tax impact, is $34 million. Our ability
to utilize NOL carryforwards to reduce future taxable income may be limited
under Section 382 of the Internal Revenue Code if certain ownership changes in
our Company occur during a rolling three-year period. These ownership changes
include the offering of stock by us, the purchase or sale of our stock by 5%
shareholders, as defined in the Treasury regulations, or the issuance or
exercise of rights to acquire our stock. If such ownership changes by
5% shareholders result in aggregate increases that exceed 50 percentage points
during the three-year period, then Section 382 imposes an annual limitation on
the amount of our taxable income that may be offset by the NOL carryforwards or
tax credit carryforwards at the time of ownership change.
Periodic examinations of our tax returns by the Internal Revenue Service ("IRS")
or other taxing authorities could result in the payment of additional taxes. The
IRS has completed audits of our tax returns for all tax years ended on or before
December 31, 2007. All disputed issues with respect to these audits have been
resolved, and all related tax assessments
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(including interest) have been paid. Tax returns for years ended after
December 31, 2007 are not currently under examination by the IRS.
SOURCES AND USES OF CASH
Our liquidity for the year ended December 31, 2012 was primarily derived from
net cash provided by operating activities, cash on hand and borrowings under our
revolving credit facility. We had approximately $364 million of cash and cash
equivalents on hand at December 31, 2012 to fund our operations and capital
expenditures, and our borrowing availability under our credit facility was $646
million based on our borrowing base calculation as of December 31, 2012.
Our primary source of operating cash is the collection of accounts receivable.
As such, our operating cash flow is negatively impacted by lower levels of cash
collections and higher levels of bad debt due to unfavorable shifts in payer
mix, growth in admissions of uninsured and underinsured patients, and other
factors.
Net cash provided by operating activities was $593 million in the year ended
December 31, 2012 compared to $497 million in the year ended December 31, 2011.
Key negative and positive factors contributing to the change between the 2012
and 2011 periods include the following:
† $81 million of proceeds in the 2012 period related to our continuing
operations from the aforementioned Medicare Budget Neutrality Settlement;
† Income tax payments of $13 million in the year ended
December 31, 2012 compared to $10 million in the year ended December 31, 2011;
† Higher payments on reserves for restructuring charges and litigation
costs of $19 million; and
† $3 million less cash used in operating activities from discontinued
operations.
We continue to seek further initiatives to increase the efficiency of our
balance sheet by generating incremental cash. These initiatives may include the
sale of excess land, buildings or other underutilized or inefficient assets.
Capital expenditures were $508 million and $475 million in the years ended
December 31, 2012 and 2011, respectively.
In October 2012, we announced that our board of directors had authorized the
repurchase of up to $500 million of our common stock through a share repurchase
program expiring in December 2013. Our board of directors previously authorized
the repurchase of up to $400 million of our common stock through a separate
share repurchase program in May 2011. Under the 2012 program, as was the case
with the 2011 program, shares may be purchased in the open market or through
privately negotiated transactions in a manner consistent with applicable
securities laws and regulations, including pursuant to a Rule 10b5-1 plan
maintained by the Company, at times and in amounts based on market conditions
and other factors. Pursuant to the 2012 share repurchase program, we paid
approximately $100 million to repurchase a total of 3,406,324 shares during the
period from the commencement of the program through December 31, 2012, or an
average of $29.36 per share. The 2011 share repurchase program, which was
scheduled to expire on May 9, 2012, was completed in January 2012. Pursuant to
that share repurchase program, we paid approximately $400 million to repurchase
a total of 20,268,466 shares (as adjusted to reflect a one-for-four reverse
stock split in October 2012), or an average of $19.75 per share.
We record our investments that are available-for-sale at fair market value. As
shown in Note 18 to the accompanying Consolidated Financial Statements, the
majority of our investments are valued based on quoted market prices or other
observable inputs. We have no investments that we expect will be negatively
affected by the recent economic downturn that will materially impact our
financial condition, results of operations or cash flows.
DEBT INSTRUMENTS, GUARANTEES AND RELATED COVENANTS
We have a senior secured revolving credit facility, as amended November 29, 2011
(the "Credit Agreement"), that provides, subject to borrowing availability, for
revolving loans in an aggregate principal amount of up to $800 million, with a
$300 million subfacility for standby letters of credit. The Credit Agreement has
a scheduled maturity date of November 29, 2016, subject to our repayment or
refinancing on or before December 3, 2014 of approximately $238 million of the
aggregate outstanding principal amount of our 91/4% senior notes due 2015
(approximately $474 million of which was outstanding at December 31, 2012). If
such repayment or refinancing does not occur, borrowings under the Credit
Agreement will be due December 3, 2014. We are in compliance with all covenants
and conditions in our Credit Agreement. There were no
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of cash borrowings outstanding under the revolving credit facility at
December 31, 2012, and we had approximately $154 million of standby letters of
credit outstanding. Our borrowing availability under the Credit Agreement was
$646 million based on our borrowing base calculation as of December 31, 2012.
In February 2013, we sold $850 million aggregate principal amount of 41†2%
senior secured notes, which will mature on April 1, 2021. We will pay interest
on the 41†2% senior secured notes semi-annually in arrears on April 1 and
October 1 of each year, commencing on October 1, 2013. We used a portion of the
proceeds from the sale of the notes to purchase approximately $645 million
aggregate principal amount outstanding of our 10% senior secured notes due 2018
in a tender offer and to call approximately $69 million of the remaining
aggregate principal amount outstanding of those notes. In connection with the
purchase, we expect to record a loss from early extinguishment of debt of
approximately $179 million primarily related to the difference between the
purchase prices and the par values of the purchased notes, as well as the
write-off of unamortized note discounts and issuance costs.
In October 2012, we sold $500 million aggregate principal amount of 43†4% senior
secured notes due 2020 and $300 million aggregate principal amount of 63†4%
senior notes due 2020. We used a portion of the proceeds from the sale of the
notes to purchase $161 million aggregate principal amount outstanding of our
73†8% senior notes due 2013 in a tender offer.
In April 2012, we issued an additional $141 million aggregate principal amount
of our 61†4% senior secured notes due 2018 at a premium for $142 million of cash
proceeds and an additional $150 million aggregate principal amount of our
8% senior notes due 2020 in a private financing related to our repurchase and
subsequent retirement of 298,700 shares of our 7% mandatory convertible
preferred stock.
We were party to an interest rate swap agreement for an aggregate notional
amount of $600 million from February 14, 2011 through August 2, 2011. The
interest rate swap agreement was designated as a fair value hedge and was being
used to manage our exposure to future changes in interest rates. It had the
effect of converting our 10% senior secured notes due 2018 from a fixed interest
rate paid semi-annually to a variable interest rate paid semi-annually based on
the six-month LIBOR plus a floating rate spread of 6.60%. During the term of the
interest rate swap agreement, changes in the fair value of the interest rate
swap agreement and changes in the fair value of the 10% senior secured notes
were recorded in interest expense. During the year ended December 31, 2011, our
interest rate swap agreement generated $8 million of cash interest savings and a
$22 million gain on the settlement of the agreement.
For additional information regarding our long-term debt, see Note 6 to the
accompanying Consolidated Financial Statements.
LIQUIDITY
From time to time, we expect to engage in additional capital markets, bank
credit and other financing activities depending on our needs and financing
alternatives available at that time. We believe our existing debt agreements
provide significant flexibility for future secured or unsecured borrowings.
In October 2012, we sold $500 million aggregate principal amount of 43†4% senior
secured notes due 2020 and $300 million aggregate principal amount of 63†4%
senior notes due 2020. We used a portion of the proceeds from the sale of the
notes to purchase $161 million aggregate principal amount outstanding of our
73†8% senior notes due 2013 in a tender offer. The remaining net proceeds were
used for purchases of our other outstanding senior notes through public or
privately negotiated transactions and for general corporate purposes, including
strategic acquisitions and the repayment of indebtedness and drawings under our
senior secured revolving credit facility. We continue to focus on opportunities
to enhance the Company's primary business lines and plan to expend approximately
$400 million in the near term to acquire acute care hospitals, outpatient
facilities and business process services companies. During the three months
ended December 31, 2012, we spent approximately $175 million on acquisitions.
Our cash on hand fluctuates day-to-day throughout the year based on the timing
and levels of routine cash receipts and disbursements, including our book
overdrafts, and required cash disbursements, such as interest and income tax
payments. These fluctuations result in material intra-quarter net operating and
investing uses of cash that has caused, and in the future could cause, us to use
our senior secured revolving credit facility as a source of liquidity. We expect
to be required to pay approximately $35 million as a result of the SSI matter
described under "Disproportionate Share Hospital Payments" under the caption
"Sources of Revenue" during 2013. We will be required to make the payments at
the time of the cost report settlements pending the final outcome of our appeals
related to this matter; the MACs commenced issuing the relevant cost report
settlements during the three months ended September 30, 2012. We believe that
existing cash and cash equivalents on hand, availability under our revolving
credit facility, anticipated future cash provided by operating activities, and
our investments in marketable securities of our captive insurance companies
classified as noncurrent investments on our balance sheet should be
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adequate to meet our current cash needs. These sources of liquidity should also
be adequate to finance planned capital expenditures, payments on the current
portion of our long-term debt and other presently known operating needs.
Long-term liquidity for debt service will be dependent on improved cash provided
by operating activities and, given favorable market conditions, future
borrowings or refinancings. However, our cash requirements could be materially
affected by the use of cash in acquisitions of businesses and repurchases of
securities, and also by a deterioration in our results of operations, as well as
the various uncertainties discussed in this and other sections of this report,
which could require us to pursue any number of financing options, including, but
not limited to, additional borrowings, debt refinancings, asset sales or other
financing alternatives. The level, if any, of these financing sources cannot be
assured.
We do not rely on commercial paper or other short-term financing arrangements
nor do we enter into repurchase agreements or other short-term financing
arrangements not otherwise reported in our period-end balance sheets. We do not
have any significant European sovereign debt exposure.
We continue to aggressively identify and implement further actions to control
costs and enhance our operating performance, including cash flow. Among the
areas being addressed are volume growth, including the acquisition of outpatient
businesses, physician recruitment and alignment strategies, expansion of our
management services business within Conifer, managed care payer contracting,
procurement efficiencies, cost standardization, bad debt expense reduction
initiatives, underperforming hospitals, and certain hospital and overhead costs
not related to patient care. Although these initiatives may result in improved
performance, our performance may remain somewhat below our hospital management
peers because of geographic and other differences in hospital portfolios.
OFF-BALANCE SHEET ARRANGEMENTS
Our consolidated operating results for the years ended December 31, 2012, 2011
and 2010 include $953 million, $908 million and $874 million, respectively, of
net operating revenues and $132 million, $115 million and $94 million,
respectively, of operating income generated from four general hospitals operated
by us under lease arrangements. In accordance with GAAP, the applicable
buildings and the future lease obligations under these arrangements are not
recorded on our consolidated balance sheet as they are considered operating
leases. The current terms of these leases expire between 2014 and 2027, not
including lease extensions that we have options to exercise. In February 2013,
we exercised our options under the leases to purchase three of the hospitals. If
these leases expire, and we do not purchase the hospitals, we would no longer
generate revenue or expenses from such hospitals.
We have no other off-balance sheet arrangements that may have a current or
future material effect on our financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources, except for
$280 million of standby letters of credit outstanding and guarantees as of
December 31, 2012.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 21 to our Consolidated Financial Statements included in this report for
a discussion of recently issued accounting standards.
CRITICAL ACCOUNTING ESTIMATES
In preparing our Consolidated Financial Statements in conformity with GAAP, we
must use estimates and assumptions that affect the amounts reported in our
Consolidated Financial Statements and accompanying notes. We regularly evaluate
the accounting policies and estimates we use. In general, we base the estimates
on historical experience and on assumptions that we believe to be reasonable,
given the particular circumstances in which we operate. Actual results may vary
from those estimates.
We consider our critical accounting estimates to be those that (1) involve
significant judgments and uncertainties, (2) require estimates that are more
difficult for management to determine, and (3) may produce materially different
outcomes under different conditions or when using different assumptions.
Our critical accounting estimates cover the following areas:
† Recognition of net operating revenues before provision for doubtful
accounts, including contractual allowances;
† Provisions for doubtful accounts;
† Electronic health record incentives;
† Accruals for general and professional liability risks;
† Accruals for supplemental executive retirement plans;
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† Accruals for litigation losses;
† Impairment of long-lived assets;
† Impairment of goodwill;
† Accounting for income taxes; and
† Accounting for stock-based compensation.
REVENUE RECOGNITION
We recognize net operating revenues before provision for doubtful accounts in
the period in which our services are performed. Net operating revenues before
provision for doubtful accounts primarily consist of net patient service
revenues that are recorded based on established billing rates (i.e., gross
charges), less estimated discounts for contractual and other allowances,
principally for patients covered by Medicare, Medicaid, and managed care and
other health plans, as well as certain uninsured patients under the Compact.
Revenues under the traditional fee-for-service Medicare and Medicaid programs
are based primarily on prospective payment systems. Retrospectively determined
cost-based revenues under these programs, which were more prevalent in earlier
periods, and certain other payments, such as DSH, DGME, IME and bad debt
expense, which are based on our hospitals' cost reports, are estimated using
historical trends and current factors. Cost report settlements under these
programs are subject to audit by Medicare and Medicaid auditors and
administrative and judicial review, and it can take several years until final
settlement of such matters is determined and completely resolved. Because the
laws, regulations, instructions and rule interpretations governing Medicare and
Medicaid reimbursement are complex and change frequently, the estimates recorded
by us could change by material amounts.
We have a system and estimation process for recording Medicare net patient
revenue and estimated cost report settlements. This results in us recording
accruals to reflect the expected final settlements on our cost reports. For
filed cost reports, we record the accrual based on those cost reports and
subsequent activity, and record a valuation allowance against those cost reports
based on historical settlement trends. The accrual for periods for which a cost
report is yet to be filed is recorded based on estimates of what we expect to
report on the filed cost reports, and a corresponding valuation allowance is
recorded as previously described. Cost reports must generally be filed within
five months after the end of the annual cost report reporting period. After the
cost report is filed, the accrual and corresponding valuation allowance may need
to be adjusted.
Revenues under managed care plans are based primarily on payment terms involving
predetermined rates per diagnosis, per-diem rates, discounted fee-for-service
rates and other similar contractual arrangements. These revenues are also
subject to review and possible audit by the payers. The payers are billed for
patient services on an individual patient basis. An individual patient's bill is
subject to adjustment on a patient-by-patient basis in the ordinary course of
business by the payers following their review and adjudication of each
particular bill. We estimate the discounts for contractual allowances at the
individual hospital level utilizing billing data on an individual patient basis.
At the end of each month, on an individual hospital basis, we estimate our
expected reimbursement for patients of managed care plans based on the
applicable contract terms. We believe it is reasonably likely for there to be an
approximately 3% increase or decrease in the estimated contractual allowances
related to managed care plans. Based on reserves as of December 31, 2012, a 3%
increase or decrease in the estimated contractual allowance would impact the
estimated reserves by approximately $8 million. Some of the factors that can
contribute to changes in the contractual allowance estimates include:
(1) changes in reimbursement levels for procedures, supplies and drugs when
threshold levels are triggered; (2) changes in reimbursement levels when
stop-loss or outlier limits are reached; (3) changes in the admission status of
a patient due to physician orders subsequent to initial diagnosis or testing;
(4) final coding of in-house and discharged-not-final-billed patients that
change reimbursement levels; (5) secondary benefits determined after primary
insurance payments; and (6) reclassification of patients among insurance plans
with different coverage levels. Contractual allowance estimates are periodically
reviewed for accuracy by taking into consideration known contract terms, as well
as payment history. Although we do not separately accumulate and disclose the
aggregate amount of adjustments to the estimated reimbursement for every patient
bill, we believe our estimation and review process enables us to identify
instances on a timely basis where such estimates need to be revised. We do not
believe there were any adjustments to estimates of individual patient bills that
were material to our revenues. In addition, on a corporate-wide basis, we do not
record any general provision for adjustments to estimated contractual allowances
for managed care plans.
Revenues related to self-pay patients may qualify for a discount under the
Compact, whereby the gross charges based on established billing rates would be
reduced by an estimated discount for contractual allowance.
We believe that adequate provision has been made for any adjustments that may
result from final determination of amounts earned under all the above
arrangements. We know of no material claims, disputes or unsettled matters with
any payers that would affect our revenues for which we have not adequately
provided for in our Consolidated Financial Statements.
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PROVISIONS FOR DOUBTFUL ACCOUNTS
Although outcomes vary, our policy is to attempt to collect amounts due from
patients, including co-payments and deductibles due from patients with
insurance, at the time of service while complying with all federal and state
laws and regulations, including, but not limited to, the Emergency Medical
Treatment and Active Labor Act ("EMTALA"). Generally, as required by EMTALA,
patients may not be denied emergency treatment due to inability to pay.
Therefore, services, including the legally required medical screening
examination and stabilization of the patient, are performed without delaying to
obtain insurance information. In non-emergency circumstances or for elective
procedures and services, it is our policy to verify insurance prior to a patient
being treated; however, there are various exceptions that can occur. Such
exceptions can include, for example, instances where (1) we are unable to obtain
verification because the patient's insurance company was unable to be reached or
contacted, (2) a determination is made that a patient may be eligible for
benefits under various government programs, such as Medicaid or Victims of
Crime, and it takes several days or weeks before qualification for such benefits
is confirmed or denied, and (3) under physician orders we provide services to
patients that require immediate treatment.
We provide for an allowance against accounts receivable that could become
uncollectible by establishing an allowance to reduce the carrying value of such
receivables to their estimated net realizable value. We estimate this allowance
based on the aging of our accounts receivable by hospital, our historical
collection experience by hospital and for each type of payer over an 18-month
look-back period, and other relevant factors. Based on our accounts receivable
from self-pay patients and co-payments and deductibles owed to us by patients
with insurance as of December 31, 2012, a 10% decrease or increase in our
self-pay collection rate, or approximately 3%, which we believe could be a
reasonable likely change, would result in an unfavorable or favorable adjustment
to provision for doubtful accounts of approximately $7 million. There are
various factors that can impact collection trends, such as changes in the
economy, which in turn have an impact on unemployment rates and the number of
uninsured and underinsured patients, the volume of patients through our
emergency departments, the increased burden of co-payments and deductibles to be
made by patients with insurance, and business practices related to collection
efforts. These factors continuously change and can have an impact on collection
trends and our estimation process.
Our practice is to reduce the net carrying value of self-pay accounts
receivable, including accounts related to the co-payments and deductibles due
from patients with insurance, to their estimated net realizable value at the
time of billing. Generally, uncollected balances are assigned to Conifer between
90 to 180 days, once patient responsibility has been identified. When accounts
are assigned to Conifer by the hospital, the accounts are completely written off
the hospital's books through the provision for doubtful accounts, and an
estimated future recovery amount is calculated and recorded as a receivable on
the hospital's books at the same time. The estimated future recovery amount is
adjusted based on the aging of the accounts and changes to actual recovery
rates. The estimated future recovery amount for self-pay accounts is written
down whereby it is fully reserved if the amount is not paid within two years
after the account is assigned to Conifer.
Managed care accounts are collected through the regional business offices of
Conifer, whereby the account balances remain in the related hospital's patient
accounting system and on the hospital's books, and are adjusted based on an
analysis of the net realizable value as they age. Managed care accounts are
gradually written down whereby they are fully reserved if the accounts are not
paid within two years.
Changes in the collectability of aged managed care accounts receivable are
ongoing and impact our provision for doubtful accounts. We continue to
experience payment pressure from managed care companies concerning amounts of
past billings. We aggressively pursue collection of these accounts receivable
using all means at our disposal, including arbitration and litigation, but we
may not be successful.
ELECTRONIC HEALTH RECORD INCENTIVES
Under certain provisions of ARRA, federal incentive payments are available to
hospitals, physicians and certain other professionals when they adopt, implement
or upgrade ("AIU") certified EHR technology or become "meaningful users," as
defined under ARRA, of EHR technology in ways that demonstrate improved quality,
safety and effectiveness of care. Providers can become eligible for annual
Medicare incentive payments by demonstrating meaningful use of EHR technology in
each period over four periods. Medicaid providers can receive their initial
incentive payment by satisfying AIU criteria, but must demonstrate meaningful
use of EHR technology in subsequent years in order to qualify for additional
payments. Hospitals may be eligible for both Medicare and Medicaid EHR incentive
payments; however, physicians and other professionals may be eligible for either
Medicare or Medicaid incentive payments, but not both. Hospitals that are
meaningful users under the Medicare EHR incentive payment program are deemed
meaningful users under the Medicaid EHR incentive payment program and do not
need to meet additional criteria imposed by a state. Medicaid EHR incentive
payments to Providers are 100% federally funded and administered by the states.
CMS established calendar year 2011 as the first year states could offer EHR
incentive payments. Before a state may offer EHR incentive payments, the state
must submit and CMS must approve the state's incentive plan.
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We recognize Medicaid EHR incentive payments in our consolidated statements of
operations for the first payment year when: (1) CMS approves a state's EHR
incentive plan; and (2) our hospital or employed physician acquires certified
EHR technology (i.e., when AIU criteria are met). Medicaid EHR incentive
payments for subsequent payment years are recognized in the period during which
the specified meaningful use criteria are met. We recognize Medicare EHR
incentive payments when: (1) the specified meaningful use criteria are met; and
(2) contingencies in estimating the amount of the incentive payments to be
received are resolved.
The meaningful use information submitted to CMS is subject to review,
verification and audit. Additionally, the final Medicare and Medicaid EHR
incentive payments under ARRA are based on financial and statistical data, which
may be estimated using historical trends and current factors, in the settled
Medicare cost report for the cost reporting period that begins in the federal
fiscal year in which the criteria are met. We have acquired, developed and
implemented systems to accumulate the information necessary to demonstrate
meaningful use of EHR technology. We also have a system and estimation process
for recording the financial and statistical data utilized as part of the cost
reporting process. Cost reports must generally be filed within five months after
the end of the annual cost report reporting period. Cost report settlements are
subject to audit by Medicare and Medicaid auditors and administrative and
judicial review, and it can take several years until final settlement of such
matters is determined and completely resolved. Because the laws, regulations,
instructions and rule interpretations governing Medicare and Medicaid
reimbursement are complex and change frequently, the estimates recorded by us
could change by material amounts. Final settlement of cost reports, which could
impact the financial and statistical data on which EHR incentives are based, or
a determination that meaningful use was not attained could result in adjustment
to previously recognized EHR incentive payments or retrospective recoupment of
incentive payments.
ACCRUALS FOR GENERAL AND PROFESSIONAL LIABILITY RISKS
We accrue for estimated professional and general liability claims, to the extent
not covered by insurance, when they are probable and can be reasonably
estimated. We maintain reserves, which are based on actuarial estimates for the
portion of our professional liability risks, including incurred but not reported
claims, to the extent we do not have insurance coverage. Our liability consists
of estimates established based upon discounted actuarial calculations using
several factors, including the number of expected claims, estimates of losses
for these claims based on recent and historical settlement amounts, estimates of
incurred but not reported claims based on historical experience, the timing of
historical payments, and risk free discount rates used to determine the present
value of projected payments. We consider the number of expected claims, average
cost per claim and discount rate to be the most significant assumptions in
estimating accruals for general and professional liabilities. Our liabilities
are adjusted for new claims information in the period such information becomes
known. Malpractice expense is recorded within other operating expenses in the
accompanying Consolidated Statements of Operations.
Our estimated reserves for professional and general liability claims will change
significantly if future claims differ from expected trends. We believe it is
reasonably likely for there to be a 5% increase or decrease in the number of
expected claims or average cost per claim. Based on our reserves and other
information as of December 31, 2012, a 5% increase in the number of expected
claims would increase the estimated reserves by $40 million, and a 5% decrease
in the number of expected claims would decrease the estimated reserves by
$33 million. A 5% increase in the average cost per claim would increase the
estimated reserves by $54 million, and a 5% decrease in the average cost per
claim would decrease the estimated reserves by $42 million. Because our
estimated reserves for future claim payments are discounted to present value, a
change in our discount rate assumption could also have a significant impact on
our estimated reserves. Our discount rate was 1.18%, 1.35% and 2.71% at
December 31, 2012, 2011 and 2010, respectively. A 100 basis point increase or
decrease in the discount rate would change the estimated reserves by $9 million.
In addition, because of the complexity of the claims, the extended period of
time to settle the claims and the wide range of potential outcomes, our ultimate
liability for professional and general liability claims could change materially
from our current estimates.
The table below shows the case reserves and incurred but not reported and loss
development reserves as of December 31, 2012, 2011 and 2010:
December 31,
2012 2011 2010
Case reserves $ 97 $ 111 $ 149Incurred but not reported and loss development reserves 272 319 357
Total undiscounted reserves
$ 369 $ 430 $ 506
Several actuarial methods, including the incurred, paid loss development and
Bornhuetter-Ferguson methods, are applied to our historical loss data to produce
estimates of ultimate expected losses and the resulting incurred but not
reported and loss development reserves. These methods use our specific
historical claims data related to paid losses and loss adjustment
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expenses, historical and current case reserves, reported and closed claim
counts, and a variety of hospital census information. Based on these analyses,
we determine our estimate of the professional liability claims, including the
incurred but not reported and loss development reserve estimates. The
determination of our estimates involves subjective judgment and could result in
material changes to our estimates in future periods if our actual experience is
materially different than our assumptions.
Malpractice claims generally take 4 to 5 years to settle from the time of the
initial reporting of the occurrence to the settlement payment. Accordingly, the
percentage of undiscounted reserves as of December 31, 2012 and 2011
representing unsettled claims is approximately 99% and 98%, respectively.
The following table, which includes both our continuing and discontinued
operations, presents the amount of our accruals for professional and general
liability claims and the corresponding activity therein:
Years Ended December 31,
2012 2011 2010
Accrual for professional and general liability
claims, beginning of the year $ 412 $ 467 $ 572
Expense (income) related to:(1)
Current year 86 107 125
Prior years (2 ) 10 (98 )
Expense from discounting 4 22 10
Total incurred loss and loss expense 88 139 37
Paid claims and expenses related to:
Current year (2 ) (2 ) (2 )
Prior years (142 ) (192 ) (140 )
Total paid claims and expenses (144 ) (194 ) (142 )
Accrual for professional and general liability
claims, end of year $ 356 $ 412 $ 467
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(1) Total malpractice expense for continuing operations, including premiums
for insured coverage, was $92 million, $108 million and $56 million in the years
ended December 31, 2012, 2011 and 2010, respectively.
ACCRUALS FOR SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
Our supplemental executive retirement plan benefit obligations and related costs
are calculated using actuarial concepts. The discount rate is a critical
assumption in determining the elements of expense and liability measurement. We
evaluate this critical assumption annually. Other assumptions include employee
demographic factors such as retirement patterns, mortality, turnover and rate of
compensation increase.
The discount rate enables us to state expected future cash payments for benefits
as a present value on the measurement date. The guideline for setting this rate
is a high-quality long-term corporate bond rate. A lower discount rate increases
the present value of benefit obligations and increases pension expense. Our
discount rate for 2012 was 4.00% and for 2011 was 5.00%. The assumed discount
rate for pension plans reflects the market rates for high-quality corporate
bonds currently available. A 100 basis point decrease in the assumed discount
rate would increase total net periodic pension expense for 2013 by approximately
$2 million and would increase the projected benefit obligation at
December 31, 2012 by approximately $36 million. A 100 basis point increase in
the assumed discount rate would decrease net periodic pension expense for 2013
by approximately $2 million and decrease the projected benefit obligation at
December 31, 2012 by approximately $30 million.
ACCRUALS FOR LITIGATION LOSSES
We record reserves for litigation losses if a loss is probable and can be
reasonably estimated. We record probable loss contingencies based on the best
estimate of the loss. If a range of loss can be reasonably estimated, but no
single amount within the range appears to be a better estimate than any other
amount within the range, the minimum amount in the range is accrued. These
estimates are often initially developed earlier than when the ultimate loss is
known, and the estimates are adjusted if additional information becomes known.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long-lived assets for possible impairment annually or whenever
events or changes in circumstances indicate that the carrying amount of the
asset, or related group of assets, may not be recoverable from estimated future
undiscounted cash flows. If the estimated future undiscounted cash flows are
less than the carrying value of the assets, we calculate the amount of an
impairment charge if the carrying value of the long-lived assets exceeds the
fair value of the assets. The fair value of the assets is estimated based on
appraisals, established market values of comparable assets or internal estimates
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of future net cash flows expected to result from the use and ultimate
disposition of the asset. The estimates of these future cash flows are based on
assumptions and projections we believe to be reasonable and supportable. They
require our subjective judgments and take into account assumptions about revenue
and expense growth rates. These assumptions may vary by type of facility and
presume stable, improving or, in some cases, declining results at our hospitals,
depending on their circumstances. If the presumed level of performance does not
occur as expected, impairment may result.
We report long-lived assets to be disposed of at the lower of their carrying
amounts or fair values less costs to sell. In such circumstances, our estimates
of fair value are based on appraisals, established market prices for comparable
assets or internal estimates of future net cash flows.
Fair value estimates can change by material amounts in subsequent periods. Many
factors and assumptions can impact the estimates, including the following risks:
† future financial results of our hospitals, which can be impacted by
volumes of insured patients and declines in commercial managed care patients,
terms of managed care payer arrangements, our ability to collect accounts due
from uninsured and managed care payers, loss of volumes as a result of
competition, and our ability to manage costs such as labor costs, which can be
adversely impacted by union activity and the shortage of experienced nurses;
† changes in payments from governmental health care programs and in
government regulations such as reductions to Medicare and Medicaid payment rates
resulting from government legislation or rule-making or from budgetary
challenges of states in which we operate;
† how the hospitals are operated in the future; and
† the nature of the ultimate disposition of the assets.
During the year ended December 31, 2012, we recorded net impairment and
restructuring charges of $19 million, consisting of $3 million relating to the
impairment of obsolete assets, $2 million relating to other impairment charges,
$8 million of employee severance costs and $6 million of other related costs.
Additionally, in our most recent impairment analysis as of December 31, 2012, we
had two hospitals with an aggregate carrying value of long-lived assets of
approximately $95 million whose estimated future undiscounted cash flows
exceeded the carrying value of long-lived assets by an aggregate amount of
approximately $194 million. These two hospitals had the smallest excess of
future undiscounted cash flows on an annual basis necessary to recover the
carrying value of their assets. Future adverse trends that result in necessary
changes in the assumptions underlying these estimates of future undiscounted
cash flows could result in the hospitals' estimated cash flows being less than
the carrying value of the assets, which would require a fair value assessment of
the long-lived assets and, if the fair value amount is less than the carrying
value of the assets, impairment charges would occur and could be material.
IMPAIRMENT OF GOODWILL
Goodwill represents the excess of costs over the fair value of assets of
businesses acquired. Goodwill and other intangible assets acquired in purchase
business combinations and determined to have indefinite useful lives are not
amortized, but instead are subject to impairment tests performed at least
annually. For goodwill, we perform the test at the reporting unit level, as
defined by applicable accounting standards, when events occur that require an
evaluation to be performed or at least annually. If we determine the carrying
value of goodwill is impaired, or if the carrying value of a business that is to
be sold or otherwise disposed of exceeds its fair value, then we reduce the
carrying value, including any allocated goodwill, to fair value. Estimates of
fair value are based on appraisals, established market prices for comparable
assets or internal estimates of future net cash flows and presume stable,
improving or, in some cases, declining results at our hospitals, depending on
their circumstances. If the presumed level of performance does not occur as
expected, impairment may result.
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Our continuing operations consist of two operating segments, our Conifer
subsidiary and our hospital and other operations. Our hospital and other
operations are structured as follows:
† Our California region includes all of our hospitals in California;
† Our Central region includes all of our hospitals in Missouri, Tennessee
and Texas;
† Our Florida region includes all of our hospitals in Florida; and
† Our Southern States region includes all of our hospitals in Alabama,
Georgia, North Carolina, Pennsylvania and South Carolina.
In addition to our Conifer subsidiary, these regions are reporting units used to
perform our goodwill impairment analysis and are one level below our operating
segment level. Our hospitals in Pennsylvania, which were previously part of a
separate market, became part of our Southern States region effective May 1,
2011. This change did not have any impact on our consolidated financial
condition, results of operations or cash flows. Future restructuring that
changes our goodwill reporting units could also result in future impairments of
our goodwill.
Our goodwill balance is primarily related to our Southern States region, which
totals approximately $356 million, and our Central region, which
totals approximately $341 million. In our latest impairment analysis as of
December 31, 2012, the estimated fair value of these regions exceeded the
carrying value of long-lived assets, including goodwill, by approximately 77%
and 105%, respectively.
ACCOUNTING FOR INCOME TAXES
We account for income taxes using the asset and liability method. This approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Income tax receivables and
liabilities and deferred tax assets and liabilities are recognized based on the
amounts that more likely than not will be sustained upon ultimate settlement
with taxing authorities.
Developing our provision for income taxes and analysis of uncertain tax
positions items requires significant judgment and knowledge of federal and state
income tax laws, regulations and strategies, including the determination of
deferred tax assets and liabilities and, if necessary, any valuation allowances
that may be required for deferred tax assets.
We assess the realization of our deferred tax assets to determine whether an
income tax valuation allowance is required. Based on all available evidence,
both positive and negative, and the weight of that evidence to the extent such
evidence can be objectively verified, we determine whether it is more likely
than not that all or a portion of the deferred tax assets will be realized. The
main factors that we consider include:
† Cumulative profits/losses in recent years, adjusted for certain
nonrecurring items;
† Income/losses expected in future years;
† Unsettled circumstances that, if unfavorably resolved, would
adversely affect future operations and profit levels;
† The availability, or lack thereof, of taxable income in prior
carryback periods that would limit realization of tax benefits; and
† The carryforward period associated with the deferred tax assets and
liabilities.
Prior to the year ended December 31, 2010, we had not included projections of
future taxable income in the determination of the amount of the required
valuation allowance primarily as a result of negative evidence represented by
our cumulative losses in recent years. However, during the year ended
December 31, 2010, our judgment about the need for a valuation allowance
changed, and we concluded that the valuation allowance could be reduced to $66
million. As a result, the reduction in the valuation allowance of approximately
$1.1 billion was recorded as a benefit in the provision for income taxes from
continuing operations. Our change in judgment resulted from our assessment that
positive evidence outweighed negative evidence during 2010 thereby resulting in
the inclusion of projections of future taxable income in the determination of
the amount of the required valuation allowance. The following factors were taken
into account in our assessment:
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† Cumulative profits for the three years ended December 31, 2010;
† Projected profits for 2011 based on then-current business plans;
† Carryforward periods for utilization of federal net operating loss
carryovers;
† Significant improvement in operating performance in 2009 and 2010 as
evidenced by:
† Improved cost controls;
† Successful renegotiation of managed care contracts on favorable
terms;
† Successful quality control initiatives as reflected by improved
clinical outcomes;
† Successful execution of physician alignment strategies; and
† Expansion of our outpatient business; and
† Formulation of strategic initiatives to address uncertainties
presented by the Affordable Care Act and health information technology
requirements under ARRA.
During the year ended December 31, 2011, we reduced the valuation allowance by
an additional $5 million based on 2011 profits and projected profits for 2012.
During the year ended December 31, 2012, we reduced the valuation allowance by
an additional $5 million based on 2012 profits and projected profits for 2013.
The remaining $56 million balance in the valuation allowance as of
December 31, 2012 is primarily attributable to certain state net operating loss
carryovers that, more likely than not, will expire unutilized.
We consider many factors when evaluating our uncertain tax positions, and such
judgments are subject to periodic review. Tax benefits associated with uncertain
tax positions are recognized in the period in which one of the following
conditions is satisfied: (1) the more likely than not recognition threshold is
satisfied; (2) the position is ultimately settled through negotiation or
litigation; or (3) the statute of limitations for the taxing authority to
examine and challenge the position has expired. Tax benefits associated with an
uncertain tax position are derecognized in the period in which the more likely
than not recognition threshold is no longer satisfied.
While we believe we have adequately provided for our income tax receivables or
liabilities and our deferred tax assets or liabilities, adverse determinations
by taxing authorities or changes in tax laws and regulations could have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We account for the cost of stock-based compensation using the fair-value method,
under which the cost of stock option grants and other incentive awards to
employees, directors, advisors and consultants is measured by the fair value of
the awards on their grant dates and is recognized over the requisite service
periods of the awards, whether or not the awards had any intrinsic value during
the period. We estimate the fair value of stock option grants as of the date of
each grant, using a binomial lattice model. The key assumptions of the binomial
lattice model include:
† Expected volatility;
† Expected dividend yield;
† Expected life;
† Expected forfeiture rate;
† Risk-free interest rate range;
† Early exercise threshold; and
† Early exercise rate.
The expected volatility used in the binomial lattice model incorporates
historical and implied share-price volatility and is based on an analysis of
historical prices of our stock and open market exchanged options. The expected
volatility reflects the historical volatility for a duration consistent with the
contractual life of the options, and the volatility implied by the trading of
options to purchase our stock on open-market exchanges. The historical
share-price volatility excludes the movements in our stock price during the
period October 1, 2002 through December 31, 2002 due to unique events occurring
during that time, which caused extreme volatility in our stock price, and two
dates (one in 2010 and one in 2011) with unusual volatility due to an
unsolicited acquisition proposal. The expected life of options granted is
derived from the output of the binomial lattice model and represents the period
of time that the options are expected to be outstanding. This model incorporates
an early exercise assumption in the event of a significant increase in stock
price. The risk-free interest rates are based on zero-coupon U.S. Treasury
yields in effect at the date of grant consistent with the expected exercise
timeframes.
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The most critical of the above assumptions in our calculations of fair value is
the expected life of an option, because it is a principal part of our
calculations of expected volatility and interest rates. Accordingly, we
reevaluate our estimate of expected life at each major grant date. Our
reevaluation is based on recent exercise patterns.
