LIFEPOINT HOSPITALS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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We recommend that you read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report, as well as our Annual Report on Form 10-K for the year endedDecember 31, 2011 (the "2011 Annual Report on Form 10-K"). Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations. Additionally, unless the context indicates otherwise,LifePoint Hospitals, Inc. and its subsidiaries are referred to in this section as "we," "our," or "us." We make forward-looking statements in this report, other reports and in statements we file with theUnited States Securities and Exchange Commission (the "SEC") and/or release to the public. In addition, our senior management makes forward-looking statements orally to analysts, investors, the media and others. Broadly speaking, forward-looking statements include: projections of our revenues, net income, earnings per share, capital expenditures, cash flows, debt repayments, interest rates, operating statistics and data or other financial items; descriptions of plans or objectives of our management for future operations, services or growth plans including acquisitions, divestitures, business strategies and initiatives; interpretations ofMedicare andMedicaid laws and regulations and their effect on our business; and descriptions of assumptions underlying or relating to any of the foregoing. In this report, for example, we make forward-looking statements, including statements discussing our expectations about: future financial performance and condition; future liquidity and capital resources; future cash flows; existing and future debt; our business strategy and operating philosophy, including an evaluation of growth strategies for existing markets and for potential acquisitions; effects of competition in a hospital's market; costs of providing care to our patients; changes in interest rates; our compliance with new and existing laws and regulations as well as costs and benefits associated with compliance; the impact of national healthcare reform; the performance of counterparties to our agreements; other income from electronic health records ("EHR"); anticipated capital expenditures; impact of accounting methodologies; effect of credit ratings; professional fees; industry and general economic trends; reimbursement changes; patient volumes and related revenues; claims and legal actions relating to professional liabilities, governmental investigations and other matters; and physician recruiting and retention. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements often include words such as "can," "could," "may," "should," "believe," "will," "would," "expect," "project," "estimate," "seek," "anticipate," "intend," "target," "continue" or similar expressions. You should not unduly rely on forward-looking statements, which give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. We do not undertake any obligation to update our forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. There are several factors, some beyond our control that could cause results to differ significantly from our expectations. Some of these factors as well as other factors such as market, operational, liquidity, interest rate and other risks are described in Part I, Item 1A. Risk Factors and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk of the 2011 Annual Report on Form 10-K. Any factor described in this report and in the 2011 Annual Report on Form 10-K could by itself, or together with one or more factors, adversely affect our business, results of operations and/or financial condition. There may be factors not described in this report or in the 2011 Annual Report on Form 10-K that could also cause results to differ from our expectations. 24 --------------------------------------------------------------------------------
TABLE OF CONTENTS Overview We operate general acute care hospitals primarily in non-urban communities inthe United States . AtMarch 31, 2012 , on a consolidated basis, we operated 54 hospital campuses in 18 states, having a total of 6,048 licensed beds. We generate revenues primarily through hospital services offered at our facilities. We generated$851.0 million and$758.5 million in revenues from continuing operations during the three months endedMarch 31, 2012 and 2011, respectively. For the three months endedMarch 31, 2012 and 2011, we derived 49.8% and 50.2%, respectively, of our revenues from theMedicare andMedicaid programs, collectively. Payments made to our hospitals pursuant to theMedicare andMedicaid programs for services rendered rarely exceed our costs for such services. As a result, we rely largely on payments made by private or commercial payors, together with certain limited services provided toMedicare recipients, to generate an operating profit. The hospital industry continues to endure a period where the costs of providing care are rising faster than reimbursement rates from government or private commercial payors. This places a premium on efficient operation, the ability to reduce or control costs and the need to leverage the benefits of our organization across all of our hospitals. OnApril 5, 2012 , a settlement agreement (the "Rural Floor Settlement") was signed between theDepartment of Health and Human Services ("HHS"), the Secretary of HHS, theCenters for Medicare and Medicaid Services ("CMS") and a large number of healthcare service providers, including our hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMS's calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 from federal fiscal year 1998 through and including federal fiscal year 2011 for healthcare service providers that participated in certain court cases and group appeals. As a result of the Rural Floor Settlement we recognized$31.3 million of additionalMedicare revenue included under the caption "Revenues before provision for doubtful accounts" and approximately$5.7 million of costs, which are included under the captions "Other operating expenses" and "Salaries and benefits", during the three months endedMarch 31, 2012 .
Competitive and Structural Environment
The environment in which our hospitals operate is extremely competitive. In addition to competitive concerns, many of our communities are experiencing slow growth, and in some cases, population losses. We believe this trend has occurred primarily as a result of poor economic conditions because the economies in the non-urban communities in which our hospitals primarily operate are often dependent on a small number of larger employers, especially manufacturing or other facilities. The economies of our communities are also more sensitive to economic downturns in the manufacturing sector thanthe United States , generally. Our hospitals face competition from other acute care hospitals, including larger tertiary hospitals located in larger markets and/or affiliated with universities; specialty hospitals that focus on one or a small number of very lucrative service lines but that are not required to operate emergency departments; stand-alone centers at which surgeries or diagnostic tests can be performed; and physicians on the medical staffs of our hospitals. In many cases, our competitors focus on the service lines that offer the highest margins. By doing so, our competitors can potentially draw the best-paying business out of our hospitals. This, in turn, can reduce the overall operating profit of our hospitals as we are often obligated to offer service lines that operate at a loss or that have much lower profit margins. We continue to see the shift of increasingly complex procedures from the inpatient to the outpatient setting and have also seen growth in the general shift of lower acuity procedures to physician offices and other non-hospital outpatient settings. These trends have, to some extent, offset our efforts to improve equivalent admission rates at many of our hospitals. 25
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Our hospitals also face extreme competition in their efforts to recruit and retain physicians on their medical staffs. It is widely recognized thatthe United States has a shortage of physicians in certain practice areas, including specialists such as cardiologists, oncologists, urologists and orthopedists, in various areas of the country. This fact, and our ability to overcome these shortages, is directly relevant to our growth strategies because cardiologists, oncologists, urologists and orthopedists are often the physicians in highest demand in communities where our hospitals are located. Larger tertiary medical centers are acquiring physician practices and employing physicians in some of our communities. While physicians in these practices may continue to be members of the medical staffs of our hospitals, they may be less likely to refer patients to our hospitals over time. We believe other key factors in our competition for patients is the quality of our patient care and the perception of that quality in the communities where our hospitals are located, which may be influenced by, among other things, the technology, service lines and capital improvements made at our facilities. The quality of care, and our communities' perception of that quality, may also be influenced by the skills and experience of our non-physician employees involved in patient care. Business Strategy In order to achieve growth in patient volumes, revenues and profitability given the competitive and structural environment, we continue to focus our business strategy on the following:
• Measurement and improvement of quality of patient care and perceptions of
such quality in communities where our hospitals are located;
• Targeted recruiting of primary care physicians and physicians in key
specialties;
• Retention of physicians and efforts to improve physician satisfaction;
• Retention and, where needed, recruitment of non-physician employees
involved in patient care and efforts to improve employee satisfaction;
• Targeted investments in new technologies, new service lines and capital
improvements at our facilities;
• Improvements in management of expenses and revenue cycle;
• Negotiation of improved reimbursement rates with non-governmental payors; and
• Strategic growth through acquisition and integration of hospitals and other
healthcare facilities where valuations are attractive and we can identify
opportunities for improved financial performance through our management or
ownership. Regulatory Environment Our business and our hospitals are highly regulated, and the penalties for noncompliance are severe. We are required to comply with extensive, extremely complicated and overlapping government laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, from what service lines must be offered in order to be licensed as an acute care hospital, to whether our hospitals may employ physicians, and to how (and whether) our hospitals may receive payments pursuant to theMedicare andMedicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to receive reimbursements through theMedicare andMedicaid programs. Not only are our hospitals heavily regulated, but the rules, regulations and laws to which they are subject often change, with little or no notice, and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require our hospitals to make changes in their facilities, equipment, personnel or services, and may also require that standard operating policies and procedures be re-written and re-implemented. The cost of complying with such laws and regulations is a significant component of our overall expenses. Further, this expense has grown in recent periods because of new regulatory requirements and the severity of the penalties associated with non-compliance. Management anticipates that compliance expenses will continue to grow in the foreseeable future. 26 --------------------------------------------------------------------------------
TABLE OF CONTENTS Health Care Reform The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act") dramatically altersthe United States healthcare system and is intended to decrease the number of uninsured Americans and reduce the overall cost of healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expandingMedicare andMedicaid eligibility, reducingMedicare disproportionate share hospital ("DSH") andMedicaid payments to providers, expanding theMedicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, and instituting certain private health insurance reforms. Although a majority of the measures contained in the Affordable Care Act do not take effect until 2013, certain of the reductions inMedicare spending, such as negative adjustments to theMedicare hospital inpatient and outpatient prospective payment system market basket updates and the incorporation of productivity adjustments to theMedicare program's annual inflation updates, became effective in 2010 and 2011 or will be implemented in 2012.The United States Supreme Court recently heard arguments regarding the constitutionality of the Affordable Care Act and is expected to render a decision in the summer of 2012.The Supreme Court is considering four issues: (1) whether the "individual mandate" - the requirement that all individuals purchase some form of health insurance - is constitutional; (2) if the individual mandate is found unconstitutional, whether it is severable from the remainder of the Affordable Care Act; (3) whether the Affordable Care Act's requirement that states expandMedicaid eligibility or risk losing federal funds is constitutional; and (4) whether the individual mandate is a tax for purposes of the Anti-Injunction Act, meaning that plaintiffs seeking to challenge the requirement must wait until it takes effect in 2014. Additionally, several bills have been and will likely continue to be introduced inCongress to repeal or amend all or significant provisions of the Affordable Care Act. It is difficult to predict the full impact of the Affordable Care Act on our revenue and results of operations due to pendingSupreme Court review, its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act.
Medicare payment methodologies have been, and are expected to be, significantly revised based on cost containment and policy considerations. CMS has already begun to implement some of theMedicare reimbursement reductions required by the Affordable Care Act. These revisions will likely be more frequent and significant as more of the Affordable Care Act's changes and cost-saving measures become effective. In addition, many states in which we operate are facing budgetary challenges and have adopted, or may be considering, legislation that is intended to control or reduceMedicaid expenditures, enrollMedicaid recipients in managed care programs, and/or impose additional taxes on hospitals to help finance or expand theirMedicaid programs.Congress has made an effort to address the financial challengesMedicaid is facing by increasing the amount ofMedicaid funding available to states through the American Recovery and Reinvestment Act of 2009 ("ARRA") and the Education, Jobs, and Medicaid Assistance Act, which increased Federal Medical Assistance Percentage payments throughJune 30, 2011 . Budget cuts, federal or state legislation, or other changes in the administration or interpretation of government health programs by government agencies or contracted managed care organizations could have a material adverse effect on our financial position and results of operations.
Physician Services
Physician services are reimbursed under the
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The PFS rates are adjusted each year, and reductions in both current and future payments are anticipated. For calendar year 2012, CMS issued a final rule that would have applied the SGR and resulted in an aggregate reduction of 27.4% to all physician payments under the PFS. TheMedicare and Medicaid Extenders Act of 2010 delayed application of the SGR untilJanuary 1, 2012 , and the Temporary Payroll Tax Cut Continuation Act of 2011 then delayed application of the SGR for two additional months, throughFebruary 29, 2012 . OnFebruary 22, 2012 ,President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which, among other things, further postponed the application of the SGR throughDecember 31, 2012 .
Adoption of Electronic Health Records
The Health Information Technology for Economic and Clinical Health Act (the "HITECH Act") was enacted into law onFebruary 17, 2009 as part of ARRA. The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. We strive to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments. Our compliance has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. We currently estimate that at a minimum total costs incurred to comply will be recovered through the total EHR incentive payments over the projected lifecycle of this initiative. An important component of the effective implementation of our EHR initiatives involves our uninterrupted access to reliable information systems. We recently entered into an agreement with a third party technology provider to design and operate a hosted data center for our critical third party information systems. In addition to providing a hosted data center, the third party technology provider will offer help desk end-user support for certain clinical information systems, provide help desk and support functions for certain clinical information system applications, perform backups and recoveries of certain critical data, and monitor critical systems to facilitate the identifications of and rapid responses to certain system issues. We believe this agreement will provide us with a single technology platform for the delivery of critical third party information systems and will improve the effectiveness and efficiency of key information support functions in a cost-effective and high quality manner.
Privacy and Security Requirements and Administrative Simplification Provisions
We are subject to the privacy and security requirements of theHealth Insurance Portability and Accountability Act of 1996 ("HIPAA") that are designed to protect the confidentiality, availability and integrity of health information. The privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally, impose extensive administrative requirements on us, require our compliance with rules governing the use and disclosure of this health information, and require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf. The security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic health and related financial information. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. The HITECH Act, among other things, strengthened the HIPAA privacy and security requirements, significantly increased the penalties for violations of the HIPAA privacy and security regulations, imposed varying civil monetary penalties and created a private cause of action for state attorneys general for certain HIPAA violations, extended HIPAA's security provisions to business associates, and created new security breach notification requirements. The HITECH Act also created a federal breach notification law that mirrors protections that many states have passed in recent years. 28 --------------------------------------------------------------------------------
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In 2011, HHS initiated a pilot audit program that will run untilDecember 2012 in the first phase of HHS implementation of the HITECH Act's requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. We cannot predict whether our hospitals will be able to comply with the final rules or the financial impact to our hospitals in implementing the requirements under the final rules if and when they take effect, or whether our hospitals will be selected for an audit and the results of such an audit. In addition to the privacy and security requirements, we also are subject to the administrative simplification provisions of HIPAA, which require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. InJanuary 2009 , CMS published its 10th revision of International Statistical Classification of Diseases and Related Health Problems ("ICD-10") and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided in our hospitals and clinics will require much greater specificity. Implementation of ICD-10 will require a significant investment in technology and training. We may experience delays in reimbursement while our facilities and the payors from which we seek reimbursement make the transition to ICD-10. HIPAA currently requires implementation of ICD-10 to be achieved byOctober 1, 2013 . However, onApril 9, 2012 , CMS released a proposed rule that would delay the effective date of the ICD-10 transition toOctober 1, 2014 . If any of our hospitals fail to implement the new coding system by the deadline, the affected hospital will not be paid for services. We are not able to predict the overall financial impact of the Company's transition to ICD-10.
Revenue Sources
Our hospitals generate revenues by providing healthcare services to our patients. Depending upon the patient's medical insurance coverage, we are paid for these services by governmentalMedicare andMedicaid programs, commercial insurance, including managed care organizations, and directly by the patient. The amounts we are paid for providing healthcare services to our patients vary depending upon the payor. Governmental payors generally pay significantly less than the hospital's customary charges for the services provided. Insured patients are generally not responsible for any difference between customary hospital charges and the amounts received from commercial insurance payors. However, insured patients are responsible for payments not covered by insurance, such as exclusions, deductibles and co-payments. Revenues from governmental payors, such asMedicare andMedicaid , are controlled by complex rules and regulations that stipulate the amount a hospital is paid for providing healthcare services. We must comply with these rules and regulations to continue to be eligible to participate in theMedicare andMedicaid programs. These rules and regulations are subject to frequent changes as a result of legislative and administrative action and annual payment adjustments on both the federal and the state levels. These changes will likely become more frequent and significant as the provisions of the Affordable Care Act are implemented. Revenues from health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs") and other private insurers are subject to contracts and other arrangements that require us to discount the amounts we customarily charge for healthcare services. These discounted arrangements often limit our ability to increase charges in response to increasing costs. We actively negotiate with these payors in an effort to maintain or increase the pricing of our healthcare services; however, we have no control over patients switching their healthcare coverage to a payor with which we have negotiated less favorable reimbursement rates. Self-pay revenues are primarily generated through the treatment of uninsured patients. Our hospitals have experienced an increase in self-pay revenues during recent years as well as during the first quarter of 2012 as a result of a combination of broad economic factors, including rising unemployment in many of our markets, reductions in stateMedicaid budgets and increasing numbers of individuals and employers who choose not to purchase insurance. 29 --------------------------------------------------------------------------------
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To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. Our provision for doubtful accounts serves to reduce our reported revenues.
Results of Operations
The following definitions apply throughout the remaining portion of Management's Discussion and Analysis of Financial Condition and Results of Operations:
Admissions. Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and used by management and investors as a general measure of inpatient volume.
bps. Basis point change.
Continuing operations. Continuing operations information includes the results of (i) our hospital support center, (ii) our same-hospital operations, and (iii) the results ofMaria Parham Medical Center ("Maria Parham"), in which we acquired an 80% interest effectiveNovember 1, 2011 , andPerson Memorial Hospital ("Person Memorial"), which we acquired effectiveOctober 1, 2011 , each acquired through our joint venture withDuke University Health System ("Duke"). Continuing operations information excludes the results of our hospitals that have previously been disposed.
Effective tax rate. Provision for income taxes as a percentage of income from continuing operations before income taxes less net income attributable to noncontrolling interests.
Emergency room visits. Represents the total number of hospital-based emergency room visits.
Equivalent admissions. Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions by multiplying admissions (inpatient volume) by the outpatient factor (the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue). The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume.
N/A. Not applicable.
Net revenue days outstanding. We compute net revenue days outstanding by dividing our accounts receivable net of allowance for doubtful accounts, by our revenue per day. Our revenue per day is calculated by dividing our quarterly revenues by the number of calendar days in the quarter.
Outpatient surgeries. Outpatient surgeries are those surgeries that do not require admission to our hospitals.
Revenues. Revenues represent amounts recognized from all payors for the delivery of healthcare services, net of contractual discounts and the provision for doubtful accounts.
Same-hospital. Same-hospital information includes the results of our hospital support center and the same 52 hospitals operated during the three months endedMarch 31, 2012 and 2011. Same-hospital information excludes the results of Maria Parham, Person Memorial and our hospitals that have previously been disposed. 30 --------------------------------------------------------------------------------
TABLE OF CONTENTS Operating Results Summary
The following table summarizes the results of operations for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, 2012 2011 Amount % of Amount % of Revenues Revenues Revenues before provision for $ 998.1 117.3 % $ 888.6 117.2 % doubtful accounts Provision for 147.1 17.3 130.1 17.2 doubtful accounts Revenues 851.0 100.0 758.5 100.0 Salaries and 370.0 43.5 334.4 44.1 benefits Supplies 129.0 15.2 118.7 15.7 Other operating 188.5 22.0 161.6 21.2 expenses Other income (1.2 ) (0.1 ) - - Depreciation and 45.1 5.3 39.7 5.2 amortization Interest expense, 25.5 3.0 29.2 3.9 net Impairment charge 3.1 0.4 - - 760.0 89.3 683.6 90.1 Income from continuing 91.0 10.7 74.9 9.9 operations before income taxes Provision for 34.1 4.0 28.4 3.8 income taxes Income from continuing 56.9 6.7 46.5 6.1 operations Less: Net income attributable to (0.9 ) (0.1 ) (0.7 ) (0.1 ) noncontrolling interests Income from continuing operations $ 56.0 6.6 % $ 45.8 6.0 % attributable to LifePoint Hospitals, Inc. Revenues OnApril 5, 2012 , the Rural Floor Settlement was signed between HHS, the Secretary of HHS, CMS and a large number of healthcare service providers, including our hospitals. The Rural Floor Settlement is intended to resolve all claims that have been brought or could have been brought relating to CMS's calculation of the rural floor budget neutrality adjustment that was created by the Balanced Budget Act of 1997 from federal fiscal year 1998 through and including federal fiscal year 2011 for healthcare service providers that participated in certain court cases and group appeals. As a result of the Rural Floor Settlements we recognized$31.3 million of additionalMedicare revenue during the three months endedMarch 31, 2012 . 31 --------------------------------------------------------------------------------
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The following table presents the components of revenues for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, Increase % Increase 2012 2011 Continuing operations: Revenues before provision for $ 998.1 $ 888.6 $ 109.5 12.3 % doubtful accounts Provision for 147.1 130.1 17.0 13.0 doubtful accounts Revenues $ 851.0 $ 758.5 $ 92.5 12.2 Same-hospital: Revenues before provision for $ 960.9 $ 888.6 $ 72.3 8.1 % doubtful accounts Provision for 139.2 130.1 9.1 7.0 doubtful accounts Revenues $ 821.7 $ 758.5 $ 63.2 8.3 The following table shows the sources of our revenues before provision for doubtful accounts by payor, including adjustments to estimated reimbursement amounts and provision for doubtful accounts, for the three months endedMarch 31, 2012 and 2011 (in millions):
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Continuing Operations Same-Hospital 2012 2011 2012 2011Medicare $ 317.7 37.3 % $ 274.5 36.2 % $ 305.1 37.1 % $ 274.5 36.2 %Medicaid 105.9 12.5 106.2 14.0 101.0 12.3 106.2 14.0 HMOs, PPOs and other private 402.6 47.3 358.1 47.2 391.0 47.6 358.1 47.2 insurers Self-Pay 159.8 18.8 141.2 18.6 152.2 18.5 141.2 18.6 Other 12.1 1.4 8.6 1.2 11.6 1.4 8.6 1.2 Revenues before provision for 998.1 117.3 888.6 117.2 960.9 116.9 888.6 117.2 doubtful accounts Provision for (147.1 ) (17.3 ) (130.1 ) (17.2 ) (139.2 ) (16.9 ) (130.1 ) (17.2 ) doubtful accounts Revenues $ 851.0 100.0 % $ 758.5 100.0 % $ 821.7 100.0 % $ 758.5 100.0 % 32
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Our revenues per equivalent admission from continuing operations and on a same-hospital basis were as follows for the three months endedMarch 31, 2012 and 2011: [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, Increase % Increase 2012 2011 Revenues per equivalent admission - continuing $ 7,578 $ 7,027 $ 551 7.8
operations
Revenues per equivalent $ 7,647 $ 7,027 $ 620 8.8
admission - same-hospital
Revenues Before Provision for Doubtful Accounts
The following table shows the key drivers of our revenues before provision for doubtful accounts for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, Increase (Decrease) % Increase (Decrease) 2012 2011 Continuing operations: Admissions 51,488 51,716 (228 ) (0.4 ) Equivalent 112,295 107,931 4,364 4.0 admissions Medicare case mix 1.30 1.29 0.01 0.8 index Average length of 4.4 4.4 - - stay (days) Inpatient 13,605 13,360 245 1.8 surgeries Outpatient 42,421 38,905 3,516 9.0 surgeries Emergency room 272,913 254,770 18,143 7.1 visits Outpatient factor 2.18 2.09 0.09 4.5 Same-hospital: Admissions 49,721 51,716 (1,995 ) (3.9 ) Equivalent 107,447 107,931 (484 ) (0.4 ) admissions Medicare case mix 1.30 1.29 0.01 0.8 index Average length of 4.3 4.4 (0.1 ) (2.3 ) stay (days) Inpatient 13,121 13,360 (239 ) (1.8 ) surgeries Outpatient 40,819 38,905 1,914 4.9 surgeries Emergency room 258,854 254,770 4,084 1.6 visits Outpatient factor 2.16 2.09 0.07 3.5 For the three months endedMarch 31, 2012 , our same-hospital revenues before provision for doubtful accounts increased by$72.3 million or 8.1%, to$960.9 million as compared to$888.6 million for the same period last year. This increase in our same-hospital revenues before provision for doubtful accounts is largely a result of the following:
• Increases in our same-hospital
million or 11.1%;
• Increases in our same-hospital HMOs, PPOs and other private insurers
revenue of approximately
• Increases in our same-hospital self-pay revenue of approximately $11.0
million or 7.8%.
Increases in our same-hospitalMedicare revenues were largely driven by the impact of recognizing$31.3 million related to the Rural Floor Settlement during the three months endedMarch 31, 2012 . Our same-hospital HMOs, PPOs and other private insurer revenue increased primarily as a result of higher contracted rates partially offset by unfavorable equivalent admission volumes compared to the same period of the prior year. Finally, same-hospital self-pay revenue increased primarily as a result of higher emergency room visits from our self-pay population, overall high levels of unemployment in the majority of our communities and pricing increases. Increases in our self-pay revenues attributed to an increase in our provision for doubtful accounts, as further discussed in our analysis of our provision for doubtful accounts. 33 --------------------------------------------------------------------------------
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Provision for Doubtful Accounts
The following table summarizes the key drivers and key indicators of our provision for doubtful accounts for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, 2012 % of 2011 % of Increase % Increase Revenues Revenues Continuing operations: Related key indicators: Charity care $ 26.0 3.1 % $ 19.7 2.6 % $ 6.3 32.2 % write-offs Self-pay revenues, net of charity care $ 159.8 18.8 % $ 141.2 18.6 % $ 18.6 13.2 % write-offs and uninsured discounts Net revenue days outstanding 54.4 N/A 47.5 N/A 6.9 14.5 % (at end of period) Same-hospital: Related key indicators: Charity care $ 25.3 3.1 % $ 19.7 2.6 % $ 5.6 28.9 % write-offs Self-pay revenues, net of charity care $ 152.2 18.5 % $ 141.2 18.6 % $ 11.0 7.8 % write-offs and uninsured discounts Net revenue days outstanding 52.9 N/A 47.5 N/A 5.4 11.4 % (at end of period) For the three months endedMarch 31, 2012 , our provision for doubtful accounts increased by$17.0 million , or 13.0%, to$147.1 million on a continuing operations basis and by$9.1 million , or 7.0%, to$139.2 million on a same-hospital basis as compared to the same period last year. This increase was primarily the result of increases in self-pay revenues during the three months endedMarch 31, 2012 . Same-hospital self-pay revenues increased by$11.0 million over the same period last year and represented 18.5% of revenues. Self- pay revenues continued to increase for both our inpatient and outpatient services, which were primarily driven by high levels of unemployment in the majority of our communities. Our increased provision for doubtful accounts was partially offset by an increase in up-front cash collections for the three months endedMarch 31, 2012 , as compared to the same period last year. The provision for doubtful accounts relates principally to self-pay amounts due from patients. The provision and allowance for doubtful accounts are critical accounting estimates and are further discussed in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Estimates," in the 2011 Annual Report on Form 10-K. Our net revenue days outstanding atMarch 31, 2012 increased to 54.4 from 47.5 as ofMarch 31, 2011 on a continuing operations basis. Excluding the impact of the Rural Floor Settlement, our net revenue days outstanding on a continuing operations basis would have been 53.0 atMarch 31, 2012 . This increase, excluding the Rural Floor Settlement, was primarily the result of higher outstanding accounts receivable for our recent acquisitions and increases in our insured accounts receivable due to new managedMedicaid payors in certain of our markets and a new fiscal intermediary in our Virginia,West Virginia andNorth Carolina markets. We anticipate a decrease in our net revenue days outstanding during the six months endedSeptember 30, 2012 , as the Rural Floor Settlement and these insured accounts receivable are collected. 34 --------------------------------------------------------------------------------
TABLE OF CONTENTS Expenses and Other Income Salaries and Benefits
The following table summarizes our salaries and benefits, man-hours per equivalent admission and salaries and benefits per equivalent admission for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, 2012 % of 2011 % of Increase % Increase Revenues Revenues Continuing operations: Salaries and benefits (dollars $ 370.0 43.5 % $ 334.4 44.1 % $ 35.6 10.7 % in millions) Man-hours per equivalent 98.7 N/A 96.5 N/A 2.2 2.3 % admission Salaries and benefits per $ 3,288 N/A $ 3,099 N/A $ 189 6.1 % equivalent admission Same-hospital: Salaries and benefits (dollars $ 355.4 43.3 % $ 334.4 44.1 % $ 21.0 6.3 % in millions) Man-hours per equivalent 98.5 N/A 96.5 N/A 2.0 2.0 % admission Salaries and benefits per $ 3,301 N/A $ 3,099 N/A $ 202 6.5 % equivalent admission For the three months endedMarch 31, 2012 , our salaries and benefits expense increased to$355.4 million , or 6.3%, on a same-hospital basis as compared to$334.4 million for the same period last year. This increase in our same-hospital salaries and benefits expense is primarily a result of the impact of an increasing number of employed physicians and their related support staff, the impact of compensation increases for our employees, higher medical benefits costs and an increase in man-hours per equivalent admission to 98.5, or 2.0% on a same-hospital basis as compared to 96.5 for the same period last year. On a same-hospital basis, the number of our employed physicians, including hospitalists and their related support staff, increased by 171 from 1,013 to 1,184 from the same period last year. The increase in our employed physicians and their related support staff resulted in an increase of$5.9 million in our salaries and benefits expense for the three months endedMarch 31, 2012 as compared to the same period last year. As we continue to employ an increasing number of medical professionals, including physicians, we anticipate that salaries and benefits as a percentage of revenues will increase in future periods. Additionally, for the three months endedMarch 31, 2012 , we estimate that we incurred approximately$1.7 million of additional salaries and benefits expense related to our implementation of our EHR initiatives.
Supplies
The following table summarizes our supplies and supplies per equivalent admission for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, Increase % Increase 2012 % of 2011 % of Revenues Revenues Continuing operations: Supplies (dollars $ 129.0 15.2 % $ 118.7 15.7 % $ 10.3 8.6 % in millions) Supplies per equivalent $ 1,149 N/A $ 1,100 N/A $ 49 4.4 % admission Same-hospital: Supplies (dollars $ 123.0 15.0 % $ 118.7 15.7 % $ 4.3 3.6 % in millions) Supplies per equivalent $ 1,144 N/A $ 1,100 N/A $ 44 4.0 % admission 35
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For the three months endedMarch 31, 2012 , our supplies expense increased to$123.0 million , or 3.6% on a same-hospital basis as compared to$118.7 million for the same period last year. This increase in our same-hospital supplies expense for the three months endedMarch 31, 2012 was primarily a result of an increase in our supplies expense per equivalent admission to$1,144 , or 4.0%, as compared to$1,100 for the same period last year. Supplies per equivalent admission increased as a result of a higher utilization of more expensive supplies, predominantly cancer related pharmaceuticals and other pharmacy supplies.
Other Operating Expenses
The following table summarizes our other operating expenses for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, Increase (Decrease) % Increase (Decrease) 2012 % of 2011 % of Revenues Revenues Continuing operations: Professional fees $ 27.4 3.2 % $ 23.8 3.1 % $ 3.6 15.2 % Utilities 14.4 1.7 13.9 1.8 0.5 3.9 Repairs and 21.6 2.5 19.0 2.5 2.6 13.5 maintenance Rents and leases 8.3 1.0 7.4 1.0 0.9 12.4 Insurance 10.2 1.2 9.9 1.3 0.3 4.2 Physician 7.4 0.9 6.6 0.9 0.8 10.9 recruiting Contract services 52.0 6.1 43.3 5.7 8.7 19.9 Non-income taxes 19.2 2.3 18.1 2.4 1.1 5.8 Other 28.0 3.1 19.6 2.5 8.4 42.9 $ 188.5 22.0 % $ 161.6 21.2 % $ 26.9 16.6 % Same-hospital: Professional fees $ 25.5 3.1 % $ 23.8 3.1 % $ 1.7 7.2 % Utilities 13.8 1.7 13.9 1.8 (0.1 ) (0.3 ) Repairs and 20.9 2.5 19.0 2.5 1.9 10.1 maintenance Rents and leases 8.0 1.0 7.4 1.0 0.6 8.2 Insurance 10.0 1.2 9.9 1.3 0.1 1.1 Physician 7.1 0.9 6.6 0.9 0.5 7.7 recruiting Contract services 49.7 6.0 43.3 5.7 6.4 14.7 Non-income taxes 18.9 2.3 18.1 2.4 0.8 3.9 Other 27.2 3.3 19.6 2.5 7.6 38.4 $ 181.1 22.0 % $ 161.6 21.2 % $ 19.5 12.0 % For the three months endedMarch 31, 2012 , our other operating expenses increased to$181.1 million , or 12.0% on a same-hospital basis as compared to$161.6 million for the same period last year. This increase for the three months endedMarch 31, 2012 was primarily a result of increases in professional fees, repairs and maintenance, contract services and other. As physician shortages continue, we have experienced increasing professional fees in areas such as emergency room physician coverage and hospitalists. We expect this trend to continue and that professional fees as a percentage of revenues will increase in future periods. Our repairs and maintenance expense increased primarily as a result of higher costs associated with the maintenance of equipment as warranties expire and a number of repair projects at several of our hospitals. On a same-hospital basis, our contract services expense increased primarily as a result of increased fees and expenses related to our conversion of the clinical and patient accounting information system applications at several of our hospitals as well as relocation fees incurred in connection with our recently completed and opened replacement facility forClark Regional Medical Center . For the three months endedMarch 31, 2012 , 36 --------------------------------------------------------------------------------
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we estimate that we incurred approximately
Finally, our other expenses increased primarily as a result of increases in our charitable program expenses, additional legal fees incurred in connection with the Rural Floor Settlement and additional legal and consulting fees related to our recent acquisitions, includingTwin County Regional Healthcare , located inGalax, Virginia in which we acquired an 80% interest effectiveApril 1, 2012 through our joint venture with Duke.
Other Income
We recognize EHR incentive payments received or anticipated to be received under the HITECH Act as other income when our eligible hospitals and physician practices have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information for the full cost report year that determines the final calculation of the EHR incentive payment is available. For the three months endedMarch 31, 2012 , we recognized$1.2 million in Medicaid EHR incentive payments. No such amounts were recognized in the same period of the prior year. Depreciation and Amortization For the three months endedMarch 31, 2012 , our depreciation and amortization expense increased by$5.4 million , or 13.7% to$45.1 million , or 5.3% of revenues, on a continuing operations basis as compared to$39.7 million , or 5.2% of revenues for the same period last year. Our depreciation and amortization expense increased primarily as a result of significant increases in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We estimate that we incurred approximately$2.2 million in additional depreciation expense during the three months endedMarch 31, 2012 related to our EHR initiatives. We have also experienced depreciation expense increases relating to capital improvement projects completed during 2011 and the first quarter of 2012, as well as our recent acquisitions, including Maria Parham and Person Memorial. We anticipate overall higher levels of spending related to information systems during 2012 as compared to 2011 and previous years. As a result, we anticipate that our depreciation and amortization expense as a percentage of revenues will continue to increase in future periods.
Interest Expense
Our interest expense decreased by$3.7 million , or 12.8%, to$25.5 million , for the three months endedMarch 31, 2012 , as compared to$29.2 million for the same period last year. This decrease was partially a result of declines in interest rates which favorably impacted our interest expense on our term B loans ("Term B Loans"). Additionally, as our interest rate swap matured effectiveMay 30, 2011 , a larger portion of our total outstanding debt has become subject to floating interest rates that are lower than the previously fixed rate under the interest rate swap agreement of 5.585%. For a further discussion of our debt and corresponding interest rates, see "Liquidity and Capital Resources - Debt."
Impairment Charge
During the three months ended
Provision for Income Taxes
Our provision for income taxes was$34.1 million , or 4.0% of revenues, for the three months endedMarch 31, 2012 , as compared to$28.4 million , or 3.8% of revenues, for the same period last year. Our effective tax rate decreased to 37.8% for the three months endedMarch 31, 2012 , compared to 38.3% for the same period last year, primarily as a result of a lower effective state tax rate in certain of the states in which we operate. 37 --------------------------------------------------------------------------------
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Liquidity and Capital Resources Liquidity Our primary sources of liquidity are cash flows provided by our operations and our debt borrowings. We believe that our internally generated cash flows and the amounts available under our debt agreements will be adequate to service existing debt, finance internal growth and fund capital expenditures and certain small to mid-size hospital acquisitions.
The following table presents summarized cash flow information for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, 2012 2011 Net cash provided by operating $ 73.8 $
115.8
activities - continuing operations Less: Purchases of property and (60.8 ) (55.9 ) equipment Free operating cash flow 13.0
59.9
Acquisitions, net of cash acquired (20.1 ) (1.7 ) Proceeds from exercise of stock options 3.9
17.5
Proceeds from employee stock purchase 0.7
0.7
plans
Repurchases of common stock (5.5 ) (5.5 ) Distributions to noncontrolling (0.7 ) (1.0 ) interests Other (0.6 ) (1.3 ) Cash flows from operations (used in) (0.8 )
0.2
provided by discontinued operations Net (decrease) increase in cash and cash $ (10.1 ) $
68.8
equivalents
The non-GAAP metric of free operating cash flow is an important liquidity measure for us. Our computation of free operating cash flow consists of net cash flows provided by continuing operations less cash flows used for the purchase of property and equipment. Our cash flows provided by continuing operations for the three months endedMarch 31, 2012 were negatively impacted by an increase in our outstanding accounts receivable, including approximately$31.3 million related to the Rural Floor Settlement and increases in insured accounts receivable and outstanding accounts receivable for our recent acquisitions. We anticipate an improvement in our cash collections during the six months endedSeptember 30, 2012 , as the Rural Floor Settlement and these insured accounts receivable are collected. We believe that free operating cash flow is useful to investors and management as a measure of the ability of our business to generate cash and to repay and incur additional debt. Computations of free operating cash flow may differ from company to company. Therefore, free operating cash flow should be used as a complement to, and in conjunction with, our consolidated statements of cash flows presented in our condensed consolidated financial statements included elsewhere in this report.
Capital Expenditures
We continued to make significant, targeted investments at our hospitals to add new technologies, modernize facilities and expand the services available. These investments should assist in our efforts to attract and retain physicians, to offset outmigration of patients and to make our hospitals more desirable to our employees and potential patients. 38 --------------------------------------------------------------------------------
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The following table reflects our capital expenditures for the three months ended
[[Image Removed]] [[Image Removed]] [[Image Removed]] Three Months Ended March 31, 2012 2011 Capital projects $ 26.8 $ 19.6 Routine 5.9 17.7 Information systems 28.1 18.6 $ 60.8 $ 55.9 Depreciation expense $ 43.6 $ 39.0 Ratio of capital expenditures to 139.4 % 143.3 % depreciation expense We have a formal and intensive review procedure for the authorization of capital expenditures. The most important financial measure of acceptability for a discretionary capital project is whether its projected discounted cash flow return on investment exceeds our projected cost of capital for that project. We expect to continue to invest in information systems, modern technologies, emergency room and operating room expansions, the construction of medical office buildings for physician expansion and the reconfiguration of the flow of patient care. Throughout 2011 and the first quarter of 2012, we have experienced a significant increase in our spending related to information systems as the result of various initiatives and requirements, including compliance with the HITECH Act. We anticipate that a higher level of our capital spending will continue to represent information systems throughout 2012.
Debt
An analysis and roll-forward of our long-term debt during the first quarter of 2012 is as follows (in millions):
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December 31, Payments of Amortization of March 31, 2011 Borrowings Convertible 2012 Debt Discounts Senior Secured Credit Agreement: Term B Loans $ 443.7 $ - $ - $ 443.7 Revolving Loans - - - - 6.625% Senior 400.0 - - 400.0 Notes 3½% Notes 575.0 - - 575.0 3¼% Debentures 225.0 - - 225.0 Unamortized discounts on 3¼% (55.5 ) - 6.3 (49.2 ) Debentures and 3½% Notes Capital leases 9.1 (0.4 ) - 8.7 $ 1,597.3 $ (0.4 ) $ 6.3 $ 1,603.2 39
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We use leverage, or our total debt to total capitalization ratio, to make financing decisions. The following table illustrates our financial statement leverage and the classification of our debt atMarch 31, 2012 andDecember 31, 2011 (dollars in millions): [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] March 31, 2012 December 31, 2011 Increase (Decrease) Current portion of $ 1.9 $ 1.9 $ - long-term debt Long-term debt 1,601.3 1,595.4 5.9 Unamortized discounts of convertible debt 49.2 55.5 (6.3 ) instruments Total debt, excluding unamortized discounts 1,652.4 1,652.8 (0.4 ) of convertible debt instruments Total LifePoint Hospitals, Inc. 2,007.2 1,945.2 62.0 stockholders' equity Total capitalization $ 3,659.6 $ 3,598.0 $ 61.6 Total debt to total 45.2 % 45.9 % (70)bps capitalization Percentage of: Fixed rate debt, excluding unamortized discounts of 73.1 % 73.2 % convertible debt instruments Variable rate debt 26.9 26.8 100.0 % 100.0 % Percentage of: Senior debt 51.6 % 51.6 % Subordinated debt, excluding unamortized discounts of 48.4 48.4 convertible debt instruments 100.0 % 100.0 % Capital Resources Credit Agreement Terms Our credit agreement withCiticorp North America, Inc. , as administrative agent and a syndicate of lenders (the "Credit Agreement"), provides for the Term B Loans, term A loans (the "Term A Loans") and revolving loans (the "Revolving Loans"). The maturity date of the Term B Loans is contingent upon the refinancing of the outstanding 3½% convertible senior subordinated notes beyond their current maturity date ofMay 15, 2014 (the "3½% Notes"). Assuming that we refinance the outstanding 3½% Notes beyond their current maturity date, the Term B Loans will mature onApril 15, 2015 . If we do not refinance the outstanding 3½% Notes at least 91 days prior to their current maturity date, the Term B Loans will mature onFebruary 13, 2014 . Additionally, the Term B Loans are subject to mandatory prepayments based on excess cash flow, as well as upon the occurrence of certain other events, as specifically described in the Credit Agreement. The Term A Loans and the Revolving Loans components mature onDecember 15, 2012 . AtMarch 31, 2012 , there were no Term A Loans or Revolving Loans outstanding. We are currently working on maturity date extensions, potential increases in available capacity and additional flexibility in terms for the Credit Agreement. The Credit Agreement is guaranteed on a senior secured basis by our subsidiaries with certain limited exceptions.
Letters of Credit and Availability
The Credit Agreement provides for the issuance of letters of credit up to$75.0 million . Issued letters of credit reduce the amounts available under the Revolving Loans. As ofMarch 31, 2012 , we had$28.0 million in letters of credit outstanding that were related to the self-insured retention level of our general and professional liability insurance and workers' compensation programs as security for payment of claims. Under the terms of the Credit Agreement, Revolving Loans available for borrowing were$322.0 million as ofMarch 31, 2012 . 40 --------------------------------------------------------------------------------
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The Credit Agreement contains uncommitted "accordion" features that permit us to borrow at a later date additional aggregate principal amounts of up to$400.0 million of the Term B Loans,$250.0 million of the Term A Loans and$300.0 million of Revolving Loans, subject to obtaining additional lender commitments and the satisfaction of other conditions.
Interest Rates
Interest on the outstanding balance of the Term B Loans is payable at an adjustedLondon Interbank Offer Rate ("LIBOR") plus a margin of 2.75%. Interest on the Revolving Loans is payable at our option at either an adjusted base rate or an adjustedLIBOR plus a margin. The margin on Revolving Loans subject to an adjusted base rate ranges from 1.00% to 1.75%, based on our total leverage ratio. The margin on the Revolving Loans subject to an adjustedLIBOR ranges from 2.00% to 2.75% based on our total leverage ratio.
As of
Covenants
The Credit Agreement requires us to satisfy certain financial covenants, including a minimum interest coverage ratio and a maximum total leverage ratio. The interest coverage ratio can be no less than 3.50:1.00 and the total leverage ratio cannot exceed 3.75:1.00, both determined on a trailing four quarter basis. In addition, the Credit Agreement generally limits the amount we can spend on capital expenditures to no more than 10.0% of annual revenues. We were in compliance with these covenants as ofMarch 31, 2012 . In addition, the Credit Agreement contains customary affirmative and negative covenants, which among other things, limit our ability to incur additional debt, create liens, pay dividends, effect transactions with our affiliates, sell assets, pay subordinated debt, merge, consolidate, enter into acquisitions and effect sale leaseback transactions. It does not contain provisions that would accelerate the maturity dates upon a downgrade in our credit rating. However, a downgrade in our credit rating could adversely affect our ability to obtain other capital sources in the future and could increase our cost of borrowings.
6.625% Senior Notes
EffectiveSeptember 23, 2010 , we issued in a private placement$400.0 million of 6.625% unsecured senior notes dueOctober 1, 2020 (the "6.625% Senior Notes") withThe Bank of New York Mellon Trust Company, N.A. , as trustee. The net proceeds from this issuance were partially used to repay a portion of our outstanding borrowings under the Term B Loans. The 6.625% Senior Notes bear interest at the rate of 6.625% per year, payable semi-annually onApril 1 andOctober 1 , commencingApril 1, 2011 . The 6.625% Senior Notes are jointly and severally guaranteed on an unsecured senior basis by substantially all of our existing and future subsidiaries that guarantee the Credit Agreement. We may redeem up to 35% of the aggregate principal amount of the 6.625% Senior Notes, at any time beforeOctober 1, 2013 , with the net cash proceeds of one or more qualified equity offerings at a redemption price equal to 106.625% of the principal amount to be redeemed, plus accrued and unpaid interest, provided that at least 65% of the aggregate principal amount of the 6.625% Senior Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering. 41 --------------------------------------------------------------------------------
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We may redeem our 6.625% Senior Notes, in whole or in part, at any time prior toOctober 1, 2015 at a price equal to 100% of the principal amount of the notes redeemed plus an applicable makewhole premium, plus accrued and unpaid interest, if any, to the date of redemption. We may redeem our 6.625% Senior Notes, in whole or in part, at any time on or afterOctober 1, 2015 , plus accrued and unpaid interest, if any, to the date of redemption plus a redemption price equal to a percentage of the principal amount of the notes redeemed based on the following redemption schedule: [[Image Removed]] [[Image Removed]]October 1, 2015 toSeptember 30, 2016 103.313 %October 1, 2016 toSeptember 30, 2017 102.208 %October 1, 2017 toSeptember 30, 2018 101.104 %October 1, 2018 and thereafter 100.000 % If we experience a change of control under certain circumstances, we must offer to repurchase all of the notes at a price equal to 101.000% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date. The 6.625% Senior Notes contain customary affirmative and negative covenants, which among other things, limit our ability to incur additional debt, create liens, pay dividends, effect transactions with our affiliates, sell assets, pay subordinated debt, merge, consolidate, enter into acquisitions and effect sale leaseback transactions. 3½% Notes The 3½% Notes bear interest at the rate of 3½% per year, payable semi-annually onMay 15 andNovember 15 . The 3½% Notes are convertible prior toMarch 15, 2014 under the following circumstances: (1) if the price of our common stock reaches a specified threshold during specified periods; (2) if the trading price of the 3½% Notes is below a specified threshold; or (3) upon the occurrence of specified corporate transactions or other events. On or afterMarch 15, 2014 , holders may convert the 3½% Notes at any time prior to the close of business on the scheduled trading day immediately precedingMay 15, 2014 , regardless of whether any of the foregoing circumstances has occurred. Subject to certain exceptions, we will deliver cash and shares of our common stock upon conversion of each$1,000 principal amount of the 3½% Notes as follows: (i) an amount in cash, which we refer to as the "principal return", equal to the sum of, for each of the 20 volume-weighted average price trading days during the conversion period, the lesser of the daily conversion value for such volume-weighted average price trading day and$50 ; and (ii) a number of shares in an amount equal to the sum of, for each of the 20 volume-weighted average price trading days during the conversion period, any excess of the daily conversion value above$50 . Our ability to pay the principal return in cash is subject to important limitations imposed by the Credit Agreement and the agreements or indentures governing any additional indebtedness that we incur in the future. If we do not make any payments we are obligated to make under the terms of the 3½% Notes, holders may declare an event of default. The initial conversion rate is 19.3095 shares of our common stock per$1,000 principal amount of the 3½% Notes (subject to certain events). This represents an initial conversion price of approximately$51.79 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances. Upon the occurrence of a fundamental change (as specified in the indenture), each holder of the 3½% Notes may require us to purchase some or all of the 3½% Notes at a purchase price in cash equal to 100% of the principal amount of the 3½% Notes surrendered, plus any accrued and unpaid interest. The indenture for the 3½% Notes does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior or secured debt or other indebtedness, or the issuance or repurchase of securities by us. The indenture contains no covenants or other provisions to protect holders of the 3½% Notes in the event of a highly leveraged transaction or other events that do not constitute a fundamental change. 42 --------------------------------------------------------------------------------
TABLE OF CONTENTS 3¼% Debentures The 3¼% convertible senior subordinated debentures dueAugust 15, 2025 (the "3¼% Debentures") bear interest at the rate of 3¼% per year, payable semi-annually onFebruary 15 andAugust 15 . The 3¼% Debentures are convertible (subject to certain limitations imposed by the Credit Agreement) under the following circumstances: (1) if the price of our common stock reaches a specified threshold during the specified periods; (2) if the trading price of the 3¼% Debentures is below a specified threshold; (3) if the 3¼% Debentures have been called for redemption; or (4) if specified corporate transactions or other specified events occur. Subject to certain exceptions, we will deliver cash and shares of our common stock, as follows: (i) an amount in cash, which we refer to as the "principal return", equal to the lesser of (a) the principal amount of the 3¼% Debentures surrendered for conversion and (b) the product of the conversion rate and the average price of our common stock, as set forth in the indenture governing the securities, which we refer to as the "conversion value"; and (ii) if the conversion value is greater than the principal return, an amount in shares of our common stock. Our ability to pay the principal return in cash is subject to important limitations imposed by the Credit Agreement and the agreements or indentures governing any additional indebtedness that we incur in the future. Based on the terms of the Credit Agreement, in certain circumstances, even if any of the foregoing conditions to conversion have occurred, the 3¼% Debentures will not be convertible, and holders of the 3¼% Debentures will not be able to declare an event of default under the 3¼% Debentures. The initial conversion rate for the 3¼% Debentures is 16.3345 shares of our common stock per$1,000 principal amount of 3¼% Debentures (subject to adjustment in certain events). This is equivalent to a conversion price of$61.22 per share of common stock. In addition, if certain corporate transactions that constitute a change of control occur on or prior toFebruary 20, 2013 , we will increase the conversion rate in certain circumstances, unless such transaction constitutes a public acquirer change of control and we elect to modify the conversion rate into public acquirer common stock. On or afterFebruary 20, 2013 , we may redeem for cash some or all of the 3¼% Debentures at any time at a price equal to 100% of the principal amount of the 3¼% Debentures to be purchased, plus any accrued and unpaid interest. Holders may require us to purchase for cash some or all of the 3¼% Debentures onFebruary 15, 2013 ,February 15, 2015 andFebruary 15, 2020 or upon the occurrence of a fundamental change, at 100% of the principal amount of the 3¼% Debentures to be purchased, plus any accrued and unpaid interest. The indenture for the 3¼% Debentures does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior or secured debt or other indebtedness, or the issuance or repurchase of securities by us. The indenture contains no covenants or other provisions to protect holders of the 3¼% Debentures in the event of a highly leveraged transaction or fundamental change.
Liquidity and Capital Resources Outlook
We expect to increase our level of spending for capital expenditures in 2012 as compared to 2011. We are reconfiguring some of our hospitals to more effectively accommodate patient services and to provide for a greater variety of services, as well as implementing various information system initiatives in our efforts to comply with the HITECH Act. For the three months endedMarch 31, 2012 , we spent$28.1 million on information systems. We anticipate spending in excess of$90.0 million March 31, 2012, we had uncompleted projects with an estimated additional cost to complete and equip of approximately$73.8 million . We anticipate funding these expenditures through cash provided by operating activities, available cash and borrowings available under the Credit Agreement. The Term A Loans and the Revolving Loans components of the Credit Agreement mature onDecember 15, 2012 . AtMarch 31, 2012 , there were no Term A Loans or Revolving Loans outstanding. We are currently working on maturity date extensions, potential increases in available capacity and additional flexibility in terms for the Credit Agreement.
Our business strategy contemplates the selective acquisition of additional hospitals and other healthcare service providers, and we regularly review potential acquisitions. These acquisitions may, however, require additional financing. We regularly evaluate opportunities to sell additional equity or debt securities, obtain
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credit agreements from lenders or restructure our long-term debt or equity for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. We believe that cash generated from our operations and borrowings available under the Credit Agreement will be sufficient to meet our working capital needs, the purchase prices for any potential facility acquisitions, planned capital expenditures and other expected operating needs over the next twelve months and into the foreseeable future prior to the maturity dates of our outstanding debt.
Contractual Obligations
We have various contractual obligations, which are recorded as liabilities in our condensed consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed. For example, we are required to make certain minimum lease payments for the use of property under certain of our operating lease agreements. During the first quarter of 2012, we entered into an agreement with an unrelated third party to construct a new hospital support center. The construction of the new hospital support center is scheduled to begin in the second quarter of 2012 with a targeted completion date in the fourth quarter of 2013. Under the terms of our agreement, we will lease from the third party the newly constructed hospital support center for a period of just over 15 years. We have preliminarily determined that the lease will be classified and capitalized as a capital lease in accordance with Accounting Standards Codification ("ASC") 840-10, "Leases" ("ASC 840-10"). In connection with our entry into this agreement to construct and then lease a new hospital support center, we have notified the current lessors of our existing hospital support center leases of our intent to terminate these agreements early and effective as ofDecember 1, 2013 . Additionally, during the first quarter of 2012 we amended and extended certain of our purchase agreements, including our agreement with General Electric Medical Services ("GEMS") which provides diagnostic imaging equipment maintenance and bio-medical services. As amended, our contract with GEMS will expire onDecember 31, 2018 . Furthermore, during the first quarter of 2012, we entered into certain other new purchase agreements with committed terms ranging from one year up to eight years. The following is an update of our contractual obligations atMarch 31, 2012 for our capital lease obligations reflecting our entry into a new lease agreement for our hospital support center as well as an update for our purchase obligations reflecting our amended and extended agreement with GEMS and certain other new purchase agreements (in millions):
[[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]
Payment Due by Period Contractual Total April 1, 2012 to 2013 - 2014 2015 - 2016 After 2016 Obligations December 31, 2012 Capital lease $ 89.6 $ 2.8 $ 8.1 $ 11.9 $ 66.8 obligations(a) Purchase 1,275.7 160.8 211.1 184.9 718.9 obligations Total $ 1,365.3 $ 163.6 $ 219.2 $ 196.8 $ 785.7 [[Image Removed]]
(a) This reflects our existing obligations, including interest, under capital
leases in effect as of
lease agreement in connection with the construction of our new hospital
support center which began during the first quarter of 2012 and which we
have preliminarily determined to be a capital lease in accordance with ASC
840-10. For purposes of the above table, we have assumed that we will
commence the new lease effective
Except for the entry into a lease agreement for the construction of a new hospital support center, the amendment and extension of certain of our existing purchase agreements and our entry into certain other new purchase agreements, there were no other material changes in our contractual obligations presented in the 2011 Annual Report on Form 10-K. 44 --------------------------------------------------------------------------------
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Off-Balance Sheet Arrangements
We had standby letters of credit outstanding of$28.0 million as ofMarch 31, 2012 , all of which relates to the self-insured retention levels of our professional and general liability insurance and workers' compensation programs as security for the payment of claims.
Critical Accounting Estimates
The preparation of financial statements in accordance with
• it requires assumptions to be made that were uncertain at the time the
estimate was made; and
• changes in the estimate or different estimates that could have been made
could have a material impact on our consolidated results of operations or
financial condition.
Our critical accounting estimates include the following areas:
• Revenue recognition and accounts receivable;
• Goodwill impairment analysis;
• Reserves for self-insurance claims;
• Accounting for stock-based compensation; and
• Accounting for income taxes.
Contingencies
Please refer to Note 9 to our accompanying condensed consolidated financial statements included elsewhere in this report for a discussion of our material financial contingencies, including:
• Legal proceedings and general liability claims;
• Physician commitments; and
• Capital expenditure commitments.
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