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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11239
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COLUMBIA/HCA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2497104
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK PLAZA
NASHVILLE, TENNESSEE 37203
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(615) 344-9551
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK OF THE LATEST PRACTICAL DATE.
CLASS OF COMMON STOCK OUTSTANDING AT OCTOBER 31, 1998
--------------------- -------------------------------
VOTING COMMON STOCK, $.01 PAR VALUE 624,505,600 SHARES
NONVOTING COMMON STOCK, $.01 PAR VALUE 21,000,000 SHARES
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1 OF 39
COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
SEPTEMBER 30, 1998
PAGE OF
PART I: FINANCIAL INFORMATION FORM 10-Q
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Item 1.Financial Statements
Condensed Consolidated Statements of Income--for the quarters and
nine months ended September 30, 1998 and 1997...................... 3
Condensed Consolidated Balance Sheets--September 30, 1998 and
December 31, 1997.................................................. 4
Condensed Consolidated Statements of Cash Flows--for the nine months
ended September 30, 1998 and 1997.................................. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 12
PART II: OTHER INFORMATION
- --------------------------
Items 1 to 6........................................................... 27
The terms "Columbia/HCA" or the "Company" as used in this Quarterly Report
on Form 10-Q refer to Columbia/HCA Healthcare Corporation and its affiliates,
unless otherwise stated or indicated by context. The term "affiliates" means
direct and indirect subsidiaries of Columbia/HCA Healthcare Corporation and
partnerships and joint ventures in which such subsidiaries are partners.
2
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTER NINE MONTHS
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Revenues................................... $ 4,579 $ 4,612 $14,261 $14,445
Salaries and benefits...................... 1,900 1,895 5,911 5,621
Supplies................................... 730 653 2,195 2,010
Other operating expenses................... 914 1,023 2,815 2,928
Provision for doubtful accounts............ 369 369 1,052 976
Depreciation and amortization.............. 312 319 932 923
Interest expense........................... 142 125 440 361
Equity in earnings of affiliates........... (16) (19) (91) (116)
Gains on sales of facilities............... (537) - (537) -
Impairment of long-lived assets............ 334 - 334 -
Restructuring of operations and
investigation related costs............... 21 64 90 64
------- ------- ------- -------
4,169 4,429 13,141 12,767
------- ------- ------- -------
Income from continuing operations before
minority interests and income taxes....... 410 183 1,120 1,678
Minority interests in earnings of
consolidated entities..................... 16 33 54 125
------- ------- ------- -------
Income from continuing operations before
income taxes.............................. 394 150 1,066 1,553
Provision for income taxes................. 231 59 511 622
------- ------- ------- -------
Income from continuing operations.......... 163 91 555 931
Discontinued operations:
Income (loss) from operations of
discontinued businesses, net of income
taxes (benefits) of ($20) and $4 for the
quarters and ($33) and $38 for the nine
months ended September 30, 1998 and
1997, respectively...................... (17) 6 (61) 57
Loss on disposal of certain discontinued
businesses.............................. - - (73) -
Cumulative effect of accounting change, net
of income tax benefit of $36.............. - - - (56)
------- ------- ------- -------
Net income............................. $ 146 $ 97 $ 421 $ 932
======= ======= ======= =======
Basic earnings per share:
Income from continuing operations........ $ .25 $ .15 $ .86 $ 1.40
Discontinued operations:
Income (loss) from operations of
discontinued businesses................ (.03) .01 (.10) .09
Loss on disposal of certain discontinued
businesses............................. - - (.11) -
Cumulative effect of accounting change... - - - (.08)
------- ------- ------- -------
Net income............................. $ .22 $ .16 $ .65 $ 1.41
======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations........ $ .25 $ .15 $ .86 $ 1.39
Discontinued operations:
Income (loss) from operations of
discontinued businesses................ (.03) .01 (.10) .09
Loss on disposal of certain discontinued
businesses............................. - - (.11) -
Cumulative effect of accounting change... - - - (.08)
------- ------- ------- -------
Net income............................. $ .22 $ .16 $ .65 $ 1.40
======= ======= ======= =======
Shares used in earnings per share
calculations (in thousands):
Basic.................................... 644,959 653,328 643,494 662,455
Diluted.................................. 647,243 657,807 646,734 668,136
Cash dividends per share................... $ .02 $ .02 $ .06 $ .06
See accompanying notes.
3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents......................... $ 175 $ 110
Accounts receivable, less allowances for doubtful
accounts of $1,690 in 1998 and $1,661 in 1997.... 2,357 2,522
Inventories....................................... 444 452
Income taxes receivable........................... - 532
Other............................................. 1,121 807
------- -------
4,097 4,423
Property and equipment, at cost..................... 16,006 16,254
Accumulated depreciation............................ (6,280) (6,024)
------- -------
9,726 10,230
Investments of insurance subsidiary................. 1,559 1,422
Investments in and advances to affiliates........... 1,155 1,329
Intangible assets, net.............................. 3,044 3,521
Net assets of discontinued operations............... 77 841
Other............................................... 350 236
------- -------
$20,008 $22,002
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 745 $ 929
Accrued salaries.................................. 433 475
Other accrued expenses............................ 1,202 1,237
Income taxes payable.............................. 342 -
Long-term debt due within one year................ 1,471 132
------- -------
4,193 2,773
Long-term debt...................................... 5,371 9,276
Professional liability risks, deferred taxes and
other liabilities.................................. 1,910 1,867
Minority interests in equity of consolidated
entities........................................... 829 836
Stockholders' equity:
Common stock, $.01 par; authorized 1,600,000,000
voting shares and 50,000,000 nonvoting shares;
outstanding 624,401,800 voting shares and
21,000,000 nonvoting shares--September 30, 1998
and 620,452,200 voting shares and 21,000,000
nonvoting shares--December 31, 1997.............. 6 6
Capital in excess of par value.................... 3,569 3,480
Other............................................. 11 13
Accumulated other comprehensive income............ 78 92
Retained earnings................................. 4,041 3,659
------- -------
7,705 7,250
------- -------
$20,008 $22,002
======= =======
See accompanying notes.
4
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
(DOLLARS IN MILLIONS)
1998 1997
------- -------
Cash flows from continuing operating activities:
Net income.................................................. $ 421 $ 932
Adjustments to reconcile net income to net cash provided by
continuing operating activities:
Provision for doubtful accounts........................... 1,052 976
Depreciation and amortization............................. 932 923
Income taxes.............................................. 632 (134)
Gains on sales of facilities.............................. (537) -
Impairment of long-lived assets........................... 334 -
Loss (income) from discontinued operations................ 134 (57)
Cumulative effect of accounting change.................... - 56
Changes in operating assets and liabilities............... (1,416) (1,177)
Other..................................................... 15 58
------- -------
Net cash provided by continuing operating activities.... 1,567 1,577
------- -------
Cash flows from investing activities:
Purchase of property and equipment.......................... (969) (1,107)
Acquisition of hospitals and health care entities........... (116) (398)
Investments in and advances to affiliates................... - (29)
Disposition of hospitals and health care entities........... 1,570 194
Change in other investments................................. (269) (145)
Change in investment in discontinued operations, net........ 48 (1,079)
Sale of certain discontinued operations..................... 662 -
Other....................................................... 102 (115)
------- -------
Net cash provided by (used in) investing activities..... 1,028 (2,679)
------- -------
Cash flows from financing activities:
Issuance of long-term debt.................................. - 251
Net change in commercial paper and bank borrowings.......... (2,433) 1,878
Repayment of long-term debt................................. (141) (310)
Payment of cash dividends................................... (39) (40)
Issuances (repurchases) of common stock, net................ 81 (765)
Other....................................................... 2 3
------- -------
Net cash provided by (used in) financing activities..... (2,530) 1,017
------- -------
Change in cash and cash equivalents........................... 65 (85)
Cash and cash equivalents at beginning of period.............. 110 113
------- -------
Cash and cash equivalents at end of period.................... $ 175 $ 28
======= =======
Interest payments............................................. $ 412 $ 308
Income tax payments (refunds), net............................ $ ( 116) $ 1,014
See accompanying notes.
5
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1--BASIS OF PRESENTATION
Columbia/HCA Healthcare Corporation, a Delaware corporation, is a holding
company whose affiliates own and operate hospitals and related health care
entities. The term "affiliates" mean direct and indirect subsidiaries of
Columbia/HCA Healthcare Corporation, and partnerships and joint ventures in
which such subsidiaries are partners. At September 30, 1998, these affiliates
owned and operated 294 hospitals and 103 freestanding surgery centers.
Affiliates of Columbia/HCA Healthcare Corporation are also partners in several
50%/50% joint ventures that own and operate 24 hospitals and 5 freestanding
surgery centers which are accounted for using the equity method. The
affiliates' facilities are located in 32 states, England and Switzerland. The
terms "Columbia/HCA" or the "Company" as used in this Quarterly Report on Form
10-Q refer to Columbia/HCA Healthcare Corporation and its affiliates, unless
otherwise stated or indicated by context.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the quarter and nine months ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE 2--INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as governmental investigations by various
states. The Company is cooperating in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the scope of the ongoing investigations, the Company
expects additional subpoenas and other investigative and prosecutorial
activity to occur in these and other jurisdictions in the future.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
Management believes the ongoing investigations and related media coverage
are having a negative effect on the Company's results of operations. It is too
early to predict the outcome or effect that the ongoing investigations, the
initiation of additional investigations, if any, and the related media
coverage will have on the Company's financial condition or results of
operations in future periods. Were the Company to be found in violation of
federal or state laws relating to Medicare, Medicaid or similar programs, the
Company could be subject to substantial monetary fines, civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on the
Company's financial position and results of operations. (See Note 10-
Contingencies and Part II, Item 1: Legal Proceedings.)
NOTE 3--RESTRUCTURING OF OPERATIONS
The Company is currently in the process of restructuring its operations in
an effort to create a smaller and more focused company. The restructuring
includes divestitures of certain businesses as described in Note 5-
Discontinued Operations, divestitures of certain hospitals, surgery centers
and other assets to third parties and spin-offs of certain other assets to the
Company's shareholders.
6
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 3--RESTRUCTURING OF OPERATIONS (CONTINUED)
Divestiture of Certain Hospitals, Surgery Centers and Medical Office
Buildings
In May 1998, the Company announced agreements to sell 22 hospitals (21
consolidated and 1 non-consolidated hospital) and certain related facilities
to a consortium of not-for-profit entities for an aggregate sales price of
approximately $1.2 billion. The sales of 16 of these hospitals were completed
in August and September of 1998 for gross proceeds of approximately $930
million, resulting in a pre-tax gain of $350 million ($200 million after-tax).
Proceeds from the sales were used to repay bank borrowings. Subsequent to
September 30, 1998, the consortium transaction was consumated by the
completion of the sales of 5 hospitals and the one remaining hospital was
removed from the consortium agreement (see Note 14-Subsequent Events).
During the first nine months of 1998, the Company completed the sales of 5
additional hospitals (not part of the consortium) for gross proceeds of
approximately $75 million. The sales of these facilities resulted in a pre-tax
loss of $26 million ($17 million after-tax). Proceeds from the sales were used
to repay bank borrowings.
In July 1998, the Company completed the sale of 34 of its ambulatory surgery
centers for proceeds of approximately $550 million. The sale resulted in an
adjusted pre-tax gain of $213 million ($58 million after-tax). The high
effective tax rate of 73% on the gain was due to significant amounts of non-
deductible goodwill related the surgery centers sold. Proceeds from the sale
were used to repay bank borrowings.
During the third quarter of 1998, the Company decided to divest a group of
its medical office buildings. The divestiture is expected to be completed
through either sales or the transfer of the medical office buildings to a
joint venture in which the Company anticipates maintaining a minority
interest. The Company has also entered into agreements with several buyers to
sell 23 additional hospitals for aggregate estimated sales proceeds of
approximately $850 million. The carrying value for these medical office
buildings along with these hospitals and other assets expected to be sold, was
reduced to fair value, based on estimates of selling values, for a total non-
cash, pre-tax charge of $334 million. Proceeds from the divestitures are
expected to be used to repay bank borrowings.
Spin-Offs
The Company is continuing with its previously announced plan to create two
tax-free spin-off companies. In August 1998, the Company submitted a ruling
request to the Internal Revenue Service (the "IRS") requesting that the spin-
offs be tax-free to the Company and its shareholders. The two proposed spin-
off companies currently represent the Pacific and America operating groups.
The Pacific group is currently comprised of 42 consolidating hospitals with
$449 million and $423 million in revenues for the quarters ended September 30,
1998 and 1997, respectively, and $1,376 million and $1,367 million for the
nine months ended September 30, 1998 and 1997, respectively. Operating income
(earnings before depreciation and amortization, interest expense, management
fees, minority interests and income taxes) for the Pacific Group was $39
million and $32 million for the quarters ended September 30, 1998 and 1997,
respectively, and $126 million and $213 million for the nine months ended
September 30, 1998 and 1997, respectively. The Pacific group also has an
equity interest in one non-consolidated hospital.
The America group is currently comprised of 21 consolidating hospitals with
$121 million and $117 million in revenues for the quarters ended September 30,
1998 and 1997, respectively, and $368 million and $379 million for the nine
months ended September 30, 1998 and 1997, respectively. Operating income for
the America Group was $16 million and $14 million for the quarters ended
September 30, 1998 and 1997, respectively, and $56 million and $86 million for
the nine months ended September 30, 1998 and 1997, respectively.
7
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 4--CHARGES RELATED TO RESTRUCTURING OF OPERATIONS AND INVESTIGATIONS
During 1998, the Company recorded the following pre-tax charges related to
the investigation and restructuring of operations as discussed in Notes 2 and
3 (in millions):
QUARTER NINE MONTHS
--------- ------------
1998 1997 1998 1997
---- ---- ----- -----
Professional fees and other costs................. $20 $24 $ 85 $ 24
Severance costs................................... 1 40 5 40
--- --- ----- -----
$21 $64 $ 90 $ 64
=== === ===== =====
NOTE 5--DISCONTINUED OPERATIONS
Included in discontinued operations are three of the four business units
acquired in the August 1997 merger with Value Health, Inc. ("Value Health")
and the Company's home health care businesses. The Company implemented a plan
to dispose of these businesses during 1997.
During the second and third quarters of 1998, the Company completed the sale
of the three Value Health units for proceeds totaling $662 million. The
proceeds from the sales were used to repay bank borrowings. The Company
recorded a $73 million after-tax loss upon completion of these sales in 1998,
representing changes to the estimated after-tax loss on disposal of
discontinued operations of $443 million recorded in the fourth quarter of
1997.
Revenues of the discontinued businesses totaled $98 million and $585 million
for the quarters ended September 30, 1998 and 1997, respectively, and $920
million and $1,267 million for the nine months ended September 30, 1998 and
1997, respectively.
During the second and third quarters of 1998, the Company announced five
separate agreements to sell the majority of its home health care operations
located in 27 states for approximately $90 million.
Subsequent to September 30, 1998, the Company completed the sale of its home
health operations in 13 states (see Note 14-Subsequent Events). The remaining
sales of home health operations located in the remaining 14 states are
expected to be completed by the end of the year, subject to various regulatory
approvals, and are not expected to have a material effect on results of
operations. The proceeds from the sales are expected to be used to repay bank
borrowings.
NOTE 6--INCOME TAXES
The Company is currently contesting before the United States Tax Court (the
"Tax Court") and the United States Court of Federal Claims certain claimed
deficiencies and adjustments proposed by the IRS in conjunction with its
examination of the Company's 1994 federal income tax return, Columbia
Healthcare Corporation's ("CHC") 1993 and 1994 federal income tax returns,
HCA-Hospital Corporation of America, Inc.'s ("HCA") 1981 through 1988 and 1991
through 1993 federal income tax returns and Healthtrust, Inc.-The Hospital
Company's ("Healthtrust") 1990 through 1994 federal income tax returns. The
disputed items include the disallowance of certain acquisition-related costs,
executive compensation, system conversion costs and insurance premiums which
were deducted in calculating taxable income and the methods of accounting used
by certain subsidiaries for calculating taxable income related to vendor
rebates and governmental receivables. The IRS is claiming an additional $341
million in income taxes and interest through September 30, 1998.
8
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 6--INCOME TAXES (CONTINUED)
Tax Court decisions received in 1996 and 1997 related to HCA's 1981 through
1988 federal income tax returns may be appealed by the IRS or the Company to
the United States Court of Appeals, Sixth Circuit. The Company expects any
decisions regarding the appeal of these rulings will be made during 1999.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, HCA and Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with the IRS during
previous examinations and that final resolution of these disputes will not
have a material adverse effect on the results of operations or financial
position of the Company.
NOTE 7--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations for the quarters and nine months ended
September 30, 1998 and 1997 (dollars in millions, except per share amounts):
QUARTER NINE MONTHS
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
Numerator (a):
Income from continuing operations............ $ 163 $ 91 $ 555 $ 931
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per share... 644,959 653,328 643,494 662,455
Effect of dilutive securities:
Stock options............................ 1,677 3,743 2,604 4,931
Warrants and other....................... 607 736 636 750
------- ------- ------- -------
Shares used for dilutive earnings per share.. 647,243 657,807 646,734 668,136
======= ======= ======= =======
Earnings per share:
Basic earnings per share from continuing
operations.................................. $ .25 $ .15 $ .86 $ 1.40
Diluted earnings per share from continuing
operations.................................. $ .25 $ .15 $ .86 $ 1.39
- --------
(a) Amount is used for both basic and diluted earnings per share computations
since there is no earnings effect related to the dilutive securities.
NOTE 8--LONG-TERM DEBT
Current portion of long-term debt at September 30, 1998 includes
approximately $1.2 billion outstanding under the Company's former 364-day
revolving credit facility which was converted to a one-year term loan.
In July 1998, the Company amended its one-year term loan and $2.0 billion
five-year revolving credit agreement (the "Revolving Credit Facility"). The
amendments were primarily made to allow the Company to repurchase up to $1.0
billion of its common stock (see Note 9-Stock Repurchase Program).
In July 1998, the Company entered into a $1.0 billion term loan agreement
with several banks which matures February 2002. Proceeds from the $1.0 billion
term loan were used to reduce borrowings under the Company's Revolving Credit
Facility. The Company anticipates using the Revolving Credit Facility to
finance the $1.0 billion stock repurchase program.
9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 9--STOCK REPURCHASE PROGRAM
In July 1998, the Company announced a stock repurchase program under which
up to $1 billion of the Company's common stock may be purchased. In August
1998, the Company commenced the repurchase program by entering into a series
of forward purchase contracts. The number of shares to be purchased and the
timing of purchases will be based upon several factors, including the price of
the Company's common stock, general market conditions, the status of the
ongoing federal and state governmental investigations of the Company's
business practices and other factors.
As of September 30, 1998, the Company had entered forward purchase contracts
totaling approximately $450 million, representing approximately 18.6 million
shares. In light of the ongoing investigations, prior to the completion of the
stock repurchase program, the Company expects to address any government
concerns related to the stock repurchase program.
NOTE 10--CONTINGENCIES
Significant Legal Proceedings
Various lawsuits, claims and legal proceedings (see Note 2-Investigations,
for a description of the ongoing government investigations) have been and are
expected to be instituted or asserted against the Company, including those
relating to shareholder derivative and class action complaints; purported
class action lawsuits filed by patients and payers alleging, in general,
improper and fraudulent billing, coding and physician referrals, as well as
other violations of law; certain qui tam or "whistleblower" actions alleging,
in general, unlawful claims for reimbursement or unlawful payments to
physicians for the referral of patients and other violations and litigation
matters. While the amounts claimed may be substantial, the ultimate liability
cannot be determined or reasonably estimated at this time due to the
considerable uncertainties that exist. Therefore, it is possible that results
of operations, financial position and liquidity in a particular period could
be materially, adversely affected upon the resolution of certain of these
contingencies.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of,
or interference with, physicians' staff privileges. In certain of these
actions the claimants have asked for punitive damages against the Company,
which are usually not covered by insurance. It is management's opinion that
the ultimate resolution of these pending claims and legal proceedings will not
have a material adverse effect on the Company's results of operations or
financial position (see Part II, Item 1: Legal Proceedings).
NOTE 11--COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the quarters
and nine months ended September 30, 1998 and 1997 are as follows (in
millions):
QUARTER NINE MONTHS
---------- ------------
1998 1997 1998 1997
---- ---- ----- -----
Net income...................................... $146 $ 97 $ 421 $ 932
Unrealized gains (losses) on securities......... (16) 33 (16) 47
Foreign currency translation adjustments........ 4 (3) 2 -
---- ---- ----- -----
Comprehensive income............................ $134 $127 $ 407 $ 979
==== ==== ===== =====
10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED
NOTE 11--COMPREHENSIVE INCOME (CONTINUED)
The components of accumulated other comprehensive income, net of related
tax, at September 30, 1998 and December 31, 1997 are as follows:
1998 1997
---- ----
Net unrealized gains on securities.............................. $74 $90
Foreign currency translation adjustments........................ 4 2
--- ---
Accumulated other comprehensive income.......................... $78 $92
=== ===
NOTE 12--SEGMENT DISCLOSURES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which will be effective for
the Company's 1998 year-end consolidated financial statements. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports.
Management is currently evaluating the appropriate disclosures pursuant to
the provisions of SFAS 131 in consideration of the Company's ongoing
restructuring of operations (as discussed in Note 3-Restructuring of
Operations).
NOTE 13--DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning
after June 15, 1999. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new statement will
have a significant effect on earnings or the financial position of the
Company.
NOTE 14--SUBSEQUENT EVENTS
Divestiture of Certain Hospitals
In October and November of 1998, the Company completed the sale of 5
hospitals which were part of the original 22 hospital sale to a consortium of
not-for-profit entities for gross proceeds of approximately $300 million and
an after-tax gain of approximately $110 million. Proceeds from the sale were
used to repay bank borrowings.
Sale of Home Health Operations
In October and November of 1998, the Company completed the sale of its home
health operations in 13 states for cash proceeds of approximately $64 million.
The sale had no material effect on results of discontinued operations and the
proceeds were used to repay bank borrowings.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTIGATIONS
The Company is currently the subject of several federal investigations into
its business practices, as well as governmental investigations by various
states. The Company is cooperating in these investigations and understands,
through written notice and other means, that it is a target in these
investigations. Given the scope of the ongoing investigations, the Company
expects additional subpoenas and other investigative and prosecutorial
activity to occur in these and other jurisdictions in the future.
The Company is the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation includes the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
Management believes the ongoing investigations and related media coverage
are having a negative effect on the Company's results of operations. It is too
early to predict the outcome or effect that the ongoing investigations, the
initiation of additional investigations, if any, and the related media
coverage will have on the Company's financial condition or results of
operations in future periods. Were the Company to be found in violation of
federal or state laws relating to Medicare, Medicaid or similar programs, the
Company could be subject to substantial monetary fines, civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on the
Company's financial position and results of operations. (See Note 10-
Contingencies of the Notes to Condensed Consolidated Financial Statements and
Part II, Item 1: Legal Proceedings.)
RESTRUCTURING OF OPERATIONS & DISCONTINUED OPERATIONS
The Company is currently in the process of restructuring its operations in
an effort to create a smaller and more focused company. The restructuring
includes divestitures of certain hospitals, surgery centers and other assets
to third parties and spin-offs of certain other assets to the Company's
stockholders (See Note 3- Restructuring of Operations of the Notes to
Condensed Consolidated Financial Statements) and the divestitures of certain
discontinued businesses (See Note 5-Discontinued Operations of the Notes to
Condensed Consolidated Financial Statements).
BUSINESS STRATEGY
The Company's strategy is to be a comprehensive provider of quality health
care services in select markets. The Company maintains and replaces equipment,
renovates and constructs replacement facilities and adds new services to
increase the attractiveness of its hospitals and other facilities to patients
and physicians. By developing a comprehensive health care network with a broad
range of health care services located throughout a market area, the Company
achieves greater visibility and is better able to attract and serve patients
and physicians. The Company is also able to reduce operating costs by sharing
certain services among several facilities in the same market and is better
positioned to work with health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs") and employers.
The Company generally seeks to operate each of its facilities as part of a
network with other health care facilities that it owns or operates within the
same region. In instances where acquisitions of additional facilities in the
area are not possible or practical, the Company may seek joint ventures or
partnership arrangements with other local facilities.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
Revenue/Volume Trends
During the past twelve months, the Company has experienced declines in
revenues and volume growth rates as well as operational challenges. Management
believes that the impact of the ongoing government investigations and related
media coverage, facility sales, and the announced divestiture of several other
hospitals as part of the Company's restructuring of operations have created
uncertainty in many markets.
The Company's revenues also continue to be affected by the trend toward
certain services being performed more frequently on an outpatient basis and an
increasing proportion of revenue being derived from fixed payment, higher
discount sources, including Medicare, Medicaid and managed care plans.
Admissions related to Medicare, Medicaid and managed care plan patients were
89% and 88% of total admissions for the nine months ended September 30, 1998
and 1997, respectively.
Insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are negotiating discounted
amounts that they will pay health care providers rather than paying standard
prices. These purchasers then become discounted payers, similar to HMOs and
PPOs, in virtually all markets and make it increasingly difficult for
providers to maintain their historical revenue growth trends. Revenues from
capitation arrangements (prepaid health service agreements) are less than 1%
of consolidated revenues.
The growth in outpatient services is expected to continue in the health care
industry as procedures performed on an inpatient basis are converted to
outpatient procedures through continuing advances in pharmaceutical and
medical technologies. The redirection of certain procedures to an outpatient
basis is also influenced by pressures from payers to direct certain procedures
from inpatient care to outpatient care. Outpatient revenues grew to 37.3% of
net patient revenues for the nine months ended September 30, 1998 from 36.9%
during the same period last year.
The Company expects patient volumes from Medicare and Medicaid to continue
to increase due to the general aging of the population and the expansion of
state Medicaid programs. However, under the Balanced Budget Act of 1997 (the
"BBA-97"), the Company's reimbursement from the Medicare and Medicaid programs
was reduced and will be further reduced as some reductions will be phased in
over the next few years.
Reductions in Medicare and Medicaid reimbursement, increasing percentages of
the patient volume being related to patients participating in managed care
plans and continuing trends toward more services being performed on an
outpatient basis are expected to present an ongoing challenge to the Company.
To achieve and maintain a reasonable operating margin in future periods, the
Company must increase patient volumes while controlling the costs of providing
services.
Management believes that the proper response to these challenges include the
delivery of a broad range of quality health care services to patients through
comprehensive health care networks with operating decisions being made by the
local management teams and local physicians.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary
The following is a summary of results from continuing operations for the
quarters and nine months ended September 30, 1998 and 1997 (dollars in
millions, except per share amounts):
QUARTER
-----------------------------
1998 1997
-------------- -------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Revenues....................................... $4,579 100.0 $4,612 100.0
Salaries and benefits.......................... 1,900 41.5 1,895 41.1
Supplies....................................... 730 15.9 653 14.2
Other operating expenses....................... 914 20.0 1,023 22.1
Provision for doubtful accounts................ 369 8.1 369 8.0
Depreciation and amortization.................. 312 6.7 319 6.9
Interest expense............................... 142 3.1 125 2.7
Equity in earnings of affiliates............... (16) (0.4) (19) (0.4)
Gains on sales of facilities................... (537) (11.7) - -
Impairment of long-lived assets................ 334 7.3 - -
Restructuring of operations and investigation
related costs................................. 21 0.5 64 1.4
------ ----- ------ -----
4,169 91.0 4,429 96.0
------ ----- ------ -----
Income from continuing operations before
minority interests and income taxes........... 410 9.0 183 4.0
Minority interests in earnings of consolidated
entities...................................... 16 0.4 33 0.7
------ ----- ------ -----
Income from continuing operations before income
taxes......................................... 394 8.6 150 3.3
Provision for income taxes..................... 231 5.0 59 1.3
------ ----- ------ -----
Income from continuing operations.............. $ 163 3.6 $ 91 2.0
====== ===== ====== =====
Diluted earnings per share from continuing
operations.................................... $ .25 $ .15
% changes from prior year:
Revenues..................................... (0.7)% 0.2%
Income from continuing operations before
income taxes................................ 161.0 (69.8)
Income from continuing operations............ 80.1 (69.7)
Diluted earnings per share from continuing
operations.................................. 66.7 (65.9)
Admissions (a)............................... (0.6) (0.2)
Equivalent admissions (b).................... (1.1) 1.3
Revenues per equivalent admission............ 0.3 (1.1)
Same-facility % changes from prior year (c):
Revenues..................................... (0.4) 0.7
Admissions (a)............................... 0.7 1.0
Equivalent admissions (b).................... 1.3 2.6
Revenues per equivalent admission............ (1.7) (1.9)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary (Continued)
NINE MONTHS
-------------------------------
1998 1997
--------------- --------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
Revenues..................................... $14,261 100.0 $14,445 100.0
Salaries and benefits........................ 5,911 41.4 5,621 38.9
Supplies..................................... 2,195 15.4 2,010 13.9
Other operating expenses..................... 2,815 19.7 2,928 20.2
Provision for doubtful accounts.............. 1,052 7.4 976 6.8
Depreciation and amortization................ 932 6.6 923 6.5
Interest expense............................. 440 3.1 361 2.5
Equity in earnings of affiliates............. (91) (0.6) (116) (0.8)
Gains on sales of facilities................. (537) (3.8) - -
Impairment of long-lived assets.............. 334 2.3 - -
Restructuring of operations and investigation
related costs............................... 90 0.6 64 0.4
------- ----- ------- -----
13,141 92.1 12,767 88.4
------- ----- ------- -----
Income from continuing operations before
minority interests and income taxes......... 1,120 7.9 1,678 11.6
Minority interests in earnings of
consolidated entities....................... 54 0.4 125 0.8
------- ----- ------- -----
Income from continuing operations before
income taxes................................ 1,066 7.5 1,553 10.8
Provision for income taxes................... 511 3.6 622 4.4
------- ----- ------- -----
Income from continuing operations............ $ 555 3.9 $ 931 6.4
======= ===== ======= =====
Diluted earnings per share from continuing
operations.................................. $ .86 $ 1.39
% changes from prior year:
Revenues................................... (1.3)% 3.4%
Income from continuing operations before
income taxes.............................. (31.4) (12.5)
Income from continuing operations.......... (40.3) (12.4)
Diluted earnings per share from continuing
operations................................ (38.1) (11.5)
Admissions (a)............................. 0.3 1.4
Equivalent admissions (b).................. 0.9 3.1
Revenues per equivalent admission.......... (2.1) 0.3
Same-facility % changes from prior year (c):
Revenues................................... (1.9) 4.1
Admissions(a).............................. 0.7 2.0
Equivalent admissions (b).................. 1.7 3.9
Revenues per equivalent admission.......... (3.5) 0.2
- --------
(a) Admissions represent the total number of patients admitted (in the
facility for a period in excess of 23 hours) to the Company's hospitals.
(b) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by
the sum of gross inpatient 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.
(c) "Same-facility" information excludes the operations of hospitals and
their related facilities which were either acquired or divested during
the current and prior year. The facilities to be sold as part of the
Company's restructuring of operations efforts will continue to be
included in "same-facility" until the date they are divested.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 1998 and 1997
Income from continuing operations before income taxes increased 161.0% to
$394 million in 1998 from $150 million in 1997, and pre-tax margins increased
to 8.6% in 1998 from 3.3% in 1997. The increase in pre-tax income was
primarily attributable to gains of $537 million resulting from the completed
sale of several facilities as part of the Company's restructuring of
operations. The gains were offset by a decline in revenues and a charge taken
for the impairment of long-lived assets of $334 million. The announced
divestiture of several hospitals as part of the Company's restructuring of
operations also contributed to the declines in revenues and admissions.
Revenues decreased by 0.7% to $4,579 million in 1998 compared to $4,612
million in 1997. Inpatient admissions decreased 0.6% from a year ago and
equivalent admissions (adjusted to reflect combined inpatient and outpatient
volume) also decreased 1.1% from a year ago. The decline in equivalent
admissions was greater than the decline in inpatient admissions due to a
decrease in outpatient revenues resulting from the sale of 34 surgery centers
in July 1998. On a same-facility basis, revenues decreased 0.4%, admissions
increased 0.7% and equivalent admissions increased 1.3% from a year ago. The
slight decrease in revenues and admissions resulted in a 0.3% decline in
revenue per equivalent admission. On a same-facility basis, the decline in
revenues compared to an increase in equivalent admissions resulted in a
decline in revenue per equivalent admission of 1.7%.
The decline in revenues was due to several factors, including decreases in
Medicare reimbursement rates mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1998 revenues by approximately $55 million for the
quarter), continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to 40%
in 1998 compared to 36% during 1997), a net decrease in the number of
consolidated hospitals since September 30, 1997 due to facility sales and the
announced divestitures of hospitals in certain markets. Excluding hospitals
expected to be divested, same-facility revenues declined slightly and same-
facility admissions increased 1.4%.
Operating expenses increased as a percentage of revenues in almost every
expense category, except other operating expenses, which decreased 2.1% from
1997, and the provision for bad debts which remained relatively flat. The
primary reason for the increases, as a percentage of revenues, in all other
expense categories was the Company's inability to adjust expenses in line with
the decreases experienced in volumes and reimbursement trends. The level of
management's attention being devoted to the investigations, reactions by
certain physicians and patients to the negative media coverage and management
changes at several levels and locations throughout the Company continue to
contribute to the Company's inability to implement changes to reduce operating
expenses in response to the volume and revenue declines.
Salaries and benefits, as a percentage of revenues, increased to 41.5% in
1998 from 41.1% in 1997. The increase was due to an increase in the cost of
salaries and benefits per equivalent admission and the Company's inability to
adjust staffing levels corresponding with the declining equivalent admission
growth (man-hours per equivalent admission increased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.9% in 1998 from
14.2% in 1997 due to a relatively flat change in net revenue per equivalent
admission while the cost of supplies per equivalent admission increased 12.9%
primarily due to increased costs of certain new technology items such as heart
stents, spinal cages and certain pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased as a percentage of revenues to 20.0%
in 1998 from 22.1% in 1997. The decrease was due to small decreases in several
of these areas as a
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 1998 and 1997 (Continued)
percentage of revenues including lower advertising costs incurred compared to
last year due to the cancellation of a national branding campaign.
Provision for doubtful accounts, as a percentage of revenues, increased
slightly to 8.1% in 1998 from 8.0% in 1997.
Depreciation and amortization decreased slightly as a percentage of revenues
to 6.7% in 1998 from 6.9% in 1997.
Interest expense increased to $142 million in 1998 compared to $125 million
in 1997 primarily as a result of an increase in average outstanding debt
during 1998 compared to last year. This was due, in part, to the additional
debt incurred during the third and fourth quarters of 1997 related to the
Company's $1.0 billion common stock repurchase program which was completed in
the fourth quarter of 1997. Interest expense associated with the increase in
debt related to the funding of the 1997 merger with Value Health has been
allocated to "Discontinued operations" for the periods prior to the sales of
the respective Value Health businesses and is therefore excluded from interest
expense from continuing operations for certain periods.
Equity in earnings of affiliates remained unchanged at 0.4% of revenues as
compared to last year.
During 1998, the Company recognized a pre-tax gain of $537 million ($243
million after-tax) on the sale of certain hospitals and surgery centers. The
gain includes a pre-tax gain of $350 million ($200 million after-tax) on the
sale of 16 hospitals to a consortium of not-for-profit entities, a pre-tax
gain of $213 million ($60 million after-tax) on the sale of 34 surgery
centers, and a loss of $26 million ($17 million after-tax) on the sale of 5
hospitals and other facilities. See Note 3-Restructuring of Operations in the
Notes to Condensed Consolidated Financial Statements.
During 1998, the Company, as part of its strategic business plan, decided to
divest a group of its medical office buildings. The divestiture is expected to
be completed through either sales or the transfer of the medical office
buildings to a joint venture in which the Company anticipates maintaining a
minority ownership interest. The carrying value for these medical office
buildings, along with certain hospitals and other facilities expected to be
sold, was reduced to fair value based upon estimated selling values, resulting
in a pre-tax impairment charge of $334 million.
During 1998, the Company incurred $21 million ($13 million after-tax) of
costs in connection with the restructuring of operations and investigations.
These costs included $20 million in professional fees and other costs and $1
million in severance costs.
Minority interests declined 0.3% from 1997 due to decreased income from
joint ventures that included minority partners.
The Company incurred a $17 million net loss from operations of its
discontinued businesses in 1998 compared to net income of $6 million during
the prior year. The majority of the loss, which is primarily related to the
Company's home health care business, is due to revenue reductions related to
Medicare rates of reimbursement for home health visits under the BBA-97 and a
decline in home health visits.
Nine Months Ended September 30, 1998 and 1997
Income from continuing operations before income taxes declined 31.4% to
$1,066 million in 1998 from $1,553 million in 1997, and pre-tax margins
decreased to 7.5% in 1998 from 10.8% in 1997. The decrease in
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1998 and 1997 (Continued)
pre-tax income was primarily attributable to a decline in revenues, decreases
in the operating margin, costs associated with the restructuring of operations
and investigation related costs, and a charge of $334 million for the
impairment of long-lived assets. The announced divestiture of several
hospitals as part of the Company's restructuring of operations also
contributed to the declines in both revenues and operating margins.
Revenues decreased 1.3% to $14.3 billion in 1998 compared to $14.4 billion
in 1997. Inpatient admissions increased 0.3% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
increased 0.9%. On a same-facility basis, revenues decreased 1.9%, admissions
increased 0.7% and equivalent admissions increased 1.7% from a year ago. The
decline in both reported and same-facility revenues compared to increases in
equivalent admissions resulted in declines in revenue per equivalent admission
of 2.1% on a reported basis and 3.5% on a same-facility basis. As previously
discussed, the increase in outpatient volume activity is primarily a result of
the continuing trend of certain services, previously provided in an inpatient
setting, being converted to an outpatient setting.
The decline in revenues was due to several factors including decreases in
Medicare reimbursement rates mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1998 revenues by approximately $160 million),
continued increases in discounts from the growing number of managed care
payers (managed care as a percentage of total admissions increased to 38% in
1998 compared to 35% during 1997), delays experienced in obtaining Medicare
cost report settlements (cost report filings and settlements resulted in
favorable revenue adjustments of $57 million in 1998 compared to $91 million
in 1997), a net decrease in the number of consolidated hospitals since
September 30, 1997 due to facility sales and the announced divestitures of
hospitals in certain markets. Excluding hospitals expected to be divested,
same-facility revenues declined 1.1% and same-facility admissions increased
1.5%.
Operating expenses increased as a percentage of revenues in almost every
expense category except other operating expenses which declined 0.5% from
1997. The primary reason for the increases as a percentage of revenues in all
other expense categories was the Company's inability to adjust expenses in
line with the decreases experienced in revenues and reimbursement trends.
Management's attention to the investigations, reactions by certain physicians
and patients to the negative media coverage and management changes at several
levels and locations throughout the Company continue to contribute to the
Company's inability to implement changes to reduce operating expenses in
response to the revenue declines.
Salaries and benefits, as a percentage of revenues, increased to 41.4% in
1998 from 38.9% in 1997. The decline in revenues per equivalent admission was
a primary factor in the increase. The increase was also due to an increase in
the cost of salaries and benefits per equivalent admission and the Company's
inability to adjust staffing levels corresponding with the declining
equivalent admission growth (man-hours per equivalent admission increased
slightly compared to last year).
Supply costs increased as a percentage of revenues to 15.4% in 1998 from
13.9% in 1997 due to a decline in net revenue per equivalent admission while
the cost of supplies per equivalent admission increased primarily due to
increased costs of certain new technology items such as heart stents, spinal
cages and certain pharmaceuticals.
Other operating expenses (which includes various expense categories)
decreased as a percentage of revenues to 19.7% in 1998 from 20.2% in 1997. The
decrease was due to small decreases in several of these areas as a percentage
of revenues.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1998 and 1997 (Continued)
Provision for doubtful accounts, as a percentage of revenues, increased to
7.4% in 1998 from 6.8% in 1997 due to internal factors such as continued
computer information system conversions (including patient accounting systems)
at various facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and payer remittance slowdowns. The information system
conversions hampered the business office billing functions and collection
efforts in those facilities as some resources are directed to installing and
converting systems and building new data files, rather than devoting full
effort to billing and collecting receivables. The Company has experienced an
increased occurrence of charge audits from certain payers due to the negative
publicity surrounding the government investigations which have resulted in
delays in the collection of receivables. The delays in collections resulted in
an increase in receivables reserved under the Company's bad debt allowance
policy. Management is unable at this time to predict when or if, these delays
in collecting accounts receivable will improve or the effect these delays will
have on the ultimate amounts collected.
Depreciation and amortization increased slightly to 6.6% in 1998 from 6.5%
in 1997, primarily due to the slowdown in revenue growth.
Interest expense increased to $440 million in 1998 compared to $361 million
in 1997, primarily as a result of an increase in average debt during 1998
compared to last year. This was due, in part, to the additional debt incurred
during the third and fourth quarters of 1997 related to the Company's $1.0
billion common stock repurchase program which was completed in the fourth
quarter of 1997. Interest expense associated with the increase in debt related
to the funding of the 1997 merger with Value Health has been allocated to
"Discontinued operations" for periods prior to the sales of the respective
Value Health businesses and is therefore excluded from interest expense from
continuing operations for certain periods.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.6% in 1998 from 0.8% in 1997 primarily due to decreased profitability at
certain non-consolidated joint venture facilities.
During 1998, the Company recognized a pre-tax gain of $537 million ($243
million after-tax) on the sale of certain hospitals and surgery centers. The
gain includes a pre-tax gain of $350 million ($200 million after-tax) on the
sale of 16 hospitals to a consortium of not-for-profit entities, a pre-tax
gain of $213 million ($60 million after-tax) on the sale of 34 surgery
centers, and a loss of $26 million ($17 million after-tax) on the sale of 5
hospitals and other facilities. See Note 3-Restructuring of Operations in the
Notes to Condensed Consolidated Financial Statements.
During 1998 the Company, as part of its strategic business plan, decided to
divest a group of its medical office buildings. The divestiture is expected to
be completed through either sales or the transfer of the medical office
buildings to a joint venture in which the Company anticipates maintaining a
minority ownership interest. The recorded value for these medical office
buildings, along with certain hospitals and other facilities expected to be
sold, was reduced to fair value, based upon an estimated sales value,
resulting in a pre-tax impairment charge of $334 million.
During 1998, the Company incurred $90 million ($53 million after-tax) of
costs in connection with the restructuring of operations and investigations.
These costs included $85 million in professional fees and other costs and $5
million in severance costs.
Minority interests declined as a percentage of revenues to 0.4% in 1998 from
0.8% in 1997 due to decreased income from joint ventures that included
minority partners.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1998 and 1997 (Continued)
The Company incurred a $61 million net loss from operations of its
discontinued businesses in 1998 compared to net income of $57 million during
the prior year. The majority of the loss, which is primarily related to the
Company's home health care business, is due to revenue reductions related to
Medicare rates of reimbursement for home health visits under the BBA-97 and a
decline in home health visits.
Liquidity
Cash provided by continuing operating activities was $1.6 billion during the
first nine months of both 1998 and 1997.
Cash provided by investing activities increased to $1 billion in 1998
compared to cash used in investing activities of $2.7 billion in 1997. The
increase was primarily due to proceeds from the sales of certain discontinued
operations of $662 million in 1998 and cash proceeds from the disposition of
hospitals and other health care entities of $1.6 billion in 1998 compared to
$194 million in 1997. Also in 1998, cash flows from the change in investment
in discontinued operations of $48 million compared to cash used of $1 billion
in 1997 to complete the Value Health acquisition.
Cash flows used in financing activities totaled approximately $2.5 billion
during the first nine months of 1998 compared to cash provided of $1 billion
in 1997. The cash flows from continuing operations and investing activities
was primarily used to pay down debt during the first nine months of 1998.
During 1997, the Company repurchased approximately 20.4 million shares of its
common stock for a total cost of approximately $737 million which was funded
by the issuance of long-term debt, commercial paper and bank borrowings.
At September 30, 1998, current liabilities exceeded current assets by $96
million. Included in current liabilities is approximately $1.1 billion
outstanding under the Company's former 364-day revolving credit facility which
was converted to a one-year term loan. The Company expects to repay the one-
year term loan primarily through proceeds from facility sales. Working capital
balances totaled $1.7 billion at December 31, 1997. Management believes that
proceeds from expected asset sales, cash flows from operations and amounts
available under the Company's $2.0 billion five-year revolving credit facility
due February 2002 will be sufficient to meet expected liquidity needs during
the next twelve months.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.6 billion at September 30,
1998 and $1.5 billion at December 31, 1997.
The Company has various agreements with joint venture partners whereby the
partners have an option to sell or "put" their interests in the joint venture
back to the Company within specific periods at fixed prices or prices based on
certain formulas. The combined put price under all such agreements was
approximately $1.0 billion at September 30, 1998. During April 1998, the
partner in the Memorial Healthcare Group, Inc. joint venture exercised their
put option whereby the Company purchased their remaining interest in the joint
venture for approximately $40 million. The Company cannot predict if, or when,
other joint venture partners will exercise such options.
During the first quarter of 1998, the Internal Revenue Service issued
guidance regarding the tax consequences of joint ventures between for-profit
and not-for-profit hospitals. The Company has not determined the impact of the
tax ruling on its existing joint ventures and is consulting with its joint
venture partners and tax advisers to develop an appropriate course of action.
The tax ruling could require the restructuring of certain joint ventures with
not-for-profits or influence the exercise of the put agreements by certain
joint venture partners.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (Continued)
The settlement of the government investigations and the various lawsuits and
legal proceedings that have been asserted could result in substantial
liabilities to the Company. The ultimate liabilities cannot be reasonably
estimated, as to the timing or amounts, at this time; however, it is possible
that results of operations, financial position and liquidity could be
materially, adversely affected upon the resolution of certain of these
contingencies.
Capital Resources
Excluding acquisitions, capital expenditures were $969 million during the
first nine months of 1998 compared to $1.1 billion for the same period in
1997. Planned capital expenditures (including construction projects) in 1998
are expected to approximate $1.3 billion. Management believes that its capital
expenditure program is adequate to expand, improve and equip the Company's
existing health care facilities.
Acquisition of hospitals and health care entities and investments in and
advances to affiliates (generally 50% interests in joint ventures that are
accounted for using the equity method) totaled $116 million during the first
nine months of 1998 and $398 million in 1997.
The Company expects to finance all capital expenditures with internally
generated and borrowed funds. Available sources of capital include public or
private debt, amounts available under the Company's revolving credit facility
(approximately $1.8 billion as of October 31, 1998) and equity. At September
30, 1998, there were projects under construction which had an estimated
additional cost to complete and equip over the next few years of approximately
$1.1 billion.
During July 1998, the Company amended the one-year term loan and the
revolving credit facility primarily to allow repurchases of up to $1.0 billion
of its common stock. Also during July 1998, the Company entered into a $1.0
billion term loan agreement with several banks which matures February 2002.
Proceeds from $1.0 billion term loan were used to reduce borrowings under the
Company's revolving credit facility which the Company anticipates using to
finance the $1.0 billion stock repurchase program.
The one-year term loan, the revolving credit facility and the new $1.0
billion term loan contain customary covenants which include (i) limitations on
additional debt, (ii) limitations on sales of assets, mergers and changes of
ownership, (iii) limitations on repurchases of the Company's common stock,
(iv) maintenance of certain interest coverage ratios and (v) attaining certain
minimum levels of consolidated earnings before interest, taxes, depreciation
and amortization. The revolving credit facility and one-year term loan also
provide for the mandatory prepayment of loans thereunder, and a corresponding
reduction of commitments in the case of certain asset sales and certain debt
or equity issuances. The Company is currently in compliance with all such
covenants.
During the third quarter of 1997, the Company began replacing amounts
outstanding under its commercial paper programs with borrowings under its bank
credit facilities. This was due to the limited access of commercial paper as a
funding source caused by downgrades of the Company's senior debt and
commercial paper credit ratings by Moody's Investor Service and Standard and
Poor's. In February 1998, Moody's further downgraded the Company's senior debt
credit rating to Ba2 and the commercial paper rating to NP (not prime) from P-
3.
As part of the Company's restructuring of operations discussed earlier, the
Company announced it is pursuing various restructuring alternatives which
include divestitures of certain assets to third parties and spin-offs of
certain assets to the Company's stockholders. These restructuring alternatives
could have the effect of
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (Continued)
materially changing the capital structure of the Company. At this time,
management has not determined the preferred allocation of the debt and equity
for the future capital structure of the Company.
YEAR 2000 ISSUES
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on the Company's systems and equipment. The first problem
arises due to computers being programmed to use two rather than four digits to
define the applicable year. The second problem arises in embedded chips, where
microchips and microcontrollers have been designed using two rather than four
digits to define the applicable year. Certain of the Company's computer
programs, building infrastructure components (e.g., alarm systems and HVAC
systems) and medical devices that are date sensitive, may recognize a date
using "00" as the year 1900 rather than the year 2000. If uncorrected, the
problem could result in computer system and program failures or equipment and
medical device malfunctions that could result in a disruption of business
operations or that could affect patient diagnosis and treatment.
With respect to the information technology ("IT") portions of the Company's
Year 2000 project, which address the inventory, assessment, remediation,
testing and implementation of internally developed software, the Company has
identified various software applications that are being addressed on separate
time lines. The Company has begun remediating all these software applications
and is testing the software applications where remediation has been completed.
The Company has also completed the assessment of mission critical third party
software (i.e., that software which is essential for day to day operations)
and has developed testing and implementation plans with separate time lines.
The Company anticipates completing, in all material respects, remediation,
testing and implementation for internally developed and mission critical third
party software by June 1999. The Company's efforts are currently on schedule
in all material respects.
With respect to the IT infrastructure portion of the Company's Year 2000
project, the Company has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products (hardware,
systems software, business software, and telecommunication equipment). The
Company has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT products that pose
a material Year 2000 impact. The Company anticipates completion, in all
material respects, of the IT infrastructure portion of its program by June
1999. The IT infrastructure portion of the Company's Year 2000 project is
currently on schedule in all material respects.
The Company presently believes that with modifications to existing software
or the installation of upgraded software under the IT infrastructure portion,
the Year 2000 will not pose material operational problems for its computer
systems. However, if such modifications or upgrades are not accomplished in a
timely manner, Year 2000 related failures may present a material adverse
impact on the operations of the Company. Contingency planning will be
established and implemented in an effort to minimize any impact from Year 2000
related failures.
With respect to the non-IT infrastructure portion of the Company's Year 2000
project, the Company has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products, medical
equipment and other related equipment with embedded chips. The Company has
implemented a program to contact vendors, analyze information provided, and to
remediate, replace or otherwise address devices or equipment that pose a
material Year 2000 impact. The Company anticipates completion, in all material
respects, of the non-IT infrastructure portion of its program by June 1999.
The non-IT infrastructure portion of the Company's Year 2000 project is
currently on schedule in all material respects.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
YEAR 2000 ISSUES (CONTINUED)
The Company is prioritizing its non-IT infrastructure efforts by focusing on
equipment and medical devices that will have a direct impact on patient safety
and health. The Company is directing the majority of its efforts to repair,
replace, upgrade or otherwise address this equipment and these medical devices
in order to minimize risk to patient safety and health. The Company is relying
on information that is being provided to it by equipment and medical device
manufacturers regarding the Year 2000 status of their products. While the
Company is attempting to evaluate information provided by its present vendors,
there can be no assurance that in all instances accurate information is being
provided. The Company also cannot in all instances guarantee that the repair,
replacement or upgrade of all non-IT infrastructure systems will occur on a
timely basis. Contingency planning will be established and implemented in an
effort to minimize any impact from Year 2000 related failures.
The Company has initiated communications with its major third party payers
and intermediaries, including government payers and intermediaries. The
Company relies on these entities for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. The Company has
not received assurances that these interfaces will be timely converted.
Failure of these third party systems could have a material adverse affect on
the Company's results of operations. The Company also has initiated
communications with its mission critical suppliers and vendors (i.e. those
suppliers and vendors whose products and services are essential for day to day
operations) to assure their continued operation through the Year 2000. The
Company is continuing its efforts to obtain such assurances from all mission
critical suppliers and vendors. Failure of these third parties could have a
material impact on operations and/or the ability to provide health care
services. Contingency planning will be established and implemented in an
effort to minimize any impact from Year 2000 related failures.
The Company is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of such resources, the
Company has recently undertaken the development of contingency plans in the
event that its Year 2000 efforts, or the failures of third parties upon which
the Company relies, are not accurately or timely completed. This development
phase will continue through the end of 1998 with the implementation of
contingency plans occurring in 1999.
The Year 2000 project is currently estimated to have a minimum total cost of
$75 million, of which the Company has incurred $28 million through the first
nine months of 1998. Cumulatively, the Company has incurred $43 million of
costs related to the Year 2000 project. The Company recognizes that the total
cost is likely to increase as it completes its assessment of non-IT systems
and as it continues its remediation and testing of IT systems. The Company is
not currently able to reasonably estimate the ultimate cost to be incurred for
the assessment, remediation, upgrade, replacement and testing of its impacted
non-IT systems. The majority of the costs related to the Year 2000 project
will be expensed as incurred and are expected to be funded through operating
cash flows.
The costs of the project and estimated completion dates for the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area
and the ability to locate and correct all relevant computer codes and all
medical equipment.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in the Company's markets. The
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
HEALTH CARE REFORM (CONTINUED)
cost of certain proposals would be funded in significant part by reduction in
payments by government programs, including Medicare and Medicaid, to health
care providers (similar to the reductions incurred as part of BBA-97 as
previously discussed). While the Company is unable to predict which, if any,
proposals for health care reform will be adopted, there can be no assurance
that proposals adverse to the business of the Company will not be adopted.
PENDING IRS DISPUTES
The Company is contesting income taxes and related interest proposed by the
IRS for prior years aggregating approximately $341 million as of September 30,
1998. Management believes that final resolution of these disputes will not
have a material adverse effect on the results of operations or financial
position of the Company. (See Note 6-Income Taxes of the Notes to Condensed
Consolidated Financial Statements for a description of the pending IRS
disputes).
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects," "estimates" and words of similar import, constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: (i) general economic and business conditions,
(ii) competition; (iii) existing laws and governmental regulations and changes
in, or the failure to comply with laws or governmental regulations; (iv) the
outcome of the known and unknown governmental investigations of the Company's
business practices; (v) the recently enacted changes in the Medicare and
Medicaid programs affecting reimbursement to healthcare providers and
insurers; (vi) legislative proposals for healthcare reform; (vii) the ability
to enter into managed care provider arrangements on acceptable terms;
(viii) liability and other claims asserted against the Company; (ix) changes
in business strategy or development plans; (x) the ability to attract and
retain qualified management and personnel, including physicians; (xi) the
availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities; (xii) Year 2000
issues; (xiii) slowness of reimbursement; (xiv) future divestitures which may
result in additional charges; and (xv) ability to complete the share
repurchase program. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
CONSOLIDATED 1998 1997
- ------------ ------- ---------
Number of hospitals in operation at:
March 31.................................................. 310 314
June 30................................................... 309 315
September 30.............................................. 294 314
December 31............................................... 309
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 142 143
June 30 .................................................. 139 145
September 30.............................................. 103 143
December 31............................................... 140
Licensed hospital beds at (a):
March 31.................................................. 60,739 60,993
June 30................................................... 60,418 61,275
September 30.............................................. 57,521 61,071
December 31............................................... 60,643
Weighted average licensed beds (b):
Quarter:
First..................................................... 60,765 61,222
Second.................................................... 60,712 61,203
Third..................................................... 59,396 60,981
Fourth.................................................... 60,983
Year....................................................... 61,096
Average daily census (c):
Quarter:
First..................................................... 28,758 28,401
Second.................................................... 25,515 25,921
Third..................................................... 24,573 24,343
Fourth.................................................... 25,411
Year....................................................... 26,006
Admissions (d):
Quarter:
First..................................................... 507,600 497,200
Second.................................................... 474,400 477,200
Third..................................................... 458,800 461,700
Fourth.................................................... 479,000
Year....................................................... 1,915,100
Equivalent Admissions (e):
Quarter:
First..................................................... 755,800 731,900
Second.................................................... 731,900 729,600
Third..................................................... 703,800 711,300
Fourth.................................................... 728,600
Year....................................................... 2,901,400
Average length of stay (days) (f):
Quarter:
First..................................................... 5.1 5.1
Second.................................................... 4.9 4.9
Third..................................................... 4.9 4.9
Fourth.................................................... 4.9
Year....................................................... 5.0
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
OPERATING DATA (CONTINUED)
NON-CONSOLIDATED (G) 1998 1997
- -------------------- ----- -----
Number of hospitals in
operation at:
March 31................ 26 27
June 30................. 26 27
September 30............ 24 27
December 31............. 27
Number of freestanding
outpatient surgical
centers in operation at:
March 31................ 5 5
June 30................. 5 5
September 30............ 5 5
December 31............. 5
Licensed hospital beds at:
March 31................ 6,357 6,537
June 30................. 6,317 6,641
September 30............ 6,029 6,455
December 31............. 6,455
- --------
(a) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(b) Weighted average licensed beds represents the average number of licensed
beds weighted based on periods owned.
(c) Average daily census represents the average number of patients in hospital
beds each day.
(d) Admissions represent the total number of patients admitted (in the
facility for a period in excess of 23 hours) to the Company's hospitals.
(e) Equivalent admissions are computed by multiplying admissions (inpatient
volume) by 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.
(f) Average length of stay represents the average number of days admitted
patients stay in the Company's hospitals.
(g) The non-consolidated facilities include facilities operated through 50/50
joint ventures which are not controlled by Columbia. They are accounted
for using the equity method of accounting and therefore, are not included
on a fully consolidated basis in the condensed consolidated financial
statements.
26
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
FEDERAL AND STATE INVESTIGATIONS
In March 1997, various facilities of the Company's El Paso, Texas operations
were searched by federal authorities pursuant to search warrants, and the
government removed various records and documents. In February 1998, an
additional warrant was executed and a single computer was seized.
In July 1997, various Company affiliated facilities and offices were
searched pursuant to search warrants issued by the United States District
Court in several states. During July, September and November 1997, the Company
was also served with subpoenas requesting records and documents related to
laboratory billing and diagnosis related group ("DRG") coding in various
states and home health operations in various jurisdictions, including, but not
limited to, Florida. In January 1998, the Company received a subpoena which
requested records and documents relating to physician relationships.
Also, in July 1997, the United States District Court for the Middle District
of Florida, in Fort Myers, issued an indictment against three employees of a
subsidiary of the Company. The indictment relates to the alleged false
characterization of interest payments on certain debt resulting in Medicare
and CHAMPUS overpayments since 1986 to Fawcett Memorial Hospital, a Port
Charlotte, Florida hospital that was acquired by the Company in 1992. The
Company has been served with subpoenas for various records and documents. A
fourth employee of a subsidiary of the Company was indicted on July 22, 1998
by a superseding indictment.
In addition, several hospital facilities affiliated with the Company in
various states have received individual federal and/or state government
inquiries, both informal and formal, requesting information related to
reimbursement from government programs.
The Company is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the scope of the ongoing investigations, the Company expects
additional subpoenas and other investigative and prosecutorial activity to
occur in these and other jurisdictions in the future.
The Company is also the subject of a formal order of investigation by the
Securities and Exchange Commission. The Company understands that the
investigation relates to the anti-fraud, periodic reporting and internal
accounting control provisions of the federal securities laws.
While it is too early to predict the outcome of any of the ongoing
investigations or the initiation of any additional investigations, were the
Company to be found in violation of federal or state laws relating to
Medicare, Medicaid or similar programs, the Company could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on the Company's financial position and results
of operations. (See Note 2- Investigations and Note 10-Contingencies of the
Notes to Condensed Consolidated Financial Statements.)
LAWSUITS
Qui Tam Actions
Several qui tam actions have been brought by private parties ("relators") on
behalf of the United States of America and have been unsealed and served on
the Company. With the exception of one case discussed below, the government
has declined to intervene in the qui tam actions unsealed to date. To the best
of the Company's knowledge, the actions allege, in general, that the Company
and certain subsidiaries and/or affiliated partnerships violated the False
Claims Act, 31 U.S.C. (S)3729 et seq., for improper claims submitted to the
government for
27
Qui Tam Actions (Continued)
reimbursement. The lawsuits seek damages of three times the amount of all
Medicare or Medicaid claims (involving false claims) presented by the
defendants to the federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys'
fees and costs. The Company is aware of additional qui tam actions that remain
under seal and believes that there are other sealed qui tam cases of which it
is unaware.
On October 5, 1998, the matter of United States of America ex rel. James F.
Alderson v. Columbia/HCA Healthcare Corp., Healthtrust-The Hospital Company
and Quorum Health Group, et al., Case No. 97-2035-CIV-T-23E, in the Middle
District of Florida, Tampa Division, was unsealed. The Government intervened
in this action on October 1, 1998. The Complaint was originally filed in
Montana in 1993 but was later transferred to Florida. The Complaint alleges
that defendants made false statements in annual Medicare cost reports over a
period of ten years. The Complaint further alleges that defendants engaged in
a scheme of filing improper reimbursement claims while keeping a "secret" set
of books which were known as "reserve cost reports" and concealing these books
from Medicare auditors. The Government has not yet served the Complaint on
defendants.
The matter of United States of America ex rel. Sara Ortega v. Columbia/HCA
Healthcare Corp., et al., No. EP95-CA-259H, was filed on July 31, 1998 in the
Western District of Texas, El Paso Division. The Complaint alleges that
defendants submitted false statements to the Joint Commission on Accreditation
of Healthcare Organizations in order to be eligible for Medicare payments,
thereby rendering false the defendants' claims for Medicare reimbursement. The
Complaint also alleges that defendants engaged in fraudulent accounting
practices. Defendants have moved to dismiss the Complaint and that motion is
pending.
The matter of United States of America, ex rel. Scott Pogue v. Diabetes
Treatment Centers of America, Inc., et al., Civil Action No. 3-94-0515, was
filed under seal on June 23, 1994 in the United States District Court for the
Middle District of Tennessee. On February 6, 1995, the United States filed its
Notice of Non-Intervention and on that same date, the District Court ordered
the complaint unsealed. In general, the relator contends that sums paid to
physicians by the Diabetes Treatment Centers of America, who served as Medical
Directors at a hospital affiliated with the Company, were unlawful payments
for the referrals of their patients. Plaintiffs have filed a motion for
partial summary judgment which is pending.
A lawsuit captioned United States of America ex rel. James Thompson v.
Columbia/HCA Healthcare Corporation, et al., was filed on March 10, 1995 in
the United States District Court for the Southern District of Texas, Corpus
Christi Division (Civil Action No. C-95-110). In general, the relator claims
that the defendants (the Company and certain subsidiaries and affiliated
partnerships) engaged in a widespread strategy to pay physicians money for
referrals and engaged in other conduct to induce referrals, such as: (i)
offering physicians equity interests in hospitals; (ii) offering loans to
physicians; (iii) paying money under the guise of "consultation fees" to
physicians to guarantee their capital investment; (iv) paying consultation
fees, rent or other monies to physicians; (v) providing office space for free
or reduced rent; (vi) providing free or reduced rate vacations and trips;
(vii) providing free or reduced rate opportunities for additional medical
training; (viii) providing income guarantees; and (ix) granting physicians
exclusive rights to perform procedures in particular fields of practice. The
defendants filed a Motion to Dismiss the Second Amended Complaint in November
1995 which was granted by the Court in July 1996. In August 1996, the relator
appealed to the United States Court of Appeals for the Fifth Circuit, and in
October 1997, the Fifth Circuit affirmed in part and vacated and remanded in
part the Trial Court's rulings. Defendants filed a Second Amended Motion to
Dismiss which was denied on August 18, 1998. On August 21, 1998, relator filed
a Third Amended Complaint. Discovery has begun and defendants are in the
process of producing documents at this time.
On December 21, 1995, a matter entitled United States of America ex rel. Roy
Meidinger vs. Lee Memorial Health System, et al., Case No. 95-423-FTM-99D, was
filed in the United States District Court for the Middle District Court of
Florida, Fort Myers Division. This case was brought against approximately
2,500 health care
28
Qui Tam Actions (Continued)
providers and insurance companies, including Columbia Southwest Florida
Regional Medical Center, and generally concerns misrepresentation of customary
charges to HCFA. In December 1996, the United States declined to intervene. In
June 1997, the District Court entered an order directing relator to serve the
defendants. In late November and early December 1997, each of the six
defendants moved to dismiss the Complaint. In January 1998, relator filed his
opposition to the defendants' motion to dismiss. The Court has not yet ruled
on the defendants' motions.
The matter of United States of America ex rel. Sandra Russell; and Sandra
Russell, in her own right v. EPIC Healthcare Management Group, et al., No. H-
95-99151, was filed on January 18, 1995 in the United States District Court
for the Southern District of Texas, Houston Division. The complaint alleges
that the defendants submitted claims, records and/or statements for Medicare
reimbursement in connection with home health services which were false. The
defendants moved to dismiss in May 1997. The Court granted defendants' motion
but allowed the relator the right to replead. Relator filed an amended
complaint. Defendants filed a second motion to dismiss which was granted on
June 25, 1998. Relator has filed a Notice of Appeal which was dismissed by
Fifth Circuit for failure to order transcript.
The matter of Mary Ann Wisz, Individually, and ex rel. United States of
America v. C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic
Hospital and Medical Center, Inc., et al., Case No. 97-C-2646, was filed on
April 16, 1997, in the United States District Court for the Northern District
of Illinois, Eastern Division. An amended complaint was filed on February 17,
1998, and on May 15, 1998, plaintiff was permitted leave to file its Second
Amended Complaint. In addition to adding Midwestern University as a party
defendant, the Second Amended Complaint contained allegations that Olympia
Fields Osteopathic Hospital and Medical Center and/or the Chicago Osteopathic
Hospital changed dates on out-patient surgical procedures. That portion of the
Second Amended Complaint has been answered and discovery is ongoing. The
Second Amended Complaint also alleges that one or both hospitals directed
surgical nurses to misdesignate the severity of surgeries. That portion of the
Second Amended Complaint was subject to a partial motion to dismiss, which
motion was fully briefed and was granted.
The Company intends to pursue the defense of the qui tam actions vigorously.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
Since April 1997, numerous securities class action and derivative lawsuits
have been filed in the United States District Court for the Middle District of
Tennessee against the Company and a number of its current and former
directors, officers and/or employees.
On October 10, 1997, the Court entered an order consolidating all of the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the Court. The consolidated Morse lawsuit is a purported class
action seeking the certification of a class of persons or entities who
acquired the Company's common stock from April 9, 1994 to September 9, 1997.
The consolidated lawsuit was brought against the Company, Richard Scott, David
Vandewater, Thomas Frist, Jr., R. Clayton McWhorter, Carl E. Reichardt,
Magdalena Averhoff, M.D., T. Michael Long and Donald S. MacNaughton. The
lawsuit alleges, among other things, that the defendants committed violations
of the federal securities laws by materially inflating the Company's revenues
and earnings through a number of practices, including upcoding, maintaining
reserve cost reports, disseminating false and misleading statements, cost
shifting, illegal reimbursements, improper billing, unbundling and violating
various Medicare laws. The lawsuit seeks damages, costs and expenses.
Plaintiffs filed their Motion for Class Certification in February 1998, and
defendants filed responsive briefs. No ruling has been made on class
certification.
On October 10, 1997, the Court entered an order consolidating all of the
above-mentioned derivative law claims into a single-captioned case, McCall, H.
Carl, as Comptroller of the State of New York and as Trustee of
29
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts (Continued)
the New York State Common Retirement Fund, derivatively on behalf of
Columbia/HCA Healthcare Corporation v. Richard L. Scott, et al., No. 3-97-
0838. All of the other derivative lawsuits were administratively closed by the
Court. The consolidated McCall lawsuit was brought against the Company, Thomas
Frist, Jr., Richard L. Scott, David T. Vandewater, R. Clayton McWhorter,
Magdalena Averhoff, M.D., Frank S. Royal, M.D., T. Michael Long, William T.
Young and Donald S. MacNaughton. The lawsuit alleges, among other things,
derivative claims against the individual defendants that they intentionally or
negligently breached their fiduciary duties to the Company by authorizing,
permitting or failing to prevent the Company from engaging in various schemes
to improperly increase revenue, upcoding, improper cost reporting, improper
referrals, improper acquisition practices and overbilling. In addition, the
lawsuit asserts a derivative claim against some of the individual defendants
for breaching their fiduciary duties by allegedly engaging in improper insider
trading. The lawsuit seeks restitution, damages, recoupment of fines or
penalties paid by the Company, restitution and pre-judgment interest against
the alleged insider trading defendants, and costs and disbursements. In
addition, the lawsuit seeks orders: (i) prohibiting the Company from paying
individual defendants employment benefits; (ii) terminating all improper
business relationships with individual defendants; and (iii) requiring the
Company to implement effective corporate governance and internal control
mechanisms designed to monitor compliance with federal and state laws and
ensure reports to the Board of material violations.
The defendants filed motions to dismiss in both the Morse and McCall
lawsuits. These motions were referred to the Magistrate Judge for
consideration. In June 1998, the Magistrate Judge recommended that the Court
grant the motions to dismiss in both cases. Plaintiffs in both cases have
filed objections to the Magistrate's recommendations with the District Court,
and defendants have filed responsive pleadings.
Shareholder Derivative Actions Filed in State Courts
Several derivative actions have been filed in state court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and
failure to take reasonable steps to ensure that the Company did not engage in
illegal practices thereby exposing the Company to significant damages.
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22,
1997, and Kovalchick, John E. v. Magdelena Averhoff, et al., Civil Action No.
15829NC, filed on July 29, 1997, have been filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The actions were brought
on behalf of the Company by certain purported shareholders of the Company
against certain of the Company's current and former officers and directors.
The suits seek damages, attorneys' fees and costs. In the Barron lawsuit,
plaintiffs also seek an Order (i) requiring individual defendants to return to
the Company all salaries or remunerations paid them by the Company, together
with proceeds of the sale of Columbia stock made in breach of their fiduciary
duties; (ii) prohibiting the Company from paying any individual defendant any
benefits pursuant to the terms of employment, consulting or partnership
agreements; and (iii) terminating all improper business relationships between
the Company and any individual defendant. In the Kovalchick lawsuit,
plaintiffs also seek an Order (i) requiring individual defendants to return to
the Company all salaries or remunerations paid to them by the Company and all
proceeds from the sale of Columbia stock made in breach of their fiduciary
duties; (ii) requiring that an impartial Compliance Committee be appointed to
meet regularly; and (iii) requiring that the Company be prohibited from paying
any director/defendant any benefits pursuant to terms of employment,
consulting or partnership agreements. On August 14, 1997, a similar purported
derivative action entitled State Board of Administration of Florida, the
public pension fund of the State of Florida in behalf of itself and in behalf
of all other stockholders of Columbia/HCA Healthcare Corporation derivatively
in behalf of Columbia/HCA Healthcare Corporation vs. Magdalena Averhoff, et
al., (No. 97-2729), was filed in the Circuit Court in Davidson County,
Tennessee on behalf of the Company by certain purported shareholders of the
Company against certain of the Company's current and former directors and
officers. These lawsuits seek damages and costs as well as orders (i)
enjoining the Company from paying benefits to individual defendants; (ii)
requiring termination of all improper business
30
Shareholder Derivative Actions Filed in State Courts (Continued)
relationships with individual defendants; (iii) requiring the Company to
provide for "independent public directors"; and (iv) requiring the Company to
put in place proper mechanisms of corporate governance.
The matter of Louisiana State Employees Retirement System, a public pension
fund of the State of Louisiana, in behalf of itself and in behalf of all other
stockholders of Columbia/HCA Healthcare Corporation derivatively in behalf of
Columbia/HCA Healthcare Corporation v. Magdalena Averhoff, et al., another
derivative action, was filed on March 19, 1998 in the Circuit Court of the
Eleventh Judicial Circuit, Dade County, Florida, General Jurisdiction Division
(Case No. 98-6050 CA04) and the defendants removed it to the United States
District Court, Southern District of Florida (Case No. 98-814-CIV). The
Louisiana State Employees Retirement System is the public pension fund of the
State of Louisiana. The suit alleges, among other things, breach of fiduciary
duties resulting in damage to the Company. The lawsuit seeks damages from the
individual defendants to be paid to the Company and attorneys' fees, costs and
expenses. In addition, the lawsuit seeks orders (i) requiring the individual
defendants to pay to the Company all benefits received by them from the
Company; (ii) enjoining the Company from paying any benefits to individual
defendants; (iii) requiring that defendants terminate all improper business
relationships with the Company and any individual defendants; (iv) requiring
that the Company provide for appointment of a majority of "independent public
directors"; and (v) requiring that the Company put in place proper mechanisms
of corporate governance. On August 10, 1998, the Court transferred this case
to the Middle District of Tennessee. By agreement of the parties, the case has
been administratively closed pending the outcome of the Court's ruling on the
defendants' motions to dismiss the McCall action referred to above.
The Company intends to pursue the defense of these federal and state
Shareholder Derivative and Class Action Complaints vigorously.
Patient/Payer Actions and Other Class Actions
The Company from time to time has received several purported class action
lawsuits which have been filed by patients and/or payers against the Company
and/or certain of its current and/or former officers and/or directors
alleging, in general, improper and fraudulent billing, overcharging, coding
and physician referrals, as well as other violations of law. Certain of the
lawsuits have been conditionally certified as class actions.
The matter of Boyson, Cordula, on behalf of herself and all others similarly
situated v. Columbia/HCA Healthcare Corporation was filed on September 8, 1997
in the United States District Court for the Middle District of Tennessee,
Nashville Division (Civil Action No. 3-97-0936). The original complaint, which
sought certification of a national class comprised of all persons or entities
who have paid for medical services provided by the Company, alleges, among
other things, that the Company has engaged in a pattern and practice of
(i) inflating diagnosis and medical treatments of its patients to receive
larger payments from the purported class members; (ii) providing unnecessary
medical care; and (iii) billing for services never rendered. This lawsuit
seeks injunctive relief requiring the Company to perform an accounting to
identify and disgorge medical bill overcharges. It also seeks damages,
attorneys' fees, interest and costs. In an Order entered on June 11, 1998 by
the Judicial Panel on Multi-District Litigation (the "MDL Panel"), other
lawsuits against the Company were consolidated with the Boyson case in the
Middle District of Tennessee. The amended complaint in Boyson was withdrawn
and superseded by the Coordinated Class Action Complaint filed in the MDL
proceeding on September 21, 1998. (See In re: Columbia/HCA Healthcare
Corporation Billing Practices Litigation, below.)
The matter of Brown, Nancy, individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was filed on
November 16, 1995, in the Fifteenth Judicial Circuit Court in and for
Palm Beach County, Florida, Case No. 95-9102 AD. The suit alleges that Palms
West Hospital has charged excessive amounts for goods and services associated
with patient care and treatment including items such as pharmaceuticals,
medical supplies, laboratory tests, medical equipment and related medical
services such as x-rays. The suit seeks the certification of a nationwide
class, and damages for patients who have paid bills for
31
Patient/Payer Actions and Other Class Actions (Continued)
the allegedly unreasonable portion of the charges as well as interest,
attorneys' fees and costs. In response to defendants' amended motion to
dismiss filed in January 1996, plaintiff amended the Complaint and defendant
subsequently filed an answer and defenses in June 1996. To date, discovery is
proceeding and no class has been certified.
In October 1997, Colville, Douglas et al. v. Columbia/Palm Drive Hospital,
et al. was filed in the Sonoma County Superior Court, California, Case No.
217646. The suit seeks certification of a class comprised of uninsured
patients treated at the Company's hospitals and entities in California who
have been treated and charged different fees than any other patient. The suit
alleges, among other things, that the Company fraudulently overcharged the
plaintiffs and that it unlawfully charged uninsured patients at a higher rate
for the same services, compared to patients with insurance or Medicare. This
lawsuit seeks damages, attorneys' fees and costs, restitution and injunctive
relief. In March 1998, the Company filed a Demurrer Motion. The Demurrer was
granted in part and denied in part. Plaintiff filed an Amended Complaint and
the defendants filed a Second Demurrer Motion in June 1998. The Court granted
the Demurrer as to all causes of action. Plaintiff filed a Third Amended
Complaint and the Company's response was filed on or about November 2, 1998.
Jane Doe and her husband, John Doe, on their own behalf, and on behalf of
all other persons similarly situated v. HCA Health Services of Tennessee,
Inc., d/b/a HCA Donelson Hospital n/k/a Summit Medical Center is a class
action suit filed on August 17, 1992 in the First Circuit Court for Davidson
County, Tennessee, Case No. 92C-2041. The suit principally alleges that Summit
Medical Center's charges for hospital services and supplies for medical
services (a hysterectomy in the plaintiff's case) exceeded the reasonable
costs of its goods and services, that the overcharges constitute a breach of
contract and an unfair or deceptive trade practice as well as a breach of the
duty of good faith and fair dealing. This suit seeks damages, costs and
attorneys' fees. In addition, the suit seeks a declaratory judgment
recognizing plaintiffs' rights to be free from predatory billing and
collection practices and an Order (i) requiring defendants to notify plaintiff
class members of entry of declaratory judgment and (ii) enjoining defendants
from further efforts to collect charges from the plaintiffs. In 1997, this
case was certified as a class action consisting of all past, present and
future patients at Summit Medical Center. In July 1997, Summit filed a Motion
for Summary Judgment. In March 1998, the Court denied the Motion for Summary
Judgment and ordered the parties into mediation. In June 1998, the Court of
Appeals denied defendant's application for permission to appeal the trial
court's denial of the summary judgment motion. At this time, Summit has filed
an application for permission to appeal to the Supreme Court of Tennessee,
which has not been decided. In addition, the trial court withdrew the order
for mediation pending defendant's appeal of the summary judgment denial.
Ferguson, Charles, on behalf of himself and all other similarly situated v.
Columbia/HCA Healthcare Corporation, et al. was filed on September 16, 1997 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 18679.
This lawsuit seeks certification of a national class comprised of all those
who paid or were responsible for payment of any portion of a bill for medical
care or treatment provided by the Company and alleges, among other things,
that the Company engaged in billing fraud by excessively billing patients for
services rendered, billing patients for services not rendered or not medically
necessary, uniformly using improper codes to report patient diagnosis, and
improperly and illegally recruiting doctors to refer patients to the Company's
hospitals. The suit seeks damages, interest, attorneys' fees, costs and
expenses. In addition, the suit seeks an Order (i) requiring defendants to
provide an accounting of plaintiffs and class members who overpaid or were
obligated to overpay; and (ii) requiring defendants to disgorge all monies
illegally collected from plaintiffs and the class. Plaintiff filed a Motion
for Class Certification in September 1997 which has not been ruled on. In
December 1997, the Company filed a Motion for Summary Judgment which was
denied. In January 1998, plaintiff filed a Motion for Leave to File a Second
Amended Class Action Complaint to Add an Additional Class Representative which
was granted but the Court dismissed the claims asserted by the additional
plaintiff. In June 1998, plaintiff filed a Motion for Leave of Court to File a
Third Amended Class Action Complaint, and in October 1998 plaintiff filed a
Motion for Leave of Court to File a Fourth Amended Class Action Complaint.
Both proposed Amended Complaints seek to add new named plaintiffs to represent
the proposed class. Both seek
32
Patient/Payer Actions and Other Class Actions (Continued)
to add additional allegations of billing fraud, including improper billing for
laboratory tests, inducing doctors to perform unnecessary medical procedures,
improperly admitting patients from emergency rooms and maximizing patients'
lengths of stay as inpatients in order to increase charges, and improperly
inducing doctors to refer patients to the Company's home healthcare units or
psychiatric hospitals. Both seek an additional order that the Company's
contracts with plaintiffs and all class members are rescinded and that the
Company must repay all monies received from plaintiffs and the class members.
The Court has not ruled on either Motion for Leave to Amend. Discovery is
underway in the case. The Company in September 1998 filed another Motion for
Summary Judgment contesting the standing of the named plaintiffs to bring the
alleged claims. That motion has not been ruled on by the Court.
The matter of The United Paper Workers International Union, et al. v.
Columbia/HCA Healthcare Corporation, et al., was filed on September 3, 1998 in
the Circuit Court for Washington County, Tennessee, Civil Action No. 19350.
The lawsuit contains billing fraud allegations similar to those in the
Ferguson case and seeks certification of a national class comprised of all
self-insured employers who paid or were obligated to pay any portion of a bill
for, among other things, pharmaceuticals, medical supplies or medical
services. The suit seeks declaratory relief, damages, interest, attorneys'
fees and other litigation costs. In addition, the suit seeks an Order (i)
requiring defendants to provide an accounting to plaintiffs and class members
who overpaid or were obligated to overpay, (ii) requiring defendants to
disgorge all monies illegally collected from plaintiffs and the class, and
(iii) rescinding all contracts of defendants with plaintiffs and all class
members. The complaint has not been served formally on the Company.
The matter of Douglas, Cheryl, individually, and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation, et al. is a
purported class action filed on March 5, 1998 in the Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 98 CH 2942.
The suit generally alleges that defendants were involved in fraudulent and
deceptive acts including wrongful billing, unnecessary treatment and wrongful
diagnosis of patients with illnesses that necessitate higher medical fees for
financial gain. The suit seeks damages, costs and expenses. All of the
individual defendants have been voluntarily dismissed by plaintiff. On
September 18, 1998, the Company's motion to dismiss was granted and
plaintiff's complaint was dismissed without prejudice. Plaintiff has until on
or about November 6, 1998 to file an amended complaint, and the Company has
until on or about December 11, 1998 to respond to the amended complaint, if
one is filed.
The matter of Hoop, Kemp, et al. v. Columbia/HCA Health Corporation, et al.
was filed on August 18, 1997 in the District Court of Johnson County, Texas,
Civil Action No. 249-171-97. This suit seeks certification of a Texas class
comprised of persons who paid for any portion of an improper or fraudulent
bill for medical services rendered by any Texas facility owned or operated by
the Company. The suit seeks damages, attorneys' fees, costs and expenses, as
well as restitution to plaintiffs and the class in the amount by which
defendants have been unjustly enriched and equitable and injunctive relief.
The lawsuit principally alleges that the Company perpetrated a fraudulent
scheme that consisted of systematic and routine overbilling through false and
inaccurate bills, including padding, billing for services never provided, and
exaggerating the seriousness of patients' illnesses. The lawsuit also alleges
that the Company systematically entered into illegal kickback schemes with
doctors for patient referrals. The Company filed its answer in November 1997.
The matter of Jackson, Harald F., individually and on behalf of all others
similarly situated v. Columbia/HCA Healthcare Corporation was initially filed
as a motion to intervene in the Brown matter in October 1997 in the Fifteenth
Judicial Circuit Court in and for Palm Beach County, Florida. The Court denied
Jackson's motion on December 19, 1997, and Jackson subsequently filed a
Complaint in the same state court on December 23, 1997, Case No. 97-011419-AI.
This suit seeks certification of a national class of patients or persons who
were allegedly overcharged for medical services by the Company through an
alleged practice of systematically and unlawfully inflating prices, concealing
its practice of inflating prices, and engaging in, and concealing, a uniform
practice of inflating overbilling. This suit seeks damages on behalf of the
plaintiff and
33
Patient/Payer Actions and Other Class Actions (Continued)
individual members of the class as well as interest, attorneys' fees and
costs. In January 1998, the case was removed to the United States District
Court, Southern District of Florida, Case No. 98-CIV-8050; however, the Court
subsequently issued an order to remand the action to state court. To date,
initial discovery has commenced, and Defendant has filed a motion to dismiss
which is pending in the state court.
The matter of Johnson, Bruce A., et al. v. Plantation General Hospital,
Limited Partnership was filed on March 9, 1992 in the Circuit Court for the
Seventeenth Judicial Circuit, State of Florida, Broward County, Case No. 92-
06823 Division 2. In general, the suit alleges that the hospital charged
excessive amounts for pharmaceuticals, medical supplies and laboratory tests.
The suit sought certification of a class. Count I sought a price reduction on
all outstanding bills in the amount of the allegedly excessive portion of the
charges. Counts II and III sought damages for patients who have paid bills
containing allegedly excessive amounts for the alleged unreasonable portion of
the charges. Plaintiffs' Complaint claimed fees from any recovery or benefit
in the action. On September 18, 1995, the trial court certified a class and
the Fourth District Court of Appeals affirmed. In October 1996, the hospital
filed a Motion for Summary Judgment on Counts II and III on the basis of the
voluntary payment defense. The Court granted the motion in November 1997. In
April 1998, following the hospital's statement that it would deem the six to
eleven year old outstanding debt of class members to be fully satisfied,
summary judgment was granted to the class on Count I on the ground of
mootness. No monetary judgment was recovered. In September 1998, the Court
entered an order denying plaintiffs' motion for attorneys' fees and granting
their motion for costs. Both parties have appealed. There have been no appeals
of the final judgments.
The matter of Operating Engineers Local No. 312 Health & Welfare Fund, on
behalf of itself and as representative of a class of those similarly situated
v. Columbia/HCA Healthcare Corporation was filed on August 6, 1997 in the
United States District Court for the Eastern District of Texas, Civil Action
No. 597CV203. The original complaint alleged violations of the Racketeering
Influenced and Corrupt Organization Act ("RICO") based on allegations that the
defendant has employed one or more schemes or artifices to defraud the
plaintiff and purported class members through fraudulent billing for services
not performed, fraudulent overcharging in excess of correct rates and
fraudulent concealment and misrepresentation. In October 1997, the Company
filed a motion to transfer venue and to dismiss the lawsuit on jurisdiction
and venue grounds because the RICO claims are deficient. The motion to
transfer was denied on January 23, 1998. The motion to dismiss was also
denied. In February 1998, defendant filed a petition with the MDL Panel to
consolidate this case with Boyson for pretrial proceedings in the Middle
District of Tennessee. During the pendency of the motion to consolidate,
plaintiff amended its Complaint to add allegations under the Employee
Retirement Income Security Act of 1974 ("ERISA") as well as state law claims.
The amended complaint seeks damages, attorneys' fees and costs, as well as
disgorgement and injunctive relief. The MDL Panel granted defendant's motion
to consolidate on June 11, 1998, and this action was transferred to the Middle
District of Tennessee. The amended complaint in Operating Engineers was
withdrawn and superseded by the Coordinated Class Action Complaint filed in
the MDL proceeding on September 21, 1998.
On April 24, 1998, two matters, Board of Trustees of the Carpenters &
Millwrights of Houston & Vicinity Welfare Trust Fund v. Columbia/HCA
Healthcare Corporation, Case No. 598CV157, and Board of Trustees of the Texas
Ironworkers' Health Benefit Plan v. Columbia/HCA Healthcare Corporation, Case
No. 598CV158, were filed in the United States District Court for the Eastern
District of Texas. The original Complaint in these suits alleged violations of
RICO only. Plaintiffs in both cases principally alleged that in order to
inflate its revenues and profits, defendant engaged in fraudulent billing for
services not performed, fraudulent overcharging in excess of correct rates and
fraudulent concealment and misrepresentation. These suits seek damages,
attorneys' fees and costs, as well as disgorgement and injunctive relief.
Plaintiffs subsequently amended their complaint to add allegations under ERISA
as well as state law claims. These suits have been consolidated by the MDL
Panel with Boyson and transferred to the Middle District of Tennessee for
pretrial proceedings. The amended complaints in these suits were withdrawn and
superseded by the Coordinated Class Action Complaint filed in the MDL
proceeding on September 21, 1998.
34
Patient/Payer Actions and Other Class Actions (Continued)
The matter of Tennessee Laborers Health and Welfare Fund, on behalf of
itself and all others similarly situated vs. Columbia/HCA Healthcare
Corporation, Case No. 3-98-0437, was filed in the United States District Court
of the Middle District of Tennessee, Nashville Division, on May 14, 1998. The
lawsuit seeks certification of a national class comprised of all employee
welfare benefit plans that have paid for medical services provided by the
Company. This case involves allegations under ERISA, as well as state law
claims which are similar to those alleged in Boyson. Plaintiff, an Employee
Welfare Benefit Plan, alleges that defendant violated the terms of the Plan
documents by overbilling the Plans, including but not limited to, exaggerating
the severity of illnesses, providing unnecessary treatment, billing for
services not rendered and other methods of overbilling and further violated
the terms of the Plan documents by taking Plan assets in payment of such
improper bills. Plaintiff further alleges that defendant intentionally
concealed or suppressed the true nature of its patients' illnesses, and the
actual treatment provided to those patients, and its improper billing. The
suit seeks injunctive relief in the form of an accounting, damages, attorneys'
fees, interest and costs. This suit has been consolidated by the Court with
Boyson and the other cases transferred by the MDL Panel to the Middle District
of Tennessee. The complaint in Tennessee Laborers was withdrawn and superseded
with the filing of the Coordinated Class Action Complaint in the MDL
proceeding on September 21, 1998.
The matter of In re: Columbia/HCA Healthcare Corporation Billing Practices
Litigation, Master File No. MDL 1227, was commenced by Order of the MDL Panel
entered on June 11, 1998 granting the Company's petition to consolidate the
Boyson and Operating Engineers cases for pretrial purposes in the Middle
District of Tennessee pursuant to 28 U.S.C. (S)1407. Three other cases that
have been consolidated with Boyson and Operating Engineers in the MDL
proceeding are (i) Board of Trustees of the Carpenters & Millwrights of
Houston & Vicinity Welfare Trust Fund, (ii) Board of Trustees of the Texas
Ironworkers' Health Benefit Plan, and (iii) Tennessee Laborers Health and
Welfare Fund. On September 21, 1998, the plaintiffs in five consolidated cases
filed a Coordinated Class Action Complaint, which the Company answered on
October 13, 1998. The plaintiffs seek certification of two proposed classes
including all private individuals and all employee welfare benefit plans that
have paid for health-related goods or services provided by the Company. The
plaintiffs allege, among other things, that the Company has engaged in a
pattern and practice of inflating charges, concealing the true nature of
patients' illnesses, providing unnecessary medical care, and billing for
services never rendered. The plaintiffs seek damages, attorneys' fees and
costs, as well as disgorgement and injunctive relief. A scheduling order has
been entered that provides for class certification motions to be filed by
February 22, 1999 and for discovery to be completed by June 30, 1999.
The Company intends to pursue the defense of these class actions vigorously.
While it is premature to predict the outcome of the qui tam, shareholder
derivative and class action lawsuits, the amounts claimed may be substantial.
It is possible that an adverse resolution, individually or in the aggregate,
could have a material adverse impact on the Company's liquidity, financial
position and results of operations. See Notes 2 and 10 of the Notes to
Consolidated Condensed Financial Statements.
The Company believes the ongoing investigations, qui tam, shareholder cases,
class action cases and related media coverage are having a negative effect on
the Company's financial position and results of operations. However, the
Company is unable to measure the effect or predict the magnitude that these
matters and the related media coverage could have on the Company's future
results of operations and financial position.
General Liability Claims
The matter of Landgraff, Anne M. and Gina Magarian, on behalf of the
Columbia/HCA Stock Bonus Plan v. Columbia/HCA Healthcare Corporation of
America, et al. was originally filed on November 7, 1997 in the United States
District Court for the Northern District of Georgia, Atlanta Division, Civil
Action No. 97-CV-3381
35
General Liability Claims (Continued)
and transferred by agreement of the parties to the United States District
Court for the Middle District of Tennessee, Civil Action No. 3-98-0090. The
plaintiffs filed a second amended complaint on April 24, 1998 against the
Company and certain members of the Retirement Committee during 1997 alleging
breach of fiduciary duty owing to the participants in the Stock Bonus Plan by
failing to sell the Plan's holdings of Company stock based upon knowledge of
material public and non-public adverse information and by failing to act
solely in the interests and for the benefit of the participants. The suit
generally alleges that the defendants fraudulently concealed information from
the public and fraudulently inflated the Company's stock price through billing
fraud, overcharges, inaccurate Medicare cost reports and illegal kickbacks for
physician referrals. The suit seeks an order allowing the plaintiffs to
proceed on behalf of the Plan as in a derivative action, a judgment for
compensatory and restitutionary damages for the losses allegedly experienced
by the Plan because of breaches of fiduciary duty, an order transferring
management of the Plan to a competent, neutral third-party, and an award of
pre-judgment interest, reasonable attorneys' fees and costs. A scheduling
order has been entered, discovery is underway and a trial date of June 8, 1999
has been set.
A class action styled Mary Forsyth, et al. v. Humana, Inc., et al., Case No.
CV-S-89-249-DWH, was filed on March 29, 1989, in the United States District
Court for the District of Nevada. Plaintiffs are two classes of individuals
who paid for, or received coverage under, group insurance policies sold in the
State of Nevada by Humana Insurance. They allege violations of antitrust laws,
ERISA and RICO which arise from the sale of the policies and from incentives
provided under the policies for insureds to use Humana Sunrise Hospital in Las
Vegas, a facility now owned by the Company. The suit seeks attorneys' fees and
costs, as well as injunctive relief and insurance benefits for plaintiffs. In
1993, the United States District Court granted summary judgment dismissing
most of plaintiffs' claims but granted plaintiffs judgment on one claim that
is assessed as having a maximum exposure of under $4 million, plus attorneys'
fees. Plaintiffs appealed to the United States Court of Appeals for the Ninth
Circuit which, in May 1997, affirmed the judgment on the ERISA claims;
reversed as to the antitrust claims; and reversed in part as to the RICO
claims, but affirmed the District Court's grant of summary judgment limiting
RICO damages to three times the ERISA damages, with exposure assessed at under
$12 million. In their current complaint, plaintiffs claim approximately $133
million in antitrust damages that is subject to statutory trebling. However,
in their most recent expert report, plaintiffs' expert claims antitrust
damages of approximately $13-$21 million. Humana, Inc. ("Humana") has
petitioned the Supreme Court for a Writ of Certiorari on the RICO claims which
was granted. The antitrust claims have been remanded to the United States
District Court in Nevada. The District Court has indicated that it is unlikely
to set a trial date until the United States Supreme Court rules on the merits
of the claims presented in the Petition for Writ of Certiorari. Humana filed a
Motion for Summary Judgment on all remaining antitrust claims raising issues
that were not reached by the District Court. On September 21, 1998 an order
was entered by the District Court granting defendants' motion for summary
judgment on the issue of attempted antitrust monopolization, but denying all
other arguments for dismissal of plaintiffs' antitrust claims. Accordingly,
the remaining antitrust issues will be decided at a trial on this matter.
On December 4, 1997, a lawsuit captioned Florida Software Systems, Inc., a
Florida corporation v. Columbia/HCA Healthcare Corporation, a Delaware
corporation was filed in the United States District Court for the Middle
District of Florida (Civil Action No. 97-2866-C.V.-T-17b). The lawsuit alleges
that the defendant breached an agreement under which Florida Software Systems,
Inc. was allegedly granted the exclusive right to provide medical claims
management for certain claims made by the Company for payment to any third
party payers in connection with the rendition of medical care or services. The
lawsuit alleges claims for fraud, breach of implied contract and breach of
contract. The lawsuit seeks damages, attorneys' fees and costs, as well as
injunctive relief. On October 15, 1998, the Company filed a counterclaim and
third party complaint against Florida Software Systems, Inc., Receivable
Dynamics, Inc., Nevada Communications Corporation, Norman R. Dobiesz, Maureen
Donovan Dobiesz, Stuart M. Lopata, and Samuel A. Greco (a former senior
officer at the Company). The counterclaim alleges racketeering, conspiracy,
breach of fiduciary duty, and breach of contract.
The Company intends to pursue the defense of these actions vigorously.
36
General Liability Claims (Continued)
The Company is also subject to claims and suits arising in the ordinary
course of business, including claims for personal injuries or for wrongful
restriction of, or interference with, physicians' staff privileges. In certain
of these actions the claimants have asked for punitive damages against the
Company, which are usually not covered by insurance. In the opinion of
management, the ultimate resolution of these pending claims and legal
proceedings will not have a material adverse effect on the Company's results
of operations or financial position.
The above information updates the Legal Proceedings section of the Company's
annual report on Form 10-K for the year ended December 31, 1997 and the
Company's Quarterly Report on Form 10-Q for the period ending June 30, 1998.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 12--Statement re Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27--Financial Data Schedule *
* Included only in filings under the Electronic Data, Gathering, Analysis and
Retrieval system.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1998:
On July 30, 1998, the Company filed a report on Form 8-K which included
its second quarter 1998 earnings release and announced the $1.0 billion
share repurchase program.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBIA/HCA HEALTHCARE CORPORATION
Date: November 12, 1998 /s/ Kenneth C. Donahey
-----------------------------------
Kenneth C. Donahey
Senior Vice President
/s/ R. Milton Johnson
-----------------------------------
R. Milton Johnson
Vice President and Controller
38