EXHIBIT 99.2
FORWARD-LOOKING STATEMENTS
PROPOSED MERGER WITH LIFEPOINT HOSPITALS, INC.
Our disclosure and analysis in the following discussion contain some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. Our proposed merger with LifePoint Hospitals, Inc., projected to
close by April 15, 2005, will affect a number of the forward-looking statements
made herein. Although we believe our management team and management of LifePoint
Hospitals share many of the same goals and operating strategies, some of the
forward-looking statements contained herein may become inapplicable once the
operations of the two companies are combined upon completion of the merger. The
following discussions apply only to Province Healthcare and do not give effect
to the proposed merger, the operations of LifePoint, or the combined operations
of our company and LifePoint following the merger.
Any or all of our forward-looking statements contained herein may turn out
to be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in this
discussion will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially. Factors that may cause our plans, expectations, future financial
condition and results to change include, but are not limited to:
- the highly competitive nature of the healthcare business;
- the efforts of insurers, healthcare providers and others to contain
healthcare costs;
- the financial condition of managed care organizations that pay us
for healthcare services;
- possible changes in the levels and terms of reimbursement for our
charges by government programs, including Medicare and Medicaid or
other third-party payors;
- changes in or failure to comply with federal, state or local laws
and regulations affecting the healthcare industry;
- the possible enactment of federal or state healthcare reform;
- the departure of key members of our management;
- claims and legal actions relating to professional liability;
- our ability to implement successfully our acquisition and
development strategy;
- our ability to recruit and retain qualified personnel and
physicians;
- potential federal or state investigations;
- fluctuations in the market value of our common stock or notes;
- changes in accounting principles generally accepted in the United
States or in our critical accounting policies;
- changes in demographic, general economic and business conditions,
both nationally and in the regions in which we operate;
- changes in the availability, cost and terms of insurance coverage
for our hospitals and physicians who practice at our hospitals; and
- other risks described herein.
Except as required by law, we undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any additional
disclosures we make in our Form 10-K, 10-Q and 8-K reports to the Securities and
Exchange Commission, as well as the discussion of risks and uncertainties to be
described in our Annual Report on Form 10-K for the year ended December 31,
2004. These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed here also
could affect us adversely. You are cautioned not to place undue reliance on such
forward-looking statements when evaluating the information presented in this
report. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
EXECUTIVE OVERVIEW
We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban communities throughout the United States. As
of December 31, 2004, we owned or leased 21 general acute care hospitals in 13
states with a total of 2,533 licensed beds.
On April 30, 2004, we completed the sale of Glades General Hospital in
Belle Glade, Florida to a wholly-owned subsidiary of the Health Care District of
Palm Beach County. The District reacquired the operating assets of the hospital
for a purchase price of approximately $1.5 million in cash at closing, net of
assumed and contractual obligations. Under the purchase agreement, we retained
the hospital's accounts receivable, income tax receivable and deferred income
taxes. We also retained certain payroll-related liabilities and other accrued
expenses. On June 30, 2004, we completed the sale of the stock of Brim
Healthcare, Inc., our hospital management subsidiary, to Brim Holding Company,
Inc., an independent investor-owned entity for approximately $13.2 million in
cash. As required by Statement of Financial Accounting Standards No. 144 ("SFAS
No. 144"), Accounting for the Impairment or Disposal of Long-Lived Assets, the
operations and non-cash impairment of assets charge related to Glades General
Hospital and Brim Healthcare, Inc. are reported as "discontinued operations" and
the consolidated financial statements, statistics and all references to such
information contained in this discussion have been adjusted to reflect this
presentation for all periods. Our remaining 21 hospitals continue to be reported
as "continuing operations."
Effective June 1, 2004, we completed the acquisition, through a long-term
lease, of the 286-bed Memorial Medical Center in Las Cruces, New Mexico
("Memorial Medical Center") for approximately $152.2 million, including direct
and incremental costs of the acquisition.
On August 16, 2004, our company and LifePoint Hospitals, Inc.
("LifePoint") announced that we had entered into a definitive merger agreement
(the "Merger Agreement") pursuant to which LifePoint will acquire us. Pursuant
to the terms of the Merger Agreement, our company and LifePoint will each become
wholly-owned subsidiaries of a newly formed holding company that will be
publicly traded. Each of our shareholders will receive a per share consideration
comprised of $11.375 of cash and a number of shares of common stock of the new
company equal to an exchange ratio of between 0.3447 and 0.2917, which shares
will have a value of $11.375 to the extent that LifePoint's average share price
is between $33.00 and $39.00. The exchange ratio will be 0.3447 if the volume
weighted average daily share price of a share of LifePoint's common stock for
the twenty consecutive trading day period ending at close of business on the
third trading day prior to the closing (the "LifePoint average share price") is
$33.00 or less, and 0.2917 if LifePoint's average share price is $39.00 or more.
If LifePoint's average share price is between $33.00 and $39.00, then the
exchange ratio will be equal to $11.375 divided by the LifePoint average share
price.
The proposed merger is subject to approval by the stockholders of our
company and LifePoint. The proposed merger is projected to close by April 15,
2005, subject to the satisfaction of customary closing conditions.
During the fourth quarter of 2004, we completed the construction of the
41-bed Coastal Carolina Medical Center in Hardeeville, South Carolina and opened
the hospital on November 29, 2004.
Revenues from continuing operations for the year ended December 31, 2004
increased 18.3% to $882.9 million, compared with $746.2 million for the year
ended December 31, 2003, primarily as a result of the acquisition of Memorial
Medical Center and increases in same-store net patient revenue per adjusted
admission of 6.2% and outpatient revenue of 11.2%, as well as the recording of
cost report settlements. For the year ended December 31, 2004, income from
continuing operations was $50.1 million compared with $41.7 million for the year
ended December 31, 2003. The increase in income from continuing operations was
primarily due to the acquisition of Memorial Medical Center and improved
operations at our same store hospitals. Cash flow from operations for the year
ended December 31, 2004 increased 21.0% to $126.3 million, compared with $104.3
million for the year ended December 31, 2003. The increase was due primarily to
an increase of $8.3 million in our income from continuing operations, a $9.3
million increase in depreciation and amortization expense (of which $5.0 million
is attributable to the Memorial Medical Center acquisition), and an increase of
$15.2 million in our deferred income tax provision resulting from the Memorial
Medical Center acquisition and divestitures of Glades General Hospital and Brim
Healthcare, Inc. The increase in cash flow from operations is partially offset
by an increase in net accounts receivable of continuing operations of $12.6
million. The increase in net accounts receivable principally relates to a $6.2
million loan to a third party for the construction of a medical office building
on one of our facility's campuses and approximately $5.9 million from the lessor
of Memorial Medical Center for their obligations required under the facility
lease agreement.
For the year ended December 31, 2004, 19 of our 21 owned or leased
hospitals are considered same-store hospitals. Memorial Medical Center and
Coastal Carolina Medical Center are excluded from same-store results. On a
same-store basis, net patient revenue for the year ended December 31, 2004
increased 5.9%, net patient revenue per adjusted admission increased 6.2% and
surgeries increased 3.1% as compared to the year ended December 31, 2003. We
continue to see the results of the successful recruitment of primary care
physicians and specialists in 2003 and 2004, strong outpatient growth and an
increase in acuity. Same-store outpatient revenue for the year ended December
31, 2004 increased 11.2% and same-store acuity increased 2.2%.
In the fourth quarter of 2003, we announced plans to construct a new
60-bed acute care hospital in Ft. Mohave, Arizona, near our existing hospital in
Needles, California. Construction of the Ft. Mohave facility is anticipated to
be completed in the third quarter of 2005. In the first quarter of 2005, we
announced plans to construct a 52-bed replacement facility for our existing
72-bed facility in Eunice, Louisiana. Construction of the Eunice replacement
facility is anticipated to be completed in the second quarter of 2006.
REVENUES
The table below reflects the approximate percentages of net patient
revenue received from Medicare, Medicaid, managed care and other payors and
self-pay for the periods presented:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
------ ------ ----
Medicare 37.7% 38.5% 45.4%
Medicaid 10.1 10.3 11.3
Managed care and other payors 41.2 44.2 38.2
Self-pay 11.0 7.0 5.1
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Net patient revenue is reported net of contractual adjustments and policy
discounts. Net patient revenue includes amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. In addition, we are
reimbursed by non-governmental payors using a variety of payment methodologies.
Amounts we receive from treatment of patients covered by these programs are
generally less than the standard billing rates. We account for the differences
between the estimated program reimbursement rates and the standard billing rates
as contractual adjustments, which we deduct from gross revenues to arrive at net
patient revenue. Final settlements under some of these programs are subject to
adjustment based on administrative review and audit by third parties. We account
for adjustments to previous reimbursement estimates as contractual adjustments
and report them in the periods that such adjustments become known. Cost report
settlements and the filing of cost reports increased net patient revenue by $9.9
million, of which $2.9 million related to facilities that had not previously
qualified for disproportionate share payments in prior years,
and $5.5 million for the years ended December 31, 2004 and 2003, respectively,
and decreased net patient revenue by $0.9 million for the year ended December
31, 2002.
The payment rates under the Medicare program for inpatients are based on a
prospective payment system, depending upon the diagnosis of a patient's
condition. While these rates are indexed for inflation annually, the increases
have historically been less than actual inflation. Reductions in the rate of
increase in Medicare reimbursement may have an adverse impact on our net patient
revenue growth. Effective April 1, 2002, the Centers for Medicare and Medicaid
Services implemented changes to the Medicare outpatient prospective system.
Although these changes have resulted in reductions to Medicare outpatient
payments, these reductions, as well as changes to the Medicare system caused by
the Benefit Improvement and Protection Act of 2000, should not materially affect
our net patient revenue growth. While the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("MMA") provides a broad range of
provider payment benefits, federal government spending in excess of federal
budgetary provisions contained in passage of MMA could result in future deficit
spending for the Medicare system, which could cause future payments under the
Medicare system to grow at a slower rate or decline.
We continually monitor the cost/benefit relationship of services provided
at our hospitals, and make decisions about adding new services or discontinuing
existing services.
Revenue/Volume Trends
The key metrics we use to internally evaluate our revenues are adjusted
admissions, which we equate to volume, and revenues per adjusted admission,
which we relate to pricing and acuity. We anticipate our patient volumes and
related revenues will continue to be impacted by the following factors:
- - Physician Recruitment and Retention. Recruiting and retaining both primary
care physicians and specialists for our non-urban communities is a key to
increasing revenues and patient volumes. Adding specialists and new
services typically results in an increase in volumes at a hospital. We
recruited 148 physicians during the year ended December 31, 2004, of which
approximately two-thirds of these physicians are specialists.
- - Medicare Rate Increases. MMA provides a prescription drug benefit for
Medicare beneficiaries and also contains numerous provisions that provide
incremental funding to hospitals. Hospitals qualify for Medicare
disproportionate share hospital ("DSH") payments when their percentage of
low-income patients exceeds 15%. A majority of our hospitals qualify to
receive DSH payments. Effective April 1, 2004, MMA raised the cap on the
DSH payment adjustment percentage from 5.25% to 12.0% for rural and small
urban hospitals and specified that payments to all hospitals are based on
the same conversion factor, regardless of geographic location. A majority
of our hospitals are benefiting from these provisions.
- - Growth in Outpatient Services. Many procedures once performed only on an
inpatient basis are now performed as outpatient procedures. This shift is
the result of continuing advances in medical and pharmaceutical
technologies, and of efforts by payors to control costs. Reimbursement for
inpatient services is typically higher than that for the same procedures
performed on an outpatient basis. We anticipate that the long-term growth
trend toward outpatient services will continue. The following table
reflects gross outpatient, inpatient and other revenues as a percentage of
our total gross revenues:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
------ ------ -----
Outpatient 46.0% 44.5% 42.6%
Inpatient 53.4 54.9 56.8
Other 0.6 0.6 0.6
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Other Trends
Increase in Provision for Doubtful Accounts. Like many of the other companies in
our industry, we are experiencing an increase in our provision for doubtful
accounts relating to "self-pay" accounts receivable. "Self-pay" revenue refers
to payment for healthcare services received directly from individual patients,
either in the form of a deductible
or co-payment under a health insurance plan or as full or partial payment of the
amount charged by the provider or not covered by insurance. The current soft
economic environment, higher unemployment rates and increasing numbers of
uninsured patients, combined with higher co-payments and deductibles, are
placing a greater portion of the financial responsibility for healthcare
services on the patient rather than insurers. Additionally, many of these
patients are being admitted through the emergency room department and often
require more costly care, resulting in higher billings. Many of these accounts
remain uncollected for extended periods of time, requiring providers to increase
the amounts reserved as "doubtful accounts" and ultimately written off as
uncollectible.
We experienced an increase in our provision for doubtful accounts during
each of the years in the three-year period ending December 31, 2004. Although
the economies of a majority of the communities in which we operate hospitals
have stabilized, some of our hospitals are experiencing a reduction in state
Medicaid coverage, primarily in Texas. In addition, we realized an increase in
our provision for doubtful accounts during the year ended December 31, 2004 as a
result of our acquisition of Memorial Medical Center. Our provision for doubtful
accounts relates primarily to self-pay revenues. Self-pay revenues as a
percentage of total net patient revenue were 11.0%, 7.0% and 5.1% for the years
ended December 31, 2004, 2003 and 2002, respectively.
Our gross revenues are reduced for patient accounts identified as charity
and indigent care. Our hospitals write-off a patient's account upon the
determination that the patient qualifies, or when it is not paid and deemed
uncollectible, under a hospital's charity and indigent care policy. Charity care
(based on gross charges) was approximately $17.5 million, $23.5 million and
$19.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Charity care and provision for doubtful accounts was approximately
$112.5 million, $96.1 million and $72.5 million for the years ended December 31,
2004, 2003 and 2002, respectively.
RESULTS OF OPERATIONS
The following tables present, for the periods indicated, the results of
operations of our company and its subsidiaries. Such information has been
derived from our unaudited consolidated statements of income for the year ended
December 31, 2004 and our audited consolidated statements of income for the
years ended December 31, 2003 and 2002. The results of operations for the
periods presented include hospitals from their respective dates of acquisition.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003
--------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------
% OF % OF % CHANGE
AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR
-------- -------- -------- -------- ---------------
Revenues:
Net patient revenue $872,275 $735,841
Other 10,631 10,367
-------- --------
882,906 100.0% 746,208 100.0% 18.3%
Expenses:
Salaries, wages and benefits 323,565 36.6 282,794 37.9
Purchased services 85,698 9.7 68,872 9.2
Supplies 114,186 12.9 95,579 12.8
Provision for doubtful accounts 95,015 10.8 72,583 9.7
Other operating expenses 96,934 11.0 88,137 11.8
Rentals and leases 11,250 1.3 9,007 1.2
Transaction costs 851 0.1 -- --
Depreciation and amortization 46,881 5.3 37,617 5.1
Interest expense 29,652 3.3 26,262 3.5
Minority interests 687 0.1 260 --
Loss on sale of assets 30 -- 75 --
Loss on early extinguishment of debt -- -- 486 0.1
-------- ----- -------- -----
Total expenses 804,749 91.1 681,672 91.3 18.1%
Income from continuing operations before provision for
income taxes 78,157 8.9 64,536 8.7 21.1%
Income taxes 28,101 3.2 22,816 3.1
-------- ----- -------- -----
Income from continuing operations 50,056 5.7 41,720 5.6 20.0%
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003
------------------------- ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
% OF % OF % CHANGE
AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR
----------- -------- ----------- -------- ---------------
Discontinued operations, net of tax:
Loss from operations (2,220) (1,149)
Net gain (loss) on divestitures 6,663 (8,952)
----------- -----------
Net income $ 54,499 $ 31,619 72.4%
=========== ===========
Diluted earnings per common share:
Continuing operations $ 0.96 $ 0.84
Discontinued operations, net of tax:
Loss from operations (0.03) (0.02)
Net gain (loss) on divestitures 0.11 (0.15)
----------- -----------
Net income $ 1.04 $ 0.67
=========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002
------------------------- ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
% OF % OF % CHANGE
AMOUNT REVENUES AMOUNT REVENUES FROM PRIOR YEAR
------------ --------- ------------ -------- ---------------
Revenues:
Net patient revenue $ 735,841 $ 649,954
Other 10,367 8,308
------------ ------------
746,208 100.0% 658,262 100.0% 13.4%
Expenses:
Salaries, wages and benefits 282,794 37.9 261,499 39.7
Purchased services 68,872 9.2 69,934 10.6
Supplies 95,579 12.8 84,408 12.8
Provision for doubtful accounts 72,583 9.7 53,201 8.1
Other operating expenses 88,137 11.8 69,447 10.6
Rentals and leases 9,007 1.2 8,284 1.3
Depreciation and amortization 37,617 5.1 32,169 4.9
Interest expense 26,262 3.5 21,285 3.2
Minority interests 260 -- 34 --
Loss (gain) on sale of assets 75 -- (77) --
Loss on early extinguishment of debt 486 0.1 -- --
------------ ------ ------------ ------
Total expenses 681,672 91.3 600,184 91.2 13.6%
Income from continuing operations before
provision for income taxes 64,536 8.7 58,078 8.8 11.1%
Income taxes 22,816 3.1 23,240 3.5
------------ ------ ------------ ------
Income from continuing operations 41,720 5.6 34,838 5.3 19.8%
Discontinued operations, net of tax:
(Loss) earnings from operations (1,149) 1,274
Net loss on divestitures (8,952) --
------------ ------------
Net income $ 31,619 $ 36,112 (12.4)%
============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.84 $ 0.70
Discontinued operations, net of tax:
(Loss) earnings from operations (0.02) 0.03
Net loss on divestitures (0.15) --
------------ ------------
Net income $ 0.67 $ 0.73
============ ============
The following tables present key operating statistics for our owned and
leased hospitals (excluding discontinued operations) for the periods presented.
(1)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 % CHANGE
--------------- --------------- --------
CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):
Number of hospitals at end of period 21 19 10.5%
Licensed beds at end of period (2) 2,533 2,189 15.7
Beds in service at end of period 2,157 1,933 11.6
Inpatient admissions (3) 76,107 72,630 4.8
Adjusted admissions (4) 141,671 131,557 7.7
Net patient revenue per adjusted admission $ 6,157 $ 5,593 10.1
Patient days (5) 323,949 307,195 5.5
Adjusted patient days (6) 602,962 556,331 8.4
Average length of stay (days) (7) 4.3 4.2 2.4
Net patient revenue (in thousands) $ 872,275 $ 735,841 18.5
Gross patient revenue (in thousands) (8):
Inpatient $ 1,033,038 $ 903,740 14.3%
Outpatient 889,903 732,844 21.4
--------------- --------------- ----
Total gross patient revenue $ 1,922,941 $ 1,636,584 17.5%
=============== =============== ====
SAME HOSPITALS (CONTINUING OPERATIONS)(9):
Number of hospitals at end of period 19 19 -- %
Licensed beds at end of period (2) 2,206 2,189 0.8
Beds in service at end of period 1,920 1,933 (0.7)
Inpatient admissions (3) 70,071 72,630 (3.5)
Adjusted admissions (4) 131,277 131,557 (0.2)
Net patient revenue per adjusted admission $ 5,937 $ 5,592 6.2
Patient days (5) 297,083 307,195 (3.3)
Adjusted patient days (6) 556,459 556,331 --
Average length of stay (days) (7) 4.2 4.2 --
Net patient revenue (in thousands) $ 779,419 $ 735,727 5.9
Gross patient revenue (in thousands) (8):
Inpatient $ 933,552 $ 903,740 3.3%
Outpatient 814,808 732,844 11.2
--------------- --------------- ----
Total gross patient revenue $ 1,748,360 $ 1,636,584 6.8%
=============== =============== ====
- ------------
(1) All statistics have been restated to exclude the ownership and operations
of Glades General Hospital, which was sold on April 30, 2004. The
statistics above have not been impacted by the disposal of Brim
Healthcare, Inc. on June 30, 2004.
(2) Beds for which a hospital has been granted approval to operate from the
applicable state licensing agency.
(3) Represents the total number of patients admitted (in a facility for a
period in excess of 23 hours) and used by management and investors as a
general measure of inpatient volume.
(4) Used by management and investors as a general measure of combined
inpatient and outpatient volume. Adjusted admissions are computed by
multiplying admissions (inpatient volume) by the outpatient factor. The
outpatient factor is the sum of gross inpatient revenue and gross
outpatient revenue divided by gross inpatient revenue. The adjusted
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.
(5) Represents the total number of days the patients who are admitted stay in
our hospitals.
(6) Adjusted patient days are computed by multiplying patient days (inpatient
volume) by the outpatient factor. The outpatient factor is the sum of
gross inpatient revenue and gross outpatient revenue divided by gross
inpatient revenue. The adjusted patient days computation equates
outpatient revenue to the volume measure (patient days) used to measure
inpatient volume, resulting in a general measure of combined inpatient and
outpatient volume.
(7) The average number of days admitted patients stay in our hospitals.
(8) Represents revenues prior to reductions for discounts and contractual
allowances.
(9) Same hospital information includes the operations of only those hospitals
which were owned or leased during both entire periods presented and
excludes the ownership and operations of Glades General Hospital, which
was sold on April 30, 2004.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 % CHANGE
----------------- ----------------- --------
CONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):
Number of hospitals at end of period 19 19 --%
Licensed beds at end of period (2) 2,189 2,207 (0.8)
Beds in service at end of period 1,933 1,933 --
Inpatient admissions (3) 72,630 69,107 5.1
Adjusted admissions (4) 131,557 120,990 8.7
Net patient revenue per adjusted admission $ 5,593 $ 5,372 4.1
Patient days (5) 307,195 299,138 2.7
Adjusted patient days (6) 556,331 523,307 6.3
Average length of stay (days) (7) 4.2 4.3 (2.3)
Net patient revenue (in thousands) $ 735,841 $ 649,954 13.2
Gross patient revenue (in thousands) (8):
Inpatient $ 903,740 $ 799,358 13.1%
Outpatient 732,844 599,333 22.3
----------------- ----------------- -----
Total gross patient revenue $ 1,636,584 $ 1,398,691 17.0%
================= ================= =====
SAME HOSPITALS (CONTINUING OPERATIONS)(9):
Number of hospitals at end of period 19 19 --%
Licensed beds at end of period (2) 2,189 2,207 (0.8)
Beds in service at end of period 1,933 1,933 --
Inpatient admissions (3) 68,205 67,694 0.8
Adjusted admissions (4) 121,707 118,035 3.1
Net patient revenue per adjusted admission $ 5,521 $ 5,363 2.9
Patient days (5) 287,880 293,248 (1.8)
Adjusted patient days (6) 513,539 510,906 0.5
Average length of stay (days) (7) 4.2 4.3 (2.3)
Net patient revenue (in thousands) $ 671,910 $ 633,005 6.1
Gross patient revenue (in thousands) (8):
Inpatient $ 857,340 $ 787,050 8.9%
Outpatient 672,018 584,687 14.9
----------------- ----------------- -----
Total gross patient revenue $ 1,529,358 $ 1,371,737 11.5%
================= ================= =====
See notes following preceding table.
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The revenues received from the Medicare program are
expected to increase with the general aging of the population. The payment rates
under the Medicare program for inpatients are based on a prospective payment
system, based upon the diagnosis of a patient. While these rates are indexed for
inflation annually, the increases historically have been less than actual
inflation. In addition, states, insurance companies and employers are actively
negotiating the amounts paid to hospitals as opposed to paying standard hospital
rates. The trend toward managed care, including health maintenance
organizations, preferred provider organizations and various other forms of
managed care, may affect our hospitals' ability to maintain their current rate
of net operating revenue growth.
We continually monitor the cost/benefit relationship of services provided
at our hospitals, and make decisions related to adding new services or
discontinuing existing services.
Net patient revenue is reported net of contractual adjustments and policy
discounts. The adjustments principally result from differences between our
hospitals' customary charges and payment rates under the Medicare, Medicaid and
other third-party payor programs. Customary charges generally have increased at
a faster rate than the rate of increase for Medicare and Medicaid payments. We
provide care without charge to patients who are financially unable to pay for
the healthcare services they receive. Because we do not pursue collection of
amounts determined to qualify as charity care, they are not reported in net
patient revenue. Operating expenses of our hospitals primarily consist of
salaries, wages and benefits, purchased services, supplies, provision for
doubtful accounts, rentals and leases, and other operating expenses, principally
consisting of utilities, insurance, property taxes, travel, physician
recruiting, telephone, advertising, repairs and maintenance.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues increased 18.3% to $882.9 million in 2004 compared to $746.2
million in 2003. This increase was primarily attributable to the acquisition of
Memorial Medical Center in Las Cruces, New Mexico ("Memorial Medical Center")
effective June 1, 2004 and an increase in same hospital revenues. Same hospital
net patient revenues increased 5.9% in 2004 from 2003 primarily due to increases
in net patient revenue per adjusted admission of 6.2% and outpatient revenue of
11.2%. The increase in same-store net patient revenue per adjusted admission was
due, in part, by acuity as our same-store Medicare case mix index increased
approximately 2.2% to 1.23 for the year ended December 31, 2004 from 1.20 for
the year ended December 31, 2003. Cost report settlements and the filing of cost
reports also increased revenues in 2004 by $9.9 million, of which $2.9 million
related to facilities that had not previously qualified for disproportionate
share payments in prior years, and $5.5 million in 2003, respectively. Under our
agreement with the seller of Memorial Medical Center, we are to receive payments
from the seller through June 1, 2007 as reimbursement for providing certain
levels of charity services. For the period from June 1, 2004 through the end of
2004, we recorded $4.2 million in reimbursement for these services provided.
The table below reflects the sources of our net patient revenue for the
years ended December 31, 2004 and 2003, expressed as a percentage of total net
patient revenue:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
----- -----
Medicare 37.7% 38.5%
Medicaid 10.1 10.3
Other (including self-pay) 52.2 51.2
----- -----
100.0% 100.0%
===== =====
Salaries, wages and benefits as a percentage of revenues, decreased to
36.6% from 37.9% in 2003. The decrease is primarily due to improvements
resulting from continued implementation of our flexible staffing standards
throughout our hospitals, which effectively matches labor with hospital volume
trends and continued cost containment of employee benefit expenses.
Purchased services, as a percentage of revenues, increased to 9.7% in 2004
from 9.2% in 2003. The increase is primarily due to an increase in legal fees of
$1.6 million and a $4.0 million increase in contract labor (primarily contract
services for nursing, emergency room and physical therapy at Memorial Medical
Center and four of our
same-store hospitals) for the year ended December 31, 2004 compared to the year
ended December 31, 2003. The increase in legal fees is related to medical staff
bylaws and physician contract matters.
The provision for doubtful accounts, as a percentage of revenues,
increased to 10.8% in 2004 from 9.7% in 2003 due primarily to the increase in
bad debts resulting from the increase in self-pay revenue and due to the
purchase of Memorial Medical Center. During the year ended December 31, 2004,
self-pay revenue as a percentage of gross revenues increased to 5.9% from 4.6%
for 2003. The increase in self-pay revenue is due to the current economic
environment and slow employment recovery, coupled with changes in benefit plan
design toward increased co-pays and deductibles as employers pass a greater
percentage of healthcare costs to individual employees. Although the economies
of a majority of the communities in which we operate hospitals have stabilized,
some of our hospitals are experiencing a reduction in state Medicaid coverage,
particularly in Texas. Net patient revenue associated with self-pay patients are
generally recorded at gross charges, which are higher than what government
programs and managed care plans pay. As a result, failure to receive payment
from self-pay and uninsured patients results in a higher provision for doubtful
accounts as a percentage of total net patient revenue.
Other operating expenses decreased as a percentage of revenues to 11.0% in
2004 from 11.8% in 2003 primarily due to a reduction of $1.2 million in
insurance cost as we continued to realize favorable experience in both
professional and general liability and workers' compensation insurance, as
determined by our independent third party actuary.
Depreciation and amortization expense increased $9.3 million to $46.9
million in 2004 from $37.6 million in 2003. Approximately $5.0 million of this
increase is the result of the additional expense associated with the acquisition
of Memorial Medical Center, with the remainder of the increase resulting from
our capital expenditure program focusing on revenue generating projects.
Interest expense increased to $29.7 million in 2004 from $26.3 million in
2003. The increase is primarily driven by the additional debt associated with
the acquisition of Memorial Medical Center and the issuance in May 2003 of
$200.0 million aggregate principal amount of 7 1/2% Senior Subordinated Notes
due 2013, offset by repayments of outstanding borrowings on our senior bank
credit facility and repurchases of a portion of our 4 1/2% Convertible
Subordinated Notes due 2005. The interest related to the $200.0 million 7 1/2%
Senior Subordinated Notes due 2013 was reduced by a $100.0 million fixed to
floating interest rate swap agreement entered into in the third quarter of 2003,
which has rates currently lower than the underlying debt.
The provision for income taxes totaled $28.1 million, or a 36.0% effective
tax rate, in 2004 compared to $22.8 million, or a 35.4% effective tax rate, in
2003. The reduction in the effective tax rate for both 2004 and 2003 from the
statutory rate was primarily attributable to a reduction in our tax liabilities
due to the final and favorable resolution of examinations by taxing authorities
in 2004. In addition, the reduction in the federal tax rate for 2004 was
attributable to the realization of Empowerment Zone and Renewal Community Tax
credits related to two of our facilities and the impact of the disposition of
Glades General Hospital and Brim Healthcare, Inc.
In 2004, the Company's discontinued operations incurred an after-tax gain
on divestitures of $6.7 million and a loss from operations totaling $2.2
million. In 2003, the Company's discontinued operations incurred an after-tax
impairment of assets charge of $9.0 million and a loss from discontinued
operations totaling $1.1 million. The gain on divestitures recorded in 2004 was
principally due to the gain on sale of Brim Healthcare, Inc., which resulted in
an after-tax gain of $7.0 million. The impairment of assets charge in 2003 was
related to the write-off of goodwill and physician recruiting costs and the
write down of other assets of Glades General Hospital to their net realizable
value, less cost to sell. The decline in loss from operations resulted primarily
from the recording of an additional provision for doubtful accounts for Glades
General Hospital patient accounts receivable that we retained in the sale of
that entity.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues increased 13.4% to $746.2 million in 2003 compared to $658.3
million in 2002. This increase was primarily attributable to the hospitals
acquired in 2002 and an increase in same hospital revenues. During the second
quarter of 2002, the Company acquired Los Alamos Medical Center in New Mexico
and Memorial Hospital of Martinsville and Henry County in Virginia. Same
hospital net patient revenue increased 6.1% in 2003 from 2002
primarily due to increases in adjusted admissions of 3.1% and net patient
revenue per adjusted admission of 2.9%. The increase in adjusted admissions was
attributable, in part, to the addition of 106 new doctors, of which 17 were
hospital-based, in our communities in 2003. Cost report settlements and the
filing of cost reports also increased revenue in 2003 by $5.5 million compared
to a reduction in revenue in 2002 of $0.9 million.
The table below reflects the sources of our net patient revenue for the
years ended December 31, 2003 and 2002, expressed as a percentage of total net
patient revenue:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
----- -----
Medicare 38.5% 45.4%
Medicaid 10.3 11.3
Other (including self-pay) 51.2 43.3
----- -----
100.0% 100.0%
===== =====
Salaries, wages and benefits as a percentage of revenues, decreased to
37.9% from 39.7% in 2002. The decrease is primarily due to improvements
resulting from continued implementation of our flexible staffing standards
throughout our hospitals, which effectively matches labor with hospital volume
trends and continued cost containment of employee benefit expenses.
Purchased services, as a percentage of revenues, decreased to 9.2% in 2003
from 10.6% in 2002. The decrease is primarily attributable to an 18.5% reduction
in contract labor and reductions in collection agency fees as we were less
reliant on outside collection consultants and staffing.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.7% in 2003 from 8.1% in 2002 due primarily to the increase in bad debts
resulting from increases in self-pay revenue. During 2003, self-pay revenue as a
percentage of total gross revenues increased to 4.6% from 3.8% in 2002. The most
significant increase occurred in the second quarter of 2003 when self-pay
revenue as a percentage of gross revenues increased to 5.1% but then declined
slightly in the third quarter to 4.8% and continued to decline in the fourth
quarter to 4.5%. The increase in self-pay revenue is due to the current economic
environment and slow employment recovery, coupled with changes in benefit plan
design toward increased co-pays and deductibles as employers pass a greater
percentage of healthcare costs to individual employees. Net patient revenue
associated with self-pay patients are generally recorded at gross charges, which
are higher than what government programs and managed care plans pay. As a
result, failure to receive payment from self-pay and uninsured patients results
in a higher provision for doubtful accounts as a percentage of total net patient
revenue.
Other operating expenses increased as a percentage of revenues to 11.8% in
2003 from 10.6% in 2002 primarily due to increased medical malpractice, workers'
compensation and directors and officers insurance cost of $7.2 million and
increased physician recruitment expense of $3.1 million based upon the
significant number of physicians we recruited to our communities in 2003.
Depreciation and amortization expense increased $5.4 million to $37.6
million in 2003 from $32.2 million in 2002 primarily due to depreciation at the
two hospitals acquired in 2002 and capital expenditures.
Interest expense increased to $26.3 million in 2003 from $21.3 million in
2002 primarily due to the issuance in May 2003 of $200.0 million aggregate
principal amount of 7 1/2% Senior Subordinated Notes due 2013, offset by
repayments of outstanding borrowings on our senior bank credit facility,
repurchases of a portion of our 4 1/2% Convertible Subordinated Notes due 2005
and entering into a $100.0 million fixed to floating interest rate swap
agreement during the third quarter of 2003.
The write-off of deferred loan costs and the gain resulting from
repurchasing a portion of our 4 1/2% Convertible Subordinated Notes at a
discount resulted in a net pre-tax loss on extinguishment of debt of $0.5
million during 2003.
The provision for income taxes totaled $22.8 million, or a 35.4% effective
tax rate, in 2003 compared to $23.2 million, or a 40.0% effective tax rate, in
2002. The reduction in the effective tax rate during 2003 was primarily
attributable to a $2.3 million reduction in our tax liabilities due to the final
and favorable resolution of examinations by taxing authorities as we recently
concluded audits that have been ongoing for over one year.
In 2003, the Company's discontinued operations incurred an after-tax
impairment of assets charge of $9.0 million and a loss from operations totaling
$1.1 million. In 2002, the discontinued operations achieved earnings from
operations of $1.3 million. The decline in operations resulted primarily from a
shift in the demographic make-up of the service area surrounding Glades General
Hospital and a significant increase in the proportion of indigent care provided
by that facility.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had working capital from continuing operations of
$15.7 million, including cash and cash equivalents of $9.8 million, compared to
working capital from continuing operations of $130.6 million, including $46.1
million in cash and cash equivalents at December 31, 2003.
Net cash provided by operating activities was $126.3 million for the year
ended December 31, 2004, compared to $104.3 million for the year ended December
31, 2003. The $22.0 million increase in cash provided by operating activities is
primarily due to an increase of $8.3 million in our income from continuing
operations, a $9.3 million increase in depreciation and amortization expense (of
which $5.0 million is attributable to the Memorial Medical Center acquisition),
and an increase of $15.2 million in our deferred income tax provision resulting
from the Memorial Medical Center acquisition and divestitures of Glades General
Hospital and Brim Healthcare, Inc. The increase in cash flow from operations is
partially offset by an increase in net accounts receivable of continuing
operations of $12.6 million. The increase in net accounts receivable principally
relates to a $6.2 million loan to a third party for the construction of a
medical office building on one of our facility's campuses and approximately $5.9
million from the lessor of Memorial Medical Center for their obligations
required under the facility lease agreement.
Net cash used in investing activities increased to $228.1 million in 2004
from $56.9 million in 2003. The $171.2 million increase is primarily due to the
$152.2 million acquisition of Memorial Medical Center, and as a result of our
capital expenditure program focusing on revenue generating projects. Significant
capital expenditures for the year ended December 31, 2004 included $6.3 million
for the purchase of land and building at Havasu Regional Medical Center, $25.4
million in construction costs and equipment purchases for the new hospital in
Hardeeville, South Carolina, $3.9 million for our MRI project at Los Alamos
Medical Center, $3.8 million for women's services at Teche Regional Medical
Center, $6.6 million in construction costs for the new hospital in Ft. Mohave,
Arizona and $9.3 million for a company-wide information system upgrade. Net cash
used in investing activities was partially offset by approximately $14.7 million
in cash proceeds from the sale of Glades General Hospital and Brim Healthcare,
Inc. in the second quarter of 2004.
Net cash provided by financing activities totaled $66.4 million for 2004
primarily due to borrowings of $110.4 million under our senior bank credit
facility for the acquisition of Memorial Medical Center, as primarily offset by
$55.4 million in repayments of borrowings under our senior bank credit facility
and $0.8 million in payments under capital lease obligations. Net cash used in
financing activities of $16.3 million in 2003 resulted from $194.2 million in
net proceeds from the issuance of our 7 1/2% Senior Subordinated Notes due 2013,
which were used to more than offset the cash used to repay $114.3 million
outstanding on the senior bank credit facility and to repurchase $74.0 million
principal amount of our 4 1/2% Convertible Subordinated Notes due 2005.
We maintain a senior bank credit facility with Wachovia Bank, National
Association, as agent and issuing bank for a syndicate of lenders with aggregate
commitments up to $250.0 million. At December 31, 2004, we had $186.7 million,
net of outstanding revolver borrowings of $55.0 million and letters of credit of
$8.3 million, available for borrowing under the senior bank credit facility.
Loans under the senior bank credit facility bear interest, at our option, at the
adjusted base rate or at the adjusted LIBOR rate. We pay a commitment fee, which
varies from three-eighths to one-half of one percent of the unused portion,
depending on our compliance with certain financial ratios. We may prepay any
principal amount outstanding under the senior bank credit facility at any time
before the maturity date of November 13, 2006.
In May 2003, we completed a public offering of $200.0 million aggregate
principal amount of 7 1/2% Senior Subordinated Notes due June 1, 2013. Net
proceeds of the offering totaling $194.2 million were used to repay
$114.3 million in existing borrowings under the senior bank credit facility and
to repurchase $74.0 million of our 4 1/2% Convertible Subordinated Notes due
2005. The 7 1/2% Notes bear interest from May 27, 2003 at the rate of 7 1/2% per
year, payable semi-annually on June 1 and December 1, beginning on December 1,
2003. We may redeem all or a portion of the 7 1/2% Notes on or after June 1,
2008, at the then current redemption prices, plus accrued and unpaid interest.
In addition, at any time prior to June 1, 2006, we may redeem up to 35% of the
aggregate principal amount of the 7 1/2% Notes within 60 days of one or more
common stock offerings with the net proceeds of such offerings at a redemption
price of 107.5% of the principal amount, plus accrued and unpaid interest. Note
holders may require us to repurchase all of the holder's notes at 101% of their
principal amount plus accrued and unpaid interest in some circumstances
involving a change of control. The 7 1/2% Notes are unsecured and subordinated
to our existing and future senior indebtedness. The 7 1/2% Notes rank equal in
right of payment to our 4 1/2% Convertible Subordinated Notes due 2005 and our 4
1/4% Convertible Subordinated Notes due 2008. The 7 1/2% Notes effectively rank
junior to our subsidiary liabilities. The indenture contains limitations on our
ability to incur additional indebtedness, sell material assets, retire, redeem
or otherwise reacquire its capital stock, acquire the capital stock or assets of
another business, and pay dividends.
In October 2001, we sold $172.5 million of 4 1/4% Convertible Subordinated
Notes due October 10, 2008. Net proceeds of approximately $166.4 million were
used to reduce the outstanding balance on our senior bank credit facility and
for acquisitions. The 4 1/4% Notes bear interest at the rate of 4 1/4% per year,
payable semi-annually on each April 10 and October 10. The 4 1/4% Notes are
convertible at the option of the holder at any time on or prior to maturity into
shares of our common stock at a conversion price of $27.70 per share. The
conversion price is subject to adjustment. We may redeem all or a portion of the
4 1/4% Notes on or after October 10, 2004, at the then current redemption
prices, plus accrued and unpaid interest. Note holders may require us to
repurchase all of the holder's notes at 100% of their principal amount plus
accrued and unpaid interest in some circumstances involving a change of control.
The 4 1/4% Notes are unsecured and subordinated to our existing and future
senior indebtedness. The 4 1/4% Notes rank equal in right of payment to our 4
1/2% Convertible Subordinated Notes due 2005 and our 7 1/2% Senior Subordinated
Notes due 2013. The 4 1/4% Notes effectively rank junior to our subsidiary
liabilities. The indenture does not contain any financial covenants. A total of
6,226,767 shares of our common stock have been reserved for issuance upon
conversion of the 4 1/4% Notes.
In November and December 2000, we sold $150.0 million aggregate principal
amount of 4 1/2% Convertible Subordinated Notes due November 20, 2005. The 4
1/2% Notes bear interest at the rate of 4 1/2% per year, payable semi-annually
on each May 20 and November 20. The 4 1/2% Notes are convertible at the option
of the holder at any time on or prior to maturity into shares of our common
stock at a conversion price of $26.45 per share. The conversion price is subject
to adjustment. We may redeem all or a portion of the 4 1/2% Notes on or after
November 20, 2003, at the then current redemption prices, plus accrued and
unpaid interest. Note holders may require us to repurchase all of the holder's
notes at 100% of their principal amount plus accrued and unpaid interest in some
circumstances involving a change of control. The 4 1/2% Notes are unsecured
obligations and rank junior in right of payment to all of our existing and
future senior indebtedness. The 4 1/2% Notes rank equal in right of payment to
our 4 1/4% Convertible Subordinated Notes due 2008 and our 7 1/2% Senior
Subordinated Notes due 2013. The 4 1/2% Notes effectively rank junior to our
subsidiary liabilities. The indenture does not contain any financial covenants.
At December 31, 2004, approximately $76.0 million principal amount of the 4 1/2%
Notes remained outstanding, and a total of 2,872,760 shares of common stock have
been reserved for issuance upon conversion of the remaining 4 1/2% Notes.
Our Board of Directors has authorized the repurchase from time to time and
subject to market conditions of our outstanding 4 1/2% Notes and 4 1/4% Notes in
the open market or in privately negotiated transactions. During 2003, we
repurchased $74.0 million principal amount of the 4 1/2% Notes. We recorded a
$0.5 million pretax loss associated with the early extinguishment of debt
related to the repurchase of the 4 1/2% Notes. We did not repurchase any of
the 4 1/2% Notes during 2004 and have not repurchased any of the 4 1/4% Notes.
On March 18, 2005, in connection with the pending acquisition by
LifePoint, the Company commenced a cash tender offer and consent solicitation
for any and all of its 7 1/2% Senior Subordinated Notes. The tender offer
consideration for each $1,000 principal amount of 7 1/2% Senior Subordinated
Notes validly tendered and accepted for purchase will be based on a fixed spread
of 50 basis points over the yield on the price, as of April 12, 2005, of the
2.625% U.S. Treasury Note due May 15, 2008, plus accrued interest minus a
consent payment equal to $20 per $1,000 principal amount tendered and accepted
for purchase. The tender offer is scheduled to expire on April 15, 2005, unless
extended or terminated earlier.
Our shelf registration statement, providing for the offer, from time to
time, of common stock and/or debt securities up to an aggregate of $300.0
million remains effective with the Securities and Exchange Commission. Following
the issuance of $200.0 million aggregate principal amount of our 7 1/2% Senior
Subordinated Notes due
2013, the shelf registration statement remains available for the issuance of up
to $100.0 million of additional securities, subject to market conditions and our
capital needs.
Capital expenditures for our owned and leased hospitals may vary from year
to year depending on facility improvements and service enhancements undertaken
by the hospitals. We expect to make total capital expenditures in 2005 of
approximately $51.0 million, exclusive of new hospital construction projects.
Planned capital expenditures for 2005 consist principally of capital
improvements to owned and leased hospitals. In addition, we expect our new
hospital construction projects in Ft. Mohave, Arizona and Eunice, Louisiana will
total $40.9 million in 2005. We anticipate opening the Arizona hospital in the
third quarter of 2005 and the Louisiana hospital in the second quarter of 2006.
We expect to fund these expenditures through cash provided by operating
activities and borrowings under our senior bank credit facility.
Our management anticipates that cash flows from operations, amounts
available under our senior bank credit facility, and our anticipated access to
capital markets are sufficient to meet expected liquidity needs, planned capital
expenditures and other expected operating needs for the next twelve months.
The following tables reflect a summary of our obligations and commitments
outstanding as of December 31, 2004.
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------
LESS THAN 1
YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL
----------- --------- --------- ---------- -----
(IN THOUSANDS)
CONTRACTUAL CASH OBLIGATIONS:
Long-term debt $ 75,970 $ 55,000 $172,500 $198,337 $501,807
Capital lease obligations, with interest 479 940 892 2,311 4,622
Operating leases 7,609 12,127 7,693 15,538 42,967
-------- -------- -------- -------- --------
Subtotal $ 84,058 $ 68,067 $181,085 $216,186 $549,396
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------------------------
LESS THAN 1
YEAR 1-2 YEARS 3-4 YEARS THEREAFTER TOTAL
----------- --------- --------- ---------- -------
(IN THOUSANDS)
OTHER COMMITMENTS:
Letters of credit $ -- $ 8,277 $ -- $ -- $ 8,277
Construction and improvement commitments 69,643 12,394 -- -- 82,037
Physician commitments(1) 15,982 5,607 1,306 -- 22,895
-------- -------- -------- -------- --------
Subtotal $ 85,625 $ 26,278 $ 1,306 $ -- $113,209
-------- -------- -------- -------- --------
Total obligations and commitments $169,683 $ 94,345 $182,391 $216,186 $662,605
-------- -------- -------- -------- --------
- ------------
(1) Represents the aggregate of our contractual obligations for advances to
physicians as reflected in physician recruiting agreements. Amounts shown
are calculated based on the full extent of the obligation set forth in the
agreements, although the actual amount of such advances often depends on
the financial performance of the physician's practice during the first
year after relocating to the community and whether the physician remains
in the community. In most cases, the amounts advanced under the agreements
are significantly less than the contractual commitment.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. In preparing
our financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We evaluate our estimates and
judgments on an ongoing basis. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Our actual results may differ from these estimates,
and different assumptions or conditions may yield different estimates. The
following represent the estimates that we consider most critical to our
operating performance and involve the most complex assumptions and assessments.
Allowance for Doubtful Accounts
Substantially all of our accounts receivable are related to providing
healthcare services to our hospitals' patients. Our ability to collect
outstanding receivables from third-party payors and others is critical to our
operating performance and cash flows. The primary collection risk lies with
uninsured patient accounts or patient accounts for which a balance remains after
primary insurance has paid. Insurance coverage is verified prior to treatment
for all procedures scheduled in advance and walk-in patients. Insurance coverage
is not verified in advance of procedures for emergency room patients.
Deductibles and co-payments are generally determined prior to the patient's
discharge with emphasis on collection efforts before discharge. Once these
amounts are determined, any remaining patient balance is identified and
collection activity is initiated before the patient is discharged. Our standard
collection procedures are then followed until such time that management
determines the account is uncollectible, at which point the account is written
off. For hospitals that we have owned in excess of one year, our policy with
respect to estimating our allowance for doubtful accounts is to reserve 50% of
all self-pay accounts receivable aged between 121 and 150 days and 100% of all
self-pay accounts that have aged greater than 150 days. For hospitals that the
Company has owned less than one year, the Company estimates the allowance for
doubtful accounts by applying a hospital-specific reserve percentage for each
self-pay and non self-pay aging category, beginning with the 0-30 day aging
category, with all self-pay and non-self pay accounts fully reserved at 150
days. Accordingly, substantially all of our bad debt expense is related to
uninsured patient accounts and patient accounts for which a balance remains
after primary insurance has paid. We continually monitor our accounts receivable
balances and utilize cash collections data and other analytical tools to support
the basis for our estimates of the provision for doubtful accounts. In addition,
we perform hindsight procedures on historical collection and write-off
experience to determine the reasonableness of our policy for estimating the
allowance for doubtful accounts. Significant changes in payor mix or business
office operations, or deterioration in aging accounts receivable could result in
a significant increase in this allowance.
In general, the standard collection cycle at our hospitals is as follows:
- - Upfront cash collection of deductibles, co-payments, and self-pay
accounts.
- - From the time the account is billed until the period 120 days after the
billing, internal business office collections and early out program
collections are performed.
- - From the time the account is 121 days after billing until the period one
year after billing, uncollected accounts are turned over to one of two
primary collection agencies utilized by our company.
- - One year following the date of billing, any uncollected accounts are
written off and the accounts are turned over to our secondary collection
agency.
The following table summarizes our days revenue outstanding on a
same-store basis as of the dates indicated:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
- ----------------- ----------------- -----------------
54 54 62
Our target for days revenue outstanding ranges from 53 to 58 days.
Uncollected accounts are manually written off: (a) if the balance is less
than $10.00, (b) when turned over to an outside secondary collection agency at
365 days, or (c) earlier than 365 days if all collection efforts indicate an
account is uncollectible. Once accounts have been written off, they are not
included in our gross accounts receivable or allowance for doubtful accounts.
The approximate percentage of total gross accounts receivable summarized
by aging categories is as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
0 to 60 days 59.8% 57.7% 52.9%
61 to 150 days 18.7 17.2 17.3
Over 150 days 21.5 25.1 29.8
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The approximate percentage of total gross accounts receivable summarized by
payor is as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
Medicare 24.5% 25.5% 23.3%
Medicaid 11.1 11.6 12.5
Managed Care and Other 30.1 25.4 26.2
Self-Pay 34.3 37.5 38.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
We owned or leased three hospitals in Texas, which accounted for 16.1% and
16.6% of net accounts receivable in 2004 and 2003, respectively. We owned or
leased four hospitals in Louisiana, which accounted for 9.5% and 13.2% of net
accounts receivable in 2004 and 2003, respectively. We owned or leased two
hospitals in New Mexico, one of which was acquired in 2004, which accounted for
16.2% and 3.6% of net accounts receivable in 2004 and 2003, respectively.
Same-store upfront cash collections for the year ended December 31, 2004
were approximately $13.5 million compared to $11.5 million and $8.1 million for
the years ended December 31, 2003 and 2002, respectively.
Allowance for Contractual Discounts
We derive a significant portion of our revenues from Medicare, Medicaid
and other payors that receive discounts from our standard charges. The Medicare
and Medicaid regulations and various managed care contracts under which these
discounts must be calculated are often complex and subject to interpretation and
adjustment. In addition, the services authorized and provided and resulting
reimbursement, are often subject to interpretation. These interpretations
sometimes result in payments that differ from our estimates. Additionally,
updated regulations and contract negotiations occur frequently, necessitating
our continual review and assessment of the estimation process. Our hospitals'
computerized billing systems do not automatically calculate and record
contractual allowances. Rather, we utilize an internally developed contractual
model to estimate the allowance for contractual discounts on a payor - specific
basis, given our interpretation of the applicable regulations or contract terms.
Our contractual model for Medicare and Medicaid inpatient services utilizes the
application of actual diagnosis related group ("DRG") data to individual patient
accounts to calculate contractual allowances. For all inpatient and outpatient
non-Medicare and non-Medicaid services, our contractual model utilizes six month
historical paid claims data by payor for such services to calculate the
contractual allowances. Differences between the contractual allowances estimated
by our contractual model and actual paid claims are adjusted when the individual
claims are paid. Our contractual model is updated each quarter. In addition to
the contractual allowances estimated and recorded by our contractual model, we
also record an allowance equal to 100% of all Medicare, Medicaid, and other
insurance payors accounts receivable that are aged greater than 365 days.
General and Professional Liability Reserves
We purchased a professional liability claims-made reporting policy
effective January 1, 2004. This coverage is subject to a $5.0 million
self-insured retention per occurrence for general and professional liability and
provides coverage up to $50.0 million for claims incurred during the annual
policy term. This retention amount increases our exposure for claims occurring
prior to December 31, 2002, and reported on or after January 1, 2004, due to the
increased retention amount as compared to prior years. In 2002, our company had
a claims-made reporting policy subject to a $750,000 deductible and a $2.0
million self-insured retention per occurrence, providing coverage up to $51.0
million for claims incurred during the annual policy term in 2002. In 2001, we
maintained insurance for individual malpractice claims exceeding $50,000 per
medical incident, subject to an annual maximum of $500,000 for claims occurring
and reported in 2001. We purchased a tail policy that provides an unlimited
claim reporting period for our professional liability for claims incurred in
2000 and prior years. We estimate our self-insured retention portion of the
malpractice risks using an outside actuary which uses historical claims data,
demographic factors, severity factors and other actuarial assumptions. The
estimated accrual for malpractice claims could be significantly affected should
current and future occurrences differ from historical claims trends. The
estimation process is also complicated by the relatively short period of time in
which we have owned some of our healthcare facilities, as occurrence data under
previous ownership may not necessarily reflect occurrence data under our
ownership. While management monitors current claims closely and considers
outcomes when estimating our insurance accruals, the complexity of the claims
and wide range of potential outcomes often hampers timely adjustments to the
assumptions used in the estimates. We maintain a reserve to cover both reported
claims and claims that have been incurred but not yet reported within our
self-insured retention.
Workers' Compensation Reserves
Workers' compensation claims are insured with a deductible with stop loss
limits of $100,000 per accident and a $1.9 million and $2.2 million minimum cap
on total losses for the 1999 and 2000 years, respectively, and $250,000 per
accident and a $6.6 million and $3.0 million minimum cap on total losses for the
2002 and 2001 years, respectively. We increased our deductible loss amount to
$500,000 per accident effective January 1, 2003. The minimum cap for total 2003
losses is $12.0 million. The minimum cap for total 2004 losses is $12.1 million.
In 2002 and 2003 our arrangement with the insurance provider allows us to prepay
the expected amounts of annual workers' compensation claims, which is based upon
claims experience. The claims processor tracks payments for the policy year. At
the end of the policy year, the claims processor compares the total amount
prepaid by us to the actual amount paid by the claims processor. This comparison
ultimately will result in a receivable from or a payable to the claims
processor. For 2004, we elected not to prepay our expected workers' compensation
losses. We estimate our deductible portion of the workers' compensation risk
using an outside actuary which uses historical claims data, demographic factors,
severity factors and other actuarial assumptions. The estimated accrual for
workers' compensation claims could be significantly affected should current and
future occurrences differ from historical claims trends. The estimation process
also is complicated by the relatively short period of time in which we have
owned some of our healthcare facilities, as occurrence data under previous
ownership may not necessarily reflect occurrence data under our ownership. While
management monitors current claims closely and considers outcomes when
estimating our insurance accruals, the complexity of the claims and wide range
of potential outcomes often hampers timely adjustments to the assumptions used
in the estimates. We maintain a reserve to cover both reported claims and claims
that have been incurred but not yet reported within our deductible levels.
We are fully insured in the commercial marketplace for workers'
compensation claims prior to January 1, 1999. We utilize loss run reports
provided by the claims administrator to determine the appropriate range of loss
reserves for the 1999 and subsequent years. Our accruals are calculated to cover
the risk from both reported claims and claims that have been incurred but not
yet reported.
Goodwill and Long-Lived Assets, Including Impairment
Our consolidated financial statements primarily include the following
types of long-lived assets: property and equipment, goodwill and other
intangible assets. Property and equipment purchased in the normal course of
business are recorded at the cost of the purchase and a useful life is assigned
based upon the nature of the asset in comparison to our policy. We also, in
connection with our acquisition of businesses, acquire property and equipment,
goodwill and other intangible assets. We use outside firms to perform a
valuation of these acquired assets for the purpose of allocating the purchase
price of the acquisition. As a result of the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"), we have obtained valuation reports to identify property and equipment, as
well as any intangible assets purchased in our acquisitions. Based on the
valuation reports completed to date, the only identifiable intangible assets
valued have been non-compete agreements and licenses and accreditations, which
have had minimal associated value; the remainder was goodwill. In accordance
with SFAS No. 142, goodwill resulting from acquisitions after June 30, 2001 has
not been amortized.
Impairment of goodwill is governed by SFAS No. 142. In accordance with the
adoption of SFAS No. 142, we completed our annual impairment test as of October
1, 2004. The results of our 2004 review indicated no impairment of our
long-lived assets. Our annual impairment test is based upon a combination of
market capitalization and a projected run-rate for income from continuing
operations before provision for income taxes, depreciation and amortization,
interest, minority interests, loss on sale of assets and loss on extinguishment
of debt (adjusted for a multiple of earnings) for the consolidated company.
Impairment of long-lived assets other than goodwill is governed by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We adopted this statement effective
January 1, 2002. In accordance with the standard, in connection with the sale of
Glades General Hospital, which was effective April 30, 2004, the Company
recorded an after tax impairment charge of $9.0 million related to the write-off
of goodwill associated with the hospital, the write-off of the net book value of
physician recruiting costs and the write down of other assets of the hospital to
their net realizable value, less costs to sell.
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along to us rising costs in the form of higher prices.
We generally have been able to offset increases in operating costs by increasing
charges for services, expanding services, and implementing cost control measures
to curb increases in operating costs and expenses. In light of cost containment
measures imposed by government agencies and private insurance companies, we do
not know whether we will be able to offset or control future cost increases, or
be able to pass on the increased costs associated with providing healthcare
services to patients with government or managed care payors, unless such payors
correspondingly increase reimbursement rates.