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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 MARCH 31, 1999
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 37203
NASHVILLE, TENNESSEE (Zip Code)
(Address of principal executive 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)
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 [ ]
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 APRIL 30, 1999
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Voting common stock, $.01 par value 547,075,056 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
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COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
MARCH 31, 1999
PAGE OF
FORM 10-Q
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -- for the
quarters ended March 31, 1999 and 1998................. 1
Condensed Consolidated Balance Sheets -- March 31, 1999
and December 31, 1998.................................. 2
Condensed Consolidated Statements of Cash Flows -- for the
quarters ended March 31, 1999 and 1998................. 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 11
PART II: OTHER INFORMATION
Items 1 and 6............................................... 24
3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1999 1998
-------- --------
Revenues.................................................... $ 4,655 $ 4,901
Salaries and benefits....................................... 1,860 2,013
Supplies.................................................... 722 746
Other operating expenses.................................... 892 940
Provision for doubtful accounts............................. 338 343
Depreciation and amortization............................... 296 309
Interest expense............................................ 111 153
Equity in earnings of affiliates............................ (35) (42)
Gains on sales of facilities................................ (249) --
Impairment of long-lived assets............................. 106 --
Restructuring of operations and investigation related
costs..................................................... 30 38
-------- --------
4,071 4,500
-------- --------
Income from continuing operations before minority interests
and income taxes.......................................... 584 401
Minority interests in earnings of consolidated entities..... 14 20
-------- --------
Income from continuing operations before income taxes....... 570 381
Provision for income taxes.................................. 248 162
-------- --------
Income from continuing operations........................... 322 219
Loss from operations of discontinued businesses, net of tax
benefit of ($16).......................................... -- (22)
-------- --------
Net income........................................ $ 322 $ 197
======== ========
Basic earnings per share:
Income from continuing operations......................... $ .50 $ .34
Loss from operations of discontinued businesses........... -- (.03)
-------- --------
Net income........................................ $ .50 $ .31
======== ========
Diluted earnings per share:
Income from continuing operations......................... $ .50 $ .34
Loss from operations of discontinued businesses........... -- (.03)
-------- --------
Net income........................................ $ .50 $ .31
======== ========
Shares used in earnings per share calculations (in
thousands):
Basic..................................................... 639,403 642,050
Diluted................................................... 645,011 644,933
Cash dividends per share.................................... $ .02 $ .02
See accompanying notes.
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COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 586 $ 297
Accounts receivable, less allowances for doubtful accounts
of $1,639 in 1999 and $1,645 in 1998................... 2,250 2,096
Inventories............................................... 419 434
Income taxes receivable................................... -- 149
Other..................................................... 979 887
------- -------
4,234 3,863
Property and equipment, at cost............................. 15,410 15,644
Accumulated depreciation.................................... (6,261) (6,195)
------- -------
9,149 9,449
Investments of insurance subsidiary......................... 1,533 1,614
Investments in and advances to affiliates................... 865 1,275
Intangible assets, net...................................... 2,815 2,910
Other....................................................... 201 318
------- -------
$18,797 $19,429
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 748 $ 784
Accrued salaries.......................................... 429 425
Other accrued expenses.................................... 1,252 1,282
Long-term debt due within one year........................ 763 1,068
------- -------
3,192 3,559
Long-term debt.............................................. 5,566 5,685
Professional liability risks, deferred taxes and other
liabilities............................................... 1,788 1,839
Minority interests in equity of consolidated entities....... 772 765
Stockholders' equity:
Common stock $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
602,577,100 voting shares and 21,000,000 nonvoting
shares -- March 31, 1999 and 621,578,300 voting shares
and 21,000,000 nonvoting shares -- December 31, 1998... 6 6
Capital in excess of par value............................ 3,103 3,498
Other..................................................... 11 11
Accumulated other comprehensive income.................... 64 80
Retained earnings......................................... 4,295 3,986
------- -------
7,479 7,581
------- -------
$18,797 $19,429
======= =======
See accompanying notes.
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5
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS)
1999 1998
------- -----
Cash flows from continuing operating activities:
Net income................................................ $ 322 $ 197
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Provision for doubtful accounts...................... 338 343
Depreciation and amortization........................ 296 309
Income taxes......................................... 331 501
Gains on sales of facilities......................... (249) --
Impairment of long-lived assets...................... 106 --
Loss from discontinued operations.................... -- 22
Changes in operating assets and liabilities.......... (844) (678)
Other................................................ 12 (6)
------- -----
Net cash provided by continuing operating
activities....................................... 312 688
------- -----
Cash flows from investing activities:
Purchase of property and equipment........................ (301) (316)
Acquisition of hospitals and health care entities......... -- (66)
Disposition of property and equipment..................... 506 43
Change in investments..................................... 541 (39)
Change in net assets of discontinued operations, net...... -- 30
Other..................................................... 64 71
------- -----
Net cash provided by (used in) investing
activities....................................... 810 (277)
------- -----
Cash flows from financing activities:
Issuance of long-term debt................................ 1,004 --
Net change in bank borrowings............................. (1,241) (345)
Repayment of long-term debt............................... (187) (72)
Payment of cash dividends................................. (13) (13)
Issuances (repurchases) of common stock, net.............. (408) 35
Other..................................................... 12 2
------- -----
Net cash used in financing activities............. (833) (393)
------- -----
Change in cash and cash equivalents......................... 289 18
Cash and cash equivalents at beginning of period............ 297 110
------- -----
Cash and cash equivalents at end of period.................. $ 586 $ 128
======= =====
Interest payments........................................... $ 83 $ 117
Income tax refunds, net..................................... $ (82) $(334)
See accompanying notes.
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
Columbia/HCA Healthcare Corporation is a holding company whose affiliates
own and operate hospitals and related health care entities. The term
"affiliates" includes direct and indirect subsidiaries of Columbia/HCA
Healthcare Corporation and partnerships and joint ventures in which such
subsidiaries are partners. At March 31, 1999, these affiliates owned and
operated 273 hospitals, 95 freestanding surgery centers and provided extensive
outpatient and ancillary services. 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 31 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 ended March 31, 1999, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. 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, 1998.
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 breadth of the ongoing investigations, the Company
expects additional investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. Columbia/HCA is a defendant in several
qui tam actions brought by private parties on behalf of the United States of
America, which have been unsealed and served on Columbia/HCA. The actions
allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act by submitting improper claims to the
government for reimbursement. The lawsuits generally 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,
attorney's fees and costs. The government has intervened in three qui tam
actions. Columbia/HCA 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.
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, insider trading, periodic reporting and
internal accounting control provisions of the Federal securities laws.
Management believes it is too early to predict the outcome or effect of the
ongoing investigations or qui tam and other actions. If Columbia/HCA is found to
have violated 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. Similarly, the amounts claimed in the qui tam and other actions are
substantial, and Columbia/HCA could be subject to substantial costs resulting
from an adverse outcome of one or more such actions. Any such sanctions or
losses could have
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 2 -- INVESTIGATIONS (CONTINUED)
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 the divestitures of certain hospitals, surgery centers and related
facilities, the spin-offs of two companies that represented the Pacific and
America operating groups and the divestitures of the Company's home health and
certain other businesses, as described in Note 5 -- Discontinued Operations.
Divestiture of Certain Hospitals and Surgery Centers
During the first quarter of 1999, the Company recognized a pretax gain of
$249 million ($151 million after-tax) on the sale of two hospitals and certain
related health care facilities. Proceeds from the sales were used to repay bank
borrowings.
During the first quarter of 1999, management identified and initiated, or
revised, plans to sell or close during 1999, 13 consolidated hospitals and 4
non-consolidated hospitals. The carrying value for the hospitals and other
assets expected to be sold was reduced to fair value of approximately $210
million, based upon estimates of sales values, for a total non-cash, pretax
charge of approximately $106 million. For the quarters ended March 31, 1999 and
1998, respectively, the hospitals and other assets for which the impairment
charge was recorded had net revenues of approximately $136 million and $138
million and incurred losses from continuing operations before the pretax charge
and income tax benefits of approximately $10 million and $11 million. Proceeds
from the expected divestitures will be used to repay bank borrowings.
Spin-Offs
During the first quarter, the Company continued with its previously
announced plan to create two tax-free spin-off companies that represented the
Pacific (Triad) and America (Lifepoint) operating groups. In March 1999, the
Company received a ruling from the Internal Revenue Service (the "IRS") that the
proposed spin-offs would generally be tax-free to the Company and its
shareholders. On May 11, 1999, the spin-offs were completed through a
distribution of one share of LifePoint Hospitals, Inc. common stock and one
share of Triad Hospitals, Inc. common stock for every 19 shares of the Company's
common stock outstanding on April 30, 1999.
At March 31, 1999, the Pacific group (Triad) was comprised of 35
consolidating hospitals with $368 million and $414 million in revenues for the
quarters ended March 31, 1999 and 1998, respectively. EBITDA (income from
continuing operations before depreciation and amortization, interest expense,
gains on sales of facilities, impairment of long-lived assets, management fees,
minority interests and income taxes) for Triad was $41 million and $48 million
for the quarters ended March 31, 1999 and 1998, respectively.
The America group (Lifepoint) was comprised of 23 consolidating hospitals
with $134 million and $130 million in revenues for the quarters ended March 31,
1999 and 1998, respectively. EBITDA for Lifepoint was $22 million and $20
million for the quarters ended March 31, 1999 and 1998, respectively.
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 4 -- RESTRUCTURING OF OPERATIONS AND INVESTIGATION RELATED COSTS
During 1999 and 1998, the Company recorded the following pretax charges
related to the investigation and restructuring of operations as discussed in
Note 2 -- Investigations and Note 3 -- Restructuring of Operations (in
millions):
QUARTER
-----------
1999 1998
---- ----
Professional fees related to investigation.................. $19 $28
Severance costs............................................. 2 4
Other....................................................... 9 6
--- ---
$30 $38
=== ===
NOTE 5 -- DISCONTINUED OPERATIONS
Discontinued operations included 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 plans to dispose
of these businesses during 1997.
During the second and third quarters of 1998, the Company completed the
sales 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 loss upon completion of these sales during the second quarter of
1998, representing an adjustment to the tax benefit related to the estimated
$443 million after-tax loss on disposal of discontinued operations recorded in
the fourth quarter of 1997.
During the third and fourth quarters of 1998, the Company completed five
separate sales transactions that included substantially all of the Company's
home health care operations and received approximately $90 million in proceeds.
The proceeds from the sales were used to repay bank borrowings.
Revenues of the discontinued businesses totaled $641 million for the
quarter ended March 31, 1998.
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 $360 million in
income taxes and interest through March 31, 1999.
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
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9
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 6 -- INCOME TAXES (CONTINUED)
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 three months ended March
31, 1999 and 1998 (dollars in millions, except per share amounts):
QUARTER
-------------------
1999 1998
-------- --------
Numerator (a):
Income from continuing operations......................... $ 322 $ 219
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per share............... 639,403 642,050
Effect of dilutive securities:
Stock options........................................ 1,326 2,178
Warrants and other................................... 4,282 705
-------- --------
Shares used for dilutive earnings per share............... 645,011 644,933
======== ========
Earnings per share:
Basic earnings per share from continuing operations....... $ .50 $ .34
Diluted earnings per share from continuing operations..... $ .50 $ .34
(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
During March 1999, the Company entered into a $1.0 billion Senior Interim
Term Loan agreement. Borrowings under this agreement will be used to fund the
$1.0 billion share repurchase program approved in February 1999 (see Note
9 -- Stock Repurchase Program). The Company's revolving credit facility and $1.0
billion term loan were amended during March 1999 to permit the spin-offs of the
Company's America and Pacific operating groups.
NOTE 9 -- STOCK REPURCHASE PROGRAM
In February 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to an additional $1 billion of its common stock
through open market purchases, privately negotiated transactions or through a
series of accelerated or forward purchase contracts. During the first quarter of
1999, through open market purchases, the Company repurchased 3.6 million shares
of its common stock for approximately $68 million. During April 1999, through
open market purchases, the Company repurchased 5.0 million shares of its common
stock for approximately $110 million. Also during April 1999, the Company,
through accelerated purchase agreements, repurchased 27.0 million shares of its
common stock for approximately $700 million.
In July 1998, the Company announced a stock repurchase program under which
up to $1 billion of the Company's common stock would be repurchased by entering
into a series of forward purchase contracts. Approximately 44 million shares
were purchased at an average cost of approximately $22.65 per share. The
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10
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 9 -- STOCK REPURCHASE PROGRAM (CONTINUED)
majority of these shares were purchased by certain financial organizations
through a series of forward purchase contracts. In accordance with the terms of
the forward purchase contracts, which permit settlement on a net shares basis,
the shares purchased remain issued and outstanding until the forward purchase
contracts are settled. During the first quarter of 1999, the Company settled
forward purchase contracts representing 15.0 million shares at a cost of
approximately $323 million. The company settled another 24.4 million shares at a
cost of approximately $566 million in April 1999.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement (the
"LOC Agreement") with the United States Department of Justice (the "DOJ"). As
part of the LOC Agreement, the Company has provided the DOJ with Letters of
Credit totaling $1 billion. The LOC Agreement also provides that the Company's
repurchase program announced in February 1999 may be made, at the Company's
discretion, through open market purchases, privately negotiated transactions or
through a series of accelerated or forward purchase contracts. The Company and
the DOJ acknowledge that the amount in the LOC Agreement is not based upon the
amount or expected amount of any potential settlement. The LOC Agreement does
not constitute an admission of liability by the Company.
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 of law. 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 may seek 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.
8
11
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 11 -- COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes, for the
quarters ended March 31, 1999 and 1998 are as follows (in millions):
QUARTER
------------
1999 1998
---- ----
Net income.................................................. $322 $197
Unrealized (losses) gains on securities..................... (9) 24
Foreign currency translation adjustments.................... (7) (2)
---- ----
Comprehensive income........................................ $306 $219
==== ====
The components of accumulated other comprehensive income, net of related
taxes, at March 31, 1999 and 1998 are as follows (in millions):
QUARTER
------------
1999 1998
---- ----
Net unrealized gains on securities.......................... $68 $114
Foreign currency translation adjustments.................... (4) --
--- ----
Accumulated other comprehensive income...................... $64 $114
=== ====
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION
Columbia/HCA operates in one line of business which is operating hospitals
and related health care entities. During the quarters ended March 31, 1999 and
1998, approximately 31% and 33%, respectively, of the Company's revenues related
to patients participating in the Medicare program.
In November 1997, Columbia/HCA restructured its operations into five
divisions which are organized geographically. Included in these five divisions
are the Eastern Group made up of 107 consolidated hospitals located in the
Eastern United States and the Western Group made up of 98 consolidated hospitals
located in the Western United States. These two divisions make up the Company's
core operations and are typically located in urban areas that are characterized
by highly integrated facility networks. The America Group (LifePoint) includes
23 consolidated hospitals which are located in non-urban areas where, in almost
every case the hospital is the only hospital in the community. The Pacific Group
(Triad) includes 35 consolidated hospitals, approximately three-quarters of
which are located in small cities, generally in the Southern, Western and
Southwestern United States where the hospital is usually the only hospital or
one of two hospitals in the community, and the remainder of Pacific's facilities
are located in larger urban areas typically characterized by a high rate of
population growth. On May 11, 1999, Columbia/HCA completed the spin-offs of
LifePoint Hospitals, Inc. and Triad Hospitals, Inc. as two independent,
publicly-traded companies. See Note 3 -- Restructuring of Operations. The
Atlantic Group includes 8 hospitals which are located outside of the Company's
core markets and are currently held for sale.
9
12
COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
The geographic distributions of the Company's revenues and EBITDA for the
quarters ended March 31, 1999 and 1998 are summarized in the following table
(EBITDA is defined as income from continuing operations before depreciation and
amortization, interest expense, gains on sales of facilities, impairment of
long-lived assets, management fees, restructuring of operations and
investigation related costs, minority interests and income taxes) (dollars in
millions):
QUARTER
----------------
1999 1998
------ ------
Revenues:
Eastern Group............................................. $2,098 $2,019
Western Group............................................. 1,865 1,723
Pacific Group............................................. 368 414
America Group............................................. 134 130
Atlantic Group............................................ 109 497
Corporate and other....................................... 81 118
------ ------
$4,655 $4,901
====== ======
EBITDA
Eastern Group............................................. $ 512 $ 476
Western Group............................................. 322 312
Pacific Group............................................. 41 48
America Group............................................. 22 20
Atlantic Group............................................ (5) 40
Corporate and other....................................... (14) 5
------ ------
$ 878 $ 901
====== ======
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.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan" or "continue". These forward-looking statements are based
on the current plans and expectations of the Company and are subject to a number
of uncertainties and risks that could significantly affect current plans and
expectations and the Company's future financial condition and results. These
factors include, but are not limited to, (i) the outcome of the known and
unknown governmental investigations and litigation involving the Company's
business practices, (ii) the highly competitive nature of the health care
business, (iii) the efforts of insurers, health care providers and others to
contain health care costs, (iv) possible changes in the Medicare program that
may further limit reimbursements to health care providers and insurers, (v)
changes in Federal, state or local regulation affecting the health care
industry, (vi) the possible enactment of Federal or state health care reform,
(vii) the ability to attract and retain qualified management and personnel,
including physicians, (viii) liabilities and other claims asserted against the
Company, (ix) fluctuations in the market value of the Company's common stock,
(x) ability to complete the share repurchase program, (xi) changes in accounting
practices, (xii) changes in general economic conditions, (xiii) future
divestitures which may result in additional charges, (xiv) the complexity of
integrated computer systems and the success and expense of the remediation
efforts of the Company and relevant third parties in achieving Year 2000
readiness, (xv) the ability to enter into managed care provider arrangements on
acceptable terms, (xvi) the availability and terms of capital to fund the
expansion of the Company's business, (xvii) changes in business strategy or
development plans, (xviii) slowness of reimbursement, and (xix) other risk
factors. As a consequence, current plans, anticipated actions and future
financial condition and results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
INVESTIGATIONS
The Company is currently the subject of several federal investigations into
certain of 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 breadth of the ongoing investigations, the
Company expects additional 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 ("SEC").
The Company understands that the SEC investigation includes the anti-fraud,
insider trading, periodic reporting and internal accounting control provisions
of the Federal securities laws.
The Company cannot predict the outcome or quantify effects 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.
BUSINESS STRATEGY
Columbia/HCA's primary objective is to provide the communities it serves
with a comprehensive array of quality health care services in the most cost
effective manner possible. The Company's general, acute care
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
BUSINESS STRATEGY (CONTINUED)
hospitals usually provide a full range of services commonly available in
hospitals, such as internal medicine, general surgery, cardiology, oncology,
neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency
services. Outpatient and ancillary health care services are provided by the
Company, including outpatient surgery centers, diagnostic centers,
rehabilitation facilities and other facilities. In addition, Columbia/HCA
operates psychiatric hospitals which generally provide a full range of mental
health care services in inpatient, partial hospitalization and outpatient
settings. The Company also operates preferred provider organizations in 46
states.
In November 1997, Columbia/HCA reorganized its operations into five
divisions. In May 1999, Columbia/HCA established two of those divisions, America
Group ("LifePoint") and Pacific Group ("Triad"), as independent, publicly-traded
companies through tax-free spin-offs of these companies to Columbia/HCA
stockholders. LifePoint's hospitals are located in non-urban areas where, in
almost every case, LifePoint's hospital is the only hospital in the community.
Approximately three-quarters of Triad's hospitals are located in small cities,
generally in the Southern, Western and Southwestern United States, where Triad's
hospital is usually either the only hospital or one of two hospitals in the
community, and the remainder of Triad's hospitals are located in larger urban
areas.
Management believes that separating LifePoint and Triad into two smaller,
strategically focused public companies will have positive effects on the
performance and profitability of the facilities in these groups by enabling more
focused management attention, more effective operating strategies based on local
market conditions, and compensation incentives for employees that are more
closely tied to group performance.
During the third quarter of 1997, management implemented plans to divest
the Company's home health businesses and three of the four Value Health business
units (Value Health was a provider of specialty managed care benefit programs).
The divestitures of the three Value Health business units and the home health
operations were completed during 1998. The results of operations of these
divested businesses are reflected in the 1998 Condensed Consolidated Statement
of Income as discontinued operations.
The divestiture of the home health operations and the Value Health business
units and the spin-offs of LifePoint and Triad, will allow Columbia/HCA
management to focus their efforts on the Company's core markets, which are
typically located in urban areas that are characterized by highly integrated
health care facility networks.
The Company's strategy is to be a comprehensive provider of quality health
care services in select communities. 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
believes it achieves greater visibility and is better able to attract and serve
patients and physicians. The Company believes it is also able to reduce
operating costs by sharing certain services among several facilities in the same
area 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 or alternatively, may seek
to divest those assets.
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS
Revenue/Volume Trends
During the first quarter of 1999, the Company continued to face challenges
affecting revenues and volume growth rates. Three primary factors have
contributed these challenges: the impact of reductions in Medicare payments
mandated by the Balanced Budget Act of 1997 ("BBA-97"), the continuing trend
toward the conversion of more services to an outpatient basis and the impact of
the restructuring of operations and government investigations.
The Company's revenues continue to be affected by an increasing proportion
of revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, 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. The Company
expects patient volumes from Medicare and Medicaid to continue to increase due
to the general aging of the population and expansion of state Medicaid programs.
However, under BBA-97, the Company's reimbursement from the Medicare and
Medicaid programs was reduced and will be further reduced as certain reductions
will be phased in over the next two years. During the first quarter of 1999,
Congress did not adopt the Administration's proposed Medicare cuts for fiscal
year 2000 and their proposal to extend BBA-97 two additional years beyond 2002.
BBA-97 has accelerated a shift, by certain Medicare beneficiaries, from
traditional Medicare coverage to medical coverage that is provided under managed
care plans. The Company generally receives lower payments per patient under
managed care plans than under traditional indemnity insurance plans. With an
increasing proportion of services being reimbursed based upon fixed payment
amounts (where the payment is based upon the diagnosis, regardless of the cost
incurred or level of service provided), revenues, earnings and cash flows are
being significantly reduced. Admissions related to Medicare, Medicaid and
managed care plan patients were 90% of total admissions for the quarters ended
March 31, 1999 and 1998. Revenues from capitation arrangements (prepaid health
service agreements) are less than 1% of consolidated revenues.
The Company's revenues also continue to be affected by the trend toward
certain services being performed more frequently on an outpatient basis. 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. Generally, the payments received for an
outpatient procedure are less than those received for a similar procedure
performed in an inpatient setting. Outpatient revenues grew to 38% of net
patient revenues in 1999 from 36% in 1998.
Management believes that the impact of the ongoing governmental
investigations of certain of the Company's business practices and the related
media coverage, combined with the restructuring of operations (including the
spin-offs, the divestiture of the home health operations and the announced
divestitures of several facilities) have created uncertainties with physicians,
patients and payers in certain markets.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of 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 ongoing challenges to the
Company. The challenges presented by these trends are enhanced in that the
Company does not have the ability to control these trends and the associated
risks. To maintain and improve its operating margins in future periods, the
Company must increase patient volumes while controlling the cost of providing
services. If the Company is not able to achieve reductions in the cost of
providing services through operational efficiencies, and the trend of declining
reimbursements and payments continues, results of operations and cash flows will
deteriorate.
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients with operating decisions being made by the local management teams and
local physicians.
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16
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 ended March 31, 1999 and 1998 (dollars in millions, except per share
amounts):
1999 1998
-------------- --------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Revenues.................................................... $4,655 100.0 $4,901 100.0
Salaries and benefits....................................... 1,860 40.0 2,013 41.1
Supplies.................................................... 722 15.5 746 15.2
Other operating expenses.................................... 892 19.0 940 19.2
Provision for doubtful accounts............................. 338 7.3 343 7.0
Depreciation and amortization............................... 296 6.4 309 6.3
Interest expense............................................ 111 2.4 153 3.1
Equity in earnings of affiliates............................ (35) (0.7) (42) (0.9)
Gains on sales of facilities................................ (249) (5.3) -- --
Impairment of long-lived assets............................. 106 2.3 -- --
Restructuring of operations and investigation related
costs..................................................... 30 0.6 38 0.8
------ ----- ------ -----
4,071 87.5 4,500 91.8
------ ----- ------ -----
Income from continuing operations before minority interests
and income taxes.......................................... 584 12.5 401 8.2
Minority interests in earnings of consolidated entities..... 14 0.3 20 0.4
------ ----- ------ -----
Income from continuing operations before income taxes....... 570 12.2 381 7.8
Provision for income taxes.................................. 248 5.3 162 3.4
------ ----- ------ -----
Income from continuing operations........................... $ 322 6.9 $ 219 4.4
====== ===== ====== =====
Basic earnings per share from continuing operations......... $ .50 $ .34
Diluted earnings per share from continuing operations....... $ .50 $ .34
% changes from prior year:
Revenues.................................................. (5.0)% (1.7)%
Income from continuing operations before income taxes..... 49.5 (49.8)
Income from continuing operations......................... 46.7 (51.8)
Basic earnings per share from continuing operations....... 47.1 (49.3)
Diluted earnings per share from continuing operations..... 47.1 (48.5)
Admissions (a)............................................ (6.0) 2.1
Equivalent admissions (b)................................. (7.1) 3.3
Revenues per equivalent admission......................... 2.2 (4.8)
Same facility % changes from prior year(c):
Revenues.................................................. 2.7 (2.6)
Admissions (a)............................................ 3.5 0.7
Equivalent admissions (b)................................. 3.6 2.0
Revenues per equivalent admission......................... (0.8) (4.6)
- ---------------
(a) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient 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 period.
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 1999 and 1998
Income from continuing operations before income taxes increased 49.5% to
$570 million in 1999 from $381 million in 1998 and pretax margins increased to
12.2% in 1999 from 7.8% in 1998. The increase in pretax income was primarily
attributable to $249 million in gains on sales of facilities (an excess of $143
million in net gains over the $106 million in impairment charges recorded in the
first quarter of 1999) and an increase in the operating margin.
Revenues decreased 5.0% to $4.7 billion in 1999 compared to $4.9 billion in
1998. Inpatient admissions decreased 6.0% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 7.1%. Revenues, admissions and equivalent admissions declined
primarily as a result of the sales of facilities. At March 31, 1999 there were
37 fewer hospitals and 47 fewer surgery centers than there were at March 31,
1998. On a same facility basis, revenues increased 2.7%, admissions increased
3.5% and equivalent admissions increased 3.6% from a year ago. Revenue per
equivalent admissions increased 2.2% from 1998 to 1999 and on a same facility
basis remained relatively unchanged from the same period last year. 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 rates of reimbursement mandated by the BBA-97 which became effective
October 1, 1997 (lowered 1999 revenues by approximately $30 million), continued
increases in discounts from the growing number of managed care payers (managed
care as a percent of total admissions increased to 39% in 1999 compared to 36%
during 1998) and a net decrease in the number of consolidated hospitals and
surgery centers due to the sales of several facilities during 1998.
Salaries and benefits, as a percentage of revenues, decreased to 40.0% in
1999 from 41.1% in 1998. The increase in revenues per equivalent admission was a
primary factor for the decrease. In addition, the Company was more successful in
adjusting staffing levels to correspond with the equivalent admission growth
rates (man hours per equivalent admission decreased slightly compared to last
year).
Supply costs increased as a percentage of revenues to 15.5% in 1999 from
15.2% in 1998 due to an increase in the cost of supplies per equivalent
admission.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) remained relatively unchanged as a percentage of
revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.3% in 1999 from 7.0% in 1998 due to internal factors such as continued
computer information system conversions (including patient accounting systems)
at certain facilities and external factors such as payer mix shifts to managed
care plans (resulting in increased amounts of patient co-payments and
deductibles) and increases in claim audits and remittance denials from certain
payers. Management is unable to quantify the effects of each of these factors,
but the shift in payer mix is expected to continue and the provision for
doubtful accounts is likely to remain at higher levels than in past years.
Equity in earnings of affiliates decreased as a percentage of revenues to
0.7% in 1999 from 0.9% in 1998.
Depreciation and amortization increased as a percentage of revenues to 6.4%
in 1999 from 6.3% in 1998, primarily due to the increased capital expenditures
related to ancillary services (such as outpatient services) and information
systems. Capital expenditures in these areas generally result in shorter
depreciation and amortization lives for the assets acquired than typical
hospital acquisitions.
15
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended March 31, 1999 and 1998 (continued)
Interest expense decreased to $111 million in 1999 compared to $153 million
in 1998 primarily as a result of a decrease in average outstanding debt during
1999 compared to last year. This was due to the restructuring of operations
discussed earlier which has resulted in the receipt of a significant amount of
cash proceeds in 1998 which were used to pay down borrowings.
During 1999 and 1998, respectively, the Company incurred $30 million and
$38 million of costs in connection with the restructuring of operations and
investigation related costs. These costs included $19 and $28 million in
professional fees related to the investigations, $2 million and $4 million of
severance costs and $9 million and $6 million in various other costs in 1999 and
1998, respectively.
Minority interests decreased slightly as a percentage of revenues to 0.3%
in 1999 from 0.4% in 1998.
As previously discussed, the Company is currently in the process of
restructuring its operations. See Note 3-Restructuring of Operations in the
Notes to Condensed Consolidated Financial Statements. Assuming the completion of
the restructuring, the Company's remaining core assets had combined net income
from continuing operations which increased 6.9% to $231 million in 1999 from
$216 million in 1998. Excluding gains on sales of facilities, impairment of
long-lived assets and restructuring of operations and investigation related
costs, combined net income for the Company's remaining core assets increased
18.3% to $281 million in 1999 from $238 million in 1998.
Liquidity
Cash provided by continuing operating activities totaled $312 million
during the first quarter of 1999 compared to $688 million in 1998. The decrease
was primarily due to $334 million of net income tax refunds received during
1998, related to excess estimated payment amounts made during 1997, compared to
$82 million of net income tax refunds received in the first quarter of 1999.
Cash provided by investing activities increased to $810 million in 1999,
compared to cash used in investing activities of $277 million during the first
quarter of 1998. The increase was due to proceeds from the disposition of
hospitals and other health care facilities of $506 million in the first quarter
of 1999 compared with $43 million in 1998. During 1999 cash flows from the
changes in investments were $541 million (including repayment by a
nonconsolidated joint venture of Company advances approximating $330 million)
compared with cash used of $39 million in 1998.
Cash flows used in financing activities totaled $833 million in the first
quarter of 1999 compared to $393 million in 1998. The excess of cash flows from
operations over cash used in investing activities was primarily used to pay down
debt (approximately $424 million and $417 million in 1999 and 1998,
respectively) and repurchase the Company's common stock (approximately $408
million during the first quarter of 1999).
Working capital totaled $1.0 billion as of March 31, 1999 compared to $304
million at December 31, 1998. At December 31, 1998, included in current
liabilities was $741 million outstanding under the Company's former 364-day
revolving credit facility which was repaid during the first quarter of 1999.
Management believes that cash flows from operations, amounts available under the
Company's bank revolving credit facilities and proceeds from expected asset
sales will be sufficient to meet expected liquidity needs during the remainder
of 1999.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at March 31, 1999
and $1.8 billion at December 31, 1998.
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
16
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
prices based on certain formulas. The combined put price under all such
agreements was approximately $900 million at March 31, 1999. The Company cannot
predict if, or when, their joint venture partners will exercise such options (no
put options have been exercised between December 31, 1998 and March 31, 1999).
During the first quarter of 1998, the Internal Revenue Service (the "IRS")
issued guidance regarding certain tax consequences of joint ventures between
for-profits and not-for-profit hospitals. The Company has not determined the
impact of the tax ruling on its existing joint ventures and is continuing to
consult with its joint venture partners and tax advisers to develop appropriate
courses 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.
In February 1999, the Company announced that its Board of Directors
authorized the repurchase of up to an additional $1 billion of its common stock
through open market purchases, privately negotiated transactions or through a
series of accelerated or forward purchase contracts. During the first quarter of
1999, through open market purchases, the Company repurchased 3.6 million shares
of its common stock for approximately $68 million. During April 1999, through
open market purchases, the Company repurchased 5.0 million shares of its common
stock for approximately $110 million. Also during April 1999, the Company,
through accelerated purchase agreements, repurchased 27.0 million shares of its
common stock for approximately $700 million.
In July 1998, the Company announced a stock repurchase program under which
up to $1 billion of the Company's common stock would be repurchased by entering
into a series of forward purchase contracts. Approximately 44 million shares
were purchased at an average cost of approximately $22.65 per share. The
majority of these shares were purchased by certain financial organizations
through a series of forward purchase contracts. In accordance with the terms of
the forward purchase contracts, the shares purchased remain issued and
outstanding until the forward purchase contracts are settled. During the first
quarter of 1999, the Company settled forward purchase contracts representing
15.0 million shares at a cost of approximately $323 million. The Company settled
another 24.4 million shares at a cost of approximately $565 million in April
1999.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement (the
"LOC Agreement") with the United States Department of Justice (the "DOJ"). As
part of the LOC Agreement, the Company has provided the DOJ with Letters of
Credit totaling $1 billion. The LOC Agreement also provides that the Company's
repurchase program announced in February 1999 may be made, at the Company's
discretion, through open market purchases, privately negotiated transactions or
through a series of accelerated or forward purchase contracts. The Company and
the DOJ acknowledge that the amount in the LOC Agreement is not based upon the
amount or expected amount of any potential settlement. The LOC Agreement does
not constitute an admission of liability by the Company.
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint Hospitals, Inc. and one share
of Triad Hospitals, Inc. common stock for every 19 shares of the Company's
common stock outstanding on April 30, 1999. The Company received approximately
$900 million in cash upon the completion of the spin-offs and used the proceeds
to pay down debt.
The resolution 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.
17
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources
Excluding acquisitions, capital expenditures were $301 million during the
first quarter of 1999 compared to $316 million for the same period in 1998.
Planned capital expenditures in 1999 are expected to approximate $1.2 billion.
Management believes that its capital expenditure program is adequate to expand,
improve and equip its 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 $66 million during the first
quarter of 1998 compared with none during the first quarter of 1999.
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 $710 million as of April 30, 1999) and equity. At March 31, 1999,
there were projects under construction which had an estimated additional cost to
complete and equip over the next two years of approximately $1.0 billion.
The Company's revolving credit facility, the $1.0 billion term loan and the
$1.0 billion senior interim term loan contain customary covenants which include
(i) limitations on additional debt, (ii) limitations on sales of assets, mergers
and changes of ownership, and (iii) maintenance of certain interest coverage
ratios. The Company is currently in compliance with all such covenants.
In February 1999, Standard & Poor's downgraded the Company's senior debt
rating to BB+ and its commercial paper rating to B.
The Company entered into a $1.0 billion senior interim term loan agreement
during March 1999. Borrowings under this agreement will be used to fund the $1.0
billion share repurchase program approved in February 1999. The Company's
revolving credit facility and $1.0 billion term loan agreement were amended
during March 1999 to permit the spin-offs of the Company's America and Pacific
operating groups (Lifepoint and Triad) and place a $1.25 billion letter of
credit sublimit in the revolving credit facility.
The Company's restructuring of operations has resulted in the receipt of a
significant amount of cash proceeds from sales of facilities during both 1998
and 1999. The Company continues to manage its capital structure during this
process through the application of such proceeds, as it considers appropriate,
to the repayment of debt and the repurchase of its common stock.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Company has dedicated substantial resources to address the impact of
the Year 2000 problem. The Company has engaged all relevant aspects of the
organization in a coordinated effort to address the Year 2000 problem and to
minimize the chance of an interruption to the Company's operations or impact to
patient safety and health. 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
that could result in a disruption of business operations or equipment and
medical device malfunctions that could affect patient diagnosis and treatment.
18
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
With respect to the information technology ("IT") systems portion 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 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 has completed and placed into production 95% of software
applications and anticipates completing, in all material respects, remediation,
testing and implementation for internally developed and mission critical third
party software by June 30, 1999. Remediation, testing and implementation of
various software applications for certain of the Company's related subsidiaries
will be completed in the fourth quarter of 1999. These exceptions to the June
1999 IT systems goals should not have a material effect on the Company's
readiness. The IT systems portion of the Company's Year 2000 project is
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-supplied 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 September 30, 1999
(revised from an expected completion date of June 30, 1999). With respect to
such revised date, 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 the Company's
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.
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 September 30,
1999. The non-IT infrastructure portion of the Company's Year 2000 project is
currently on schedule in all material respects.
The Company is prioritizing its non-IT infrastructure efforts by focusing
on equipment and medical devices that will have a direct impact on patient care.
The Company is directing substantial 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 previous and current 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 or
that such repairs, replacements or upgrades will avoid all Year 2000 problems.
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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
assurances that these interfaces will be timely converted. Testing with payers
and intermediaries will not be completed by June 30, 1999 because the payers and
intermediaries are not ready to test with the Company's systems. Failure of
these third party systems could have a material adverse affect on the Company's
cash flow and 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 verify their ability to
continue to deliver goods and services through the Year 2000. The Company has
not received assurances from all mission critical suppliers and vendors that
they will be able to continue to deliver goods and services through the Year
2000, but the Company is continuing its efforts to obtain such assurances.
Failure of these third parties could have a material impact on operations and/or
the ability to provide health care services.
With the assistance of external resources, the Company has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or the
efforts of third parties upon which the Company relies, are not accurately or
timely completed. The Company has developed a contingency planning methodology
and will implement contingency plans throughout 1999.
While the Company is developing contingency plans to address possible
failure scenarios, the Company recognizes that there are "worst case" scenarios
which may develop and are largely outside the Company's control. The Company
recognizes the risks associated with extended infrastructure (power, water,
telecommunications) failure, the interruption of insurance payments to the
Company and the failure of equipment or software that could impact patient
safety or health despite the assurances of third parties. The Company is
addressing these and other failure scenarios in its contingency planning effort
and is engaging third parties in discussions regarding how to manage common
failure scenarios, but the Company cannot currently estimate the likelihood or
the potential cost of such failures. Currently, the Company does not believe
that any reasonably likely worst case scenario will have a material impact on
the Company's revenues or operations. Those reasonably likely worst case
scenarios include continued expenditures for remediation, continued expenditures
for replacement or upgrade of equipment, continued efforts regarding contingency
planning, increased staffing for the periods immediately preceding and after
January 1, and possible payment delays from the Company's payers.
The Year 2000 project is currently estimated to have a minimum total cost
of $86 million, of which the Company has incurred $7 million in the first
quarter of 1999. Cumulatively, the Company has incurred $57 million of costs
related to the Year 2000 project. The estimated minimum total cost has been
increased related to estimates for repair or replacement of non-IT systems and
costs related to an affiliated subsidiary. The estimate does not include payroll
costs for certain internal employees because these costs are not separately
tracked by the Company or asset replacement costs which cannot currently be
estimated. 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 and such increase could be material. 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 (except the cost of new equipment) 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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 COMPUTER ISSUES (CONTINUED)
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 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 $360 million as of March 31, 1999.
Management believes that final resolution of these disputes will not have a
material adverse effect on the results of operations or liquidity of the
Company. (See Note 6 -- Income Taxes of the Notes to Condensed Consolidated
Financial Statements for a description of the pending IRS disputes).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA
1999 1998
------- ---------
CONSOLIDATED
Number of hospitals in operation at:
March 31.................................................. 273 310
June 30................................................... 309
September 30.............................................. 294
December 31............................................... 281
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 95 142
June 30................................................... 139
September 30.............................................. 103
December 31............................................... 102
Licensed hospital beds at (a):
March 31.................................................. 51,797 60,739
June 30................................................... 60,418
September 30.............................................. 57,521
December 31............................................... 53,693
Weighted average licensed beds (b):
Quarter:
First.................................................. 52,451 60,765
Second................................................. 60,712
Third.................................................. 59,396
Fourth................................................. 55,594
Year...................................................... 59,104
Average daily census (c):
Quarter:
First.................................................. 26,546 28,816
Second................................................. 25,780
Third.................................................. 24,414
Fourth................................................. 23,932
Year...................................................... 25,719
Admissions (d):
Quarter:
First.................................................. 477,400 508,200
Second................................................. 475,400
Third.................................................. 459,700
Fourth................................................. 448,500
Year...................................................... 1,891,800
Equivalent Admissions (e):
Quarter:
First.................................................. 703,300 756,600
Second................................................. 733,500
Third.................................................. 705,100
Fourth................................................. 680,400
Year...................................................... 2,875,600
Average length of stay (days) (f):
Quarter:
First.................................................. 5.0 5.1
Second................................................. 4.9
Third.................................................. 4.9
Fourth................................................. 4.9
Year...................................................... 5.0
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
OPERATING DATA (CONTINUED)
1999 1998
------- ---------
NON-CONSOLIDATED (G)
Number of hospitals in operation at:
March 31.................................................. 24 26
June 30................................................... 26
September 30.............................................. 24
December 31............................................... 24
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 5 5
June 30................................................... 5
September 30.............................................. 5
December 31............................................... 5
Licensed hospital beds at:
March 31.................................................. 6,015 6,357
June 30................................................... 6,317
September 30.............................................. 6,029
December 31............................................... 6,015
- ---------------
(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) Represents the average number of patients in the Company's hospital beds
each day.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(e) Equivalent admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Equivalent
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient 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) 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 the Company. They are accounted
for using the equity method of accounting and are, therefore, not included
on a fully consolidated basis in the condensed consolidated financial
statements.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is facing significant legal challenges. The Company is the
subject of various Federal and state investigations, qui tam actions,
shareholder derivative and class action suits filed in Federal court,
shareholder derivative actions filed in state courts, patient/payer actions and
general liability claims.
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 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 in July 1998 by a superseding indictment.
The trial on this matter commenced on May 3, 1999.
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.
In general, the Company believes that the United States Department of
Justice and other Federal and state governmental authorities are investigating
certain acts, practices or omissions alleged to have been engaged in by the
Company with respect to Medicare, Medicaid and CHAMPUS patients regarding (a)
allegedly improper DRG coding (commonly referred to as "upcoding") relating to
bills submitted for medical services, (b) allegedly improper outpatient
laboratory billing (e.g., unbundling of services and medically unnecessary
tests), (c) inclusion of allegedly improper items in cost reports submitted as a
basis for reimbursement under Medicare, Medicaid and similar government
programs, (d) arrangements with physicians and other parties that allegedly
violate certain Federal and state laws governing fraud and abuse, anti-kickback
and "Stark" laws and (e) allegedly improper acquisitions of home health care
agencies and allegedly excessive billing for home health care services.
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, insider trading, 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
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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 three cases 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. sec.3729 et seq., for improper claims submitted to the government
for reimbursement. The lawsuits generally 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 February 12, 1999, the United States filed a Motion before the Judicial
Panel on Multidistrict Litigation ("MDL Panel") seeking to transfer and
consolidate all qui tam actions against the Company, including those that are
sealed and unsealed, for purposes of discovery and pretrial matters, to the
District Court for the District of Columbia. The MDL Panel denied the Motion on
procedural grounds relating to notice but granted leave to refile.
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 filed an Amended Complaint. The Government has not yet served an
Amended Complaint on the Columbia/HCA 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 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. Relator filed a motion for partial summary
judgment. The court ordered relator's motion for partial summary judgment
stricken and ordered the relator to file an amended motion for partial summary
judgment, which relator has not yet done.
In December 1998, the matter of United States of America ex rel. John W.
Schilling v. Columbia/HCA Healthcare Corporation, et al., Civil Action No.
96-1264-CIV-T-23B, in the Middle District of Florida, was unsealed. The
Government has intervened in this action. The Complaint alleges that defendants
made false
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statements in annual Medicare cost reports. The Complaint further alleges, as in
Alderson, that Columbia kept "reserve cost reports." The Government has not yet
served the Complaint on Defendants.
In June of 1998, the case United States of America ex rel, Joseph "Mickey"
Parslow v. Columbia/HCA Healthcare Corporation and Curative Health Services,
Incorporated, No. 98-1260-CIV-T-23F, in the Middle District of Florida, Tampa
Division, was filed. This complaint was unsealed by the Court on April 9, 1999.
The Government has intervened in this lawsuit but has not yet served the
complaint on the Company. This qui tam case alleges that the Company submitted
false claims relating to contracts with Curative for the management of certain
wound care centers. The complaint further alleges that management fees paid to
Curative were excessive and not reasonable and that the claims for reimbursement
for these management fees violated the anti-kickback statutes.
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.
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 filed an Appeal which is pending before the Fifth Circuit.
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, relator 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 granted.
The Company intends to pursue the defense of the qui tam actions
vigorously.
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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 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 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 expenses. 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
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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/HCA
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/HCA 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.
Plaintiffs in both Barron and Kovalchick have granted the defendants an
indefinite extension of time to respond to the Complaint. 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 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 Court has entered an Order temporarily staying the lawsuit. That
order recently expired and the defendants have filed a motion to extend the
duration of the stay. The Court has granted the Company's motion to temporarily
stay the lawsuit.
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 is a party to 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.
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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
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 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 the allegedly unreasonable portion of the charges as well as
interest, attorneys' fees and costs. In response to defendant's amended motion
to dismiss filed in January 1996, plaintiff amended the Complaint and defendant
subsequently filed an answer and defenses in June 1996. On October 15, 1997,
Harald Jackson moved to intervene in the lawsuit (see case below). The court
denied Jackson's motion on December 19, 1997. To date, discovery is proceeding
and no class has been certified.
Jane Doe and her husband, John Doe, on their own behalf, and on behalf of
all other persons similarly situated vs. 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. Summit has filed an
application for permission to appeal to the Supreme Court of Tennessee, which
the Supreme Court granted on November 9, 1998, and remanded the case to the
Court of Appeals for review on the merits. The case is set for oral argument
before the Court of Appeals on June 8, 1999. 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 individuals and
entities 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 proposed class is broad enough to encompass all
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private payers, including individuals, insurers and health and welfare plans.
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 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. On September 18, 1998, the Company's
motion to dismiss was granted and plaintiff's complaint was dismissed without
prejudice. On November 6, 1998, the plaintiff filed an amended complaint
alleging violations of the Illinois Consumer Fraud and Deceptive Trade Practices
Act, fraudulent misrepresentation, breach of contract and civil conspiracy. On
April 16, 1999, the court granted the Company's motion to dismiss the amended
complaint. Such dismissal was with prejudice as to the civil conspiracy count
and without prejudice as to the remaining counts, and plaintiff was allowed
until May 14, 1999 to replead those counts that had been dismissed without
prejudice.
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
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kickback schemes with doctors for patient referrals. The Company filed its
answer in November 1997 denying the claims. Plaintiffs have recently sought to
commence discovery.
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 persons or entities 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 overbilling. The proposed class is broad enough to encompass all
private payers, including individuals, insurers and health and welfare plans.
This suit seeks damages on behalf of the plaintiff and 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. In February 1998, Jackson filed an amended complaint, and
the case was remanded to state court. The Company has filed motions in response
to the amended complaint which are pending. Jackson moved to transfer the case
to the judge handling the Brown case which is also pending, but the motion to
transfer was denied on April 8, 1999. Discovery has commenced.
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. In September 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 the September 1998 orders. Those appeals are pending. 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 in June 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
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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.
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. sec. 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 parties are currently engaged in discovery. In February 1999,
plaintiffs filed a motion to extend the time periods in the scheduling order,
which has not been ruled on by the Court.
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 are 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 Note 2 -- Investigations and 10 -- Contingencies
of the Notes to Condensed Consolidated Financial Statements.
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The Company believes the ongoing investigations, qui tam, shareholder
cases, class action cases and related media coverage have had 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 and Other 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 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 Company's 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. Discovery in this case is almost completed.
A trial date of June 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. 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. 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 United States Supreme Court for a Writ of Certiorari on the RICO claims
which was granted. On January 20, 1999, the Supreme Court affirmed the Ninth
Circuit's decision that the plaintiffs could proceed with their RICO claims. The
Supreme Court did not address the amount of damages that plaintiffs could seek
on their claim. The entire case is now back in the Nevada district court, where
Humana has filed several motions seeking dismissal of the antitrust claims. A
trial is expected to be scheduled before the end of the year.
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 rendering 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
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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. Defendants have filed a motion to dismiss the counterclaim, which
motion to dismiss has been partially granted.
The Company intends to pursue the defense of these actions and prosecution
of its counterclaims and third party claims vigorously.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit 10(a) -- $1,000,000 Credit Agreement dated as of March 30, 1999
among the Company, The Several Banks and Other
Financial Institutions, Chase Securities Inc., as Lead
Arranger and Sole Book Manager, NationsBank, N.A., as
Documentation Agent, The Bank of New York, The Bank of
Nova Scotia, and Toronto-Dominion (Texas), Inc., as
Co-Syndication Agents, Deutsche Bank AG New York Branch
and/or Cayman Islands Branch and Fleet National Bank,
as Co-Agents, SunTrust Bank, Nashville, N.A. and
Wachovia Bank, N.A., as Lead Managers and The Chase
Manhattan Bank, as Administrative Agent.*
Exhibit 10(b) -- First Amendment to the July 1998 $1 Billion Agreement
dated as of March 30, 1999.*
Exhibit 10(c) -- Fifth Amendment to the Five-Year Agreement dated as of
March 30, 1999.*
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 March 31, 1999:
On February 24, 1999, the Company filed a report on Form 8-K which
included its operating results for the year and fourth quarter ended
December 31, 1998 and announced a new $1.0 billion share repurchase
program. The Company also announced that it entered into a Letter of Credit
Agreement with the United States in connection with the Company's share
repurchase agreement.
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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
/s/ R. MILTON JOHNSON
--------------------------------------
R. Milton Johnson
Vice President and Controller
Date: May 14, 1999
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