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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 31, 1999
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Voting common stock, $.01 par value 542,276,800 shares
Nonvoting common stock, $.01 par value 21,000,000 shares
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COLUMBIA/HCA HEALTHCARE CORPORATION
FORM 10-Q
SEPTEMBER 30, 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 and nine months ended September 30,
1999 and 1998..................................... 3
Condensed Consolidated Balance Sheets -- September
30, 1999 and December 31, 1998.................... 4
Condensed Consolidated Statements of Cash
Flows -- for the nine months ended September 30,
1999 and 1998..................................... 5
Notes to Condensed Consolidated Financial
Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................... 29
Item 6. Exhibits and Reports on Form 8-K.................... 40
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3
COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
QUARTER NINE MONTHS
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues.................................................. $ 3,899 $ 4,579 $ 12,715 $ 14,261
Salaries and benefits..................................... 1,583 1,900 5,119 5,911
Supplies.................................................. 618 730 1,994 2,195
Other operating expenses.................................. 733 914 2,451 2,815
Provision for doubtful accounts........................... 318 369 985 1,052
Depreciation and amortization............................. 262 312 836 932
Interest expense.......................................... 122 142 351 440
Equity in earnings of affiliates.......................... (8) (16) (73) (91)
Gains on sales of facilities.............................. -- (537) (257) (537)
Impairment of long-lived assets........................... -- 334 160 334
Restructuring of operations and investigation related
costs................................................... 24 21 84 90
-------- -------- -------- --------
3,652 4,169 11,650 13,141
-------- -------- -------- --------
Income from continuing operations before minority
interests and income taxes.............................. 247 410 1,065 1,120
Minority interests in earnings of consolidated entities... 13 16 41 54
-------- -------- -------- --------
Income from continuing operations before income taxes..... 234 394 1,024 1,066
Provision for income taxes................................ 96 231 458 511
-------- -------- -------- --------
Income from continuing operations......................... 138 163 566 555
Discontinued operations:
Loss from operations of discontinued businesses, net of
income tax benefit of $20 for the quarter and $33 for
the nine months ended September 30, 1998.............. -- (17) -- (61)
Loss on disposal of certain discontinued businesses..... -- -- -- (73)
-------- -------- -------- --------
Net income....................................... $ 138 $ 146 $ 566 $ 421
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations....................... $ .25 $ .25 $ .95 $ .86
Discontinued operations:
Loss from operations of discontinued businesses....... -- (.03) -- (.10)
Loss on disposal of certain discontinued businesses... -- -- -- (.11)
-------- -------- -------- --------
Net income....................................... $ .25 $ .22 $ .95 $ .65
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations....................... $ .24 $ .25 $ .95 $ .86
Discontinued operations:
Loss from operations of discontinued businesses....... -- (.03) -- (.10)
Loss on disposal of certain discontinued businesses... -- -- -- (.11)
-------- -------- -------- --------
Net income....................................... $ .24 $ .22 $ .95 $ .65
======== ======== ======== ========
Shares used in earnings per share calculations (in
thousands):
Basic................................................... 562,539 644,959 593,021 643,494
Diluted................................................. 567,789 647,243 598,594 646,734
Cash dividends per share.................................. $ .02 $ .02 $ .06 $ .06
See accompanying notes.
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COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 124 $ 297
Accounts receivable, less allowances for doubtful accounts
of $1,571 in 1999 and $1,645 in 1998................... 1,834 2,096
Inventories............................................... 367 434
Income taxes receivable................................... 188 149
Other..................................................... 1,002 887
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3,515 3,863
Property and equipment, at cost............................. 13,955 15,644
Accumulated depreciation.................................... (5,650) (6,195)
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8,305 9,449
Investments of insurance subsidiary......................... 1,545 1,614
Investments in and advances to affiliates................... 617 1,275
Intangible assets, net...................................... 2,481 2,910
Other....................................................... 164 318
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$16,627 $19,429
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 608 $ 784
Accrued salaries.......................................... 384 425
Other accrued expenses.................................... 1,147 1,282
Long-term debt due within one year........................ 1,010 1,068
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3,149 3,559
Long-term debt.............................................. 5,522 5,685
Professional liability risks, deferred taxes and other
liabilities............................................... 1,679 1,839
Minority interests in equity of consolidated entities....... 768 765
Stockholders' equity:
Common stock, $.01 par; authorized 1,600,000,000 voting
shares and 50,000,000 nonvoting shares; outstanding
542,282,000 voting shares and 21,000,000 nonvoting
shares -- September 30, 1999 and 621,578,300 voting
shares and 21,000,000 nonvoting shares -- December 31,
1998................................................... 6 6
Capital in excess of par value............................ 934 3,498
Other..................................................... 8 11
Accumulated other comprehensive income.................... 43 80
Retained earnings......................................... 4,518 3,986
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5,509 7,581
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$16,627 $19,429
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See accompanying notes.
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COLUMBIA/HCA HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
UNAUDITED
(DOLLARS IN MILLIONS)
1999 1998
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Cash flows from continuing operating activities:
Net income................................................ $ 566 $ 421
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Provision for doubtful accounts...................... 985 1,052
Depreciation and amortization........................ 836 932
Income taxes......................................... (117) 632
Gains on sales of facilities......................... (257) (537)
Impairment of long-lived assets...................... 160 334
Loss from discontinued operations.................... -- 134
Changes in operating assets and liabilities.......... (1,387) (1,416)
Other................................................ 20 15
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Net cash provided by continuing operating
activities.......................................... 806 1,567
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Cash flows from investing activities:
Purchase of property and equipment................... (936) (969)
Acquisition of hospitals and health care entities.... -- (116)
Disposition of hospitals and health care entities.... 660 1,570
Spin-off of facilities to stockholders............... 886 --
Change in investments................................ 557 (269)
Change in net assets of discontinued operations,
net................................................. -- 48
Sale of certain discontinued operations.............. -- 662
Other................................................ 17 102
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Net cash provided by investing activities............ 1,184 1,028
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Cash flows from financing activities:
Issuance of long-term debt........................... 1,024 --
Net change in bank borrowings........................ (441) (2,433)
Repayment of long-term debt.......................... (826) (141)
Payment of cash dividends............................ (35) (39)
Issuances (repurchases) of common stock, net......... (1,905) 81
Other................................................ 20 2
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Net cash used in financing activities................ (2,163) (2,530)
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Change in cash and cash equivalents......................... (173) 65
Cash and cash equivalents at beginning of period............ 297 110
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Cash and cash equivalents at end of period.................. $ 124 $ 175
======= =======
Interest payments........................................... $ 320 $ 412
Income tax payments (refunds), net.......................... $ 565 $ (116)
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 September 30, 1999, these affiliates owned and
operated 202 hospitals, 81 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 12 hospitals and 3 freestanding surgery centers which are accounted for
using the equity method. The affiliates' facilities are located in 24 states,
England and Switzerland. The terms "Columbia/HCA" or the "Company," as used in
this Quarterly Report on Form 10-Q, refer to Columbia/HCA Healthcare Corporation
and its affiliates unless otherwise stated or indicated by context.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
quarter and nine months ended September 30, 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 five unsealed 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 has substantially completed the restructuring of its operations
in an effort to create a smaller and more focused company. The restructuring
included the divestitures of certain hospitals, surgery centers and related
facilities, the spin-offs of LifePoint Hospitals, Inc. ("LifePoint") and Triad
Hospitals, Inc. ("Triad") 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 1999, the Company recognized a net pretax gain of $257 million ($151
million after-tax) on the sale of three hospitals and certain related health
care facilities. Proceeds from the sales were used to repay bank borrowings.
During the first nine months of 1999, management identified and initiated,
or revised, plans to divest or close during 1999 and 2000, 19 consolidating
hospitals and 4 non-consolidating hospitals. The carrying value for the
hospitals and other assets expected to be sold was reduced to fair value of
approximately $195 million, based upon estimates of sales values, for a total
non-cash, pretax charge of approximately $160 million. The hospitals and other
assets for which the impairment charge was recorded had net revenues of
approximately $101 million and $167 million for the quarters ended September 30,
1999 and 1998, respectively, and approximately $421 million and $530 million for
the nine months ended September 30, 1999 and 1998, respectively. These
facilities incurred losses from continuing operations before the pretax charge
and income tax benefits of approximately $20 million and $19 million for the
quarters ended September 30, 1999 and 1998, respectively, and approximately $40
million and $48 million for the nine months ended September 30, 1999 and 1998,
respectively. During the first nine months of 1999, the Company completed the
sales of 5 of the 19 consolidating hospitals and the 4 non-consolidating
hospitals, and 4 of the consolidating hospitals were included in the spin-off of
Triad. The Company completed the sales of 3 consolidating hospitals in October
1999. The proceeds from the completed sales approximated the carrying values and
were used to repay bank borrowings. Proceeds from the expected divestitures will
be used to repay bank borrowings.
Spin-Offs
On May 11, 1999, the Company completed the spin-offs of LifePoint and Triad
through a distribution of one share of LifePoint common stock and one share of
Triad common stock for every 19 shares of the Company's common stock outstanding
on April 30, 1999. Triad was comprised of 34 consolidating hospitals and
LifePoint was comprised of 23 consolidating hospitals. Capital in excess of par
value was reduced by approximately $683 million for the spin-offs of LifePoint
and Triad.
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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 NINE MONTHS
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1999 1998 1999 1998
---- ---- ---- ----
Professional fees related to investigations and
restructuring of operations............................ $20 $20 $62 $72
Other.................................................... 4 1 22 18
--- --- --- ---
$24 $21 $84 $90
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NOTE 5 -- DISCONTINUED OPERATIONS
Discontinued operations included three of the four business units acquired
in the Company's August 1997 merger with Value Health, Inc. ("Value Health") and
the Company's home health care businesses. During 1997, the Company implemented
plans to dispose of these businesses. 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 $98 million and $920
million for the quarter and nine months ended September 30, 1998, respectively.
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'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 $374 million in
income taxes and interest with respect to disputed issues through September 30,
1999.
The Company expects to receive a Statutory Notice of Deficiency ("Statutory
Notice") during the first quarter of 2000 in connection with the IRS examination
of its 1995 and 1996 Federal income tax returns. The Company anticipates filing
a petition with the Tax Court contesting any claimed deficiencies and proposed
adjustments included in the Statutory Notice during the second quarter of 2000.
Because the 1995 - 96 IRS examination has not been completed, the Company is
presently unable to estimate the amount of any additional income tax and
interest which the IRS may claim.
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 6 -- INCOME TAXES (CONTINUED)
Tax Court decisions received in 1996 and 1997 related to the IRS'
examination of 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 2000. Because no final decisions have been made regarding
appeals of the decisions, the Company is presently unable to estimate the amount
of any additional income tax and interest which the IRS may claim.
Management believes that adequate provisions have been recorded to satisfy
final resolution of the disputed issues. Management believes that the Company,
CHC, HCA and Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with the IRS during
previous examinations and that final resolution of these disputes will not have
a material adverse effect on the results of operations or financial position of
the Company.
NOTE 7 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations for the quarters and nine months
ended September 30, 1999 and 1998 (dollars in millions, except per share
amounts):
QUARTER NINE MONTHS
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1999 1998 1999 1998
--------- -------- -------- --------
Numerator (a):
Income from continuing operations.... $ 138 $ 163 $ 566 $ 555
Denominator:
Share reconciliation (in thousands):
Shares used for basic earnings per
share............................. 562,539 644,959 593,021 643,494
Effect of dilutive securities:
Stock options..................... 4,285 1,677 3,446 2,604
Warrants and other................ 965 607 2,127 636
--------- -------- -------- --------
Shares used for dilutive earnings per
share............................. 567,789 647,243 598,594 646,734
========= ======== ======== ========
Earnings per share:
Basic earnings per share from
continuing operations............. $ .25 $ .25 $ .95 $ .86
Diluted earnings per share from
continuing operations............. $ .24 $ .25 $ .95 $ .86
- ---------------
(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 were used during the second
quarter to fund the $1.0 billion share repurchase program approved in February
1999 (see Note 9 -- Stock Repurchase Program). The Company previously entered
into a $1.0 billion senior term loan in June 1998. During the third quarter of
1999, the Company repaid $500 million on the senior interim term loan. During
the third quarter of 1999, the Company repaid $100 million on the senior term
loan. The Company used amounts available under the Company's revolving credit
facility to fund the payments on the senior interim term loan and the senior
term loan.
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 9 -- STOCK REPURCHASE PROGRAM
In February 1999, the Company's Board of Directors authorized the
repurchase of up to $1 billion of the Company's common stock, which the Company
completed through open market purchases and accelerated 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 the second quarter of 1999, through open market purchases, the
Company repurchased 10 million shares of its common stock for approximately $232
million. Also during 1999, the Company, through accelerated purchase agreements,
repurchased 28 million shares of its common stock for approximately $700
million.
In July 1998, the Company announced a stock repurchase program under which
$1 billion of the Company's common stock was repurchased. The majority of these
shares were purchased by certain financial organizations through a series of
forward purchase contracts. 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 during the second quarter of 1999. The
Company repurchased 4 million shares for $97 million during the fourth quarter
of 1998 and 0.6 million shares for $14 million through open market purchases.
During 1999, the share repurchase transactions reduced capital in excess of
par value by approximately $1.9 billion.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The
agreement also provided that the Company's share repurchase program announced in
February 1999 could be completed, at the Company's discretion, through open
market purchases, privately negotiated transactions or through accelerated or
forward purchase contracts. The Company and the government acknowledge that the
amount in the agreement is not based upon the amount or expected amount of any
potential settlement of the ongoing government investigation, and the 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, claims and overcharging, 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 are 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.
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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 and nine months ended September 30, 1999 and 1998 are as follows (in
millions):
QUARTER NINE MONTHS
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net income............................................ $138 $146 $566 $421
Change in unrealized gains on securities.............. (32) (16) (31) (16)
Foreign currency translation adjustments.............. 5 4 (6) 2
---- ---- ---- ----
Comprehensive income.................................. $111 $134 $529 $407
==== ==== ==== ====
The components of accumulated other comprehensive income, net of related
taxes, at September 30, 1999 and December 31, 1998 are as follows (in millions):
1999 1998
---- ----
Net unrealized gains on securities.......................... $46 $77
Foreign currency translation adjustments.................... (3) 3
--- ---
Accumulated other comprehensive income...................... $43 $80
=== ===
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION
Columbia/HCA operates in one line of business, which is operating hospitals
and related health care entities. The Company's revenues related to patients
participating in the Medicare program approximated 28% and 30% for the quarters
ended September 30, 1999 and 1998, respectively, and 29% and 31% for the nine
months ended September 30, 1999 and 1998, respectively.
Columbia/HCA's operations are structured in two geographically organized
groups: the Eastern Group made up of 104 consolidating hospitals located in the
Eastern United States and the Western Group made up of 85 consolidating
hospitals located in the Western United States. These two groups make up the
Company's core operations and are typically located in urban areas that are
characterized by highly integrated facility networks. An additional group, the
National Group, includes 11 consolidating hospitals which are located in the
United States but are not located in the Company's core markets and are
currently held for sale. During the third quarter of 1999, the Company moved 8
consolidating hospitals which are currently held for sale, three of which were
sold during the third quarter, from the Eastern and Western Groups to the
National Group. One hospital which had been previously held for sale was moved
to the Eastern Group since it will not be sold. The Company also operates 2
consolidating hospitals in Switzerland.
The Company completed the spin-offs of LifePoint and Triad (the
"Spin-offs") during the second quarter of 1999. At April 30, 1999, LifePoint
included 23 consolidating hospitals which are located in non-urban areas where,
in almost every case the hospital is the only hospital in the community. At
April 30, 1999, Triad included 34 consolidating 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 Triad's
facilities are located in larger urban areas typically characterized by a high
rate of population growth. See Note 3 -- Restructuring of Operations.
The geographic distribution of the Company's revenues and EBITDA, restated
for the restructuring of operations, for the quarters and nine months ended
September 30, 1999 and 1998, the quarters ended June 30, 1999 and 1998 and March
31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 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, restructuring of
operations and investigation related costs, minority interest and income taxes).
The
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COLUMBIA/HCA HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
geographic distribution of the Company's assets, restated for the restructuring
of operations, as of September 30, 1999 and December 31, 1998, 1997 and 1996 are
also summarized in the following table (dollars in millions):
NINE MONTHS
QUARTER ENDED QUARTER ENDED QUARTER ENDED ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- ----------------- ---------------------------
1999 1998 1999 1998 1999 1998 1999 1998 1998 1997 1996
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Revenues:
Eastern Group........... $1,965 $1,846 $1,989 $1,933 $2,080 $1,998 $ 6,034 $ 5,777 $ 7,677 $ 7,585 $ 7,595
Western Group........... 1,751 1,664 1,798 1,655 1,803 1,657 5,352 4,976 6,607 6,346 6,141
Corporate and
other(a).............. 87 86 85 128 84 120 256 334 400 432 593
National Group.......... 96 469 125 541 186 582 407 1,592 1,910 2,359 2,393
Spin-offs............... -- 514 164 524 502 544 666 1,582 2,087 2,097 2,064
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
$3,899 $4,579 $4,161 $4,781 $4,655 $4,901 $12,715 $14,261 $18,681 $18,819 $18,786
====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
EBITDA:
Eastern Group........... $ 393 $ 349 $ 438 $ 422 $ 512 $ 474 $ 1,343 $ 1,245 $ 1,581 $ 1,458 $ 1,918
Western Group........... 276 265 296 255 311 302 883 822 979 997 1,479
Corporate and
other(a).............. 3 2 (47) 44 (14) 5 (58) 51 47 (58) 56
National Group.......... (17) 9 (1) 19 6 52 (12) 80 55 184 356
Spin-offs............... -- 57 20 56 63 68 83 181 206 270 405
------ ------ ------ ------ ------ ------ ------- ------- ------- ------- -------
$ 655 $ 682 $ 706 $ 796 $ 878 $ 901 $ 2,239 $ 2,379 $ 2,868 $ 2,851 $ 4,214
====== ====== ====== ====== ====== ====== ======= ======= ======= ======= =======
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1999 1998 1997 1996
------------- ------- ------- -------
Assets:
Eastern Group............................................. $ 6,854 $ 6,950 $ 6,891 $ 7,166
Western Group............................................. 6,510 6,895 6,531 6,519
Corporate and other(a).................................... 2,848 3,016 4,866 3,535
National Group............................................ 415 842 1,905 2,094
Spin-offs................................................. -- 1,726 1,809 1,802
------- ------- ------- -------
$16,627 $19,429 $22,002 $21,116
======= ======= ======= =======
- ---------------
(a) Includes the Company's 2 consolidating hospitals which are located in
Switzerland.
NOTE 13 -- DERIVATIVES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting
for Derivative Instruments and Hedging Activities". In July 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133", which requires the adoption of SFAS 133 in fiscal
years beginning after June 15, 2000. 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.
12
13
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) changes in accounting practices, (xi) changes in general economic
conditions, (xii) future divestitures which may result in additional charges,
(xiii) the complexity of integrated computer systems, any failure of the Company
or its material third party suppliers or payers to timely achieve Year 2000
readiness or institute effective contingency plans in the event such Year 2000
readiness is not achieved, and the expense of the remediation efforts of the
Company in achieving Year 2000 readiness, and effecting any necessary
contingency plans, (xiv) the ability to enter into managed care provider
arrangements on acceptable terms, (xv) the availability and terms of capital to
fund the expansion of the Company's business, (xvi) changes in business strategy
or development plans, (xvii) slowness of reimbursement, and (xviii) 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
13
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 47
states and the District of Columbia.
As a part of its ongoing strategy, 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 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 market and is better positioned to
work with health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs") and employers.
In May 1999, Columbia/HCA established LifePoint Hospitals, Inc.
("LifePoint") and Triad Hospitals, Inc. ("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.
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 Company has substantially completed the restructuring of its operations
in an effort to create a smaller and more focused company. The divestiture of
the home health operations and the Value Health business units and the spin-offs
of LifePoint and Triad 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.
RESULTS OF OPERATIONS
Revenue/Volume Trends
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 the Balanced Budget Act of 1997 ("BBA-97"), the Company's
reimbursement from the Medicare and Medicaid programs was reduced. The Company
continues to experience a shift in its payer mix as patients move from
traditional indemnity insurance and 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 Medicare or 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
14
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue/Volume Trends (continued)
are being reduced. Admissions related to Medicare, Medicaid, managed care plans
and other discounted arrangements for the quarters and nine months ended
September 30, 1999 and 1998 are set forth below.
QUARTER NINE MONTHS
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
Medicare.................................... 35.8% 38.0% 37.8% 39.7%
Medicaid.................................... 11.3 11.6 11.0 11.4
Managed care and other discounted........... 43.0 39.6 41.0 38.3
Other....................................... 9.9 10.8 10.2 10.6
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Revenues from capitation arrangements (prepaid health service agreements)
are less than 1% of consolidated revenues.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
and increasing percentages of patient volume attributed to patients
participating in managed care plans are expected to present ongoing challenges
to the Company. The challenges presented by these trends are enhanced by the
fact 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 continue, 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.
15
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 and nine months ended September 30, 1999 and 1998 (dollars in millions,
except per share amounts):
QUARTER
------------------------------------
1999 1998
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
Revenues.................................................... $ 3,899 100.0 $ 4,579 100.0
Salaries and benefits....................................... 1,583 40.6 1,900 41.5
Supplies.................................................... 618 15.9 730 15.9
Other operating expenses.................................... 733 18.7 914 20.0
Provision for doubtful accounts............................. 318 8.2 369 8.1
Depreciation and amortization............................... 262 6.8 312 6.7
Interest expense............................................ 122 3.1 142 3.1
Equity in earnings of affiliates............................ (8) (0.2) (16) (0.4)
Gains on sales of facilities................................ -- -- (537) (11.7)
Impairment of long-lived assets............................. -- -- 334 7.3
Restructuring of operations and investigation related
costs..................................................... 24 0.6 21 0.5
------- ----- ------- -----
3,652 93.7 4,169 91.0
------- ----- ------- -----
Income from continuing operations before minority interests
and income taxes.......................................... 247 6.3 410 9.0
Minority interests in earnings of consolidated entities..... 13 0.3 16 0.4
------- ----- ------- -----
Income from continuing operations before income taxes....... 234 6.0 394 8.6
Provision for income taxes.................................. 96 2.5 231 5.0
------- ----- ------- -----
Income from continuing operations........................... $ 138 3.5 $ 163 3.6
======= ===== ======= =====
Basic earnings per share from continuing operations......... $ .25 $ .25
Diluted earnings per share from continuing operations....... $ .24 $ .25
% changes from prior year:
Revenues................................................ (14.8)% (0.7)%
Income from continuing operations before income taxes... (40.4) 161.0
Income from continuing operations....................... (15.2) 80.1
Basic earnings per share from continuing operations..... -- 66.7
Diluted earnings per share from continuing operations... (4.0) 66.7
Admissions (a).......................................... (19.4) (0.6)
Equivalent admissions (b)............................... (20.9) (1.1)
Revenues per equivalent admission....................... 7.6 0.3
Same facility % changes from prior year (c):
Revenues................................................ 5.8 (0.4)
Admissions (a).......................................... 2.0 0.7
Equivalent admissions (b)............................... 1.9 1.3
Revenues per equivalent admission....................... 3.8 (1.7)
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Results Summary (continued)
NINE MONTHS
------------------------------------
1999 1998
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -----
Revenues.................................................... $12,715 100.0 $14,261 100.0
Salaries and benefits....................................... 5,119 40.3 5,911 41.4
Supplies.................................................... 1,994 15.7 2,195 15.4
Other operating expenses.................................... 2,451 19.2 2,815 19.7
Provision for doubtful accounts............................. 985 7.8 1,052 7.4
Depreciation and amortization............................... 836 6.4 932 6.6
Interest expense............................................ 351 2.8 440 3.1
Equity in earnings of affiliates............................ (73) (0.6) (91) (0.6)
Gains on sales of facilities................................ (257) (2.0) (537) (3.8)
Impairment of long-lived assets............................. 160 1.3 334 2.3
Restructuring of operations and investigation related
costs..................................................... 84 0.7 90 0.6
------- ----- ------- -----
11,650 91.6 13,141 92.1
------- ----- ------- -----
Income from continuing operations before minority interests
and income taxes.......................................... 1,065 8.4 1,120 7.9
Minority interests in earnings of consolidated entities..... 41 0.3 54 0.4
------- ----- ------- -----
Income from continuing operations before income taxes....... 1,024 8.1 1,066 7.5
Provision for income taxes.................................. 458 3.6 511 3.6
------- ----- ------- -----
Income from continuing operations........................... $ 566 4.5 $ 555 3.9
======= ===== ======= =====
Basic earnings per share from continuing operations......... $ .95 $ .86
Diluted earnings per share from continuing operations....... $ .95 $ .86
% changes from prior year:
Revenues................................................ (10.8)% (1.3)%
Income from continuing operations before income taxes... (3.9) (31.4)
Income from continuing operations....................... (2.0) (40.3)
Basic earnings per share from continuing operations..... 10.5 (38.6)
Diluted earnings per share from continuing operations... 10.5 (38.1)
Admissions (a).......................................... (13.8) 0.3
Equivalent admissions (b)............................... (15.4) 0.9
Revenues per equivalent admission....................... 5.3 (2.1)
Same facility % changes from prior year (c):
Revenues................................................ 4.3 (1.9)
Admissions (a).......................................... 2.2 0.7
Equivalent admissions (b)............................... 2.1 1.7
Revenues per equivalent admission....................... 2.2 (3.5)
- ---------------
(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.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 1999 and 1998
Income from continuing operations before income taxes decreased to $234
million in 1999 from $394 million in 1998 and pretax margins decreased to 6.0%
in 1999 from 8.6% in 1998. The decrease in pretax income was primarily
attributable to a decrease in the number of facilities as a result of the
spin-offs and other asset sales completed as part of the restructuring of
operations and gains of $537 million in 1998 resulting from the completed sale
of several facilities as part of the Company's restructuring of operations. See
Note 3 -- Restructuring of Operations of the Notes to Condensed Consolidated
Financial Statements.
Revenues decreased 14.8% to $3.9 billion in 1999 compared to $4.6 billion
in 1998. Inpatient admissions decreased 19.4% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 20.9%. Revenues, admissions and equivalent admissions declined
primarily as a result of the spin-offs of LifePoint and Triad and sales of
several facilities. At September 30, 1999 there were 92 fewer hospitals and 22
fewer surgery centers than there were at September 30, 1998. On a same facility
basis, revenues increased 5.8%, admissions increased 2.0% and equivalent
admissions increased 1.9% from a year ago. Revenue per equivalent admission
increased 7.6% from 1998 to 1999 and on a same facility basis increased 3.8%
from 1998 to 1999 due to success achieved during 1999 in improved managed care
pricing.
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 $25 million), a
continuing shift in revenues away from traditional Medicare and indemnity payers
to managed care (managed care as a percent of total admissions increased to 43%
in 1999 compared to 40% during 1998) and a net decrease in the number of
consolidating hospitals and surgery centers due to the sales and spin-offs of
several facilities during 1999.
Salaries and benefits, as a percentage of revenues, decreased to 40.6 % in
1999 from 41.5% in 1998. The increase in revenue 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 remained relatively flat as a percentage of revenues at 15.9%.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased, as a percentage of revenues, to 18.7%
in 1999 from 20.0% in 1998 due to certain fixed costs such as rents and leases
and utilities remaining relatively flat while revenue per equivalent admission
was increasing. A decline in professional fees, due to the sales of certain
teaching facilities which incurred costs for medical directorships, also
contributed to the decrease.
Provision for doubtful accounts, as a percentage of revenues, increased to
8.2% in 1999 from 8.1% in 1998 due to payer mix shifts to managed care plans
(resulting in increased amounts of patient co-payments and deductibles).
Management is unable to quantify the effects, 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 at
0.2% in 1999 compared to 0.4% in 1998. The decrease was due to an impairment
charge recorded by one of our equity investment entities (resulting in an $8
million decrease) and the sales of certain non-consolidating hospitals during
1999. At September 30, 1999 there were 12 fewer non-consolidating hospitals than
there were at September 30, 1998.
Depreciation and amortization increased as a percentage of revenues to 6.8%
in 1999 from 6.7% in 1998, primarily due to the increased capital expenditures
related to ancillary services (such as outpatient services) and information
systems. Capital expenditure in these areas generally result in shorter
depreciation and amortization lives for the assets acquired than typical
hospital acquisitions.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Quarters Ended September 30, 1999 and 1998 (continued)
Interest expense decreased to $122 million in 1999 compared to $142 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 resulted in the receipt of cash proceeds in 1999 and the
third and fourth quarters of 1998 which were used to pay down borrowings.
During 1999 and 1998, respectively, the Company incurred $24 million and
$21 million of restructuring of operations and investigation related costs.
These costs included $20 million in professional fees related to the
restructuring of operations and the investigations in 1999 and 1998.
Minority interests decreased slightly as a percentage of revenues to 0.3%
in 1999 from 0.4% in 1998.
The decrease in the effective income tax rate from 1998 to 1999 is
primarily due to higher amounts of non-deductible intangible assets related to
gains on sales of facilities and impairments of long-lived assets during the
1998 period.
As previously discussed, the Company has substantially completed the
restructuring of its operations. See Note 3 -- Restructuring of Operations of
the Notes to Condensed Consolidated Financial Statements. Assuming the
completion of the restructuring as of the beginning of the period, the Company's
remaining core assets had combined net income from continuing operations which
increased to $161 million in 1999 from a loss of $1 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 10% to $176 million in 1999 from $160
million in 1998.
Nine Months Ended September 30, 1999 and 1998
Income from continuing operations before income taxes decreased 3.9% to
$1,024 million in 1999 from $1,066 million in 1998. Pretax margins increased to
8.1% in 1999 from 7.5% in 1998. The decrease in pretax income was primarily
attributable to $537 million in gains on sales of facilities in 1998 compared to
only $257 million in gains on sales of facilities in 1999 (an excess of $203
million in net gains over the $334 in impairment charges recorded during the
first nine months of 1998 compared to an excess of $97 million in net gains over
the $160 million in impairment charges recorded during the first nine months of
1999) and an increase in the operating margin.
Revenues decreased 10.8% to $12.7 billion in 1999 compared to $14.3 billion
in 1998. Inpatient admissions decreased 13.8% from a year ago and equivalent
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 15.4%. Revenues, admissions and equivalent admissions declined
primarily as a result of the spin-offs of LifePoint and Triad and the sales of
facilities. At September 30, 1999 there were 92 fewer hospitals and 22 fewer
surgery centers than there were at September 30, 1998. On a same facility basis,
revenues increased 4.3%, admissions increased 2.2% and equivalent admissions
increased 2.1% from a year ago. Revenue per equivalent admission increased 5.3%
from 1998 to 1999 and on a same facility basis increased 2.2% from 1998 to 1999.
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 $85 million), a
continuing shift in revenues away from traditional Medicare and indemnity payers
to managed care (managed care as a percent of total admissions increased to 41%
in 1999 compared to 38% during 1998) and a net decrease in the number of
consolidating hospitals and surgery centers due to the spin-offs and sales of
several facilities during 1999 and 1998.
Salaries and benefits, as a percentage of revenues, decreased to 40.3% in
1999 from 41.4% in 1998. The increase in revenues per equivalent admission was a
primary factor for the decrease. In addition, the Company
19
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended September 30, 1999 and 1998 (continued)
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 15.7% in 1999 from
15.4% in 1998 due to an increase in the cost of supplies per equivalent
admission related to the increasing costs of new technology and pharmaceuticals.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased as a percentage of revenues to 19.2%
in 1999 from 19.7% in 1998, due to certain fixed costs such as rent and leases,
and utilities remaining relatively flat while revenue per equivalent admission
was increasing. A decline in professional fees, due to the sales of certain
teaching facilities which had costs for medical directorships, also contributed
to the decrease.
Provision for doubtful accounts, as a percentage of revenues, increased to
7.8% in 1999 from 7.4% in 1998 due to external factors such as payer mix shifts
to managed care plans (resulting in increased amounts of patient co-payments and
deductibles) and an increase in self pay net revenue as a percentage of total
patient revenue. 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 remained flat as a percentage of revenues
at 0.6%.
Depreciation and amortization remained relatively flat as a percentage of
revenues in 1999 compared to 1998.
Interest expense decreased to $351 million in 1999 compared to $440 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 cash proceeds in 1999 and
in the third and fourth quarters of 1998 which were used to pay down borrowings.
During 1999 and 1998, respectively, the Company incurred $84 million and
$90 million of restructuring of operations and investigation related costs.
These costs included $62 and $72 million in professional fees related to the
restructuring of operations and investigations, $2 million and $5 million of
severance costs and $20 million and $13 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.
The effective income tax rate is high in both 1999 and 1998 due to
non-deductible intangible assets related to gains on sales of facilities and
impairments of long-lived assets.
As previously discussed, the Company has substantially completed the
restructuring of its operations. See Note 3--Restructuring of Operations of the
Notes to Condensed Consolidated Financial Statements. Assuming the completion of
the restructuring as of the beginning of the period, the Company's remaining
core assets had combined net income from continuing operations which increased
37.8% to $558 million in 1999 from $405 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 7.0% to $649 million in 1999 from $607
million in 1998.
Liquidity
Cash provided by continuing operating activities totaled $806 million
during the first nine months of 1999 compared to $1.6 billion in 1998. The
decrease was primarily due to changes in the timing of tax payments, as
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
tax payments of $565 million have been made in 1999 compared to a net $116
million tax refund received during 1998.
Cash provided by investing activities increased to $1.2 billion in 1999,
compared to $1.0 billion during the first nine months of 1998. The increase was
due to proceeds from changes in investments of $557 million (including repayment
by a non-consolidating joint venture of Company advances of approximately $330
million) compared with $269 million used to invest in affiliates in 1998. This
increase in cash flows from investments in affiliates was partially offset by a
lower level of proceeds from sales and the spin-offs (approximately $1.5 billion
in 1999 compared to approximately $2.2 billion in 1998).
Cash flows used in financing activities totaled $2.2 billion in the first
nine months of 1999 compared to $2.5 billion in 1998. The excess of cash flows
from operations and cash provided by investing activities was primarily used to
repurchase the Company's common stock (approximately $2.0 billion) during the
first nine months of 1999. During the third quarter of 1999, the Company repaid
$100 million on the Company's senior term loan and $500 million on the senior
interim term loan. The Company used amounts available under the Company's
revolving credit facility to fund these payments.
Working capital totaled $366 million as of September 30, 1999 compared to
$304 million at December 31, 1998. Management believes that cash flows from
operations, amounts available under the Company's bank revolving credit facility
and proceeds from expected asset sales will be sufficient to meet expected
liquidity needs during the next twelve months.
Investments of the Company's professional liability insurance subsidiary to
maintain statutory equity and pay claims totaled $1.7 billion at September 30,
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 prices based on
certain formulas. The combined put price under all such agreements was
approximately $500 million at September 30, 1999. The Company cannot predict if,
or when, their joint venture partners will exercise such options.
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 consulting 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's Board of Directors authorized the
repurchase of up to $1 billion of the Company's common stock. The Company
completed the repurchase of its shares through open market purchases and through
a series of accelerated 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 the second quarter of 1999,
through open market purchases, the Company repurchased 10 million shares of its
common stock for approximately $232 million. Also during the second quarter of
1999, the Company, through accelerated purchase agreements, repurchased
approximately 28 million shares of its common stock for approximately $700
million.
In July 1998, the Company announced a stock repurchase program under which
$1 billion of the Company's common stock was repurchased. The majority of these
shares were purchased by certain financial organizations through a series of
forward purchase contracts. 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 during the second
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Liquidity (continued)
quarter of 1999. The Company also repurchased 4 million shares for $97 million
during the fourth quarter of 1998 and 0.6 million shares for $14 million through
open market purchases.
During the first quarter of 1999, in connection with the Company's share
repurchase programs, the Company entered into a Letter of Credit Agreement with
the United States Department of Justice. As part of the agreement, the Company
provided the government with letters of credit totaling $1 billion. The Company
and the government acknowledge that the amount in the agreement is not based
upon the amount or expected amount of any potential settlement of the ongoing
government investigation and the agreement does not constitute an admission of
liability by the Company.
During May 1999, the spin-offs of LifePoint and Triad were accomplished
through a distribution of one share of LifePoint and one share of Triad common
stock for every 19 shares of the Company's common stock outstanding on April 30,
1999. The Company also received $886 million in cash related to debt which it
incurred prior to the spin-offs which was assumed by LifePoint and Triad in
connection with the spin-off transaction. The proceeds were used 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.
Capital Resources
Excluding acquisitions, capital expenditures were approximately $1 billion
during the first nine months of 1999 and 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 $116 million during the first
nine months of 1998.
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 $580 million as of October 31, 1999) and equity. At September 30,
1999, there were projects under construction which had an estimated additional
cost to complete and equip over the next three years of approximately $735
million.
The Company's revolving credit facility, the $1.0 billion senior 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 Senior Interim Term Loan Agreement also provides for the
mandatory prepayment of loans thereunder in the case of certain debt or equity
issuances. 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+.
The Company entered into a $1.0 billion Senior Interim Term Loan Agreement
during March 1999. The borrowings under this agreement were used to fund the
$1.0 billion share repurchase program approved in February 1999. The Company's
revolving credit facility and $1.0 billion Senior Term Loan Agreement were
amended during March 1999 to permit the spin-offs of LifePoint and Triad and
place a $1.25 billion letter of credit sublimit in the revolving credit
facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Capital Resources (continued)
In July 1999, the Company filed a "shelf" registration statement and
prospectus with the Securities and Exchange Commission relating to $1.5 billion
in debt securities.
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 ISSUES
The Company has dedicated substantial resources to address the impact of
the Year 2000 problem on the Company. The Company has engaged appropriate
individuals and groups within its organization, as well as independent
consultants, in an effort to address the Year 2000 problem as it may affect the
Company and to help address the potential for a material interruption to the
Company's operations or impact to its patients' safety and health. If
uncorrected, Year 2000 problems could result in computer system and program
failures that could result in material disruptions of the Company's business
operations and equipment and medical device malfunctions that could materially
adversely affect patient diagnosis and treatment.
The Company has completed the material aspects of its information
technology ("IT") systems portion of the Company's Year 2000 project, which
addresses the inventory, assessment, remediation, testing and implementation of
centrally supported and distributed (i) internally developed software and (ii)
mission critical third party software (i.e., that software which is essential
for day-to-day operations). The Company adopted a structured approach to
inventory, assessment, remediation, testing and implementation with regard to
its centrally supported and distributed software, with test cases based on
future dates and aging of dates. Testing was conducted internally and at the
Company's disaster recovery site. Testing, remediation and implementation of
certain specialized software applications used at a non-healthcare provider
subsidiary is scheduled to be completed in the fourth quarter of 1999 and is
currently not expected to have a material effect on the Company's Year 2000
readiness based on the relative size of the subsidiary. The Company has
developed contingency plans and an Information Technology and System Control
Center which will be staffed to address Year 2000 problems which may arise.
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 (such as
hardware, systems software, business software and telecommunication equipment).
The Company has contacted vendors, analyzed the vendor information provided, and
is completing its efforts to remediate, replace or otherwise address IT products
that could pose a material Year 2000 impact on the Company. The Company
developed a database of vendor compliance information for use by its facilities
to determine the Year 2000 readiness of such facility assets. The Company had
originally anticipated completion of the IT infrastructure portion of its
program by September 30, 1999. Due to certain delays and other implementation
issues at a number of the Company's facilities being remediated, as of the time
of this Form 10-Q, the Company anticipates completion of the IT infrastructure
portion of its program in the fourth quarter of 1999. The cause for the delays
have been reviewed, and action plans have been implemented to provide a focused
effort to cure the delays. Contingency plans have been developed for mission
critical and high impact patient care and business operation areas.
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, facility and physical plant equipment and other related equipment
with embedded chips. The Company implemented a program to contact vendors,
analyze information provided, and to remediate, replace or otherwise address
devices or equipment that could pose a material Year 2000 impact. These vendor
contacts included a survey and assessment process and on-site visits to certain
high impact vendors, which
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 ISSUES (CONTINUED)
have now been substantially completed. The Company originally anticipated
completion of the non-IT infrastructure portion of its program by September 30,
1999. Due to certain delays and other implementation issues at a number of the
Company's facilities being remediated, as of the date of this Form 10-Q, the
Company anticipates completion of the non-IT infrastructure portion of its
program in the fourth quarter of 1999. The cause for the delays have been
reviewed, and action plans have been implemented to provide a focused effort to
cure the delays. Contingency plans have been developed for mission critical and
high impact patient care and business operation areas.
The Company has directed and is continuing to direct substantial efforts to
repair, replace, upgrade or otherwise address equipment and medical devices that
will have a direct impact on patient care in its effort to address the 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. There
also can be no assurances 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. Contingency plans
have been developed for mission critical and high impact patient care and
business operation areas.
The Company has communicated with its major accounts receivable ("A/R")
vendors and third party payers, including government payers and fiscal
intermediaries on Year 2000 readiness issues. As of September 30, 1999, the
Company had contacted its major A/R vendors and third party payers to request
end to end testing relating to billing and payment. The Company has completed or
is in the process of testing with most of its vendors and many of its major
payers. The Company relies on these entities for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
The Company has not received assurances that all these interfaces will be Year
2000 compliant. Because certain payers have refused or are not ready to test
with the Company's systems, testing and continued follow-up efforts with those
payers and intermediaries that will test will continue through the end of the
year. The Company anticipates that some third party payers will be unable or
unwilling to participate in the Company's request for voluntary testing.
Additionally, the Company recognizes that, even though it has successfully
tested with a payer, such testing will not ensure that the payer will be able to
process the Company's claims in a post Year 2000 day-to-day environment.
Multiple failures of third party systems from which the Company derives
significant revenues could have a material adverse effect on the Company's cash
flow and results of operations. Contingency plans are being developed in the
event payments are delayed for an extended period of time due to a Year 2000
problem.
The Company has also communicated with its mission critical suppliers and
vendors (i.e., those suppliers and vendors whose products and services are
essential for day-to-day operations, such as medical-surgical suppliers) to
verify their ability to continue to deliver goods and services after December
31, 1999. These efforts included a survey and assessment process, on-site visits
to certain high impact suppliers and vendors, as well as a program of website
review and telephone and mail contact. 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 after the arrival of the Year 2000, but
the Company is continuing its efforts to obtain such assurances. Contingency
plans for this area of the program include identification of alternate suppliers
for "at risk" suppliers.
With the assistance of external resources, the Company has developed
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 will continue to implement contingency plans as needed.
Contingency plans have been developed for mission-critical and high impact
patient care and business operations. The contingency plans developed by the
facilities include those in the following areas: medical equipment,
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 ISSUES (CONTINUED)
suppliers and service providers, utilities, information technology and services,
facility and physical plant equipment and business office operations.
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 and other 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 efforts
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. In addition to the extended infrastructure
risks discussed above, potential worst case scenarios include medical devices
and systems failing to operate properly; material and unplanned expenditures to
correct unanticipated Year 2000 failures, including remediation, replacement or
upgrade of equipment, and extended operation of labor intensive contingency
plans; material and extended payment delays from the Company's payers;
unavailability of critical supplies from historic or alternate vendors which
result in the inability to continue the operation of one or more facilities;
litigation from any of the above; and the inability of the Company to bill or
receive payment for its services over an extended period.
As of September 30, 1999, the estimated minimum Year 2000 project costs
(consultants, training, compliance systems development, etc.) which will be
expensed have been increased from $86 million to approximately $90 million. The
increase is related to certain retention bonuses and other items to be paid in
connection with the Year 2000 project. This estimate does not include payroll
costs for certain internal employees because these costs are not separately
tracked by the Company. Cumulatively through September 30, 1999, the Company has
incurred $79 million of expenses related to the Year 2000 project, including $22
million incurred during the first nine months of 1999. In addition to the above
Year 2000 project costs, the Company currently estimates the minimum Year 2000
capitalized and expensed costs incurred for the remediation, upgrade and
replacement of its impacted non-IT infrastructure systems and equipment to be
increased from $80 million to approximately $86 million. The increase of $6
million is related to estimates for additional equipment purchased that must be
expensed rather than capitalized under the Company's capitalization policy. As
of September 30, 1999, the Company had incurred approximately $71 million of
these capitalized and expensed costs. The Company believes that its total cost
may increase as it completes its assessment and remediation of non-IT
infrastructure systems and equipment and such costs will be expensed or
capitalized as appropriate.
The potential estimated costs of the Company's Year 2000 project and
estimated completion dates for the Year 2000 modifications are based on
management's best estimates, as of September 30, 1999. These estimates were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. These estimates do not include the costs of executing any contingency
plans or potential litigation claims resulting from any Year 2000 failure. There
can be no assurance that the Company's Year 2000 project will be timely
completed in all respects within the estimated cost range. Actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area and the cost and ability to locate and correct
all relevant computer codes and all medical equipment.
The Company believes that if (i) any material phase or aspect of its Year
2000 project is not completed successfully and timely, (ii) certain mission
critical suppliers and venders (particularly medical surgical suppliers and
utilities) are not able to deliver goods or services after December 31, 1999, or
(iii) its contingency plans do not anticipate and effectively address actually
experienced Year 2000 related problems or do not effectively address
unanticipated Year 2000 related problems, then the Company's results of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
IMPACT OF YEAR 2000 ISSUES (CONTINUED)
operations and financial condition, as well as its day-to-day business
operations and its ability to provide health care services (potentially
including patient diagnosis and treatment), could be materially adversely
affected.
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 $374 million as of September 30,
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
------- ---------
CONSOLIDATING
Number of hospitals in operation at:
March 31.................................................. 273 310
June 30................................................... 204 309
September 30.............................................. 202 294
December 31............................................... 281
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 95 142
June 30................................................... 81 139
September 30.............................................. 81 103
December 31............................................... 102
Licensed hospital beds at (a):
March 31.................................................. 51,797 60,739
June 30................................................... 43,969 60,418
September 30.............................................. 43,461 57,521
December 31............................................... 53,693
Weighted average licensed beds (b):
Quarter:
First................................................... 52,451 60,765
Second.................................................. 46,490 60,712
Third................................................... 43,511 59,396
Fourth.................................................. 55,594
Year...................................................... 59,104
Average daily census (c):
Quarter:
First................................................... 26,546 28,816
Second.................................................. 21,467 25,780
Third................................................... 19,704 24,414
Fourth.................................................. 23,932
Year...................................................... 25,719
Admissions (d):
Quarter:
First................................................... 477,400 508,200
Second.................................................. 395,800 475,400
Third................................................... 370,500 459,700
Fourth.................................................. 448,500
Year...................................................... 1,891,800
Equivalent Admissions (e):
Quarter:
First................................................... 703,300 756,600
Second.................................................. 596,900 733,500
Third................................................... 557,900 705,100
Fourth.................................................. 680,400
Year...................................................... 2,875,600
Average length of stay (days) (f):
Quarter:
First................................................... 5.0 5.1
Second.................................................. 4.9 4.9
Third................................................... 4.9 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-CONSOLIDATING (G)
Number of hospitals in operation at:
March 31.................................................. 24 26
June 30................................................... 16 26
September 30.............................................. 12 24
December 31............................................... 24
Number of freestanding outpatient surgical centers in
operation at:
March 31.................................................. 5 5
June 30................................................... 4 5
September 30.............................................. 3 5
December 31............................................... 5
Licensed hospital beds at:
March 31.................................................. 6,015 6,357
June 30................................................... 3,868 6,317
September 30.............................................. 3,153 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-consolidating 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 consolidating 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, also in
El Paso, 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. In June 1999, Columbia Home Care Group
received a subpoena seeking records related to home health operations.
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 related to the alleged false
characterization of interest payments on certain debt resulting in Medicare and
CHAMPUS (TRICARE) 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. On
July 2, 1999, the jury returned a mixed verdict, finding two such employees
guilty and acquitting one. The jury was unable to reach a verdict as to the
fourth employee. Sentencing has been scheduled for December 1999 for the two
convicted employees. The Government and the fourth employee executed an
agreement to defer prosecution for 18 months after which charges will be
dismissed.
Several hospital and other facilities affiliated with the Company in
various states have also 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 (TRICARE) 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.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with Columbia/HCA), announced that they will pay
$61 million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges filed by the U.S.
Attorneys in the Middle and Southern District of Florida and the Northern
District of Georgia, the three separate charges being conspiracy, mail fraud and
violating the Medicare anti-kickback statute. While
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Columbia/HCA was not specifically named in these guilty pleas, the guilty pleas
refer to the involvement of a "Company A" or a "company not named as a
defendant." The Company believes these references refer to Columbia/HCA or its
subsidiaries.
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 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 five 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. 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, pursuant to 28 U.S.C. sec. 1407, all qui tam actions against the
Company, including those sealed and unsealed, for purposes of discovery and
pretrial matters, to the United States District Court for the District of
Columbia. The MDL Panel denied the Motion on procedural grounds. On August 12,
1999, the United States Government filed an Application to Conduct 28 U.S.C.
sec. 1407 Consolidated Proceedings under seal with the MDL Panel. The underlying
motion to consolidate the proceedings relates to the qui tam cases against the
Company, both sealed and unsealed.
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 and served an Amended Complaint against Quorum Health Group.
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 unsealed 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 (JCAHO) in order to be eligible for Medicare
payments, thereby rendering false defendants' claims for Medicare reimbursement.
An Amended Complaint, which has not been served on the Company, also alleges
that defendants engaged in fraudulent accounting practices, paid kickbacks for
patient referrals, upcoded claims for reimbursement from Federal healthcare
programs and shifted costs to its Medicare cost reports. Defendants have moved
to dismiss the Complaint, and that motion is pending.
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Defendants have also moved to stay discovery while the motion to dismiss is
pending. The Government announced that it intervened on all counts of the
Amended Complaint except for the count alleging false statements to JCAHO.
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. The relator did not file an amended motion for summary judgment and
the Court's deadline for filing such a motion has passed. This action is
currently stayed.
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 statements in annual Medicare cost reports. The Complaint further
alleges, as in Alderson (above), that the Company kept "reserve cost reports."
The Government has not yet served the Complaint on Defendants, and the case is
currently stayed.
In June 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 action 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. Although some discovery has
occurred, there is currently a stay of discovery.
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 defendant's 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. The Fifth Circuit affirmed the dismissal on
October 14, 1999.
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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 parties in this matter have reached a settlement in principle. Such
settlement must be documented and approved by the court before it becomes
effective, and C/HCA Development, Inc. d/b/a Columbia-Olympia Fields Osteopathic
Hospital and Medical Center, Inc. was dismissed from the matter on August 11,
1999.
The matter of United States ex rel. McLendon v. Columbia/HCA, et al., Civ.
No. 1 97 CV 0890, was filed under seal on April 4, 1997 in the U.S. District
Court for the Northern District of Georgia, Atlanta Division. On July 19, 1999,
the court unsealed this action. The Complaint alleges that the Company acted to
illegally obtain Medicare reimbursement for costs incurred in purchasing home
health agencies. The Complaint also alleges that the Company illegally billed
Medicare for certain sales and marketing activities and for certain home care
visits. The Government has intervened in this action but has not served the
Complaint.
In August 1999, the Company was made aware that the case of United States
ex rel. Tonya M. Atchison v. Col/HCA Healthcare, Inc., El Paso Healthcare
System, Ltd., Columbia West Radiology Group, P.A., West Texas Radiology Group,
Rio Grande Physicians' Services Inc., El Paso Nurses Unlimited Inc., El Paso
Healthcare Systems Limited, and El Paso Healthcare Systems United Partnership,
No. EP 97-CA234, was unsealed in the U.S. District Court for the Western
District of Texas and the Company was served on or about September 16, 1999. In
general, the complaint alleges that the defendants submitted false claims
regarding the 72-hour rule, cost reports and central business office billings,
wrote-off bad debt on international patients, inflated financial information on
the sale of a hospital, improperly billed pharmacy charges and radiology
charges, improperly billed skilled nursing facility charges, improperly
accounted for discounts and rebates, improperly billed certified first
assistants in surgery, home health visits, senior health centers, diabetic
treatment and wound care centers. The Government has not intervened in this
action. The parties have agreed to extend the time within which to respond to
the complaint.
On October 18, 1999, three subsidiaries of the Company received a qui tam
complaint from the relator, entitled United States ex rel. Dan R. Williams v.
West Regional Medical Center, West Florida Medical Center Clinic, West Florida
Behavioral Health, filed on May 28, 1999, in the U.S. District Court of the
Northern District of Florida, No. 3:99CV221LAC. The complaint alleges, in
general, that the defendants billed the Federal Employees Health Benefit Program
for a physician visit on days during relator's hospitalization when, according
to the relator, a physician visit had not occurred. The complaint alleges this
was a standard practice. The complaint also alleges that blood tests and
laboratory services submitted during relator's hospitalization were inaccurate,
and that the three defendants engaged in a system of self-referral designed to
increase usage of each others' services. The United States has not intervened in
this case.
The Company intends to pursue the defense of the qui tam actions
vigorously.
Shareholder Derivative and Class Action Complaints Filed in the U.S. District
Courts
Since April 1997, numerous securities class action and derivative lawsuits
have been filed in the United States District Court for the Middle District of
Tennessee against the Company and a number of its current and former directors,
officers and/or employees.
On October 10, 1997, the court entered an order consolidating all of the
above-mentioned securities class action claims into a single-captioned case,
Morse, Sidney, et al. v. R. Clayton McWhorter, et al., Case No. 3-97-0370. All
of the other individual securities class action lawsuits were administratively
closed by the Court. The consolidated Morse lawsuit is a purported class action
seeking the certification of a class of persons
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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 filed objections to the
Magistrate's recommendations with the District Court, and defendants filed
responsive pleadings. In September 1999, the District Court entered an Order
granting the defendants' motion to dismiss McCall, H. Carl, as Comptroller of
the State of New York and as Trustee of the New York State Retirement Fund,
derivatively on behalf of Columbia/HCA Healthcare Corporation v. Richard L.
Scott, et al., No. 3-97-0838 with prejudice. The plaintiffs in the McCall
lawsuit have filed an appeal from that order.
Shareholder Derivative Actions Filed in State Courts
Several derivative actions have been filed in state court by certain
purported stockholders of the Company against certain of the Company's current
and former officers and directors alleging breach of fiduciary duty, and failure
to take reasonable steps to ensure that the Company did not engage in illegal
practices thereby exposing the Company to significant damages.
Two purported derivative actions entitled Barron, Evelyn, et al. v.
Magdelena Averhoff, et al., (Civil Action No. 15822NC), filed on July 22, 1997,
and Kovalchick, John E. v. Magdelena Averhoff, et al., (Civil Action No.
15829NC), filed on July 29, 1997, have been filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The actions were brought on
behalf of the Company by certain purported shareholders of the Company against
certain of the Company's current and former officers and directors. The suits
seek damages, attorneys' fees and costs. In the Barron lawsuit, plaintiffs also
seek an Order (i) requiring individual defendants to return to the Company all
salaries or remunerations paid them by the Company, together with proceeds of
the sale of Columbia/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
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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 Complaints. 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.
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. As a result
of the court's September 1, 1999, order dismissing the McCall lawsuit, this
lawsuit was also dismissed with prejudice. The plaintiffs in this lawsuit have
filed an appeal from that order.
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.
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. 1407. Three other cases (see cases
below) 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
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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 was entered that provided
for class certification motions to be filed by February 22, 1999 and for
discovery to be completed by June 30, 1999. 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 parties are currently engaged in discovery pending a
ruling by the court on plaintiffs' motion.
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, above.)
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 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 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.
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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 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 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. On August 27, 1999, the Court of Appeals issued an
opinion affirming the trial court's denial of Summit's Motion for Summary
Judgment. Summit filed an application for permission to appeal to the Tennessee
Supreme Court in October 1999.
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
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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 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. Following the service of this
complaint on the Company on August 20, 1999, the Company subsequently removed
this lawsuit to the United States District Court for the Eastern District of
Tennessee and it has been conditionally transferred by the MDL Panel to the
Middle District of Tennessee for consolidated pretrial proceedings with In re:
Columbia/HCA Healthcare Corporation Billing Practices Litigation.
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 provided
time to replead those counts that had been dismissed without prejudice. The
Company subsequently entered into a settlement of this lawsuit with the
plaintiff in exchange for a full and complete release of the Company by the
plaintiff. The settlement has been consummated and this lawsuit has been
dismissed.
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
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certification of a Texas class comprised of persons who paid for any portion of
an improper or fraudulent bill for medical services rendered by any Texas
facility owned or operated by the Company. The suit seeks damages, attorneys'
fees, costs and expenses, as well as restitution to plaintiffs and the class in
the amount by which defendants have been unjustly enriched and equitable and
injunctive relief. The lawsuit principally alleges that the Company perpetrated
a fraudulent scheme that consisted of systematic and routine overbilling through
false and inaccurate bills, including padding, billing for services never
provided, and exaggerating the seriousness of patients' illnesses. The lawsuit
also alleges that the Company systematically entered into illegal kickback
schemes with doctors for patient referrals. The Company filed its answer in
November 1997 denying the claims. Discovery has commenced.
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 (above) 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 alleged 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. Plaintiff's Complaint also claimed the right to recover attorneys'
fees and costs. 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, the court granted
defendant's motion for summary judgment on Count I on the ground of mootness. No
monetary judgment was recovered. In September 1998, the court entered an order
denying plaintiff's 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 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 Note 10--Contingencies
of the Notes to Condensed Consolidated Financial Statements.
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.
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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 owed to the participants in the Company's
Stock Bonus Plan by failing to sell the Plan holdings of Company stock based
upon knowledge of material public and non-public adverse information and by
failing to act solely in the interests and for the benefit of the participants.
The suit generally alleges that the defendants fraudulently concealed
information from the public and fraudulently inflated the Company's stock price
through billing fraud, overcharges, inaccurate Medicare cost reports and illegal
kickbacks for physician referrals. The suit seeks an order allowing the
plaintiffs to proceed on behalf of the plan as in a derivative action, a
judgment for compensatory and restitutionary damages for the losses allegedly
experienced by the Plan because of breaches of fiduciary duty, an order
transferring management of the plan to a competent, neutral third-party, and an
award of pre-judgment interest, reasonable attorneys fees and costs. A bench
trial was held from June 8 through July 1, 1999, and the Court is expected to
hear closing arguments later this year.
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") 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
settlement has been negotiated and has received the preliminary approval of the
Court. A hearing on the parties' joint motion for final approval is set for
November 30, 1999.
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 in excess of $2 billion, as
well as injunctive relief. The court denied the plaintiff's motion for a
preliminary injunction. On October 15, 1998, the Company filed a counterclaim
and third party complaint against Florida Software Systems, Inc., Receivable
Dynamics Inc., Nevada Communications Corporation, Norman R. Dobiesz, Maureen
Donovan Dobiesz, Stuart M. Lopata, and Samuel A. Greco (a former senior officer
at the Company). The counterclaim alleges racketeering, conspiracy, breach of
fiduciary duty, and breach of contract. Defendants in the counterclaim and
third-party complaint have filed answers to the
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counterclaim and third-party complaint. Discovery has been conducted and several
dispositive motions are pending with the court.
The Company intends to pursue the defense of these actions and prosecution
of its counterclaims and third party claims vigorously.
The Company from time to time is a party to certain proceedings in the
United States Tax Court and the United States Court of Federal Claims. For a
description of those proceedings, see Note 6 to the Condensed Consolidated
Financial Statements which is incorporated herein by reference.
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 3--Amended and Restated Bylaws of the Company.*
Exhibit 10.1--Columbia/HCA Healthcare Corporation Outside Directors Stock
and Incentive Compensation Plan, as amended and restated.*
Exhibit 10.2--First Amendment to Amended and Restated Columbia/HCA
Healthcare Corporation 1992 Stock and Incentive Plan.*
Exhibit 12--Statement re Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27--Financial Data Schedule.*
*Included only in filings under the Electronic Data, Gathering, Analysis
and Retrieval system.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
On July 27, 1999, the Company filed a report on Form 8-K which included its
second quarter 1999 earnings release.
On September 13, 1999, the Company filed a report on Form 8-K which
announced the substantial completion of the Company's restructuring, announced
the filing of a "shelf" registration statement relating to $1.5 billion of debt
securities, and updated certain additional information.
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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
Senior Vice President and Controller
Date: November 15, 1999
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