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| HMA > SEC Filings for HMA > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Results of Operations
Overview
On September 30, 2008, Health Management Associates, Inc. and its subsidiaries ("we," "our" or "us") operated 56 hospitals with a total of 8,018 licensed beds in non-urban communities in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia.
During September 2008, we made certain changes and additions to our senior executive management team. Effective September 13, 2008, Gary D. Newsome was appointed to our Board of Directors and named President and Chief Executive Officer, succeeding Burke W. Whitman. Mr. Whitman had previously resigned as an officer, director and employee of our company on September 12, 2008. Additionally, Kelly E. Curry was appointed as our Executive Vice President and Chief Administrative Officer effective September 13, 2008. Mr. Curry had previously served as our Executive Vice President and Chief Operating Officer since July 1, 2007.
Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 4 to the Interim Condensed Consolidated Financial Statements in Item 1. Discontinued operations were not material to our consolidated results of operations during the periods presented herein other than (i) a 2008 long-lived asset and goodwill impairment charge of approximately $23.1 million, (ii) a 2008 charge of $7.9 million for the estimated cost of partially subsidizing certain third party physician practice losses and (iii) a pre-tax gain of $21.8 million from the disposition of certain assets during 2007.
During the three months ended September 30, 2008, which we refer to as the 2008
Three Month Period, we experienced net revenue growth over the three months
ended September 30, 2007, which we refer to as the 2007 Three Month Period, of
approximately 3.4%. Such growth primarily resulted from favorable case mix
trends and improvements in reimbursement rates. Income from continuing
operations and diluted earnings per share from continuing operations decreased
approximately $15.4 million and $0.06, respectively, during the 2008 Three Month
Period when compared to the 2007 Three Month Period. The primary factors causing
this year-over-year decrease in profitability were (i) non-cash refinancing and
debt modification costs related to the mandatory repurchase of certain of our
convertible debt securities, (ii) higher costs for salaries and benefits,
(iii) an increase in depreciation and amortization expense and (iv) additional
minority interests in the earnings of consolidated entities. In addition, the
provision for doubtful accounts during the 2007 Three Month Period was favorably
impacted by approximately $16.0 million from the recovery of accounts receivable
that were previously written off; however, there was no corresponding amount
during the 2008 Three Month Period. Conversely, the 2008 Three Month Period
benefited from a reduction in interest expense of approximately $7.5 million,
primarily due to lower average outstanding debt balances.
At our hospitals, all of which were in operation during the entirety of the 2008 Three Month Period and the 2007 Three Month Period, surgical volume, hospital admissions and emergency room visits declined during the 2008 Three Month Period by approximately 2.6%, 3.3% and 1.3%, respectively, when compared to the 2007 Three Month Period. These declines were partially attributable to lower uninsured patient volume during the 2008 Three Month Period, the current downturn in the national economy and certain operational disruptions experienced during our transition to a multi-hospital joint venture arrangement in North Carolina and South Carolina. We have implemented corrective action plans at certain hospitals to address unfavorable operating trends, including, among other things, hiring new management teams, modifying physician employment agreements, renegotiating payor contracts and initiating patient, physician and employee satisfaction surveys. In this regard, our prime objective is to stabilize operations in the areas of patient volume, operating margins, uninsured/underinsured patient levels and the provision for doubtful accounts. Secondarily, we seek opportunities for market development in the communities that our hospitals serve. Furthermore, we continue to invest significant resources in physician recruitment and retention, emergency room operations and capital projects at our hospitals. We believe that our strategic initiatives will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions.
We have also taken the steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is that over the next two to three years we will be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With new clinical affairs leaders to support this critical quality initiative, we are now measuring the appropriate performance objectives, increasing accountability for achieving those objectives and recognizing the leaders whose quality indicators and clinical outcomes demonstrate improvement.
Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net revenue during the 2008 Three Month Period and the 2007 Three Month Period generated on an outpatient basis. Recognizing the importance of these services, we have improved our health care facilities to meet the outpatient needs of the communities that they serve. We have also invested substantial capital in our hospitals and clinics during the past several years, resulting in improvements and enhancements to our diagnostic imaging and ambulatory surgical services. Notwithstanding this continuous operational focus, our adjusted admissions, which adjusts admissions for outpatient volume, decreased approximately 1.0% during the 2008 Three Month Period when compared to the 2007 Three Month Period. We believe that the factors that caused declines in our surgical volume, hospital admissions and emergency room visits also contributed to our adjusted admissions decline.
Economic conditions and changes in commercial health insurance benefit plans over the past several years have contributed to an increase in the number of uninsured and underinsured patients seeking health care in the United States. Although this general industry trend has affected us, our self-pay admissions as a percent of total admissions declined from approximately 7.6% during the 2007 Three Month Period to 7.0% during the 2008 Three Month Period. There can be no assurances that this favorable self-pay admissions trend will continue. We regularly evaluate our self-pay policies and programs and consider changes or modifications as circumstances warrant.
Critical Accounting Policies and Estimates Update
There were no material changes to our critical accounting policies and estimates during the 2008 Three Month Period. See Note 5 to the Interim Condensed Consolidated Financial Statements in Item 1 for recent and pending accounting pronouncements that may affect us in future periods.
2008 Three Month Period Compared to the 2007 Three Month Period
The tables below summarize our operating results for the 2008 Three Month Period
and the 2007 Three Month Period.
Three Months Ended September 30,
2008 2007
Percent Percent
of Net of Net
Amount Revenue Amount Revenue
(in thousands) (in thousands)
Net revenue $ 1,081,914 100.0 % $ 1,046,816 100.0 %
Operating expenses:
Salaries and benefits 449,421 41.5 421,538 40.3
Supplies 146,933 13.6 135,990 13.0
Provision for doubtful accounts 124,194 11.5 122,707 11.7
Depreciation and amortization 59,831 5.5 55,264 5.3
Rent expense 23,444 2.2 19,975 1.9
Other operating expenses 195,994 18.1 187,189 17.9
Total operating expenses 999,817 92.4 942,663 90.1
Income from operations 82,097 7.6 104,153 9.9
Other income (expense):
Gains (losses) on sales of assets, net 1,201 0.1 (8) -
Interest expense (56,226) (5.2) (63,694) (6.0)
Refinancing and debt modification costs (9,495) (0.9) - -
Income from continuing operations
before minority
interests and income taxes 17,577 1.6 40,451 3.9
Minority interests in (earnings) losses
of consolidated entities (4,569) (0.4) 282 -
Income from continuing operations
before income taxes 13,008 1.2 40,733 3.9
Provision for income taxes (2,562) (0.2) (14,922) (1.4)
Income from continuing operations $ 10,446 1.0 % $ 25,811 2.5 %
Three Months Ended
September 30, 2008 Percent
2008 2007 Change Change
Total Hospitals
Occupancy 41.9 % 43.0 % (110) bps* n/a
Patient days 303,622 314,093 (10,471) (3.3) %
Admissions 72,448 74,904 (2,456) (3.3) %
Adjusted admissions 129,168 130,468 (1,300) (1.0) %
Emergency room visits 326,765 330,937 (4,172) (1.3) %
Surgeries 67,518 69,288 (1,770) (2.6) %
Outpatient revenue percent 50.2 % 50.1 % 10 bps n/a
Inpatient revenue percent 49.8 % 49.9 % (10) bps n/a
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* basis points
Net revenue during the 2008 Three Month Period was approximately $1,081.9 million as compared to $1,046.8 million during the 2007 Three Month Period. This change represented an increase of $35.1 million or 3.4%. Substantially all such increase resulted from reimbursement rate increases and favorable case mix trends. Net revenue per adjusted admission increased approximately 4.4% during the 2008 Three Month Period as compared to the 2007 Three Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers.
Our provision for doubtful accounts during the 2008 Three Month Period declined 20 basis points to 11.5% of net revenue as compared to 11.7% of net revenue during the 2007 Three Month Period. During the 2007 Three Month Period, the provision for doubtful accounts was partially offset by approximately $16.0 million from the recovery of certain accounts receivable that were previously written off. Excluding this accounts receivable recovery, there was a 180 basis point reduction in the 2008 Three Month Period provision for doubtful accounts as a percent of net revenue, which is attributable to the reduced prevalence of uninsured and underinsured patients in the mix of patients that we serve.
Our consistently applied accounting policy is that accounts written off as
charity and indigent care are not recognized in net revenue and, accordingly,
such amounts have no impact on our provision for doubtful accounts. However, as
a measure of our fiscal performance, we routinely aggregate amounts pertaining
to our (i) provision for doubtful accounts, (ii) uninsured self-pay patient
discounts and (iii) foregone/unrecognized revenue for charity and indigent care
and then we divide the resulting total by the sum of our (i) net revenue,
(ii) uninsured self-pay patient discounts and (iii) foregone/unrecognized
revenue for charity and indigent care. We believe that this fiscal measure,
which we refer to as our Uncompensated Patient Care Percentage, is important
because it provides us with key information regarding the level of patient care
for which we do not receive remuneration. During the 2008 Three Month Period,
such percentage was determined to be 23.8% as compared to 24.0% during the 2007
Three Month Period. This drop in our Uncompensated Patient Care Percentage
reflects, among other things, declining uninsured and underinsured patient
volume, partially offset by the impact of the abovementioned 2007 accounts
receivable recovery that did not recur during the 2008 Three Month Period.
Salaries and benefits as a percent of net revenue increased to 41.5% during the 2008 Three Month Period from 40.3% during the 2007 Three Month Period. This increase was primarily due to higher employed physician costs, routine salary and wage increases, growth in employee health benefit costs and incremental costs attributable to our change in Chief Executive Officer. Additionally, nursing personnel costs increased during the 2008 Three Month Period as a result of implementing certain aspects of our clinical quality initiatives.
Depreciation and amortization as a percent of net revenue increased from 5.3% during the 2007 Three Month Period to 5.5% during the 2008 Three Month Period. This increase primarily resulted from 2007 calendar year capital expenditures for renovation and expansion projects at certain of our facilities. Additionally, the intangible assets from our physician and physician group guarantees generated approximately $1.5 million of incremental amortization expense during the 2008 Three Month Period.
Other operating expenses as a percent of net revenue increased from 17.9% during the 2007 Three Month Period to 18.1% during the 2008 Three Month Period. This change is primarily attributable to increases in professional fees and utility costs.
Interest expense decreased from approximately $63.7 million during the 2007 Three Month Period to $56.2 million during the 2008 Three Month Period. Such decrease was primarily attributable to (i) reduced interest expense on our 1.50% Convertible Senior Subordinated Notes due 2023 (the "2023 Notes"), substantially all of which were repurchased during the nine months ended September 30, 2008, and (ii) a lower average outstanding principal balance under our $2.75 billion seven-year term loan (the "Term Loan") during the 2008 Three Month Period as compared to the 2007 Three Month Period. The 2008 Three Month Period was adversely impacted by incremental interest expense from the 3.75% Convertible Senior Subordinated Notes due 2028 (the "2028 Notes") that we sold on May 21, 2008. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.
Refinancing and debt modification costs during the 2008 Three Month Period included losses on the early extinguishment of debt of approximately $9.5 million in connection with our repurchases of certain of the 2023 Notes on August 1, 2008. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding the 2023 Notes.
Minority interests in earnings of consolidated entities was approximately $4.6 million during the 2008 Three Month Period and minority interests in losses of consolidated entities was $0.3 million during the 2007 Three Month Period. This change was primarily due to a joint venture arrangement in North Carolina and South Carolina with an affiliate of Novant Health, Inc. that became effective March 31, 2008. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our recent joint venture activity.
Our effective income tax rates were approximately 19.7% and 36.6% during the 2008 Three Month Period and the 2007 Three Month Period, respectively. During the 2008 Three Month Period, our provision for income taxes was favorably impacted by, among other things, the finalization of certain federal and state income tax returns and the satisfactory resolution of two Internal Revenue Service examinations.
2008 Nine Month Period Compared to the 2007 Nine Month Period
The tables below summarize our operating results for the nine months ended
September 30, 2008 and 2007, which we refer to as the 2008 Nine Month Period and
the 2007 Nine Month Period, respectively. Additionally, our hospitals that were
in operation for all of the 2008 Nine Month Period and the 2007 Nine Month
Period are referred to herein as same nine month hospitals.
Nine Months Ended September 30,
2008 2007
Percent Percent
of Net of Net
Amount Revenue Amount Revenue
(in thousands) (in thousands)
Net revenue $ 3,339,785 100.0 % $ 3,218,256 100.0 %
Operating expenses:
Salaries and benefits 1,365,841 40.9 1,279,374 39.8
Supplies 454,102 13.6 435,964 13.5
Provision for doubtful accounts 378,001 11.3 384,249 11.9
Depreciation and amortization 176,915 5.3 157,925 4.9
Rent expense 68,260 2.0 60,783 1.9
Other operating expenses 586,756 17.6 566,002 17.6
Total operating expenses 3,029,875 90.7 2,884,297 89.6
Income from operations 309,910 9.3 333,959 10.4
Other income (expense):
Gains on sales of assets, net 211,154 6.3 3,251 0.1
Interest expense (177,086) (5.3) (158,561) (5.0)
Refinancing and debt modification
costs (20,958) (0.6) (761) -
Income from continuing operations
before minority
interests and income taxes 323,020 9.7 177,888 5.5
Minority interests in earnings of
consolidated entities (10,754) (0.4) (625) -
Income from continuing operations
before income taxes 312,266 9.3 177,263 5.5
Provision for income taxes (118,007) (3.5) (67,836) (2.1)
Income from continuing operations $ 194,259 5.8 % $ 109,427 3.4 %
Nine Months Ended
September 30, Percent
2008 2007 Change Change
Same Nine Month Hospitals
Occupancy 45.6 % 45.6 % - bps* n/a
Patient days 980,050 984,413 (4,363) (0.4) %
Admissions 226,963 232,249 (5,286) (2.3) %
Adjusted admissions 394,802 396,774 (1,972) (0.5) %
Emergency room visits 1,004,087 982,501 21,586 2.2 %
Surgeries 205,924 208,975 (3,051) (1.5) %
Outpatient revenue percent 48.8 % 48.8 % - bps n/a
Inpatient revenue percent 51.2 % 51.2 % - bps n/a
Total Hospitals
Occupancy 45.5 % 45.5 % - bps n/a
Patient days 990,712 992,067 (1,355) (0.1) %
Admissions 229,808 234,192 (4,384) (1.9) %
Adjusted admissions 399,131 399,695 (564) (0.1) %
Emergency room visits 1,020,537 994,517 26,020 2.6 %
Surgeries 207,732 210,090 (2,358) (1.1) %
Outpatient revenue percent 48.7 % 48.8 % (10) bps n/a
Inpatient revenue percent 51.3 % 51.2 % 10 bps n/a
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* basis points
Net revenue during the 2008 Nine Month Period was approximately $3,339.8 million as compared to $3,218.3 million during the 2007 Nine Month Period. This change represented an increase of $121.5 million or 3.8%. Same nine month hospitals provided approximately $111.4 million, or 91.7%, of the increase in net revenue as a result of increases in emergency room visits and reimbursement rates and favorable case mix trends. The remaining $10.1 million increase was primarily attributable to Physicians Regional Medical Center-Collier Boulevard, our de novo general acute care hospital that opened on February 5, 2007.
Net revenue per adjusted admission at our same nine month hospitals increased approximately 4.0% during the 2008 Nine Month Period as compared to the 2007 Nine Month Period. The factors contributing to such change included increased patient acuity and the favorable effects of renegotiated agreements with certain commercial health insurance providers.
Our provision for doubtful accounts during the 2008 Nine Month Period declined 60 basis points to 11.3% of net revenue as compared to 11.9% of net revenue during the 2007 Nine Month Period. As discussed under the heading "Net Revenue, Accounts Receivable and Allowance for Doubtful Accounts" at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, we modified our provision for doubtful accounts policy for self-pay accounts receivable during the 2007 Nine Month Period, resulting in the recognition of incremental expense of approximately $39.0 million. Excluding the impact of such change in estimate, we experienced an increase of approximately 60 basis points in the 2008 Nine Month Period provision for doubtful accounts as a percent of net revenue. Such increase was primarily attributable to a consistent application of our modified allowance for doubtful accounts policy for self-pay patients subsequent to June 30, 2007 and the abovementioned 2007 recovery of approximately $16.0 million of accounts receivable that did not recur during the 2008 Nine Month Period.
Our Uncompensated Patient Care Percentage, which is defined above under the heading "2008 Three Month Period Compared to the 2007 Three Month Period," was determined to be 23.2% during the 2008 Nine Month Period. As a result of the allowance for doubtful accounts policy modifications discussed at Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1, the Uncompensated Patient Care Percentage for the 2008 Nine Month Period is more readily comparable to the six months ended December 31, 2007, which was 24.0%. The drop in our Uncompensated Patient Care Percentage during 2008 reflects, among other things, declining uninsured and underinsured patient volume, partially offset by the impact of the abovementioned 2007 accounts receivable recovery that did not recur during the 2008 Nine Month Period.
Salaries and benefits as a percent of net revenue increased to 40.9% during the 2008 Nine Month Period from 39.8% during the 2007 Nine Month Period. Same nine month hospital salaries and benefits increased from 38.6% of net revenue during the 2007 Nine Month Period to 39.4% during the 2008 Nine Month Period. These increases were primarily due to higher employed physician costs, routine salary and wage increases and growth in employee health benefit costs. Additionally, nursing personnel costs increased during the 2008 Nine Month Period as a result of implementing certain aspects of our clinical quality initiatives.
Depreciation and amortization as a percent of net revenue increased from 4.9% during the 2007 Nine Month Period to 5.3% during the 2008 Nine Month Period. This increase primarily resulted from 2007 calendar year capital expenditures for renovation and expansion projects at certain of our facilities and our de novo hospital construction. Additionally, the intangible assets from our physician and physician group guarantees generated approximately $3.9 million of incremental amortization expense during the 2008 Nine Month Period.
During the 2008 Nine Month Period, among other things, we recorded gains on sales of assets of (i) approximately $203.4 million on the sale of a minority equity interest and (ii) approximately $7.8 million on the sales of three home health agencies, a nursing home and a health care billing operation. See Note 6 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding these transactions and other related matters.
Interest expense increased from approximately $158.6 million during the 2007 Nine Month Period to $177.1 million during the 2008 Nine Month Period. Such increase was primarily due to (i) the Term Loan being outstanding for the entire 2008 Nine Month Period but only seven months of the 2007 Nine Month Period and . . .
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