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| THC > SEC Filings for THC > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this section, Management's Discussion and Analysis of Financial Condition and Results of Operations, is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which our financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to our continuing operations, with dollar amounts expressed in millions (except per-share, per admission, per patient day and per visit amounts). This information should be read in conjunction with the accompanying Condensed Consolidated Financial Statements. It includes the following sections:
• Executive Overview
• Forward-Looking Statements
• Sources of Revenue
• Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements
• Critical Accounting Estimates
EXECUTIVE OVERVIEW
We continue to focus on the execution of our operating and financing strategies. While we have seen certain areas of improvement, we are still facing several industry challenges that continue to negatively affect our progress. We are dedicated to improving our patients', shareholders' and other stakeholders' confidence in us. We believe we will accomplish that by providing quality care and generating positive growth and earnings at our hospitals.
KEY DEVELOPMENTS
Recent key developments include the following:
Repurchases of Senior Notes-In early July 2009, we completed open market repurchases of approximately $68 million aggregate principal amount of our senior notes due in 2011, 2012, 2014 and 2031 for cash of approximately $60 million. We estimate that these repurchases will result in a pretax gain in continuing operations of approximately $6 million in the three months ending September 30, 2009.
Private Offering of Senior Secured Notes-In June 2009, we sold $925 million aggregate principal amount of 8 7/8% senior secured notes due 2019 in a private placement. We will pay interest on the senior secured notes semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2010. The senior secured notes rank equally with our 9% senior secured notes due 2015 and 10% senior secured notes due 2018. All of our senior secured notes are guaranteed by and secured by a first-priority pledge of the capital stock and other ownership interests of certain of our subsidiaries.
Tender Offer to Purchase Senior Notes-In June 2009, we purchased in a cash tender offer approximately $900 million of the $1 billion aggregate principal amount outstanding of our 9 7/8% senior notes due 2014 for total consideration of approximately $941 million, representing approximately $900 million in principal payments and approximately $41 million in accrued and unpaid interest through the dates of purchase. We purchased the 9 7/8% senior notes with the net proceeds of approximately $881 million from the offering of the 8 7/8% senior secured notes and cash on hand. In connection with the purchases of our 9 7/8% senior notes, we recorded a loss from early extinguishment of debt of approximately $24 million related to the write-off of unamortized notes discounts and issuance costs.
NorthShore Regional Medical Center Lease Not Renewed-In May 2009, we announced that we would not renew the lease for NorthShore Regional Medical Center in Slidell, Louisiana, which expires in May 2010. We will work with the hospital's owner to facilitate a transition of the hospital to a new operator once one has been identified.
New Joint Venture Created-In May 2009, we announced the creation of MED3000 Practice Resources, LLC, a joint venture between MED3000, Inc., an unaffiliated third party, and one of our subsidiaries, which is a 20% minority owner. The new joint venture will initially focus on providing services to physician practices in the 12 states where we currently operate. In
addition, the joint venture will provide health information technology (including practice management systems, electronic health records and personal health records) and management services (including revenue cycle management, group purchasing and comprehensive practice and data management).
SIGNIFICANT CHALLENGES
As stated above, there are significant industry-wide challenges that have been impacting our operating performance. Below is a summary of these items.
Volumes-Although we have seen some improvements in recent quarters, we have experienced declines in patient volumes over the last several years. We believe the reasons for these declines include, but are not limited to, factors that have affected many hospital companies, including decreases in the demand for invasive cardiac procedures, increased competition and utilization pressure by managed care organizations. Given our geographic concentration, we are also affected by population trends, which have been a particular concern in Florida. In addition, we believe the industry-wide challenges associated with physician recruitment, retention and attrition have also been significant contributors to our past volume declines. Our operations depend on the efforts, abilities and experience of the physicians on the medical staffs of our hospitals, most of whom have no contractual relationship with us. It is essential to our ongoing business that we attract and retain an appropriate number of quality physicians in all specialties on our medical staffs. Although we had a net overall gain in physicians added to our medical staffs during 2007 and 2008, in some of our markets, physician recruitment and retention are still affected by a shortage of physicians in certain sought-after specialties and the difficulties that physicians experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Other issues facing physicians, such as proposed decreases in Medicare payments, are forcing them to consider alternatives, including relocating their practices or retiring sooner than expected.
We continue to take steps to increase patient volumes; however, due to the concentration of our hospitals in California, Florida and Texas, we may not be able to mitigate some factors that contribute to volume declines. One of our initiatives is our Physician Relationship Program, which is centered around understanding the needs of physicians who admit patients both to our hospitals and to our competitors' hospitals and responding to those needs with changes and improvements in our hospitals and operations. We have targeted capital spending in order to address specific needs or growth opportunities of our hospitals, which is expected to have a positive impact on their volumes. We have also sought to include all of our hospitals in the affected geographic area or nationally when negotiating new managed care contracts, which should result in additional volumes at facilities that were not previously a part of such managed care networks. In addition, we have completed clinical service line market demand analyses and profitability assessments to determine which services are highly valued that can be emphasized and marketed to improve our operating results. This Targeted Growth Initiative has resulted in some reductions in unprofitable service lines in several locations, which have had a slightly negative impact on our volumes. However, the elimination of these unprofitable service lines will allow us to focus more resources on services that are in higher demand and are more profitable.
Our Commitment to Quality initiative is further helping position us to competitively meet the volume challenge. We continue to work with physicians to implement the most current evidence-based medicine techniques to improve the way we provide care. As a result of these efforts, our hospitals have improved substantially in quality metrics reported by the government and have been recognized by several managed care companies for their quality of care. We believe that quality of care improvements will continue to have the effect of increasing physician and patient satisfaction, potentially improving our volumes.
In our efforts to continuously improve our clinical outcomes and to drive down our cost of care, we launched our Medicare Performance Initiative in the second quarter of 2009. This project is focused on the dissemination of best practices based on evidence-based medicine, which we expect to result in driving down length of stay, as well as minimizing redundant ancillary services and readmissions for hospitalized patients.
Bad Debt-Like other organizations in the health care industry, we continue to provide services to a high volume of uninsured patients and more patients than in prior years with an increased burden of co-payments and deductibles as a result of changes in their health care plans. The discounting components of our Compact with Uninsured Patients ("Compact") have reduced our provision for doubtful accounts recorded in our Condensed Consolidated Financial Statements, but they do not mitigate the net economic effects of treating uninsured or underinsured patients. We continue to experience a high level of uncollectible accounts, and we continue to focus, where applicable, on placement of patients in various government programs, such as Medicaid. However, unless our business mix shifts toward a greater number of insured patients or the trend of higher co-payments and deductibles reverses, we anticipate this high level of uncollectible accounts to continue.
Cost Pressures-Labor and supply expenses remain a significant cost pressure facing us as well as the industry in general. Controlling labor costs in an environment of fluctuating patient volumes and increased labor union activity will continue to be a challenge. Also, inflation and technology improvements are driving supply costs higher, and our efforts to control supply costs through product standardization, bulk purchases and improved utilization are constantly challenged.
General Economic Conditions-We believe the current economic downturn, tightening in the credit markets, and instability in the banking and financial institution industries has had some impact on our volumes and has affected our ability to collect outstanding receivables. A significant amount of our admissions comes through our emergency rooms and, therefore, is not usually materially impacted by broad economic factors. However, our levels of elective procedures and our ability to collect accounts receivable, due to the related effects of higher unemployment and reductions in commercial managed care enrollment, may be materially impacted if the current economic environment continues. We could also be negatively affected if California, Florida or other states reduce funding of Medicaid and other state health care programs.
RESULTS OF OPERATIONS-OVERVIEW
Our results of operations have been and continue to be influenced by industry-wide challenges, including fluctuating volumes, decreased demand for inpatient cardiac procedures and high levels of bad debt, that have negatively affected our revenue growth and operating expenses. We believe our future profitability will be achieved through volume growth, appropriate reimbursement levels and cost control across our portfolio of hospitals. Because we believe our results of operations for our most recent fiscal quarter best reflect the trends we are currently experiencing with respect to volumes, revenues and expenses, we have provided below detailed information about these metrics for the three months ended June 30, 2009 and 2008. In order to disclose trends using data comparable to the prior-year period, operating statistics in this section and throughout Management's Discussion and Analysis are presented on a same-hospital basis, where noted, and exclude the results of our Sierra Providence East Medical Center, which opened in May 2008, because we do not yet have a full calendar year of operating results for that hospital, and NorthShore Regional Medical Center, which was reclassified to discontinued operations in the three months ended June 30, 2009.
Same-Hospital Continuing
Operations
Three Months Ended June 30,
Increase
Admissions, Patient Days and Surgeries 2009 2008 (Decrease)
Commercial managed care admissions 33,519 35,557 (5.7 )%
Governmental managed care admissions 28,977 26,761 8.3 %
Medicare admissions 38,632 39,734 (2.8 )%
Medicaid admissions 15,591 15,562 0.2 %
Uninsured admissions 5,860 5,936 (1.3 )%
Charity care admissions 2,731 2,484 9.9 %
Other admissions 3,508 3,306 6.1 %
Total admissions 128,818 129,340 (0.4 )%
Paying admissions (excludes charity and
uninsured) 120,227 120,920 (0.6 )%
Charity admissions and uninsured admissions 8,591 8,420 2.0 %
Admissions through emergency department 73,701 72,125 2.2 %
Commercial managed care admissions as a
percentage of total admissions 26.0 % 27.5 % (1.5 )%(1)
Emergency department admissions as a percentage
of total admissions 57.2 % 55.8 % 1.4 %(1)
Uninsured admissions as a percentage of total
admissions 4.5 % 4.6 % (0.1 )%(1)
Charity admissions as a percentage of total
admissions 2.1 % 1.9 % 0.2 %(1)
Surgeries - inpatient 38,298 38,789 (1.3 )%
Surgeries - outpatient 53,277 51,464 3.5 %
Total surgeries 91,575 90,253 1.5 %
Patient days - total 624,125 640,812 (2.6 )%
Adjusted patient days(2) 931,502 927,945 0.4 %
Patient days - commercial managed care 132,024 143,165 (7.8 )%
Average length of stay (days) 4.9 5.0 (0.1 )(1)
Adjusted patient admissions(2) 193,572 188,696 2.6 %
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(1) The change is the difference between the amounts shown for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.
(2) Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.
Total same-hospital admissions were relatively flat, with a decline of 0.4% in the three months ended June 30, 2009 as compared to the same period in 2008. Commercial managed care admissions declined by 5.7% in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Our Central region and our Philadelphia market both achieved positive total admissions growth, while our other regions reported slight declines in admissions, in the three months ended June 30, 2009 as compared to the same period in 2008. Surgery growth remained strong in the three months ended June 30, 2009, with a 1.5% increase in total surgeries that was comprised of outpatient surgery growth of 3.5% and a decline in inpatient surgeries of 1.3%, in each case as compared to the three months ended June 30, 2008.
Same-Hospital Continuing
Operations
Three Months Ended June 30,
Increase
Outpatient Visits 2009 2008 (Decrease)
Commercial managed care visits 352,700 350,535 0.6 %
Governmental managed care visits 186,919 154,131 21.3 %
Medicare visits 213,403 212,219 0.6 %
Medicaid visits 75,866 67,159 13.0 %
Uninsured visits 93,822 99,780 (6.0 )%
Charity care visits 7,287 4,858 50.0 %
Other visits 53,098 51,831 2.4 %
Total visits 983,095 940,513 4.5 %
Paying visits (excludes charity and uninsured) 881,986 835,875 5.5 %
Surgery visits 53,277 51,464 3.5 %
Emergency department visits 356,125 327,311 8.8 %
Charity visits and uninsured visits 101,109 104,638 (3.4 )%
Charity visits and uninsured visits as a
percentage of total visits 10.3 % 11.1 % (0.8 )%(1)
Commercial visits as a percentage of total visits 35.9 % 37.3 % (1.4 )%(1)
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(1) The change is the difference between the amounts shown for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.
We had strong growth of 42,582 outpatient visits, or 4.5%, in total same-hospital outpatient visits in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. This growth was highlighted by improving mix, including 5.5% growth in total paying outpatient visits (excluding charity and uninsured outpatient visits) and 0.6% growth in commercial managed care outpatient visits in the three months ended June 30, 2009 compared to the same period in 2008.
Outpatient surgeries experienced strong growth, increasing by 3.5%, as did outpatient imaging, which increased by 2.6%, in the three months ended June 30, 2009 as compared to the same period in 2008.
Emergency department outpatient visits increased 28,814 visits, or 8.8%, in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. This increase in emergency room outpatient visits contributed 67.7% of the increase in total outpatient visits in the three months ended June 30, 2009 as compared to the same period in 2008.
All of our regions, except our Southern States region, showed strong growth in outpatient visits in the three months ended June 30, 2009 compared to the same period in 2008. Our Southern States region experienced outpatient volumes that were approximately flat in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.
Same-Hospital Continuing
Operations
Three Months Ended June 30,
Increase
Revenues 2009 2008 (Decrease)
Net operating revenues $ 2,205 $ 2,110 4.5 %
Net patient revenue from commercial managed care $ 887 $ 853 4.0 %
Revenues from the uninsured $ 154 $ 158 (2.5 )%
Net inpatient revenues(1) $ 1,427 $ 1,391 2.6 %
Net outpatient revenues(1) $ 692 $ 645 7.3 %
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(1) Net inpatient revenues and net outpatient revenues are components of net operating revenues. Net inpatient revenues include self-pay revenues of $64 million and $66 million for the three months ended June 30, 2009 and 2008, respectively. Net outpatient revenues include self-pay revenues of $90 million and $92 million for the three months ended June 30, 2009 and 2008, respectively.
Unfavorable prior-year cost report adjustments reduced net operating revenues by approximately $12 million in the three months ended June 30, 2009 as compared to a reduction of $9 million in the three months ended June 30, 2008.
Commercial managed care revenues increased by approximately 4.0%, representing a rate of growth significantly in excess of the 5.7% decline in commercial managed care admissions and 0.6% growth in commercial managed care outpatient visits in the three months ended June 30, 2009 as compared to the same period in 2008.
Same-Hospital Continuing
Operations
Three Months Ended June 30,
Increase
Revenues on a Per Patient Day, Per Admission and Per Visit Basis 2009 2008 (Decrease)
Net inpatient revenue per admission $ 11,078 $ 10,755 3.0 %
Net inpatient revenue per patient day $ 2,286 $ 2,171 5.3 %
Net outpatient revenue per visit $ 704 $ 686 2.6 %
Net patient revenue per adjusted patient admission(1) $ 10,947 $ 10,790 1.5 %
Net patient revenue per adjusted patient day(1) $ 2,275 $ 2,194 3.7 %
Managed care: net inpatient revenue per admission $ 12,108 $ 11,446 5.8 %
Managed care: net outpatient revenue per visit $ 822 $ 802 2.5 %
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(1) Adjusted patient days/admissions represents actual patient days/admissions adjusted to include outpatient services by multiplying actual patient days/admissions by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.
Pricing improvement was evident across all key metrics, primarily reflecting the improved terms of our commercial managed care contracts. The growth in net inpatient revenue per admission of 3.0% was constrained by the 5.7% decline in commercial managed care admissions in the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.
Same-Hospital Continuing
Operations
Three Months Ended June 30,
Increase
Selected Operating Expenses 2009 2008 (Decrease)
Salaries, wages and benefits $ 942 $ 930 1.3 %
Supplies 392 377 4.0 %
Other operating expenses 467 482 (3.1 )%
Total $ 1,801 $ 1,789 0.7 %
Rent/lease expense(1) $ 36 $ 33 9.1 %
Salaries, wages and benefits per adjusted patient day(2) $ 1,011 $ 1,002 0.9 %
Supplies per adjusted patient day(2) 421 406 3.7 %
Other operating expenses per adjusted patient day(2) 501 519 (3.5 )%
Total per adjusted patient day $ 1,933 $ 1,927 0.3 %
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(1) Included in other operating expenses.
(2) Adjusted patient days represent actual patient days adjusted to include outpatient services by multiplying actual patient days by the sum of gross inpatient revenues and outpatient revenues and dividing the results by gross inpatient revenues.
Salaries, wages and benefits per adjusted patient day increased by approximately 0.9% in the three months ended June 30, 2009 as compared to the same period in 2008. This increase is primarily due to higher compensation and health benefits costs, partially offset by a decline in full-time employee headcount, reduced contract labor expense, lower stock-based compensation expense, a lower 401(k) match effective January 1, 2009 and lower overtime costs. Contract labor expense, which is included in salaries, wages and benefits, was $21 million in the three months ended June 30, 2009, a decrease of $17 million, or 45%, as compared to the same period in 2008.
Supplies expense per adjusted patient day increased by 3.7% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The increase in supplies expense is primarily due to the increase in the number of surgeries, which grew by 1.5%, and increased utilization of high cost implants and high cost drugs. A portion of the increase in supplies expense is offset by revenue growth related to payments we receive from certain payers.
Other operating expenses per adjusted patient day decreased by 3.5% in the three months ended June 30, 2009 as compared to the same period in 2008. Contributing to this decrease was an $11 million, or 28.9%, decline in total hospital malpractice expense to $27 million in the three months ended June 30, 2009, compared to $38 million in the three months ended June 30, 2008. This decrease is primarily attributable to improved claims experience. A decline in consulting costs also had a favorable impact on other operating expenses. The favorable impact of these items was partially offset by increases in other items, including higher physician fees relating to increased emergency department on-call payments and increases in the costs of contracted services.
Total selected operating expenses, which is defined as salaries, wages and benefits, supplies, and other operating expenses, increased by 0.3% on a per adjusted patient day basis in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Same-Hospital Continuing
Operations
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