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| THC > SEC Filings for THC > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-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:
Sale of Mandatory Convertible Preferred Stock and Repurchase of $300 Million of Outstanding Senior Notes-In September 2009, we sold 345,000 shares of 7% mandatory convertible preferred stock for net proceeds of approximately $334 million. We used $315 million of the net proceeds to repurchase $300 million aggregate principal amount of our outstanding 91/4% senior notes due 2015.
Quality Awards-In August 2009, we announced that 29 of our hospitals received 73 UnitedHealth Premium Specialty Center designations for cardiac care, cardiac surgery and heart rhythm disorders. To receive these designations, hospitals must meet or exceed UnitedHealthcare's rigorous quality criteria based on nationally recognized medical standards, including programmatic structure, patient care processes and clinical outcomes that are submitted by the hospital to UnitedHealthcare.
SIGNIFICANT CHALLENGES
As stated above, there are a number of significant industry-wide challenges that have been impacting our operating performance, including those summarized below.
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, 2008 and for the first nine months of 2009, 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, tight 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. We also 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; therefore, we have provided below detailed information about these metrics for the three months ended September 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 September 30,
Increase
Admissions, Patient Days and Surgeries 2009 2008 (Decrease)
Commercial managed care admissions 33,204 34,759 (4.5 )%
Governmental managed care admissions 29,539 27,065 9.1 %
Medicare admissions 37,131 38,127 (2.6 )%
Medicaid admissions 16,694 16,531 1.0 %
Uninsured admissions 6,107 6,301 (3.1 )%
Charity care admissions 2,620 2,164 21.1 %
Other admissions 3,357 3,578 (6.2 )%
Total admissions 128,652 128,525 0.1 %
Paying admissions (excludes charity and
uninsured) 119,925 120,060 (0.1 )%
Charity admissions and uninsured admissions 8,727 8,465 3.1 %
Admissions through emergency department 73,082 70,741 3.3 %
Commercial managed care admissions as a
percentage of total admissions 25.8 % 27.0 % (1.2 )%(1)
Emergency department admissions as a percentage
of total admissions 56.8 % 55.0 % 1.8 %(1)
Uninsured admissions as a percentage of total
admissions 4.7 % 4.9 % (0.2 )%(1)
Charity admissions as a percentage of total
admissions 2.0 % 1.7 % 0.3 %(1)
Surgeries - inpatient 38,828 39,121 (0.7 )%
Surgeries - outpatient 52,906 50,655 4.4 %
Total surgeries 91,734 89,776 2.2 %
Patient days - total 616,850 625,702 (1.4 )%
Adjusted patient days(2) 926,344 916,104 1.1 %
Patient days - commercial managed care 132,119 136,970 (3.5 )%
Average length of stay (days) 4.8 4.9 (0.1 )(1)
Adjusted patient admissions(2) 194,568 189,536 2.7 %
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(1) The change is the difference between the amounts shown for the three months ended September 30, 2009 as compared to the three months ended September 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 an increase of 0.1% in the three months ended September 30, 2009 as compared to the same period in 2008. Commercial managed care admissions declined by 4.5% in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. Our California region and our Philadelphia market each reported positive total admissions growth, while our other regions reported admissions declines, in the three months ended September 30, 2009 as compared to the same period in 2008. Total surgeries increased 2.2% in the three months ended September 30, 2009, which growth was comprised of an increase of 4.4% in outpatient surgeries, partially offset by a decline in inpatient surgeries of 0.7%, in each case as compared to the three months ended September 30, 2008. Flu-related admissions were not a major factor in the three months ended September 30, 2009; there were 339 flu-related admissions in the three months ended September 30, 2009 as compared to 17 flu-related admissions in the same period in 2008, an increase of 322 admissions.
Same-Hospital Continuing
Operations
Three Months Ended September 30,
Increase
Outpatient Visits 2009 2008 (Decrease)
Commercial managed care visits 351,592 351,594 - %
Governmental managed care visits 186,544 155,156 20.2 %
Medicare visits 212,008 207,515 2.2 %
Medicaid visits 75,936 68,103 11.5 %
Uninsured visits 97,189 98,282 (1.1 )%
Charity care visits 7,135 5,320 34.1 %
Other visits 52,685 52,028 1.3 %
Total visits 983,089 937,998 4.8 %
Paying visits (excludes charity and uninsured) 878,765 834,396 5.3 %
Surgery visits 52,906 50,655 4.4 %
Emergency department visits 357,122 326,769 9.3 %
Charity visits and uninsured visits 104,324 103,602 0.7 %
Charity visits and uninsured visits as a
percentage of total visits 10.6 % 11.0 % (0.4 )%(1)
Commercial visits as a percentage of total
visits 35.8 % 37.5 % (1.7 )%(1)
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(1) The change is the difference between the amounts shown for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008.
We had growth of 45,091 total same-hospital outpatient visits, or 4.8%, in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. Changes in outpatient payer mix included growth in total paying outpatient visits (excluding charity and uninsured outpatient visits), which rose to 89.4% of total outpatient visits in the three months ended September 30, 2009 as compared to 89.0% in the same period in 2008. Commercial outpatient visits declined to 35.8% of total outpatient visits in the three months ended September 30, 2009 as compared to 37.5% in the three months ended September 30, 2009. Charity and uninsured outpatient visits increased by 0.7% in the three months ended September 30, 2009 compared to the same period in 2008. Newly opened or acquired facilities contributed 1,814 visits, net of the loss of visits from centers that were closed in the period subsequent to September 30, 2008. Excluding this net incremental volume from new facilities, organic growth in outpatient visits was an increase of 43,277 visits, or 4.6%, in the three months ended September 30, 2009 as compared to the same period in 2008
Outpatient surgery visits grew by 4.4% and outpatient imaging visits increased by 2.7% in the three months ended September 30, 2009 as compared to the same period in 2008. Emergency department outpatient visits increased 30,353 visits, or 9.3%, in the three months ended September 30, 2009 compared to the three months ended September 30, 2008. This increase in emergency department outpatient visits contributed 67.3% of the increase in total outpatient visits in the three months ended September 30, 2009 as compared to the same period in 2008. Flu-related outpatient visits were 5,271 in the three months ended September 30, 2009 as compared to 214 in the three months ended September 30, 2008. This increase of 5,057 visits accounted for 11.2% of the total increase in outpatient visits of 45,091 in the three months ended September 30, 2009 compared to the same period in 2008.
All of our regions exhibited growth in outpatient visits in the three months ended September 30, 2009 compared to the same period in 2008, with the strongest growth coming from our Central and Florida regions and our Philadelphia market, each of which saw outpatient visit growth in excess of 8%. Our California and Southern States regions had growth in outpatient visits of more than 1% in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008.
Same-Hospital Continuing
Operations
Three Months Ended September 30,
Increase
Revenues 2009 2008 (Decrease)
Net operating revenues $ 2,238 $ 2,127 5.2 %
Net patient revenue from commercial managed care $ 886 $ 850 4.2 %
Revenues from the uninsured $ 166 $ 152 9.2 %
Net inpatient revenues(1) $ 1,452 $ 1,399 3.8 %
Net outpatient revenues(1) $ 699 $ 649 7.7 %
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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 $70 million and $64 million for the three months ended September 30, 2009 and 2008, respectively. Net outpatient revenues include self-pay revenues of $96 million and $88 million for the three months ended September 30, 2009 and 2008, respectively.
Net operating revenues increased approximately $111 million, or 5.2%, on a same-hospital basis in the three months ended September 30, 2009 as compared to the same period in 2008. Favorable prior-year cost report adjustments contributed approximately $11 million to net operating revenues in the three months ended September 30, 2009 as compared to a contribution of $10 million in the three months ended September 30, 2008. Excluding prior-year cost report adjustments, same-hospital net operating revenues would have shown the same increase of 5.2% in the three months ended September 30, 2009 as compared to the same period in 2008. Net operating revenues in the three months ended September 30, 2009 include the recognition by our Philadelphia hospitals of $6 million of revenues related to 2008 that were approved for distribution to us in the three months ended September 30, 2009 by a Philadelphia health maintenance organization in which we hold a minority ownership interest.
Commercial managed care revenues increased by 4.2% on a same-hospital basis despite the 4.5% decline in commercial managed care admissions and the flat commercial managed care outpatient visits in the three months ended September 30, 2009 as compared to the same period in 2008.
Same-Hospital Continuing
Operations
Three Months Ended September 30,
Increase
Revenues on a Per Patient Day, Per Admission and Per Visit Basis 2009 2008 (Decrease)
Net inpatient revenue per admission $ 11,286 $ 10,885 3.7 %
Net inpatient revenue per patient day $ 2,354 $ 2,236 5.3 %
Net outpatient revenue per visit $ 711 $ 692 2.7 %
Net patient revenue per adjusted patient admission(1) $ 11,055 $ 10,805 2.3 %
Net patient revenue per adjusted patient day(1) $ 2,322 $ 2,236 3.8 %
Managed care: net inpatient revenue per admission $ 12,133 $ 11,469 5.8 %
Managed care: net outpatient revenue per visit $ 823 $ 813 1.2 %
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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 3.7% was adversely impacted by a shift in payer mix, including a decline in commercial managed care admissions as a percent of total admissions to 25.8% in the three months ended September 30, 2009 as compared to 27.0% the three months ended September 30, 2008. Similarly, the 2.7% growth in outpatient revenue per visit in the three months ended September 30, 2009 compared to the same period in 2008 was constrained by the decline in commercial outpatient visits as a percent of total outpatient visits to 35.8% in the three months ended September 30, 2009 from 37.5% in the three months ended September 30, 2008.
Same-Hospital Continuing
Operations
Three Months Ended September 30,
Increase
Selected Operating Expenses 2009 2008 (Decrease)
Salaries, wages and benefits $ 945 $ 937 0.9 %
Supplies 386 375 2.9 %
Other operating expenses 481 491 (2.0 )%
Total $ 1,812 $ 1,803 0.5 %
Rent/lease expense(1) $ 34 $ 35 (2.9 )%
Salaries, wages and benefits per adjusted patient
day(2) $ 1,020 $ 1,023 (0.3 )%
Supplies per adjusted patient day(2) 417 409 2.0 %
Other operating expenses per adjusted patient
day(2) 519 536 (3.2 )%
Total per adjusted patient day $ 1,956 $ 1,968 (0.6 )%
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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.
Total selected operating expenses, which is defined as salaries, wages and benefits, supplies, and other operating expenses, decreased by 0.6% on a per adjusted patient day basis in the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Salaries, wages and benefits per adjusted patient day decreased by approximately 0.3% in the three months ended September 30, 2009 as compared to the same period in 2008. This decrease is primarily due to a decline in full-time employee headcount, reduced contract labor expense, a lower 401(k) match effective January 1, 2009 and lower overtime costs, partially offset by higher health benefits costs and increased accruals for annual incentive compensation. Contract labor expense, which is included in salaries, wages and benefits, was $16 million in the three months ended September 30, 2009, a decrease of $18 million, or 53%, as compared to the same period in 2008. We also recorded a $3 million favorable pension expense adjustment in the three months ended September 30, 2009 related to the termination of a fully funded and frozen retirement plan of a previously acquired company.
Supplies expense per adjusted patient day increased by 2.0% in the three months ended September 30, 2009 compared to the three months ended September 30, 2008. The increase in supplies expense is primarily due to the increase in the number of surgeries, which grew by 2.2%, and increased utilization of high cost implants. A portion of the increase in supplies expense was offset by revenue growth related to payments we receive from certain payers.
Other operating expenses per adjusted patient day decreased by 3.2% in the three . . .
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