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| HMA > SEC Filings for HMA > Form 10-Q on 1-Aug-2012 | All Recent SEC Filings |
1-Aug-2012
Quarterly Report
Results of Operations
Overview
As of June 30, 2012, Health Management Associates, Inc. by and through its subsidiaries (collectively, "we," "our" or "us") operated 70 hospitals with a total of 10,527 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. The operating results of hospitals and other ancillary health care businesses that we acquire are included in our consolidated financial statements subsequent to the date of acquisition.
Unless specifically indicated otherwise, the following discussion excludes our discontinued operations, which are identified at Note 7 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.
During March 2010, the Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010 (collectively, the "Health Care
Reform Act") were signed into law by President Obama. The primary goals of the
Health Care Reform Act are to: (i) provide coverage by January 1, 2014 to an
estimated 32 to 34 million Americans who currently do not have health insurance;
(ii) reform the health care delivery system to improve quality; and (iii) lower
the overall costs of providing health care. To accomplish the goal of expanding
coverage, the new legislation mandates that all Americans maintain a minimum
level of health care coverage. To that end, the Health Care Reform Act expands
Medicaid coverage, provides federal subsidies to assist low-income individuals
when they obtain health insurance and establishes insurance exchanges through
which individuals and small employers can purchase health insurance. Health care
cost savings under the Health Care Reform Act are expected to come from:
(i) reductions in Medicare and Medicaid reimbursement payments to health care
providers, including hospital operators; (ii) initiatives to reduce fraud, waste
and abuse in government reimbursement programs; and (iii) other reforms to
federal and state reimbursement systems. Although certain aspects of the Health
Care Reform Act have already become effective, it will be several years before
most of the far-reaching and innovative provisions of the new legislation are
fully implemented. While we continue to evaluate the provisions of the Health
Care Reform Act, its overall effect on our business cannot be determined at the
present time because, among other things, the new legislation is very broad in
scope and uncertainties exist regarding the interpretation and future
implementation of many of the regulations mandated under the Health Care Reform
Act. Additionally, the Health Care Reform Act remains subject to significant
legislative debate, including possible amendment and/or a full or partial
repeal. For further discussion of the Health Care Reform Act and its possible
impact on our business and results of operations, see (i) "Risk Factors" in
Item 1A of Part II of this Quarterly Report on Form 10-Q and (ii) "Business -
Sources of Revenue" in Item 1 of Part I and "Risk Factors" in Item 1A of Part I
of our Annual Report on Form 10-K for the year ended December 31, 2011.
During the three months ended June 30, 2012, which we refer to as the 2012 Three
Month Period, we experienced growth in our net revenue before the provision for
doubtful accounts over the three months ended June 30, 2011, which we refer to
as the 2011 Three Month Period, of approximately 20.9%. Such growth principally
resulted from: (i) our acquisition of a 95% equity interest in a
Mississippi-based general acute care hospital with a total of 112 licensed beds
and certain related health care operations (collectively, "Tri-Lakes") in May
2011; (ii) our acquisition of six Tennessee-based general acute care hospitals
and other ancillary health care operations with a total of 882 licensed beds
(collectively, the "Mercy Hospitals") on September 30, 2011; (iii) our
acquisition of an 80% interest in each of five Oklahoma-based general acute care
hospitals with a total of 218 licensed beds and certain related health care
operations (collectively, the "Integris Hospitals") in April 2012;
(iv) increased surgical volume attributable to physician recruitment and market
service development (e.g., ambulatory surgical centers, robotic surgical
systems, etc.) at certain of our hospitals and other health care facilities;
(v) an increase in emergency room visits, which we believe was attributable, in
part, to our dedicated focus on emergency room operations; and (vi) improvements
in reimbursement rates that resulted primarily from renegotiated agreements with
certain commercial health insurance providers. During the 2012 Three Month
Period, we recognized a benefit of approximately $2.9 million from the
meaningful use measurement standard under various Medicare and Medicaid
Healthcare Information Technology incentive programs (collectively, the "HCIT
Programs"), with no comparable amount recognized during the 2011 Three Month
Period. Items that adversely affected our profitability during the 2012 Three
Month Period included increases in interest expense (principally non-cash
charges), costs associated with government investigations and depreciation and
amortization. Overall, our income from continuing operations decreased during
the 2012 Three Month Period by $8.8 million, or 15.4%.
Our strategic operational objectives include increasing patient volume and operating margins, while at the same time moderating the provision for doubtful accounts. Our specific plans include, among other things, utilizing experienced local and regional management teams, modifying physician employment agreements, renegotiating payor and vendor contracts and developing action plans responsive to feedback from patient, physician and employee satisfaction surveys. Based on the needs of the communities that we serve, we also seek opportunities for market service development, including, among other things, establishing ambulatory surgical centers, urgent care centers, cardiac cath labs, angiography suites and orthopedic, cardiology and neurology/neurosurgery centers of excellence. Furthermore, we are investing significant resources in
physician recruitment and retention (primary care physicians and specialists), emergency room operations, advanced robotic surgical systems, replacement hospital construction and other capital projects. For example, we continue to implement ER Extra®, which is our signature patient-centered emergency room program that is designed to reduce patient wait times, enhance patient satisfaction and improve the quality and scope of patient assessments. Additionally, we have deployed new MAKOplasty® and da Vinci® robotic surgical systems at many of our hospitals and, in April 2012, we opened a newly constructed hospital (Clearview Regional Medical Center) that was built to replace Walton Regional Medical Center in Monroe, Georgia. We believe that our strategic initiatives, coupled with appropriate executive management oversight, centralized support and innovative marketing campaigns, will enhance patient, physician and employee satisfaction, improve clinical outcomes and ultimately yield increased surgical volume, emergency room visits and admissions. Additionally, as we consider potential acquisitions, joint ventures and partnerships in 2012 and beyond, we believe that continually improving our existing operations provides us with a fundamentally sound infrastructure upon which we can add hospitals and other ancillary health care businesses.
We have also taken steps that we believe are necessary to achieve industry leadership in clinical quality. Our vision is to be the highest rated health care provider of any hospital system in the country, as measured by Medicare. With our knowledgeable and experienced clinical affairs leadership supporting this critical quality initiative, we measure key performance objectives, maintain accountability for achieving those objectives and recognize the leaders whose quality indicators and clinical outcomes demonstrate improvement. As most recently reported by the Centers for Medicare and Medicaid Services, all four of our core measure care areas have dramatically improved since the commencement of our clinical quality initiatives and we now rank second in core measures amongst for-profit hospital systems. Additionally, The Joint Commission, a leading independent not-for-profit organization that accredits and certifies health care organizations in the United States, named nearly 60% of our hospitals as Top Performers on Key Quality Measures, which compared to a nationwide achievement rate of approximately 14%. The Joint Commission aggregated certain evidence-based accountability data from 2010, including core measurement performance data, to determine the top performers.
Outpatient services continue to play an important role in the delivery of health care in our markets, with approximately half of our net revenue before the provision for doubtful accounts generated on an outpatient basis. Recognizing the importance of these services, we have improved many of our health care facilities to accommodate the outpatient needs of the communities that they serve. We have also invested substantial capital in many of our hospitals and physician practices during the past several years, resulting in improvements and enhancements to our diagnostic imaging and ambulatory surgical services.
During the past several years, various economic and other factors have resulted in a large number of uninsured and underinsured patients seeking health care in the United States. Self-pay admissions as a percent of total admissions at our hospitals were approximately 6.7% and 7.4% during the 2012 Three Month Period and the 2011 Three Month Period, respectively. We continue to take various measures to address the impact of uninsured and underinsured patients on our business. Additionally, one of the primary goals of the Health Care Reform Act is to provide health insurance coverage to more Americans. Nevertheless, there can be no assurances that our self-pay admissions will not grow in future periods, especially in light of the prolonged downturn in the economy and correspondingly higher levels of unemployment in many of the markets served by our hospitals. Therefore, we regularly evaluate our self-pay patient policies and programs and consider changes or modifications as circumstances warrant.
Critical Accounting Policies and Estimates Update
General. The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. We consider a critical accounting policy to
be one that requires us to make significant judgments and estimates when we
prepare our consolidated financial statements. Such critical accounting policies
and estimates, which are more fully described in Item 7 of Part II of our Annual
Report on Form 10-K for the year ended December 31, 2011, include: (i) net
revenue before the provision for doubtful accounts; (ii) the provision for
doubtful accounts; (iii) impairments of long-lived assets and goodwill;
(iv) income taxes; (v) professional liability risks and other self-insured
programs; and (vi) loss contingencies.
There were no material changes to our critical accounting policies and estimates during the 2012 Three Month Period. However, see Note 2 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding certain new accounting guidance that we adopted during 2012. Such new accounting guidance did not have a material impact on our consolidated financial statements.
Goodwill. We test our goodwill for impairment on an annual basis (i.e., each October 1) and whenever circumstances indicate that a possible impairment might exist. Our judgment regarding the existence of impairment indicators is based on many qualitative and quantitative factors, including market conditions and operational performance. When performing the goodwill impairment test, among other things, we compare the estimated fair values of the net assets of our reporting units that are potentially impaired to the corresponding carrying amounts on our consolidated balance sheet. If the estimated fair value of one of our reporting unit's net assets is less than the balance sheet carrying amount, we determine the implied fair value of the reporting unit's goodwill, compare such fair value to the corresponding carrying amount and, if necessary, record a goodwill impairment charge. We do not believe that any of our reporting units are currently at risk of requiring a goodwill impairment charge.
2012 Three Month Period Compared to the 2011 Three Month Period
The tables below summarize our operating results for the 2012 Three Month Period and the 2011 Three Month Period. Hospitals that were owned/leased and operated by us for one year or more as of June 30, 2012 are referred to as same three month hospitals. For all year-over-year comparative discussions herein, the operating results of our same three month hospitals are only considered to the extent that there was a similar period of operation in both years.
Three Months Ended June 30,
2012 2011
Percent Percent
of Net of Net
Amount Revenue Amount Revenue
(in thousands) (in thousands)
Net revenue before the provision for doubtful
accounts $ 1,686,541 $ 1,395,353
Provision for doubtful accounts (214,563) (170,787)
Net revenue 1,471,978 100.0 % 1,224,566 100.0 %
Salaries and benefits 645,933 43.9 546,198 44.6
Supplies 226,154 15.4 185,789 15.2
Rent expense 43,839 3.0 36,774 3.0
Other operating expenses 325,635 22.1 252,037 20.6
Medicare and Medicaid HCIT incentive payments (2,871) (0.2) - -
Depreciation and amortization 85,712 5.8 64,201 5.2
Interest expense 75,166 5.1 51,033 4.2
Other (1,022) (0.1) (139) -
1,398,546 95.0 1,135,893 92.8
Income from continuing operations before
income taxes 73,432 5.0 88,673 7.2
Provision for income taxes (25,291) (1.7) (31,757) (2.6)
Income from continuing operations $ 48,141 3.3 % $ 56,916 4.6 %
Three Months Ended
June 30, Percent
2012 2011 Change Change
Same Three Month Hospitals*
Occupancy 40.3% 42.7% (240) bps ** n/a
Patient days 324,806 343,107 (18,301) (5.3) %
Admissions 77,488 80,753 (3,265) (4.0) %
Adjusted admissions † 151,908 152,216 (308) (0.2) %
Emergency room visits 392,461 378,125 14,336 3.8 %
Surgeries 84,893 82,509 2,384 2.9 %
Outpatient revenue percent ¿ 54.6% 52.4% 220 bps n/a
Inpatient revenue percent ¿ 45.4% 47.6% (220) bps n/a
Total Hospitals
Occupancy 39.6% 42.7% (310) bps n/a
Patient days 361,924 343,107 18,817 5.5 %
Admissions 86,467 80,753 5,714 7.1 %
Adjusted admissions † 172,194 152,216 19,978 13.1 %
Emergency room visits 453,964 378,125 75,839 20.1 %
Surgeries 100,164 82,509 17,655 21.4 %
Outpatient revenue percent ¿ 54.9% 52.4% 250 bps n/a
Inpatient revenue percent ¿ 45.1% 47.6% (250) bps n/a
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* Includes acquired hospitals to the extent we operated them for comparable periods
** basis points
† Admissions adjusted for outpatient volume
¿ Determined by reference to net revenue before the provision for doubtful accounts
Net revenue before the provision for doubtful accounts during the 2012 Three Month Period was approximately $1,686.5 million as compared to $1,395.4 million during the 2011 Three Month Period. This change represented an increase of $291.1 million, or 20.9%. Our same three month hospitals provided $98.5 million, or 33.8%, of the increase in net
revenue before the provision for doubtful accounts as a result of: (i) increased outpatient and surgical volume from physician recruitment and market service development; (ii) an increase in emergency room visits; and (iii) improvements in reimbursement rates. These items were partially offset by a decrease in hospital admissions. The remaining 2012 increase in our net revenue before the provision for doubtful accounts (i.e., $192.6 million) was due to our acquisitions of: (i) Tri-Lakes in May 2011; (ii) the Mercy Hospitals in September 2011; and (iii) the Integris Hospitals in April 2012.
Our provision for doubtful accounts during the 2012 Three Month Period increased 50 basis points to 12.7% of net revenue before the provision for doubtful accounts as compared to 12.2% of net revenue before the provision for doubtful accounts during the 2011 Three Month Period. This change was primarily due to an increase in revenue from uninsured self-pay patients and amounts considered to be patient responsibility (e.g., deductibles, co-payments, other amounts not covered by insurance, etc.).
Our consistently applied accounting policy is that accounts written off as
charity and indigent care are not recognized in net revenue before the provision
for doubtful accounts 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 divide the
resulting total by the sum of our (i) net revenue before the provision for
doubtful accounts, (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, provides us with key information regarding the aggregate level of
patient care for which we do not receive remuneration. During the 2012 Three
Month Period and the 2011 Three Month Period, our Uncompensated Patient Care
Percentage was 27.2% and 25.8%, respectively. This 140 basis point increase
during the 2012 Three Month Period primarily reflects greater uninsured self-pay
patient revenue discounts.
Salaries and benefits as a percent of net revenue after the provision for
doubtful accounts (hereinafter referred to as "net revenue") decreased from
44.6% during the 2011 Three Month Period to 43.9% during the 2012 Three Month
Period. This decrease was primarily due to (i) reductions in staffing
corresponding to inpatient and outpatient volume and patient acuity changes and
(ii) certain outsourced hospital support services, partially offset by increased
physician employment.
Supplies as a percent of net revenue increased from 15.2% during the 2011 Three Month Period to 15.4% during the 2012 Three Month Period. This increase was primarily due to disproportionately higher costs at our recent acquisitions, partially offset by improved pricing and greater discounts from our vendors under our group purchasing agreements.
Other operating expenses as a percent of net revenue increased from 20.6% during the 2011 Three Month Period to 22.1% during the 2012 Three Month Period. This increase was primarily due to: (i) disproportionately higher costs at our recent acquisitions; (ii) certain services at our hospitals that have been recently outsourced and/or contracted to third parties; and (iii) costs associated with certain government investigations. See Note 10 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our ongoing government investigations.
During the 2012 Three Month Period, we recognized a benefit of approximately $2.9 million under the meaningful use measurement standard of the HCIT Programs. There was no corresponding benefit recognized during the 2011 Three Month Period.
Depreciation and amortization increased approximately $21.5 million during the 2012 Three Month Period over the 2011 Three Month Period. This increase resulted from: (i) our recent acquisitions; (ii) the acceleration of depreciation of the remaining net book value of one of our hospitals that is to be replaced in 2013; and (iii) an increase in capitalized equipment.
Interest expense increased from approximately $51.0 million during the 2011 Three Month Period to $75.2 million during the 2012 Three Month Period. Such increase was primarily due to non-cash interest expense of $22.3 million attributable to our interest rate swap contract (i.e., accumulated other comprehensive loss amortization and net fair value adjustment expense) that we recognize in our consolidated statement of income subsequent to a debt restructuring that we completed on November 18, 2011. See Note 8 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our accounting for the interest rate swap contract. Although the average outstanding principal balance on our long-term debt and capital lease obligations was higher during the 2012 Three Month Period than the 2011 Three Month Period, our overall effective interest rate on such obligations has declined subsequent to the abovementioned debt restructuring. We also recorded a greater amount of capitalized interest during the 2012 Three Month Period as compared to the 2011 Three Month Period. See "Liquidity, Capital Resources and Capital Expenditures" below and Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 for information regarding our long-term debt arrangements.
Our effective income tax rates were approximately 34.4% and 35.8% during the 2012 Three Month Period and the 2011 Three Month Period, respectively. Net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements, reduced our effective income tax rates by approximately 430 basis points and 290 basis points during the 2012 Three Month Period and the 2011 Three Month Period, respectively.
2012 Six Month Period Compared to the 2011 Six Month Period
The tables below summarize our operating results for the six months ended June 30, 2012 and 2011, which we refer to as the 2012 Six Month Period and the 2011 Six Month Period, respectively. Hospitals that were owned/leased and operated by us for one year or more as of June 30, 2012 are referred to as same six month hospitals. For all year-over-year comparative discussions herein, the operating results of our same six month hospitals are only considered to the extent that there was a similar period of operation in both years.
Six Months Ended June 30,
2012 2011
Percent Percent
of Net of Net
Amount Revenue Amount Revenue
(in
(in thousands) thousands)
Net revenue before the provision for doubtful accounts $ 3,373,059 $ 2,822,182
Provision for doubtful accounts (415,824) (342,856)
Net revenue 2,957,235 100.0 % 2,479,326 100.0 %
Salaries and benefits 1,305,017 44.1 1,115,236 45.0
Supplies 460,597 15.6 380,255 15.3
. . .
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