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HMA > SEC Filings for HMA > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for HEALTH MANAGEMENT ASSOCIATES, INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HEALTH MANAGEMENT ASSOCIATES, INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Overview

As of September 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 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 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 our Quarterly Report on Form 10-Q for the three months ended June 30, 2012 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 September 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 September 30, 2011, which we refer to as the 2011 Three Month Period, of approximately 19.0%. Such growth principally resulted from: (i) 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; (ii) 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; (iii) 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; (iv) an increase in emergency room visits, which we believe was attributable, in part, to our dedicated focus on emergency room operations; and (v) 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 $24.2 million from the meaningful use measurement standard under various Medicare and Medicaid Healthcare Information Technology incentive programs (collectively, the "HCIT Programs"), as compared to a $1.7 million benefit during the 2011 Three Month Period. The timing of our recognition of benefits under these programs correlates to the availability of program funding and our achievement of the related incentive criteria. 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 year-over-year income from continuing operations was effectively unchanged.

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


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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 the newly constructed Clearview Regional Medical Center, which 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 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 patient safety and quality. Our goal 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 (i.e., myocardial infarction, congestive heart failure, pneumonia and surgical care improvement project) have dramatically improved since the commencement of our clinical quality initiatives and we now rank second in core measures amongst large 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, recently named 64% of our hospitals as Top Performers on Key Quality Measures, which compared to a nationwide achievement rate of approximately 18%. Moreover, 77% of our hospitals that were top performers during 2010 were once again recognized by The Joint Commission this year based on 2011 quality performance statistics. To determine top performers, The Joint Commission aggregates certain evidence-based accountability data, including core measurement performance data.

Outpatient services continue to play an important role in the delivery of health care in our markets, with over 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 7.1% 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 Exhibit 99.1 to our Current Report on Form 8-K that was filed with the Securities and Exchange Commission on August 10, 2012, include (i) revenue; (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


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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; however, we have not yet completed our October 1, 2012 annual impairment testing.

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 September 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 September 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                           $          1,664,187                       $      1,398,495
Provision for doubtful accounts                         (224,078 )                             (178,873 )

Net revenue                                            1,440,109            100.0 %           1,219,622              100.0 %


Salaries and benefits                                    637,305             44.3               549,857               45.1
Supplies                                                 216,819             15.1               179,993               14.7
Rent expense                                              41,882              2.9                38,117                3.1
Other operating expenses                                 331,935             23.0               267,140               21.9
Medicare and Medicaid HCIT incentive
payments                                                 (24,224 )           (1.7 )              (1,749 )             (0.1 )
Depreciation and amortization                             91,610              6.4                65,605                5.4
Interest expense                                          76,814              5.3                50,018                4.1
Other                                                     (2,363 )           (0.2 )              (1,450 )             (0.1 )

                                                       1,369,778             95.1             1,147,531               94.1


Income from continuing operations before
income taxes                                              70,331              4.9                72,091                5.9
Provision for income taxes                               (20,913 )           (1.5 )             (22,387 )             (1.8 )


Income from continuing operations           $             49,418              3.4 %    $         49,704                4.1 %


                                              Three Months Ended September 30,                                    Percent
                                                    2012                  2011              Change                 Change

Same Three Month Hospitals*
Occupancy                                                   38.9 %           41.1 %               (220)  bps**         n/a
Patient days                                             318,357          335,934               (17,577 )             (5.2 )%
Admissions                                                76,166           81,411                (5,245 )             (6.4 )%
Adjusted admissions †                                    151,620          155,097                (3,477 )             (2.2 )%
Emergency room visits                                    392,181          376,539                15,642                4.2 %
Surgeries                                                 82,322           81,665                   657                0.8 %
Outpatient revenue percent t                                55.5 %           53.1 %                 240  bps           n/a
Inpatient revenue percent t                                 44.5 %           46.9 %               (240)  bps           n/a

Total Hospitals
Occupancy                                                   38.9 %           41.1 %               (220)  bps           n/a
Patient days                                             357,613          335,934                21,679                6.5 %
Admissions                                                84,704           81,411                 3,293                4.0 %
Adjusted admissions †                                    171,206          155,097                16,109               10.4 %
Emergency room visits                                    455,372          376,539                78,833               20.9 %
Surgeries                                                 97,230           81,665                15,565               19.1 %
Outpatient revenue percent t                                55.4 %           53.1 %                 230  bps           n/a
Inpatient revenue percent t                                 44.6 %           46.9 %               (230)  bps           n/a

* Includes acquired hospitals to the extent we operated them for comparable periods

** basis points

† Admissions adjusted for outpatient volume

t 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 $1,664.2 million as compared to $1,398.5 million during the 2011 Three Month Period. This change represented an increase of $265.7 million, or 19.0%. Our same three month hospitals contributed $78.5 million, or 29.5%, of the increase in net revenue before the provision for doubtful accounts. The same three month hospital increase was primarily the result of: (i)


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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., $187.2 million) was due to our acquisitions of (i) the Mercy Hospitals in September 2011 and
(ii) the Integris Hospitals in April 2012.

Our provision for doubtful accounts during the 2012 Three Month Period increased 70 basis points to 13.5% of net revenue before the provision for doubtful accounts as compared to 12.8% 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 29.0% and 26.1%, respectively. This 290 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 45.1% during the 2011 Three Month Period to 44.3% during the 2012 Three Month Period. This decrease was primarily due to (i) adjustments in staffing corresponding to changes in inpatient and outpatient volume and (ii) the outsourcing of certain hospital support services, partially offset by increased physician employment.

Supplies as a percent of net revenue increased from 14.7% during the 2011 Three Month Period to 15.1% 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 21.9% during the 2011 Three Month Period to 23.0% during the 2012 Three Month Period. This increase was primarily due to (i) certain services at our hospitals that have been recently outsourced and/or contracted to third parties and (ii) costs associated with certain government investigations. Such items were partially offset by a reduction in acquisition-related costs during the 2012 Three Month Period. 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 $24.2 million under the meaningful use measurement standard of the HCIT Programs as compared to a $1.7 million benefit during the 2011 Three Month Period.

Depreciation and amortization increased approximately $26.0 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 $50.0 million during the 2011 Three Month Period to $76.8 million during the 2012 Three Month Period. Such increase was primarily due to non-cash interest expense of $23.9 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 the debt restructuring we completed on November 18, 2011. See Note 9 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 29.7% and 31.1% 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 310 basis points and 290 basis points during the 2012 Three Month Period and the 2011 Three Month Period, respectively. Both our 2012 and 2011 provisions for income taxes were favorably impacted by the finalization of certain federal and state income tax returns. Our 2011 provision for income taxes also benefited from the satisfactory conclusion of certain state tax audits and examinations.


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2012 Nine Month Period Compared to the 2011 Nine Month Period

The tables below summarize our operating results for the nine months ended September 30, 2012 and 2011, which we refer to as the 2012 Nine Month Period and the 2011 Nine Month Period, respectively. Hospitals that were owned/leased and operated by us for one year or more as of September 30, 2012 are referred to as same nine month hospitals. For all year-over-year comparative discussions herein, the operating results of our same nine month hospitals are only considered to the extent that there was a similar period of operation in both years.

                                                          Nine Months Ended September 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                          $         5,037,246                         $      4,220,677
Provision for doubtful
accounts                                     (639,902 )                               (521,729 )

Net revenue                                 4,397,344             100.0 %            3,698,948               100.0 %


Salaries and benefits                       1,942,322              44.2              1,665,093                45.0
Supplies                                      677,416              15.4                560,248                15.1
Rent expense                                  130,746               3.0                110,738                 3.0
Other operating expenses                      969,350              22.0                762,115                20.6
Medicare and Medicaid HCIT
. . .
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